India’s auto component industry, already slowing in the wake of decelerating vehicle sales, has been further hit by declining profits as higher input prices and a weakening dollar hurt exports, a trade study has revealed.
An analysis, commissioned by Automotive Component Manufacturers Association of India (Acma), of the top 50 Indian component suppliers by sales showed that for the half-year ending 27 December, companies have seen declining net profits compared with a year ago.
The combined net profit of these companies declined by 130 basis points for the period, though the extent of the decline was offset by stronger results posted by larger companies, the study said.
Since July, prices of inputs such as steel and aluminium have increased, while a weakening dollar has hurt export earnings for India’s auto component suppliers.
Steel prices have increased by as much as 25% in the past quarter, Acam says.
Similarly, prices of aluminium have increased by 23% since the beginning of this year, according to the website of the London Metal Exchange.
“All key input costs have risen,” said Rahul Kejriwal, vice-president at Remson Industries Ltd, a maker of control cables and gear shift systems. “We are working with our customers to offset the increases, but it will still affect margins.” He declined to quantify the hit.
What makes it tougher for the industry is that they are not able to pass on the increase in raw material costs to the vehicle makers.
“While OEMs (original equipment manufacturers) are fully aware of the extent of the increase, the process of price hikes still goes through protracted negotiations,” said Ashok K. Taneja, president and chief executive of Shriram Pistons and Rings Ltd.
“Elsewhere, contracts provide for automatic increases.”
Vehicle makers, on their part, say that steel prices affect them more than component vendors since a lot of metals goes into the body of the vehicle rather than components.
“The larger impact on steel is on body parts,” said Rajesh Jejurikar, chief executive officer of Mahindra-Renault Pvt. Ltd, which makes the Logan sedan. “We have not easily given in (to demands of price increases by vendors) and are trying to hold prices since these are all pre-negotiated contracts.”
The dollar depreciation and the global credit crunch has added to the vendors’ woes. Some have reported losses on account of exposures to hedging instruments such as credit derivatives.
On Friday, Amtek Auto Ltd said it may lose Rs72 crore in the next two years due to exposures on derivate instruments.
Companies, such as Shriram Pistons, have also suffered because the dollar fluctuated. The company lost Rs7 crore, or 6% of its profits, last quarter.