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TheStreet Open House

GM, Ford, Toyota to Raise Prices in India

Stocks in this article: FTMTTM

NEW YORK ( TheStreet) -- General Motors, Ford (F) and Toyota (TM) plan to raise car prices in India starting next week.

Buoyed by the recent boom in auto sales in India, these auto majors are planning to pass on some of their production costs to consumers. Auto sales grew nearly 31% in June. The Society of Indian Automobile Manufacturers predicts 12% to 13% growth by the end of fiscal year 2011 to more than 1.7 million units.

Prices of cars may increase between 0.5% and 3%. Toyota already has announced that the price for Innova, one of the best selling vehicles in India, will increase by INR10,000 (or $214), while that of Corolla Altis sedan will increase by INR15,000 (or $321).

Although many manufacturers are concerned that higher prices may deter buying, analysts believe the dip in purchases would be temporary. "Over the longer term, comparatively low penetration levels, a healthy economic environment and favorable demographics supported by higher per-capita income levels are likely to help auto companies in sustaining their top-line (revenue) growth," Vaishali Jajoo, an analyst at Mumbai-based Angel Broking, told the Wall Street Journal.

Much of these price hikes are due to rising commodity prices. "Natural rubber (prices) rose 40% between November and May. Even though input costs have been stable during the past four weeks, if they rise further, then the industry would be under pressure to revise prices, which can impact sales," said Pawan Goenka, president of Mahindra & Mahindra, a major producer of utility vehicles, to the Times of India.

Steel and aluminum prices have been rising as well, with steel rising by as much as 25% between April and May. Since much of the steel used for automobile production in India is imported, automakers are looking to pass on as much of the cost as possible to customers.

In the current scenario of booming demand, the industry may not suffer a setback. But the biggest concern is the threat of higher interest rates because the central bank of India is keen to control inflation, which is consistently hovering around the double-digit mark. Nearly 80% of car purchasing is through bank finance. Therefore, any interest rate hike could potentially hamper borrowing costs. Higher car prices, in turn, may accelerate inflation. The central bank of India recently raised key policy rates on July 2, for the third time this year.

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