Higher duty to hit automakers in excise-free zone

India’s excise-free zones will not shield auto makers from the impact of higher excise levy proposed in the budget, as firms in the enclaves are not eligible to claim the modified value-added tax (Modvat) on buying parts and aggregates from vendors as they are already enjoying excise rebates, unlike others who do not operate from such areas.

Analysts said this will affect firms such as Mahindra and Mahindra Ltd (M&M), Ashok Leyland Ltd, Hero MotoCorp Ltd and Bajaj Auto Ltd. Few others, including Maruti Suzuki India Ltd, Hyundai Motor India Ltd and Honda Motorcycles and Scooter India Pvt. Ltd, will not be affected.

Modvat is a scheme that allows relief to manufacturers of finished products on excise duty borne by suppliers related to goods made by them. When a factory is located in an excise-free zone, any increase in the cost of purchase will have to be borne solely by the manufacturer. With the vendors likely to pass the 2% hike in excise duty proposed in the budget, the input costs for the manufacturers will go up and this will make production in these enclaves less attractive.

The companies will either have to pass on the entire increase to buyers or reduce production, analysts said.

“The higher are the number of units produced on the excise-free zones, the greater will be the impact,” said Mahantesh Sabarad, senior vice-president, equity and research, at brokerage Fortune Equity Brokers India Ltd.

M&M, which makes tractors in Rudrapur in Uttarakhand, three-wheelers in Haridwar in Uttarakhand and utility vehicles in Chakan near Pune (all excise-free zones, except Chakan), and a few other car makers have already announced price hikes.

Ashok Leyland, Bajaj Auto and Hero MotoCorp are yet to make announcements in this regard.

For the Chakan unit, which has been given the status of a non-manufacturing unit, M&M pays service tax, which also cannot benefit from Modvat, said Pawan Goenka, president, farm equipment and automotive sectors.

M&M’s overall tax outgo will be Rs. 850 crore in fiscal 2012-13, said Goenka. In fiscal 2011, it had paid Rs. 761.67 crore, 3.8% of its gross sales. The tax outgo for the current year is not known.

Goenka said the tax burden includes increase in excise duty on automobiles, an overall 2% hike in excise duty , and 2.5% increase on customs duty on non-alloy, flat-rolled steel.

Besides increasing the duty on small cars, the budget also proposed to raise the duty on large cars, which have an engine displacement of 1,500cc and above, by 2 percentage points to 24%.

In case of cars that attract 22% duty and an additional charge of Rs. 15,000 a vehicle, the budget has proposed to switch over to an ad-valorem rate of 27%.

M&M announced price hikes ranging from Rs. 3,000 to 35,000 on Friday to offset the impact.

Goenka said for the top-end variant of some of its models, the XUV500, for instance, the duty is as high as 29%.

According to him, as a result of the excise hike, while the cost of production on tractors has gone by Rs. 5,000-6,000— 1% of the selling price, for utility vehicles, it has gone up by Rs. 3,000-38,000, 2% of the selling price.

Two-wheeler market leader Hero MotoCorp, which has one out of very three motorcycles produced in Haridwar, is also likely to be hit. Hero produces at least 600,000 units every month.

Ravi Sud, chief financial officer, did not respond to calls and text messages.

Bajaj Auto, which also has one-third of its production accounted for by its unit in Pantnagar in Uttarakhand, is likely to be hit. Kevin P. D’Sa, vice-president, finance, at Bajaj Auto, did not respond to calls or messages. K Srinivas, president, motorcycle business, at the firm, said, “We will pass on the hike.”

Ashok Leyland, India’s second largest commercial vehicle maker, which has a factory in Pantnagar, is also likely to be impacted. Company officials were not available for a comment over the weekend.

The Pantnagar unit accounts for one-fourth of its total production, said Ajay Shethiya, an analyst at Centrum Broking Pvt Ltd.

“With the freight rates already being under pressure, any price hike by a commercial vehicle maker will not go down well with the fleet operators,” Shethiya said. “Even for tractors, the hike may dampen sales.”