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Money Jun 6, 2012

Auto makers could hike prices soon, sector may bounce back

By Sourav Majumdar

The petrol price hike has proved to be a major dampener for the auto sector, with major automakers like Maruti Suzuki, Ford, TVS and General Motors India posting lower numbers. Hyundai Motors, Mahindra and Tata Motors, however, registered increases in sales. Despite the petrol price hike and the high interest rate scenario affecting the sector, analysts expect the trend to improve from the first quarter of FY13 onwards, with automakers expected to hike prices and also benefit from softer commodity prices.

The slowdown in the auto sector, at this point, is evident. Most analysts reckon that the slowdown earlier visible in passenger cars is now evident also in two-wheeler volumes, where growth has moderated to about 10 percent in the past four months versus 17 percent in the first eight-months of FY12. Brokerage firm Motilal Oswal, in its latest report on the auto sector, points out that utility vehicles and light commercial vehicles, however, continue to record strong volume growth.

Will the auto sector see better days? Reuters

While auto majors like Mahindra benefited from its diesel range and the growing demand for diesel vehicles, even the Society of Indian Automobile Manufacturers (SIAM) has admitted that things are not looking good. A recent Reuters report quoted Sugato Sen, SIAM's senior director as saying he did not expect sales to be so low in May.

But despite the grim scenario at this point, analysts say the future will be better for the sector. Despite the short-term volumes outlook being impacted by macro headwinds, Motilal Oswal says long-term volume outlook remains positive, driven by strong economic growth, softening in interest rates, new product launches and export potential. Similarly, other analysts are also forecasting that while the steep petrol price hike has proved an immediate dampener, the second half of FY13 will be positive for the industry.

The price increases are also expected to help restore margins for the automakers, and analysts say the margins have already bottomed out in FY12 and will head upward from now on. Higher operating leverage and softer commodity prices, together with the price hikes, will lead to a gradual improvement in margins from the first quarter of FY13.

But what could be the extent of price hikes? The volatile foreign exchange situation and the increasing competitive intensity in some segments would also restrict pricing power, says Motilal Oswal.

"We anticipate price increases coupled with productivity improvement programs and high operating leverage to drive profitability from the first quarter of FY13 onwards," says the broking firm.

The recent, deeper-than-expected cut in the key repo rate by the Reserve Bank of India has also provided a boost to the auto sector, something which will be evident in the coming days. The reversal of the interest rate cycle has begun with the 50 basis point rate cut in April, and this will augur well for demand for commercial vehicles and passenger vehicles, analysts reckon. EBITDA (earnings before interest,tax, depreciation and amortization) margins are estimated to improve in FY13, analysts say.

The fourth quarter FY12 volumes also showed a divergent trend, with strong volume growth in LCVs, utility vehicles and cars, but a decline in three-wheelers and moderation in two wheelers, and medium and heavy commercial vehicles, the Motilal Oswal analysis says.

Raw material costs were also the highest in the past five years on the back of higher commodity costs, adverse foreign exchange movements and product mix. Most auto OEMs (original equipment makers) have also indicated that they do not expect to benefit from commodity cost savings as the decrease in costs in the international markets has been offset by a depreciating rupee.

EBITDA margins, however, have been improving sequentially after posting eight quarters of decline. This trend is expected to continue now. With the latest GDP growth figure of 5.3 percent for the fourth quarter of FY12 rattling the official establishment, if the RBI acts further with another round of rate cuts in its June 18 policy review, the auto sector could get a further boost.

by Sourav Majumdar

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