The Hindu Business Line : Bumpy ride ahead for auto sector

In the results that were out on Friday, Tata Motors, the country's biggest automobile company, said that courtesy higher input costs its operating margin for the second quarter at 12.5 per cent trailed the year ago level of 13.8 per cent. Mr Ravi Kant, Executive Director, Tata Motors, estimates input costs for the company to have risen by 7-8 per cent.

The company is gearing up for another round of cost reduction. From 2001-03, it saved Rs 1,000 crore in cost. "We are now looking at something on a similar scale," Mr Praveen Kadle, Executive Director, Tata Motors, said.

Alongside, new overseas markets are being opened up to enhance scale. The company is already top seller in the South African market for 7 tonne-GVW light trucks, its cars also launched there recently.

Largely due to aggressive domestic sales taking base numbers up, growth rate in trucks is slowing. With the 5-6 year business cycle already in its third, a flat to marginally high growth rate is expected for trucks next year. Not to mention, the direction interest rates might take amidst inflation and the impact that has on vehicle financing.

Statistics could cause a deceleration in car growth rate too as the base gets bigger. "It was around 20 per cent but by year-end it may be 15-17 per cent," Mr Rajiv Dube, Vice-President (Commercial), Passenger Car Business Unit, Tata Motors, said.

Given the delicately poised growth rates and general inflationary scenario, there is real dilemma on how much rising input cost can be passed on to the market.

Last week, when Maruti Udyog Ltd declared its result, the company said second quarter was impacted by higher material cost and price repositioning of select models.

What will add pressure is emission compliance coming up in April 2005, when select cities upgrade to Bharat Stage III with cascading impact on other towns, taking norms there to the next higher rung. This applies to trucks as well.

Industry officials say the technology involved in Stage III compliance is of a higher order than what was seen in the earlier stages. Thus costs for the next level cannot be dismissed as incremental costs. "It is too early to peg a cost for Stage III compliance, we are trying to see how best we can contain it," Mr Kadle said.

The fuzzy area is how to ease this mix of high input cost and emission compliance into a market pinched by inflation. What is the right share for pass-on without hitting sales?

This is a tricky question because few players, possibly none, have actually passed on a sizable part of cost increase to date. Tata Motors itself, over the last two years, hiked vehicle prices by 35-40 per cent on the average but officials said cost pressure was one third passed on to the market, one third contained through cost savings and one third, absorbed. Not all did so. Fewer still reveal the ratio.

Some companies dropped prices with a smiling face and quietly bled within or offset it against larger global operations. Consequently, the market's demand elasticity is hard to gauge because sales are being driven by cash discounts and incentives.

The market is unrealistically priced and there is now strong suspicion that demand-pull may be weak in the sea of discounting. In such a situation how do you increase prices?

Dr V. Sumantran, Executive Director, Tata Motors, feels the volume hunt is not over and surplus industry capacity in cars may force manufacturers to further absorb costs. In focus then, would be the cost of absorption and the impact that has on operating margin, particularly for players with a game centred on the spoilt segment of the vehicle market.

On Thursday, Mr Alan Durante, Executive Director, Mahindra & Mahindra Ltd (M&M), said, price hikes are taken depending on time and market condition. For the present, few industry answers on cost pressure are getting any better.

Manufacturers, however, are gearing up for the party closer at hand. Traditionally the fourth quarter sees a peak in sales. That may now gain fuel from the emission compliance aspect. With, a likely slump in FY06 first quarter, as the price for it.