| ▪ |
Passenger car sales rose by 28 per cent and utility vehicles (UVs) increased by 25 per cent in 2003 -04. The strong growth in sales was due price reduction following the excise duty cut from 32 per cent to 24 cent in the Union Budget of 2003-04, lower EMIs due to reduction in consumer finance interest rates by 100 -150 basis points and higher loan tenures, and launch of new models such as Chevrolet Optra, New Honda City, New Maruti Zen, Wagon Santro Xing. The cut in EMIs also spurred tour operators to replace old vehicles in their fleet. |
| ▪ |
The growth of passenger cars is likely to be around 10 per cent in 2004 - 05, but is expected to be slower as compared to 2003 - 04, due to non - reduction in prices of cars, fewer new models and new variant launches, stable interest rates and lower growth in corporate profitability. The mid - size segment and compact segment will continue to see strong growth, while the mini segment may see a fall in sales. Similarly, the growth in utility vehicles is likely to be lower, in the range of 10 - 12per cent, mainly due to expectations of sable consumer finance interest rates, which was the main growth driver in the pervious fiscal. |
| ▪ |
The operating margins of car UV manufacturers are likely to improve due to the growth in volumes and continued reduction in production overheads (due to higher capacity utilisation). Net profits are likely to grow on account of higher volumes and lower interest cost, due to further repayment of long - term loans by most of the manufactures. |
Car and Utility Vehicles: Tariffs
| |
Customs (%) |
Excise (%) |
2004-05
(Interim) |
2004-05 |
2004-05
(Interim) |
2004-05 |
New car
- CKDs
- SKDs
- CBUs
|
20.0
60.0
60.0
|
20.4
61.2
61.2
|
24.0
24.0
24.0
|
24.5
24.5
24.5
|
| Secondhand cars |
105.0 |
107.1 |
24.0 |
24.5 |
Utility vehicles
- 6-12 seater*
- More than 12 seeater* |
20.0
20.0
|
20.4
20.4
|
24.0
16.0
|
24.5
16.3
|
| Steel items |
15.0 |
10.2 |
8.0 |
12.2 |
| Engines and engine parts |
20.0 |
20.4 |
16.0 |
16.3 |
| Other components |
20.0 |
20.4 |
16.0 |
16.3 |
|
Cost savings for Car and UV manufacturers to increase margins
| Company Name |
Impact |
Impact factors |
| Hindustan Motors Limited |
|
A, B, C |
| Hyundai Motors India Limited |
|
A, B, C |
| Honda SIEL Cars India Limited |
|
A, B |
| Mahindra & Mahindra Limited |
|
A, B, C, D |
| Maruti Udyog Limited |
|
A, B, C |
| Tata Motors Limited |
|
A, B, C |
|
Impact Factors |
| |
| A. |
The reduction in import duty on steel from 15 per cent to 10 per cent will result in a cut in the cost of production for car and utility vehicle manufacturers, as along with the benefit of reduced prices on steel used directly as inputs, the benefit on component manufacturers will also be largely passed on to the OEMs. |
| B. |
The increase in excise duty on steel from 8 per cent to 12 per cent will not impact OEMs, as the increase in excise on input will be modvatable against the excise paid by companies on their final product. Combining both the factors, the impact will be positive for car and utility vehicle manufacturers. |
| C. |
The increase in tax deduction for research and development expenditure to 150 per cent will marginally benefit companies such as Tata Motors, M&M and Maruti Udyog. |
| D. |
Mahindra & Mahindra will also benefit from the cut in excise duty on tractors from 16 per cent to 0 per cent. The company is likely to partially pass on the benefit to the consumers. This will positively affect the margins of the company. |
| E. |
The imposition of education cess on cars and utility vehicles will marginally increase prices, as the companies will pass on the increase to the customers. Since the price increase will be marginal, the demand growth is not likely to be affected. |
| |
| Commercial Vehicles |
| |
| Demand growth to continue, but to slow down in 2004 -05 |
| |
| ▪ |
The commercial vehicles (CV) industry ended 2003 -04 with a sales growth of around 38 per cent. Growth was driven by the good vehicles segment, which clocked a high growth of 42 per cent, followed by passenger vehicles, which grew at a healthy 20 per cent. The improved infrastructure, robust economic growth, low finance costs, and increased modal shift towards road were the main growth drivers.
|
| ▪ |
The positive growth in CV demand is likely to continue in 2004 - 05, but will slow down to 12 - 15 per cent. |
| ▪ |
Factors such as the rise in diesel Prices, completion of fleet renewal programmers by large transport operators and expectations of a marginal decline in agricultural growth are likely to affect demand growth in 2004 - 05. |
| ▪ |
Volume growth, combined with a gradual shift towards higher tonnage vehicles, is expected to have a positive impact on the margins and profits of commercial vehicle manufacturers in 2004 - 05.
