Economy

Limited incentive and poor cost economics could limit scrappage offtake: Crisil

Our Bureau Mumbai | Updated on April 28, 2021

Potential benefit of scrapping a vehicle largely appears less than its resale value, according to the analysis

The Centre’s scrappage policy is unlikely to have freight transporters queuing up to replace old vehicles with new ones. The scrappage volume of buses, passenger vehicles (PVs) and two-wheelers will be limited as well, a Crisil Research analysis shows.

In the optimistic scenario, the potential benefit of scrapping a 15-year-old CV, and its resale value are similar. As the age of vehicle increases, the benefit reduces, while incentives increase. That’s because, the resale value of a 20-year-old truck is less compared with a 15-year-old truck, so scrapping makes sense. However, in the base case, the potential benefit is less than the resale value of the truck, so scrapping does not make sense. Even in the optimistic scenario, it doesn’t make sense to scrap a 16-year-old truck, the analysis shows.

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Unviable numbers

The distance a truck covers annually decreases with age. Typically, a 16-year-old truck will ply 40,000 km, while a 20-year-old one will traverse about 35,000 km or lesser.

In a scenario where a transporter using a 16-year-old truck chooses to scrap it, he will most likely replace with a used truck, say, 10 years or older, instead of buying a brand new vehicle. That’s because, typically, his business requirements would warrant a vehicle that can be driven for 4-5 years.

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But despite having a better and younger truck, the transporter won’t be able to charge higher-than-market freight rates. Consequently, the freight rate will remain around ₹40 per km (₹3.4 per tonne km) — the same as when using the 16-year-old truck.

Moreover, the annual distance covered would also remain unchanged, while the interest burden would rise because of the higher price paid to buy the younger truck.

As such, the transporter’s annual earnings will reduce by a drastic 20-25 per cent after incremental annual loan payments of around ₹1.2 lakh for an 11-year-old truck bought in a scrappage deal. Operational profit will be ₹1.9 lakh compared with ₹2.4 lakh for a 16-year-old truck.

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“Thus, the financial burden after replacement increases significantly, hence even in our optimistic scenario, we do not see much traction for the policy from an incremental demand perspective. That’s unviable and small-fleet owners — who account for around 85 per cent of the total transporter segment revenue — are thus likely to stay away from scrapping,” Crisil said.

State govts’ wherewithal

In the bus segment, many buses owned by state transport undertakings will have a life of over 15 years. In comparison, buses operated for intercity, staff, school and tourist segments typically do not have a life beyond 15 years and would thus be outside the ambit of the scrappage policy. Hence, Crisil Research estimates 45,000 buses, largely owned by state transport corporations, could be scrapped and replaced. Assuming a three-year window, starting April 2022, scrappage of 15,000 buses annually could result in 15-20 per cent incremental new bus sales — based on the average of 90,000 buses sold between fiscals 2016 and 2020. This, however, would depend on the State government’s wherewithal to purchase new vehicles and therefore will be a monitorable.

PVs, two-wheelers

As for PVs, renewal of registration fees is proposed to increase from ₹600 to ₹5,000 (valid for five years) for passenger vehicles older than 15 years, a hike of over eight times. However, these vehicles mostly ply in the rural areas where enforcement of higher registration fees is difficult to monitor. The potential benefit from scrapping a 15-year-old, entry-level small car will be ₹70,000, whereas its resale value is ₹95,000. That makes scrapping unattractive.

But for vehicles older than 20 years, considering that there is a proposal to de-register them, the potential scrappage benefit is ₹50,000, which is similar to its resale value. That can incentivise scrapping. As a result, 40,000-60,000 PVs can realistically be scrapped. So, the incremental contribution to new vehicle sales works out to 12,000 to 20,000 PVs annually, assuming a three-year window. As the number is less than 1 per cent of the 30 lakh units sold on average over fiscals 2016-2020, scrapping will not contribute substantially to new sales.

In the case of two-wheelers, while the fees for renewal of registration is proposed to increase from ₹300 to ₹1,000 (valid for five years) for vehicles older than 15 years, the cost burden in absolute terms is minimal. Also, as much of these older two-wheelers ply in Tier II and III cities and rural areas over short distances, the rise in registration cost may be difficult to implement, given traffic scrutiny is weak in those geographies.

Published on April 28, 2021

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