Impact of Union Budget on Auto Industry
A CRIS-INFAC Analysis
Cars and Utility Vehicles
Growth to be lower in 2005-06
| ▪ |
Domestic
passenger car sales rose by 22 per cent, while domestic
utility vehicle (UV) sales increased by 20 per cent
in the first 9 months of 2004-05. Passenger cars
and UVs are expected to grow at 17-18 per cent and
16-17 per cent respectively in 2004-05. The strong
growth in sales was due to strong growth in family
incomes, higher aspiration levels of customers,
price reductions and new models/variants launched
by companies, lower EMIs due to stable interest
rates and higher tenures. The cut in EMIs also spurred
tour operators to replace old vehicles in their
fleet. |
| ▪ |
The
growth of passenger cars is likely to be lower at
10-11 per cent in 2005-06, due to increase in prices
of cars (owing to rise in input costs), Euro III
norms, and stable interest rates. The mid-size segment
and compact segment will continue to see growth,
while the mini segment may see a fall in sales.
Similarly, the growth in utility vehicles is likely
to be lower, at 4-5 per cent, due mainly to expectations
of stable consumer finance interest rates, which
drove growth in the previous fiscal. |
| ▪ |
The operating margins of car and UV manufacturers
have improved marginally, owing to strong demand
growth and higher capacity utilisation. Going forward,
the operating margins are expected to increase slightly
in 2005-06, on the back of higher realisations,
due to change in product mix in favour of compact
and mid-size segment cars. Net profits have grown
substantially in the first 9 months of 2004-05,
on account of higher volumes and lower interest
cost, and are expected to improve further in 2005-06.
|
Cars & Utility Vehicles: Tariffs
| (Per
cent) |
Customs |
Excise |
| |
2004-05 |
2005-06 |
2004-05 |
2005-06 |
| New
Cars |
|
|
|
|
| -CKDs |
20.4 |
15.3 |
24.5 |
24.5 |
| -CKDs |
61.2 |
61.2 |
24.5 |
24.5 |
| -CKDs |
61.2 |
61.2 |
24.5 |
24.5 |
| Second
hand cars |
107.1 |
102.0 |
24.5 |
24.5 |
| Utility
Vehicles |
|
|
|
|
| -6-12
seater1 |
20.4 |
15.3 |
24.5 |
24.5 |
| -12
seater and above1 |
20.4 |
15.3 |
16.3 |
16.3 |
| Steel
Items |
5.1 |
5.1 |
12.2 |
16.3 |
| Engine
& engine parts |
20.4 |
15.3 |
16.3 |
16.3 |
| Other
components |
20.4 |
15.3 |
16.3 |
16.3 |
|
CKDs:
Completely knocked down units; SKDs: Semi-knocked
down units; CBUs: Completely built units
1Excluding driver |
Cost savings for cars & UV manufacturers to improve
margins
| Company |
Impact |
Impact
factors |
| Hindustan
Motors Ltd |
|
B,D,E |
| Honda
SIEL Cars India Ltd |
|
B,D,E |
| Hyundai
Motors India Ltd |
|
B,D,E |
| Maruti
Udyog Ltd |
|
B,D,E |
| Tata
Motors Ltd |
|
B,D,E |
| Mahindra
& Mahindra Ltd |
|
B,D,E |
|
Impact factors
| A) |
The
cut in the import duty on used cars and utility
vehicles from 105 per cent to 100 per cent will
not have any impact on the industry. |
| B) |
The
reduction in the peak customs duty on components
from 20 per cent to 15 per cent will lower the prices
of imported components. This reduction will bring
down the prices of premium segment cars, which have
higher import content. In addition, the cut in the
customs duty on aluminium from 15 per cent to 10
per cent will marginally lower the cost of production
of cars and utility vehicles. The above measures
will have a positive impact on cars and utility
vehicle manufacturers, as these benefits are likely
to be retained by auto original equipment manufacturers
(OEMs), thereby increasing their margins. |
| C) |
The increase in the excise duty on steel from 12
per cent to 16 per cent and cut in the excise duty
on tyres from 24 per cent to 16 per cent will not
affect OEMs, as the excise on inputs are modvatable
against the excise paid by companies on their final
product. |
| D) |
The extension of 150 per cent deduction up to March
31, 2007 for in-house R&D expenditure will benefit
automobile OEMs. |
| E) |
The reduction in personal tax rates will increase
household disposable income, which is a positive
for car demand. |
Commercial Vehicles
Cyclical pressures to drag commercial vehicles market
into slowdown phase
| ▪ |
The
domestic commercial vehicles (CV) industry recorded
sales growth of around 25.5 per cent during the
first 9 months of 2004-05. Large buying due to attractive
interest rate scenario, aggressive push by financiers
and strong economic and industrial growth propelled
sales of commercial vehicles. We expect sales to
grow at 20-22 per cent in 2004-05. |
| ▪ |
However,
in 2005-06, CRIS INFAC expects that cyclical pressures
may result in the growth slowing down to around
5 per cent. Overbuilding of transport capacity due
to excessive buying, increase in vehicle prices
due to high steel prices and implementation of emission
norms, and completion of fleet renewal programmes
by fleet operators may dampen growth in the CV market. |
| ▪ |
Despite the robust volume growth in commercial vehicle
sales, operating margins of CV manufacturers have
dipped in the first 9 months of 2004-05, as manufacturers
have faced the brunt of high steel prices. We expect
operating margins to remain stable, as average steel
prices are expected to remain firm in 2005-06. Net
profits have grown substantially in the first 9
months of 2004-05, on account of higher volumes
and lower interest cost, and are expected to improve
moderately in 2005-06.
