AUTO-20120227-MOSL-SU-PG012

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Sector Update | 27 February 2012 Automobiles Policy changes pose potential headwinds in the near-term FY13 growth estimates for PV segment could be in jeopardy    Likely increase in excise duties and fuel prices pose potential headwinds. Diesel tax would impact consumer preference, driving market share normalization in cars. We prefer Tata Motors and Maruti Suzuki. Within 2Ws, we like Hero MotoCorp. Regulatory actions/policy changes pose potential headwinds in the near-term: We believe the
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  Jinesh Gandhi  (Jinesh@MotilalOswal.com); Tel: +91 22 3982 5416 Mansi Varma (Mansi.Varma@MotilalOswal.com); Tel: + 91 22 3982 5418 Regulatory actions/policy changes pose potentialheadwinds in the near-term:  We believe the likelyincrease in excise duties in the budget and hike in fuelprices post the state elections pose potentialheadwinds for the automobile industry in the short-term. With significant increase in dieselization of passenger vehicles (PVs), there has been a risingdemand for levying a diesel tax of up to INR80,000/caron diesel cars which could increase prices by up to 20%.Also, there are expectations of an increase in generalexcise duty by 2% in upcoming budget. Lastly, significantunder-recoveries in fuel prices could result in bothpetrol (INR2.5/liter under-recovery) and diesel(~INR12.3/liter) prices rising by INR2-3/liter, post stateelections in March 2012. Diesel tax would impact consumer preference: Increasing petrol prices and the widening differentialbetween petrol and diesel prices resulted in increaseddieselization of PVs in FY12. Sales of diesel cars grewby robust ~37% during 9MFY12. The imposition of adiesel tax and/or increase in diesel prices could reducethe preference for diesel vehicles, as it would increasethe pay-back period. FY13 growth estimates for PV segment could be in jeopardy: The PV industry’s volume growth in FY13could be jeopardized as the occurrence of thesemultiple events simultaneously could result in furtherdeferment of demand. While the levy of a diesel taxwould hurt demand for diesel PVs, increase in excise Automobiles Sector Update | 27 February 2012 Policy changes pose potential headwinds in the near-term FY13 growth estimates for PV segment could be in jeopardy  Likely increase in excise duties and fuel prices pose potential headwinds.  Diesel tax would impact consumer preference, driving market share normalization in cars.  We prefer Tata Motors and Maruti Suzuki. Within 2Ws, we like Hero MotoCorp. duty and hike in fuel prices would hurt both diesel andpetrol cars. We estimate domestic PV volume growthto be flat to -5% in FY13 if both these events occur (v/scurrent estimate of 12-15% growth). Market shares could normalize: The increased demandfor diesel cars benefitted car manufacturers like Ford,GM and Hyundai with relevant diesel car portfolio in9MFY12, especially since Maruti Suzuki was hamperedby labor issues. The imposition of a diesel tax and hikein fuel prices, coupled with stabilization of productionat Maruti and Honda, could result in normalization of market shares. Maruti’s market share in domestic carsales (overall) declined ~770bp to ~41.7% in 9MFY12. Itlost ~510bp to 47.8% in the non-diesel segment and~830bp to 31.8% in the diesel segment. Valuation and view:  We believe the two-wheeler (2W)segment would be least impacted by these near-termheadwinds. The levy of a diesel tax could turn out to beblessing in disguise for Maruti. This is because asconsumer preference for diesel cars wanes, Maruticould see its market share recovering. M&M’s UVvolumes could be impacted as a diesel tax would hikethe cost of UVs by up to ~15%. Passenger UVs constitutes~29% of M&M’s total volumes. While ~23% of  TataMotors’ standalone volumes could be affected by thediesel tax, the overall impact on its consolidatedperformance would be negligible. We prefer TataMotors and Maruti Suzuki . Within 2Ws, we like HeroMotoCorp . Financials and valuations Volume gr. (%)EPS (INR)EPS Gr. (%)P/E (x)P/CEPS (x)EV/EBITDA(x)P/B(x)RoE (%)FY12EFY13EFY12EFY13EFY12EFY13EFY12EFY13EFY12EFY13EFY12EFY13EFY12EFY13EFY12EFY13E Bajaj Auto15.114.4110.4124.622.112.915.513.714.913.210.58.610.17.555.647.8Hero Honda16.113.1119.6140.118.917.216.213.814.512.69.97.913.19.860.653.6Maruti Suzuki*-13.815.851.573.9-37.543.724.417.014.410.912.18.42.62.49.312.1Mahindra*22.010.542.556.4-1.79.016.412.3--7.76.52.01.720.919.6Tata Motors*#9.711.021.123.928.19.112.310.91.11.11.30.90.90.640.431.9*Consolidated; #Normalized EPS (for R&D capitalization)Source: Company/MOSL    227 February 2012Automobiles Regulatory actions/policy changes pose potential headwinds inthe near-term The automobile industry, especially the PV and CV segments, witnessed multipleheadwinds in FY12 in the form of rising interest rates and higher fuel prices, whichresulted in increased cost of ownership. As a result, FY12 growth is estimated at ~5%for PVs (flat for domestic cars, ~13% for domestic UVs, ~8% for domestic MPVs and~20% for exports) and ~14% for CVs (~10% for M&HCV and ~18% for LCVs). Whileinterest rates are expected to moderate going forward, there still exist potentialmultiple headwinds in the form of increased excise duty on cars and hike in fuelprices in