Interim Budget 2014: Excise duty cut may be taxing for auto companies stuck with inventory
Emotions are mixed in auto industry over excise duty cuts aimed at boosting auto sales as it will mean manufacturers having to swallow financial liability of dealers from unsold inventory.
NEW DELHI: Emotions are mixed in the auto industry over Monday’s excise duty cuts aimed at boosting auto sales as it will mean manufacturers having to swallow the financial liability of dealers stemming from unsold inventory.
According to preliminary data collected from companies and dealer sources, this will add up to at least Rs 600 crore for listed companies. The amount will be much higher for the entire auto industry. This is because excise is levied at the factory gate but dealers don’t have any option but to charge the reduced price from customers.
Finance minister P Chidambaram reduced excise in the range of 3-6 per cent across different sets of vehicles in the interim budget on Monday. Automakers stressed by the decade’s slowest sales will have to pay channel partners around Rs 10,000 per car for regular models and up to Rs 5 lakh for top-end vehicles manufactured or assembled in India as they will now have to be sold at reduced prices.
The financial liabilities that will accrue in the ongoing fourth quarter are likely to shrink profits across the board. India’s biggest carmaker Maruti Suzuki India is likely to take a hit of around Rs 130 crore on the back of almost 1 lakh unsold cars while Hero MotoCorp, the No. 1 two-wheeler maker, faces a liability of about Rs 120 crore.
A senior Maruti Suzuki executive said the company will likely take on the financial burden of its dealers as it did in 2008, when a similar excise cut was made to boost demand following the global financial crisis. “It is a regular practice as done in the past,” the executive said. “The company most likely will take the financial liability into its books as dealers are not in a position to absorb such a large financial burden.”
Any sales bump from the excise cut may not offset the liabilities that will be incurred. “The expected volume growth is not likely to compensate the massive financial liability generated from lower excise duty,” a senior industry executive said. “This welcome but surprising decision is likely to have a severe impact on the fourth-quarter results when this differential excise burden would have to be adjusted.”
The Indian passenger car industry maintains an inventory of about a month’s production at stockyards, in transit and dealerships. Monthly production stands at 2.5 million for 17 passenger vehicle manufacturers. The tally rises to around 15 million units a month when two-wheelers, commercial vehicles and three-wheelers are added.
Unlisted Hyundai Motor India will also have to provide for the additional liability. “Yes, the car industry would get boost from the excise cut, but equally on the flip side we will have to compensate the dealers with a financial support as the stock value comes down by this reduced tax,” said Rakesh Shrivastava, senior vice president, marketing and sales.
Some analysts said the companies may hang on to some of the duty cut benefit. “It will be interesting to see the actual percentage of this tax rebate being passed on to the consumers as there are significant inventories due to sluggish demand,” said Amit Kaushik, principal analyst (auto) at IHS Automotive, a global consultancy.
An analyst with a leading domestic brokerage house said, “Average inventory is around one to one and half months currently… We believe companies will not pass the entire benefit to the consumer and in the most optimistic scenario, the price cut will be limited to 2 per cent in the small car segment.”
A few dealers started selling vehicles at new prices on Tuesday. While most companies such as Maruti Suzuki, Honda Cars India and Volkswagen are working out the new rates, two-wheeler company Suzuki Motorcycle India has started selling its bikes and scooters at reduced prices.
“We have… passed on the entire 4 per cent benefit to customers. We have asked all our dealers to sell the vehicles at lower prices,” said Atul Gupta, senior vice president, marketing and sales.