Auto makers may see profits improve as metal prices decline

Auto makers may see profits improve as metal prices decline

New Delhi: Auto makers in India, hit by a sharp rise in commodity prices and slowing consumer demand, are beginning to see their operating profits improve after prices of key inputs such as steel, aluminium, copper and lead softened.

Steel, which constitutes as much as three-fourths of input costs, is down 41% from its peak price of $1,080 (Rs52,488) per tonne, reached on 20 June, according to Bloomberg data cited by investment bank JPMorgan Chase and Co. Similarly, aluminium prices have fallen 34%.

Analysts say this would help improve profits and margins as auto makers are likely to stick to their recently hiked prices even though sales have been sluggish. Improving margins and profitability is a bigger priority, they said.

Ashok Leyland Ltd plans to roll back in the second half of the year hikes given to steel and tyre makers, chief financial officer K. Sridharan said in an interview late in October. This, coupled with the price hike announced in October, will help the firm hold on to last year’s operating margins.

Auto companies typically have long-term contracts for steel that range from three months to 12. Softening prices have prompted several manufacturers to begin the process of renegotiating contracts.

“For steel, companies typically have longer-term contracts and it also depends on the contract cycle of each company. So the benefits could accrue with a lag," said Bharat Iyer, head of India equity research at JPMorgan.

The impact on profit margins will be seen only in the fourth quarter at India’s second largest motorcycle maker Bajaj Auto Ltd, said chief executive S. Sridhar.

JPMorgan predicts a 3 percentage points gain in Ebitda margins (earnings before interest, tax, depreciation and amortization as a percentage of revenue—a key measure of profitability of operations) for Maruti Suzuki India Ltd, the country’s largest car company, and a 20% gain in 2010 earnings per share due to falling commodity prices. Hero Honda Motors Ltd, India’s largest motorcycle maker, is expected to gain 3.5 percentage points in Ebitda margins and 25% in 2010 earnings per share.

As commodity prices have only reduced in the last month, most brokerages are still to begin research on the impact this is likely to have on profit margins and earnings.

Other auto maker inputs such as aluminium, copper and lead are exchange-traded and companies prefer to buy them on the spot market.

Companies are thus expected to see gains more quickly in these commodities.