The automotive industry, one of the sectors worst affected by the economic slowdown in the nation, eagerly awaits the Union Budget this year. The sector, that employs over 35 million people in India and accounts for nearly half of India's manufacturing output, reported worst-ever sales to decline in two decades during 2019.
Shares of automobile industry companies have also taken a beating down, due to weak market sentiment and an increase in the cost of the acquisition, leaving auto manufacturers with no choice but to halt production to adjust inventory levels, causing massive layoffs of workers.
Having shown no signs of recovery over the recent months due to an overall industry slump, the Auto index on NSE too has stayed flat for the past one year.
Besides this, weaker economic growth, that is directly proportional to buyers demand has also affected the overall 2- wheeler and 4-wheeler industry. While car sales in India fell 19% last year, sales of two-wheelers fell 14% and sales of trucks dropped 15%. Besides this, the industry is also gearing up for a shift to stricter emission norms from April 1, 2020, that will further hurt consumer demand due to the rise in prices of vehicles by 8% to 10%. This, in turn, has caused an unprecedented slowdown of demand for vehicles across segments.
The industry, this budget has sought measures such as reduction in GST rates on vehicles, incentive-based scrappage policy, increase in re-registration charges of vehicles and the abolition of duty on import of lithium-ion battery cells to encourage electric mobility.
FULL COVERAGE:Union Budget 2020
Recently, the Society of Indian Automobile Manufacturers (SIAM) also indicated a flat demand for 2020 in the auto industry. Rajan Wadhera, President of SIAM said, " We have urged the Finance Ministry to consider announcing an incentive-based Scrappage Policy and also increase budget allocation for ICE bus procurement by state transport undertakings. Increased cost of BSVI may affect demand, hence we have also requested the Government to reduce GST rates for BSVI vehicles effective 1st April from 28% to 18%."
Commenting on initiatives to kickstart demand in the automotive sector, Kavan Mukhtyar, Partner & Leader - Automotive at PwC India pointed out measures such as reduction in the Goods and Services Tax (GST) for automobiles to 18% from 28%, incentive-based vehicle scrappage policy to remove old vehicles off the roads and trigger demand for new vehicles, removal of customs duty of 5% on Lithium-ion cells to promote local manufacturing of batteries and allocation of budget for state transport undertakings to boost demand for commercial vehicles.
Speaking on the budget expectations from premium motorcycle manufacturer's perspective, Shoeb Farooq, GM, Triumph Motorcycles said "Premium Motorcycle industry is small and in its nascent stages in India and needs support to withstand these challenging times."
"We expect the budget to boost customer sentiment through rationalising GST rates to 18% on premium 2 wheelers from the current 31% so that it can absorb some of the impact on prices due to BSVI up-gradation and in turn revive demand," he added.
Besides these, revival steps such as support for setting up scrapping centres and cutting custom duty on key components used in EVs which are not manufactured in India and keeping it in the range of 10% has also been suggested by industry experts.
On the technical front, the recent trend in the auto index trend suggest that auto stocks are expected to consolidate and perform at par with the market as the index continues to underperform the benchmarks, ICICI direct research said in its report. In the recent trend, selling has been recorded in most of the indices including Auto, with India VIX, market volatility index, inching higher towards 17 levels.
Edelweiss in its latest report said that the sector is in the grip of one of the sharpest slowdowns in recent years. Some incentives from the government (scrappage policy, GST rate cut for BS-VI vehicles, etc.) are required to revive the sector. The report further said that the sector has been one of the few which did not receive any big relief so far. Clarity on details of scrappage policy as well as dates of implementation of the some could be a positive for trucking companies, while a roadmap for a reduction in GST rate is likely to be positive for two-wheeler companies.
"Stocks like Exide, Hero MotoCorp and Ashok Leyland offer a favourable risk-reward while Balkrishna Industries is likely to outperform," said Pankaj Pandey Head - Research Pankaj, ICICI Direct Research Desk, ICICI Securities Limited. While the auto index extended its breather for the third month, it remains in a base formation near 2015 lows, he added.
As per industry experts, steps towards increasing consumption could be a matter of focus in the upcoming budget as relief packages to ease the burden on stressed sectors such as auto, will indirectly aid in demand for discretionary and non-discretionary products. A host of consumption-linked stocks of the industry like M&M, TVS Motors, Bajaj Auto will benefit from such announcements, traders said.