For automobile companies, problems are mounting. With high inflation and interest rates threatening a slowdown, rising raw material costs are adding to their woes. Expansion plans of many firms and vendors are likely to be hit as already-tight operating margins are further shrinking. Brokerage houses and sectoral analysts predict that it will be a tough road ahead for the auto sector, with tighter monetary policy and liquidity crunch setting in. "Raw material costs, which account for almost 70% of the total cost for auto manufacturers, have been rising continuously since the last two years and impacting margins. Till last year, manufacturers struggled to maintain margins by adopting costcutting measures on modest demand. Players hiked the product prices, though they could not fully pass on the hike in the raw material prices. Going ahead, players would find it tough to absorb further spurts in raw material prices," Angel Broking's Vaishali Jajoo said. Angel said the cost of key inputs like steel, aluminium, rubber and plastic has gone up substantially. "Our analysis suggests that a 20% increase in raw material costs per vehicle would take out at least 150-200 basis points from the operating margins of auto companies," it said. Aniket Mhatre, research analyst at Prabhudas Lilladher, said though companies hiked prices, it could not cover up rise in costs. "We feel that margins would continue to remain under pressure and year-on-year decline could be around 100-150 basis points," he added. Mahtre expects car sales to grow in double digits, but after including the numbers from the yet-to-belaunched Tata Nano and Suzuki's new small car A-Star. Two-wheeler sales, however, would take the "biggest hit" this fiscal with players like Bajaj and TVS not expected to perform well, he said, adding, "despite a low base, bike sales will just manage single-digit growth." Arvind Jain from fund house BanyanTree Growth Capital added: "The growth will definitely come down to around 6-7%, this fiscal." He said Maruti could see cannibalisation within its portfolio after launching A-Star by year-end and motorcycle sales are likely to be flat, hit by poor retail finance availability. "The companies will either have to take a hit on returns for two to three years or will have to postpone investment plans in the medium term. As of now, none of the players have formally announced any changes in their plans, which could impact their return ratios in the near term. Perhaps, the investment rate might decline due to the negative effect on consumption," Angel Broking further said, projecting a capital expenditure of over Rs 25,000 crore during 2008-2010. Mhatre, however, felt that while auto companies may continue their planned investments, Some key vendors may be forced to review immediate expansion plans. "Some have already deferred the plans." SPOILSPORTS An array of adverse factors like higher inflation, interest rates, lower credit availability will make the life tough for the auto industry in rest of 2008 Higher raw material costs are eating up operating margins Car makers have increased prices but those are not enough to cover up the higher input costs. Expansion plans of manufacturers, vendors could be affected