Impact
of Union Budget 2006-07 on Auto Industry
A CRIS INFAC Analysis
Cars and Utility Vehicles
Volume growth in passenger cars to benefit from excise duty
cut in 2006-07
| ▪ |
After
recording double-digit growth for two consecutive fiscals,
the sales growth of domestic passenger cars slowed down
to 5.9 per cent and that of domestic utility vehicles (UV)
slowed down to 7.8 per cent, in the first 10 months of 2005-06.
The reasons for subdued growth in sales were: increased
base after high growth for 2 years; fewer new model launches,
floods in Gujarat and Maharashtra; and increased fuel prices.
The revenues of car and UV manufacturers in the first 9
months of 2005-06 have improved, following a moderate growth
in volume and change in product mix towards higher segment
models. Operating margins have improved slightly due to
the decline in raw material costs and productivity gains.
Net profits also increased on account of marginal improvement
in realisations and lower financial charges. |
|
| ▪ |
However,
in 2006-07, growth in passenger cars is expected to return
to double digits, mainly on the back of excise duty cut
on small cars and new car model launches. |
|
| ▪ |
In
2006-07, the pressure of material costs is likely to ease
further, mainly on account of the decline in the average
steel costs, but intense competition will lead to higher
promotion expenses. As a result, the operating margins are
expected to remain stable in 2006-07. |
Cars and utility vehicles: Tariffs
 |
| (per
cent) |
Customs
|
Excise |
|
|
|
2005-06
|
2006-07
|
2005-06
|
2006-07 |
| |
| New
cars |
|
|
|
|
| -
CKDs |
15.3
|
12.8
|
-
|
- |
| -
SKDs |
61.2
|
61.2
|
-
|
- |
| -
CBUs |
61.2
|
61.2
|
-
|
- |
| New
cars |
|
|
|
|
| -
specified small cars |
-
|
-
|
24.5
|
16.3 |
| -
others |
-
|
-
|
24.5
|
24.5 |
| Second
hand cars |
102.0 |
102.0
|
24.5
|
24.5 |
| Utility
vehicles |
|
|
|
|
| -
6-12 seater1 |
15.3 |
12.8
|
24.5
|
24.5 |
| -
12 seater and above1 |
15.3 |
12.8
|
16.3
|
16.3 |
| Steel
items |
5.1 |
5.1
|
16.3
|
16.3 |
| Engines
& engine parts |
15.3 |
12.8
|
16.3
|
16.3 |
| Other
components |
15.3 |
12.8
|
16.3
|
16.3 |
| ------------------------------------------------------------------------------------ |
CKDs:
Completely knocked down units; SKDs: Semi-knocked down units;
CBUs: Completely built units
1 Excluding driver
Specified small cars include cars with length not exceeding
4,000mm and engine capacity not exceeding 1,200cc for petrol
cars and 1,500cc for diesel cars.
|
| |
Impact
factors
| A. |
The
abolition of the special excise duty of 8 per cent on passenger
cars of length less than 4,000 mm and engine capacity of
1,200cc (petrol) and 1,500cc (diesel) will result in a reduction
in final prices by Rs. 13,000-22,000. This will benefit
models such as Maruti 800, Maruti Alto, Maruti WagonR, Maruti
Zen, Maruti Omni, Hyundai Santro, and Tata Indica (diesel).
The manufacturers have stated their intent to pass on the
excise cut in the form of price cuts. CRISIL Research expects
this to result in an additional demand for passenger cars
by 2-3 per cent, in 2006-07. |
|
| B. |
The
reduction in peak customs duty on components, from 15.0
per cent to 12.5 per cent, will lower the prices of imported
components, resulting in a marginal improvement in operating
margins. However, the benefit is expected to be passed on
to customers by original equipment manufacturers (OEMs)
manufacturing large cars. The additional countervailing
duty (CVD) of 4 per cent levied on the import of auto components
will not have any impact as it is cenvatable against the
excise duty of the vehicle. |
Other factors
The reduction in peak customs duty on raw materials such as non-ferrous
metals and alloy steel will not have a significant impact on the
OEMs.
