Revised DEPB rate to hit Bajaj Auto, TVS: Fortune Equity

The Government announced a new duty drawback plan on Friday for exporters. As per this plan, the new duty drawback scheme will cover 1,100 items under the Duty Entitlement Pass Book (DEPB) program, which expires on Sept 30. The duty drawback rate is kept at 5.5% as recommended by the Saumitra Chaudhuri panel.

Mahantesh Sabarad, senior analyst of Fortune Equity Brokers, in an interview on CNBC-TV18, discusses how this announcement is likely to impact India Inc and what does means for the auto sector in particular. 

"Earlier, the DEPB rate was 9% and now it will be 5.5%, which means there will be earnings or profitability downgrade on stocks like Bajaj Auto and TVS Motors," added Sabarad.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: What do you make of the announcement? How do you see the impact coming in now?

A: If you look at the new DEPB policy announcement, it is going to impact the two-wheelers segment since this segment was utilising DEPB as far as exports incentives were concerned. The car industry or the commercial industry was rarely used in those DEPB rates that were available.

Earlier, the DEPB rate was 9% and now it will be 5.5%, which means there will be earnings or profitability downgrade on stocks like Bajaj Auto and TVS Motors. However, it is important to see how the companies will react to this new rate. They have an opportunity to raise their export realisations by raising their prices, which would be a compensatory effect of that. Nevertheless, there will be a slight fall in their profitability on the Y-o-Y basis.

Q: So how much impact are you factoring in for these companies? Also, the scheme says that there will be no value cap for auto products, how are you reading that?

A: If you look at Bajaj Auto, they earned around Rs 500 crore of incentives on the topline from export in the last year. If you compute that to their FOB (free on board) value of exports, it fall down to about 5% from 11%. There are certain market link incentives that they can get into and there is an opportunity to raise their FOB prices itself.

So, the company will see a loss of around Rs 200-220 crore on the topline and around Rs 150-160 crore on the bottomline. Hence, expect an impact of around Rs 150 crore on the bottomline for Bajaj Auto.

As far as value cap for auto products is concerned, it has been removed. The value cap existed for commercial vehicles and commercial vehicle industry was rarely utilising the DEPB route. In fact, it was using the drawback route for realising exports incentives, so it doesn