Saturday November 7, 03:07 AM

Source: Indian Express Finance

Auto parts firms' margins likely to be hit in next 2 quarters

By Shweta Bhanot
Auto component makers in the country expect their profitability to be impacted by 3%-4% in the third and fourth quarters of the financial year, with commodity prices further looking north. The commodity prices, on an average, are expected to increase by around 10% in the third quarter and by 7%-8% in the fourth quarter. The prices have appreciated by 15% in the past three to four months. NK Minda, chairman and managing director, Minda Group, said, The market is expected to be bullish and an increase in commodity prices looks unavoidable. We are talking about an impact of 5%-7% on gross margins of the industry. We expect the original equipment manufacturers (OEMs) to understand our concern. The reaction will be mixed in the industry. While a few auto component makers will look at absorbing the impact of the rise in prices, others may look at passing it on or balancing it. The commodities required by the industry include steel, plastic, aluminum, copper and rubber. Base metal market has remained quite bullish in the last couple of months and is expected to continue with the run. However, we do not expect any new heights to be achieved by the market and reach to the levels achieved last year. Except for lead, all the other base metals are expected to strengthen further, with projection for third quarter being around 10% and 7%-8% in the fourth quarter, said Amar Singh, head research (Indian commodities), Angle Broking. Harshbeena Zaveri, president, NRB Bearings and deputy chairman, ACMA western region, said, There will be price pressure due to the strengthening of commodity prices, which is a matter of concern. Mahantesh Sabarad, senior research analyst, Centrum Broking, said, The auto component makers will take a hit of 2% on margins in the second quarter and 2.5% in the fourth quarter. Of the total revenue earned by the auto component industry, exports stand at 10%, replacement at 20% and 70% domestic OEM demand. The industry will look at passing on the impact to the domestic OEM and in the replacement market. However, in the replacement market due to the huge pipeline inventory, the pricing action will show up not before three months. On the export side, with recovery yet to take place and the weakening dollar, the pricing action will be undertaken before six months from now. Even OEMs have expressed their concern over the strengthening commodity prices and hinted at a price increase of 2% on vehicles due to the building pressure. Recently, Pawan Goenka, president, Society of Indian Automobile Manufacturers (Siam) and automotive sector, Mahindra & Mahindra (M&M), had said, The industry is working on almost no stock levels. The industry s inventory level has come down to normal levels and no buffer remains. Moreover, we are talking about commodity prices looking northward in the coming quarters. Among the commodity prices, sheet metal and tyre prices are expected to see increase in months to come. This may also show up in the form of increased prices by makers.