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Automakers to witness swift recovery in margins despite rise in input cost

The automotive component manufacturing sector will also see gains as automobile manufacturing companies are likely to increase production in line with the demand. (Anindito Mukherjee/Reuters)Premium
The automotive component manufacturing sector will also see gains as automobile manufacturing companies are likely to increase production in line with the demand. (Anindito Mukherjee/Reuters)

  • Double-digit growth in volumes, coupled with the decision of automakers to increase prices of their respective products will help offset the adverse impact of the rise in input cost

Automobile manufacturing companies and their component manufacturers are expected to see robust recovery in operating margins in FY22 despite a sharp rise in prices of crude and other commodities such as copper and steel, according to analysts of credit rating firm, Crisil.

Double-digit growth in volumes, coupled with the decision of automakers to increase prices of their respective products will help offset the adverse impact of the rise in input cost. The automotive component manufacturing sector will also see similar gains as companies are likely to increase production in line with the demand.

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According to analysts of Crisil, strong balance sheets and liquidity helped rated original equipment manufacturers (OEMs) sustain stable credit profiles despite demand volatility in the past two fiscals. These OEMs have low or nil debt, and significant surplus liquidity (over Rs1 trillion as on 31 March 2020). Some also benefit from strong financial flexibility of their parent. Consequently, credit profiles have been largely stable and no Crisil-rated OEM has been downgraded since April 2020.

“Operating margins of OEMs could rebound to almost 2019 levels next fiscal despite rising commodity and freight rates because the increase in cost will be offset by higher volume and price hikes. OEMs had raised prices this January and another hike is likely in the near term," said Sameer Charania, director, Crisil Ratings.

The note further mentioned that improving business prospects and limited capital expenditure requirement due to headroom in capacity utilization will ensure that credit profiles continue to be stable. Crisil-rated OEMs incurred a capex of Rs1 trillion between fiscals 2018 and 2019 (33% higher than in two fiscals preceding), just before the slowdown hit.

“Our analysis of 800 listed companies shows that salary cuts made in the first quarter of this fiscal have largely been restored by the manufacturing sector, while the IT sector is continuing to offer raises. Consequently, sentiment among urban consumers, who account for a crucial 65% of passenger vehicle sales and 40% of two-wheeler sales, has improved. This, and the buoyancy in rural income, augur well." said Pushan Sharma, associate director, Crisil Research.

In FY 22, Crisil expects passenger vehicle volumes to grow in the range of 23%-25%, while the same in the two-wheeler segment is likely to see an increase of 18-20%. On the back of improvement in economic activity, commercial vehicle sales are likely to jump by 34-36%.

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