The 3 percent hike in excise duty hike on sports utility vehicles proposed in the Union Budget could hurt UV sales and lead to a possible shift in demand to other passenger vehicle segments, Pawan Goenka, president, automotive and farm equipment sector, Mahindra & Mahindra, said on Friday.
He said that they have spoken with the finance ministry and given a presentation urging them to relook into this excise duty hike. Heavy Industry Ministry too has supported the auto companies on the issue.
Goenka says the Finance Ministry is still yet to respond on the matter, but is hopeful that some favourable decision will be taken. Companies typically pass on any hike in government taxes and duties on to customers. But in an already sluggish automobile sales environment, this may not go down well among consumers.
Since the duty has been hiked on only one segment and not across the auto sector, there will be demand imbalance, he says, adding there was a possibility that demand could shift to other segments like sedans.
The overall passenger vehicle industry has taken a knock in FY2013, amid high fuel prices and expensive loans. Car sales in particular have been the most hit.
Goenka feels there is still no signal of any turnaround in the next 3-4 months. But he remains confident that UV sales will continue to outperform car sales.
The UV segment continues to do well and there will be "healthy growth" going into FY2014, he added.
Competition has increased in the segment, with several launches like Maruti Suzuki Ertiga, Renault Duster and M&M's Quanto compact SUV and more expected in FY14.
Passenger car companies have been offering huge discounts and special offers to revive car sales. Some amount of discounting has also creeped in to the UV segment given the heightened competition, says Goenka. But he says there is no "discount war" yet in the segment.
Below is the edited transcript of Goenka's interview to CNBC-TV18.
Q: A word on the news doing the rounds that the Finance Ministry may review the excise duty hike on sport utility vehicles (SUVs). Any communication with the auto companies on that front because they are saying they will be looking at the lower priced SUVs. Any categorisation that they are discussing?
A: Well we have talked to the ministry, we have given a presentation and we have met various people. There is also support from heavy industries minister on relooking at this special excise duty on SUVs. We do not know if anything will come out of it, we have not heard anything from the Finance Ministry on that and we are waiting.
Q: Is it likely that they will use a price filter to exempt some categories of utility vehicles? Or is it likely that they will tinker with the size or any of the formats to some kind of relief?
A: In the letter that has been written by the heavy industries minister, it appears that he has suggested a price cut. This would perhaps be more reasonable because if their tax is for luxury then price is a better parameter than ground clearance. So, let’s see what comes out. Clearly, for the SUV segment, this excise duty is not something that helps us in a very difficult market. Moreover, by leaving out some SUVs and including some SUVs, it certainly creates disturbance in the market dynamics.
Q: It has been a really poor demand environment. Just with reference to these utility vehicles (UVs) do you see it making a big impact in either direction of this 3 percent excise duty?
A: I think the 3 percent excise duty is very big. When we take price increases because of inflation and input material cost, we hesitate to take more than 1.5-2 percent. And that too, we do very carefully and very cautiously. So, a one time hit of 3 percent is certainly a very big increase and that does not take care of the inflation increases that will happen in the next few months. So, if you add the 3 percent plus whatever might happen in the market, say additional 1-2 percent because of inflation, then that certainly becomes a very severe hit.
Since this duty comes only on one segment of vehicles and not across the board, it certainly creates an imbalance in the demand and it is possible that demand may shift from one segment- SUVs to other segment.
Q: You did enjoy a very good run, almost a first mover advantage in the UV space. However would you concede that oflate, the market has become far more competitive with Ertiga and Duster also doing well. You have lost some market share at that space as well. Do you think that has ramifications for your growth and your margins from this segment going forward?
A: Undoubtedly, this segment has become very competitive. This is but expected because this is a growing segment where India is finally waking up and saying SUVs are good vehicles to have because they give all the comfort and convenience of a Sedan and functionality of SUV. So, that is good news. With that comes competition and every major auto player today either has already entered this segment or would come in, in the next couple of years. So, that is not a concern for us.
If we were not growing in a healthy fashion, the drop in market would be a concern but we have had about 30-35 percent growth in the last year in the UV segment. So, for any established player to grow, 30-35 percent is not something that one should be concerned about. So, it is but natural that the market share will go down when all the players are entering that segment. Earlier, it was two-three major players in the segment and therefore markets would go down. And to be in mid -40’s is by no means something that we will be concerned about. The margins have been reasonably good during this year and therefore, we will obviously have to watch and see what happens in future. However, we have had pretty good run both, financially as well as in terms of volumes.
Q: What kind of reasonable sales volume target do you think M&M can set out for this calendar year?
A: We don’t talk about our forecast for sales volume. However, despite the industry expecting or hoping the demand to pick up, but as of today, there is no strong signal of something turning around. The month of March does not appear to be much better than month of February or January. Therefore, there is no immediate signal of a turnaround. The small reduction in policy rate may or may not help much and anything that was expected out of the Budget did not happen. So, that doesn’t help the industry and I don’t see a reason for a change in the next three-four months.
The UV segment does continue to perform very well which is good news for M&M. Even in the month of February and January when other segments were significantly down, UVs have done well. There will be new players coming in, this is going to become more competitive undoubtedly. However, I would think that the next financial year starting April 1 UV will still continue to outperform the passenger car. It will probably not be 50-55 percent level growth that we saw in current financial year but certainly a very healthy growth even going into FY14.
Q: The competitive landscape, does it have ramifications for pricing? There have been some reports that small discounts are beginning to creep into the UV market even in some of your products, would you begin to worry about margins?
A: Right now, no. When competition heats up, there would be more competitiveness in the pricing also. However, I think most companies have played reasonably rational pricing and are not getting into price war as of now. Yes, there is some discounting that will always happen in a given situation. What you hear or see is not something that is happening across the country. It is very regional depending on what kind of inventories might be in a given market or what the demand might be in a given market. But we don't have any large discounting that we are doing across India and therefore, atleast there is no discount war in UVs as of now. In passenger car it is there, but not in UVs.