Commercial vehicle (CV) makers Mahindra and Mahindra Ltd (M&M) and Tata Motors Ltd were the biggest gainers among Nifty stocks on Wednesday. Evidently, the Union government’s move to cut excise duty on CVs and three-wheeler goods carriers by 2 percentage points has boosted sentiment for auto stocks. But it’s a mystery why M&M shares rose by as much as 7.2% since CVs and three-wheeler goods carriers form a minuscule portion of its overall sales.
Even for Tata Motors and Ashok Leyland Ltd, the two leading CV manufacturers in the country, the cut in excise is not expected to have any material impact. Sales may look up in March, but that’s primarily because of purchases to take advantage of depreciation benefits before the close of the fiscal year. This, however, will be a temporary phenomenon, and the weak trend in demand should resume in April. Demand for trucks has slowed simply because of the slowdown in economic activity across the country. This trend cannot be expected to reverse just by lowering prices or interest rates marginally. Tyre companies have cut rates thanks to the cut in excise and this should result in marginal savings for truck makers.
But apart from this, the outlook for profitability is rather bleak. In an interesting research report, IIFL, India Infoline Ltd’s institutional equity desk, points out that the margin impact due to declining volumes is much more on CV manufacturers compared with other auto segments. This is because of their relatively low level of outsourcing for components. According to IIFL, CV manufacturers outsource 60-65% of their component requirements, compared with 90% by a two-wheeler manufacturer. With higher fixed costs, these firms would suffer more when volumes decline.
Ironically, volumes are declining at a rapid pace in the CV segment, while other segments are much better off. Of course, the converse is also true and when volumes start picking up, profit will jump manifold. But that’s some time away. For now, the only reprieve is that prices of commodities such as steel have fallen sharply, and this will help companies offset some of the losses on account of lower volumes.
In the case of Tata Motors, another key driver for the stock is the performance of Jaguar and Land Rover, and the negative outlook on that front has driven valuations down further.
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