Supreme Court ban on BS-3 vehicles: Here's how it will impact companies, customers

New Delhi - The automobile industry has termed the Supreme Court diktat banning sale of BS-3 vehicles from Saturday a ‘shock and awe’ decision. But just a back-of-the-envelope calculation shows the ban will impact less than 4 percent of the industry’s production in the 11 months of this fiscal. This figure alone should suffice to put the ban in perspective – the industry had ample time to prepare for an eventual end date for selling BS-3 vehicles. That it happily went on producing such vehicles, hoping for a lenient view from the apex court, showed it was willing to take a chance. Well, it did and its bet didn’t work. Now, there is nothing to do but to comply with the ban.

Representational image. AFP

Representational image. AFP

Also, those expecting to quickly buy cheaper or hugely discounted cars between today and tomorrow would be disappointed – passenger vehicle makers had already transitioned to the BS-IV standards in 2010, when it was made mandatory in the National Capital Region (NCR) and 13 major cities. The only people who may be desperate to offload inventory at sizeable discounts are truck and heavy commercial vehicle makers. Another thing: retrofitting BS-3 vehicles with BS-4 kits may not be a feasible option, given technical challenges, additional costs, and potential quality issues.

But why was the SC ruling a negative surprise anyway? Analysts at brokerage IIFL have explained that though the transition to BS-4 had been notified well in advance, the earlier legal position was that the cut-off date of 31 March 2017 was applicable to production of BS-3 vehicles and not to sales or registration.

“This has been so even in the previous emission norm transitions. Since, the transition from BS III to BS IV necessitated price increases (more so in case of M&HCV), OEMs increased inventory at the company and dealer level to maximise sales of cheaper BS III vehicles. However, the ruling has changed applicability of the cut-off date from production to sale, which would result in BS III effectively becoming non-saleable.”

According to one brokerage tracking the automobile industry, actual vehicle population affected by the ban is a mere 8,24,278 out of 238,56,956 produced between April 2016 and February of this year. And the value loss for the industry would be a mere 5 percent due to the ban. This brokerage has reasoned it out thus:

1) 25% (of the banned vehicles) will go to exports

2) Realisations for each segment have been considered stable for FY16 and inventory left. This will negate any price cutting by automobile manufacturers to sell inventory in the next two days.

3) If we consider that only engine will go as scrap, then percentage loss can reduce further. If we assume that 50 percent is the engine cost, and that go as scrap with zero value, loss can be below 2.5 percent.

Analysts at brokerage Ambit said Ashok Leyland, with unsold BS-3 vehicle inventory of 18,000-20,000 units and Hero MotoCorp, with 250,000-300,000 units, would be the most impacted by the SC ban. They also echoed views expressed earlier that some mitigating factors include sale of BS-3 vehicles in some export markets, sales in the last two days of FY17 and sale of some BS-3 engines in the aftermarket.

The impact is going to be prominent for the CV segment. If full value of the inventory is taken as scrap, then also the CV industry will see an impact of 12 percent, said the analysts quoted earlier. There is negligible impact for 4-wheelers and marginal impact for 2-wheelers and 3-wheelers. Pure play CV company is Ashok Leyland, whereas players like Tata Motors, Eicher and M&M have cushion from other product offerings. Tata Motors has JLR, passenger cars; M&M also has passenger cars, utility vehicles and tractors. The ban would be felt most by commercial vehicle makers, say analysts.

“Pure CV players like Ashok Leyland to get maximum impact (in the range of 5 percent - 10 percent) on sales and profitability. On the flip side, Ashok Leyland is already producing BS IV vehicles and they should be able to cover up sales decline of BS III vehicles in next quarter itself.”

Shrikant Akolkar (Research Analyst- Auto & Auto Ancillary, Angel Broking) said he did not expect a major impact on passenger vehicle makers, since they had already begun manufacturing BS-4 compliant vehicles.

“The auto industry currently has an unsold inventory of nearly 8.2 lakh BS-III vehicles having a combined value of Rs 12,000 crore. The argument of the Society of Indian Automobile Manufacturers (SIAM) is that the production had to be increased after January 2017 as demonetisation had negatively impacted their output in the months of November and December 2016. The chunk of the inventory of BS-III vehicles pertains to the two-wheelers segment and these may have to be diverted to the international markets where BS-III vehicles are still permitted. The passenger vehicle manufacturers have already started to manufacturer the BS-IV compliant vehicles hence we do not expect any big impact on passenger vehicle manufacturers.”

In their note to clients, brokerage IIFL said OEMs would have to spend on higher discounts, recalling unsold inventory and higher working capital for holding the inventory until it is exported. Some OEMs would try to clear off as much inventory with higher discounts before 31st March.

In case of CVs, dealers invoicing sales on March 30-31 may actually undertake deliveries later in April. Some BS-3 Vehicles would find their way to developing countries with benign emission standards.

The IIFL analysts also said BS-3 inventory of two-wheelers would not be very high since most OEMs had already started producing BS-4 compliant vehicles by February end. Bajaj and Eicher were the early movers with full transition to BS-4 production in January-February.

Hero MotoCorp and TVS moved to 100 percent BS-4 production this month. It is the CV makers who continued manufacturing BS-3 vehicles in March, in anticipation of strong pre-buy and expected to continue selling them in April and beyond. CV OEMs would have to spend on higher discounts, recalling unsold inventory and higher working capital for holding the inventory until it is exported.

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Updated Date: Mar 30, 2017 12:29:39 IST

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