Budget F2013? excise duty hiked, no diesel duty: In the annual Budget the finance minister raised the excise duty. However, contrary to our expectations the new Budget did not impose any diesel duty on cars and UVs (utility vehicles). All auto segments will see 2-3% price hikes, but MHCV (medium and heavy commercial vehicles) chassis will see sharp 4-5% price hikes. Pure MHCV plays like Ashok Leyland are likely to be adversely affected by this. MSIL (Maruti Suzuki India Ltd) and M&M (Mahindra & Mahindra) should benefit as contrary to market expectations, there was no diesel duty hike.
Prices will go up across segments by 2-5%: We expect OEMs (original equipment manufacturers) to pass the excise hike to consumers, which will protect margins/earnings. Given the increased chassis duty, the non-fully built MHCVs (60-70% of market) will see 4-5% price hikes, and thus growth in coming months is likely to slow. Other segments will see 2-3% price hikes and we do not expect that to dampen demand?although it will restrict OEMs? ability to hike prices in case the recent rally in commodity prices continues.
OEMs based out of excise exemption locations benefit: As the industry takes a price hike, the OEMs based out of excise exemption locations should benefit as they take price hikes even though they do not pay excise. Key beneficiaries we see here are Hero Motors and Ashok Leyland. If the companies can retain full benefit, which we doubt in the case of Ashok, then we could see earnings upside of 3-4%.
The new excise structure, other key points: (i) Excise duty rises 2% across vehicle categories: For Sedans and UVs longer than 4 metres, the duty has risen from 22% to 24%. For Sedans and UVs longer than 4 metres and >1500cc, the duty has risen from 22% +R15k per unit to a flat rate of 27%, implying an effective hike of 3%. We believe most of M&M?s UV portfolio will see a 3% price hike.
(ii) Imported luxury cars become more expensive: Basic customs duty on CBUs (completely built units) of cars with FOB value more than $40,000 and with engine capacity more than 3000cc for petrol-run vehicles and more than 2500cc for diesel-run vehicles is being increased from 60% to 75%.
(iii) The weighted deduction of 200% for R&D expenditure in an in-house facility was extended beyond March 31, 2012, for a further period of five years. This is positive for entire sector.
(iv) MHCV chassis duty increased from 10%+R10k and 22%+R10k to 15% and 25%, respectively. In addition, MHCVs will also see a 2% additional excise duty. Fully built MHCVs prices will rise 2% and non-fully built (60-70% of market) will see 4-5% price hikes. We see this as a negative for MHCV players like Tata Motors and Ashok Leyland.
(v) Basic customs, additional customs duty and special additional duty of customs (SAD) on specific parts of hybrid vehicles were reduced from 10% to nil, 10% to 6% and 4% to nil, respectively.
(vi) The Budget saw some relief on the income tax side, with the basic exemption limit increased from 180k to 200k, and the upper limit of the slab applicable for a 20% tax increased from 800k to 1mn, which we expect will be sentimentally positive for consumers.
?Morgan Stanley Research
