Original equipment manufacturers (OEMs) typically have 3-6 months contracts with suppliers and as a result, the change in commodity prices reflects with a lag of 3-6 months.
MUMBAI: Hero MotoCorp Ltd and Maruti Suzuki India Ltd will raise prices of their vehicles in April. The reason is simple. Input costs are rising and companies will have to take price hikes to protect their profit margins. Maruti has said the price increase will vary for different models, while Hero has maintained that hikes across its range of two-wheelers will be up to Rs2,500.
The impact of the current price hikes can be gauged in the June quarter numbers. In general, automobile companies have been taking price hikes to offset raw material cost pressures. Even so, it is difficult for companies to take commensurate price increases at one go, as it would hurt demand.
Be that as it may, analysts reckon, the price increases, taken earlier may not be sufficient. Metal prices have seen a substantial increase in the past 7-8 months. As analysts from JM Financial Institutional Securities Ltd pointed out in a report on 18 March, “Domestic steel prices have increased sequentially by about 19% in 3QFY21 and by another 19% quarter-on-quarter in 4QFY21 (till date). Aluminium (LME) prices saw a similar trend and have increased 11% quarter-on-quarter in 3QFY21 and further 7% quarter-on-quarter in 4Q." Additionally, prices of precious metals have also risen.
To be sure, original equipment manufacturers (OEMs) typically have 3-6 months contracts with suppliers and as a result, the change in commodity prices reflects with a lag of 3-6 months.
"Assuming a one quarter lag, we believe that since the average steel price for 3QFY21 increased 19% QoQ, all things remaining unchanged OEM margins in 4QFY21 were likely to be adversely impacted by about 300 basis points quarter-on-quarter. However, OEMs have taken price increase of about 2% between Nov’20-Jan’21 which is likely to restrict the margin impact to about 100 basis points," said the JM Financial report. One basis point is one-hundredth of a percentage point.
On the flip side, the cost saving measures that companies have undertaken during the pandemic may offer some comfort, albeit not much. In a report on 10 March, Kotak Institutional Equities’ analysts said, “We expect automotive OEMs’ (except Royal Enfield) gross margins to decline by 50-400 basis points on a quarter-on-quarter basis in 4QFY21 mainly due to increase in commodity prices, partly offset by price hikes taken by the OEMs. OEMs will have to take further price increase to completely offset raw material headwinds."