Column: Auto, speeding

Written by Saikat Neogi | Updated: Jan 26 2010, 05:56am hrs
The Indian automobile industry is riding the crest of a new wave. After record sales during the festival season, retail demand continues to remain strong, driven by new product launches and declining interest rates.

As production of passenger vehicles for the period April to December last year increased 24% compared to the same period in 2008 and domestic sales grew 23%, results of Maruti Suzuki for the quarter ended December 2009 show the best ever bottomline growth. Buoyed by a strong export market and focus on cost reduction in operations, the market leaders net profit increased by a whopping 222%, compared with the quarter ended December 2008.

Even two-wheeler manufacturers are witnessing robust sales. Bajaj Auto reported a 189% increase in net profit in the quarter ended December 2009, compared with the same quarter in 2008. Component manufacturers also reported all-time high bottomline growth in the quarter.

Going ahead, concerns remain on hardening interest rates, roll back of excise duty cuts and rising prices of steel, rubber and aluminium, which may dent margins of auto companies. The appreciation of the rupee will also be a major concern for export revenue. Analysts say if the government rolls back the 4% reduction in excise duty offered to the industry as a part of the stimulus package in 2008, as it should given the robust growth in auto, the move would only have a short-term impact on demand, as the increase in cost will be entirely passed on to consumers. In fact, Maruti Suzuki has already increased prices between 0.12% and 1.9% across various models because of a rise in input costs. But the real challenge will be the change in emission norms to BS-IV in 11 leading cities and BS-III in others parts of the country from April. This would increase the cost of vehicles but is an opportunity for higher sales in the ongoing quarter before the change in norms.

With the recovery in the global economy auguring well for export demand, credit ratings agency Fitch expects the Indian automobile industry to grow around 12% this fiscal and the recovery will be led by passenger vehicle segment at 14%, as against 6% growth in the commercial vehicle segment. The key for companies would be to tap new destinations and increase sales through differential pricing in their existing foreign markets.