Auto sales continue to be strong, leading to a view in the markets that the finance minister may not hesitate in rolling back the excise cuts granted to the industry a little over a year ago. Most analysts expect excise rates to rise by at least 2 percentage points, while some expect the entire 4 percentage points cut will be reversed.
Interestingly, this isn’t reflected in the BSE Auto Index, which has fallen by around 10% from its peak, just as much as the broad market has fallen.
But the BSE Auto Index masks the real picture given its composition—it has a 20% weight for auto component manufacturers and a 25% weight for two-wheeler companies. The main worry regarding the excise rollback is for car and truck companies. Shares of Maruti Suzuki Ltd have fallen by 22% from its peak, those of Tata Motors Ltd have dropped by 20% and Mahindra and Mahindra Ltd’s (M&M) shares have fallen by 17.5%.
Still, it must be noted that the rollback of the excise duty in itself isn’t a large concern. A small rise in prices isn’t likely to dampen demand for four-wheelers, especially given the fact that underlying consumer demand remains strong. But it so happens that the likely hike in excise rates almost coincides with the deadline for four-wheeler manufacturers to meet new emission standards. According to the institutional equities wing of brokerage India Infoline Ltd, prices of four-wheelers are set to increase by roughly 4-6% on account of the shift to better technology.
Graphic: Paras Jain/Mint
Coupled with the likely hike in excise rates, auto companies would be forced to raise prices by 6-10%, leaving little room to increase prices further to accommodate rising commodity costs. The December quarter results of companies such as M&M and Tata Motors indicated that margins are under pressure because of higher-than-expected raw material costs.
So although sales growth is expected to remain strong, analysts are factoring in lower margins in the next fiscal, which could leave most companies with flat earnings growth. This is the reason some of the four-wheeler companies’ shares have underperformed.
Two-wheeler companies wouldn’t be affected as much since they don’t have to worry about new emission norms in the immediate term. This explains why Bajaj Auto Ltd’s shares have fallen just 5.5% from its peak and Hero Honda Motors Ltd’s shares have dropped by 10.5%.