|
Commercial vehicles: Tariffs
| (Per
cent) |
Customs |
Excise |
| |
2004-05 |
2005-06 |
2004-05 |
2005-06 |
| LCVs |
20.4 |
15.3 |
16.3 |
16.3 |
| M&HCVs |
20.4 |
15.3 |
16.3 |
16.3 |
| Steel
Items |
5.1 |
5.1 |
12.2 |
16.3 |
| Engine
& engine parts |
20.4 |
15.3 |
16.3 |
16.3 |
| Other
components |
20.4 |
15.3 |
16.3 |
16.3 |
|
LCV:
Light commercial vehicles; M&HCV: Medium &
heavy commercial vehicles |
Industry to remain unaffected by budget measures
| Company |
Impact |
Impact
factors |
| Ashok
Leyland Ltd |
|
A,
C |
| Eicher
Motors Ltd |
|
A,
C |
| Tata
Motors Ltd |
|
A,
C |
|
Impact factors
| A) |
The
reduction in the peak customs duty on components,
from 20 per cent to 15 per cent, will not have any
impact on commercial vehicle manufacturers, owing
to the high indigenisation levels in the industry.
The reduction in the customs duty on aluminium is
likely to lower the input costs of OEMs marginally. |
| B) |
The
increase in the excise duty on steel, from 12 per
cent to 16 per cent, and the reduction in the excise
duty on tyres, from 24 per cent to 16 per cent,
will not affect OEMs, as the excise on inputs will
be modvatable against the excise paid on the final
product. However, the reduction in the excise duty
on tyres will lower the operating costs of transport
operators in terms of lower tyre prices in the replacement
market. |
| C) |
The extension of the 150 per cent deduction on in-house
R&D expenses, upto March 31, 2007, will benefit
commercial vehicle OEMs. |
Two-Wheelers
Robust demand to continue
| ▪ |
After
an 11.4 per cent growth in 2003-04, two-wheeler
sales surged by over 17 per cent year-on-year (Y-o--Y)
for the first 10 months of 2004-05. Sales growth,
led by the sales of motorcycles, escalated consistently
during the April to January period due to increasing
household incomes, easy availability of finance,
and the success of certain new models launched during
the period.
|
| ▪ |
Two-wheeler
demand is expected to grow at a healthy rate of
11-12 per cent from 2004-05 to 2005-06. Rising household
incomes, frequent new model launches and the increasing
penetration of finance and distribution will act
as key growth drivers.
|
| ▪ |
The motorcycle segment witnessed stupendous growth
in 2004-05 (20.3 per cent Y-o-Y) after a moderate
performance (growth of 13.7 per cent Y-0-Y) in 2003-04.
