Soon after the excise duty cut, Business Standard spoke to companies across sectors on whether they would pass on the benefit to consumers. Barring consumer durables and commercial vehicle makers, who remained noncommittal.
STEEL: Prices to drop by Rs 500-800
The government's decision to cut excise duty by 2 per cent on Tuesday would bring down steel prices by Rs 500-800 a tonne, industry experts said.
Hot rolled coils, ruling at around Rs 25,000 a tonne, would be lower by Rs 500, TMT bars at Rs 32,000 a tonne would drop by Rs 640, while galvanised steel at Rs 30,000-40,000 a tonne would be lower by Rs 600-800, they said.
Anil Sureka, director (finance), Ispat Industries, said that the government move should help revive demand. "After months of a declining trend, prices had started stabilising and consumers were again buying the material. The excise duty cut would further boost demand," he said.
The excise duty on steel prior to the cut was 10 per cent. The cut would be effective Wednesday.
C G Patil, director (commercial) of public sector long products major Rashtriya Ispat Nigam, said the excise duty cut would definitely improve the demand.
However, it would have no impact on margins of the companies, which may benefit from new raw material contracts.
In the last quarter, margins had taken a beating as raw material purchased during the peak period could not be passed on to the consumers as finished product prices dropped by more than 50 per cent.
Ankit Miglani, director (commercial), Uttam Galva Steels, said the duty cut would not have any immediate impact on prices of the products.
CEMENT: Firms to pass on benefits to customers
With the reduction in excise duty on bulk cement effective from Wednesday, the cement industry, though still working out the impact, has said that the benefits of the cuts will be passed on to the end consumers. With the latest excise cut, bulk cement was at par with trade cement with a flat excise duty of 8 per cent.
The duty cut on bulk cement, which constitutes around 8-10 per cent of the entire cement sales in the country, will bring down the taxes from Rs 290 a tonne to Rs 230.
Amrit Lal Kapur, managing director of Ambuja Cements, said, "Excise duty on bulk cement is levied on the negotiated contract prices between the producers and the buyers. This way, the entire reduction will automatically be passed on to the end consumers."
Hari Mohan Bangur, CMD of Shree Cement and president of the Cement Manufacturers' Association, said, "The industry will pass on the entire duty cuts to the consumers. The last fortnight had seen prices firming up by Rs 2-5 a bag, but now with the latest duty cuts, prices would come down." North-based Shree Cement is one of the largest cement makers operating in the bulk cement category.
K C Birla, CFO, UltraTech Cement, said, "We still have to see how to go ahead. But the duty reduction will tantamount to a reduction of Rs 3 a bag in bulk cement category." This means, that the cost should reduce by around Rs 60 a tonne.
The government announcement has come at a time when the peak construction period is underway.
ALUMINIUM: Small relief in terms of demand push
The country’s aluminium producers, reeling from the pressure of high cost of production, have welcomed the excise cut.
“It is good for the industry; it will help demand pick up,” said Sunirmal Talukdar, group executive president and chief financial officer at Hindalco Industries — India’s second largest producer of the base metal. The current excise duty on aluminium products is 10 per cent, which has been brought down to 8 per cent.
Spot price for aluminium on the London Stock Exchange was down to $1,251 per tonne on Monday from the high of $3,271 on July 11, 2008.
“The benefit of the excise duty cut would be eventually passed on the end consumer. This way it would help in inducing demand,” said C R Pradhan, managing director and chief executive officer of Bhubaneswar-based Nalco over phone.
TYRE: Industry takes no time in slashing prices
The tyre industry’s leading companies such as Apollo Tyres and Ceat Tyres plan to pass on the duty reduction to customers. “ We will be passing on this reduction to our customers,” says Onkar S Kanwar, chairman & managing director, Apollo Tyres. Excise duty on tyres was lowered to 10 per cent from 14 per cent following the 4 per cent Cenvat cut announced in the second stimulus package in January this year. The 2 per cent cut announced on Tuesday has lowered the excise duty on tyres to 8 per cent.
“The effective price reduction on our range of tyres following today's announcement stands between 1.6 – 1.7 per cent,” says Arnab Banerjee, VP (sales & marketing) Ceat Tyres. Which means, truck tyres will be cheaper by Rs 175– 200, those of light commercial vehicles will be lower by about Rs 100, and two wheeler tyres cheaper by around Rs 20.
For tyre majors like Ceat today's price cut is the third price reduction implemented in the last three months. “First we lowered tyre prices in December following the first stimulus package by about 3 per cent, then we reduced prices by about 6 per cent in January, and now we've lowered prices again by about 2 per cent bringing the total cuts to well over 10 per cent in the last three months,” says Banerjee.
Apollo Tyres, JK Tyres and MRF have been posting losses over the last three quarters of FY09 on the back of slackening demand in the CV segment and rising raw material costs. Prices of the raw materials rose nearly 35 per cent over the last three quarters. “But we're positive to improve profitability based on falling prices of critical raw materials in the fourth quarter. Plus the operational efficiencies we've put in place in the last 3 quarters will also improve profitability,” says Banerjee.
HARDWARE: Prices of non-PC IT products to fall
The country’s IT industry has welcomed the excise duty cut. However, industry experts feel that it won’t do much for the industry.