Small cars to drive demand growth in passenger cars
|
| Company |
Impact |
Impact
factors |
|
| Hindustan
motors Ltd |
|
B |
| Honda
SIEL Cars India Ltd |
|
B |
| Hyundai
Motor India Ltd |
|
A,B |
| Maruti
Udyog Ltd |
|
A,B |
| Tata
Motors Ltd |
|
A,B |
| Mahindra
& Mahindra Ltd |
|
B |
|
Commercial Vehicles
Volume growth sustained by sub-one-tonne segment, ban on
overloading
| ▪ |
After
continuous robust growth for the last 3 years, the domestic
commercial vehicles (CV) industry has slowed down and recorded
sales growth of around 7.5 per cent during the first 10
months of 2005-06. The slowdown in growth was mainly due
to supply-side factors (non-availability of critical components)
in the first half of 2005-06, and the high base effect.
Subsequently, with the easing of the components crunch and
the successful launch of Tata Ace, the sales growth improved.
The increase in vehicle prices to cover the costs of the
implementation of the Euro III norms and the hike in the
prices of inputs lifted the turnover of CV manufacturers
in the first 9 months of 2005-06. Despite the slowdown in
volume growth, operating margins have improved slightly
due to price hikes. Net profits have increased in the first
9 months of 2005-06 on account of improvement in margins
and lower financial charges. |
|
| ▪ |
In
2006-07, CRISIL Research expects the domestic CV industry
to grow at 10-12 per cent driven by the rising offtake of
Tata Ace and the positive impact of the Supreme Court's
order banning overloading of trucks above permissible limits,
propelling the demand for M&HCVs. |
|
| ▪ |
We
expect operating margins to remain stable or improve marginally
in 2006-07 due to the anticipated decline in average steel
prices. |
Commercial vehicles: Tariffs
|
| (per
cent) |
Customs
|
Excise |
|
|
|
2005-06
|
2006-07
|
2005-06
|
2006-07 |
|
| LCVs |
15.3 |
12.8 |
16.3 |
16.3 |
| M&HCVs |
15.3 |
12.8 |
16.3 |
16.3 |
| Steel
items |
5.1 |
5.1 |
16.3 |
16.3 |
| Engines
and engine parts |
15.3 |
12.8 |
16.3 |
16.3 |
| Other
components |
15.3 |
12.8 |
16.3 |
16.3 |
| ------------------------------------------------------------------------------------ |
LCV:
Light commercial vehicles; M&HCV: Medium and heavy commercial
vehicles
|
|
Industry to remain unaffected by budget measures
|
| Company |
Impact |
Impact
factors |
|
| Ashok
Leyland Ltd |
|
- |
| Eicher
Motors Ltd |
|
- |
| Tata
Motors Ltd |
|
- |
|
Other factors
The reduction in peak customs duty on components, from 15.0 per
cent to 12.5 per cent, will not benefit commercial vehicle manufacturers
significantly, owing to the high indigenisation levels and cost-competitiveness
of the domestic auto ancillary industry. The reduction in peak customs
duty on raw materials, such as non-ferrous metals and alloy steel,
will have not have a significant impact on original equipment manufacturers
(OEMs).
An increase in transport operators' service tax, from 10 per cent
to 12 per cent, will be passed on to end-consumers. As a result,
the operators' profitability will not be affected.
