Will Bharat Stage Norms Suffocate the Indian Auto Sector?
The auto sector has been in the news for all the wrong reasons.
First, notebandi proved to be a roadblock. Now, the Supreme Court's ruling banning the sale and registration of BS III-compliant vehicles from April 1 has again caught automobile manufacturers off-guard.
What are Bharat Stage (BS) emission norms?
BS norms are emission standards instituted by the government of India to regulate auto-induced air pollution. These norms are based on the European standards and were first introduced in 2000. They apply to all vehicles - two wheelers and three wheelers, commercial vehicles and passenger vehicles.
In February 2016, The Ministry of Road Transport and Highways issued a notification declaring any vehicle to be sold from 1 April 2017 should be BS IV compliant. The transition from BS III to BS IV will reduce emissions 50%. Of course, it will also increase the cost of vehicles.
But there was some confusion on the applicability on production and registration of such vehicles. The manufacturers thought they would be allowed to sell the inventory of already manufactured vehicles before 31st March 2017.
They also expected strong pre-buying in March and decided to keep inventories, especially the commercial vehicle (CV) players.
However, the recent Supreme Court ruling made it clear no BS III vehicle will be allowed to be sold in the Indian market from 1 April 2017.
How Is This Impacting Auto Companies?
The auto industry works on 20 to 30 days' inventory within the distribution channel. Now, given the notebandi-induced slowdown, it is fair to assume the inventory to be 30-35 days.
As per SIAM, total unsold inventory in the system (BS III) stood at 823,000 vehicles - 94% of them two wheelers and CVs. Passenger vehicles were early adopters of the BS IV norms (from 2010).
A Snapshot of the auto volume numbers
The total value of the unsold inventory is estimated between Rs 15,000 and 18,000 crore. However, a basic calculation around the production and the unsold inventory reveals a relatively small impact on the industry as a whole.
Of the total vehicles produced between April 2016 to February 2017, unsold inventory is just 4%. However, while the overall impact is small, some players are better placed than others.
The total value of the unsold inventory is estimated between Rs 15,000 and 18,000 crore. However, a basic calculation around the production and the unsold inventory reveals a relatively small impact on the industry as a whole.
Of the total vehicles produced between April 2016 to February 2017, unsold inventory is just 4%. However, while the overall impact is small, some players are better placed than others.
Two Wheelers
Around 80% of the total unsold inventory is two wheelers. This accounts for around 4% of the total two wheelers produced in eleven months. This is roughly half a month sales or Rs 4,000 crore.
Players like Bajaj and Eicher were proactive and started manufacturing BS IV compliant vehicles from January 2017. They have a very low inventory of BS III vehicles.
However, market leaders Hero Motocorp, TVS, and Honda Motorcycle and Scooter India Ltd became BS IV compliant only from March 2017. That's why both Hero and Honda have had to resort to offering discounts up to Rs 22,000 per vehicle to clear their inventory by 31 March 2017.
Around 80% of the total unsold inventory is two wheelers. This accounts for around 4% of the total two wheelers produced in eleven months. This is roughly half a month sales or Rs 4,000 crore.
Players like Bajaj and Eicher were proactive and started manufacturing BS IV compliant vehicles from January 2017. They have a very low inventory of BS III vehicles.
However, market leaders Hero Motocorp, TVS, and Honda Motorcycle and Scooter India Ltd became BS IV compliant only from March 2017. That's why both Hero and Honda have had to resort to offering discounts up to Rs 22,000 per vehicle to clear their inventory by 31 March 2017.
Commercial Vehicles
After two wheelers, CVs are the most impacted segment in terms of volumes, forming around 12% of total unsold inventory.
However, the overall impact on the CV segment is expected to be higher than two wheelers as it forms 13% of the total vehicles produced in eleven months. The unsold inventory is roughly valued at Rs 11,000 to 13,000 crore.
Pure CV players like Ashok Leyland will likely be impacted the most. Tata Motors, Eicher Motors, and M&M are placed better than the pure CV players.
We believe the CV segment will face the maximum heat.
After two wheelers, CVs are the most impacted segment in terms of volumes, forming around 12% of total unsold inventory.
However, the overall impact on the CV segment is expected to be higher than two wheelers as it forms 13% of the total vehicles produced in eleven months. The unsold inventory is roughly valued at Rs 11,000 to 13,000 crore.
Pure CV players like Ashok Leyland will likely be impacted the most. Tata Motors, Eicher Motors, and M&M are placed better than the pure CV players.
We believe the CV segment will face the maximum heat.
Going Forward
We believe the industry players can minimise their losses by taking the following steps:
- Diverting unsold inventory to the export markets. This would take around one year for CV players and three months for two-wheeler manufacturers.
- OEMs can recall the stock and upgrade them to BS IV. However, this would result in increased cost both in the upgradation and high working capital requirements.
- Dealers can sell the parts in the replacement market.
- Aggressive discounts before the cutoff date (31 March 2017).
Now, as we've seen, the worst-case would be a 4% hit to the industry. But with some diversion to the export market and these other measures, the impact could be a bit lower.
Again, we believe the CV segment will be the worst hit, along with some players in the two-wheeler space.
That said, the ban will have a one-off impact. So we ask a simple question: How does this affect our assumptions if we take a ten-year view of the Indian auto industry?
Considering the long road ahead, we believe this is just a minor speed bumper.
We believe the industry players can minimise their losses by taking the following steps:
- Diverting unsold inventory to the export markets. This would take around one year for CV players and three months for two-wheeler manufacturers.
- OEMs can recall the stock and upgrade them to BS IV. However, this would result in increased cost both in the upgradation and high working capital requirements.
- Dealers can sell the parts in the replacement market.
- Aggressive discounts before the cutoff date (31 March 2017).
Now, as we've seen, the worst-case would be a 4% hit to the industry. But with some diversion to the export market and these other measures, the impact could be a bit lower.
Again, we believe the CV segment will be the worst hit, along with some players in the two-wheeler space.
That said, the ban will have a one-off impact. So we ask a simple question: How does this affect our assumptions if we take a ten-year view of the Indian auto industry?
Considering the long road ahead, we believe this is just a minor speed bumper.
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