The economic stimuli in December 2008 and February 2009 provided a boost to the auto sector. Key positives were the reduction in excise duty, accelerated depreciation on CVs, lower interest rates and more easily available financing. Continuation of such measures would benefit the entire automobile sector. Additionally, the agro-focus of the government would be positive for M&M, which is expect to be a major beneficiary of the budget.
Expectations
* Domestic volumes have been lower recently in segments like passenger vehicles, while M&H CV volumes witnessed a sharp decline. In view of this, we expect the excise-duty reduction of 4-6 per cent to be retained at least partially for the coming year, particularly in these segments and in two-wheelers.
* Depreciation benefit on the purchase of new commercial vehicles should be extended beyond September 09 (till when CVs purchased can avail of this benefit).
* An additional duty of Rs 15,000-20,000 is now levied on PVs with engine displacement of over 1,500cc. The budget may abolish or lower this.
* We also expect the focus on developing the rural economy to continue.
* We expect continuation of the focus on infrastructure development and measures to ease credit availability.
Impact on the sector
* Keeping the excise duty at reduced rates for the year would maintain the cost of acquiring a new vehicle at lower levels. On the other hand, a rollback/dilution of the stimuli would dampen demand and be negative for the sector.
* Extending the depreciation benefit would continue to benefit the CV segment, although sustainable demand recovery would depend on economic growth and greater availability of freight.
* Lowering/abolishing the Rs15,000-20,000 additional excise duty on passenger vehicles above 1,500cc engine capacity would benefit Uvs and cars in the executive segment and above, but this positive would be set-off by partial roll-back of the lowered excise duty.
* Investment in infrastructure and easing of credit availability would also be beneficial for the sector.
Companies affected
* If the lower excise duty rates are continued in FY10, the benefit would be felt across the auto sector and vice versa. Measures for infrastructure development and easier credit availability would be beneficial for the sector.
* Lowering of additional duty would benefit M&M’s and Tata Motors’ UV range. Extending the depreciation benefits on CVs would benefit Tata Motors and Ashok Leyland.
* The budget focus on agriculture and rural development would be encouraging for M&M’s farm-equipment segment. It would also benefit UVs like Maxx (which are used in mofussil areas) and Hero Honda, which is very strongly rural-oriented. Maruti Suzuki, which is widening its countryside reach would also benefit, though to a lesser extent.
To sum up, we expect the biggest beneficiary from the budget to be M&M.
(The report has been prepared by Amit Kasat and Rohan Korde of Anand Rathi Securities.)