GST cuts lifted Indian automakers out of slump. Now they face a commodity storm

Since the third quarter earnings season kicked off, the nation’s largest carmakers Maruti Suzuki India Ltd and Hyundai Motor India Ltd, commercial vehicles maker Tata Motors Ltd, two-wheeler manufacturers TVS Motor Co., Bajaj Auto Ltd, and electric scooter maker Ather Energy Ltd flagged rising prices of key inputs such as steel, aluminium and copper. Combined with a depreciating rupee, it is weighing on their profitability.

“I don't think anybody knows what's happening," Tarun Mehta, co-founder and chief executive at Ather, told analysts on 2 February during a post-earnings call. “This is truly unprecedented in every way. There are a lot of commodities going haywire."

The pressure to increase prices could threaten a rebound in the world’s third-largest auto market after the reduction in goods and services tax (GST) and the festive period bolstered demand to a record in the quarter ended December. According to data from the Society of Indian Automobile Manufacturers (Siam), passenger vehicle sales during the period grew 21% to 1.27 million units, while two-wheeler dispatches rose 17% to 5.69 million units, and commercial vehicle sales grew 22% to 290,085 units.

Since the start of October, nearly all the key raw materials have turned costlier amid geopolitical uncertainties and rising demand. According to Trading Economics data, aluminium and copper have climbed 15% to 25% during the period. Platinum has surged more than 40%.

“Some of it is fundamental. There are some commodities that do seem to secularly be in a demand-supply gap," Ather’s Mehta said. “A lot of them probably seem to be stuck in some sort of a hype situation right now. Even hype situations can last a couple of quarters, so you can't exactly predict. So we are preparing for the worst."

Currency hit

Major currencies such as the US dollar, euro, and China’s renminbi have appreciated by 4–5% since October, materially increasing input costs for auto suppliers, according to Anurag Singh, advisor at consulting firm Primus Partners. “At the same time, although OEMs (original equipment makers) are seeing higher volumes, intense competitive pressures are limiting their ability and willingness to absorb cost increases."

Hyundai Motor India, which released its December-quarter results on Monday, said commodity prices were weighing on the industry’s margins.

On the commodity front, the industry has been going through tough times, KS Hariharan, head of investor relations at the Indian unit of the Korean giant, said in a post-earnings media briefing. While the company has tried to absorb some costs, he said, some of that has been passed on in a January price increase, mainly on the Venue compact SUV.

KN Radhakrishnan, director and chief executive at two-wheeler maker TVS Motor, said in the company’s earnings call on 28 January that prices of aluminium, copper, zinc, platinum, palladium, and rhodium have risen.

These metals are used in automobile bodies and multiple parts, including engines, exhaust systems, and electrical components.

“The strength of the company has been when the volume is growing, we are able to get the scale benefits, and we are also able to drive our cost down program, and we have been very prudent," Radhakrishnan said. “We keep looking at price increases, and if you look at recently, we have taken up about 0.2, 0.3 percentage price increases."

TVS Motor’s peer Bajaj Auto plans to increase prices in the January-March quarter.

“As it turned out, given the beat on volumes that we saw through the festive season, we chose to defer all pricing actions to the start of this current quarter, essentially January, and therefore taking none to cover the inflation last quarter," Dinesh Thapar, chief financial officer at Bajaj Auto, said in an earnings call on 30 January.

Steel prices rising too

Maruti Suzuki announced on Monday that it is reviewing price hikes amid rising commodity prices, days after the company told analysts in a 28 January call that higher commodity costs led to a 60-basis-point hit to its margins in the October-December quarter.

There are also concerns about steel, as domestic players are using the safeguard duty on imports as an opportunity to raise prices, Rahul Bharti, senior executive officer-corporate affairs at Maruti Suzuki, told analysts.

“Though there was a clear message from the government that the steel industry should not use it to profiteer or raise commodity prices, it appears there are some such pressures," he said. “So, we will engage with the steel industry and mention to them that the safeguard duty should not be misused to increase steel prices, but it appears that there are some signals that they want to increase prices."

According to Big Mint, a commodities market intelligence, steel prices remained flat in the October-December quarter. However, prices are up 8% in January over October.

“There has been some increase in steel prices. But the impact of this has been lower than the increase in non-ferrous metals," Tata Motors managing director and chief executive Girish Wagh said in the post-earnings results call on 29 January. “The increase has been higher in non-ferrous metals like copper and PGM (platinum group) metals."