Comments
That the big hike in excise duty for diesel cars has not come about in the Budget is a good reason to cheer for select players in the automobile industry. Had it happened, Maruti Suzuki, which derives about 30 per cent of its total revenues from the sale of diesel cars and Mahindra and Mahindra, all of whose utility vehicles run on diesel would have been at a greater disadvantage over the others.
Now, the across-the-board increase in excise duty by two per cent levels the field for all, be it two wheeler makers or commercial vehicle manufacturers or passenger car players. History suggests that players will simply hike retail prices to pass it on.
The hike in excise duty does come at a difficult time for the auto sector. After two successive years of 26 per cent growth (2009-10 & 2010-11), auto industry sales have grown only by 12.5 per cent (so far in 2011-12), thanks to the high inflation rate and interest costs. Besides, pressure on the raw material front, first from high commodity prices and then a depreciating rupee (making raw material imports costlier) has shrunk the operating margins of almost every company in the sector this fiscal. Operating margins of Tata Motors (standalone) for example, has come down from 10 per cent last year to 6 per cent this year in the April-December period.
Pricing power
Given this background, this round of excise hikes becomes a tightrope walk for the industry. For instance, the excise duty hikes are expected to make M&M vehicles dearer by anywhere between Rs 3,000 and Rs 35,000.
If companies choose to pass it on, demand could suffer a blip. If they don't choose to pass in on, their margins may suffer further. That said, going by history, automakers are endowed with good pricing power. The last nine months itself is an example, where despite a moderation in growth, companies raised prices periodically to pass on input price increases. They can be expected to do the same now. Although this may impact demand in the short-term, profit margins should hold . An expected easing in interest rates would provide the needed fillip to demand over the next six months.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.