Automobiles - Budget : neutral to marginally positive; Edelweiss

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n  No news is good news

·         We believe impact of Budget 2011-12 on the auto sector is neutral to marginally positive with no major announcements.

·         Excise duty was left untouched, contrary to consensus expectation of a hike in excise duty on diesel vehicles. In our view, the status quo was maintained to: (1) avoid the reduction in duty again once GST is rolled out; and (2) maintain demand momentum.  

·         Government’s rural thrust continued with wages under National Rural Employment Guarantee Act (NREGA) now linked to CPI (consumer price index) and credit flow to farmers has also been increased.

·         With a view to promote hybrid and electric vehicles (EV), budget proposes to set up a National Mission to set the road map for green vehicles. It has as well lowered excise duty to 5% from 10%. Earlier, the government had announced subsidies worth INR 4,000-100,000 for e-vehicles in Nov 2010.

·         a) Scope of taxi has been widened to include up to 13 seater (from 7 seater) vehicle. Currently taxi attracts lower tax rate of 10%. b) Also, the excise refund to manufacturer has been increased to 20% on such taxi from 10% earlier.

·         To conclude, we expect Mahindra & Mahindra’s underperformance versus the BSE Auto index to end as the big overhang of hike in excise duty on diesel vehicles no longer exists. We have ‘BUY’ recommendation on the stock with a target price of INR 820.