India’s move to cut goods and services tax (GST) is emerging as a crucial buffer for carmakers as they counter the impact on margins from sharply higher commodity prices. Unlike previously, companies such as Mahindra & Mahindra, Tata Motors, and Hyundai Motor India are deploying various strategies to minimise product price increases and sustain the current demand momentum.
Executive director and CEO, auto and farm sectors at Mahindra, said the GST cuts created headroom for the company to endure volatile commodity prices without resorting to steep price increases. “If we are still at prices which are lower than the GST price of September, in a way, there is a headroom which is helping us tide over the commodity cycle,” he told ET. He said Mahindra didn’t want to continue raising prices simply because demand is strong.
Mahindra raised prices by an average 5.2% in the June quarter across its petrol, diesel, and electric SUV range. The company is also working to further reduce production costs to lessen the impact of price increases in the future.
Under GST 2.0, Centre cut tax rates on small cars and SUVs measuring less than four metres to 18% from 28% plus cess, while reducing it for large SUVs and luxury vehicles to about 40% from peak 50% levy.
Factory dispatches of passenger vehicles in country breached the 400,000-unit mark in six out of eight months since the GST cut, rebounding from weak sales in the months prior. The top four carmakers have guided for more than 10% increase in FY27 sales, despite a high base kicking in from next month.
While the GST cut has provided some cushion, automakers are continuing to rely on internal cost reductions and selective price increases to absorb the commodity shock emanating from the disruptions caused by the Iran war.
At Tata Motors Passenger Vehicles, commodity pressure is more acute. Commodity costs dented profitability at its India business by 4.5% of revenue in the June quarter. MD and CEO, expects another about 3% increase in commodity costs in the September quarter.
“Commodity pressure again in Q2 is going to hit us badly,” he said on a post-earnings media call last week. He expects the fiscal first half to be particularly difficult in terms of commodity prices. He highlighted a divergent approach for Mahindra compared to the previous commodity spike. In 2022-23, the automaker had to take price increases of 17-18% as input costs surged, he said. This time, however, it has undertaken several cost reduction measures before correcting prices.
Hyundai Motor India is taking a broader cost optimisation approach. Commodity costs hurt its margins by about 1 percentage point sequentially in June quarter, mainly due to higher precious metals and copper prices. The company offset part of the impact through calibrated pricing and cost reduction.
Hyundai carried out three price increases totalling around 1 percentage point this calendar year, while pushing localisation and value engineering. Its localisation level has risen to 83% from 77-78% a few years ago, with a target of 90% by 2030.
“We are expecting that from October, industry growth will mute,” MD & CEO, Hyundai Motor India said on a post-earnings call. “We’ll have a calibrated approach and do what is best in terms of volume and profit put together.”
Market leader Maruti Suzuki is relying more on calibrated pricing.
Source from: https://economictimes.indiatimes.com/industry/auto/auto-news/gst-cuts-shield-indian-carmakers-from-commodity-price-shock/articleshow/133281617.cms?from=mdr
