Vote on Account - Excise duty cuts for automobile sector

Amongst the little that the Finance Minister could do in the Vote on Account, he chose to provide some relief to the ailing automobile sector where demand has fallen to historical lows.

Feb 18, 2014 04:02 IST India Infoline News Service

Amongst the little that the Finance Minister could do in the Vote on Account, he chose to provide some relief to the ailing automobile sector where demand has fallen to historical lows. The FM cut excise duties extensively across many categories as listed below

Cut in excise duties
Category Previous Revised Players
Small cars 12% 8% Maruti, Tata Motors, M&M
Motorcycles 12% 8% Hero Moto, Bajaj Auto, TVS Motors, Eicher Motors, M&M
Scooters 12% 8% Hero Moto, TVS Motors, M&M
CVs 12% 8% Ashok Leyland, Tata Motors, Eicher Motors
SUVs 30% 24% M&M, Tata Motors, Maruti
Large and mid-segment cars 27% 24% No major presence of listed player
24% 20% Maruti, Tata Motors
Source: Government of India, India Infoline Research

April 2013 -Jan 2014 domestic auto sales
  10m FY13 10m FY14 Change FY13 Change
Passenger cars 1,534,868 1,454,692 -5.2% -6.7%
Utility Vehicles 451,937 431,192 -4.6% 52.2%
Vans 194,748 162,011 -16.8% 1.1%
Total pass vehicles 2,181,553 2,047,895 -6.1% 2.2%
M&HCV - pass carriers 36,937 31,561 -14.6% -6.7%
M&HCV- Goods carrier 180,631 129,259 -28.4% -25.9%
Total M&HCV 217,568 160,820 -26.1% -23.2%
LCV - pass carriers 38,784 34,882 -10.1% -1.5%
LCV - goods carriers 383,515 324,953 -15.3% 15.9%
Total LCV 422,299 359,835 -14.8% 14.0%
Total CVs 639,867 520,655 -18.6% -2.0%
Three-wheelers 450,641 400,766 -11.1% 4.9%
Scooters 2,430,325 2,934,554 20.7% 14.2%
Motorcycles 8,504,813 8,729,845 2.6% 0.1%
Mopeds 648,575 586,856 -9.5% 1.5%
Total two-wheelers 11,583,713 12,251,255 5.8% 2.9%
Total all categories 14,855,774 15,220,571 2.5% 2.6%
Excluding two-wheelers 3,272,061 2,969,316 -9.3% 1.7%
Source: SIAM, India Infoline Research

These duty cuts will be passed on to the retail customers through price cuts by the OEMs. We believe that there is a significant pent-up demand in the system for passenger cars given the marked slowdown seen over the past couple of years. With new launches and the expected price cuts, we believe the demand should revive in the near term albeit for a short term as rising fuel prices, high interest rates and poor sentiment will restrict the growth.

While the total automotive volumes have grown by 2.5% in 10m FY14, excluding two-wheelers (growth of 5.8%) total volumes declined by 9.3%. The out performance of two-wheelers has been driven by rural India and scooters. While demand from rural India will continue to be strong on the back of rising MSPs, employment guarantee schemes of government and better credit availability, penetration of scooters is also expected to increase given the rising proportion of women in India's workforce. The price cuts would provide fillip to this demand.

Commercial vehicles have been the worst hit in this slowdown especially M&HCVs with 26.1% decline in 10m FY14 preceded by a 23.2% decline in FY13. Poor industrial activity, slowdown in investments towards infrastructure and weak mining activity were the key headwinds which continue to exist. The price cuts might provide some relief to fleet operators but we expect a major recovery to happen only when the macro picture undergoes a major change.

Our top picks in the sector are M&M, Hero Motocorp and Eicher Motors. We also like Maruti Suzuki and Tata Motors.

Recommendation summary
Company Reco CMP (Rs) Previous target (Rs) New Target (Rs) Expected return Remarks
M&M BUY 934 1,041 1,041 11.5%
Hero Motocorp BUY 1,975 2,350 2,350 19.0%  
Bajaj Auto BUY 1,846 2,069 1,950 5.6% Target cut to factor in ban of 2W and 3W imports in Egypt
Maruti Suzuki BUY 1,666 1,809 1,875 12.5% Target raised to factor in demand revival
Tata Motors BUY 386 425 425 10.1%  
Ashok Leyland MP 15.4 15.0 15.0 -2.3%  
TVS Motors MP 83 70 80 -3.4% Target raised to factor in stronger volume growth
Eicher Motors BUY 4,886 5,729 5,729 17.3%  
Source: Company, India Infoline Research

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