Automakers raise prices, but sales may drop

Rising commodity prices and enhanced regulatory compliance are forcing automakers to take price hikes despite vehicle demand staying poor for the last six months.

Mahindra & Mahindra (M&M), Tata Motors, Toyota are among the vehicle makers that have announced price hikes from April 1. Interestingly, some of these companies had raised prices in January too.

M&M on Thursday announced raising prices of its range of personal and commercial vehicles by 0.5%-2.7%, or Rs 5,000-Rs 73,000, across its models from April 1.

Rajan Wadhera, president, automotive sector, M&M, said, "This year has seen record high commodity price increases. Further, regulatory compliances effective April 1 have also contributed to cost increases. While we have made efforts to reduce costs, it has not been possible to hold back the price increase."

Tata Motors last week announced raising passenger vehicle prices by up to Rs 25,000 from the next month. Mayank Pareek, President, PV business unit at Tata Motors, attributed the price hike to the rising input costs and external economic conditions.

N Raja, managing director, Toyota Kirloskar Motor, echoed the views of his counterparts. "We have been absorbing additional costs through a bouquet of cost reduction measures, including refinement in the production process. However, considering the trend of continuous increase, we are constrained to pass on a small portion to the customers," he said.

A Mumbai-based analyst from a global consulting firm said it is a tricky situation for the automobile companies as they are being forced to increase the price though the demand is at nadir. He, however, did not rule out that some of the manufactures may offer "discounts" after raising the prices.

According to Sridhar V, partner, Grant Thornton India LLP, the steel, aluminium and copper prices have been showing an upward trend in the past three months, and hence the original equipment manufacturers (OEMs) would look at passing the increase to the buyers. The last price increase was in January where some OEMs increased prices by about 4-5%. "The input costs have not shown any reduction in the last quarter," Sridhar said.

On the regulatory front, beginning April 1, the vehicle manufactures have been mandated to include tamper-proof high security plates (HSRP) to protect against counterfeiting and anti-lock braking system (ABS), a braking safety feature. Both the compliances have increased the costs, industry insiders claim.

Within an annual production of over 24 million units, the Indian auto industry is estimated to be among the largest in the world. As per several estimates, the automobile industry contributes around 7.1% to the country's GDP and almost 49% to the manufacturing GDP.

However, the industry is currently going through a rough patch, which is unlikely to improve until the general elections. According to a ICICI Securities report, auto dispatches were weighed down by large inventory with the dealers. Total factory dispatches for February fell 2.5% year on year to 24.1 lakh units. According to the data by Federation of Automotive Dealers Association, domestic retail sales declined 8.1% month on month to 15.8 lakh units, with all segments showing a drop. PV segment inventories increased to 50-60 days of sales in February, while for two-wheelers they jumped to 80-90 days, and 100 days-plus in some cases.