Published on 7/07/2019 11:24:12 AM | Source: HT Media

Budget boost for electric vehicles will not fix auto sector`s problems

Posted in Budget News| #Auto Sector #Union Budget

Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel 

Download Telegram App before Joining the Channel

Now Get news on WhatsAppClick Here To Know More

Union Budget 2019’s concessions to roll electric vehicles on to the fast track were a bolt from the blue. Neither industry nor analysts expected a battery of concessions to make EV ownership more viable.

On the contrary, there was hope for incentives such as a lower goods and services tax (GST) or direct tax benefits that would boost consumer demand including that for automobiles. The sector, particularly, has been languishing, with sales incessantly plummeting in the last year.

The proposal to lower the GST rate for EVs from 12% to 5% and reduce duties on components reinforces the government’s commitment to move ahead on cleaner mobility. A substantially higher tax exemption on loans incentivises EV purchases as well.

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

A good thing is this nudge comes at a time when many original equipment manufacturers across cars and two-wheelers, such as the Tatas, Mahindras, Hyundai, Maruti Suzuki, Hero and Bajaj Auto, are set to hit the market with EVs.

The moot question is, whether the current budgetary incentives will steer customers to 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% higher than 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, analyst, Yes Securities Ltd, “While the measures would narrow the cost difference between electric and internal combustion 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 margins 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 amortisation. One 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 cutting earnings for FY20/FY21 of most firms it covers. Thus, while the move to put EVs on the fast track is good, getting too excite about it will be a case of putting the cart before the horse.