|
| |
Commercial Vehicles: Tariffs
| |
Customs (%) |
Excise (%) |
2004-05
(Interim) |
2004-05 |
2004-05
(Interim) |
2004-05 |
LCVs
|
20.0 |
20.4 |
16.0 |
16.3 |
| M&HCVs |
20.0 |
20.4 |
16.0 |
16.3 |
| Steel items |
15.0 |
10.2 |
8.0 |
12.2 |
| Engines and engine parts |
20.0 |
20.4 |
16.0 |
16.3 |
| Other components |
20.0 |
20.4 |
16.0 |
16.3 |
Industry to remain unaffected by service tax implementation
| Company Name |
Impact |
Impact factors |
| Ashok Leyland Limited |
|
A, B, C, D |
| Eicher Motors Limited |
|
A, B, C, D |
| Tata Motors Limited |
|
A, B, C, D |
|
| |
Impact Factors |
| |
| A. |
The reduction in the customs duty on steel, from 15 per cent to 10per cent, is likely to put pressure on domestic steel prices. This development will have a marginally positive impact on the commercial vehicle industry. |
| B. |
The increase in the excise duty on steel from 8 per cent to 12 per cent, will not have any impact on the industry, as the duty is modvatable. |
| C. |
The service tax of 10 per cent imposed on agencies that transport good by road, will be fully passed on to end users as the government has allowed credit of service tax against excise duty payable by the end - user industry. Thus, the demand for commercial vehicles is not expected to be affected by the imposition of this service tax. |
| D. |
The increase in the tax benefit on R&D expenditure incurred by auto OEMs, to 150 per cent, will marginally benefit companies like Tata Motor, Ashol Leyland and Eicher Motors. |
| E. |
The imposition of an education cess of 2 per cent will be passed on customers, increasing vehicle prices marginally. |
| |
| Two – Wheelers |
| |
| Volume growth to be sustained in 2004 - 05 |
| |
| ▪ |
After a healthy 17.4 per cent growth in 2002 - 03, two wheeler sales grew at a moderate 11.4 per cent in 2003 - 04. While sales growth was subdued in the first quarter due to the delayed effect of the drought last year, demand growth picked up in the second and third quarter of 2003-04 and finally perked up in the last quarter. |
| ▪ |
A continued increase in householder incomes, a slew of new model launches, and a grater availability of low - cost finance will result in a 10 - 11 per cent growth in 2004 - 05.
|
| ▪ |
The motorcycle segment witnessed a more sedate growth in 2003 - 04 (13.7 per cent Y-o-Y) after the stupendous growth (30 per cent Y-o-Y) last year. The segment will grow at 12 -13 per cent in 2004 - 05.
|
| ▪ |
Scooter sales are likely to grow by 4 - 5 per cent, led by the ungeared segment, while moped sales are expected to stagnate or decline marginally. |
Two-Wheelers: Tariffs
| |
Customs (%) |
Excise (%) |
2004-05
(Interim) |
2004-05 |
2004-05
(Interim) |
2004-05 |
Two wheelers (< 75 cc)
Two wheelers (> 75 cc)
|
60.0
60.0 |
61.2
61.2 |
16.0
16.0 |
16.3
16.3 |
| Steel items |
15.0 |
10.2 |
8.0 |
12.2 |
| Engines and engine parts |
20.0 |
20.4 |
16.0 |
16.3 |
| Other components |
20.0 |
20.4 |
16.0 |
16.3 |
R & D concessions, steel duty cut positive or domestic players
| Company Name |
Impact |
Impact factors |
| Bajaj Auto Limited |
|
A, B |
| Hero Honda Motors Limited |
|
A |
| Kinetic Motor Company Limited |
|
A, B |
| TVS Motor Company Limited |
|
A, B |
|
| |
Impact Factors |
| |
| A. |
The cut in the customs duty on steel is expected to result in a drop in domestic prices. The expected reduction in steel prices (constituting about 5 - 10 per cent of the Motorcycle and moped cost, and around 20 per cent of the cost of a scooter) will benefit two - wheeler players.
