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
|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|
April 2013 -Jan 2014 domestic auto sales
|10m FY13||10m FY14||Change||FY13 Change|
|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%|
|LCV - pass carriers||38,784||34,882||-10.1%||-1.5%|
|LCV - goods carriers||383,515||324,953||-15.3%||15.9%|
|Total all categories||14,855,774||15,220,571||2.5%||2.6%|
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.
|Company||Reco||CMP (Rs)||Previous target (Rs)||New Target (Rs)||Expected return||Remarks|
|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|
|TVS Motors||MP||83||70||80||-3.4%||Target raised to factor in stronger volume growth|