Ashok Leyland’s price hike well timed, others may follow to offset cost pressures
On Tuesday, commercial vehicle manufacturer Ashok Leyland Ltd announced a minimum 2% price hike across all categories with effect from 1 April 2018. Will others follow suit?
Most likely, yes. Here are the reasons why:
Rising input costs, thanks to higher metal and rubber prices over the last year, will hurt profitability. Add to that the cost of mandatory compliance with the AIS (Automotive Industry Standards) 140 regulations that would require automakers to invest in vehicle tracking and camera surveillance systems.
And, what better time to pass on cost pressures than now, when the demand for commercial vehicles is skyrocketing. Growth rates are surpassing that of all other vehicle segments. The cyclical medium and heavy commercial vehicle (M&HCV) segment posted a 32% annual growth in fiscal year 2017 (FY17) after contracting by 1% in the previous year. Analysts estimate a robust 17-18% growth in FY18 too after which it might taper a bit as the base becomes higher.
With the goods and services tax in place, the unorganized small truck operators are expected to give way to organized logistics service providers. This would drive demand from fleet owners.
Further, the truck scrappage policy that is reckoned to be round the corner is likely to spur demand. The industry expects incentives for those who discard aged trucks and purchase new ones.
In other words, Ashok Leyland’s move to hike prices is well timed. According to Bharat Gianani, analyst at Sharekhan Ltd: “When a formidable manufacturer (Ashok Leyland is the No. 2 commercial vehicle maker) hikes prices due to cost increases, others tend to follow because cost pressures tend to be an industry phenomenon.”
Meanwhile, competition in both M&HCV and light commercial vehicles is high. This is reflected in the discounts still prevalent in these segments. While Ashok Leyland has increased its hold in the market by steadily gaining share to its current 33%, Tata Motors Ltd has ceded the phenomenal lead it had with nearly two-thirds share of the market about five years ago. Besides, firms like Eicher Motors Ltd and Mahindra and Mahindra Ltd are also giving tough competition to the two leaders.
That said, strong demand and ability to hike prices and pass on cost pressures has aided profitability. Ashok Leyland’s operating margin improved from 7% to 11% and that of Tata Motors from an operating loss to 8% margin over the last three quarters.
The price hikes in the wake of continuing discounts will therefore help improve profitability at least as long as the upturn in the commercial vehicles cycle lasts.
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