Price hikes to dampen recovery for Indian automakers after festive boost: Fitch

Fitch Ratings said that the automakers' decision to hike prices will dampen consumer sentiment in an already weak demand environment.

Mumbai: Indian automakers' plans to pass on higher commodity prices to customers will dim the prospects for a demand recovery after December when the boost in some categories from pent-up demand and festive spending fades and the economic impact from the coronavirus pandemic reasserts itself, Fitch Ratings said on Thursday.

Pent-up demand after gradual easing in the government's lockdown measures helped monthly wholesale volume of passenger vehicles (PVs) return to growth after July. PV wholesale volumes rose by 13 per cent year-on-year in the quarter ended September.

Festive demand helped sustain the growth after September but the pace slowed to 5 per cent in November from 14 per cent in October. This is even after including timing benefit from the Diwali festival falling in November instead of October. This indicates that pent-up demand is tapering off, said Fitch.

Demand in other auto categories has remained weak. Commercial vehicle (CV) wholesale volume fell by 20 per cent in the quarter ended September after a sharp 85 per cent drop in the preceding quarter, reflecting challenges from excess freight capacity, weak availability of financing and dependence on more cyclical end-markets -- particularly, for medium and heavy commercial vehicles (MHCVs).

Reported CV wholesale volumes from leading manufacturers including Ashok Leyland Ltd, Tata Motors Limited and Mahindra & Mahindra suggest the volume inched towards normal levels in October and November, but registrations declined by more than 30 per cent.

Monthly despatches of two-wheeled (2W) vehicles to dealers increased by double digits after August. However, retail sales continued to decline underscoring challenges from the limited availability of financing in rural areas, which offset better demand stemming from good harvests and consumers' preference for personal mobility amid the pandemic.

The automakers reported that profitability in the three months to September, the second quarter of the financial year ending March 2021 (FY21), rose from 1Q FY21 as they benefitted from better fixed-cost absorption arising from higher volumes, cost efficiency measures amid the pandemic and prudent pricing practices.

Fitch said these factors helped to counter-balance the uptick in commodity prices as automakers chose not to raise prices amid an uncertain environment. Nonetheless, some leading automakers recently announced their intentions to raise prices from January 2021 with the aim of passing on the sustained increase in commodity prices since June.

"The extent of the price increases is not clear at this stage, but we believe they could range from low to mid-single digits depending on the model and company. We expect most automakers to raise their prices, given the competitive margins and market participants' broadly synchronised price moves in the past."

The price increase will further lift the cost of owning vehicles after price hikes of up to 15 per cent from April 1 following the implementation of BS6 -- a more stringent emission framework. This will dampen consumer sentiment in an already weak demand environment.

"We believe the impact will be more pronounced on CVs which experienced higher price increases in percentage terms in April," said Fitch.

(ANI Report)