You are here: Home » Economy & Policy » News
Business Standard

Commodity inflation for auto sector to be offset by price hikes

The automobiles sector is expected to face commodity cost inflation which will be offset by price hikes, lower discounts, cost cutting, and operating leverage

Auto sector | Carmakers | Auto industry

IANS  |  New Delhi 

companies, automobile, industry, production, workers, manufacturing, jobs, employment, auto, cars, auto component makers, companies, economy, growth
Representational image of auto sector | File

The automobiles sector is expected to face commodity cost inflation which will be offset by price hikes, lower discounts, cost cutting, and operating leverage, according to a report by Motilal Oswal Institutional Equities.

The report said spot prices of base commodities saw a sharp increase (15-40 per cent) over 2QFY21. "Considering 3-6 month contracts, we expect the impact of base commodity prices to reflect in the P&L from 3QFY21 onwards. Base commodity price inflation would have a 350-400bp gross impact over the next 2-3 quarters," the report said.

Precious metals (platinum, palladium and rhodium) are facing a double whammy of a huge increase in usage due to BS-VI compliance and a sharp rise in prices. This is particularly true for rhodium where spot prices are higher by 28 per cent/70 per cent over 1HFY21/FY20 on an average.

While cost inflation is fairly large, OEMs are focusing on more than offsetting the same through price increases (of 1-6 per cent in 2Ws, Tractors, and PVs), lower discounts (100-400bp across segments), cost cutting (80-100bp), and operating leverage (150-170bp).

"Putting all negatives and positives together, we expect EBITDA margin to improve to 13.3 per cent by FY23E (v/s 10.5 per cent in FY20 and 12.7 per cent in FY19) as the impact of commodity cost inflation is more than offset by benefits of price increases, lower discounts, cost cutting initiatives, and operating leverage," the report said.

With a likely pick-up in volumes (higher asset turns), margin improvement, and lower capex intensity, the brokerage expects a sharp improvement in FCF generation over FY21-23E. "For our Auto OEM (excluding JLR) universe, FCF conversion (percentage of PAT) is estimated to be at 100-125 per cent over FY21-23E (as against 20 per cent/33 per cent in FY20/FY19)," it said.

Analysis of past cycles suggests that valuations expand as the cyclical recovery sustains, laying the foundation for the next upcycle. Current valuations reflect an early to mid-cycle recovery, with scope for a further rise if the volume expansion sustains.



(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Tue, January 12 2021. 18:15 IST