BS III ban: Auto stocks wobble as Supreme Court chokes firms with emission compliance
On Wednesday, auto stocks were quick to react to the Supreme Court (SC) ban on both the production and sale of BS III (emission standards) vehicles from 1 April 2017. Shares of Hero MotoCorp Ltd and Ashok Leyland Ltd, which analysts believe have significantly high inventories of BS-III vehicles, fell hardest by 3.2% and 2.8% respectively, even as others wobbled in sympathy.
While the apex court verdict puts to rest the conundrum on whether already manufactured vehicles can be sold even after 1 April, it is sure to have some ramifications for auto firms in the near term.
One, with just two days to go, there is little that automakers can do to dispose of the existing inventory of vehicles already produced and yet to be sold. So, sales of non-compliant vehicles will drop in the near term, besides having higher inventory costs on account of unsold units.
Two, although all auto firms had planned production of BS-IV compliant vehicles from 1 April, it may take a while to completely withdraw or modify existing vehicles and introduce the new ones in the market. Supply-chain impact could entail time and costs for some auto firms.
Remarkably, the Street had done its math well on approximate inventory levels with various auto firms. The Society of Indian Automobile Manufacturers had pegged the figure of BS-III vehicles in the pipeline at around 820,000 units, worth a huge Rs12,000 crore. Analysts’ average estimates indicate that Hero MotoCorp has a huge pile of around 290,000 vehicles, while Bajaj Auto Ltd in contrast has a far lower number. Further, the total BS-III commercial vehicle inventory of 96,000 units is also a significant number, with most of it between Ashok Leyland and Tata Motors Ltd. Mahindra and Mahindra Ltd (M&M), the fairly diversified automaker, has stocks of both three-wheelers and commercial vehicles under the BS-III category.
It’s hard to get a fix on the exact impact on revenue and profits of these companies. No doubt, the SC order is marginally negative for all original equipment manufacturers. However, most of them will try to divert the vehicles to export markets.
The catch here is that this may entail some alterations in the product, and time and costs on managing the logistics, which in turn could have a bearing on the revenue and operating profits.
According to Nitesh Sharma, an analyst at PhillipCapital (India) Pvt. Ltd, Ashok Leyland and M&M may be the worst off with a 10-15% hit on operating profit for FY18. Although Hero has the highest inventory among automakers and hardly any addressable export markets, given the relatively smaller value of two-wheelers in comparison to commercial vehicles, it may take a 3-5% hit on operating profit. The case of Tata Motors, although significant, has little bearing on the consolidated profits, in any case.
Investors must note that Maruti Suzuki India Ltd, the country’s largest car maker in the listed universe, goes unscathed as it is compliant with the new BS-IV emission norms. Bajaj Auto, too, is the hero among two-wheelers as its limited stock can be easily exported. These two stocks, therefore, were least impacted.
The rest of the shares in the auto universe corrected on Wednesday. They may continue to be range-bound in the near term as investors track sales trends for the next couple of months.