|
| B. |
The tax benefit of 150 per cent on R&D expenditure will benefit domestic two - wheeler players such as TVS Motor, Bajaj Auto and Kinetic. During 1997- 98 and 2002 - 03, the overall Industry R&D costs grew at CAGR of 20 per cent, of which Bajaj Auto and TVS Motor have spent the highest. |
| C. |
The industry is expected to pass on the impact of the 2 spent the highest. |
| |
| Tractors |
| |
| Tractors Volumes revive, Poised for strong growth |
| |
| ▪ |
The industry has been reeling under recessionary conditions, with a negative sales growth of 15 per cent CAGR in the past 4 years (1999-2000 to 2002-03). The main factors that led to the sales slump were high inventory levels, poor monsoons, lower farm incomes and rising diesel prices. |
| ▪ |
In 2003-04, domestic tractors sales were around 190,000 units as against 170,000 units in the previous year, an increase of 11 per cent. The industry turn around on the back of good monsoons, strong inventory corrective measures of the most of the players and aggressive financing. Despite an improvement in sales volumes, the operating profit margins are expected to fall compared with the previous fiscal, due to a steep rise in steel costs and the manufacturers’ inability to pass on the entire increase in costs. |
| ▪ |
The interim budget of 2004-05 had cut the peak customs duty on tractors and other key inputs (Steel and components) form 30 per cent to 20 per cent. Te customs and excise duties on steel were further reduced to 15 per cent and 8 per cent respectively after the interim budget. The cut in the peak customs duty on tractors d9oes not have any impact on the domestic industry, as imports are negligible. |
| ▪ |
CRIS INFAC estimates that tractor demand will grow at 5-6 per cent annually over the next 5 years. |
Tractors: Tariffs
| |
Customs (%) |
Excise (%) |
2004-05
(Interim) |
2004-05 |
2004-05
(Interim) |
2004-05 |
| Tractors |
20.0 |
20.4 |
16.0 |
- |
| Steel items |
15.0 |
10.2 |
8.0 |
12.2 |
| Engines and engine parts |
20.0 |
20.4 |
16.0 |
16.3 |
| Other components |
20.0 |
20.4 |
16.0 |
16.3 |
Agri-focus budget will boost tractor demand
| Company Name |
Impact |
Impact factors |
| Eicher Motors Limited |
|
A, B |
| Escorts Limited |
|
A, B, C |
| Mahindra & Mahindra Limited |
|
A, B, C |
| Punjab Tractor Limited |
|
A, B |
| TAFE Limited |
|
A, B |
|
| |
Impact Factors |
| |
| A. |
The removal of the excise duty on tractors (From 16 per cent) will have a positive impact on tractor demand. Besides, the impetus to irrigations, water-harvesting schemes, restorations of water bodies, crop risk-mitigating measures, and the increased flow of agricultural credit will give a further fillip to tractor demand. |
| B. |
The removal of the excise duty on tractors will result in the absence of MODVAT benefits on inputs. This will offset the benefit of the excise duty cut. Tractor manufacturers are likely to only partially pass on the benefit of excise exemption, which will have a positive impact on margins. |
| C. |
The entitlement of 150 per cent deductions on in-house R & D expenditure will marginally benefits players. The major beneficiaries will be M&M (R&D expenditure of 1.3 per cent of sales) and Escorts limited (R&D expenditure of 1.9 per cent of sales). |
| D. |
The imposition of a 2 per cent cess, hike in the excise duty on steel and reduction in the customs duty on steel will have a negligible impact on industry, as steel costs account for 2-3 per cent of total raw material costs. |
| |
| Auto Ancillaries |
| |
| Domestic growth to slow down, surge in exports to continue in 2004-05 |
| |
| ▪ |
The auto ancillary industry is estimated to have grown by around 20-22 per cent in 2003-2004 to Rs. 300 billion in terms of value of production. The growth has been led by the strong domestic growth posted by almost all the segments of the automobile industry. The passenger cars and utility vehicles segment grew by 28 per cent and 25 per cent respectively, commercial vehicles by 36 per cent, two-wheelers by 10 per cent tractors by 11 per cent. Auto Component exports are estimated to have grown by over 35 per cent to touch the $ 1 billion mark in 2003-04. |
| ▪ |
In 2004-05, the auto ancillary industry is likely to post a lower, yet robust growth of around 13 per cent. The lower growth will be due to the reduced growth rate in almost al the automobile segments. However, exports are expected to continue the strong growth momentum in the current fiscal. This will be led by the continued thrusts on exports by domestic manufacturers as well as an increase in outsourcing of components from India by global OEMs and tier-I vendors. |
| ▪ |
