President revs up reconditioned vehicles

• Importers secure increase in age limit for cars and commercial vehicles; higher duty to stay

President Mahinda Rajapaksa yesterday stepped up the accelerator for re-conditioned vehicles agreeing to revise the recently imposed age limit rules at a meeting with importers.
Responding to pleas by motorists as well as Vehicle Importers Association, the President has agreed to increase the age limit for cars to two years from one and for commercial vehicles from three and half years to four years.

At yesterday’s meeting at Temple Trees, the President had explained that higher duty structure cannot be revised since revenue safeguards were important in the current context.
“We are happy with the relaxation of age limits which will now make reconditioned vehicles more affordable for people,” Vehicle Importers Association President Yoga Perera told the Daily FT last night following the meeting with the President. Treasury Secretary Dr. P.B. Jayasundera and President’s Chief of Staff Gamini Senarath were among officials associated with the President at the meeting.
The sharp upward revision in import duties on motor vehicles imposed from 1 April and cut in age limit dealt a big blow to the motor trade as well as motorists.
The Government justified the move to limit imports, save foreign reserves as well as conserve fuel and better manage traffic on the road.“Whilst we understand the revenue needs of the Government, with the revision in age limits, we can at least survive now,” said Perera.
The relaxation of age limit is likely to unsettle companies which deal in brand new vehicles though they too have expressed concern over the hike in duties.
The Association had maintained that if the two-year (age of vehicle) rule is not continued, it could result in the closure of reconditioned vehicle importers’ business and render one million jobless.
At the time the Government revised rules and import duty, around 2000 reconditioned vehicles were already at the Colombo port whilst 6,000 on order.
Last year value of import of vehicles doubled to a record $ 1 billion from $ 546 million in 2010.
Finance Ministry said total number of motor vehicles imported had increased by 121% and 147% respectively in 2010 and 2011 compared to the year 2009. Number of imported motor cars which was 37,134 in 2010 has risen upto 54,285 by 46% by the year 2011. Import of motorcycles has gone up by 61% and 81% respectively in 2010 and 2011 compared to the year 2009 while import of three-wheelers has been increased by 163% and 298% respectively in 2010 and 2011 compared to the year 2009.
As per some estimates the new duty imposed which certain sections of the industry described as “irrational” results in a small vehicle’s price increasing by approximately Rs.1.2 million while others had gone up by at least approximately Rs.1.6 million.
CT Smith Stockbrokers in a recent analysis on the duty revision noted that the change has been greater for smaller cylinder vehicles, such as cars with an engine capacity of less than 1,600cc. This is likely to impact listed players such as United Motors (UML) and Diesel & Motor Engineering (DIMO), which have strong small car brands in Perodua and Tata respectively; each brand sells approximately 300-400 vehicles per month.
Both UML and DIMO however also have strong larger car brands in Mitsubishi and Mercedes Benz respectively. Meanwhile, recent market entrant Softlogic Holdings (SHL) will also be negatively impacted, although the impact is not expected to be too severe as only 12.0% of Group recurring net profit was from the Automobile sector in 1-3Q12; SHL is the agent for Daihatsu, Ford and Zxauto. It is expected the increase in motor vehicle taxes will sharply curb demand in the next three to six months.
“As the vehicle taxes have been revised with immediate effect, those motor vehicles that have been ordered and are being shipped to Sri Lanka will be taxed at the new tax rates. Hence, the backlog of vehicles (which has been approx. three-four months for most companies) will continue to be imported, though there may be some disputes and cancellations by customers,” CT Smith said.
It also said the past few months have seen a dramatic shift in the operating environment for vehicle distributors as interest rates have risen sharply (the 12M T-bill yield is up 401bps since 30 Sept 2011), the exchange rate has depreciated 12.6% in the past two months, and now vehicle taxes have been significantly increased. As a result, we expect sizeable reductions in sector EPS in FY13E.
The new duty imposed results in a small vehicle increasing by approximately Rs.1.2 million while others had gone up by at least approximately Rs.1.6 million, importers said. Ceylon Motor Traders Association (CMTA) President Tilak Gunasekara told the Business Times that there is a need to phase out used vehicles in this country. In fact, he believes the government would unlikely change the one year age of imported vehicles already imposed. Gunasekara said they understood the Government’s situation but believed the rate of increase was “irrational.”