The current announcement maintains the status quo of taxes in the industry.
During the 2008-09 budget, the government had increased excise duty on packaged software from 8 per cent to 12 per cent. However, in December 2008 the government announced a cut of 4 per cent and hence now packaged software attracts 8 per cent excise.
“We welcome the several proactive measures announced by the government over the last few months to sustain the growth of the domestic economy. Two per cent reduction in Cenvat rate will help bring down the prices of IT products other than computers. With this, hardware equipment would attract 8 per cent excise duty, while desktops and notebooks will continue to remain at the same rate,” said Vinnie Mehta, executive director, MAIT.
TEXTILES: Industry expects marginal benefits
The cut in excise duty and service tax will have a marginal impact on the country’s textile industry. While textile makers will gain from the cut in service tax, they will not gain much from the excise duty cut as most of them don’t pay any excise, except on some inputs and machinery.
“There’s not much impact on textiles, except for savings on inputs like dyes and chemicals, spare parts or machinery. There will savings on their purchase,’’ said Jayesh Shah, CFO, Arvind Mills. But no one is investing in capacity expansion.
There’s no excise duty on cotton textiles though synthetic textiles (polyester yarn or fibre) attract an excise duty of 4 per cent but the same has not been impacted as the duty has been cut on items that currently attract excise of 10 per cent. The excise duty cut on inputs will have a little impact, said O P Lohia, CMD, Indo Rama Synthetics, as the excise on inputs is “modvatable” with the excise paid on the product, and a manufacturer has to pay a duty only on the difference.
These measures do not address the problem being faced by textile exporters, said D K Nair, secretary general, Confederation of Textile Industry. He estimates that textile exports have come down by 5-10 per cent in the last three months, which are likely to fall 10-15 per cent FY 2009-10.
“Many retail chains and stores are in bad shape. Some garment makers have no orders after April and there are no signs of recovery,’’ says Nair.
COMMERCIAL VEHICLES: Another shot in the arm
The ailing commercial vehicle (CV) industry received another shot in the arm with the latest excise cut. This is the third bailout in less than three months for the auto sector from the government.
The excise duty on auto products, which were earlier taxed at 10 per cent, will now be 8 per cent. The government also clarified that the Cenvat rate cut of 4 per cent announced in December 2008 will continue beyond March 31, 2009.
However, most commercial vehicle manufacturers in the country were cautious towards announcing any reduction in prices immediately, saying they were awaiting for details regarding the cut.
The country’s top commercial vehicle manufacturers, including Tata Motors, Ashok Leyland, Volvo Eicher Commercial Vehicles and Mahindra & Mahindra, remained noncommittal on any price reduction.
A senior executive from India's largest CV maker Tata Motors said, "We welcome this move of a 2 per cent cut on excise duty on commercial vehicles. A decision on effecting a price cut could be taken only after the notification is examined."
To provide an indication on the rate cut, an excise duty of Rs 150,000 was payable on a truck costing about Rs 15 lakh at 10 per cent rate. At the revised rate, Rs 120,000 at 8 per cent will be payable thereby making a saving of Rs 30,000.
However, experts say that the cut will not have any quick or major impact on the CV industry, which is struggling to source retail finance at the moment as banks and other financial institutions have refrained from lending to the sector. During January, the government as part of its second stimulus package had announced that it will provide assistance under the JNNURM to buy buses for urban transport, giving hope to bus manufacturers.
In addition, it also said that an accelerated depreciation of 50 per cent will be provided for CV's to be brought during the current quarter. Special line of credit will also be arranged for non-banking finance companies with the help of state-owned banks.
According the latest report from the Society of Indian Automobile Manufacturers (Siam), sales in the CV industry fell by almost 20 per cent at 311,283 units for the period ended April-January.
CONSUMER DURABLES: To evaluate duty cut
The duty reduction has given the white good manufacturers in the country a reason to rejoice. The 4 per cent reduction in Cenvat in December last year had translated into a mere 1-2 per cent reduction in prices, giving little boost to an industry, which was reeling from pressure arising out of low consumer buying sentiment and high input costs involved.
The Rs 32,000-crore domestic durables industry is now evaluating the effective reduction as announced in order to decide whether to pass on the entire benefit to the consumers or not. The 2 per cent cut will translate into 1.5 per cent cut on the market operating prices of durables. If passed on, the high-end consumer durables such as plasma TVs, fully automatic washing machines and frost free refrigerators may get cheaper by around Rs 500- 1,000 with a lower reduction for other appliances.
“We will pass on the entire benefit of the cut to consumers. The new prices will be implemented within a month’s time subject to the inventory clearance,” said George Menezes, COO of Godrej Appliances. “The move is a step towards stimulating demand,” he adds.
While the interim budget had failed to address concerns of durables manufactures, the stimulus package has provided the industry an extension on the timeframe of the Cenvat cut to beyond March.
Korean chaebol LG Electronics is still evaluating the optimum solution post the duty cut. Moon B Shin, managing director, LG Electronics India, said, “While we have registered good growth in January this year, it is still less than what we achieved in the same period last year. We need to make some recovery for future investment and hence we are working out a solution that is win-win for both the company and the consumer.”
