The excise duty cuts are unlikely to revive demand in the near term.
Manufacturers of commercial vehicles (CV) including Tata Motors and Ashok Leyland have had had a rough ride these past few months with sales slumping by 40-- 50 per cent. They’re unlikely to bet on a big change in the marketplace even after the 2 per cent cut in excise duties to 8 per cent. That’s because the outlook for the economy remains uncertain and small price cuts aren’t really going to kick-start demand — Sheshagiri Rao, Finance Director at JSW Steel says he hasn’t seen auto makers or auto parts maker for that matter, buying more steel recently.
They’re unlikely to because even if the worst is over, the recovery hasn’t really been strong enough. While companies rolled out many more vehicles in January than in December — the increase for Leyland was 43 per cent while for Tata Motors it was 22 per cent — a year on year comparison reveals a fall in volumes.
However, even that is good news because it would mean better numbers from these companies in the March 2008 quarter. In the December 2008 quarter, Leyland’s net sales fell 44 per cent while the fall for Tata Motors was less steep at 35 per cent. Both firms, however, saw poor operating profit margins-- for Tata Motors they were just 2 per cent while for Leyland it was at 6.8 per cent. With the cost of raw materials easing, margins should improve and lower interest rates would help net margins.
However, ultimately it’s only an indication that sales are picking up that can drive a re-rating in these stocks. Tata Motors, at Rs 132, may be trading at close to seven year lows but the Street is anxious that the consolidated earnings might be dragged down by losses at JLR. Besides, analysts are concerned about the high levels of debt on the balance sheet. Leyland too is expected to see volumes fall in 2009-10 which is why the stock seems expensive even at 7.5 times estimated 2009-10 earnings.