upcoming Union Budget 2012 and post state election. We have brieflyelaborated on three potential regulatory/ policy actions expected in the short-term. 1.Imposition of additional tax on diesel cars (diesel tax): With significant increasein dieselization of PVs, there has been increasing concern about abuse of subsidizeddiesel by passenger cars and SUVs. There has been demand for levying a dieseltax from various quarters, including Ministry of Oil. However, Ministry of HeavyIndustries and SIAM have opposed this move and proposed increase in dieselprices. There has been recommendation of levying additional tax of upto INR80,000on diesel cars by Kirit Parikh Committee, Mr Jaipal Reddy, Oil Minister and Centreof Science and Environment. If levied, it could result in the cost of a diesel carincreasing by up to 20%.Levy of diesel tax of up toINR80,000 would resultin ~20% increasein diesel car cost Source Kirit Parikh Committee(Feb-10)Mr. Jaipal Reddy, Oil MinisterMr. Praful Patel,Heavy Industries MinisterSIAMCentre for Science& Environment Recommendation Additional excise duty of INR81,000 on dieselcars and SUVs (Based on erroneous data of 15% of diesel consumption by PV).As per media interview, the oil minister haspropsed to the Government to raise the exciseduty on diesel vehicles by INR80,000.As per media interview, the union heavyindustry minister has opposed Kirit Parikhcommittee’s recommended additional exciseduty on diesel cars.Opposed the additional duty as it willstigmatise diesel technology.Recommends INR81,000 excise duty on dieselcars with engines less than 1,400 cc and doublefor larger cars. Remarks Result in increase in prices of diesel vehiclesby 5-17% and will therefore significantly reducetheir attractiveness, especially for entry leveldiesel cars.Result in increase in prices of diesel vehiclesby 5-17%.Status quo, aiding continuance of strong dieselvehicle growth.Status quo, aiding continuance of strong dieselvehicle growth.Demand for additional tax on diesel cars toreduce public revenue losses and publichealth costs. Snapshot of various recommendations on diesel tax Source: MOSL    327 February 2012Automobiles 2.Increase in general excise duty by 2%:  A widening fiscal deficit may force thegovernment to increase the general excise duty by 2% to 12% from the existing10%. The move would result in a total reversal of the 4% reduction in December2008 (post the Lehman Brother’s crisis). In February 2010, the government hadhiked excise duty by 2%. This increase would be on both diesel and petrol vehicles.However, there is another school of thought that argues that increase in exciseduty is unlikely in view of the impending implementation of the GST. While theexcise duty cut of 4% in December 2008 was key catalyst for demand recovery inFY10, the 2% excise duty increase in February 2010 did not adversely impact FY11volumes (which increased 23%). Trend in excise duty on automobiles Excise Duty (%)Rate of Excise duty on AutomobilesFeb-07Feb-08Dec-08Feb-10Feb-11 Cars - Specified small cars*16.512.48.410.410.4Cars - Others ^24.724.720.722.722.7Utility vehicles ^- 6-12 seater24.724.720.722.724.7-12 seater and above (excl. driver)16.514.410.412.414.43-Wheelers12.48.410.410.4Two-wheelers16.512.48.410.412.4Trucks (LCVs & MHCVs)16.514.48.410.412.4Buses (LCVs & MHCVs)16.512.48.410.412.4* Include cars with length not exceeding 4,000mm and engine capacity not exceeding 1,200ccfor petrol cars and 1,500cc for diesel cars.; ^ Addition excise duty of INR15,000 for enginecapacity of 1,500cc to 2,000cc, and INR20,000 for engine capacity above 2,000cc.Source: MOSL 3.Increase in fuel prices: With under-recoveries of oil marketing companies (OMCs)rising, the government might be compelled to increase prices of both petrol anddiesel in March 2012 (post state elections). The current under-recovery for petrolis ~INR2.5/liter and ~INR12.3/liter for diesel. According to media reports, thegovernment is contemplating an INR2-3/liter hike for both petrol and diesel. Risingfuel prices, especially for petrol, had a significant impact on FY12 domesticpassenger car demand (volumes remained flat). Differential in petrol and diesel prices is at its peak (INR/liter) Source: IOC/MOSL Fuel prices are expectedto increase by INR2-3/ltrpost state elections    427 February 2012AutomobilesSource: Company/MOSL Imposition of diesel tax would influence consumer preference Rising petrol prices and the widening differential between petrol and diesel prices inIndia resulted in acceleration of dieselization in FY12. As a result, sales of diesel carsgrew by a robust ~37% during 9MFY12. The imposition of a diesel tax and/or increasein diesel prices could impact consumer’s preference for diesel vehicles. A diesel taxof up to INR80,000/car could significantly reduce the attractiveness of diesel cars asthe pay-back period would increase from 2.4 years to 4.4 years. Further, a INR2/literhike in diesel prices would result in the break-even usage (for premium pricing of diesel vehicles) increasing to ~40,000km as against ~35,500km currently (v/s ~50,000kmlast year). Widening of fuel price differential has accelerated dieselization in IndiaUnder-recoveries based on current crude prices (INR/liter)Running cost of various fuels (INR/km) Source: Industry/MOSL
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