Mumbai:Two-wheeler makers have managed to grow briskly despite rising fuel prices and interest rates, but their run may now be hobbled as tax and export incentives are taken away.

Two-wheeler sales grew almost 16% to 5.3 million units in the five months to August over a year earlier, even as the pressure of fuel prices and interest rates dented car sales by 1.3% to 743,000 units, according to lobby group Society of Indian Automobile Manufacturers.


Photo by Hemant Mishra; graphic by Yogesh Kumar/Mint

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“However, with excise duty now bottoming out, tax (free) period lapsing and export incentives likely to come down, we believe earnings growth from here on would be driven by volume growth and competitive positioning in the market," the report said.

On 30 September, the government will abolish the duty entitlement pass book (DEPB) scheme, under which exporters are reimbursed on customs duty paid on an imported input as a percentage of the export price. The government said on Friday that a transitional duty drawback scheme will replace DEPB.

But the duty drawback rate is kept at 5.5% compared with the DEPB rate of 9%, which means exporters will still be at a disadvantage.

Bajaj Auto, the largest exporter of two-wheelers from India, will be hurt the most, said Mahantesh Sabarad, analyst at Fortune Equity Brokers India Ltd.

Exports account for 36-40% of the company’s total volume. In August, it exported 138,225 two-wheeler and three-wheer units.

Bajaj Auto earned a revenue of around 500 crore from export incentives last year, Sabarad said. If computed to its so-called free on board (FOB) value of exports, it comes down to about 5% from 11%, after the DEPB scheme is withdrawn. FOB means the seller’s responsibility is up to the loading port, after which all freight, carriage and insurance costs are carried by the buyer.

This means the company will lose 200-220 crore in revenue and 130-150 crore in profit, according to him.

“The company can offset the loss by certain market link incentives," Sabarad said.

S. Ravikumar, senior vice-president of business development at Bajaj Auto, declined to comment on the impact of the new export scheme, saying he still has to study the programme.

TVS Motor exports 15% of its total volume; it exported 29,984 units in August. H.S. Goindi, the company’s president of marketing, also declined to comment, saying the firm is yet to study the new policy thoroughly.

For domestic sales-driven Hero MotoCorp, the impact is negligible, chief financial officer Ravi Sud said.

But he criticized the timing of the move, saying that coming alongside hardening interest rates and fuel prices, the decrease in export benefits will hurt the industry.

The company, following its split with Honda Motor Co. Ltd, has drawn up an aggressive exports strategy to sell a million bikes and scooters overseas in five to six years. The approaching end of tax holidays for two-wheeler factories in excise-free zones will also hit these companies hard. The income tax holiday for Hero MotoCorp’s plant in Haridwar, Uttarakhand, which started operations in April 2008, comes to an end in March 2013.

For Bajaj Auto’s Pantnagar factory in Uttarakhand, which started production in 2007, the benefits will last only until the end of the current fiscal.

“Profits from both Bajaj Auto and TVS’ tax-exempt plans would start attracting corporate tax from fiscal 2013 (estimate) as the five-year period comes to an end, leading to an overall effective tax rate rising from the current levels, going forward," Elara’s Lal and Sharma wrote. But while Hero MotoCorp draws 30-35% of its profits from the Haridwar units, only 5-8% of Bajaj Auto’s profits are generated from Pantnagar. So the impact for Bajaj Auto will be limited, Fortune Equity Broker’s Sabarad said.

Hero MotoCorp’s Sud said at his company’s Haridwar factory, when the 100% tax holiday gets over in the fiscal ending March 2013, only 30% of the firm’s profit from the unit will be exempt from tax. This will effectively increase the company’s tax rate from the current 17-18% to 22%, he said.

Income tax benefits have served as a cushion against rising raw material prices, Sud said, and their reduction will put margins under some pressure.