‘Automakers’ profitability likely to weaken after strong Q3FY21′
High commodity prices along with lower sales volumes are likely to put pressure on automakers’ margins after an improvement Q3FY21, Fitch Ratings said in a report. “We believe the price hikes announced by automakers in January 2021 will not fully offset higher costs.” the report said.
“We expect a quarter-on-quarter decline in volume from 3QFY21 on account of higher prices and a modest supply disruption due to a semiconductor shortage.
“This is notwithstanding our expectation that resilient demand after the November 2020 festive season will support higher volume in 4QFY21 from a low base last year and result in a stronger operating performance than our previous expectations.” Lately, prices of key raw materials, including steel and copper increased by double digits after 2QFY21.
As such material costs typically amount to more than 60 per cent of automakers’ revenue.
However, the impact on automakers’ profitability was limited in 3QFY21 as their stronger bargaining power with suppliers facilitated a lag of three-four months in passing on higher costs.
Nonetheless, sustained high commodity prices imply the cost impact will be more visible in 4QFY21, the report said.
“Automakers have limited the price hikes to low single digits in most cases, underscoring a cautious approach in the current environment. We believe this will result in moderately lower gross margins.” Consequently, the report cited that price hikes will add to the higher cost of ownership, especially in light of the continued rise in retail fuel prices after 1QFY21.
“We believe this could delay the recovery in passenger-vehicle (PV) sales volume, notwithstanding the resilience after the end of the festive season,” the report said.