The segment is expected to grow by 12-13 per cent
in 2005 -06.
|
| ▪ |
Led by the ungeared segment, scooter sales are likely
to grow by 8 per cent, while moped sales are expected
to stagnate or decline marginally in 2005-06. |
Two-wheelers: Tariffs
| (Per
cent) |
Customs |
Excise |
| |
2004-05 |
2005-06 |
2004-05 |
2005-06 |
| Two-wheelers |
61.2 |
61.2 |
16.3 |
16.3 |
| Steel
Items |
5.1 |
5.1 |
12.2 |
16.3 |
| Engine
& engine parts |
20.4 |
15.3 |
16.3 |
16.3 |
| Other
components |
20.4 |
15.3 |
16.3 |
16.3 |
|
Marginally positive impact on the two-wheeler segment
| Company |
Impact |
Impact
factors |
| Bajaj
Auto Ltd |
|
A,
B, C, D |
| Hero
Honda Motors Ltd |
|
A,
B, C, D |
| TVS
Motor Company Ltd |
|
A,
B, C, D |
|
Impact factors
| A) |
The
reduction in the import duty on used two-wheelers
will not affect the industry.
|
| B) |
The
hike in the excise duty on steel will not affect
the industry, as cenvat credit can be availed for
the same.
|
| C) |
The extension up to March 2007 of 150 per cent deduction
on R&D expenditure will marginally benefit domestic
two-wheeler players, such as TVS Motors, Bajaj Auto
and Kinetic.
|
| D) |
The reduction in personal tax rates will increase
household disposable income, which is a positive
for two-wheeler demand. |
Tractors
Stupendous growth and continued focus on agriculture
brings cheer to players
| ▪ |
The
tractor industry has been on a growth trajectory
since the second half of 2003-04, after going through
a trough for 4 consecutive years. The key factors
driving this growth are increasing farm incomes,
aggressive financing resulting in easy availability
of low-cost credit, sharp inventory correction and
strong export growth.
|
| ▪ |
The
tractor industry ended the 9 months of 2004-05 on
a buoyant note, with sales growing by 39.5 per cent
over the corresponding period of the previous year.
On account of pumped-up sales volumes, the industry
has registered a stellar financial performance.
|
| ▪ |
Government policies have been extremely favourable
for the industry. The Union Budget 2004-05 announced
an excise duty exemption for tractors (earlier an
excise duty of 16 per cent was levied) and tractor
parts that are meant for captive consumption. The
industry is entitled to a 150 per cent deduction
in expenditure on in-house R&D.
|
| ▪ |
CRIS INFAC estimates that tractor volumes will grow
by 25-30 per cent in 2004-05 and 8-10 per cent in
2005-06. |
Tractors: Tariffs
| (Per
cent) |
Customs |
Excise |
| |
2004-05 |
2005-06 |
2004-05 |
2005-06 |
| Agricultural
tractors |
20.4 |
20.4 |
- |
- |
| Road
Tractors1 |
20.4 |
20.4 |
- |
16.3 |
| Steel
Items |
5.12 |
5.12 |
12.2 |
16.3 |
| Engine
& engine parts |
20.42 |
15.32 |
16.3 |
16.3 |
| Other
components |
20.42 |
15.32 |
16.3 |
16.3 |
1
Excise durty of 16% has been imposed on road
tractors (of engine capacity more than 1800
cc) for road trailers.
2 Excluding countervailing duty
|
|
Continued focus on agriculture positive for tractor
industry
| Company |
Impact |
Impact
factors |
| Eicher
Motors Ltd1 |
|
A,
B, C, D |
| Escorts
Ltd |
|
A,
B, C, D |
| Mahindra
& Mahindra Ltd |
|
A,
B, C, D |
| Punjab
Tractors Ltd |
|
A,
B, C, D |
| TAFE
Ltd |
|
A,
B, C, D |
|
1
Notwithstanding the recent announcement to sell
its tractors division to TAFE, which will take time
to come into effect. |
Impact factors
| A) |
The
hike in the excise duty on steel is likely to result
in an increase in tractor prices, as cenvat credit
cannot be availed on inputs since agricultural tractors
are exempt from excise duty.
|
| B) |
The
extension of the 150 per cent deduction on R&D expenditure
up to March 31, 2007, will benefit the industry
in terms of new product development.
|
| C) |
The cut in the peak customs duty on components as
well as the cut in the excise duty on tractor front
tyres is not expected to have a significant impact,
given the high levels of indigenisation and the
low value of tractor front tyres.
|
| D) |
The budget has announced various agriculture-friendly
measures: |
| |
▪ |
Greater
thrust on agricultural credit through 30 per cent
increased flow of credit in 2005-06 and an increase
in the number of borrowers by 5,000,000. |
|
▪ |
Increase
in the area under irrigation under the Bharat Nirman
Project and the micro irrigation scheme. |
|
▪ |
Road
connection for all villages. |
|
▪ |
Schemes
for agricultural diversification. |
|
▪ |
Continuation
of farm insurance scheme. |
|
▪ |
The
commission of National Horticulture Mission to cover
research, production, post harvest management, processing
and marketing in an integrated manner. |
|
▪ |
Scheme
for strengthening agricultural marketing infrastructure. |
|
▪ |
National
project for repair, renovation and restoration of
water bodies. |
In the long run, these measures are likely to boost farm
incomes and thereby boost tractor demand.