Two-Wheelers
Growth to remain healthy
| ▪ |
After
a 16.8 per cent growth in 2004-05, growth in two-wheeler
sales remained strong at 14.6 per cent year-on-year (Y-o-Y)
for the first 10 months of 2005-06. Sales growth, led by
the sales of motorcycles, continues to be driven by rising
household incomes, easier availability of finance, and new
models and variants launched during the period. |
|
| ▪ |
The
motorcycle segment continued to grow strongly between April
2005 and January 2006 (18.6 per cent Y-o-Y) after a strong
growth of 20.3 per cent Y-o-Y in 2004-05. Based on this
increase, this segment is expected to grow at a lower, but
healthy, rate of 10-12 per cent in 2006-07. |
|
| ▪ |
Scooter
sales were affected by supply constraints of the leader,
Honda Motorcycles and Scooters (India) Limited, as capacity
limitations capped the recovery in volumes after 2 months
of labour strike. As a result, scooter sales declined by
0.5 per cent in April 2005-January 2006. Going forward,
the entry of Hero Honda into this segment is expected to
aid the momentum. We expect scooter sales to grow by 2 per
cent in 2005-06 and 7 per cent in 2006-07, as capacity constraints
ease and new players enter the market. |
|
| ▪ |
Moped
sales recovered in 2004-2005 and 2005-2006, after steadily
declining until 2003-04. Moped sales grew by 7.1 per cent
in April 2005-January 2006. |
|
| ▪ |
The
profitability of the industry improved in the first 3 quarters
of 2005-06 due to a better product mix (higher proportion
of 125cc bikes) and price hikes by players. |
Two-wheelers: Tariffs
|
| (per
cent) |
Customs
|
Excise |
|
|
|
2005-06
|
2006-07
|
2005-06
|
2006-07 |
|
| Two-wheelers |
61.2 |
61.2 |
16.3 |
16.3 |
| Steel
items |
5.1 |
5.1 |
16.3 |
16.3 |
| Engines
and engine parts |
15.3 |
12.8 |
16.3 |
16.3 |
| Other
components |
15.3 |
12.8 |
16.3 |
16.3 |
|
Industry to remain unaffected by budget measures
|
| Company |
Impact |
Impact
factors |
|
| Bajaj
Auto Ltd |
|
- |
| Hero
Honda Motors Ltd |
|
- |
| TVS
Motor Company Ltd |
|
- |
|
Other factors
The reduction in peak customs duty on components, from 15.0 per
cent to 12.5 per cent, will not benefit two-wheeler manufacturers
significantly, owing to the high indigenisation levels and cost-competitiveness
of the domestic ancillary industry. The reduction in peak customs
duty on raw materials, such as non-ferrous metals and alloy steel,
will not have a significant impact on the original equipment manufacturers
(OEMs).
Tractors
Demand continues to be robust for the third successive year
| ▪ |
In
2004-05, tractor sales posted a strong growth of 29.1 per
cent, due to rising farm incomes and easier availability
of finance. This buoyancy was maintained in 2005-06, as
tractor sales grew by 13.5 per cent year-on-year during
April to November 2005. While domestic demand benefited
from the increase in farm incomes due to a normal monsoon
and rise in minimum support prices, exports to the US recorded
very high growth. |
|
| ▪ |
During
the April-December 2005 period, the operating margins of
tractor manufacturers improved, due to better product mix
(higher sales of more than 40 horse power tractors) and
softening of steel and pig iron prices. |
Tractors: Tariffs
|
| (per
cent) |
Customs
|
Excise |
|
|
|
2005-06
|
2006-07
|
2005-06
|
2006-07 |
|
| Agriculture
tractors |
20.4 |
20.4 |
- |
- |
| Road
tractors |
20.4 |
20.4 |
16.3 |
16.3 |
| ------------------------------------------------------------------------------------ |
| Pig
iron |
5.1 |
5.1 |
16.3 |
16.3 |
| Steel
items |
5.1 |
5.1 |
16.3 |
16.3 |
| Engines
and engine parts |
15.3 |
15.3 |
16.3 |
16.3 |
| Other
components |
15.3 |
15.3 |
16.3 |
16.3 |
|
Agricultural thrust to continue to benefit tractors, no
impact of duty changes
|
| Company |
Impact |
Impact
factors |
|
| escorts
Ltd |
|
A |
| Mahindar
& Mahindra Ltd |
|
A |
| Punjab
Tractors Ltd |
|
A |
| TAFE
Ltd |
|
A |
|
Impact factors
| ▪ |
The
government's continued thrust on rural employment and agricultural
credit, and on irrigation will continue to support tractor
demand. |
Other factors
The reduction in peak customs duty on components, from 15.0 per
cent to 12.5 per cent, will not benefit two-wheeler manufacturers
significantly due to the high indigenisation levels and cost-competitiveness
of the domestic ancillary industry. The reduction in peak customs
duty on raw materials, such as non-ferrous metals and alloy steel,
will not have a significant impact on the original equipment manufacturers
(OEMs).
