Higher duties may hurt margins of auto companies

CV firms to gain the most from scrappage policy, 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 7.5-10 per cent could lead to higher costs for automakers. Though these measures would encourage localisation in the long term, Saurabh Agarwal, tax partner, automotive sector, EY India believes that there can be some pressures in the near term as auto part makers pass on the higher import duties. Though annual auto imports are pegged at ~2 trillion, only half of these are impacted as the rest are covered under the FTA agreements, which offer differential rates.

Given the higher input cost, margins of automakers (depending on their localisation level) can come under further pressure. Most automakers had indicated after the December quarter results their inability to fully pass on the cost of inputs over concerns that such a move may 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 are among the key gainers over the last two sessions, given a slew of proposals related to investments in road infrastructure and the 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 that are over 15 years are scrapped. The beneficiaries will also include ancillary companies, such as Bharat Forge, Bosch, and Apollo Tyres. While the scheme is also applicable to passenger vehicles, the impact is expected to be minimal as there are only a few personal vehicles that may be operating beyond 20 years.

In addition to scrappage, the government has announced a ~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 may help commercial vehicle players is the awarding of 8,500 km of highways in FY22 which is expected to improve efficiency and profitability of fleet operators.