Indian automakers' plans to pass on higher commodity prices to customers will dim the prospects for a demand recovery after December 2020, when the boost in some categories from pent-up demand and festive spending fades, and the economic impact from the coronavirus pandemic reasserts itself, said Fitch Ratings on Thursday.
Accordingly, the ratings agency said pent-up demand after the gradual easing in the government's lockdown measures helped India's monthly wholesale volume of passenger vehicles (PV) return to growth after July 2020.
The data from Society of Indian Automobile Manufacturers (SIAM) showed PV wholesale volumes rising by 13 per cent on a YoY basis in the quarter ended September 2020.
Besides, festive demand helped sustain the growth after September, but the pace slowed to 5 per cent YoY in November 2020 from 14 per cent in October 2020.
"This is even after including timing benefit from the Diwali festival falling in November in 2020 instead of October in 2019. We believe this indicates that pent-up demand is tapering off," the ratings agency said in a statement.
"Demand in other auto categories has remained weak."
Furthermore, Indian automakers reported that profitability in the three months to September 2020, the second quarter of the financial year ending March 2021 (FY21), rose from Q1 FY21, as they benefitted from better fixed-cost absorption arising from higher volumes, cost efficiency measures amid the pandemic and prudent pricing practices.
"These factors helped to counterbalance the uptick in commodity prices as automakers chose not to raise prices amid an uncertain environment," the statement said.
"Nonetheless, some leading automakers recently announced their intentions to raise prices from January 2021, with the aim of passing on the sustained increase in commodity prices since June 2020."
According to the statement, the extent of the price increases is not clear at this stage, "but we believe they could range from low to mid-single digits depending on the model and company".
"We expect most automakers to raise their prices, given the competitive margins and market participants' broadly synchronised price moves in the past," the statement said.
"The price increase will further lift the cost of owning vehicles in India, after price hikes of up to 15 per cent from April 1, 2020, following the implementation of BS6 - a more stringent emission framework. This would dampen consumer sentiment in an already weak demand environment. We believe the impact will be more pronounced on CVs, which experienced higher price increases in percentage terms in April."