HomeBusinessPrices of raw materials, oil to pinch automakers’ margins

Prices of raw materials, oil to pinch automakers’ margins


Rising cost of raw material and crude oil following the Russia-Ukraine conflict may drag down the margins of auto manufacturers. Auto stocks have corrected 10-23% in anticipation of the impact.

However, the BSE Auto Index ended at 22,845.16 points, up 1.8%, on Thursday, in line with the broader index, the BSE Sensex, which closed 1.5% higher.

The Auto Index, comprising 15 auto and auto ancillaries heavyweights, has corrected 12% since 22 February, when Russian forces entered Ukraine.

Automakers may have to take steep price increases in a staggered manner this year to offset the higher costs due to elevated freight rates and substantial input cost inflation since February. An equity research note by financial advisory and investment banking firm Elara Capital said companies could witness an impact of 6-21% on estimated FY23 margins, in case they do not pass on the increase in raw material cost to consumers. However, raising prices, especially for two-wheelers, amid a demand slump may further hurt sentiment.

Original equipment manufacturers (OEMs) may also have to contend with elevated freight rates because of the spike in global crude oil price, as demand for entry-level two-wheelers and four-wheelers may be hit further following a spike in retail fuel prices. According to Elara Capital, freight rates have gone up by 23% along the Delhi-Mumbai-Delhi route since last August. Higher diesel prices may hurt profitability for commercial fleet operators, which in turn would affect demand for commercial vehicles, which have seen a healthy rebound across segments.

However, Jay Kale, senior vice president, Elara Capital, said fleet utilization will depend on the overall economic scenario, which remains unclear.

Absolute profits for fleet operators are likely to still be higher than August 2021 levels as freight rates have increased even as diesel prices have dipped recently, Kale added.

According to Elara Capital, Maruti Suzuki, Tata Motors’ UK-based subsidiary Jaguar Land Rover, Mahindra and Mahindra, and Eicher Motors are likely to face higher supply chain disruptions due to the semi-conductor shortages, while the impact of the disruptions is likely to be least for Ashok Leyland, Hero MotoCorp, and Tata Motors’ domestic business. Two-wheeler makers TVS Motor Co. and Bajaj Auto may see an impact on premium models.

On the demand side, Hero MotoCorp is likely to be most affected as high fuel prices will raise the running costs of entry-level two-wheelers, it added.

However, on the upside, analysts at the financial advisory firm expect export-oriented businesses like Bajaj Auto and TVS Motor Company may see some positive momentum in oil-dependent African economies.

Prices of key raw materials have surged since Russia sent troops to Ukraine in an all-out war on February 2022. In the last twenty days, the price of aluminum has shot up by 18%, copper by 10%, lead by 7%, and steel by 5%.

Source link

Must Read