Automobile - Budget: Neutral to marginal negative :: Edelweiss PDF link

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We view the impact of budget on the automobile sector as neutral to marginally negative. As expected, excise duty in general has increased at least 2% for most product categories. However, no special duty has been levied on diesel engine vehicles, as was feared. Excise duty has been rationalized into ad-volarem from ad-volarem + fixed rate for large passenger vehicles and commercial vehicle chassis. We expect companies to take price hikes and pass on the burden; hence, their earnings are unlikely to be significantly affected. M&M is likely to be the biggest beneficiary of no duty hike on diesel engines.

Rate increased across board but no special duty on diesel vehicles

·       As expected, general excise duty increased 2-12% for two wheelers, trucks and small cars.

·       Excise on large passenger vehicles (more than 4 metre in length but less than 1.2 litre petrol or 1.5 litre diesel engine) increased to 24% from 22%.

·       Excise on large passenger vehicle (more than 4 metre length and engine more than 1.2 litre petrol and 1.5 litre diesel) increased to 27% from 22% + Fixed INR15,000. Our analysis suggests price of Mahindra Bolero to go up ~2%, while those of Scorpio is to rise ~2.5%.

·       On CV chassis, excise duty has been increased from 10% + Fixed INR10,000 to 15% and 22% + Fixed INR10,000 to 25%. This is likely to affect buses and trucks. Overall, CV cost likely to go up by 2-5% on account of twin hikes

·       Import duty on CBU of premium vehicles of more than 2.5 litre diesel or 3 litre petrol engine would be increased to 75% from 60%.

·       No mention of any duty on diesel engine passenger vehicles, which should provide major relief to MSIL and M&M. However, uncertainty stays on govt’s future policy for diesel vehicles. 

Companies likely to pass on the burden

We expect auto OEMs to take price hike and pass on the burden. Hence, we don’t expect any significant impact on earnings. Companies that have presence in tax free zones with ability to ramp up production in such facilities are likely to be better off than competition (Ashok Leyland, Hero Motocorp and Bajaj Auto, in that order).

    

Conclusion: We prefer M&M

Fear of duty hikes on diesel vehicles has been one of the reasons for recent under-performance of M&M vis-à-vis sector. We expect tractor business to improve from May 2012 as rural cash-flow improves with harvesting of rabi crop. We have ‘BUY’ on M&M with target price of INR819.

Automobile - Budget: Neutral to marginal negative; sector update

Regards,