Informist, Tuesday, May 24, 2022

By Vinay Khulbe

NEW DELHI – The government's measures announced on Saturday to tame galloping inflation have come as a shot in the arm for India's auto sector amid various challenges such as high raw material costs, shortage of semiconductors and low rural demand. 

While the excise duty cut on fuel may support sales of two-wheelers and commercial vehicles, the changes in import and export duty on some raw materials are being seen as a big positive for the entire automobile sector. 

When it comes to an automobile manufacturer, about 75-77% of costs are due to the raw materials and steel is a large part of raw material costs. So, overall the changes in duties imposed on metals will bring down the production costs, Shashank Shrivastava, executive director of sales and marketing at Maruti Suzuki India Ltd, told Informist. 

This change in raw materials costs is typically reflected with the delay of a quarter, he said. Analysts said a decline of 1% in steel prices will increase the operating margins of a company by 10-20 basis points depending upon their specific raw material basket. 

With the objective of reducing the cost of production of steel products and increasing domestic availability of iron ore and steel intermediaries, the government has scrapped import duty on some raw materials and hiked export duty on 11 items that include iron ore and some steel intermediaries. 

PROFITABILITY BOOST

Given the low sales of two-wheelers last year, the sector will see a trend of rising sales helped by the wedding season and the reduced fuel prices will certainly add to the fledgling momentum, an analyst said. 

The Centre announced a cut in excise duty on petrol by 8 rupees per ltr and diesel by 6 rupees as part of measures to control inflation.

Two-wheeler makers have been facing the brunt of low demand, especially in rural areas, as an increase in selling prices due to the introduction of Bharat Stage-VI norms has been aggravated by higher raw material costs. Reduced purchasing power of buyers due to the impact of COVID-19 pandemic also weighed on sales.

For commercial vehicle fleet operators, fuel prices are a big component of their cost structure. So, this price cut might come have come as a big breather for them. 

Industry experts believe the operating costs of fleet operators will go down even as the freight availability keeps rising. The fleet operators are unlikely to pass on the fuel price cut to customers, which will increase their profitability. 

Even the automakers, who have resorted to multiple price hikes over the last year to offset the rise in costs, may not pass on the advantage of reduced costs to their customers. However, any plans for a new round of price hikes may have been put to rest. 

However, analysts also warned that if the Ukraine-Russia war doesn't de-escalate any time soon, automakers may see sustained pressure on their margins even in Jul-Sep because of elevated commodity costs globally.  End

Edited by Shirsha Thakur

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