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Autos: Likely policy benefits? - Views on News from Equitymaster
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  • Dec 11, 2000

    Autos: Likely policy benefits?

    Share prices of automobile companies have attracted buying interest in the last few trading sessions. This being despite no good news on the volume front for the month of November 2000. The trigger has been the likely auto policy which would continue to protect the Indian automobile segment by hiking import tariffs and then phasing them out in a four year period starting April 2001.

    This will come as a big relief to all automobile manufacturers as earlier they were expecting a drop in import duties from April 2001 onwards. The earlier expected reduction in tariffs along with the fact that the domestic demand scenario over the past year has been miserable, has led to a sharp decline in valuations of automobile companies.

    The main tenets of the expected policy are as follows:

    • Import tariffs are likely to be raised for commercial vehicles, cars and CKD/SKD kits. The hike in motor cars would be the steepest from 35% currently to 100% in the following year. These would then be phased out over a four year period.

    • The small car segment is likely to get a further incentive as the excise duty rate for cars having a length size of less than 3.7 metres is to reduce by 8%, so as to promote this segment. Currently the excise duty rate on cars is 40%. This would benefit all small car manufacturers like Telco, Daewoo, Hyundai and Maruti.

    • The whole aim of the policy is to protect Indian companies from cheaper second hand imports. It has also laid down minimum foreign equity limits for different segments. The minimum investment limit for motor cars is to be US$ 250 m, for commercial vehicles is US$ 100 m and for 2 to 3 wheelers is US$ 25 m. This minimum amount would have to be brought in by the majority stakeholder within three years of starting operations. This aims at protecting both domestic and foreign players who have already set up base here. However as many of the large international players especially in the car segment have already set up base here, this would not benefit the existing players to a large extent.

    Telco's share price has been attracting more buying interest as compared to others like Mahindra & Mahindra or Bajaj Auto, as it is to be big a beneficiary of the above policy. The reduction in excise duty will boost sales of its small car the 'Indica' and also the hiking of import tariffs will protect it from cheaper second hand imports. Besides its likely tie-up with an international car manufacturer has also generated buying interest. Its commercial vehicle business continues to be dull, with no signs of an improvement. From April to October 2000 its heavy and medium commercial vehicle volumes fell by 25% YoY.

    The government seems to be going all out to woo the automobile sector. Before reaching the April 2001 deadline given by WTO to phase down import tariffs, it is hiking the import tariffs upwards. This move would definitely help manufacturers to come out of the current recession in the sector as the hike in sales tax in the current year, oil price hike and the overall slowdown in sectors has taken their toll on the domestic industry.



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