Auto ancillaries
Domestic growth to slow down, surge in exports to
continue in 2005-06
| ▪ |
The
auto ancillary industry is estimated to have grown
by around 20 per cent in the first 9 months of 2004-05
in terms of value of production as compared with
the same period last year. The growth was led by
the strong domestic growth posted by almost all
the segments of the automobile industry and high
growth in exports. For the full year of 2004-05,
the auto ancillary industry is expected to grow
by 18-20 per cent, while exports are seen growing
by 25-30 per cent.
|
| ▪ |
In
2005-06, the auto ancillary industry is likely to
post a relatively lower growth of 12-13 per cent.
The lower growth will be due to the reduced growth
rate in almost all the automobile segments. However,
exports are expected to continue the strong growth
momentum in 2005-06 at 20-25 per cent. This will
be led by the continued thrust on exports by domestic
manufacturers as well as increase in outsourcing
of components from India by global OEMs and Tier-I
vendors.
|
| ▪ |
Operating profit margins slipped marginally in the
first 9 months of 2004-05, owing to a rise in input
costs; the margins are expected to remain under
marginal pressure in 2005-06 as well, as CRIS INFAC
expects average steel prices to remain firm in 2005-06.
But net profits of players have risen, on account
of higher growth in net sales and lower capital
charges in the first 9 months of 2004-05; the net
profits are expected to improve further in 2005-06.
|
| ▪ |
CRIS INFAC estimates that tractor volumes will grow
by 25-30 per cent in 2004-05 and 8-10 per cent in
2005-06. |
Auto ancillaries: Tariffs
| (Per
cent) |
Customs |
Excise |
| |
2004-05 |
2005-06 |
2004-05 |
2005-06 |
| Parts
of four -wheelers |
20.4 |
15.3 |
16.3 |
16.3 |
| Parts
of two -wheelers |
20.4 |
15.3 |
16.3 |
16.3 |
| Parts
of IC engines |
20.4 |
15.3 |
16.3 |
16.3 |
| IC
engines |
20.4 |
15.3 |
16.3 |
16.3 |
| Transmission
shafts, gears & gear boxes |
20.4 |
15.3 |
16.3 |
16.3 |
| Auto
gaskets/brake linings |
20.4 |
15.3 |
16.3 |
16.3 |
| Catalytic
convertors |
5.1 |
5.1 |
16.3 |
16.3 |
| GP/GC
steel |
5.1 |
5.1 |
12.2 |
16.3 |
| HR
steel |
5.1 |
5.1 |
12.2 |
16.3 |
| Aluminium |
15.3 |
10.2 |
16.3 |
16.3 |
| Copper |
15.3 |
10.2 |
16.3 |
16.3 |
| Lead |
15.3 |
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 |
Budget measures marginally positive for the auto
ancillary sector
| Company |
Impact |
Impact
factors |
| Bharat
Forge Ltd |
|
D |
| Goetze
India Ltd |
|
B,
D |
| Kalyani
Brakes Ltd |
|
B,
D |
| Motor
Industries Co Ltd |
|
A,
D |
| Munjal
Showa Ltd |
|
A |
| Sona
Koyo Steering Systems Ltd |
|
A,
D |
| Sundaram
Fasteners Ltd |
|
A |
|
Impact factors
| A) |
The
reduction in the peak customs duty on components
will benefit companies that import sub-components
for manufacturing their final product, such as MICO
and Sona Koyo Steering Systems.
|
| B) |
The
reduction in the peak customs duty on aluminium
will marginally reduce the input costs of auto ancillaries
in terms of lower prices. The cut in the peak customs
duty on copper will marginally reduce the input
costs of companies manufacturing electrical components
such as wire harnesses. The reduction in the customs
duty on lead to 5 per cent will reduce the input
costs of automotive battery manufacturing companies
such as Exide and Amara Raja Batteries. The benefit
of the above measures will be passed on to the original
equipment manufacturers.
