Post Budget Analysis For The Auto Sector: Bumpy Ride Ahead

The Auto sector was not hoping for any sops from the FM this time. One major fear was the probability that an additional excise duty would be imposed on Diesel cars to reduce the subsidy burden on diesel. But this has not happened and came in as a big relief for the sector. However, as expected, excise duty on cars has gone up from 10 per cent to 12 per cent. This is a negative for the sector as it will make cars costly. Manufacturers would pass on the increase in cost to customers. Also with the fiscal deficit pegged at 5.1 per cent of the GDP there is an underlying assumption that rate of interest would take some time to come down and this would impact the demand for auto products. In its latest monetary policy the RBI has not announced any cut in interest rate and this could mean a waiting period of at least 3-4 months before financing costs coming down. Investors would surely be aware that a significant portion of auto sales happens through the financing route.

Also we have a feeling that the government intends to increase prices of diesel and petrol as petroleum subsidy provided for in the budget papers is lower than what it was last year. This again means a negative for the sector. Since car sales haven’t done well in 2011-12 we believe auto companies have no positive takeaways from the budget.