GST Relief Fades as Commodity Storm Threatens Indian Auto Recovery
The recent reduction in goods and services tax (GST) had provided a much-needed boost to India's automotive sector, lifting it from a prolonged slump. However, that momentum is now under threat as automakers grapple with an unprecedented surge in raw material costs. This dual challenge of maintaining sales growth while managing profitability has put the industry at a critical juncture.
Post-GST Sales Boom Meets Commodity Reality
Following the September GST reduction and the festive season, Indian automakers experienced record-breaking demand in the December quarter. According to data from the Society of Indian Automobile Manufacturers (Siam), passenger vehicle sales grew by an impressive 21% to reach 1.27 million units during this period. Two-wheeler dispatches increased by 17% to 5.69 million units, while commercial vehicle sales saw a 22% growth to 290,085 units.
This remarkable recovery in the world's third-largest auto market now faces a significant threat from soaring commodity prices. Since October, key raw materials including aluminium, copper, steel, and platinum have seen dramatic price increases ranging from 15% to over 40%. This surge, driven by geopolitical uncertainties and rising global demand, has created what industry leaders are calling an unprecedented situation.
Industry Leaders Sound Alarm on Margins
Major automotive companies across segments have flagged serious concerns about their profitability. Maruti Suzuki India Ltd and Hyundai Motor India Ltd, the country's leading car manufacturers, have both highlighted the pressure on margins from rising input costs. The situation is equally challenging for commercial vehicle maker Tata Motors Ltd and two-wheeler manufacturers including TVS Motor Co., Bajaj Auto Ltd, and electric scooter maker Ather Energy Ltd.
"I don't think anybody knows what's happening," said Tarun Mehta, co-founder and chief executive at Ather Energy, during a post-earnings call. "This is truly unprecedented in every way. There are a lot of commodities going haywire." Mehta noted that while some commodities face genuine demand-supply gaps, others appear to be in what he described as a "hype situation" that could last several quarters.
Price Hikes Loom as Companies Grapple with Costs
Faced with these mounting pressures, automakers are being forced to consider price increases that could potentially suppress the hard-won demand recovery. Hyundai Motor India has already implemented price increases, particularly on its Venue compact SUV, while absorbing some of the cost impact internally.
KS Hariharan, head of investor relations at Hyundai Motor India, acknowledged during a media briefing that "the industry has been going through tough times" on the commodity front. Similarly, TVS Motor's director and chief executive KN Radhakrishnan revealed that the company has already implemented modest price increases of 0.2-0.3% and continues to monitor the situation closely.
Bajaj Auto has deferred pricing actions to the current quarter, with chief financial officer Dinesh Thapar explaining that the company chose to focus on volume growth during the festive season before addressing cost pressures. The company now plans to implement price increases in the January-March quarter.
Currency Depreciation Compounds the Challenge
The commodity price surge is further exacerbated by currency depreciation, according to industry experts. Anurag Singh, advisor at consulting firm Primus Partners, noted that major currencies including the US dollar, euro, and Chinese renminbi have appreciated by 4-5% since October, significantly increasing input costs for auto suppliers.
"At the same time, although OEMs are seeing higher volumes, intense competitive pressures are limiting their ability and willingness to absorb cost increases," Singh observed. This creates a delicate balancing act for automakers who must navigate between maintaining competitive pricing and protecting their margins.
Steel Industry Dynamics Add to Concerns
Beyond non-ferrous metals, there are growing concerns about steel prices as well. Rahul Bharti, senior executive officer-corporate affairs at Maruti Suzuki, expressed apprehension that domestic steel producers might be using safeguard duties on imports as an opportunity to raise prices.
"Though there was a clear message from the government that the steel industry should not use it to profiteer or raise commodity prices, it appears there are some such pressures," Bharti told analysts. He emphasized that the company would engage with steel manufacturers to ensure that safeguard duties are not misused to artificially inflate prices.
According to commodities market intelligence from Big Mint, steel prices remained relatively stable in the October-December quarter but have increased by approximately 8% in January compared to October levels. Tata Motors managing director Girish Wagh noted that while steel prices have risen, the impact has been less severe than the increases seen in non-ferrous metals like copper and platinum group metals.
Industry Prepares for Continued Volatility
As automakers navigate this challenging landscape, most are preparing for continued volatility in commodity markets. Companies are implementing various strategies including cost reduction programs, operational efficiencies, and selective price increases to manage the impact on their bottom lines.
The coming months will be crucial for the Indian automotive industry as it attempts to sustain the growth momentum achieved through GST reductions while managing the headwinds from rising input costs. Industry leaders emphasize the need for careful planning and strategic pricing decisions to ensure that the hard-won recovery is not derailed by the current commodity storm.
