Excise break short-lived with car prices set to rise

Mar 31 2014, 00:40 IST
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Buyers will likely pay around 1-2% more as companies want to cash in on improving demand. (Reuters) Buyers will likely pay around 1-2% more as companies want to cash in on improving demand. (Reuters)
SummaryIn January this year, Maruti, General Motors India and Hyundai had increased prices by 2-3% following a similar hike in October 2013

Cars from almost every manufacturer ó Maruti Suzuki, Hyundai, Renault, Honda, Tata Motors and Mahindra & Mahindra (M&M) ó are expected to cost more from April 1 as they raise prices barely a month after they lowered them by 4-6% following an excise duty cut.

Buyers will likely pay around 1-2% more as companies want to cash in on improving demand and recover more to make up for cost increases. In January this year, Maruti, General Motors India and Hyundai had increased prices by 2-3% following a similar hike in October 2013.

While companies claim margins are under pressure, despite heavy discounting, both Maruti and M&M have reported fairly robust operating margins in FY13 so far. M&Mís net realisations from the auto business increased by 1.1% year-on-year and 1% quarter-on-quarter in Q3FY14, despite an increase in average discounts in December after the festive season, and automotive Ebit (earnings before interest and tax) margins increased to 11.9% from 11.2% in Q2FY14 and 11.2% in Q3FY13.

Maruti too surprised with its strong profitability in the nine months to December despite weak volumes and rising discounts, though some of the gains came from currency and cost reduction benefits. Analysts point out that discounts at Indiaís biggest carmaker rose to R19,412 per vehicle in Q3FY14 from R17,466 per vehicle in Q2FY14 and are at 10-year-high levels. However, Marutiís Ebitda margin rose 440 basis points y-o-y to 12.4% in Q3FY14 with cost reduction measures mitigating the impact of higher raw material prices. In Q1FY14, the firm reported a margin of 11.4%, which rose to 12.6% in Q2FY14.

This is the third time in the last six months that carmakers have increased prices citing higher costs including logistics costs following price hikes in diesel and exchange rate fluctuations.

Data from industry body Society of Indian Automobile Manufacturers shows passenger car sales rose 1.4% y-o-y in February after falling 7.6% y-o-y in January and 6% y-o-y in December; in the 14 months between January 2013 and February 2014, sales increased y-o-y only in two months.

Pravin Shah, chief executive (automotive), M&M, confirmed to FE that demand was picking up after the price cut, adding there was also traction in utility vehicles due to elections. The tradition of companies completing purchases by the year-end was also helping. ďThe market is better than it was in January and February but we donít see any full turnaround yet,Ē Shah said.

M&Mís margins, he said,

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