After party, Motown fears hangover

Car sales rose 67 per cent in November, the highest since February 2004, and many in the industry haven't stopped partying since this number was announced by the Society of Indian Automobile Manufacturers.

There are enough reasons for the celebration. Car sales have grown for the 10th straight month on the back of the government's stimulus package announced in January and cheaper car loans (For example, State Bank of India offers car loans at 8 per cent for the first year). A flurry of new launches helped.

But, many have started wondering if like all things good, this will come to an end shortly. Many manufacturers are already contemplating price hikes due to the sharp rise in raw material costs and inflationary pressures. For example, SkodaAuto, the maker of Fabia and Superb, is planning to increase prices by up to Rs 20,000 next month.

Utility vehicle maker Mahindra & Mahindra (M&M) is raising prices after making certain changes in engines following the government's decision to introduce Bharat Stage-IV (BS-IV) emission norms in 11 cities. Honda Siel Cars India is planning to raise prices because of the increased cost of imports following the surge in the yen's value.

Many car makers feel the biggest party-pooper will be the increase in bank interest rates. The Reserve Bank of India (RBI) has already hinted at tighter money in the coming credit policy. This fear has intensified after the sharp rise in inflation in November.

Already, major banks have reduced their exposure to the two-wheeler segment by imposing stringent norms or charging higher rates. Non-banking finance companies are trying to fill the void but have limited presence, experts say.

Sandeep Singh, deputy managing director (sales and marketing), Toyota Kirloskar Motors, said, "About 75 per cent of our sales are financed. If RBI decides to increase interest rates, it will certainly have an impact on sales."

Prices of raw material such as steel, other metals and rubber have also increased sharply. In fact, tyre manufacturers supplying to original equipment manufacturers recently raised prices by 2-5 per cent.

Pawan Goenka, president (automotive), M&M, said: "There will be tremendous pressure on manufacturers if there is any rise in interest rates, a roll-back of excise duty benefits or a surge in input prices. Our understanding is that the industry can absorb an increase of a maximum of 25-50 basis points."

The government had in January slashed the excise duty on compact cars to nearly 8 per cent from 12 per cent. This was done to incentivise consumers, who were postponing purchases due to the uncertain economic climate. The stimulus package helped manufacturers reduce prices by at least Rs 12,000 on small cars.

But, the industry is nervous about the impact of a possible withdrawal of the stimulus package in the Budget.

Ankush Arora, senior V-P (marketing and sales), General Motors India, said, "The demand can be sustained even if there is an interest rate hike, but if the government decides to withdraw the special cut in excise duty, it will be a major dampener. Our take is that the cut won't be rolled back till the Budget, but we do not know what will happen after that."

What is certain is that vehicle prices will be increased on or before April 1 as the new fuel expected to hit the market then will be more refined than the current fuel available at pumps. Auto manufacturers have to alter their engine components to suit the new fuel.

In addition, companies heavily dependent on imported components are under pressure due to a sharp increase in the value of the trading currency in their home countries. Companies like Honda, Toyota, Skoda and Volkswagen have low local content and depend on imported parts.

Jnaneswar Sen, senior V-P (marketing) Honda Siel Cars India, said: "The Japanese yen reached a 14-year high last week, putting pressure on our imports. The combined increase in prices is 8-12 per cent after you figure in taxes like VAT. However, the quantum of the increase passed to the consumer is well below that. We have no option but to increase prices from the first week of January."

Exports started falling in October last year following deepening of global financial crisis post-Lehman collapse.

This coupled with recession in developed markets saw India's exports taking a severe beating. The impact of falling demand felt the maximum in May this with exports declining a steep 39 per cent.

However, October figures had given some indications that falling trend could be halted soon. Though exports fell in October as well, pace of decline slowed down to single digit at 6.6 per cent, which was also attributed to base effect.

Analysts had said there was an up tick in revival of some demand in the overseas markets and hoped that the forthcoming Christmas festivities would further push Indian exports.

The US and other major markets coming out of the recession in July-September quarter also augured well, they had said.