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Event update: Automobiles - Registration fee hike to aid scrappage?

The government has released two separate draft notifications, which are: 1) increasing registration charges for all vehicles, including renewal registration (on vehicles more than 15 years old), and tightening fitness certificate requirements from once a year to twice a year; 2)  waiving registration charges on new vehicles purchased as against presentation of authorised certificate received on scrapping old vehicles. Although the two notifications are discrete, they are nonetheless interlinked. The registration and renewal charges have been increased to ensure that there is a certain degree of benefit from scrapping of old vehicles. On the whole, we believe the increased registration charges could have a negative impact on volumes, whilst the benefit from scrappage could be limited.

Our takeaways and view

• New vehicle demand (not linked to scrappage) could be impacted: We expect a 20-30x hike in vehicle registration charges to ~2% of a 2W (to Rs1,000 from Rs50) cost, 6% of 3W (to Rs5,000 from Rs300), 1% of cars (to Rs5,000 from Rs600), 4% of LCVs (to Rs10,000 from Rs1,000) and 1-2% of MHCVs (to Rs20,000 from Rs1,500). The effective price increase could have a negative impact on demand, in our view, particularly in the current stressed scenario, with 3Ws/2W facing the highest impact. Notably, the higher registration charges further decrease the price gap between ICE (internal combustion engine) and EVs (electric vehicles). This could give a push to EVs particularly in the 3 wheeler segment.
• Registration renewal hikes: Vehicles that cross the life of over 15 years need to mandatorily re-register every 5 years, i.e, in the 15^th and 20^th years. The government has increased renewal registration by nearly 20x on vehicles over 15 years, which we believe would raise costs to the extent of 2-3% for MHCVs and 4-5% for taxis/ LCVs. Additionally, this would be accompanied by a fitness certificate requirement twice a year instead of once a year. The idea behind the new notification is possibly to make it prohibitive to own more than 15-year old vehicles.
• Impact on scrappage: From a truck owner’s perspective, a 2% benefit on registration of a vehicle already renewed is unlikely to drive him to purchase a new vehicle. Hence, the chance of a huge one-time benefit on vehicle demand seems bleak to us. 
• On the other hand, the scrappage scheme could create some demand from trucks crossing the 15-year threshold limit on a regular basis, and add to truck manufacturers’ volumes every year prima facie. The extent of volume benefit would depend on the number of trucks sold 15/20 years ago, as well as the current economics for running a 15-year old truck. While the situation remains unclear, we believe that for a 15 year old truck, the average trucker might chose to invest Rs40,000 to increase the life of a truck by about 5 years rather than buy a new truck, from an economic perspective. Trucks over 20 years old are more likely to be scrapped. More importantly, given that the older trucks operate in the interior region (where new trucks are economically unviable), the scrapped trucks will unlikely be traded for new trucks. All in all, given the current available information, we see low conversion rate even among trucks crossing the 15-year age barrier.
• Fiscal prudence versus effectiveness: The current structure will likely put minimal pressure on government’s fiscal expenditure. The sharp increase in registration charges will likely accrue capital to the government (we estimate incremental revenue of Rs330bn would have accrued to the government in FY19,). The loss due to the scrappage policy would be minimal, as original registration charges were nominal. However, this fiscal prudence will reduce the efficacy of the program, as the net benefit to a trucker scrapping his truck will be less than 3-4% (including renewal fees) of the truck cost. 

Prima facie, we believe the incentives offered may not lead to scrappage-led vehicle demand. Although it might be a support in addition to other incentives (if offered), on a standalone basis, the same may not cut much ice, in our view. On the other hand, a sharp increase in registration charges could add fuel to fire, at a time when cost/demand pressures are high in the industry. The negative impact would be higher on 3W/2W players and lower on passenger vehicle OEMs, in our view.