Reduction In Duty Drawback Rates: The Effect On Auto Makers

The Ministry of Finance (Department of Revenue) a reduction in duty drawback rates on exports. In accordance to this notification, export duty drawback rates on motorcycles, three-wheelers and medium and heavy commercial vehicles (M&HCV) would be reduced from 5.5 per cent to 2 per cent. For Light Commercial Vehicles (LCV), it would be cut to 2 per cent from 4 per cent and for auto components from 3-5 per cent to 2.4-4 per cent. These new rates would be effective from 10 October 2012.

In 2011, the government replaced the Duty Entitlement Pass Book (DEPB) at 9 per cent with the duty drawback scheme at 5.5 per cent. Duty Drawback rates are the rates at which the government refunds duties paid on imported inputs for products that are to be exported. Auto companies that were dependent on exports for a significant part of their revenues took a hit with this change in place in 2011 and the same is expected to happen this year as well.

In the previous year though, auto companies passed on the extra costs to consumers through a raise in prices. However, this year the situation is a tad different because of the worsening of global economic factors. Markets have become price sensitive to a larger extent and companies may find it difficult to transfer it and may instead have to absorb the impact. Moreover, there have been changes in the last one year in key markets like Sri Lanka and Egypt due to which exports took a hit.

To take an increasingly widening fiscal deficit, Sri Lanka increased import duties on cars from 120-291 per cent to 200-350 per cent, on three-wheelers from 51-61 per cent to 100 per cent and on two-wheelers from 61 per cent to 100 per cent while Egypt has been dodgy over political issues. Indian automobile exporters face intense competition from Chinese players in these markets making a price rise rather difficult.

Of the major players, the ones that will face the maximum impact of this rate deduction are as follows

According to media reports, Bajaj Motors has said that they would pass the price on to consumers since they lay more emphasis on the bottomline that on sales. TVS Motors on the other said they would assess the situation and decide based on region and product. Currently, the change in stock prices of Force Motors, Bajaj Auto, TVS Motors and Ashok Leyland stands at -1.70 per cent, -1.19 per cent, -2.15 per cent and -1.24 per cent respectively.

It is clear that this move will affect the margins of the already troubled automobile industry. Companies like Bajaj had been well supported by export growth when it came to sales volumes. For the month of August 2012, while the YoY domestic sales volume growth stood at 5.79 per cent, exports grew at 40.22 per cent, sending the cumulative sales volume growth up to 16.10 per cent. Demand being a bigger issue for automobile companies, they are now looking at the festive season for a revival in sales and a reversal in trend.