• BUDGET 04 COVERAGE
  • Get More Info
  • STOCKSELECT
  • COMPANY FOCUS
  • SECTOR FOCUS
  • RELATED VIEWS
  • SECTOR REPORT

  • Related Companies
  • MARUTI SUZUKI
  • TATA MOTORS
  • M&M
  • Views Search

    Portfolio Tracker
  • VIEW PORTFOLIO
  • Equitymaster.com : Auto: Unfurling the excise cut!
     
  • PRINT THIS
  • E-MAIL THIS
  • FEEDBACK
  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  FEBRUARY 28, 2006

    Auto: Unfurling the excise cut!
    BUDGET SECTOR QUOTES | MYSTOCKS | FREE NEWSLETTER

    In the Budget 2006-07, the Finance Minister announced a reduction in excise duty on manufacturing of compact cars (engine capacity upto 1,200 cc (for petrol cars), 1,500 cc (for diesel cars) and measuring upto 4,000 mm in length). In this article, we shall try to understand whether such a reduction in excise is actually beneficial to the auto company and if yes, to what extent.

    A highly taxed sector
    The Indian automobile industry is amongst the highly taxed ones. To put this in perspective, all passenger cars attract excise at 24% (pre-budget), sales tax at 12% (on excise as well as freight, thus creating a cascading effect), road tax in the range of 4% to 11% (rising with car costs) and octroi. Further, with the customs duty on components thrown in, the taxes together account for over half of what a customer pays for a car. Another interesting fact to note is the correlation of a reduction in excise duty with the growth in volumes. (see chart below)

    Companies that are likely to benefit the most are Maruti and Tata Motors (the listed companies). It should be noted that compact cars account for around 75% of the volumes of the passenger car industry. Assuming that the cost of producing a car is Rs 0.2 m and the on-road price is Rs 0.3 m, an 8% reduction in excise will straightway result in an Rs 16,000 reduction in prices (or 5% of the selling price). This is assuming that the manufacturers pass on the entire benefit to the consumers.

    What can be the potential effect of the reduction?
    For the purpose of this article, we have restricted ourselves to the volume numbers of Maruti, as it is the leader in the passenger car segment with a 54% market share. Almost 70% of the company’s total volumes in FY05 were accounted by the compact car segment. Further, we have extrapolated FY05 and FY06 volume numbers to assess the impact of the change in the duty structure. Another assumption is that the company will pass on 80% of the benefits to the consumers. Similarly, as far as price elasticity is concerned, we have relied on the study conducted by National Council of Applied and Economic Research (NCAER). As per its report, the price elasticity is 1.8 times, indicating a change in demand by 1.8 units for a change in price by 1 unit. Thus for a 4% reduction in price of the vehicle, the additional demand should increase by around 7.2%. Translating these into numbers, we get the following picture. Earnings growth (all other things remaining the same) will be augmented by 11% in the case of Maruti (based on FY05 earnings).

      FY05 FY06
    Incremental units 29,066 30,476
    Incremental sales (Rs m) 9,214 10,640
    NPM 7.8% 8.8%
    Incremental earnings 719 936
    No of shares (m) 289 289
    Incremental EPS 2.5 3.2
    EPS (FY05) 29.5 29.5
    % increase in EPS 8.4% 11.0%

    Thus, in our opinion, the excise reduction should benefit the company. This is just a sensitivity analysis and not intended at recommending a stock.

     Research ReportsTop 100 Indian companies with Buy/Sell price limits
     StockSelectBuy/Sell recommendation every week in your mailbox
     Mid-Cap SelectBuy/Sell recommendation every fortnight in your mailbox
     FundSelectMutual Fund Advisory with downloadable database

    More Views on News

    Tata Motors Ltd: Another Disappointing Quarter, Management fails to Perform! (Quarterly Results Update - Detailed)

    Aug 14, 2017

    Tata Motors Ltd disappoints again for both India and JLR business. Management commentary indicates a slow year ahead.

    Maruti Suzuki Ltd: Bumpy First Quarter. GST dents Margins! (Quarterly Results Update - Detailed)

    Aug 2, 2017

    GST realted cost impacts Margins, Management expects good year ahead.

    Hero Motocorp Ltd: Riding on the Scooters Growth, Maintains Margins! (Quarterly Results Update - Detailed)

    Aug 1, 2017

    Good Recovery in the Scooters market, expects pick up in exports too.

    Bajaj Auto Limited: Recovery in Exports but Domestic Disappoints! (Quarterly Results Update - Detailed)

    Aug 1, 2017

    New Export Markets picking up, Management expects good recovery in domestic Three wheeler market.

    Bajaj Auto Limited: Finishes the Year with Headwinds. Poised for a Recovery Ahead? (Quarterly Results Update - Detailed)

    Jul 6, 2017

    Ends the year on a Flat note. Expects good recovery in the exports market.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
     

    © Equitymaster Agora Research Private Limited
    www.personalfn.com | www.equitymaster.com
    Why Personalfn? | Why Equitymaster? | Terms of Use | Contact Us | About Us