Operating Profit Margins are expected to increase marginally, due to the rise in volumes. Similarly, net profits of players will increase on account of higher operating profits and lower interest outgo, on account of a reduction in long-term loans. |
| |
Auto Ancillaries: Tariffs
| |
Customs (%) |
Excise (%) |
2004-05
(Interim) |
2004-05 |
2004-05
(Interim) |
2004-05 |
Parts of four-wheelers
Parts of two-wheelers
Parts of IC engines
IC Engines
Transmission, Shafts, gears and gear boxes
Auto Gaskets/Break Linings
Catalytic Convertors
GP/GC Steel
HR steel
Aluminium
Copper
Nickel
Specified inputs or piston rings/pins/piston/piston assembly, fuel injection parts, engine valves, gear boxes |
20.0
20.0
20.0
20.0
20.0
20.0
5.0
15.0
15.0
15.0
20.0
10.0
10.0
|
20.4
20.4
20.4
20.4
20.4
20.4
5.1
10.2
10.2
15.3
16.3 10.2 10.2
|
16.0
16.0
16.0
16.0
16.0
16.0
16.0
8.0
8.0
16.0
16.0
16.0
16.0
|
16.3
16.3
16.3
16.3
16.3
16.3
16.3
12.2
12.2
16.3
16.3
16.3
16.3
|
HR: Hot rolled; GC:Galvanised coil; GP: Galvanised plae; IC: Internal combustion
Budget measures to have a neutral impact on industry
| Company Name |
Impact |
Impact factors |
| Bharat Forge Limited |
|
A, B, C |
| Goetze India Limited |
|
A, B |
| Kalyani Brakes Limited |
|
A, B, C |
| MICO |
|
A, B, C |
| Munjal Showa Limited |
|
A, B |
| Sundaram Fasteners Limited |
|
A, B |
| Ucal Fuel Systems Limited |
|
A, B |
|
| |
Impact Factors |
| |
| A. |
The reductions in the customs duty on steel from 15 per cent to 10 per cent, and copper from 20 per cent to 15 per cent, will result in a moderate decline in the production costs of auto ancillary manufacturers. However, the benefit will be passed on to automobiles OEMs, resulting in a neutrals impact on component manufactures. |
| B. |
The hike in the excise duty on steel will not affect the productions costs of component manufacturers, as it is modvatable against the excise duty on finished products. |
| C. |
Increase in the tax deductions for R&D expenditure to 150 per cent will marginally benefit companies such as Bharat Forge, MICO and Sona Koyo Steering Systems. |
| D. |
Impositions of the education cess will have a neutral impact on component manufactures, as they will pass on the same to OEMs. |
| |
Roads
2004-05 will be a critical year of the road sector. To the achieve scheduled completions targets, a majority of the contracts for NSEW corridor and Pradhan Mantri Bharat Jodo Pariyajana (PMBJP) projects will have to be awarded during the current year and resources for funding the NSEW project will need to be tied up. We expect delays on both this fronts.
The National Highways Authority of India (NHAI) aims to complete phase I of the national Highways development programme (NHDP), the Golden Quadrilateral (GQ) project, by Dec’ 04. Phase II, involving the NSEW project, is scheduled for completion by Dec.’07. However, we expect the GQ project, already delayed by a year, to be delayed by another year from the revised target date of December 2004, while the NSEW project may be delayed by 18-24 months.
With Change in the central Government, there are concerns that the impetus on infrastructure developments, especially through the various national highways projects (GQ, NSEW and PMBBJP), would be lost due to a slowdown in activity. Although it is still too early to judge the new government’s commitment, the recent invitations of bids for the second lot of 10 projects (that are as part of PMBJP) is a positive step. However, given the size of this project (total strength of 10,000 km.), the pace of implementation has to be much faster than witnessed till date, given the fact that this project was initiated in the Union Budget 2003-04. There are also concerns about the level of private sector participation given the poor financial viability of most stretches (Incidentally, NHAI plans to implement the entire PMBJP project under the BOT scheme).
On the Rs. 600 billion Padhan Mantri Grameen Sadak Yojana (PMGSY) project, we expect a substantial delay in implementation, given the difficulty in raising funds faced by the Ministry of Rural Development (MoRD). Of the total funs required, about Rs. 200 billion is expected to be available from the cess on diesel. The resource gap of Rs. 400 billion is expected to be bridged by access to multilateral funds and funds raised from domestic market. No visible progress has been made on this front till date. |
| |
Impact Factors
Funding related announcements a marginal positive for the sector
The government has indicated that will provide equity support to the turn of Rs. 149.14 billion and loans to Rs. 21.32 billions to public sector enterprises in select sectors, including roads, in 2004-05. However, unlike previous budgets, there were no major initiatives. Further, given the slippages in implementation of GQ, NSEW and PMGSY projects, a grater thrust on timely completions was needed. |
| |
