Loan dry-up, costs will hit CV firms more

Mumbai: The recent petrol and diesel price hikes is seen putting a strain on the demand side for automobile sector in the near term, but the bigger concern in the long term are issues such as credit crunch and input cost pressures, analysts feel.

Last week, the government hiked petrol and diesel prices by 10% to partially offset the huge losses upstream oil companies are facing on account of spiralling crude oil prices.

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Analysts see there could be near-term blip in demand on account of fuel price hikes, but the industry can absorb it. Longer term, worries on interest rate hike and inflation still overhang.

Vaishali Jajoo, analyst with Angel Broking, said in the commercial vehicles space, there would be a postponement of demand in the short term since freight costs would go up and transporters would postpone buying.

“Freight rates should have gone up 5-7% to fully offset the diesel price hikes, but it has risen by 2-3%. Hence profitability of the operators will go down and they will postpone their purchase. We are maintaining a flat growth for CV sector for the year,” Jajoo said.

She has a ‘neutral’ call on Tata Motors and a ‘buy’ on Ashok Leyland.

According to estimates by Crisil, the credit rating agency, the operating costs for transporters have gone up by 8 paise per tonne-kilometre (tkm) since January 2008. Of this, 7 paise per tkm has been on account of increase in fuel costs and 1 paise per tkm due to increase in the cost of tyres and other inputs.

Truck freight rates increased by nearly 2 paise per tkm, subsequent to the diesel price hikes effected in February, and are expected to go up by another 6-7 paise per tkm now.

Crisil expects a 5% increase in the freight rates on contractual fleet, while spot transactions could increase by as much as 10-15% initially, which may eventually stabilise at lower levels due to market dynamics.

At present, the fleet is almost equally divided between spot and contractual arrangements.

“Truckers have begun demanding reduction of taxes and increase in freight rates."

Usually the delay between fuel price hike and freight rates hike is two-four months. But since the freight demand is strong, there is case of freight rates being adjusted sooner.

"We don’t see much negative in the long term on the fuel price hike, though in the short -term there could be a blip,” said an analyst with brokerage Dolat Capital, requesting anonymity.

Analysts expect that if there is a slowdown in industrial production, freight operators could come under pressure.

Crisil estimates that with industrial growth at around 8%, cash flows for operators from new multi-axle vehicles are expected to remain healthy, but at 6% industrial growth, cash flows would drop to near break-even levels for small fleet operators.

Abhijeet Naik and Alok Rawat, CLSA Asia Pacific analysts, in a recent report estimated a 24% drop in truck operators’ profitability post-price hike. They would need a 6.4% price hike to neutralise the impact.

However, given that the railways, freight operators’ biggest competitor, is not hiking prices, truckers are unlikely to implement a full price hike and instead take a hit on their margins.

Hence their near term incentive on fleet addition would be low.

Analysts see limited impact of fuel price hikes on passenger cars and two wheelers.

“People won’t stop buying cars because petrol prices have gone up by Rs 5. It is more of a sentiment drive. We see a greater demand for alternate fuel and the launch of Maruti 800 duo (runs on petrol and LPG) as very timely. We expect a 10% growth in passenger cars sales this year, subject to new launches, since the incremental demand has been coming from new product launches,” the Dolat Capital analyst said.

Naik and Rawat estimate a 5.5% increase in car ownership cost and 4.5% increase in two wheeler ownership costs, which would be compensated by rising incomes.