Education cess to impact auto sector

Status quo on the customs duty on new and second hand motor cars/two wheelers will continue to ensure that these remain out of the reach of many, which in turn will force the prospective customers to turn towards domestic companies

With no significant proposals being made, we believe the long-term fundamentals of the auto industry remains intact. Infact, if anything, the higher GDP growth rates targeted for the 11th plan and increased emphasis on infrastructure, the fundamentals are only likely to strengthen from here. All the growth drivers viz., higher discretionary incomes, favorable demographics, easy availability of credit and improved infrastructure have been emphasised enough and hence need to be elaborated upon any further. Thus, while depending upon the profile of the end users and the industry dynamics, some of the segments may witness increased cyclicality than others. Point to point, growth rates from a long term perspective are likely to be higher than what has being witnessed in the recent past.

We believe the impact of increase in education cess and dividend distribution tax will be felt across all the companies in the sector

As far as the company specific impacts are concerned, tractor players like M&M and Punjab Tractors stand to benefit from the government's target of bringing around 50 lakh more farmers under the banking system

SIAM (Society of Indian Automobile Manufacturers) pre-budged memorandum

Uniform rate of excise duty on all passenger vehicles i.e., passenger cars, MPVs (multi-purpose vehicles) and MUVs (multi-utility vehicles) of 16%.

Retention of current level of customs duty for CBUs of passenger cars, two and three wheelers. Delinking of tariffs for CBUs of commercial vehicles from other tariffs.

Benefit of weighted deduction of 150% of R&D expenditure u/s 35 (2AB) of Income Tax Act, which is to expire on March 31 2007, be extended for a period of 10 years not only in order to meet the new standards of safety and emission but also to encourage the R&D activities and to enable the companies to compete globally.

Deduction of 150% allowed on in-house R&D

Tractors exempted fully from excise duties. Target of doubling agricultural credit in three years set.

Consortium of banks formed to ensure speedy conclusion of loan agreements and implementation of infrastructure projects.

Duty on non-alloy steel reduced from 15% to 10%. Duty on alloy steel and base metals also reduced from 20% to 15%.

Levy of 2% additional surcharge on corporate tax.

Custom duty on second hand motorcars and motorcycles reduced to 100% as compared to 105% earlier. Custom duty on new cars maintained at 60%.

Excise duty on tractors of engine capacity more than 1800 cc for semi trailers to attract @ 16%.

Introduction of new income tax brackets.

Peak customs duty reduced from 20% to 15%.

Excise duty on tyres, tubes and flaps reduced from 24% to 16%. Customs duty on lead cut to 5%.

Agricultural lending target set at Rs 1,750 bn for FY07, an increase of 32.5%. One time grant to farmers who have availed loans from scheduled commercial banks, RRBs and PSCs for Kharif and Rabi 2005-06 of a principle amount upto Rs 0.1 m and interest rate of upto 2%. Short-term credit to farmers at 7% for loans upto Rs 0.3 m and 0.6 m hectors to be brought under irrigation in FY07.

Excise duty on cars having engine capacity upto 1,200 cc (petrol based engines) and 1,500 cc (diesel based engines) and length of the car upto 4,000 mm reduced from 24% to 16%.

Budget support for NHDP enhanced from Rs 93 bn to Rs 99 bn in 2006-07. Around 1,000 kms of access-controlled expressways (totaling six) to be developed on the BOT basis.

Custom duty on alloy steel and non-ferrous (primary and secondary) metals reduced from 10% to 7.5%. Peak customs duty reduced from 15% to 12.5%.

Rising middle class:  Expansion of population between the age group of 25 to 50 years, increasing affluence of the Indian middle class and heightened competition amongst automobile manufacturers, resulting in improved quality offerings, will continue to be the key drivers for the industry in terms of both market size and production capacities

Increasing exports:  The Indian auto industry has emerged as an export hub, on account of its low cost technical manpower and increasing focus on quality. To give a perspective, in the last four years (FY02-FY06), volume exports of Indian automobiles has increased by 45% CAGR, led by motorcycles (CAGR of 61%). This development has led to domestic players increasing their share of exports in the overall pie.

Infrastructure thrust:  Improvement in road infrastructure has led to increased movement of goods through roadways. Around 65% of all the goods movement in the country takes place by roads as opposed to 55% a decade ago. Also, owing to the fact that an estimated 45% of CVs (commercial vehicles) plying on the roads are 10 years old, demand for HCVs (heavy commercial vehicles) is expected to grow by a steady rate in the long term.

Low interest rate regime:  Close to 80% of the new vehicles being purchased in the country are financed, thus underlying the importance of a low interest rate regime to the fortunes of the industry. Though the interest rates have risen significantly in recent times, we believe it is likely to have only a small impact over the medium term as there has been a substantial rise in income levels.

Environment led benefits:  Implementation of pollution norms like restriction on the age of the vehicle plying on the road and overloading of commercial vehicles would seemingly aid higher volume growth of this segment. The Supreme Court ban on overloading is already showing great results as sales of CVs have grown by more than 30% during the first ten months of FY07.