Auto: limited impact as duty hike to be passed on

Excise duty rose from 10% to 12% (ad valorem) for most automobiles—two- and three-wheelers, commercial vehicles and cars within four metres length and under 1,500cc engine powerMark to Market | Vatsala Kamat There were no big surprises for the auto sector. Excise duty rose from 10% to 12% (ad valorem) for most automobiles—two- and three-wheelers, commercial vehicles and cars within four metres length and under 1,500cc engine power.

The more expensive, luxury car segment above 1,500cc and longer than four metres will suffer higher duties—24% compared with 22% earlier. The worst hit will be the utility vehicles segment, which will bear a 27% duty incidence (up from 22%). The duty on commercial vehicle chassis has been increased by 3-5 percentage points and is likely to affect the prices of buses and trucks meaningfully.

Further, the overall increase in excise duty on steel and other auto parts may also add to costs. But most leading automobile manufacturers, including Maruti Suzuki India Ltd, Mahindra and Mahindra Ltd (M&M) and TVS Motor Co. Ltd, are likely to pass on the increase to consumers.

Analysts expect price increases across the sector to range from Rs. 3,000 to Rs. 35,000 a vehicle.

Hence, they expect a minimal impact of the budget on auto firms’ profitability. As a result, the BSE auto index rose marginally even as the benchmark index fell 2.1% in the post-budget session. What about the impact of higher prices on demand? Well, the 2% increase in duty was already being factored in. And, unlike what the markets feared, there was no large increase in the duty of diesel vehicles. This was one of the reasons the M&M stock was the star performer among auto stocks—it rose 2.7% in Friday’s trading session.

Another boost for M&M is that the duty hike is not applicable to tractors, which comprise one-third of the firm’s sales and nearly half of its earnings before interest and tax. Of course, it remains to be seen if the hike in the cost of components and raw materials will hit the profit margins of tractors, given that sales volumes have been steadily declining.