Auto parts sector worried over shrinking margins, profit

Despite the automotive industry witnessing a growth of 28 per cent in 2010-11, the profitability level has fallen, which is causing concern, said Mr Srivats Ram, President, Automotive Components Manufacturers Association of India.

Mr Srivats Ram told Business Line that analyses of financials for the first half of 2010-11 saw the return on investment declining for automotive companies.

“We will have to wait for companies to announce their financial results for 2010-11, to see how much the return on investment has been affected,” he said.

It is estimated that the automotive industry grew by $30 billion in 2010-11, exports reported a $5-billion growth and imports went up by $10 billion.

Exports have shown a revival, with the US economy showing signs of recovery, to post a growth of 15 per cent over the previous year. In 2009-10 the market did not grow due to the impact of the financial crisis.

Exports have risen because new entrants are sourcing components from India for their other markets. With India becoming a global platform, car companies are looking at the mass market with usage of similar auto components across countries.

Issues facing the industry

The withdrawal of Duty Entitlement Passbook (DEPB) from June 30, 2011 may hurt automotive component manufacturers particularly the small and medium enterprises that cater to the export market.

The industry is grappling with the commodity price hike and declining profits. With no Value Added Tax in place, the removal of DEPB will make the Indian automotive industry uncompetitive in global market, he said.

Mr Srivats Ram said the withdrawal of the DEPB scheme without accompanying tax reforms, which ensure that domestic taxes are not exported, would leave Indian exporters handicapped in the global market.

DEPB scheme encourages the use of domestic raw material. It is known that the element of the import duty may be contained in the pricing of the domestic suppliers itself even though such customs duty may not be reflected, he said.