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What the auto components sector wants from Budget

March 14, 2012 20:03 IST
The auto component industry caters to automobile industry through a whole gamut of auto parts such as engine parts, body & chassis, electrical parts, drive transmission & steering parts, braking, suspension etc.

It is directly driven by automobile industry through OEMs, aftermarket and exports.

As per the industry body - Automotive Component Manufacturers Association of India, the auto component industry reported turnover of USD 39.9 billion in financial year 2010-11, up by robust 34% y-o-y.

Out of this, the exports grew by robust 54% to USD 5.2 billion aided by signs of recovery in North America, Western Europe and Asian markets. However, with growth in the domestic market, imports of auto components too grew by 30% to USD 8.5 billion with almost 85% of the imports accounted for by the OEMs and the rest 15% by the aftermarket.

Going ahead, for the financial year 2011-12, the ACMA expects auto component industry's turnover to grow only by 12-15% due to moderation seen in the automobile industry this year.

The Indian automobile industry, after an eventful FY 2011, reported slump/moderation in auto demand due to impact of 325 bps hike in repo rate over 20 months, Rs 14.21 per litre hike in petrol prices since deregulation of petrol prices till date as well as inflation.

Nonetheless, revival in automobile demand is anticipated in FY 2013 on back of hopes on the RBI reducing the interest rates. This would indirectly benefit the auto component industry.

Industry expectation

Union Budget 2012-13 expectations of Automotive Component Manufacturers Association of India are as follows:

Create Technology Upgradation & Development Scheme (TUDS) for auto component industry – As over 70% of auto component companies are SMEs, government support towards R&D is critical.

ACMA has requested the Government to support auto component companies as they modernise/ upgrade technology, wherein the scheme would provide support to companies by financing 50% of the project cost by way of soft loan, at nominal rate of interest.

Eliminate customs duty on alloy steel and secondary aluminum alloy.

Reduce customs duty on SS wirecloth stripe from 10% to 5% and on washcoat from 7.5% to 5% used for manufacture of catalytic converters and their parts.

To allow input credit on diesel procured for internal power generation & industrial use by manufacturing unit.

To provide 100% Cenvat Credit on capital goods in year of purchase. Currently 50% Cenvat Credit is allowed on capital goods in year of purchase, balance 50% to be availed in subsequent years.

No interest for differential excise duty paid due to price increase subsequent to sale of goods in case supplies made to OEM's

Phase out central sales tax by either removing it or reducing it from 2% to 1% pending GST

Reduce corporate tax rate for domestic companies from current 32.445% (including surcharge of 5% and education cess 3%) to 30%.

Increase depreciation rate on capital goods from current 15% to 25% to encourage investments. It has also recommended charging a higher depreciation rate for domestically manufactured capital goods.

To extend weighted deduction for in house R&D that expires on 31st March 2012.

To provide 100% tax benefit on corporate social responsibility activities.

Companies to watch

Sundram Fasteners, Sundaram Clayton, WABCO India, Wheels India, Bosch, Bharat Forge, Motherson Sumi, Exide Industries etc

Outlook

The budget appears bleak for the auto component industry on account of two factors – one is the anticipated hike in excise duties for both auto components and various automobile sectors and the other is nil change or increase in import duty on steel and aluminum.

Increase in fiscal deficit, rising subsidies and possible passing of food security bill is expected to trigger hike in excise duties across the board including automobiles and auto components.

Further to bring a level playing between diesel and petrol prices, we expect the government to charge additional tax on diesel passenger vehicles. These measures will indirectly impact the auto component industry that caters to the automobile demand.

Nonetheless, with the government focusing on returning back to 8-9% GDP growth, continued thrust on infrastructure investment is expected which would benefit the commercial vehicle industry directly and auto component industry indirectly. However n overall basis, the budget outlook for auto component industry is negative.