Auto Industry reeling under BS-VI compliance

by Vivek Bajaj on Fundamental Analysis
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In 2016, the Centre had announcedthat the country would be adopting to be BS-VI norms in 2020 instead of BS-Valtogether as it felt that there is an urgent need to shift to cleaner fuels inIndia in order to cut down pollution after CHINA’s instance.

What is BS-VI emission standard?

It is basically the emissionstandard set by the Government to check the pollutant levels emitted byvehicles. It is stricter emission norm than the BS-IV standard. It will helpthe vehicles move to cleaner fuels and will help to curb the world’s most toxicair.

Disadvantages:

  • Shifting to a totally new emission standard isnot that simple. It takes years for the automakers to develop a new kind ofengine to meet with the new emission standards. All this comes at a cost whicheventually makes the vehicles expensive for the end consumers.
  • Increase in the price of the vehicle is a majorconcern for the Auto Industry as it would affect the demand of the vehicles.  Also the rise in the crude prices is acting asa major catalyst to this uncertainty within the industry.
  • Already the sector has been facing headwindslike increase in crude oil prices and insurance costs which have led to lowerdemand and thus huge pileup of inventory which even with huge discounts couldnot be cleared.
  • There has been certain regulatory changes likeinclusion of mandatory safety features which has also increased the prices ofthe vehicles.
  • The Vehicles are levied 28 per cent GST, whereasthe auto companies are hardly able to generate 7-8 per cent returns. Thus, tobe able to recoup the growth story in the sector the auto manufacturers haverequested the government to lower the tax rate from 28 per cent to 18 per cent.
  • Fuel for the BS-VI complaint vehicles is one ofthe important change which has to be made as the auto companies won’t be ableto sell the vehicles unless there is enough fuel available across India whichare BS-VI complaint.
  • The automakers are forced to cut down theproduction due to inventory pile up of BS-III and BS-IV vehicles. Now the newemission norms are like a wall in front of the Auto Sector.  
auto sector

Currently due to various negativefactors prevailing in the economy there has been a major slowdown in theconsumption sector which includes the Auto Sector as well.It is expected thatthe Auto Sector will grow at a pace of around 7-9 per cent in FY 20.

It has been reported by theSociety of Indian Automobile Manufacturers (SIAM) that the companies alreadyhave a stock of around 8.24 lakh of BS-III compliant which the manufacturersare not allowed to sell anymore.

Battling such challenges in thesector, the automotive industry has requested the government to reduce theGoods and Services Tax in order to offset higher costs of the vehicles due to theimplementation of safety and cleaner BS-VI emissions standard.

The decrease in the tax rate willhelp to offset the high price of the vehicles which would further help to growthe demand of the vehicles.

Solutions forward:

 From the past it has been seen that inDecember 2009, due to a 6 per cent tax rate cut, there had been 25 per centvolume led growth between FY10 and FY12. Also a duty cut of 4 per cent inFebruary-December 2014 had aided growth in the following few months.

Similarly, a GST cut would leadto a 10 per cent increase in volume estimates and also a 15 per cent increasein operating profits due to lower discounting pressures on the segments whereit’s being implemented.   

Future Path:

  • For the implementation of the BS-VI, the automakersare gearing up for the changes that need to make in the vehicles which includedcompany like Maruti stopping its production of Diesel cars due to high cost inshifting to the new norms.
  • The Government has to made huge investments inorder to make cleaner fuels required for the newer version of vehicles.
  • The Automakers need to make sure that they speedup the R&D process and make changes in its manufacturing facilities forstarting the production process of BS-VI compliant vehicles.
  • The cost of the vehicles have to be checked sothat it does not become a burden on the potential customers along with that marginsalso needs to be maintained for the companies to continue its operations.
  • It is expected that during the transition periodit might hurt the sales.
  • Even though it is not clear about the Indiangovernment policies but still it can be assumed seeing the global marketcircumstances that the focus is towards clean fuel and Hybrid segment vehiclesin the coming 10 years.
 auto sector 3

Key Takeaways:

  • The centre had made a decision of shifting fromBS-IV to BS-VI complaint in order to cut down the air pollution caused by thevehicles in India.
  • Due to various negative factors in the economythe consumption sector has slowed down from the last three quarters resultingin the slowdown of the Auto sector too.
  • Factors affecting the demand growth for the autosector are weak festive season, fluctuations in the crude oil prices, tradewars and increase in the insurance costs.
  • Shifting to the new emission complaint willbring in higher price of the vehicles which will ultimately affect the demandof the consumers.
  • To offset the high cost of the vehicles, the automanufacturers have urged the government to lower the GST rate. 
  • Lowering the GST will bring down the price ofthe vehicles and thus it might ultimately help in bringing up the volume ledgrowth.

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