BS III ban to cost automakers nearly Rs 3,000 cr.
The ban on BS III vehicles imposed by the Supreme Court on Wednesday will cost automakers nearly Rs 3,000 crore, according to market research firm Crisil.
According to Crisil’s report, commercial vehicle makers taking a hit of up to Rs 2,500 crore while the same for two-wheeler makers could be up to Rs 480 crore.
It said commercial vehicle (CV) makers disposed of over half their stock of BS III vehicles before the Supreme Court-set April 1, 2017, deadline. “The discounts and incentives on vehicles sold till March 31, 2017, are expected to have cost them about Rs 1,200 crore. Additionally, Rs 1,300 crore would be incurred to dispose of the unsold inventory,” Crisil Research said.
Ashok Leyland, one of the commercial vehicle maker, too, said that BS III vehicles were sold as BS IV fuel wasn’t available throughout the country. “Ashok Leyland has been making BS IV vehicles since 2010 and has sufficient capability and capacity to make BS IV vehicles. However, since BS IV Commercial Vehicles cannot run properly on BS III fuel – and such fuel is not available nationwide - our customers continued to buy BS III vehicles,” said Vinod K Dasari, MD and CEO, Ashok Leyland.
He added that most of the vehicles in the inventory will be sold off. “Of the little inventory that we expect to remain beyond this, we will export them to other markets where we have significant presence and still operate on BS III norms,” Dasari said.
According to Crisil, impact on the EBIDTA margins of listed truck makers (Ashok Leyland and Tata Motors’ standalone) will be around 2.5% of their revenues, it said.
“The impact would be staggered across fiscals 2017 and 2018, because the unsold inventory will have to be brought back from dealerships and then dealt with,” the report added.
It further said leading CV makers had continued manufacturing BS III vehicles all the way to March in anticipation of strong buying in the closing weeks of the financial year 2016-17, given price hikes of 8% to 10% expected on BS IV vehicles.
Indeed, for want of clarity on ban on production or registration, the industry had expected some BS III trucks to be sold even in April, the report added.
“This had bloated up inventories. When the Supreme Court ruling came, CV dealers’ inventory at risk was around 97,000 units (equivalent to 1.7 months of sales) valued at Rs 11,600 crore,” it said.
The industry is expected to have sold around 55% of this in the last three days of March by offering discounts of 20% to 40% on the sticker price compared with around 10% before the ruling.
Out of the additional discounts and incentives, the manufacturers are likely to bear about 80 per cent and their dealers the rest, it said.
On the unsold inventory, the report said: “We estimate the remaining 40,000-45,000 units of unsold inventory to be returned in the upcoming months, mainly comprising less-popular models since there were instances of supply shortage in some popular BSIII models.”
The companies may upgrade them for resale or dismantle vehicles for spares or incur higher working capital for holding the inventory until it is exported, which could take 5-6 months, it added.
On the two-wheeler front, Crisil Research said when the ruling came, inventory at risk was at 670,000 units, amounting to Rs 3,800 crore (half-a-month of sales).
“With a proactive preparedness towards the launch of BS IV-compliant vehicles, Hero MotoCorp liquidated large BS III inventory, leading up to March 29th. In the past two days, we have taken tactical steps to assist our dealers and incentivise the customers with an objective to liquidate the remaining BS III stocks. By the end of today, March 31, we would have sold almost all of our BS III inventory... As a public limited company, we have thereby tried to minimise the losses of all our stakeholders,” said Pawan Munjal, chairman, MD and CEO of Hero MotoCorp.
However, discounts and freebies of 10% to 30% on the vehicle price helped the dealers clear most of the stock in the last three days of March.
While OEMs provided for the incentives, dealers also sweetened the deals by providing free insurance.
“The total discounts provided work out to nearly Rs 600 crore, where the manufacturers would be sharing the bulk of the impact (over 70 per cent of the incentives), taking a total hit of Rs 460-480 crore,” it said.
This would cause a 150-200 bps erosion in the aggregate fourth-quarter EBITDA margins of listed players (Hero, Bajaj and TVS) in fiscal 2017, with the industry leader taking a higher impact due to its large BS-III inventory, the report said.
“As for three-wheeler makers, since the BS-III inventory could not be cleared due to the limited number of permits, we expect a marginal impact for Piaggio and TVS. Bajaj would be unscathed as it had already transitioned to BS-IV,” Crisil Research said.
For passenger vehicles, it said with the BS-III inventory at just 16,000 units, as players had transitioned to BS-IV much earlier, the impact was always expected to be marginal.
“On top of it, given the steep discounts offered in the last three days of the month, much of this stock is expected to have been cleared,” it said.
On March 29, observing that health of the people is “far, far more important” than the commercial interests of the manufacturers, the Supreme Court banned sales of BS-III vehicles in the country from April 1. The ban impacted over 8 lakh vehicles.
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