Pressure easing at auto, consumer appliance firms as input costs cool down

Manufacturers, however, remain watchful of inflationary trend, even as their prices hikes begin to outpace incremental costs

After a persistent increase in commodity prices, automobile and consumer appliances firms are expecting the cost pressure to ease as prices of the key inputs including steel, aluminum, copper, plastics and some precious metals, show signs of softening. They however, continue to tread with caution and remain watchful of the inflationary trend. As the price hikes taken by the manufacturers begin to outpace the incremental cost pressures, margins of companies are expected to expand in the current quarter, said analysts.

“Commodity prices are expected to remain volatile but one is unlikely to see the steep hike one has seen in the last one year. With most auto companies having taken price hikes, one can expect margins to improve from here on,” said Hemal Thakkar, director, Crisil Research. Prices of aluminum, steel, copper and other commodities have jumped 25-75 per cent in the last one year, he pointed out.

In a post earnings investor call last week, Maruti Suzuki India said that the cost of precious metals declined in the third quarter and a correction is expected in steel prices in the fourth quarter as well. This coupled with lower discounts and price hikes to help gross margins, said the company.  It expects raw material prices to stabilize going forward, said the management of the car market leader. The average raw material prices rose 10 per cent compared to last year.

Maruti’s gross margin during the quarter improved 50bps quarter on quarter as price hikes and lower discounts more than offset the incremental input cost pressures. This, along with better operating leverage, drove 250bp QoQ expansion in EBITDA margin to 6.7 per cent — the first sequential improvement after four consecutive quarters of decline.

Though still at an elevated level, prices of hot rolled coil (HRC) steel, platinum, and natural rubber (domestic) have cooled off. Current prices of HRC for instance are at Rs65000-66000 per tonne as compared to Rs68,350 per tonne in the fourth quarter of calendar year 2021. It was Rs67,317 per tonne in the third quarter of the calendar year.

Similarly, platinum -- a precious metal that has seen an upswing in demand from auto companies since the switchover to BS-VI emission norms has also seen the prices soften quarter-on-quarter. Its current price stands at $32.5 /gram -$33.0/gram from the highs of $38.1/gram in the second quarter of calendar year 2021.              

The management of Bajaj Auto also indicated that the cost pressures have reduced to some extent. While it does expect some increments in the current quarter it is not going to be too severe. Like the carmakers, two wheeler makers have also been taking frequent price hikes. Amid a weak demand in the domestic market, Bajaj Auto has been able to pass on the costs in phases to the customer, the company said during the call.

Meanwhile, it’s not only the cars and two wheeler makers who jacked up prices. Prices of ACs, refrigerator, television among other consumer durables rose by an average 12-13 per cent last calendar year as manufacturers took multiple rounds of price increases to offset the cost inflation.

They have taken another round of 5-10 per cent increase in the current month. Consumer durable firms remain cautious and unsure of the softening seen in the recent past to sustain.

“In the third quarter, we did see some cooling off in the raw material prices, but the fourth quarter has started off again with some volatility. So it's difficult to say what kind of contribution margins would be there in these product categories, but we do believe that it will be now moving north from here,” Anil Rai Gupta-- chairman and MD of Havells, told investors in a post earnings call. Gupta expects the prices to get back to normalized levels either in one or two quarters or in the next fiscal.

Others in the sector echoed a similar sentiment. Atul Lall, MD at Dixon Technologies—a contract manufacturer of consumer electronics and home appliances said, “There has been some kind of softening in commodity costs and obviously one expects it to continue.”

Polymers’ prices have witnessed a correction of 2-5 per cent. Even the freight costs have come down from its peak of 8-10 per cent. However, it is still higher compared to last year, he said. In metals, steel has also reduced by 3-5 per cent, aluminum still remains elevated while copper is stable.

“We expect further softening as the situation stabilizes and supply chain disruptions start to ease,” said Lall.   Hit by the raw material inflation, Havells' gross margins for the third quarter contracted by 580 basis points to year-on-year.