Compact car sales grow, but margins remain stressed: CRISIL

The ratings agency has said that costs have increased as manufacturers have stepped up product development expenditure, and incurred higher marketing and selling expenses

Ratings agency CRISIL has said that according to its research study, during FY11, margins of car manufacturers will be under pressure despite sustained growth in compact car volumes.

CRISIL has said that cost pressure has been mounting on car manufacturers with a decline in sales per model. Costs have increased as manufacturers have stepped up product development expenditure, and incurred higher marketing and selling expenses per unit of sales.

“To maintain margins and benefit from scale efficiency, car manufacturers would need to increase sales per model in the compact car segment rather than focus on overall sales by introducing more models,” said Manoj Mohta, head for research, CRISIL.

During FY11, total sales of compact cars are expected to increase by 11%-13%. However, sales per model or variant will be 6% to 7% lower than the previous year due to growing competition and new model launches, the ratings agency said in a release.

“While total sales in the compact car segment have increased 14% each year from 2006-07 to 2009-10, average sales per model have declined 12%,” said Mr Mohta.

Over the past five years, competition has been intensifying in the compact car segment with an increase in the number of models and manufacturers. The number of compact car models increased to 21 from nine and the number of players to eight from five, between March 2005 and March 2010. The launch of four new models and entry of three players this fiscal will further intensify competition, it added.

Also, manufacturers have been offering more value-added features in compact car models such as power windows, power steering and electronic devices to maintain market share. These factors have added to the manufacturers' costs without a commensurate increase in realisations, the ratings agency added.


SAIL, JSPL and Tata Steel to benefit most from rise in iron ore prices

With captive mines under their belts, SAIL, JSPL and Tata Steel could emerge as the biggest winners due to rising iron ore prices. These companies are well placed to cash in on the subsequent rise in steel prices, while their raw material costs will remain comparatively on the lower side

With iron ore prices skyrocketing, steel companies like Steel Authority of India (SAIL), Jindal Steel and Power ltd (JSPL) and Tata Steel are likely to make the most of the situation.

All three companies have access to assured iron ore supplies from their own private mines. Unlike others, these companies are not dependent on external iron ore purchases.

Last week, we had reported on how iron prices in the spot market had increased due to low supply from Indian mines. Softening of iron ore prices looks unlikely as supply bottlenecks continue to haunt Indian mining activities. Iron ore prices have touched a high of $192 per tonne, moving closer to the all-time high of $200 per tonne reached in 2008. Industry sources expect a further increase of 10% to 20%.

Amid such a scenario, SAIL, JSPL and Tata Steel are expected to emerge as the biggest winners. According to a PTI report published last week, steel companies like Tata Steel, SAIL and JSW Steel have increased the prices of their products by about Rs6,000 a tonne since February 2010. This increase for Tata Steel and SAIL will go straight to their respective bottom-lines.

Among the smaller steel companies, Prakash Industries and Ispat industries are expected to benefit. Both these companies don’t have access to their own iron ore mines, but have reportedly enough raw material supply through long-term contracts. However, there are concerns on whether Prakash Industries will be able to use its long-term deals to its advantage.

SAIL, JSPL and Tata Steel will be able to jack up their selling prices, and will enjoy greater margins, thanks to lower input costs.

Last week, steel secretary Atul Chaturvedi had indicated that further fluctuation in steel prices was likely. “Steel prices could rise or fall by Rs2,000-Rs2,500 a tonne mainly due to fluctuation in prices of raw material in the next six months,” Mr Chaturvedi was quoted as saying. On an average, any change in iron ore prices could lead to a doubling of steel prices.



Shadi Katyal

7 years ago

True they will have a better profit margin but that does not mean that they will sell their products at below market prices. I fail to understand what the writer is trying to tell us.

Oil moves above $85/barrel

Growing investor optimism over a possible rebound in the US economy helped to boost prices

Oil prices gained above $85 a barrel today in Asia as growing investor optimism about the US economy boosted equity and commodity prices, reports PTI.

Benchmark crude for May delivery was up 16 cents to $85.28 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract rose $0.42 to settle at $85.12 on Friday.

Oil prices have bobbed around the $85/barrel mark for about three weeks, holding gains after a jump from $69 in February amid signs that the US economy was improving.

The Dow rose 0.6% on Friday, and most Asian stock indices gained today, led by a 2.2% jump in Japan and an advance of 1.7% in Hong Kong.

Oil traders often look to equity markets as a barometer of overall investor sentiment.

“The economic health of the US is getting better,” said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore. “The positive economic data has supported the increasing confidence among investors, and that’s bullish for oil.”

Despite growing corporate earnings, the unemployment rate remains high and US crude demand hasn’t yet recovered strongly.

“Crude inventories are still very high,” Mr Shum said. “Oil prices would be a lot lower than $85 if you worried about fundamentals.”

In other Nymex trading in May contracts, heating oil rose 1.15% to $2.262 a gallon, and gasoline increased 1.19 cents to $2.365 a gallon. Natural gas jumped 5.6 cents to $4.313 per 1,000 cubic feet.

In London, Brent crude was up 17 cents at $87.42 on the ICE Futures Exchange.


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