March 22, 2002

Auto Sector: Karnataka gives a boost

We have been positive on the auto sector for sometime now. While we are not sanguine about any sustainable economic recovery, our positive bias (to borrow from the lexicon of the RBI Governor) towards the auto sector has been based on the following:

• Availability of abundant and cheap finance to consumers in the urban sector and also rural credit (Kisan Credit Card etc.)

• In commercial vehicles a shift towards higher tonnage and multi-axle vehicles as road conditions improve and efficiency of goods movement comes into focus

• Regulatory changes like pollution norms, limit on the age of vehicles that can ply on roads and ban on overloading

The above has resulted in good sales volumes from most of the auto majors. Of course, recent decline in diesel consumption remains a cause for concern especially if the slowdown is accentuated in the next fiscal. To come back to our main theme of regulatory changes, the first change came in Delhi thanks to the Supreme Court. Now comes the news that the Karnataka government has also initiated measures that will likely give a boost to commercial vehicles (LCVs and MCV/ HCV).

The Karnataka government has said that no vehicle older than 15 years would be allowed to ply within the metropolitan area of Bangalore. This essentially means that all the old commercial vehicles used for goods transport or transport of passengers would have to stop outside the metropolitan limits. The recent state budget has additionally imposed a "green tax" on non-transport vehicles with more than 15 years of age and transport vehicles with more than 7 years of age. The "green tax" should be substantial enough to push people to discard the older vehicles or sell them in the semi-urban and rural markets (because resale prices of these vehicles within Bangalore will plummet) and switch to new vehicles. Thus, demand for commercial vehicles should remain firm.

I also foresee a booming market for cars in the semi-urban and rural markets, as it becomes cheaper for consumers in these areas to purchase second hand vehicles. Maybe leading auto companies will give attractive exchange offers in the metro and then sell the same vehicles outside the metros at cheaper rates with some warranty and service guarantees. This could be similar to the boom in the television industry witnessed a few years back – exchange schemes and what not. A moot point is whether motorcycle sales would be affected! However, if the "green tax" is not substantial, then the policy would be a non-starter.

Close on the heels of the Karnataka government, similar moves are expected from the Maharashtra government. Already the transporters in Maharashtra have been on strike for the last five days. Transporters themselves may not have much choice – apart from regulatory changes, even companies are demanding that transporters upgrade their fleet. Said an official of one of the largest cement companies in the country, "We are moving most of our goods only through large fleet operators and are telling them to use only higher tonnage vehicles and to ensure quick turnaround. All this is to improve efficiency and save costs". All in all these seem to be happy days for auto manufacturers. And as an investor go ahead and BUY Tata Engg, our top pick in the sector.

Auto sell off: Is diesel consumption the culprit?

Courtesy : India Infoline

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