Auto Companies and Auto Multibaggers counting on Budget
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It’s Budget again around the corner and Auto sector has pinned their hopes on it. In the previous Budget, 1 per cent service charge was implied on purchase of luxury cars over Rs. 10 lakh and SUVs and 4% high capacity tax for SUVs made Luxury cars more expensive. The boost came from the rolling out of GST which is due in July. Since the last Budget, Nifty Auto have surged 40% securing its place in the top three after Nifty Metal which rallied 91% and Bank Nifty which surged 43% since Budget. Auto Index held on to its position until last week after Nifty Finance claimed the first place, displacing Auto to the fourth in line.
Auto Companies’ Budget’s Wish-List:
Amid frail demand environment, the Auto Sector is expected to see a host of announcements aiming at improving consumer sentiment that may revive auto sales after a tepid December quarter.
Experts believe that the Government may reveal rural-focused schemes in the wake of impending state elections, while it could raise income tax exemptions in the Budget scheduled for next week. All this could enhance consumer sentiment and result in higher sales of two-wheelers and personal vehicle, whose sales slipped 2-5 per cent in the past quarter.
A boost to hybrid or electric vehicle and an introduction of a scheme to scrap truck older than 15 year old is also in the hanging, feel experts. They though see low likelihood on any change in the tax structure given the awaiting goods and services tax (GST).
Considering the likely GST implementation from July, experts do not anticipate any changes in indirect taxes. However, they look forward to an increase in income tax exemptions and higher allocation toward rural-focused schemes. Lower income tax and the focus on rural markets could put two-wheeler industry back on the growth path. This, together with the benefit of normal monsoon and 7th Pay commission, could drive two-wheeler volume CAGR of 10-12 per cent over FY17-19E.
The experts are positive on the impact of budget on Hero, TVS Motor and Mahindra. The market is expecting the Government to incentivize electric or hybrid vehicles through duty exemptions. For this, the foreign brokerage is expecting details on likely extension of the FAME (Faster Adoption and Manufacturing of Hybrid and Electric vehicles in India) program and announcement incentives for electric vehicles. M&M and Maruti could benefit from any such announcement.
The market would be looking into particulars relating to incentives, timeline and process for the fleet modernization or scrappage program, which could benefit players such as Ashok Leyland, Tata Motors and Eicher Motors.
In the current financial year, excise duty charged on purchase of ranges between 6% and 30%. The industry is anticipating uniform excise duty structure, which could be positive for Maruti Suzuki, M&M and Tata Motors, among others.
There may also be scheme incentivizing those with plans to phase out of older commercial vehicles (CV). That may turn positive for Ashok Leyland and Tata Motors.
Reminiscing the Past:
In 2016, auto sales grew 9.2 percent driven by two- wheelers that moved up by 9.6 percent from 0.7 percent in 2015. At the same time, cars clipped at 7 percent and commercial vehicles grew 7.8 percent. Commercial vehicles sale recovered in 2015 with a growth of 6.3 percent and 7.7 percent in 2016.
Escorts and Rico Auto gained over 100% since last budget. Escorts share price surged 192% while Rico Auto share price gained 111%. SML Isuzu share price went up by 81% and Carborandum Universal share price increased by 51% since last Budget. Hopes are these stocks will further benefit if the Sector’s wish is given this Budget.
Foreseeing the Future:
Reports from the experts indicates that the Auto sector, which saw a revitalization last year after two years of commotion, is set to continue the momentum this year with demand picking up across all segments.
Growth of the auto industry is likely to continue in 2017 across all vehicle categories-commercial and passenger vehicles, as well as two and three-wheelers. But it is unlikely that the industry will uphold the sales growth of 2016 due to the note ban impact and the uncertainty regarding the GST.
Sales will also be aided by higher replacement demand on account of the expected implementation of new emission norms and the impact of delayed purchases as a result of Demonetization.
The recovery will take at least two to three months more as consumers are still beat by the note ban. Consequently, although the mid to long term prospects look positive, given the effect of Demonetization and the uncertainty regarding the GST the industry may not sustain the growth rates achieved in 2016.
Another reason is the aggressive play by the cab aggregators who are growing their operations extensively.
Demand will also be driven by replacement demand, construction and mining, increasing freight movement and moderation in fuel prices and firm freight rates, while greater than before Government focus on infra sector will drive demand for specialized heavy goods vehicles such as construction trucks, mining tippers etc.
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