Auto Inds set to slow down on high input cost

Inflation, rising rupee also contribute to the sector's woes.

Weighed down by spiralling input costs, the automobile industry is staring at another slowdown this year also. The industry saw a five per cent decline in its sales last year.

Apart from prices of raw materials reaching an all-time high, there is a liquidity crunch in the automobile consumer market. Inflation has affected buying decisions. Finance companies are getting increasingly reluctant to grant loans.

The automobile sector is also facing slower growth in the export market: A weakening US dollar has reduced margins.

Manufacturers are left with no option but to pass on the price rise to customers. Almost all manufacturers and allied sectors, like auto-component makers, say the impact of inflation has become unbearable.

Mahindra and Mahindra, Tata Motors, Maruti Suzuki, and Hyundai say they are trying to absorb price hikes but fear a bulk will be passed on to buyers.

Large, medium, and small-sized auto component makers are also saying the same.

Sales in March were not as high as they traditionally are. That, despite the finance minister announcing a substantial cut in excise duty, from 16 per cent to 12 per cent.

The passenger-car segment saw a rise of just 12 per cent, while the two-wheeler segment recorded a fall of eight per cent.

Pawan Goenka, president, Mahindra and Mahindra (automotive sector), says: "I haven't seen such a price rise in raw materials in as many years as I can remember. We will witness a lower growth in the first six months of this fiscal."

Market watchers and analysts say high input prices can be absorbed to a large extent by manufacturers. But, they add, small and medium-sized components makers will have a tough time as their margins are already narrow.

Vishnu Mathur, executive director, Auto Components Manufacturers Association (ACMA), said, "A price escalation of about three to four per cent is understandable. But a sudden spike of 25-30 per cent within three months is not. Most companies are renegotiating prices with OEMs (other equipment manufacturers). If matters are not sorted, the sector will face a slowdown. Component makers are already facing negative profitability for the past seven to eight months."

Prices of essential commodities like steel, copper, alloys, pig iron, coke, ferro manganese, ferro alloys, and rubber, crude oil have risen by 30-70 per cent in the past few months.
 

ROADBLOCK
Product	Price hike (%)*
Iron	60
Met Coke	32**
Shredded Scrap (used for alloys)	53**
Ferro Coke	70**
Cast Iron Scrap	47
Pig Iron	46
Coke	42
Other Ferro Alloys	30
* From Aug 2007-March 2008 ** Price hike in the last three months alone

According to an ICRA report, a fall of 60 and 40 basis point was noticed in the PBT and PBDIT margins of auto component manufacturers during the quarter ended December 2007.

Surinder Kapur, chairman, Sona Group, said, "Prices of steel cannot be absorbed. If situation persists, it can lead to high prices of vehicles."

Even the recent reduction in steel prices by Rashtriya Ispat Nigam and Tata Steel has not helped the auto industry.

Products on which prices were cut are not used in manufacturing vehicles.