Harjeet Gill, 5790 , Section - B

8/8/2019 Harjeet Gill, 5790 , Section - B

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ASSIGNMENT 1

Of

FINANCIAL MANAGEMENT

ON

Topic- PRE AND POST BUDGET ANALYSIS OF AUTOMOTIVE SECTOR

SUBMITTED TO: SUBMITTED BY:

PROF. RATINDER KAUR HARJEET GILL5790 MBA-1(B)

SCHOOL OF MANAGEMENT STUDIESPUNJABI UNIVERSITY PATIALA


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INTRODUCTION

The issue before the Finance Minister ahead of Budget 2010 is two-fold: one is to decide

on the trajectory the economy needs to take in terms of deciding on the growth versus

inflation divide and second on the need to contain the rampantly increasing fiscal defi-cit.

Although the Finance Minister wanted to cut the fiscal deficit to 2.5% of GDP in his

2008-09 budget, the actual figure was multi folds of it. In Pranab Da s last budget despite

the smoke and mirrors the budget still pro-jected a fiscal deficit of 6.8% of GDP. The

hidden borrowing re-quirements added up to another 2% of GDP. India has for decades

been giving huge, open-ended subsidies for pe-troleum products and fertilizers. Oil and

fertil-izer companies need to be freed from price control. However no finance minister in

the past had the nerve to bite the bullet due to political compulsions. Will Pranabda dothe unthinkable of linking the prices of fertilizers and petroleum products to the market?

Well this seems to be the best opportunity he has-he does not have to face any major

assembly elections this year, the government is one of the most stable of the decade and

also globalprices are at relatively stable levels. It just re-quires political will and foresight

for it to be im-plemented. Well our guess in the team is it would be implemented but not

fully deregulated as rec-ommended by the Kirit Parikh committee but on a smaller scale.

One of the issues concerning the economy right now is the extent of importance the

Finance Min-ister needs to accord to the growth versus inflation debate. A growth focus

would require the fiscal and monetary policies to be in accordance with the objective of

higher growth, such as marginally lower direct taxes (to account for the GST

implementation road-map) and a loose monetary posi-tion vis-a-vis the interest rates.

However, this requires political courage since higher food prices costs the Government in

terms of political mileage.

In terms of FDI and FII flows, India continues to experience steady increase over the

previous years, however, the failure to increase the long-term capital formation, is indeed

a cause of con-cern. Since the nature of inflows into the capital markets over the last few

months has been essen-tially hot-money or hedge funds, the transitory nature of the

bubble formation in the stock mar-kets in particular is a note of concern.


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While currency management is not directly under the purview of the Finance Ministry, it

is in-cumbent of the Government to ensure that there is some level of free-float in the

cur-rency markets since the actual value of the currency is necessary to be determined for

exports-imports parity to be maintained. Get-ting the RBI to play an active role in the

cur-rency markets to bring down the volatility is counter-productive and in the long-run

deeply harmful.

Food inflation management is a critical issue facing the country, while in the long run,

supply side progression is the solution, in the short-run probable imports would cool off

the relentless pressure on prices. Also the Food Security Act which is to be passed this

year will impose huge pressure on food prices and it is up to the Finance Minister to take

up these challenges in the coming budget speech.

In terms of taxation proposals, reversing the excise duty and service tax cuts is of prime

importance not only as a revenue generating activity but also to prevent overheating the

economy. How the minister decides to end the stimulus will be a big issue-Will it be a

one stroke measure or a gradual approach. The answer will be based on the govern-

ment s estimate of how strong the recovery is. We recommend a gradual stepwise reduc-

tion in duty cuts as no one is sure how strong the recovery and one does not want to end

the party before it starts.

Overall the economy is in reasonably good shape, however with prudent management,

sustainable high-growth with moderate inflation is possible, this the Finance Ministry

owes to India and more so to the poor.

Key Features of Budget 2010-2011CHALLENGES

To quickly revert to the high GDP growth path of 9 per cent and then find the means to

cross the double digit growth barrier.

To harness economic growth to consolidate the recent gains in making development

more inclusive.


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To address the weaknesses in government systems, structures and institutions at

different levels of governance.

