NEW DELHI: Tax tweaks over the weekend to test soaring inflation are expected to melt prices within the short term, though analysts expect their overall impact to be limited. The central government cut the excise levy on auto fuels, slapped an duty on ore and other steel intermediates, and reduced duty on inputs for steel and petrochemicals to enhance their local availability.
The measures, however, don’t bode well for companies in these sectors, with BSE metals and oil and gas indices falling the foremost on Monday while the auto index gained the foremost. The Sensex and Nifty declined 0.07% and 0.32%. Export duties on ore and a few steel intermediates spooked steelmakers since their profits will take successful both in domestic and export markets.
According to analysts at Kotak Institutional Equities, the 15% tariff on steel should bring down domestic steel prices by 8-10%. Factoring in lower steel and ore prices, Kotak has cut its Ebitda/tonne estimate by 20-35% for steel companies and 24-33% for ore explorer NMDC Ltd for FY2023-24.
Top steelmakers like Tata Steel, JSW Steel, and SAIL saw shares break down 10% on Monday. Analysts at Motilal Oswal Financial Services Ltd (MOFSL) said the govt. measures didn’t address international coking coal prices that remain elevated. They also don’t expect steel users like automakers, realty developers, and infrastructure companies to die the benefit to finish consumers.
Analysts said the measure would have had a far better impact a year ago when steel prices were at an analogous level, but coal was about 20% cheaper and profitability at a near peak. The industry could absorb the impact without sacrificing Capex plans, which isn’t possible now, say analysts at MOFSL.
To be sure, cheaper fuel and steel will be positive for automobile manufacturers that have seen high ownership costs impacting sales. Mitul Shah, head of research at Reliance Securities, said the auto sector, which continues to face commodity cost pressures, stands to learn from the levy of export duties on steel and reduction of taxes on imports as this might result in moderation in domestic input prices. However, inflation may remain above RBI’s desired upper limit of 6% for the fiscal, he said.
According to Soumitra Bhattacharya, president, and manager, Bosch India, “While the RBI has made an awfully brave and good move of the 40 bps hike in lending rate and therefore the CRR increase of fifty bps to contain inflation, inflation is probably going to extend, and this inflationary pressure will continue being passed down, and also the consumer will should bear it.” “As outlined, the benchmark repo rate are going to be taken to the pre-pandemic level of 5.15% by a 50 basis points hike in June and +25bp in August,” said DBS Macro insight weekly note.
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