Carmakers get a GST cushion as costs climb

India's recent reduction in goods and services tax (GST) has become a vital lifeline for car manufacturers as they navigate the challenges posed by soaring commodity prices. Companies like Mahindra & Mahindra, Tata Motors, and Hyundai Motor India are employing various tactics to limit price hikes and maintain current demand levels.

Rajesh Jejurikar, executive director and CEO of Mahindra, explained that the GST cuts have provided headroom for the company to endure fluctuating commodity prices without having to hike prices significantly. Mahindra kept prices lower than the GST rate from September, giving them leeway to navigate the commodity cycle. Mahindra increased prices by an average of 5.2% in the June quarter across its SUV range, while also working on cost reduction strategies.

Under GST 2.0, the government lowered tax rates on small cars and SUVs measuring less than four meters to 18% from 28% plus cess, and reduced it for large SUVs and luxury vehicles to around 40% from a peak levy of 50%. Factory dispatches of passenger vehicles in the country surpassed 400,000 units in six out of eight months since the GST cut, marking a rebound from weak sales in the preceding months.

Despite the GST relief, automakers continue to rely on internal cost reductions and selective price increases to absorb the commodity shock stemming from disruptions caused by the Iran war. Tata Motors Passenger Vehicles experienced a 4.5% drop in profitability due to commodity costs in the June quarter, with Shailesh Chandra, MD and CEO, anticipating another 3% rise in commodity costs for the September quarter.

Chandra noted that the first half of the fiscal year is likely to be particularly challenging in terms of commodity prices. Mahindra's approach contrasts with the previous commodity spike, where they had to implement price increases of 17-18% due to surging input costs. This time, they have taken steps to reduce costs before adjusting prices.

Hyundai Motor India is adopting a more comprehensive cost optimization strategy. Commodity costs impacted its margins by about 1 percentage point sequentially in the June quarter, primarily due to higher precious metals and copper prices. The company countered part of the impact by implementing calibrated pricing and cost reduction measures.

Hyundai raised prices by around 1 percentage point this year while emphasizing localisation and value engineering. Their localisation rate has risen to 83% from 77-78% a few years ago, with a goal of reaching 90% by 2030. Hyundai expects industry growth to slow from October, and they plan to balance volume and profit. Maruti Suzuki, the market leader, is relying on calibrated pricing to mitigate the impact of rising commodity costs.