Stories
Raw-Material Costs Dent Indian Auto Margins Despite Strong Demand
- •HSBC notes that Indian auto demand momentum appears to have peaked, with rising raw-material costs cancelling out the benefits of higher sales volumes.
- •Despite strong wholesale growth in the September quarter across vehicle categories, profit margins are expected to decline due to lingering commodity cost pressures.
- •Carmakers have limited room for further price hikes as vehicle prices near pre-GST-cut levels, making cost controls and product mix critical for future margins.
- •HSBC maintained its stock ratings while cutting price targets for five out of 16 stocks, raising targets for three, and keeping eight unchanged.
Key Questions Answered
HSBC kept ratings unchanged for major automakers while cutting targets for five stocks and raising three in its October note. Maruti Suzuki's target fell 9.4% to Rs 14,500 with an expected 26.5% volume rise and a 10% EBITDA drop, while M&M showed the most upside at 47.1% with a steady target of Rs 4,200.
While the September quarter saw strong wholesale volume growth, rising raw material costs completely offset operating leverage and reduced profitability. Gross margins are projected to fall 100 to 150 basis points for four-wheelers and 150 to 200 basis points for commercial vehicles.
Carmakers have attempted to pass rising costs onto consumers through multiple price hikes, such as Maruti raising prices across June, August, and September, and M&M raising SUV prices by 2.7% in July. HSBC notes that vehicle prices are now nearing pre-GST-cut levels, making further hikes risky for demand.
