Sales of two-wheelers and passenger cars could see a spurt once salaries of government employees are hiked following the seventh pay commission's recommendations. The panel's suggestions are set to be adopted by the union cabinet on Wednesday and should boost the fortunes of manufacturers at a time when demand, in the rural markets, is yet to revive.
“With the states and PSUs also set to effect similar hikes, we see a permanent fiscal stimulus of $50 billion over the next two years, with significant multiplier effect on GDP. This should boost consumption, reduce slackness in the economy and step up investment demand. Large consumer discretionary names are likely to be the top gainers in this scenario,” said Religare Capital Markets in a flash report.
Volumes of motorcycles and small cars have remained subdued over the past one year and should see a pick up, say analysts, once disposable incomes of government employees go up.
“Almost 89% of the central government employees are in lowest rung Group C. Further, 53% of the central government employees reside in rural markets and 44% of them are under 40 years of age. While 7th CPC might not be as beneficial due to the absence of arrears, we believe it would still boost demand for two-wheelers especially in rural markets,” said Jinesh Gandhi and Aditya Arora of Motilal Oswal in a note on the sector.
According to report prepared by Credit Suisse, the 6th Pay Commission which was implemented in Aug 2008 resulted in almost a 10-fold increase in Maruti's sales to government employees between FY08 and FY12. The share of sales to government employees rose in this period from 2% to 15% of total sales.
The seventh pay commission (CPC) has recommended a hike of 25% across categories and would influence over 17.5 million public sector employees including state government, central and state public sector units (PSUs) in the coming few years.
The last pay commission came with arrears of almost two years which also boosted consumption. This time the arrears will be given for eight months and to recover the lost volumes companies may have to wait for a couple of quarters.
In FY 16 Maruti Suzuki’s largest selling car Alto saw its volumes decline by 0.40% to 2,63,422 units when compared to 2,64,492 units in FY 15 as consequence of lack of demand in the rural areas. The entire small car segment of Maruti which still constitutes 22%- 25% of the total volumes - saw a small increase of 1.7% in the last fiscal year. The Gurgaon based company still gets 35% of its volumes from the rural market.
Motorcycle volumes also declined by 0.23% to 1,07,00,466 units during the last fiscal year. Hero Motor Corp – India’s biggest two wheeler manufacturer- was adversely impacted as 50% - 55% of the total volumes came from the rural markets.
“The seventh pay commission will help the make A and B segment cars recover the volumes as 50% of the government employees stay in the rural corners. Also companies like Hero, TVS and Bajaj are also set to benefit from the increased income of government employees,” said as automotive analyst with an institutional brokerage firm.
Since the recommendations are set to be implemented from August, the automobile industry is gearing up for a healthy festival period. Companies like Tata Motors have already launched schemes for government employees.
According to experts, the pay hike of government employees will provide an opportunity for companies like Tata Motors, General Motors, Honda, Ford and others to gain volumes as well apart from the top three car makers.