According to sources, some car and bike companies are steadily scaling up their prices. They are citing non-commodity based costs. This will help these companies to post better profits upon recovery of demand.
Gross margins of several listed automobile companies have touched their highest levels over the last 10 years, thereby showing how they are keeping the benefits linked to lower commodity prices. Additionally a few automobile companies are even raising prices by citing non commodity based costs as the reason. This will also help foster growth in profits with a steady revival in overall demand. Average gross margins of these listed companies have been boosted over the last four years to stand at 30.4% for the September 2015 quarter in comparison to 25.2% for the FY12. Automobile companies are being helped by considerably flagging commodity prices and pricing power revival to some extent.
Commodities take up a whopping 20% of vehicle selling prices. Steel, aluminum and plastics comprise 40%, 15% and 20% of this component while copper and rubber take up 10% each. Owing to falling prices of commodities, raw material costs in comparison to revenue percentages of automobile companies have gone down by 400-450 basis points over the last seven quarters. Maruti Suzuki, India’s biggest automobile maker, witnessed rise in gross margin by 648 bps to a healthy 33.2% from the March 2014 quarter. Bajaj Auto, the biggest three wheeler maker in the country, also reported 33.2% in this period with a 342 bps expansion.
Operating margin before depreciation (EBITDA) is lying below the 2010 peak levels due to lower utilization of capacities and high fixed costs as a result. This has chipped away at overall gross margins. However, with revival of demand, margin should rise by at least 200-300 bps by the fiscal end. While Maruti Suzuki is slated to report growth of 400-500 bps for the current and next year in comparison to FY14, Ashok Leyland should also post expansion by 350-400 bps for a similar period.