Apart from relatively stable diesel and petrol prices, car buyers in India have one more reason to cheer, at least for the time being. In a departure from the previous trend, most passenger vehicle makers have refrained from going for an immediate price hike of even as key raw material costs including steel, aluminium, and copper, have risen sharply recently.
This is despite the fact that most companies have seen a good volume run, which gives them enough power to introduce price hikes. Passenger vehicle sales in India rose 7.8 per cent to 3.2 million in 2018-19, according to Society of Indian Automobile Manufacturer (SIAM). But most, including volume car makers Maruti Suzuki India and Hyundai Motor India, have chosen to absorb input costs increase, at least for the time being.
As in other product categories, price changes in the car market are governed by the price leader, which rest of the competitors tend to follow. Maruti has been a price leader by virtue of being a dominant player that commands half the market share. But despite the recent surge in the commodity prices and being in a position of strength, the maker of Baleno and Brezza models hasn’t done so, setting a precedent. January was the last month when Maruti and all the other companies increased prices as they entered the new model year.
Prices of hot-rolled (HR) steel have risen 7.20 per cent from March quarter till date, while aluminium and nickel have gone up 19.38 per cent and 5.25 per cent respectively, according to Bloomberg. For the full year ended March prices 31, HR steel and aluminium proces have increased by 22 per cent and 2.59 per cent respectively over the year ago-period.
In a conference call with analysts after the company’s fourth-quarter earnings earlier this month, Ajay Seth, chief financial officer at Maruti said while increasing commodity prices have been bothering the company for some time, it would go for a price increase only when it is a must. So far, cost control measures coupled with a better product mix –- higher contribution of pricier models in its overall sales mix -- has helped the company rein in prices. “We do not really want to exploit this opportunity just because customers like our vehicles and there is a waiting,” said Seth. “Whenever it becomes extremely necessary, only then do we go for a price increase.”
Hyundai, the second largest in the pecking order, and Honda Cars India, also haven't passed on the commodity price increase to buyers yet. Both, Rakesh Srivastava, director sales and marketing at Hyundai India, and a Honda spokesperson declined to comment. The only other companies in the mass segment that have passed on the cost increase are Tata Motors, which introduced a price hike of up to Rs 6,000 across its model line up last month, and Mahindra and Mahindra, which announced a hike of 1.43 percentage points across the board.
“It’s a very fine balance between market demand and profitability. While everyone has their own reasons to do it or not do, most are refraining because there is momentum on the ground, and companies are looking at profitability through volumes rather than just pricing,” said Veejay Nakra, senior vice president, sales and marketing, automotive sector, Mahindra and Mahindra. He said Mahindra tried striking a balance between the two by taking a small hike of 1.5 per cent across its passenger vehicle line-up.
Toyota Kirloskar Motor too has increased prices effective this month, but for a different reason. This is to offset the increase in customs duty on completely knocked down kits. N Raja, deputy managing director, Toyota Kirloskar said, “With monsoons setting in, the June quarter is typically slow. We can’t take frequent price increases and disturb the applecart and that is why most of the manufacturers are holding back price hikes.”
Mahantesh Sabarad, head-retail research, SBICAP Securities, said price change is also a function of the level of inventory at a company. The best time to increase prices is not when there is high demand because you end up disturbing volumes. You do it when there is low demand. “The principle of economics doesn’t always work in real market conditions,” he said adding that a price hike in a slow market induces demand as people tend to advance purchases to avail discounts on the billed amount.
Both Maruti and Hyundai are operating at optimal capacity utilisation and low inventory levels, and this has helped these companies control and absorb costs, said Hitesh Goel, analyst at Kotak Institutional Equities. "It’s only a matter of time when you see the duo increasing prices and others following it," he added.