The soaring cost of raw materials and slowing demand on the back of higher borrowing costs have not only hurt profits of auto makers here in the quarter to June, but also resulted in most four-wheeler makers posting their lowest operating margins in the last three years in this period.
An analysis of the financial results for the quarter ended June shows that Maruti Suzuki India Ltd, which makes one of every two cars sold in the country, saw the maximum dip in operating margins compared with a year ago as it spent more to buy raw materials and paid royalty to its parent Suzuki Motor Corp on new vehicles such as the Dzire and SX4. Its margins fell 4.87 percentage points to 9.75%.
Operating margins measure how much profit is left after deducting basic expenses of running a business and are a key measure of profitability.
Tata Motors Ltd, India’s biggest auto maker by revenues recorded the second lowest margins in a sample of four four-wheeler firms firms that Mint analysed. Its operating profit margin fell 4.04 percentage points to 4.66%.
Crimped Profits (Graphic)
Other four-wheeler makers such as Ashok Leyland Ltd and Mahindra and Mahindra Ltd, the country’s largest utility vehicle maker, also saw operating efficiencies fall by 4.51 and 3.04 percentage points respectively in the same period.
Steel accounts for roughly two-thirds of a four-wheeler’s weight and steel prices have risen about 50% in the past year as has that of nickel. By end June, crude oil prices, too, doubled over the last one year, increasing the power and fuel costs of auto makers.
“Sector financials are likely to worsen because of rising input costs and the inability of OEMs (original equipment manufacturers) to fully pass on (these costs) to end customers,” said an analyst with a foreign brokerage, requesting anonymity.
Most auto makers increased prices last quarter, but most of these were in the range of up to 5%, much less than the increase in material costs.
Three two-wheeler makers, Hero Honda Motors Ltd, Bajaj Auto Ltd and TVS Motor Co. Ltd, who account for nine of 10 motorcycles and scooters sold in the country, however, showed some recovery in the quarter ended June from the lows they reported during different quarters in the last financial year that ended in March, among the worst for the industry this decade.
Hero Honda, the country’s largest motorcycle maker by revenue, posted a net profit increase, helped by sales of its premium bikes.
Record prices of metals, rubber and oil dented gains from sales increases, and analysts say cost pressures will continue well into the second quarter of this financial year that began on 1 April. Firms also pared sales estimates after the latest round of interest rate hikes by the Reserve Bank of India, or RBI, expecting fewer people to buy cars as loan rates rise.
“We believe that hangover…of 1Q FY09 (the June quarter, the first of 2008-09 for most firms) shall persist for some time, considering the adverse macro-scenario and likelihood of subdued volume numbers for next two months,” says Chirag Shah of Emkay Global Financial Services Ltd.
On 29 July, the RBI increased its policy rate by 50 basis points and cash reserve ratio—the money commercial banks are required to keep with the banking regulator—by 25 basis points to tackle rising prices.
Inflation is at a 13-year high of almost 12%, and this has led the central bank to increase key interest rates for the third time in less than two months. As a result, car and house loans are likely to get costlier.
Anecdotal evidence suggests as much: consider N.S. Bharath, 29, who already owns a Marui 800, and wants to upgrade to a bigger vehicle. “I have decided to postpone buying a new car mainly because of a rise in interest rates and also the fuel price hike,” said the executive at a mobile phone services company in New Delhi. Car dealers say they are hearing from many customers like Bharath who are deferring purchases.
“The number of inquiries has come down and whatever inquires we are getting, we are finding it difficult to convert them (into sales),” said Prem Bagga, who owns six outlets that sell Bajaj two-wheelers and Maruti cars in Delhi.
Banks are becoming choosier in lending to customers and have even blacklisted entire portions of cities and non-metro areas. About 75% of passenger vehicles and almost all commercial vehicles are bought on credit.
Ashwin Ramarathinam contributed to this story.