Auto margins could come under near-term pressure on higher duties

Commercial vehicle companies to gain the most on scrappage, bus orders and infra boost

While most of the proposals for the auto sector in the Budget were positive, the increase in duties on certain auto parts to 15 per cent from 7.5 per cent to 10 per cent could lead to higher costs for auto makers. Though these measures will encourage localisation in the long term, Saurabh Agarwal, Tax Partner, Automotive sector, EY India believes that there could be some pressures in the near term as auto part makers pass on the higher import duties. Though overall annual auto imports are pegged at Rs 2 lakh crore only half of this is impacted as the rest are covered under the FTA agreements which offer differential rates. 

Given the higher input costs, margins of automakers (depending on their localisation levels) could come under further pressure. Most automakers had indicated post the December quarter results their inability to fully pass on the cost of inputs on concerns that it could impact the gradual demand recovery and volume growth. In addition to steel, the sharp rise in precious metals such as Rhodium, Palladium and Platinum used in catalytic converters has led to higher input cost burden.  

 

While this is an overhang, stocks in the sector were among the key gainers over the last two sessions given slew of proposals related to investments in road infrastructure and scrappage policy for passenger and commercial vehicles (CV). Pure play CV companies such as Ashok Leyland were the biggest gainers followed by Tata Motors as the Budget proposed a scrappage policy for vehicles older than 15 years. 

While the parameters of a fitness test are not clear, there are a million vehicles across CV categories which may need to be replaced if all vehicles which are over 15 years are scrapped. The beneficiaries will also include ancillary companies such as Bharat Forge, Bosch, Apollo Tyres among others. While the scheme is also applicable to passenger vehicles, the impact is expected to be minimal as there are few personal vehicles which may operate beyond 20 years. 

In addition to scrappage, the government also announced a Rs 18,000 crore scheme to augment public transport in urban areas. Through a public private partnership model, the scheme involves allowing private sector players to finance, acquire, operate and maintain over 20,000 buses. 

What could help the commercial vehicle players is the awarding of 8,500 kilometres of highways in FY22 which is expected to improve efficiency and profitability of fleet operators.