Auto Companies face the heat as Government reduces duty drawback

Following the reduction in the duty drawback rates for auto exports, the stocks of almost all major auto makers that have significant exposure to export markets have been on a declining spree.

BSE Auto index has been the worst performing sectoral index having lost about 0.33% so far in the day's trade. The stocks to have pulled down this index include Bajaj Auto, Ashok Leyland, Tata Motors and Exide Industries.

Duty drawback is an incentive given to boost the country's exports by refunding a part of the duty paid on imports of raw materials that are used to manufacture products meant to be exported.

The Ministry of Finance has now notified a reduction in duty drawback rates for Motorcycles, three-wheelers and Medium & Heavy Commercial Vehicles from 5.5% to 2% while it has been reduced from 4% to 2% in case of Light Commercial Vehicles. A marginal reduction of 0.1% from 3% to 2.9% has also been effected for Passenger Cars.

This move implies an immediate impact on profitability of these companies, unless the companies resolve to increase the prices of their products in the export market and pass on this burden to the consumers.

Bajaj Auto, for instance, has asserted that it will pass on most of its impact of reduction in duty drawback by increasing its prices in the international market. However, the decision to increase the prices may not be an easy one for many other players in the industry especially when the sales volumes are already under pressure.