The top 4 factors that impacted automotive industry in FY16
The performance of automotive industry cannot be seen in isolation without taking into account factors like raw material cost, rates and of course, the policies.
Pooja Chatterjee
NEW DELHI: In fiscal year 2015-16, automotive industry saw its fortunes fluctuate from month to month, from segment to segment. But the performance of the industry cannot be seen in isolation without taking into account various other factors like raw material cost, rates and of course, the policies. These indicators had both a positive as well as negative impact on the auto Inc.
1. Raw Material Price
Automotive industry enjoyed falling commodity prices for most part of the year which helped the industry pass on the benefits to the customers. The fall in steel prices particularly was favourable to the industry.
However, in the second half of the year, after 20 percent safeguard duty was introduced in September, and prices of steel started moving northwards again.
According to Society of Indian Automobile Manufacturers (SIAM), Hot rolled steel prices in February 2016 were up 3 percent when compared to September 2015. In February 2016, the price was Rs 34,000/tonne. "For fiscal 2017, one of the key concerns is steel, which is used in large quantity in vehicles, has seen increase in price increase in last three months," SIAM said.
Similarly, the government's decision to ban production, storage and sale of steel without Bureau of Indian Standards (BIS) certification too is expected to bring hard times for the auto industry.
"The auto industry uses its own proprietary technology to certify its vehicles and chooses the appropriate steel for such certification. BIS standards are much more relaxed than the international standards of Japanese and Korean manufacturers, where the auto industry is mostly importing from," a senior executive at a leading car maker told to ETAuto.
Currently, carmakers import high-tensile automotive steel from Japan and Korea for production of critical components.
The prices of aluminium too were a cause of concern for the industry as from December 2015-February 2016, its prices increased 2.14 percent and stood at USD 1,527/tonne. To add to the woes, in the Budget 2016, import duty on aluminium was hiked from 5 percent to 7.5 percent which did not go down well with the industry.
Given the increasing use of aluminium because of the weight advantage it holds over steel, its prices will have a greater impact on the industry.
One of the automotive segments which is highly dependent on raw material prices is tyre industry. It is highly impacted by both the natural rubber prices and also the crude oil prices, both of which have been favourable to the industry.
While natural rubber prices stood at Rs 94/kg in February 2016, down 16.61 percent compared to September 2015, the crude oil prices globally had gone down below $30 per barrel.
The fall in oil prices is also thought to have had an impact on the car sales as lower oil prices lead to petrol and diesel prices. However, it has to be noted that the fall in global crude prices did not reflect significantly on prices in India. At the beginning of FY2016, the petrol price was around Rs 60 per litre and the least it had fallen to was Rs 56.6 per litre early March.
2. Interest Rates
With inflation under control, RBI has had enough headroom to play around with the rates and it has done so at all possible occasions. From 7.5 percent repo rate in April 2015, today it has come down to 6.5 percent.
While this has brought down the interest rates on car loans, the dip has not been equal. In the same period, car loan rates of private banks has fallen only fallen 0.37 percent. The fall in rates of national banks is little more at 0.72 percent.
The biggest rate cut, of 50 bps happened just before the festive season in August. This gave a much needed fillip to the festive season buying as nearly 65 percent of the cars bought during the festive season are financed.
3. Additional Cess Surprise
The hopes of auto industry for a positive budget 2016 were somewhat quashed because of the various additional cess which were introduced on the auto industry.
In the Union Budget 2016, the government introduced infra cess at 1 percent on small petrol vehicles, 2.5 percent on small diesel vehicles, and 4 percent on bigger vehicles.
Finance minister Arun Jaitley also announced 1 percent tax collected at source for passenger vehicles which are priced over Rs 10 lakh. Almost all automakers soon had to increase the prices of their models. This led SIAM to lower the growth forecast for PVs in FY17 to 6-8 percent from previous 11 percent.
SIAM said, "Automobiles have become highest taxed manufactured product. Additional tax in this budget dampened sentiment further. As a result, investments on capacity expansion are getting impacted."
Even the weighted deduction of up to 200 percent on R&D was curtailed to 150 percent, with further reduction to 100 percent from FY20. This is expected to hurt companies' efforts to develop in-house R&D capabilities.
4. Policy Bump
Indian auto industry suffered major setbacks when it came to policy perspective. The biggest blow came during December 2015 when Supreme Court banned registration of diesel vehicles above 2000cc, in Delhi/NCR, till March 2016. It was recently extended beyond March.
GDP industry to grow faster at 7.6% with improvement in domestic demand and support from public spending and impact of policy reforms beginning to show.
It would impact sale of vehicles, especially of companies like Mahindra and Mahindra, Toyota Kirloskar Motor, Mercedes-Benz and Tata Motors-owned.
As a result of the ban, RTO Ghaziabad alone has suffered loss of Rs 10 crore every day in revenue because the high-end cars (priced over Rs 10 lakh) pay 10 percent of their price as registration fee. Companies also complained of getting investments, one of them being Mercedes Benz India.
The economy also suffered maximum disadvantage over two years of continuous drought, and the auto Inc is no exception. Two wheeler sales, especially motorcycles, remain subdued during financial year 2015-2016.
Motorcycle sales dipped 0.24 percent during fiscal 2016, and stood at 10,700,466 units. In commercial vehicles, sales of goods carriers were down 0.89 percent at 3,34,371 units.
SIAM said 'in spite of the abrupt policy changes and subdued rural economy, the automobile industry performed quite well in fiscal 2016.'
In its FY17 outlook the industry body said "GDP industry to grow faster at 7.6 percent with improvement in domestic demand and support from public spending and impact of policy reforms beginning to show. This will move auto Inc to a positive side."
SC Diesel Ban