Autos run into drawback pothole


The government has slashed the duty drawback rates on certain vehicles, including two- and three-wheelers, and medium and heavy commercial vehicles (M&HCVs), making it harder for automakers at a time when the industry is struggling to boost exports.

Under duty drawback, exporters are allowed to offset part of the duties paid by them on import of inputs at the time of export.

The duty drawback rate on motorcycles, three-wheelers and M&HCVs has been reduced to 2% from 5.5% earlier, and for light commercial vehicles, to 2% from 4%, a revenue department notification said.

For cars, the rate has been kept unchanged at 3%, while for auto components, the rates have been reduced from 3-5% earlier to around 2.4-4%.

The new rates will take effect from October 10, according to the notification.

The reduction in duty drawback rates, per se, is expected to have a limited impact.

“Our exports are not at a high level. We will have a limited impact of the reduction in rates,” saidPraveen Shah, chief executive, automotive division, Mahindra & Mahindra, which has sizeable exports to neighbouring countries, Latin America and Africa.

Shah, however, questioned the timing of the move. “The decision comes at a very wrong time. With rupee also appreciating, the exporters are losing money. In times like these, when the rupee is getting strong and exports are struggling, the country needs forex inflow.”

According to the Society of Indian Automobile Manufacturers, overall automobile exports registered a negative growth of -5.56% during April-August, 2012.

According to analysts, companies having higher exposure to exports will take a big hit.

Bajaj Auto managing director, Rajiv Bajaj told a business news channel that the company has no choice but to pass on the reduction. Though the impact will be limited, its Chinese competitors will have a cost advantage, he said.

But analysts feel it won’t be easy for the players to take price hikes.

“Within our coverage universe, Bajaj Auto, Ashok Leyland, TVS and Bharat Forge will be most affected by this cut in duty drawback rates. The impact on FY14F EPS of these companies will be between 2-10%. Our calculation assumes that there is no change in pricing. Given current macro economic conditions, companies will find it difficult to take the price hikes, in our view,” Kapil Singh and Nishit Jalan, analysts with Nomura Equity Research, said in a note.

Last fiscal, Bajaj Auto exported 1,579,824 vehicles, up 31% over the previous fiscal, and accounting for 35% of its net sales.

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