Despite price hike, Maruti Suzuki's margin may be hit in April quarter

Company can afford to pass on cost of increasing cost of metal prices, but investors will now put it under watch of analysts

Maruti Suzuki increased prices of its products for the second time in three months to pass on the increased input costs. Though the quantum of the latest hike is not known, the country’s largest passenger vehicle maker had taken a Rs 6,000-Rs 34,000 hike (about 3 per cent) across models in January.

Analysts at JM Financial in a recent report point out that metal prices have increased by over 30 per cent in the past six months. The input cost of metals accounts for as much as 20 per cent of net sales; a 1 per cent change in steel prices impact margins of automakers by 10-20 basis points. Analysts peg the sequential impact of higher raw material costs on Maruti at 200-300 basis points.

While there are pressure points on account of the increase in raw material costs, passenger vehicle makers are better placed than two-wheeler makers, given lower channel inventory and robust demand trends. Cost-optimisation measures, too, are expected to help mitigate the rise in the raw material basket.

In addition to these factors, analysts at Credit Suisse highlight operating leverage, discounts, and currencies as being favourable to Maruti. Led by the compact segment, the company posted a 12 per cent YoY increase in February. Discounts are down 21 per cent on a sequential basis and Maruti shall also get help from the favourable currency tailwinds.

While there will be some impact on consumer sentiment in the short term, analysts such as Mitul Shah, head of research at Reliance Securities believe that these price hikes will get absorbed.

Analysts point out that raw material hikes are passed on but automakers hold on to the prices when there is a decline in input cost inflation, thus preserving their margins in the long term.

While the company has multiple levers to offset raw material prices, given the successive price hikes, the Street will keep an eye on the impact on demand, as well as margins.