BackSC ruling on diesel vehicles a blow for Mahindra, boon for IGL
While 98% of Mahindra's portfolio comprises diesel vehicles, the government's action to control pollution may increase demand for gas, which will benefit IGL
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Investors were quick to gauge the varying impact of the Supreme Court (SC) ruling banning the registration of diesel vehicles above 2000cc in the National Capital Region until March.
Shares of auto firm Mahindra and Mahindra Ltd (M&M) tumbled by 5.44% on Wednesday as it got the biggest blow among auto firms in the listed universe. After all, 98% of its portfolio comprises diesel vehicles. In contrast, the decision fired Indraprastha Gas Ltd’s (IGL’s) stock, which closed 6.79% up on Wednesday. As the leading natural gas distributor, the government’s action to control pollution may increase demand for gas, as a preferred cleaner fuel option to diesel.
Worries on M&M may seem trivial if one were to go by its statement which clarified that the ruling affects only 2% of its monthly vehicle sales. But, Mihir Jhaveri, an analyst at Religare Capital Markets Ltd, said in a note, “It is unclear if cars can be registered in adjoining areas like Gurgaon, Faridabad, etc. The larger issue is it may impact consumer sentiment for buying a diesel vehicle and whether this ban could percolate to other regions."
Further, the ban could be extended. Also, M&M has mentioned that it would work on alternative options, which implies costs, both for technology and marketing the new vehicles. It will be a long haul for M&M to get its act together. As it stands, analysts say it may impact the company’s earnings adversely by 6-7% in the near term. Unfortunately, it comes at a time when M&M’s utility vehicle sales had started posting growth, while farm-equipment sales remain tardy.
Meanwhile, the court also banned commercial diesel vehicles registered before 2005 from plying on Delhi’s roads. This may trigger replacement demand for commercial vehicle makers such as Ashok Leyland Ltd and Tata Motors Ltd. Between the two, Ashok Leyland’s profits may get a greater bump, given that much of Tata Motors’ profits accrue from its overseas subsidiary Jaguar Land Rover Ltd.
Will this fuel demand for petrol vehicles? It may give an edge to Maruti Suzuki India Ltd by boosting consumer preference for petrol cars. Also, the firm has negligible vehicles in the above 2000cc category, clearing it from the negative impact of the ruling.
However, the ruling seems to have turned the fortunes of IGL. Besides banning diesel vehicles, the apex court has also urged taxi service providers such as Ola and Uber to shift to CNG (compressed natural gas ). Green cess on trucks entering the capital city has been nearly doubled.
Analysts are hopeful that the drive to reduce pollution levels may cascade into reduction in excise duty on CNG (currently at 14%), which in turn will help IGL. A Nomura report, which has raised the stock’s target price, says IGL is likely to post higher growth in volume from 2016-17. This and lower gas prices may lift profit margins.
The writer does not own shares in the above-mentioned companies.
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