Price rise of commodities such as aluminium likely to affect profitability of Indian auto part makers

Automobile parts makers will face the heat of rising commodity prices in the coming quarters. After all, in the last six months, steel prices, the key input for most auto components, rose by about 36 per cent. Aluminium and copper prices too gained across major global markets.

All this means higher input costs. Logically, this will translate into higher expenses and lower profitability. An Icra Ltd report analysing 48 large-sized auto component firms shows the positive correlation in the last eight quarters. In the June quarter of fiscal year 2015, when raw material (steel, aluminium, copper) costs comprised 61.1 per cent of sales, the operating margin was 13.6 per cent. Seven quarters later in March 2016, when raw material costs fell sharply to 56.8 per cent of sales, the operating margin widened to 15.9 per cent.

"Benefits of low commodity prices have peaked out in Q3FY16 (December quarter). Operating margins would stabilize in the 13.5 to 14 per cent level in the current year,” forecasts Icra.

Although a lot of pent-up demand may spur sales growth in the passenger cars and two-wheeler segments, much depends on a post-monsoon recovery too. Besides, stiff competition would force OEMs to spend on promotion and marketing. This would further impact profitability.

Then there is the added Brexit dimension. About two-thirds of India’s component exports are to Europe and the US. If Britain exits the European Union, any change in global trade equations between countries, currency movements and the economic health of the developed world may affect exports, at least temporarily.