India Autos & Auto Parts-Excise Duty Cuts, A Positive for Demand Revival
Quick Comment: As part of the interim budget, the government has announced excise duty cuts across segments which in turn will lead to price cuts for consumers in the range of 3 to 5%. The lower duty is effective till June 30, 2014, and the new government will take a call on future extension. We view the duty cuts as positive for the sector and MSIL, MM and HMCL should be the key beneficiaries.
The news: Excise duty is reduced for the period up to 30.06.2014 across segments (Exhibit 1) and OEMs are expected to cut prices to pass on the benefits of duty cuts. The excise duty cuts were announced as follows:
1) Small cars, motorcycles, scooters and commercial vehicles - from 12% to 8%.
2) SUVs - from 30% to 24%.
3) Mid and large segment cars – from 24%/27% to 20%/24%.
If you pay then you gain: Effective excise duties differ across players (Exhibit 2) for a variety of reasons, thus the level of benefit that OEMs can pass on to consumers via price cuts will also differ. For instance, as MSIL pays full excise duty on domestic sales, its products will see full benefit of price cut, but for HMCL, since 30% of its sales come from excise exempt locations, the benefits that it can offer via price cuts will be capped accordingly.
On MHCV side, increased discounts have not improved sales as demand is weak and thus we don’t expect an uptick on account of duty cuts. Overall within our coverage, we expect the key beneficiates would be MSIL, MM and HMCL. Consumer demand likely to pick up for 4 months:
The duty cut is applicable till end-June, after which the new government will take a call on future extension. To benefit from lower rates, we believe consumers will bring forwards their purchase plans, so the first three months of FY15 should see better volume traction. Given low visibility on future extension, we maintain our full-year earnings and volumes estimates across our coverage.
The news: Excise duty is reduced for the period up to 30.06.2014 across segments (Exhibit 1) and OEMs are expected to cut prices to pass on the benefits of duty cuts. The excise duty cuts were announced as follows:
1) Small cars, motorcycles, scooters and commercial vehicles - from 12% to 8%.
2) SUVs - from 30% to 24%.
3) Mid and large segment cars – from 24%/27% to 20%/24%.
If you pay then you gain: Effective excise duties differ across players (Exhibit 2) for a variety of reasons, thus the level of benefit that OEMs can pass on to consumers via price cuts will also differ. For instance, as MSIL pays full excise duty on domestic sales, its products will see full benefit of price cut, but for HMCL, since 30% of its sales come from excise exempt locations, the benefits that it can offer via price cuts will be capped accordingly.
On MHCV side, increased discounts have not improved sales as demand is weak and thus we don’t expect an uptick on account of duty cuts. Overall within our coverage, we expect the key beneficiates would be MSIL, MM and HMCL. Consumer demand likely to pick up for 4 months:
The duty cut is applicable till end-June, after which the new government will take a call on future extension. To benefit from lower rates, we believe consumers will bring forwards their purchase plans, so the first three months of FY15 should see better volume traction. Given low visibility on future extension, we maintain our full-year earnings and volumes estimates across our coverage.