OVERVIEW OF THE ECONOMY

India among the first few countries in the world to implement a broad-based counter-

cyclic policy package to respond to the negative fallout of the global slowdown.

The Advance Estimates for Gross Domestic Product (GDP) growth for 2009-10 pegged

at 7.2 per cent. The final figure expected to be higher when the third and fourth quarter

GDP estimates for 2009-10 become available.

The growth rate in manufacturing sector in December 2009 was 18.5 per cent the

highest in the past two decades.

A major concern during the second half of 2009-10 has been the emergence of double

digit food inflation. Government has set in motion steps, in consultation with the State

Chief Ministers, which should bring down the inflation in the next few months and

ensure that there is better management of food security in the country.

PRE BUDGET ANALYSIS OF AUTOMOTIVE SECTOR

Current Scenario

De-licensing in 1991 put the Indian automo-bile industry on a new growth trajectory,

which attracted foreign auto giants to set up their production facilities in the country to

take advantage of various benefits it offers. The automobile industry in India happens to

be the ninth largest in the world. Following Japan, South Korea and Thailand, in 2009,

India emerged as the fourth largest exporter of automobiles. Sev-eral Indian automobile

manufacturers have spread their operations globally as well, ask-ing for more invest-

ments in the Indian automobile sector by the MNCs.

Last year has been a great ride for the auto sector. The recent launch of Tata Nano has

brought about a new revolution in the country s small car segment. Seeing the good

initial response from consumers, many other players in the industry are chalking out their

plans to launch cars in this segment in the next few years. All segments of the sector


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posted strong double-digit numbers with total sales going up by 45% in January, against

the same month last year. Total sales of all auto-mobile companies are up 44.4% while

two-wheeler sales grew by 43.43%. Aggregate financials of 91 automobile companies

were exceptional with a spectacular 356% spike in net profit to Rs 3135 crore in the

December 2009 quarter on robust operating performance and low base effect in

December 2008 quarter.

The passenger vehicle market, which constitutes around 80% of automobile sales, has

immense growth potential. Anticipating the future market potential, the production of

passenger vehicle is forecasted to grow at a CAGR of around 11% from 2009-10 to 2012-

13.

Implications of Last Budget

The Union Budget 2009-10 failed to enthuse the slow-down-hit auto industry to a

large extent. The industry has, however, welcomed continua-tion of CENVAT cuts that

were announced in December last.

The reduction of the addi-tional levy on large cars and utility vehicles was also wel-

comed and industry hoped that further ra-tionalization of tax rate would take place and

the excise duty on utility vehicles and cars, other than small cars, would go down

Thrust on infrastructure development in the Budget, by the increase in the outlays for

NHAI and JNNURM fueled growth in the automotive industry in the medium to long

term & the auto-component industry was an indirect beneficiary of this growth.

Recognizing the challenging times being faced by the domestic industry during time

of recession previous budget did not further bring down the rates of Customs Duty last

year fulfilling demands of ACMA.

Retaining the Excise Duty at 8%, last

budget ensured that the stimulus pro-vided to the industry earlier in the year 09 would be

continued till the industry fully recovers from the current reces-sion which worked out

very well for industry.

Budget reduced on the basic customs duty on bio-diesel giving an upper hand for all

companies working on en-vironment friendly technologies.


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Demand for incentives for promoting exports was ignored, also the opportu-nity to

rationalize excise duties on the passenger car segment was not been considered.

Expectations from Budget-2010

Continuation of Stimulus Package for Commercial Vehicle Segment - The

commercial vehicle segment of the Indian auto industry has been worst affected. The

continuation of the stimulus package includes easier & softer loans, accelerated

depreciation and concessional duties would help the segment recover.

Increased Export Promotion - The manufacturers & EOUs of auto indus-try expect

specific direct & indirect tax benefits for exports by SMEs and con-tinuation of tax

holiday for themselves.

Rapid Implementation of Goods & Services Tax (GST) - The entire In-dian auto

industry is keeping its fingers crossed for the transparent, easy and simple indirect tax

regime of GST which should be uniformly implemented across the states within this

financial year.

Incentives to be Provided to Specialized Service Companies Undertaking R&D

R&D for auto industry is crucial and impor-tant and budget expectations include spe-cific

tax breaks for R&D service providers.

