The auto sector in the country will witness continued volume growth. The demand environment continues to be favourable with the increase in finance availability at lower rate of interests. With favourable business dynamics, the auto companies should continue to post a decent growth going into FY2011, say industry analysts.
Though the volume growth is expected to continue, driven by strong economic recovery, growth in demand, pre-buying due to change in emission norms, increase in availability of finance and new product launches coupled with strong exports, the industry will be facing a few risk factors such as roll back of excise duty cuts, expected raw material prices and new emission norms, says an analyst with Sharekhan.
According to the analyst, the auto industry has benefited significantly after the excise duty cut announced early last year. However, any roll-back in the excise duty cut, as expected in the upcoming FY2011 Budget, could be negative for the auto companies.
Similarly, a sharp increase in the commodity prices is a key concern. Though it is expected that the increase in the raw material prices could be mitigated by price hikes, but it would be difficult for the auto manufacturers to pass on the full impact of the same to compensate for the rise in raw material prices, the Sharekhan analyst pointed out.
Echoing the similar sentiments, an analyst with Motilal Oswal Financial Services, said the industry is facing multiple headwinds in short-term. Factors such as change in emission norm to BS IV, in the top-11 cities, BS III in other parts of India from April 2010, will result in engine modification to comply with the new emission norms, thereby increasing vehicle costs.
Similarly, the possible roll-back in excise duty cut of 4%, which was offered as part of the government?s stimulus package in December 2008 and expected increase in the selling price of vehicles to partly offset raw material cost inflation, coupled with hardening in monetary policy, will result in higher interest rates for automobile finance, which in turn not well augur for the industry in short term, the Motilal Oswal analyst pointed out.
The Motilal Oswal analyst said continued volume growth will give the industry pricing power and support high operating leverage. Moreover, leading companies have undertaken cost reduction and productivity improvement programmes, which will dilute the impact of raw material cost inflation, thereby supporting higher margins. Besides, ramping up operations in tax-free zones like Uttaranchal will help to counter cost pressure through a lower tax burden for the industry.
