Excise break short-lived with car prices set to rise

Written by Roudra Bhattacharya | New Delhi | Updated: Mar 31 2014, 06:10am hrs
CarsBuyers will likely pay around 1-2% more as companies want to cash in on improving demand. (Reuters)
Cars from almost every manufacturer Maruti Suzuki, Hyundai, Renault, Honda, Tata Motors and Mahindra & Mahindra (M&M) 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&Ms 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 Indias 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, Marutis 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. The market is better than it was in January and February but we dont see any full turnaround yet, Shah said.

M&Ms margins, he said, had been under pressure as input and operational costs had gone up. A price increase will improve margins and protect it in terms of further erosion, Shah said.

Jnaneswar Sen, senior vice-president, sales and marketing, Honda Cars India, said the idea of increasing prices was to improve profitability. We dont like increasing prices when there is high demand but inflation has driven up costs as have fuel price increases and adverse exchange rates movement, Sen said.

Although the rupee has strengthened in the last few weeks to around 60 to the dollar from 64, the impact will be felt with a lag and benefits will flow in only in Q1FY15 as they pay suppliers and vendors.

VG Ramakrishnan, MD at Frost & Sullivan, South Asia, pointed out that even if volumes fell slightly, say by 2%, after the price increase, the net gain in terms of profits would be higher. Even after substantial discounts, volumes havent improved as much. So if the new reality is lower volumes, companies may as well shore up on margins. There is no point of further discounting, he said.

India's auto market has been slowing for over two years. Passenger vehicle sales in April-February FY14 were down 6% to 22.6 lakh units though analysts expect volumes to improve in FY15.