Commercial vehicle makers to gain the most from FM Sitharaman's measures

Tata Motors, Ashok Leyland key gainers; infra boost, consumption uptick needed for trend reversal

The slew of measures for the auto sector announced by Finance Minister Nirmala Sitharaman on Friday is expected to benefit the medium and heavy commercial vehicle (M&HCV) segment the most. The segment is the worst affected by the slowdown due to falling freight rates, which hit a three-year low, credit squeeze, higher costs and relaxation of axle load norms. These factors led to a 48 per cent year-on-year (YoY) fall in M&HCV volumes in July, the highest for any segment in the auto sector. 

The key benefit for M&HCVs are the measures aimed at improving liquidity for micro, small and medium enterprises (MSMEs). Goods and services tax refunds, measures to improve credit support to banks and non-banking financial companies, cheaper working capital and lower equated monthly instalments should all help the cash flow for fleet operators. 

Jay Kale of Elara Capital says: “The release of delayed government payment to contractors should be a positive, though effective percolation from contractors to fleet operators would need effective monitoring.”

Elara Capital in a report had identified government slower fund release for infrastructure projects, flip-flop on government policies towards a ban on overloading and rising costs due to compliance, insurance and down payment as the key factors that had led to extreme stress on fleet operator profitability and their inability to repay or delay bank instalments. 

Higher depreciation is also beneficial to the sector. “The increase in depreciation from 15 per cent to 30 per cent will help both H&HCV and commercial passenger vehicle (Ola, Uber) segments. However, the benefits in terms of sharp volume uptick will come through only if the same is accompanied by higher infrastructure spends and an uptick in consumption demand.”  says Prayesh Jain, executive vice president at YES Securities. 

These measures should give a much-needed boost to sales of Tata Motors, Ashok Leyland and Volvo-Eicher commercial vehicles, which together account for three-fourths of M&HCVs sold in the country. Analysts say auto component companies, both tier 1 and tier 2, which cater largely for the commercial vehicle sector such as Bharat Forge, Bosch, and Wabco, Jamna Auto will also benefit from this move.

The decision of the government to lift the ban on the purchase of new vehicles for replacing old vehicles is expected to benefit the passenger vehicle sector. While it is not clear which departments would benefit from the same, analysts say that simultaneous orders from various government departments at the Centre (including the defence services) and state could lead to a spike in orders for utility vehicles. While the current proportion of government orders to the overall volume is low single digit, a spike will benefit Mahindra & Mahindra, Maruti Suzuki and Tata Motors. Though the introduction of a scrappage policy is on the cards and should help all segments, analysts believe that lack of scrapping centres is a limiting factor. 

While most of these measures are positive and will improve the sentiment on the Street, the issue, according to analysts is not about liquidity or prices but about prospects of the economy. An analyst at a domestic brokerage says: “The key worry for consumers both for passenger transport (two-wheelers, cars) or commercial vehicles (trucks, car aggregators) is not about higher costs (insurance, registration) or axle load norms or transition to BS-VI, it is the growing uncertainty on future income growth. This prevents them from committing upfront investment and purchase.” 

While tax-related sops are unlikely, if the situation does not improve in the near term, the government, according to experts will be forced to cut goods and services tax on segments such as two-wheelers and commercial vehicles, which may not fall under the definition of “luxury” goods.