After SC ban, buy auto on fall

Impact on carmakers not seen as significant

The stocks of Hero MotoCorp and Ashok Leyland shed three per cent each after Supreme Court banned sales of BS-III vehicles from April 1 on Wednesday. These vehicles comply with emission norms set by BS-III standards, in force since October 2010. From April 1, sales and registration of only BS-IV vehicles will be allowed, which are seen as less polluting.
 
The worst-affected from the ban will be BS-III two-wheelers and commercial vehicles, sitting as unsold inventories of 600,000 units and 96,000 units, respectively, according to estimates. The automobile industry, according to Angel Broking, has unsold BS-III inventory of 820,000 vehicles worth Rs 12,000 crore. While it is not clear if BS-III vehicles can be converted into BS-IV ones, analysts believe a way out is to export BS-III vehicles. Hero MotoCorp, for example, is sitting on an inventory of three weeks that could be sold away in South America and Africa. Bajaj Auto and TVS Motor, by comparison, carry less inventories and export much more than Hero MotoCorp.
 

Icra believes commercial vehicles will be most affected due to sizeable inventory (estimated at 75,000 units) and costs of vehicle recall from dealers. Further, in order to get rid of existing stock, commercial-vehicle makers could offer higher discounts till SC deadline of April 1. Discounts continue to remain elevated over the past few years. Among commercial-vehicle makers, Ashok Leyland will be the most hit. While the company has indicated it will not be affected much, analysts believe medium and heavy commercial-vehicle players such as Ashok Leyland had manufactured more commercial vehicles than they normally would to tap into the pre-buying rush (which did not materialise) sparked due to looming BS-IV deadline, leaving them with higher inventories. Ashok Leyland made 14,000 commercial vehicles in February.
 
While the companies have their task cut out, the impact of the SC ban on earnings of auto makers may not be significant given the options to export vehicles, say analysts. An analyst with a domestic brokerage says, "This is not a structural issue, the impact on FY18 earnings estimates (assuming exports, sales at a discount till April 1) will be marginal. Companies though will need to take a one-time exceptional hit in the March and June quarters."
 
Given the short-term pain, most analysts believe the weakness in auto stocks should be bought into as sales would perk up going ahead. Analysts say BS-VI norms (applicable from January 2020) will be a bigger challenge given the higher costs involved. Brokerages indicate that emission and safety norms would also benefit auto-part companies such as Wabco and Bosch.