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Event update: Automobiles; CV Scrappage policy - Limited benefits

Media reports suggest that government of India (GoI) has given an in-principle approval for compulsory scrappage of commercial vehicles (CV) over 20 years old from 2020. Reports suggest that GoI proposes to offer incentives in the form of lower GST rate (18% versus 28% currently) and expects CV makers to offer higher discounts. While the details are still unclear and it is likely that the proposal could see some changes, we highlight a few key aspects of the policy.

Benefit could be fairly limited

The policy was widely expected to cover CVs over 15 years, which would have led to an estimated vehicle scrappage market of ~700,000 vehicles, in our view. However, the scrappage policy being extended to over 20 years, we estimate the potential market to decline to ~150-200,000 units by 2020 (as per IFTRT). While media reports indicate a potential size of 700,000 units based on RTO numbers, we believe this is highly exaggerated, as most truck owners scrap vehicles without informing the RTO. Further, out of the estimated 150-200,000 units that could potentially be scrapped, we estimate nearly 75,000–100,000 are scrapped every year in any case, leaving the incrementally vehicles to be scrapped at ~75,000-125,000. 

New vehicle purchases will be even lower

Further, we note that over 20-year old trucks normally ply in rural areas (national permits are typically for 12 years, state permits for 15 years) as vehicles with high operating costs are not viable on long distance routes. Consequently, it is unlikely that these operators will purchase new vehicles to replace the older ones. While new purchases may lead to higher replacement demand in the long term, in the near to medium term (i.e after 2020), the impact could be limited. This is because any incentives of buying a truck may eventually flow through to fleet owners that were already looking to purchase new vehicles.

Long way between now and 2020

We note that the policy will need to be approved by the GST council. Further, we see a high possibility the policy shifting between now and 2020, considering the election cycle in 2019 and likely lobbying in the interim. We also note a similar policy with detailed calculations was floated about 2 years ago (it was supposed to be voluntary with age criterion at 15 years). Hence, we would be surprised if the scrappage policy were to be implemented as currently envisaged.

Our View

On the whole, while the policy is a step in the positive direction, as per the partial details available, the boost to volumes could be limited. However, we continue to remain positive on Ashok Leyland, which we believe is well placed to take advantage of the improved CV cycle. AL’s improved competitiveness and Medium-term plans to de-risk its business support our thesis