Stocks to Watch Out

Bajaj Auto, Clutch Auto, Maruti Suzuki, Hero Honda Apollo Tyres


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FINAL THOUGHTSThe upcoming budget would be very impor-tant for the overall direction of the market.

The key market performance would depend on whether the government can spur growth

while balancing an increasing fiscal deficit.

The budget should put more thrust towards infrastructure development so that the econ-

omy grows at a higher pace. It is a good time for further reforms, which will bring in

more economic growth. However, given the mac-roeconomic constraints on the

economy, es-pecially growing inflationary pressures and the dramatic rise in fiscal

deficit, the expectations from the Budget may be too high to fulfill. Only time will tell if

the wish list of the all the Sectors, people and students like you and me will be ful-filled.

While details would be known soon, the one thing that would remain unchanged even

post Budget is the fact that India has embarked on a growth path that is certain and clearand we, as Future Managers of India would continue to contribute towards this growth.


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Indian Union Budget review 2010-2011

Finance Minister, Mr. Pranab Mukherjee, managed to do the unexpected in the Budget.

In what was largely being feared as an exercise that could have put some friction to the

recovery that the Indian economy is currently witnessing, it actually turned out that the

Finance Minister has managed to effectively conclude this exercise in a highly balanced

fashion. This has left a lingering 'feel-good factor' in the minds of most segments of the

society; be it corporates, individuals, economists, etc.

Automobile

Union Budget 2010-11 came in marginally better than expected for the Automobile

Sector. With the government keen on increasing its tax base, the Budget hiked Excise

Duty by 2% to 10% (from 8% earlier). The industry however, was expecting the duty

hike to the extent of 4%. Similarly, the ad valorem component of Excise Duty on large

cars, multi-utility vehicles and sports-utility vehicles increased by 2 percentage points to

22%, though impact of the same would not be very significant.

Broad measures like thrust on rural, infrastructure and road development would benefit

the Sector to clock consumption-based growth in volumes. Another positive for the Auto

companies was the weighted increase in research and development (R&D) exemption

from 150% to 200%, which would further encourage R&D within the Sector. The MAT

rate has been increased from 15% of book profits to 18%, which is negative for

companies like Tata Motors, Mahindra and Mahindra (M&M) and Ashok Leyland.


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Indian Auto Sector Update

Auto Sales continued the robust momentum in February 2010 as well and touched record

highs on the back of positive consumer sentiment and partially due to pre-ponement of

buying at dealers desk in anticipation of roll back of Excise duty in the Union Budget.Volumes of most players showed no signs of tapering off and recorded healthy growth

for the month. The Commercial Vehicle (CV) Segment dominated the growth in

February 2010 led by the Medium & Heavy Commercial Vehicle (M&HCV) Segment, as

the domestic recovery was affirmed by the overall pick up in economic and industrial

activities. The Passenger Vehicle (PV) Segment also continued on growth path following

new launches and a confident consumer in the market. The Two-Wheeler Segment too

maintained its growth momentum. Going ahead, we expect the demand to be strong,

albeit more normalised across segments, considering demand may have peaked in the

past few months prior to the expected price hikes post the Excise Duty hike and spurt in

Raw Material prices.

- Maruti Suzuki (Maruti) recorded a robust 22% yoy growth registering highest ever

monthly volumes at 96,650 units (79,190). The companys Exports consolidated at an

expected run-rate of 11,800 units reflecting the effect of the discontinuation of scrappage

norms in Europe. Management is positive about Eeco, which gave a boost to its C

Segment resulting in 39.6% yoy growth. The PV Segment grew by 20.5% yoy. However,

the MUV Segment declined 46.7% yoy.

- Mahindra & Mahindra (M&M) reported healthy volumes at 41,814 units (29,017) led

by growth in the Tractor Segment at 52.6% yoy supplemented by the 40.2% yoy growth

registered by the Automotive Division. Growth of the Automotive Segment was led by

the Utility Vehicles (UV), Light Commercial Vehicles (LCV) and Three-wheeler

Segments at 24.2%, 89.8% and 102.3% yoy, respectively. The company performed

exceptionally well on the Exports front, growing at around 284.9% yoy. Management is

extremely confident of the continuation of the growth in demand as the Budget increased

allocation to Rural Development programmes in turn particularly benefitting the Farm

Equipment Segment of M&M.


