Chidambaram boost pleases car dealers

Excise duty cut can halve current inventory in 2 months, with major manufacturers promising to pass on benefit

With the finance minister's boost to the automobile industry in the form of an excise cut, passenger car dealers across the country expect their inventory to halve in the next two months.

Rough calculations show for 2,800-3,000 passenger car dealers in the country, the current inventory works out to Rs 28,000-30,000 crore, which can halve to Rs 14,000-15,000 crore in the coming two months if car buying picks up.

In Monday’s interim Budget, the minister announced an excise duty cut on small and large cars, plus sports utility vehicles (SUVs), of three to six per cent. The move was widely hailed as a needed reprieve for the automotive industry, hit by slowing demand.

Mohan Himmatsingka, president of the Federation of Automobile Dealers Associations (FADA), the apex national body, explained: “On an average, each car dealer in the country sells cars worth Rs 4-5 crore a month; in smaller towns, it is around Rs 2.5 crore a dealer a month; in metros and big towns, it is Rs 7-8 crore a dealer a month. Dealers are sitting on inventory of 45-65 days at the moment, which works out to around Rs 10 crore a dealer, on an average.”

Request to OEMs
Saying the excise duty cut would definitely have a short-term impact on inventory, he added, “Provided that original equipment makers (OEMs) do not raise prices, or increase production significantly to clog the pipeline, the duty cut boost will definitely help. Over the next two months, the inventory is expected to come down to below 30 days from the current level.”

FADA has written to the Society of Indian Automobile Manufacturers (Siam), asking OEMs to issue credit notes to dealers for the inventory they are carrying, as these vehicles have been bought at the earlier duty rates, said Himmatsingka.

OEMs have already indicated they’d bring down the prices of vehicles in line with the duty cut, which would mean Rs 1,500-80,000 price reductions, depending on value.

Short-term boost; sector needs more support
Tata Motors, General Motors and Maruti Suzuki have said they would pass on the benefit to consumers.

P Balendran, vice-president, corporate affairs, General Motors India, said: “The impact of the duty cut would be there till June 30, and while this would boost sentiment in a certain way, it would translate into long-term demand revival only if continued in the Budget that would follow. We would definitely pass on the benefit to the consumer; we are working out the exact reductions. We also do not intend to withdraw any of the discount schemes on offer at the moment.” He added buying behaviour mainly depended on macro economic factors such as interest rates and fuel prices.

Data from Siam shows during April to January of 2013-14, the first 10 months of the financial year, passenger vehicle sales fell 6.1 per cent on a year-on-year basis. Of this, passenger car sales dipped 5.2 per cent, utility vehicle sales by 4.6 per cent and vans by 16.8 per cent.

Yaresh Kothari, analyst with Angel Broking, felt while the duty cut would ease the pressure on OEMs to raise prices, if discounts were continued, the additional price reduction would increase the value proposition  for the buyer, who could advance purchases before the next Budget.