Vinkesh Gulati on how higher commodity prices will impact auto sector

The biggest thing that the Street is talking about right now is the commodity prices and the way they have inflated in the last 60 days since this entire geopolitical tension has come to the fore. Aluminium prices are up between 20% and 30% in the last few days. What is your take on commodity prices and how is it expected to impact the auto sector?
Whenever the commodity prices increase or there is an uptick, we see the market react to that. All the OEMs tend to increase the retail prices. Any OEM will usually increase prices by 2-4% but considering that we are entering March and normally it is a financial year end which affects their balance sheets, the retails would be more important for all the OEMs. So, it is a very dicey situation for anybody in the manufacturing side to look for the retail or look for the cost coverage. I am hoping that they will delay the price increase if they are able to absorb the current commodity prices increase but if they are not, the effect on demand would be there if the price increase happens this time.

Auto companies have to do a tight rope walk either in terms of taking a margin hit or taking a volume hit. Do you think that a price hike of 2% to 3% would be enough or given the fact that the prices are rising materially, they might have to take a 5% to 10% hike as well?
Practically 5% to 10% price hike will be a debacle in the market. Already we are grappling with not very good demand on the ground and such a high increase will affect it. Maybe the OEMs have to go to that level. They will have to absorb and slowly and steadily pass on the price and maybe in another month or two, absorb the cost for some time. I was giving a figure of 2% to 4% thinking that practically all the commodity price cannot be passed on seeing the ground reality today.

What is your sense of the entire commodity price rise? Is it transient and do you expect it to reverse back and normalise in a few weeks or do you expect a fundamental uptick in commodity prices and maybe for the year, we are in for a bullish trend on commodity and metal prices?
Very frankly I have my doubts about going back to the old prices. But yes, there will be some relaxation in prices in the coming time. The overall external situation is not very positive for the manufacturers today on the demand side and the commodity price side, but in a month or two, there will be some ease off but it would not go back to their normal price. So, there will be no option left with the manufacturers but to increase the prices or do some value engineering in the vehicle to accommodate or absorb the current increase in commodity prices.

What about the semiconductor shortage? Have conditions improved or is the supply chain again getting impacted due to the geopolitical tensions?
As of today, sitting at the end of February, I can confidently tell you that February is better than January. In the passenger vehicle segment, we will see at least 3 lakh plus dispatches to the dealers which will be happening after a long time. But year on year, we will be marginally down in passenger vehicles. The semiconductor issue had slowly eased off but the Russian invasion issue has cropped up and palladium comes from Russia. I am expecting that to affect the market. If this does not get resolved soon, then we will see March production getting hampered.

I am happy to say that in February, the overall situation has eased off and we are expecting that 3 lakh plus production will happen. That means the passenger vehicle retail will also be good in March. So overall a good month for the passenger vehicle segment, but if I add on the other categories, the two-wheeler segment is still under challenge. Rural demand is not great. We double digit degrowth in production. The sentiments in the two-wheeler segment is very low as compared to pre-pandemic level and last year also, that is where the major challenge was.