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Rise in steel prices to hurt automakers

With domestic steel prices set to increase in the range of 10-12 per cent following the imposition of the minimum import prices (MIP) by the Union Government, the margins of automobile manufacturers are expected to come under strain. Analysts feel that a 10 per cent increase in domestic steel prices would require price increases in the range of 0.6 per cent to 1.6 per cent depending on categories.

Some OEMs like Maruti Suzuki India Ltd (MSIL) say that they have long-term contracts, and therefore the current price rise would not have an immediate impact.

According to a recent report by Kotak Institutional Securities, steel cost accounts for around 7 per cent for two-wheelers, 10 per cent for passenger vehicles, and 16 per cent for medium and heavy commercial vehicles (MHCV). Therefore, to ensure no impact on EBITDA margins, a 10 per cent increase in domestic steel prices would require a price increase of 0.6 per cent in two-wheelers, 1 per cent in passenger vehicles and 1.6 per cent in MHCV segment.

A senior industry official in the MHCV segment felt that while the commodity prices have remained low in the past few months, the rates of discounts offered by OEMs have also been high. "This resulted in margins being thin enough. Now, with the steel prices going up, the OEMs would definitely pass on the cost increase to the consumers," he said adding that as this is likely to be a concerted move by the industry, there should not be any impact on demand.

                                                                                                                                                                                                                                                 Breakdown of metal cost as % of sales for auto OEMs   Hero MotoCorp Bajaj Auto Maruti Suzuki M&M Tata Motors Ashok Leyland Metal content 18.3  21.2 18.8 19.1 22.0 26.0 Steel content 6.5 9.8 10.0 11.3 13.3 16.2 Aluminium content 6.5 5.3 3.8 2.6 2.7 2.6 Copper content 1.8 2.1 1.7 1.9 2.2 2.8 Other Metal Content 3.6 4.1 3.3 3.3 3.8 4.4 Source: Company data, Kotak Institutional Equities estimates
Given the improvement in industry growth, Kotak said that it felt that MHCV and passenger vehicle OEMs should be able to increase prices and pass on the impact of increase in steel prices.

"For the two-wheeler segment, the price increase needed is only 0.6 per cent (for 10 per cent increase in steel prices) which should not be too difficult for OEMs to accommodate, in our view. Therefore, overall, we expect OEMs to raise prices to pass on the impact from the potential increase in steel prices," the report said.

It also analysed the case of Bharat Forge, for whom the domestic market accounts for nearly 40 per cent of revenues, with exports constituting the remaining 60 per cent. "Alloy steel cost accounts for around 35 per cent of the company’s revenues. In the domestic market, contracts with OEMs have a pass through clause for any increase in raw material prices; therefore, increase in domestic steel prices will not have any impact on the company’s EBITDA."

However, in the export segment, if the company purchases steel from the domestic market and is not able to negotiate higher prices from customers, then, a 10 per cent price hike in alloy steel can result in a 2 per cent reduction in EBITDA margin for exports.