By later this month, Mahindra & Mahindra (M&M) expects clarity from the Maharashtra State Government on its recent modifications to the Value-Added Tax (VAT) rule.
If the changes made this March are not resolved soon, the State could risk losing large future investments by auto and other mega manufacturing industries.
Dr Pawan Goenka, M&M's President of Automotive and Farm Equipment sectors, said that if the VAT rebate had been there in the first quarter, the company's operating profit margin would have been higher by 0.6-0.7 per cent. M&M's EBITDA margin in the quarter stood at 13.3 per cent (15 per cent same quarter last year).
“The impact on the second quarter could be similar. We believe that by August-end some announcement will be made by the Government, maybe on revising the rule or compensation for the losses suffered. It could impact future investment in the state,” he said.
Going back on the original deal given to manufacturers as an incentive for investing in the State, the Government announced new rules under which companies cannot claim VAT set-off for products that are sold outside the state.
Companies hit
Other mega manufacturing units affected by this include auto companies Bajaj Auto, Volkswagen, Kirloskar Oil, Tata Motors and General Motors. This is believed to be a reason for Ford chosing Gujarat for its second plant after reviewing a site in Chakan, near Pune.
Capacity Constraints
Dr Goenka said that even as the automaker has bucked the industry trend by posting significant sales growth in the first quarter, it is facing an engine capacity constraint for models such as the Pick-up, Bolero and Xylo D. While the waiting period on the Bolero is at about three weeks, for the Pick-up, one currently has to wait up to four weeks.
“We are not able to meet the demand, but by end of this quarter we will enhance production. We had very high growth in the past few months. If not for the constraint, we would probably have sold 500 units a month more of these vehicles,” he said.
“There is a shortage of engine on export vehicles as well, apart from high-end tractors like Arjun. We are increasing capacity in all,” he added.
On input costs, Dr Goenka said that prices are not expected to rise in the near future, though there could be a shortage of steel supply due to the ban in iron ore mining in Bellary, Karnataka.
Expansion plans
M&M, which has ear-marked Rs 7,000 crore till 2013-14 for new product development and capacity enhancement, said that concerns on growth in the industry could delay its expansion plans by about four months.
“As for product development there is no change in plans. Our R&D centre at Chennai is fully operational since October last year with 1,000 people. In terms of capacity, at our Chakan facility we're at Phase I and Phase II is 3-4 years away for actual production,” he said.
M&M is launching around seven new vehicles till March, 2012, including the electric vehicle NXR, a new premium SUV, Verito small car and facelift version and Ssangyong products.