Footfalls go South while input, fuel prices shoot North: Double whammy for automakers

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Ashish Kulshrestha | The Clear Picture

The Indian automotive industry, soon to become the third largest in the world, is facing a double whammy of sorts with no respite from any corner. While the industry was already battered by the severe lockdowns starting last year leading to shut down of showrooms, the current rise in prices of inputs, mainly metals and global increase in fuel prices is likely to play spoilsport in its recovery.

According to CARE Ratings, the factory dispatches of two wheelers, three-wheelers, passenger vehicles, medium and heavy commercial vehicles (HCV) and light commercial vehicles (have) declined by 33.5%, 57%, 10.1%, 57.4% and 58% respectively.

Additionally, the rising number of Coronavirus cases in smaller towns could potentially unrest the two-wheeler and tractor demand in rural India, feels Vahishta Unwalla, research analyst, CARE Ratings. She adds that while the silver lining lies in the fact people might prefer to buy a personal vehicle to avoid public transport, it may not add to a substantial increment in automobile sales in the country.

However, the companies are likely to get some cushion from the reduced expenses on lower sales promotion expenses, increase in selling prices and other cost reduction efforts which helped them improve their margins last financial year.

India’s largest passenger vehicle manufacturer Maruti Suzuki India (MSI) posted a 90 basis points and 300 basis points reduction in employee cost and other expenses respectively in the fourth quarter of financial year 2020-2021. 100 basis points make for 1 percentage.

Similarly, Mahindra and Mahindra’s automotive segment posted a profit before interest and tax (PBIT) growth of 18.9% year-on-year in the third quarter of FY21, also due to reduction in fixed expenses. The company has already undertaken two price hikes, thus far, in 2021 in order to combat commodity cost inflation, with a supportive demand scenario providing relief.

These efforts are likely to yield better results for the automakers in the coming quarters and would contribute to the revival of the sector. According to ICICI securities’ report on MSI’s fourth quarter results, going forward we expect sales volume at 17.5 lakh units in FY22E, up 20% YoY and 19.6 lakh units in FY23E, up 12% YoY.