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.
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.
President Automotive Sector
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.
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.
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.
M&M stock price
On July 25, 2014, Mahindra and Mahindra closed at Rs 1206.45, up Rs 5.80, or 0.48 percent. The 52-week high of the share was Rs 1268.75 and the 52-week low was Rs 741.50.
The company's trailing 12-month (TTM) EPS was at Rs 61.02 per share as per the quarter ended March 2014. The stock's price-to-earnings (P/E) ratio was 19.77. The latest book value of the company is Rs 272.84 per share. At current value, the price-to-book value of the company is 4.42.
READ MORE ON Mahindra & Mahindra, M&M, Utility Vehicles, SUV, sales, excise duty, Budget 2013, demand, SUV, tax
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