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Event update: Automobiles - FM stimulus: limited direct sops; indirect measures a positive

The government has announced a set of direct and indirect measures to revive the economy and stimulate demand in the automobile sector. In our view, while the direct measures/sops could have a fairly limited impact on automobile demand, the indirect measures (interest rate transmission and easing liquidity in the economy) could cause demand to improve over time. We believe these measures, coupled with a relatively low base in H2 and a normal monsoon should help revive demand. We prefer MSIL, Eicher Motors and HMCL.

Direct measures – limited benefits: The direct measures include (a) Depreciation rate increased from 15% to 30% till March 2020  (b) Vehicle purchase ban on government departments lifted (c) Consideration of a scrappage policy (d) Registration fee hike deferred until June 2020. The government also clarified that BSIV vehicles would be operational for the entire registration period, with both ICE/EVs too remaining operational. Within these measures, hike in depreciation could render a marginal positive impact on CVs; other measures will allay potential concerns. The benefit of the hike in depreciation rate will also likely be limited given that ~70% of commercial vehicles are bought by SFO’s that largely fall out of the tax net.

Rate transmission likely; improved credit flow will require execution: The government has focused on transmission of repo rate cuts to end consumers. This is because, despite 110bps decline in repo rate over the last few quarters, only ~30bps of benefit has been transmitted to end customers. Linking of repo rates with auto loan rates will likely reduce effective interest rates – a positive for the sector. However, in our view the transmission higher liquidity with banks into increased lending to end customer would be a key challenge. Post NBFC crisis, tightened lending norms negatively impacted demand the most in the CV space followed the 2W/PV segments (we understand PVs/2Ws saw 5-10% increase in the loan rejection rate). While the intent is clearly to improve lending to the sector, however, given that NBFCs and banks lend to different geographical/customer bases, the translation of bank liquidity into customer lending would require execution on the previously announced NBFC/Bank co-lending. Overall, we view the measure positively though the impact will be felt over a few quarters rather than immediately.

Indirect measure – addressing the cash crunch: The GoI has introduced a number of measures to increase liquidity in the economy. These include front loading of public sector banks (PSB) recapitalisation of Rs700bn to create liquidity support of Rs5trn in the system, and meeting regulatory requirements. The measures are geared to support credit delivery of PSBs to corporates, NBFCs, MSMEs, retail borrowers. The combined impact of enhanced PSB capital, speedy transmission of rate easing and uniform percolation of lower lending rate could boost credit availability. Further measures include clearing of GST refunds, disbursal of government/PSE dues could better liquidity across the system. The improved liquidity will likely improve automobile demand over time.

While the fiscal stimulus and direct sops to the sector are fairly limited, the indirect impact through potentially lower lending rates/improved liquidity in the system could gradually improve demand. These measures couple with a favourable base in H2 and a normal monsoon could gradually improve demand in the sector. We prefer MSIL (strong competitive advantages), EIM (brand equity) and HMCL (inexpensive valuations).