Auto: Excise duty retained at 8% for most vehicles

Cut in specific excise duty on large cars of engine capacity 2000 CC and above by Rs 5000, levy of service tax on transport through rail, coastal cargo and through inland water.

Budget highlights

• Reduction in the excise duty of petrol driven trucks from 20% to 8%
• Reduction in excise duty on chassis of petrol driven trucks from '20% + Rs 10,000' to '8% + Rs 10,000'.
• Retention of the excise duty on 2 wheelers, 3 wheelers, small cars and diesel driven commercial vehicles at 8%.
• Reduction in excise duty applicable to large cars of engine capacity 2000 cc and above from 20% + Rs 20,000 per vehicle to 20% + Rs 15,000 per vehicle.
• Service provided in relation to transport of goods by rail
• Service provided in relation to transport of coastal cargo; and goods through inland water including National Waterways
• Increased outlay for Defence to Rs 141,703 crore in 2009-10.
• Increase in the allocation to National Highways Authority of India (NHAI) for the National Highway Development Programme (NHDP) by 23%.
• Increased allocation under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) by 87% to Rs 12,887 crore in 2009-10.
• Increased allocation for National Rural Employment Guarantee Scheme by 144% to Rs 39,100 crore in FY 2009-10.

Budget expectations not met

• Lowering the excise duty on large cars.
• Extension of the 50% accelerated depreciation on new trucks for financial year 2009-10.
• Extension of the deadline of bus purchases under JNNURM scheme beyond 30th June 2009.
• Reduction in the interest rates by banks and easy availability of credit to boost sales.

Budget Impact

Though commercial vehicle industry is improving sequentially, it is still the sole auto segment to not have bounced back with y-o-y growth in its sales. In this scenario, retention of excise duty on diesel driven commercial vehicles at 8% is a relief. Also reduction in excise duty of petrol driven trucks and its chassis is a boon for the commercial vehicle industry as it would notably reduce the cost of the petrol driven trucks thereby lifting its sales.

On indirect basis, a portion of the increased funds for the defence purpose could be utilized to order defence vehicles. Thus it could benefit ALL, Mahindra & Mahindra and TM that manufacture defence vehicles. Further road development could lead to demand for construction products such as tippers.

The retention of the current excise duty at 8% for 2 wheelers, small cars, 3 wheelers is relief as it enabled the auto sales to continue at its existing momentum. Also Union budget's focus on development of agricultural sector augurs well for companies such as Hero Honda and Maruti that are focusing on the rural market.

On flip side, the retention of excise duty on large cars and insignificant reduction in its specific excise duty component would hardly suffice any change in already dull sales of large cars. Thus its impact is minimal on utility vehicle players such as Mahindra & Mahindra.

Now service tax will be levied on transport of goods by rail and also for transport of coastal cargo, goods transported through inland water and national waterways.  This can increase marginally the freight cost of the auto sector.  But it can lead to increase in the share of goods carried by roadways, and can especially benefit the commercial vehicle sector. 

The hike in Minimum Alternate Tax (MAT) from 10% to 15% is an irritant for the corporate sector.  On the positive side, this hike has come with a benefit of extending the period allowed to carry forward the tax credit under MAT from seven years to ten years.  

Also, the hike in MAT will not be earnings dilutive but will only be cash flow dilutive.  The increase in liability towards MAT will be matched by an incremental deferred tax credit.  Hence, the net profit or EPS of a company will not change due to hike in MAT from 10% to 15%.  But it will mean increase in cash outflow, and if the company is not returning to profits as per Income tax act within ten years, then it may have to forego them. 

So, from a current year(s) point of view, increase in MAT from 10% to 15% is not earnings dilutive but cash flow dilutive.  On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.

Companies to watch

Tata Motors, Ashok Leyland, Eicher Motor, Hero Honda, Maruti Suzuki

Outlook

The retention of the excise duty on most of vehicles is relief for the auto industry. However, what would drive the auto sales in the long term is the focus on undeterred rural demand and infrastructure growth. Positively, these two broader options has been the dual focus of the Union Budget 2009-10.

The possibility of slight improvement in the share of roadways due to levy of service tax on transport of goods by rail, coastal cargo, inland water including national waterways is not ruled out.  But even road freight rates have moved up due to hike in petrol and diesel prices. Thus the outlook on auto is neutral with positive bias.