Tax Sop Phaseout Fears Pull Down Export Stocks

Talk of non-renewal of duty entitlement scheme after June 30 hits Bajaj Auto, Dr Reddy’s and others

Bajaj Auto, Dr Reddy’s Laboratories and TVS Motor plunged for a second consecutive day on speculation that a popular tax incentive to exporters may be done away with by June.

The Duty Entitlement Pass Book, or DEPB, a scheme that reimburses duty paid on imported inputs that go into exports, is scheduled to end on June 30. It may not be extended since the finance ministry is seeking more avenues for revenues when the economic growth rate is forecast to fall due to higher interest rates.

Analysts say that if the scheme is not extended it will have an adverse impact on companies that depend on exports for substantial revenues. These firms are from across sectors such as pharmaceuticals, petrochemicals, engineering and automotive components. The DEPB scheme is popular among exporters as it reimburses customs duty paid by them on inputs through dutyfree scrips that can be sold freely in the market. Since the reimbursement rates are predetermined, based on the value of exports, exporters don’t have to necessarily import inputs. In that sense, it is a kind of subsidy for exports

“Apart from the DEPB, investor sentiment was also impacted because of the rate hike by the central bank,” said Murali Krishnan, head-institutional equities, Karvy Stock Broking. Automobile sales may taper off in the coming days as high interest rates and higher petrol prices may force customers postponing purchases. Most of the auto stocks reacted to news negatively led by Bajaj Auto and TVS Motors and pharma major Dr Reddy’s Laboratories as investors trimmed their holdings.

While Bajaj Auto closed the day at . 1,285.35, down 1.2%, from its previous close, TVS Motors ended 3.5% lower at . 53.30. Dr Reddy’s slipped 1% to end the day at . 1,582. About 70% of DRL’s formulations are exported and analysts see margins impact on the company of 3-4% if DEPB not extended.

It may be too early to conclude the export subsidy may be done away with exporters lobbying intensely for the continuation of the scheme for at least another five years. “On behalf of all exporters I have made a presentation to the ministry urging it to extend the scheme so that exporters can negotiate better with the buyers,” said FIEO president Ramu Deora.