Budget boost to electric vehicles will not fix auto sector’s problems

Concessions in the Union Budget 2019 to push electric vehicles (EVs) to the fast lane were a bolt from the blue. Neither the industry nor analysts expected a battery of concessions to make EV ownership more viable.

On the contrary, the industry was hoping for incentives such as a lower goods and services tax (GST) rate or direct tax benefits that would boost consumer demand for sectors such as automobiles. The sector, particularly, has been languishing, with sales plummeting for almost a year.

The proposal to lower the GST rate for EVs from 12% to 5% and reduce customs duties on components reinforces the government’s commitment to move ahead on cleaner mobility.

A substantially higher tax exemption on loans incentivizes EV purchases as well.

These steps would help narrow the ownership gap between EVs and vehicles with ICE (internal combustion engine), according to Shailesh Chandra, president (electric mobility business and corporate strategy) at Tata Motors Ltd.

A good thing is that this nudge from the government comes at a time when many original equipment manufacturers across cars and two-wheelers such as Tata Motors, Mahindra and Mahindra Ltd, Hyundai Motor India Ltd, Maruti Suzuki India Ltd, Hero MotoCorp Ltd and Bajaj Auto Ltd are set to hit the market with EVs.

The moot question is, whether the current budgetary incentives will steer customers towards buying EVs?

Analysts are not convinced. Yes, the GST cut, along with the customs-duty waiver on components, will bring down EV prices substantially, given that these cost at least 40-50% more than those of ICE vehicles.

However, even with the incentives on loans, analysts reckon that it would take EV owners twice the time to break-even on ownership costs compared to ICE vehicle owners. In other words, the cost of ownership is high even in entry-level segments.

According to Prayesh Jain, executive vice president at Yes Securities Ltd, “While the measures would narrow the cost difference between electric and internal combustion engine vehicles, the key impediment is the lack of charging infrastructure and availability of products with an adequate charging range at affordable prices. We still believe that the EV story in India is for the longer term.”

Besides, short-term woes have been mounting for auto firms. Volumes have contracted in double digits due to a plethora of issues that are still plaguing the sector.

Ebitda margin for most firms are likely to have declined by a steep 150-300 basis points in spite of softer commodity prices compared to the year-ago period. Ebitda is earnings before interest, tax, depreciation and amortization. A basis point is one-hundredth of a percentage point.

A report by Motilal Oswal Services Ltd forecasts a drop in the Ebitda margin for the fourth consecutive quarter for auto companies, leading the brokerage firm to cut FY20/FY21 earnings estimates of most companies it covers.

Thus, while the move to put EVs on the fast track is good, getting too excited about it will be a case of putting the cart before the horse.