Higher import duty to affect auto exports to Sri Lanka.

Indian auto makers exporting to Sri Lanka will pass on the burden of an import duty hike to consumers, hitting demand, analysts said.

In a bid to contain the rising fiscal deficit, the local government sharply increased the import duty on automobiles with effect from 1 April. The import duty on cars has gone up from 120-291% to 200-350%; on three-wheelers, it has gone up from 51-61% to 100%, and on two-wheelers, from 61% to 100%.

Duty on buses, trucks and tractors remains unchanged.

Sri Lanka is an important export destination for several Indian auto makers, including Bajaj Auto Ltd and Maruti Suzuki India Ltd.

Executives at the auto firms conceded sales would get affected at least in the medium term as the market is price sensitive.

Bajaj Auto, India’s largest exporter of motorcycles and three-wheelers, draws 20% of its total exports from Sri Lanka. In the fiscal year ending March 2012, the Pune-based firm exported 10,7691 units, an expansion of 54% over last year.

Rakesh Sharma, president, international business, at the firm, said, “The increase is so significant that we have no choice but to pass it on (to consumers).” The hike, according to Sharma, is likely to deter consumers from buying new vehicles at least for the time being.

With Sri Lanka’s economy improving and showing a fundamental upward trend, buyers will come to terms with the price hike over a period of time, he said.

With Bajaj Auto having a relatively high exposure to the Sri Lankan market, it will feel the maximum impact among Indian auto makers, wrote Joseph George, analyst at brokerage IIFL Ltd in a 2 April research report.

While Bajaj Auto’s three-wheelers have 80% of the Sri Lankan market, its two-wheelers account for half, he said. “Sri Lanka accounts for 35-40% of Bajaj’s three-wheeler and 10% of two-wheeler exports. This is equivalent to about 7% of Bajaj’s total revenue and an estimated 9% of earnings before interest, tax and depreciation,” the IIFL report said.

The firm estimates that the import duty hike led to a 20-30% increase in the price of vehicles.

Car market leader Maruti Suzuki’s 5% of exports sales comes from Sri Lanka. Mayank Pareek, managing executive officer, marketing and sales at Maruti Suzuki, said: “It’s quite a significant market for us and bound to have an adverse impact on sales as Sri Lanka is a price-sensitive market.” The company is awaiting clarity on duty on second-hand vehicles in the market.

Currently, duty on pre-owned cars in Sri Lanka is higher than new vehicles. If there is no change, it will give a boost to the second-hand car market in the region, which accounts for 80-85% of total car sales, said Pareek.

Although Sri Lanka is a big market for TVS Motor Co. Ltd and Hero MotoCorp Ltd, overall exports are not as big a revenue generator for these companies as they are for Bajaj Auto, said IIFL’s George. Mint wasn’t able to reach these two firms for comment.

Among other measures including a half percentage point hike in the policy rate, imposing credit growth targets for banks and substantial price hikes on petroleum products, the higher import duty on vehicles has been viewed favourably by the International Monetary Fund, which recently disbursed the last tranche of $427 million of the $ 2.1 billion it had committed to the country, wrote analysts Anushka Shah and Rohini Malkani in a 3 April report by Citi Investment Research and Analysis.

Source : livemint.com