Operating margins of major auto firms were significantly impacted during the June quarter of the financial year 2011-12 on the back of high raw material prices, mainly in steel, rubber and aluminium.
The operating margins were impacted by 60-290 basis points. Excluding Maruti Suzuki India, all the other major auto firms saw raw material cost as a percentage of sales rising. The raw material cost as percentage of sales went up by an average of 198 basis points in the June quarter year-on-year.
While the impact of the high raw material prices is seen to be favourable in the coming quarters, the focus of concern has shifted towards volume growth in the coming months. Analysts feel that the decelerating demand in the Indian automobile market could continue to keep the operating margins of the auto majors under pressure.
Confirming the same, C Ramakrishnan, chief financial officer, Tata Motors, in a call to investors, said, ?Domestic business continues to face margin pressures on subdued demand and high commodity prices.?
This is evident from the recent volume figures for the auto industry. The latest Society of Indian Automobile Manufacturers (Siam) report shows a drop of 16% in passenger car sales in July alone, the biggest drop since November 2008. Overall, the passenger vehicle segment has seen a drop of 9% in sales for July. This was on the back of slew of interest rate increases and high fuel prices.
Siam has already scaled down passenger vehicle sales forecast for financial year 2011-12 to 10-12% from 16-18% seen earlier. The passenger vehicle segment has already seen numbers falling in the first quarter of this financial year to as low as 9%. The growth has come down from levels of about 33% last year. Overall, the auto industry saw a single digit growth of 9% for July, as per the Siam report.
Moreover, the continued concerns over rising interest rates and talks of diesel de-regulation by the government are expected to slowdown the demand graph with festival season seen to miss the sheen. The festival season typically sees a 15-20% incremental growth, which may be absent this year round, say few auto makers.
Even the inventory data hint on the hard times to come. The dealer inventories has risen significantly in the cars segment to five to six weeks from a normal level of two to three weeks, according to Crisil.
However, new launches lined up in the coming quarters coupled with easily availability of retail financing are seen as life support to the demand. Makers say they will continue to take modest price increases to ease out input cost pressures and watch the global economic situation closely. The makers took a price increase of anywhere between 1% to 2.5% during the quarter.
Pawan Goenka, president ? automotive and farm equipment sectors, M&M, had said that some signs of softening in the raw material prices in June quarter helped the makers in offsetting the impact of the rising interest rates during the period and avoid significant pricing action of vehicles.
Shashank Srivastava, chief general manager, marketing, Maruti Suzuki India, said, ?During the 2008 recession, there was issue of liquidity and banks had stopped giving out loans. The situation is different now, liquidity is not a problem and loans are available easily.?