Auto Ancillaries
Healthy demand growth to continue, but margins to be under
pressure
| ▪ |
The
auto ancillary industry is expected to grow by around 14
per cent in 2005-06 and 15-16 per cent in 2006-07 by value.
The growth would be driven by healthy growth in the automobile
industry and high growth in exports. |
|
| ▪ |
The
demand growth for automobiles is expected to be relatively
higher in 2006-07 due to higher number of car model launches
and additional demand for M&HCVs, thanks to the implementation
of the Supreme Court order directing state governments to
disallow overloading of vehicles. |
|
| ▪ |
Exports
are expected to continue with their strong growth momentum,
following the increase in outsourcing of components by global
original equipment manufacturers (OEMs) and Tier-1 vendors,
and the aggressive strategies of Indian exporters to increase
their export levels. |
|
| ▪ |
The
operating margins of the industry will continue to be under
pressure in 2005-06, despite the marginal fall in input
prices on account of pricing pressure by OEMs. Also, the
industry did not witness any major productivity benefit
in the first 9 months of 2005-06 as it did in the past 2
years, due to relatively slower growth in the auto sector.
While we expect a higher fall in input costs and better
productivity benefits in 2006-07, we still believe that
the operating margins will either be maintained or improve
only marginally due to the OEM pressure on domestic as well
as export markets. However, we expect the industry's operating
profits to register healthy growth, driven largely by higher
volumes. |
Auto Ancillaries: Tariffs
|
| (per
cent) |
Customs |
Excise |
|
|
2005-06 |
2006-07 |
2005-06 |
2006-07 |
|
| Parts
of four-wheelers |
15.3 |
12.8 |
16.3 |
16.3 |
| Parts
of two-wheelers |
15.3 |
12.8 |
16.3 |
16.3 |
| Parts
of IC engines |
15.3 |
12.8 |
16.3 |
16.3 |
| IC
engines |
15.3 |
12.8 |
16.3 |
16.3 |
Transmission
shafts, gears
and gearboxes |
15.3 |
12.8 |
16.3 |
16.3 |
| Auto
gaskets/brake linings |
15.3 |
12.8 |
16.3 |
16.3 |
| Catalytic
covertors |
5.1 |
5.1 |
16.3 |
16.3 |
| ------------------------------------------------------------------------------------ |
| GP/GC
steel |
5.1 |
5.1 |
16.3 |
16.3 |
| HR
steel |
5.1 |
5.1 |
16.3 |
16.3 |
| Aluminium |
10.2 |
7.7 |
16.3 |
16.3 |
| Copper |
10.2 |
7.7 |
16.3 |
16.3 |
| Lead |
5.1 |
5.1 |
16.3 |
16.3 |
| Nickel |
5.1 |
5.1 |
16.3 |
16.3 |
| ------------------------------------------------------------------------------------ |
HR:
Hot rolled; GC: Galvanised coil; Gp: Galvanised plate; IC:Internal
combustion
|
|
Duty Cuts to have an overall neutral impact on auto components
|
| Company |
Impact |
Impact
factors |
|
| Bharat
Forge Ltd |
|
B,C |
| Goetze
India Ltd |
|
B,C |
| Bosch
Chassis Systems (I) Ltd |
|
A,B,C |
| Motor
Industries Co Ltd |
|
A,B,C |
| Munjal
Showa Ltd |
|
A,B,C |
| Sona
Koyo Steering Systems Ltd |
|
A,B,C,D |
| Sundaram
Fasteners Ltd |
|
B,C |
|
Impact factors
| A. |
The
peak duty reduction on components is likely to result in
a moderate pricing pressure for domestic manufacturers,
for their OEM supplies (OEM demand accounts for 65 per cent
of the industry). In the replacement market (accounting
for about 18 per cent of the industry), however, imports
are unlikely to increase, due to the levy of 4 per cent
countervailing duty. |
|
| B. |
Players
such as MICO, who import sub-components for their final
product, will benefit from the duty cut. |
|
| C. |
The
customs duty cut on inputs such as alloy steel, aluminium
and copper, is expected to have a marginally positive impact
on the players. |
|
| D. |
The
expected increase in demand for cars on account of the cut
in excise on small cars will have a positive impact on auto
ancillary demand. |
Roads
Awarding on a high, but timely completion a key concern
After a lull in 2003 and most of 2004, awarding activity in the
National Highway Development Programme (NHDP) gathered momentum
towards the end of 2004. With the Golden Quadrilateral (GQ) nearing
completion, the focus of awarding has shifted to the North South
East West (NSEW) programme and Phase lllA. The awarding activity
has particularly gained momentum towards the latter half of 2005,
with most of the awards (around 2,900 kms) made under the NSEW programme.
