Warming the engines

The budget 2017 did not make any direct announcements for the automobile sector, yet it stands to benefit from the government's initiatives in other areas.

Proposal
Focusing on increasing rural incomes, the government has increased MGNREGA allocation to a record level of Rs 48,000 crore. It further provided for greater agricultural credit.

Impact
The combined effect of rural push is that farmers and rural Indians will have more disposable incomes in their hands. This is positive for sectors like automobiles, farm-equipment manufacturers and two-wheelers.

Proposal
The budget proposed to accelerate road development. The rate of rural-road construction jumped from an average of 73 km a day in 2011-14 to 133 km a day in 2016-17. The government provided Rs 19,000 crore for the Pradhan Mantri Gram Sadak Yojana. Along with the contribution of the states, a cumulative amount of Rs 27,000 crore will be invested in 2017-18. A further allocation of Rs 64,000 crore for highway development has been made.

Impact
Development of roads is a long-term positive for commercial-vehicle manufacturers.

Proposal
The budget proposed to reduce the income-tax rate for individuals from current 10 per cent to 5 per cent for incomes between Rs 2.5 lakh and Rs 5 lakh.

Impact
This should help with more disposable incomes in the hands of rural India and help boost sales of two-wheelers and lower-cost automobiles. Two companies that stand to gain include the following:

Hero MotoCorp
Hero, like other automobile manufacturers, has been hit hard in recent months by the demonetisation scheme. Its volumes fell 13 per cent in the December 2016 quarter, pulling revenues down 11 per cent (YoY). On a sequential basis, the fall in revenue was even higher: at 18 per cent.

Despite the revenue fall, Hero reported its highest quarterly gross margins that expanded 274 basis points (YoY) to 35.1 per cent, aided by lower commodity prices and its cost-rationalising programme. The EBITDA margin moved up 131 basis points, to 17 per cent.

In post-results analyst conference call, the company said that as the country recovers from the demonetisation stinger, it expected volume growth to remain flat in March this year and will see some improvement only in the next financial year.

Ashok Leyland
Ashok Leyland too took a hit from the effects of the demonetisation scheme. Revenues were down 4 per cent (QoQ) in the December 2016 quarter. Despite the fall in sales, Ashok Leyland has been able to increase its market share in the medium commercial-vehicle segment from 30.1 per cent to 33.7 per cent (QoQ).

Higher commodity prices, primarily steel, and increased discounting impacted gross margins that fell 83 basis points (YoY) and 293 basis points (QoQ), to 29.3 per cent. Discounts increased from Rs 2.5 lakh to Rs 3 lakh in the quarter. As a result, EBITDA margins fell from 11.6 per cent to 10.3 per cent (QoQ). The company took a 4 per cent price hike in January 2017 to offset higher commodity prices. Sales are expected to pick up in Q4 before the BS IV kicks in from April 1, 2017.

This article is part of a series called Winners of the 2017 Budget.