)
With rising import costs, increased expenses for new launches together with high marketing costs coupled with high discounts, the margins of car makers are under huge pressure. While analysts feel that there could be a compression of operating margins of around 1.5 to 4 per cent owing to weak volumes and reduced pricing power, original equipment manufacturers (OEMs) too seem to agree.
As it is passenger car sales are on a slow lane, falling 4.67 per cent during the first half of the fiscal (which is perhaps the sharpest decline since 2002-03), what's more, the first two months of the current quarter too do not hold much promise of growth.
During October passenger car sales dipped by 3.88 per cent, and as for November, leading carmakers like Maruti Suzuki and Hyundai Motors India, which are volume players, have reported dips of 5.9 and 3.6 per cent respectively. General Motors sales too fell by 14 per cent while Tata Motors reported a fall of 42 per cent during the month. Only Ford India and Honda Cars India reported a growth in sales owing to new launches of EcoSport and Amaze.
New launches as well as tough times actually increase marketing costs for carmakers. Ajay Raghuvanshi, vice president, business management, Nissan Motor India said, " Cost pressure is indeed high. While inventory costs, input costs, production costs etc are high, this year cost of sales promotions is also very high. This usually happens when the market is down, then the cost of promotions goes up significantly. Overall, the cost pressure is high by around 2.5 per cent at least, and while we have raised prices recently, there could be pressure on margins from next year."
A recent report from ICRA highlights that, "The industry operating margin is likely to be under pressure with weak volumes and reduced pricing power – leading to an estimated margin compression ranging between 150-400 bps during 2013-14." It further adds that "The profitability metrics of industry participants too are unlikely to have any meaningful respite over the near term in view of (a) increase in expenses related to launch of new models, (b) increase in employee costs as several OEMs have announced substantial wage hikes, (c) likely sustenance of discounts-led sales push, (e) restricted pricing power in the wake of intense competition and (f) currency headwinds."
A Mumbai-based analyst explained that OEMs would continue to face margin pressure as import costs have risen sharply in the wake of the falling rupee.
R Sethuraman, director, finance and corporate affairs, of Hyundai Motor India admitted that that one cannot deny that cost pressure is high. "While there are multiple factors responsible for this, in the wake of current rupee-depreciation, the import costs have gone up. To some extent, we have to absorb this," he added.
Market share in the domestic passenger vehicle industry still remains concentrated in the hands of few players, reflected in the fact that top four players account for 75 per cent of industry volumes. "This implies that profitability pressures on the relatively low volume players may be even higher resulting in sustained external financing dependence to fund losses and capital expenditure requirements," feels ICRA.
Dealers feel that sales are unlikely to pick up anytime soon. Gulshan Ahuja, secretary general, Federation of Automobile Dealers Associations (Fada) says, "Discounts are at an all time high, even then,the situation is unlikely to improve until the next general elections. There are no major changes in the macro economic situation, and therefore, the sentiments, as such are negative." He added that dealers are sitting over an inventory of around 60-65 days at the moment.
P Balendran, vice president, corporate affairs of General Motors India seemed to agree. "We are not expecting a turn-around until the elections. Showroom traffic is down, the sentiments are negative, sales of diesel vehicles is tapering down. We expect the challenging conditions to continue and there is huge pressure on margins. The bottomlines are adversely hit," he said.