However, timely completion of the NSEW programme remains a concern,
as 85 per cent of the land to be acquired under NSEW has still not
been acquired. CRISIL Research estimates that the NSEW programme
is unlikely to be complete before 2010. Similarly, substantial delays
are also expected in the implementation of Phase IllA as only 936
kms out of 4,015 kms have been awarded so far.
Earlier, the government, in a bid to ramp up investments in roads,
restructured the NHDP into seven phases, entailing development and
upgradation of around 50,278 km of roads. All projects under these
additional phases (Phase lllA to VII) have been planned on a build-operate-transfer
(BOT) basis. However, as Phase IIlB to VII are still on the drawing
board, the National Highway Authority of India (NHAI) is likely
to focus its awarding activity over the next 2 years on the NSEW
programme and Phase IllA.
Besides the NHDP, the Pradhan Mantri Grameen Sadak Yojana (PMGSY)
and other state-level projects will provide the much-needed connectivity
across the country. On the Rs 600 billion PMGSY, we expect a substantial
delay in implementation, as there exists a large gap between the
funds available and the funds needed for the programme.
Although, the roads sector is expected to witness substantial investment
over the next 2 years, the following key sectoral issues plague
the sector:
| ▪ |
There
is a big question mark over the existing institutional capability
of the NHAI to undertake the mammoth task of timely implementation
of all the additional phases announced under the NHDP. However,
the Finance Minister in his Budget speech proposed restructuring
of the NHAI, which may do away with some of our concerns. |
|
| ▪ |
All
projects from Phase IIIB to Phase VII have been planned
on BOT basis, requiring greater private sector participation.
For the NSEW programme and Phase IllA alone, Rs. 66 billion
will have to be brought in as equity investments over the
next 7 years, which looks achievable. However, whether additional
resources for equity investment in the other phases can
be raised within the same timeframe (according to the government's
schedule) is debatable. |
Impact factors
Increased availability of funds, but timely implementation
a key concern
| ▪ |
Increase
in the allocations for the NHDP, from Rs. 93.2 billion in
2005-06 to Rs. 99.45 billion in 2006-07, will result in
greater availability of funds. |
|
| ▪ |
Budget
outlays for the Accelerated North East Road Development
Programme (Rs. 5.50 billion) and rural roads will promote
greater connectivity in the north-eastern region and in
rural India. |
|
| ▪ |
The
announcement of 1,000 km of expressways on Design, Build,
Finance and Operate (DBFO) basis will open up more opportunities
for the bigger players with a presence in BOT road projects.
The sections identified are: Vadodara-Mumbai, Delhi-Chandigarh,
Delhi-Jaipur, Delhi-Meerut, Delhi-Agra, Bangalore-Chennai,
and Kolkata-Dhanbad. |
|
| ▪ |
The
Finance Minister has proposed restructuring the NHAI. CRISIL
Research believes this will relieve some concerns about
the simultaneous implementation of the subsequent NHDP phases
(Phases IIIA to VII). |
|
| ▪ |
The
removal of Section 10(23G) will increase the interest costs
of subsequent BOT infrastructure projects by 70-80 basis
points. |
|