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- Tata Motors (TML) reported a robust 57.8% yoy growth in total volumes, with the

M&HCV Segment leading the growth at 91.3% yoy, followed by the LCV Segment

growing at 55.5% yoy. Exports also boosted the company's performance as it reported

124.5% yoy growth partially on account of a low base resulting from the downturn in

FY2009. Passenger cars also showed healthy growth of 49.5% yoy on the back of new

launches such as Manza clocking volumes.

Tata Motors

- TML registered a 57.8% yoy growth in Total sales to 69,149 units (43,811) in February

2010.

- The CV Segment recorded its highest ever volumes with the M&HCV Segment

registering a robust yoy growth of 91.3%.

- Indica sales were at 11,502 units, the highest this fiscal; Indigo recorded sales of 7,373

units, the highest since its launch in 2002 and yoy growth of 75.2%.


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Maruti Suzuki

- Maruti registered record Sales in February 2010, registering a robust 22.0% yoy growth

to 96,650 units (79,190).

- The A2 Segment grew by 20% yoy; C Segment sales hiked by 39.6% yoy on the launch

of its new offering Eeco.

- The companys Exports consolidated at a run-rate of around 11,000-12,000 units, due to

discontinuation of scrappage norms in Europe in December 2009, registering yoy growth

of 38.8%.

Mahindra & Mahindra


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- M&M reported healthy monthly sales, with a growth of 44.1% yoy to 41,814 units

(29,017).

- The Tractor Segment grew by a healthy 52.6% yoy, aided by a strong 219.7% yoy

growth in Tractor Exports.

- The Automotive Segment grew by a strong 40.2% yoy growth led by growth of 102.3%

in the domestic Three-Wheeler Segment coupled by the robust 338% yoy growth

registered by the Auto-Export Segment.

- The UV (including the XYLO, the Bolero and Pick-Ups) and LCV Segments reported

yoy growth of 24.2% and 89.8%, respectively.


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Hero Honda

- HH sold 382,096 units (329,055), registering a healthy growth of 16.1% yoy, despite a

high base effect of February 2009.

- The company reported growth across segments, with the Basic 100cc, 150cc segment in

the Motorcycle Segment, and Pleasure growing in the Scooter Segment at an average

16,000 units per month.

- Management has guided for 2 new product launches in the Motorcycle Segment in the

next two months, which will augur well for the company.

- HH crossed its landmark 4mn units for FY2010 in February 2010.


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TVS Motor

- TVS clocked 31.0% yoy growth to 140,544 units (107,301).

- Domestic sales grew by 33.4% yoy to 124,470 units (93,301).

- The Scooter Segment recorded a 38.3% yoy growth to 27,017 units (19,532).- The Motorcycle Segment grew by a 27.7% yoy to 63,394 units (49,659).

- Exports grew by 15.4% to 19,141 units (16,583).

- The recently launched TVS Jive (launched in Tamil Nadu) and the TVS Wega are

expected to be launched pan-India beginning March 2010 and augment monthly volumes

by 15-20%.


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OUTLOOK

We remain positive on the Indian Auto Sector. We estimate overall Auto Volumes to

register a growth of around 18% yoy and 10% yoy in FY2010E and FY2011E,

respectively, aided by the improved economic environment for the sector. Over the

longer term, comparatively low penetration levels, a healthy economic environment, and

favourable demographics, supported by higher per-capita income levels, are likely to help

the Auto companies in sustaining their Top-line growth.

The recent Union Budget 2010-11 came in better than expected for the Automobile

Sector, with the government keen on increasing its tax base and the Budget hiking Excise

Duty by 2% to 10% (from 8% earlier). The industry was however, expecting a duty hike

of 4%. Moreover, broad measures like thrust on rural, infrastructure and road

development would also aid the Auto Sector in clocking consumption-based growth in

volumes.


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On the bourses, most Auto stocks registered a sharp run up in the post Budget rally and

outperformed the broader indices. Among the pack, we continue to maintain our

Overweight stance on Maruti Suzuki, M&M and Tata Motors.

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