Carmakers partly absorb commodity shocks
Mumbai: India's biggest carmakers are partly absorbing a sharp rise in commodity costs rather than passing on the entire burden to customers, betting that uninterrupted
Mumbai: India's biggest carmakers are partly absorbing a sharp rise in commodity costs rather than passing on the entire burden to customers, betting that uninterrupted production is more crucial than protecting margins at a time when demand continues to be robust. Car sales in India have been advancing at a fast clip since last October despite concerns such as the Iran-US war and resultant increase in fuel prices. Sales grew at an estimated 34% year-on-year to 469,162 vehicles in July.Executives at Maruti Suzuki, Hyundai Motor India and Mahindra & Mahindra (M&M) said during post-earnings calls that they have stepped up cost controls, supported suppliers, taken calibrated price increases, and accelerated capacity expansion, even as higher steel, aluminium, copper and rubber prices dented June-quarter profitability.The approach marks a shift from previous commodity cycles, when automakers relied more heavily on price hikes to protect margins.
This time, however, healthy order books prompted manufacturers to prioritise production over quarterly profits. "For the first time in many, many years, every aspect of our business seems to be highly positive," said Rahul Bharti, executive director, corporate affairs at Maruti Suzuki, citing strong demand across small cars, SUVs, and exports.Dealer inventory at India's largest carmaker has fallen to just about 13 days, with the company ramping up output from two newly commissioned plants. "If the customer is waiting, it's our duty to deliver cars," he said.132813393The pressure on margins, however, was visible across the industry. Maruti said commodity inflation and adverse currency changes weighed on profitability despite a 36% revenue growth in the June quarter.
Operating Ebitda fell 6.7% and operating EBIT declined 17.4% year-on-year.Mahindra & Mahindra stimated that higher prices of steel, aluminium, copper and rubber had a gross impact of 4-4.5 percentage points on its automotive business before mitigation through pricing, cost controls, operating efficiencies and a favourable product mix. Even after these measures, the company's automotive profit before interest and tax margin narrowed to 8.9% in June quarter from 10.8% a year earlier.Maruti also eased working capital pressure on suppliers by shifting settlement cycles for commodities such as aluminium from quarterly to monthly. "One needs to be agile to meet extraordinary circumstances. That's flexibility and agility," said Bharti.Automakers relied on calibrated price hikes to partly offset the cost pressure.
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