|
| C) |
The increase in the excise duty on steel will not
have any impact on the costs of auto ancillary manufacturers,
as the same is modvatable.
|
| D) |
The extension of the 150 per cent tax benefit for
in-house R&D will marginally benefit auto ancillary
companies undertaking research and development. |
Roads
After a lull in 2004, pace of implementation to
pick up in second half of 2005
The National Highways Authority of India (NHAI) aims to
complete Phase I (Golden Quadrilateral) of the National
Highways Development Programme (NHDP) by December 2005 and
Phase II (North-South-East-West) by December 2007. However,
we expect the NHDP Phase II may be delayed by 36 months,
and will be completed only by December 2010.
As of January 2005, the work on the NHDP Phase I (Golden
Quadrilateral) was nearly 75 per cent complete, with the
expenditure on the project touching Rs 231.86 billion by
November 2004. Some of the key reasons for the delay are
problems related to land acquisition, law and order, the
lack of cooperation by certain states, and the non-performance
of some contractors. The project was originally scheduled
for completion in December 2003.
After a 9-month lull, in December 2004, NHAI awarded six
projects worth Rs 18 billion for the NHDP Phase II project
(NSEW project). In the next 3-4 months, nearly 70-80 bids
worth Rs 200 billion are expected to be open for the same
project, for the East West corridor, coupled with a few
projects in some of the southern states. Hence, we believe
that the pace of construction will pick up only from the
second half of 2005-06, resulting in further delay in project
implementation. There is also some funding action taking
place, by means of funds through the Asian Development Bank
(ADB), which, in Dec'04, approved a $400 million loan for
upgrading key sections in the NHDP Phase II.
The work on the NHDP Phase III (formerly called Pradhan
Mantri Bharat Jodo Pariyojana) is progressing at a snail's
pace. In the second quarter of 2004-05, NHAI invited bids
for the second lot of 10 projects. However, the award of
contracts was held up due to delays in Cabinet clearance.
On the Rs 600 billion Pradhan 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 funds 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 the domestic market. No visible progress has
been made on this front till date.
Further, the new government has drawn up more roads and
highway projects such as NHDP Phase IV and the Accelerated
North-East Road Development (ANERD). These projects, along
with NHDP Phase I, II and III and PMGSY, entail a total
cost of Rs 2,385 billion, of which NHDP Phase I, Phase II
and Phase III account for nearly 50 per cent (Rs 1,196 billion).
Till November 2004, only Rs 267.17 billion has been spent
on the latter three projects.
Although we feel that NHAI is better equipped to implement
and manage these projects, we are cautious, owing to the
concerns arising from various issues, such as –
| ▪ |
Availability
of funds: To achieve scheduled completion targets,
a majority of the contracts for the NHDP Phase II
and Phase III 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 some
delays on both these fronts. However, with the expected
increase in the cess on diesel, availability of
funds through this could increase.
|
| ▪ |
Past
experience: With respect to the delay in implementing
and awarding NHDP Phase I and Phase II, respectively,
further delay is anticipated,
|
Impact factors
Increased availability of funds and greater focus
on roads to speed up implementation of projects
| A) |
The
increase in allocations for NHDP from Rs 65.14 billion
in 2004-05 to Rs. 93.20 billion in 2005-06 will
result in greater availability of funds. To take
care of this additional allocation, the cess on
both petrol and diesel has been increased by 50
paise per litre and the resources raised will be
earmarked exclusively for national highways. CRIS
INFAC anticipates that additional resources amounting
to Rs 28 billion will be raised through the increase
in fuel cess. |
| B) |
The
government's focus on NHDP Phase III will result
in speedy implementation of the project. The Centre
has allocated Rs. 14 billion in 2005-06 to four-lane
4,000 km of roads.
|
| C) |
A special purpose vehicle (SPV) to finance infrastructure
projects (including roads, ports, airports and tourism),
for which the borrowing limit has been fixed at
Rs. 100 billion, and a provision of Rs. 15 billion
for viability gap funding for infrastructure projects
will provide a further boost to the roads sector.
|
| D) |
The National Urban Renewal Mission has been established,
which covers 7 mega cities and all cities with a
population of over a million. An outlay of Rs. 55
billion has been allocated under this mission, which
includes project such as the Mumbai Western expressway
sealink.
|
|
| |
|
