ICRA Rating Feature
Recent revision in duty drawback may not
have a significant impact on domestic OEMs
Analyst Contacts
Subrata Ray
subrata@icraindia.com
+91-22-3047 0027
Ashish Modani
ashish.modani@icraindia.com
+91-20-2556 1194
Relationship Contacts
L. Shivakumar
shivakumar@icraindia.com
+91-22-3047 0005
In a notification dated October 04, 2012, the Ministry of Finance
(Department of Revenue) has revised the duty drawback rates on
exports. As per the notification, the duty drawback rates on
motorcycles, three wheelers and medium and heavy commercial
vehicles (MHCVs) have been reduced to 2% from 5.5% previously.
As for light commercial vehicles (LCVs), the rates have been
reduced to 2% from 4% earlier, while the rates have been largely
unchanged for the passenger cars segment at 3%. For the auto
ancillary companies, rates have been reduced from 3%-5% to
around 2.4%-4%. These new rates will be effective from October 10,
2012.
Last year when the Duty Entitlement Pass Book (DEPB) at 9% was
replaced with the duty drawback scheme at 5.5%, most OEMs have
undertaken price hike to compensate for downward revision of 3.5%
in export benefits. While all major OEMs has again indicated an
increase in prices to compensate for duty drawback revision; in
current challenging macroeconomic environment, ICRA believes
that it may be difficult for OEMs to completely pass on the impact
thereby resulting in some moderation in profitability of OEMs and
some Tier I suppliers in the near term. The recent strengthening of
rupee has added to the woes of exporters, and ICRA expects BAL
to be affected the most with duty drawback amendment followed by
TVS and ALL, in case the companies are unable to pass on impact
of duty drawback revision.
Website
www.icra.in
October 2012
Apart from select few players, export revenue constitutes relatively
smaller share revenue for major domestic OEMs and hence the
impact on their profitability should be marginal. However, profitability
of OEMs with sizeable exports like Bajaj Auto Limited (BAL), TVS
Motor Company Limited (TVS) and Ashok Leyland Limited (ALL)
could be affected in near term. Also, Tier-I auto component
suppliers like Bharat Forge Limited (BFL) and Balkrishna Industries
Limited (BIL) are affected but to a lesser extent given their strong
presence in non-automotive segment (BIL in off highway and BFL in
Marine, Industrial, Oil & Gas segments), wherein these companies
enjoys strong pricing flexibility. Nevertheless, there have been some
positive amendments for components like radiators, which could
benefit its exporters like Banco Products (I) Limited (BPIL).
Impact assessment on various companies
Share of Exports
(%)
Two Wheeler
Hero MotoCorp Limited
Bajaj Auto Limited
TVS Motors Limited
M&HCVs
Tata Motors Limited
Ashok Leyland Limited
Mahindra
Limited
&
3%
35%
15%
10% of CV volumes
12%
of
M&HCV
volumes
Mahindra 14% of CV volumes
Export Incentive (during 2011-12)
Impact
(in Rs
Crore)
49
564
NA
as % of
OI
Negligible
3%
as % of OPBDIT
1%
14%
Marginal
Significant
Moderate
438
89
Negligible
1%
2%
7%
Marginal
Moderate
236^
1%
6%
Marginal due
to diversified
business
profile
Passenger Car
Maruti Suzuki India Limited 11% of PV volumes
NA
Tier I Auto Ancillaries
Bharat Forge Limited
46%
99
Balkrishna Industries Limited 84%
18
Banco Products (I) Limited 22%
1
^: includes incentives from government; NA: Not Available
Source: ICRA Research, 2011-12 annual report, SIAM
Marginal
3%
1%
Negligible
11%
3%
1%
Moderate
Marginal
Beneficial
Hero MotoCorp Limited (HMCL) – Given the strong focus on the domestic two-wheeler market, among the
two-wheeler players, HMCL remains unaffected by the change in duty draw back rates at present. In 2011-12,
HMC’s export volumes at 165,915 units accounted for only 3% of total volumes
Bajaj Auto Limited (BAL) – BAL derives about 33% of its volumes and 35% of its revenue through exports.
BAL’s margins could be affected in near term, though management plans to gradually pass on the price hike to
major export markets. In some markets like Africa where competitive intensity is high due to completion from
Chinese manufacturer, BAL might have to absorb the impact of duty drawback amendment to some extent.
TVS Motor Company Limits (TVS) – Exports constitute about 12% of TVS two wheeler volumes (15% of total
revenue) however the proportionate impact of duty draw back could be relatively higher for company.
Historically, for TVS, profitability is relatively better in exports which usually enable company to sustain modest
operating margin despite highly competitive domestic two wheeler market. As a result, in case company is
unable to pass on the impact, the profitability could be adversely affected for the company.
Ashok Leyland Limited (ALL) & Tata Motors Limited (TML) – Exports account for about 12% Ashok
Leyland’s and 10% of TML’s CV volumes. In current circumstance, wherein TML generates majority of its
profits from its overseas subsidiaries (JLR), the affect of duty drawback might not get reflected in its financial.
However, ALL’s profitability could be affected in case it is unable to pass on the price hike to its overseas
customers.
Maruti Suzuki India Limited (MSIL), Hyundai Motor India Limited (HMIL), Nissan Motor India Private
Limited: Though all these companies are significant exporters, duty drawback structure on Passenger cars has
remained largely unchanged and hence there will be minimal impact due to recent change in duty drawback.
Mahindra & Mahindra Limited (M&M): M&M mainly exports UVs and LCVs to overseas market. While duty
drawback on UVs has remained largely unchanged, 2% reduction in benefits on LCVs will have marginal
impact on company’s overall profitability.
Bharat Forge Limited (BFL): BFL generated 46% of its revenue from exports in 2011-12, and there could be
around 50-75bps impact on its operating profitability due to duty drawback amendment. Nevertheless,
increasing share of relatively higher profitable non-automotive and value added (machining activity) business
could help company to mitigate the impact.
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Balkrishna Industries Limited (BIL): BIL generates over 80% of its revenue from overseas market and recent
1%-1.1% reduction in duty drawback incentives on tyre could affect its profitability, though overall impact on
profitability should be relatively low given that BIL has strong presence in aftermarket wherein the pricing
flexibility available with the company is relatively better as compared to that with its OEM customers.
Banco Products (I) Limited (BPIL): BPIL exports radiators to OEMs and aftermarket requirement, which
constitute sizeable share (~20%) of company’s revenue. The recent revision of duty drawback rate from 1% to
2% for radiators will be beneficial for company’s profitability.
Analyst Contacts: Auto & Auto Components
Analysts
Contacts
Mumbai
Subrata Ray
Kinjal Shah
subrata@icraindia.com
kinjal.shah@icraindia.com
022 – 30470027
022 – 30470054
ashish.modani@icraindia.com
020-25561194
anupama@icraindia.com
shamsherd@icraindia.com
jitinm@icraindia.com
0124 – 4545303
0124 – 4545328
0124 – 4545368
pavethrap@icraindia.com
ksrikumar@icraindia.com
044 – 45964314
044 – 45964318
Pune
Ashish Modani
Delhi
Anupama Arora
Shamsher Dewan
Jitin Makkar
Chennai
Pavethra Ponniah
K Srikumar
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