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Unabated rise in metal prices could dent auto firms’ margins

LiveMint logoLiveMint 08-09-2017 Vatsala Kamat

Auto firms have reason to worry again. Just when the din about the impact of demonetisation, BS-IV emission norms compliance, and the new goods and services tax is fading, the unabated rise in key input costs is a growing concern.

International and domestic prices of most metals like steel, copper, alumina and lead skyrocketed between 25% and 40% in a year. And, in just a month, steel prices shot up by 13% while lead and copper were not far behind.

Subrata Jana/Mint

Commodity experts attribute this to China cutting back on production in order to absorb excess supply in the markets.

Meanwhile, recovery in developed economies has also led to higher demand for commodities, particularly metals. So, analysts forecast that global metal prices could sustain at higher levels for a couple of quarters, implying a similar trend in domestic markets.

Certainly, higher commodity prices will tell on the profitability of auto stocks. After all, nearly a fourth of their raw material costs are linked to metals. In fact, the June quarter operating margins of most of the listed firms were hit by at least 100-200 basis points when compared to the year-ago period.

No wonder, the BSE Auto index has corrected since the beginning of August when metal prices continued to rise and has since underperformed the Sensex.

However, the 3-5% price hike effected by most auto firms across the product range helped to offset the cost increases, at least partially. Another saving grace is the buoyant demand that has enabled firms to pass on the cost increase. Both July and August have been good months for auto sales. Also, the forthcoming months may witness new launches and lower discounts that may offset the input cost increases.

Therefore, analysts are unlikely to downgrade earnings due to margin pressure, at least till the festive season. After that, any moderation in sales or further increase in commodity prices may dent margins further and take a toll on valuations.

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