In another important development, the Supreme Court (SC) yesterday banned the sale of vehicles which are not compliant with Bharat Stage (BS) IV emission standards which will be effective from 1 April 2017. This means automobile makers have just two days to dispose of hundreds of thousands of BS III vehicles.
This decision leaves automobile companies saddled with a large inventory of BS-III vehicles estimated to be worth Rs 60-70 billion at the end of the month. The below chart shows companies with an unsold inventory of BS III vehicles.
No doubt, automobile companies will feel the pressure as the move to ban BS III vehicles will have an impact on revenues and profitability. At this stage, it's difficult to estimate the exact impact. To minimise the damage, most of them will try to divert the vehicles to export markets. Likewise, these companies will offer higher discounts to clear the inventory. Also, it is important to note that low availability of BS-IV compliant vehicles could hurt commercial vehicle sales in the upcoming month.
This is the second major blow for the automobile industry from the SC in the past 15 months. In December 2015, the SC had imposed a ban on sales of diesel vehicles with an engine of 2,000 cc and above in the National Capital Region. This ban was lifted in August 2016.
Investors should consider the impact of regulatory risks such as the above while considering auto stocks for investment. We, at Equitymaster, rigorously follow Equitymaster Risk Matrix (ERM®). The risks are objectively evaluated via the ERM® score. This helps us keep our analysis objective and casts aside all pre-conceived bias.
Data Source: Business Standard