Price hikes to hit demand recovery for automakers, says Fitch Ratings

Automakers’ plans to pass on higher commodity prices to customers will dim the prospects for a demand recovery after December 2020, when the boost in some categories from pent-up demand and festive spending fades and the economic impact from the coronavirus pandemic reasserts itself, Fitch Ratings has said.

The price increase will further raise the cost of owning vehicles in India, after price hikes of up to 15% from April 1, 2020, following the implementation of BS6, a more stringent emission framework. This will dampen consumer sentiment in an already weak demand environment. “We believe the impact will be more pronounced on commercial vehicles, which experienced higher price increases in percentage terms in April,” Fitch said.

Leading automakers recently announced their intention to raise prices from January 2021 with the aim of passing on the sustained increase in commodity prices since June 2020. The extent of the price increases is not clear at this stage, but they could range from low- to mid-single digits depending on the model and company. Fitch expects most automakers to raise prices, given the competitive margins and broadly synchronised price moves in the past.

Pent-up demand after the gradual easing in lockdown measures helped monthly wholesale volume of passenger vehicles (PV) return to growth after July 2020. PV wholesale volumes rose by 13% year on year in the quarter ended September 2020, according to Society of Indian Automobile Manufacturers data.

Festive demand helped sustain the growth after September, but the pace slowed to 5% year on year in November 2020 from 14% in October 2020. This is even after including timing benefit from Diwali falling in November in 2020 instead of October in 2019. This indicates that pent-up demand is tapering off, Fitch said.

The rating agency said demand in other auto categories has remained weak. The commercial vehicle (CV) wholesale volume fell by 20% year on year in the quarter ended September 2020 after a sharp 85% drop in the preceding quarter, reflecting challenges from excess freight capacity, weak availability of financing and dependence on more cyclical end-markets — particularly, for medium and heavy commercial vehicles.

Reported CV wholesale volumes from leading manufacturers, including Ashok Leyland, Tata Motors, and Mahindra & Mahindra suggest the volume inched towards normal levels in October and November, but registrations declined by more than 30%, according to Federation of Automobile Dealers Associations (Fada) data.

Monthly despatches of two-wheelers to dealers increased by double digits year on year after August 2020. However, retail sales continued to decline, underscoring challenges from the limited availability of financing in rural areas, which offset better demand stemming from good harvests and consumers’ preference for personal mobility amid the pandemic, Fitch said.

Automakers reported that profitability in the three months to September 2020 rose from the first quarter as they benefitted from better fixed cost absorption arising from higher volumes, cost efficiency measures amid the pandemic and prudent pricing practices. These factors helped to counterbalance the uptick in commodity prices as automakers chose not to raise prices in an uncertain environment, according to Fitch.