Indian Automobile :: What if duty on diesel PV is hiked? :Macquarie Research,

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Indian Automobile Sector
What if duty on diesel PV is hiked?
Event
 In the debate on inflation in the parliament on Thursday, the Finance Minister
said that he is willing to consider the proposal to levy additional tax on diesel
powered passenger vehicles (PV). Later, the Petroleum Minister said that they
are also mulling dual-pricing of diesel, so that subsidies to cars and UVs may
be curtailed. Earlier in the day, the chairman of Central Board of Excise &
Customs (CBEC) had said that they will take a call on any indirect tax hikes
after looking at the July tax collection figures (expected early next week). As
per a CNBC report, the quantum of duty hike could be Rs20-70k/vehicle.
 As is evident from these statements, the mechanism, quantum and timing for
the implementation of these proposals remain uncertain. We have attempted
to analyse the scenarios and the likely impact on automakers.
Impact
 What is fuelling these thoughts? The key reason behind these proposals is
the worsening fiscal deficit, especially after the recent duty cuts on diesel and
other fuels. As per our analysis, the total under-recovery on the diesel sale is
likely to be US$11bn in FY12E. Another reason is the general perception that
the real beneficiaries of the diesel subsidies are the wealthy who drive SUVs
and luxury cars. On the contrary, we believe private passenger vehicles use
only 5% of the total diesel consumed for transportation (Figure 2).
 Will it help improve the fiscal deficit? We believe these steps will have a
limited beneficial impact on the fiscal situation. Further, given the macro
conditions, a sharp duty hike could backfire, too. If auto sales slow materially,
this could lead to a net revenue loss for the government. We expect the fiscal
deficit to be ~US$115bn in FY12E and the proposed Rs30k-35K additional tax
on diesel PV (sales of ~0.7m) to add US$0.5bn to government finances.
 Duty hike is more likely than dual retail pricing of diesel. The dual pricing
was discussed in the past, too, but was rejected due to implementation issues
and potential risk of misuse. We estimate that the financial impact of this
proposal would be annual savings of US$0.5bn in subsidies.
 Will it sway customers back to petrol cars? At current fuel prices, payback
period for the price differential between diesel and petrol cars is 2-3 years. If
the duty on diesel car is increased, we expect the payback period to go up by
a year, which may still not be enough to reverse the trend. Further, in the
SUV/MPV segments, customers don’t have a choice of petrol engines.
 Weak auto sales growth could worsen. Additional duty on diesel PVs will
be negative for the volumes that have been sluggish this year. YTD growth of
cars has been 7.3% (FY11-30%) and UV growth has been 5.1% (FY11-19%).
Outlook
 We think the additional tax, if imposed, on diesel PV would be short-term
negative for companies with a large diesel PV portfolio like M&M and to a
smaller extent for Maruti and Tata Motors. After the sharp correction today,
we would recommend buying M&M and TTMT, despite the duty overhang