Budget 2012: Increase in excise duty to impact margins on tyres

Surprisingly, Union Budget 2012/13 has answered the un-enquired perks for the tyre industry. According to the industry Apex association ATMA, domestic Tyre industry doesn't manufacture certain type of tyres such as aircraft tyres for reasons of limited demand vis-à-vis minimum size & scale of operations required.

However, the domestic tyre industry has the capability to manufacture such specialized tyres. In this context the budget has given away perks to the tyre industry for which the demand is very low and will have no major impact. However, indirectly the Budget has pushed up the excise duty on Tyres through enhancing the general excise duty.

Budget Impact:

• General excise duty rate is being enhanced from 10 per cent to 12 per cent. This results in increase in the excise duty on tyres also from 10 per cent to 12 per cent.  This will particularly affect the margins in respect of the replacement segment, if the tyre sector is not able to fully pass on the hike in excise duty.

• Excise duty on pneumatic tyres, new or retreaded, used in aircraft is being reduced from 10 per cent to "nil

• Basic customs duty and additional customs on pneumatic tyres (new or retreaded)

for aircraft is being fully exempted subject to conditions.

Budget Impact

While the industry recommendations of the cut in excise duty on the raw materials is not met, the increase in the general increase in the excise duty on tyres is a setback for the already pressure reeling tyre industry.

On the other hand, slash on excise duty and customs duty on Pneumatic tyres of air craft is marginal as the demand for those tyres is very small in India.

Outlook:

Being one among the raw material intensive Industries, tyre industry margins are reeling under pressure on the back of spike in the rubber prices since past 4-6 quarters. The increase in the excise duty from 10 per cent to 12 per cent will not affect the industry in respect of supplies to OEMs or exports.

However, the margins in respect of replacement market will be impacted due to hike in excise duty on tyres. The players will now be forced to hike tyre prices for replacement market, at a time when the domestic demand has turned sluggish. On an overall basis, the Union Budget 2012-13 is negative for the Indian tyre industry.