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Fuel duty cut and steel export duty positive for auto sector going ahead: Shashank Srivastava, Marut.


Date: 24-05-2022
Subject: Fuel duty cut and steel export duty positive for auto sector going ahead: Shashank Srivastava, Marut
“When we talk about the euphoria of steel prices likely to come down, one must remember that about a year and a half back, CR steel was at about Rs 38/kg; it went up Rs 77-78 and this quarter was expected to be Rs 83-84. But with this news, probably the spot prices will come down maybe in that Rs 77-76 mark again. But when you compare it with Rs 38/kg, obviously it is quite high,” says Shashank Srivastava, Executive Director, Maruti Suzuki NSE -0.50 % India.

On the immediate benefit of excise duty cut in fuel and steel export duty on auto companies
The immediate benefit seems to be two; one is on the fuel prices. The cost of running cars comes down, especially for those consumers at the lower end of the spectrum who are very sensitive to the running cost. So that is a positive for Maruti Suzuki and for the industry in general because consumer sentiments for auto purchase is affected a lot by the running cost of the vehicles.

The second of course, is that steel prices are expected to come down, given some of the restrictions on export. That is a positive and as you know, material cost in any auto OEM is roughly about 75-77% of the cost structure and steel is a very important part of that material cost. Those two are immediate positives for the industry going forward.

As a percentage of the total raw material cost, how much is steel? If steel prices come down, what happens to this quarter’s margins?

I am not really sure about the exact percentage because our materials and finance guys are the best ones to answer that question. However, it is substantial and normally the steel contracts are done quarter wise and generally the effect of any decrease in spot prices of steel in contract prices happens with the lag of a quarter. So it is possible within a quarter but in subsequent quarters, one will see the full effect.
There is also an impact of demand or slowdown in demand which has happened in the auto companies. Are you likely to pass it on or are you likely to retain it?

We have not really come to any conclusion on that. However, the commodity prices generally speaking are very high. When we talk about the euphoria of steel prices likely to come down, one must remember that about a year and a half back, CR steel was at about Rs 38/kg; it went up Rs 77-78 and this quarter was expected to be Rs 83-84. But with this news, probably the spot prices will come down maybe in that Rs 77-76 mark again. But when you compare it with Rs 38/kg, obviously it is quite high. So profitability is still under pressure. There is no clear cut decision on the possible scenario.

How sensitive is a car buyer about fuel prices? Do you think there is a direct correlation between fuel prices and demand?

No, we have not seen a direct correlation because obviously the overall impact on the demand is not just fuel prices, but a host of other things. In economic terms, car buying is a discretionary purchase and that means the disposable income matters a lot.

So, directionally if you are spending more on essential items like fuel or rent or clothes or food, then your disposable income comes down but remember that the effect of running cost is different across different segments of the industry as far as consumers are concerned. On the lower end, there would be much more elasticity in terms of the running cost as compared to on the higher end where the elasticity is low. So there is no general answer but directionally, running cost reduction boosts th ..

It is getting better but as we have said before, when we were announcing the annual results very recently, we said that we are seeing the problem continuing and we have said that this quarter also. There has been an effect because of the semiconductor non availability. Going forward, it is very difficult to predict when it will become 100% normal because it is quite complex but it does appear that it is getting a little better now.

Do you think that is a function of a shift in the Indian car buyer where the car buyer is moving up the value chain or is this a permanent shift? The last couple of quarters have been tough for the entry level segment. Is that a cyclical trend or is that the new way customer preferences have moved?

Actually, immediately after Covid this segment grew. It did not decrease, it went up as a percentage of the total industry and we are talking of percentage of the total industry because overall the industry also shifted down in 2020 and there was comparative growth in 2021.

It is only in the last year that we found the entry segment coming down a little more sharply than in the past. So we believe that is obviously a function of affordability. As far as the demography is concerned, we are a very young nation and we would always have a large percentage of first time buyers and there have been 47-48% first time buyers consistently for the last 20-22 years and that has not changed.

I would expect first time buyers to keep coming, it is only a matter of affordability which is affected by cost of the vehicles going up or regulatory requirements or taxation or insurance going up or road tax registration going up. In this segment, the elasticity of demand with respect to prices, the cost of acquisition is pretty high. So that has been the primary reason. It is not as if the demand has disappeared. It is about how best to fructify the demand and that means that companies would  ..

If we are in for good monsoon and if commodity prices stabilise, should shareholders expect that in the second half of this year, they would be served with bread and a lot of butter?

I do not know about that bread or how much butter, but definitely we cannot really give any forward guidance but I think the bread will be toasted better.

If I read in between lines, can I safely say that if the worst of the demand pressure and the worst of the margin pressure – if commodity prices do not go higher and stay where they are with the downward bias – is certainly behind Maruti?
Source Name:-Economic Times


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