>COMMERCIAL VEHICLES: All is not well

We interacted with commercial vehicle manufactures, fleet operators and body building units to understand the implications of the announced excise duty hike on truck chassis. This will lead to an increase in chassis price for transporters by 4%. Based on our interactions with fleet
operators, we believe this increase will put further stress on their profitability. Though the move is aimed at incentivizing the sale of completely built units (CBUs) by OEs and organised body builders, we understand that currently CBUs account for only 15% of OE sales. Our
interaction with fleet operators also suggest that more than 95% of body-building work is done at local garages/unorganized units due to cost savings and greater flexibility in terms of customization to specific needs. As a result, the impact of 4% will be felt by most fleet owners.


Though OEMs have raised prices to the extent of excise duty hike, we believe that given the weak demand and continued pressure on fleet operators’ profitability, OEMs will have to give discounts to support demand. Within the CV segment, we expect partial under-recovery especially in the M&HCV goods segment. However, given the strong demand environment in the LCV segment (we also hold positive view driven by under penetration, low investment
and last mile transport), we expect the price hike to get absorbed in the market place.


We continue to maintain our volume growth estimate for M&HCV segment at 8-9% for FY13E (in-line with 8-9% for FY12E). However, we foresee downside risks to our FY13E numbers given the stress on fleet operators’ profitability (Our Oil and Gas analyst expects diesel hike in April 2012) and macro indicators still suggesting lack of pick-up in the investment cycle. We wait for macro indicators to show meaningful signs of revival to review our cautious view.


Within the Commercial Vehicle space, we continue to maintain Sell call on Ashok Leyland (CMP Rs.29, TP Rs.27, downside of 8%) and Hold rating on Tata Motors CMP Rs.273, TP Rs.300, Upside of 10 %).


■  Budget proposal: The recent budget has proposed increase in the excise duty for chassis from earlier 10%+ additional Rs.10,000 to 15% now (standard excise duty increased from 10% to 12% and Rs.10,000 has been replaced by an additional 3%). Chassis sales account for more than 85% of overall trucks sales.


■  …Impact on vehicle cost: This would lead to an increase in chassis cost for transporters by 4% and 2-2.5% for CBUs (if a transporter buys from OEM or gets the body built by
organized players).


■  …Our take: We believe that given the soft demand outlook for M&HCV goods segment coupled with negligible rise in fleet operators’ pricing power, it would be difficult for OEMs to pass on the excise hike in full. This would lead to partial under-recovery and impact margins.
Even if OEMs decide to completely pass on the hike, we believe it will have to be compensated by discounts.


■  Neutral on the CV segment: We continue to maintain our Sell rating on Ashok Leyland and Hold on Tata Motors.


RISH TRADER