Cost push, emission norms may hit auto firms

Auto makers are in for a rough ride ahead as a rise in raw material prices coupled with costs associated with new emission norms could force them to increase prices further, which may hit volumes.

The Budget raised factory-gate duties on large cars and sport utility vehicles by 2 per cent, which was immediately passed on by vehicles makers, including top carmaker Maruti Suzuki and utility vehicle makers Mahindra & Mahindra and Tata Motors.

From April 1, all vehicles will have to comply with Euro IV emission norms across 13 major cities, adding to costs and setting the stage for another round of price hikes.

"The industry will not be able to absorb all these costs," said Rajiv Dube, head of passenger cars at Tata Motors, the country's largest vehicles maker.

"Raw material prices are also increasing....we will have to pass on the costs of Euro IV compliance to customers," he said.

While there is still some uncertainty over the actual date of implementation of emission norms, auto makers are working on the April 1 deadline.

Analysts estimate the rise in prices, including excise duty hikes, to be in the range of 5 to 6 percent.

"We can expect an increase of 2 to 4 percent arising from this (Euro IV compliance)....and along with the rise on account of excise duties means a total increase of 5 to 6 percent," said Surjit Arora, analyst with Prabhudas Lilladher.

Dilip Chenoy, director-general of industry body Society of Indian Automobile Manufactuers, said he expected a sharp fall in sales of vehicles in April compared to March due to change in emission norms.


Commercial vehicles, which carry freight and are a barometer of economic activity in the country, will be hit harder compared to cars and other passenger vehicles, analysts said.

"Most cars, especially those recently launched, are already compliant with the norms and others are working on it and they are prepared, but commercial vehicle makers are yet to factor in those costs of upgradation and they also have to contend with the rise in diesel prices," said Vineet Hetamasaria, auto analyst with PINC Research.

Truck sales also depend heavily on financing with 90 percent of the vehicle cost being financed. A rise in prices would put more pressure on truck owners, with more than three-fourths being small operators.

Auto makers could also face further pressure from auto parts makers passing on their costs to them.

"If they have a price hike for the end product, we would expect them to understand our input price has gone up," said an official at NRB Bearings.

If input costs rise further in the near term, it would be directly passed on to the manufacturer, said Santosh Singhi, Chief Financial Officer at Amtek Auto Ltd.

"Auto parts makers have asked for price hike because of rise in rates of raw materials. Original equipment manufacturers are increasing prices as they are feeling cost pressure from supply side," said Angel Broking analyst Vaishali Jajoo.

However, auto makers are still banking on the ample liquidity in the market to see them through.

"The concern is availability of liquidity. Industry should be able to manage demand as long as financing is available," said Dube.