Interim Budget 2014: Excise duty cuts across auto segment roll in, but investors still wary
Facing its worst ever crisis in over a decade, the automobile industry on Monday was pleasantly surprised by the FM's move to jumpstart demand by slashing excise duties across vehicle segments, but investors did not appear to be buying into the story.
Analysts explain a subtle difference between the excise duty cuts in 2009 and 2014. While the excise duty cut in 2009 stimulated demand in 2009, it is not necessarily going to work this time around.
Cars sales surged 25 per cent, while commercial vehicles gained 39 per cent and two-wheeler sales increased 26 per cent in FY2010 on the back of excise duty sops announced by the government. Recovery was visible in a short span of 6-8 months, and demand perked up in the commercial vehicles segment, too.
The mood is different today. Indian automobile industry is in a protracted slowdown and unlikely to see a V-shaped recovery as seen in 2009. Tax push alone is not enough to propel volume growth for the auto sector in this environment. Second, excise duty is only applicable till June 2014, too short a time to set pace for long-term volume growth.
Another legitimate worry among investors is of the probability of pre-buying led volume growth in the short term. This may lull the new government not to extend the benefit. Such artificially constructed demand would give a false impression of a recovery.
The companies would not able to hike prices so smoothly after four months and if demand revival remains fragile, then it would significantly hit margins and volume growth. Third, the Street is having a perception that the government is now playing an indirect strategy to stimulate growth.
The emphasis is to promote consumerism by lowering prices of vehicle and drive the volume growth. However, government will garner more tax revenue, corporate tax and dividend distribution, which offset revenue forgone from excise duty.
The Street perception is lower prices for vehicle will only solve partial problems temporarily. There are other factors such as interest rate, depreciation allowance, ability to payback and macro environment to decide purchasing decision, particularly for commercial vehicles.
The excise duty will only be able to drive volume for the passenger car segment where a price cut of 3-5 per cent can allure a potential customer to buy car. The principal beneficiary of excise duty in this case will be Maruti and M&M.
Analysts expect about 3 per cent and 5 per cent volume growth in FY15 for Maruti and M&M, respectively, in the passenger vehicle segment and tax sops to add 3-4 per cent for additional volume growth for both these automakers.
Maruti is currently offering an average cash discount of Rs 18,000 for some models, which may evaporate with volume growth kicking in and is likely to perk up average realisation.
Facing its worst ever crisis in over a decade, the automobile industry on Monday was pleasantly surprised by the FM's move to jumpstart demand by slashing excise duties across vehicle segments, but investors did not appear to be buying into the story.
Analysts explain a subtle difference between the excise duty cuts in 2009 and 2014. While the excise duty cut in 2009 stimulated demand in 2009, it is not necessarily going to work this time around.
Cars sales surged 25 per cent, while commercial vehicles gained 39 per cent and two-wheeler sales increased 26 per cent in FY2010 on the back of excise duty sops announced by the government. Recovery was visible in a short span of 6-8 months, and demand perked up in the commercial vehicles segment, too.
The mood is different today. Indian automobile industry is in a protracted slowdown and unlikely to see a V-shaped recovery as seen in 2009. Tax push alone is not enough to propel volume growth for the auto sector in this environment. Second, excise duty is only applicable till June 2014, too short a time to set pace for long-term volume growth.
Another legitimate worry among investors is of the probability of pre-buying led volume growth in the short term. This may lull the new government not to extend the benefit. Such artificially constructed demand would give a false impression of a recovery.
The companies would not able to hike prices so smoothly after four months and if demand revival remains fragile, then it would significantly hit margins and volume growth. Third, the Street is having a perception that the government is now playing an indirect strategy to stimulate growth.
The emphasis is to promote consumerism by lowering prices of vehicle and drive the volume growth. However, government will garner more tax revenue, corporate tax and dividend distribution, which offset revenue forgone from excise duty.
The Street perception is lower prices for vehicle will only solve partial problems temporarily. There are other factors such as interest rate, depreciation allowance, ability to payback and macro environment to decide purchasing decision, particularly for commercial vehicles.
The excise duty will only be able to drive volume for the passenger car segment where a price cut of 3-5 per cent can allure a potential customer to buy car. The principal beneficiary of excise duty in this case will be Maruti and M&M.
Analysts expect about 3 per cent and 5 per cent volume growth in FY15 for Maruti and M&M, respectively, in the passenger vehicle segment and tax sops to add 3-4 per cent for additional volume growth for both these automakers.
Maruti is currently offering an average cash discount of Rs 18,000 for some models, which may evaporate with volume growth kicking in and is likely to perk up average realisation.
