Two & three wheeler: Retain excise duty at 10%

Amidst healthy demand, there are apprehensions of possible hike in excise duty, and hence the player seeks excise duties to be retained at current levels.

Current status

Two wheeler industry, the largest auto segment in India with over 70% market share, rode on the new high in the auto industry in financial year 2011, seen so far. Like the various auto segments, the two wheeler industry posted record breaking monthly sales for 6 consecutive months from May 2010, a dull season for auto sales till Oct 2010, peak season for festive demand driven by increased disposable income, pent up demand, strong rural demand and economic growth while unhindered by 175 bps hike in key policy rates by RBI, 7 times hike in petrol prices and deregulation of the petrol price.

The industry also witnessed milestone moment with announcement of the break up of largest two wheeler company and JV - Hero Honda.

Though JV would continue till 2014, the two companies would begin their solo ride. This move is expected to intensify the already competitive two-wheeler space especially with Japanese player Honda. The total two wheeler sales grew by 28% y-o-y to 10.96 million vehicles in April 2010 - January 2011. 

Matching the general trend in the auto industry, the three-wheeler industry is comfortably recording over 60,000 vehicle sales per month in financial year 2011 so far. However it is largely aided by the passenger carrier segment.

The passenger carrier sales are doing well thanks to the insufficient urban transport and increased disposable income.

The goods carrier sales are also showing signs of improvement due to economic recovery especially gaining from the last mile connectivity to rural, semi urban markets and recovery in organized retail sector.

Industry expectations

Retain the excise duty at 10% on two wheelers/three wheelers

Remove 1% national calamity contingent duty on two wheelers/three wheelers.

Vijay Kedia, Director, Atul Auto said that since the 3 wheeler is a means to generate self-employment, there should be special concessions in excise duty and CST. He also said that the retail financing on 3 wheelers should be identified as Priority Sector Landing and subsidies rate of interest should be offered.

Analysts/market expectations

We expect partial increase in excise duty of two wheelers/three wheelers. It most likely could be roll back of remaining stimulus of 2% excise duty in order to contain the high inflation. This would impact the demand of the two-wheeler industry, which is already grappling with increasing interest rates, and hike in petrol prices.

We expect the government to continue with its various schemes such as farm loan waiver, National Rural Employment Guarantee Scheme (NREGS) etc as well as investment in infrastructure. These measures would place more cash in hands of rural people thus aiding in demand for two/three wheelers at rural end.

Companies to watch

Hero Honda, Bajaj Auto, Mahindra & Mahindra, TVS Motor

Outlook

Considering the spike in prices, there are expectations of cut / removal in import duty on non-ferrous metals.  But as regards steel, there are two opinions. India is amidst massive rise in its steel capacity, which can transform us into a net exporter of steel from currently being a net importer of steel.  This will require increase in customs duty on HR coils from 5% to 10%.

On the other hand, steel finds application in wider range of products from construction, capital goods, consumer durables to automobiles.  So, in the context of rising prices, the customs duty can be slashed to benefit user industries.

Any cut in customs duty on metals will benefit auto sector, and hike will add to their costs. Amidst high crude oil prices, any amount of tinkering with duties are not going to prevent further hike in petrol and diesel prices, so long as civil unrest in many oil producing countries are not contained.

Prior to Union budget 2010-11, there were worries of possible negative impact on demand with hike in excise duty on two/three wheelers. On contrary, the industry not only faired well but entered new level of demand despite excise duty hike and several negative scenarios such as deregulation of petrol prices, petrol price increase by Rs 11 per litre over one year and 175 bps hike in key policy rates.

However, in present scenario, concerns are brewing up once again, as the end consumers are currently battling with inflation especially food price inflation and rising fuel prices.

With hike in excise duty, it would only add on to woes of the consumers, as companies would be unable to absorb the excise duty hike due to already high and rising raw material prices. This would most likely impact the demand for two/three wheelers unless the government undertakes steps to contain the inflation

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