Shares of auto maker Mahindra and Mahindra Ltd(M&M) shrugged off news that the government had imposed an additional excise duty on large cars and utility vehicles.
The shares rose by 0.7% on Monday, compared with a 1.2% gain in the National Stock Exchange’s Nifty index.
M&M’s utility vehicles Scorpio and Bolero and a variant of its Logan car will be affected by the excise duty, which will raise their prices. These products account for a majority of revenues earned by the company’s automotive division, which in turn accounts for about 60% of the company’s revenues and profit.
Most analysts expect the higher duty to be passed entirely onto consumers, but opinion differs on whether that will have a significant impact on demand. The good thing, from the company’s point of view, is that there will be a similar price increase in all comparable products. It’s not that consumer preference would shift to another segment as a result of the price hikes.
Still, some consumers at the lower end of the utility vehicle segment may postpone purchases and this could impact demand in the short term, says an analyst with a domestic brokerage. And in the unlikely case that some competitor chooses to bear the burden of the excise hike, Mahindra may have to sacrifice part of its profit margin.
While the impact may not be very large, excise duty hikes would normally lead to a sharp drop in share prices. In Mahindra’s case, however, its shares have already been beaten down substantially. At Rs575 per share, it has shed one-third of its value since January and trades precariously close to the lows of the year.
Analysts at two domestic brokerages, who did not wish to be identified, have valued the auto maker’s various subsidiaries at Rs400 and Rs500 per share.
Even with the lower estimate, that leaves the core auto and tractor business valuation at just Rs175 per share, or five times expected earnings for the current fiscal year.
That leaves little downside and it’s no wonder the shares hardly reacted to the negative news of the excise duty hike.
Not all Indian banks are equal
Banking stocks have been among the worst-hit in the crash, with the Bombay Stock Exchange’s Bankex down 42% from its 52-week high last January.
Banks are a play on the economy and the scepticism with which they are viewed currently is a reflection of concerns about higher interest rates and slowing economic growth. But not all banks are equal and some of them are better equipped to handle the tough times ahead.
Banks’ biggest defence against the downturn is their ability to access low-cost deposits. The higher the proportion of current and savings accounts (CASA) in the deposit mix, the better will be a bank’s ability to weather rising interest rates and slowing growth.
Banks dependent on the money markets for their deposits, on the other hand, will have to choose between lower margins if they don’t hike lending rates or lower credit growth if they do.
From this perspective, HDFC Bank Ltd, with CASA at 55% of deposits, or banks such as Axis Bank Ltd, State Bank of India (SBI), Bank of Maharashtra and Dena Bank with CASA above 40% are in a strong defensive position.
But Yes Bank Ltd with CASA at 9%, or ICICI Bank Ltd, Kotak Mahindra Bank Ltd and Oriental Bank of Commerce, with CASA at less than 30%, are least protected.
Another defence for banks lies in a higher proportion of fee income, but the problem here is that much of the rise in non-interest income is related to treasury profits, which may not be available in future, particularly given the problems that banks are facing with forex derivatives.
For several public sector banks, recoveries have been a large source of non-interest income and momentum on some of those recoveries could taper off. Growth in fee income, too, will contract during a downturn, but banks that have a high proportion of fee income will not suffer quite so much from margin compression as other banks.
Will higher interest rates increase mark-to-market losses for bank investments? Analysts say that the new private sector banks are the most insulated, while many public sector banks, too, have moved their investments to the “held-to-maturity” group, which is not required to be marked to market. But analysts point out that state-owned banks have the added disadvantage of government oversight of their lending rates and point to their lending to oil companies at very low rates as proof.
And finally, quality of assets becomes very important during a downturn.
Banks that have relatively high non-performing assets, such as ICICI Bank, SBI and Uco Bank will be at a disadvantage.
What about valuations? Says Vaibhav Agrawal, senior analyst at Angel Broking: “In the current environment, investors should choose banks on the strength of their businesses and on asset quality, since in terms of valuation they’re all available cheaply.”
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