'Ban on sale of BS III vehicles to cost manufacturers ₹2,500 cr'

The Apex Court’s ban on sale of BS III vehicles will have a negative impact of ₹2,500 crore on commercial vehicle (CV) makers, according to Crisil Research.

CV makers disposed over half their stock of BS III vehicles before the April 1 deadline set by the Supreme Court. The discounts and incentives on vehicles sold till March 31 are expected to have cost them about ₹ 1,200 crore. Additionally, ₹ 1,300 crore would be incurred to dispose the unsold inventory, it said.

Leading CV makers had continued manufacturing BS III vehicles in anticipation of strong buying in the closing weeks of the fiscal year given price hikes of 8-10 per cent expected on BS IV vehicles.

Indeed, for want of clarity on whether the ban was on production or registration, the industry had expected some BS III trucks to be sold even in April. This had bloated inventories.

When the Supreme Court ruling came, the CV dealers’ inventory at risk was around 97,000 units (equivalent to 1.7 months of sales) valued at ₹11,600 crore.

The industry is expected to have sold about 55 per cent of this in the last three days of March by offering discounts of 20-40 per cent on the sticker price compared with about 10 per cent before the ruling.

The additional discounts and incentives are expected to have cost about ₹ 1,200 crore, of which the truck makers are likely to bear about 80 per cent and their dealers the rest.

“We estimate the remaining 40,000-45,000 units of unsold inventory to be returned in the upcoming months, mainly comprising less-popular models since there were instances of supply shortage in some popular BS III models,” the report said.

For unsold BS III inventory, truck makers may upgrade them for resale or dismantle the vehicles for spares or incur higher working capital to hold the inventory until it is exported (which could take 5-6 months).

Assuming that the truck makers have to incur an additional cost of ₹ 3-4 lakh per vehicle on reverse logistics and remodelling to BS IV, it would mean an additional expense of ₹ 1,300 crore, it explained.

Thus, the total impact of the Supreme Court verdict (which includes the loss due to higher discounts and managing unsold inventory) works out to about 2.5 per cent of annual revenues of listed truck makers (Ashok Leyland and Tata Motors’ standalone). The impact for the full fiscal works out to about 100bps, which is significant considering EBITDA margins have not reached the pre-slowdown levels of 8-10 per cent.

In April, shipments are expected to drop as dealers return their BS III inventory and exchange them for BS-IV vehicles, netting off the sale.

With the pre-buying momentum gone and BS IV vehicles priced higher, sales would be subdued despite dealers looking to stock up to normal levels.

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