Budget 2023| Measures to boost demand important for auto sector: MOFSL’s Jinesh Gandhi

Jinesh Gandhi, Deputy Head of Research and Auto Analyst, Institutional Equities, MOFSL. (Illustration: Suneesh Kalarickal)

The auto sector was one of the best performers in the market in CY22, riding on pent-up demand, waning supply-side troubles and falling commodity prices. However, there are headwinds coming its way. It has to absorb the EV disruption at a time when demand may be weakening in the wake of higher interest rates, inflation and the threat of a global recession. Can the Union Budget provide some support?

In an interview with Moneycontrol, Jinesh Gandhi, Deputy Head of Research & Auto Analyst, Institutional Equities, at MOFSL, spoke about what he saw as key in the upcoming Budget and why the competitive landscape in the EV segment may change dramatically in two years.

Also read: Auto Expo| Tata Motors, Maruti adapting to evolving consumer demand

What are the announcements in the Budget that could affect auto stocks, both positively and negatively?

We don’t expect any major announcements that will directly impact the auto sector. There may be initiatives on the EV side, predominantly incentives (to encourage electrification)… like extension of the FAME II (Faster Adoption and Manufacturing of Electric Vehicles) subsidy or increase in allocation towards electrification of buses under JNNURM (Jawaharlal Nehru National Urban Renewal Mission) or of last-mile connectivity. These are the only direct implications for the auto sector from the Budget.

There could be indirect initiatives, such as income-tax related changes, which could affect the sector positively or negatively; or any increase in the Budget (allocation) for rural markets, where there has been stress for some time; or an increase in the allocation for infrastructure spending, which could have a positive impact on the commercial-vehicle (CV) category. These indirect measures that can influence demand are important.

How do you see CY2023 unfolding for the auto sector?

The positives during the calendar year will be cost pressures receding, which should give a stable environment for customers with respect to end-product prices. This may help in the recovery of entry-level PVs and two-wheelers, which were the segments that were impacted far more (with weaker demand) than the premium categories… The cost of vehicles had gone up quite materially over the last three to four years. Two wheeler prices had gone up by 35-38% and PV prices by 12-15%.

(In potential negatives, though not substantial ones) there would be some changes with respect to regulatory norms on emissions and safety, which would influence a certain category of products and won’t have a broad-based impact. Regulations around emissions will have a disproportionate impact on diesel-based vehicles, both PVs and CVs, and safety norms will have an impact more on small-cars than large cars.

Negatives that could be more broad-based will be from higher interest rates, inflation and a potential macro slowdown. These could have a substantial bearing on industry demand in CY23 and CY24.

Which are the auto segments that could feel the impact of the global slowdown and higher interest rates the most?

The global slowdown will affect different auto segments in different proportions. The direct impact will be felt most by commercial vehicles because they reflect the health of the underlying economic activity, followed by passenger vehicles, followed by two-wheelers, and lastly, tractors.

Interest rates and liquidity again affect CVs the most, followed by PVs, followed by tractors and then lastly, the two-wheeler category.

Until recently, CVs have been doing better than PVs in terms of volumes. Could these factors then reverse that equation?

They could, but with a lag. While (elevated) interest rates could have a negative influence on CVs, a crunch in liquidity could affect the category to a larger extent.

At the Auto Expo, Maruti Suzuki has displayed an all-electric car, EVX. What about its strong hybrid bet?

Maruti has been clear that its approach to greener mobility will be multi-pronged. That they will have (options) right from CNG, in which they are market leaders, to biofuels to strong hybrids to EVs. They are at different stages of development. The pure BEV (battery electric vehicle) will be launched in 2025. Their seriousness on EVs can’t be questioned because they have committed Rs 10,000 crore at the group level (on their EV drive). I would not question their seriousness on that (on pure EV play) but they are pushing strongly on hybrids because till the time we are fully electric (with infra to seamlessly support EVs), there will be multiple technologies deployed. Strong hybrid is a bridge to electrification.

Which PV players are ahead of their peers in electrification?

It wouldn’t make sense to look at who is where today because what we are seeing today is just a bridge to proper EV adoption. All the EV products that are there today are ICE-converted EVs. It is good to have something on the ground, but that won’t be the face of the companies two to three years out. I am sure that the EV products that are in the market now won’t exist then. The competitive landscape will be established in 2025 when we have all the relevant players launching their born-electric models… So, Maruti Suzuki will be launching in 2025, Mahindra in December 2024, Tata Motors in 2025 and Hyundai in 2025. Almost everyone will have models out around the same time. Tata Motors and M&M will have a large market share from ICE-converted EV vehicles, but that market share will change dramatically from 2025. I would not read too much into the current market landscape to determine the competitiveness in EVs.

Also listen: What are the four trends that will disrupt the auto sector?

How much will the transition to EVs be affected by global recession fears?

If there is a global depression, there could be a far-reaching change that will be difficult to predict. But if battery commodity prices fall dramatically because demand is weak (in the face of weakening global growth) then it could be a blessing in disguise. This is because it could lead to faster electrification (of mobility) in a market like India, where things may not be as bad or are relatively better.

Are OEMs focusing on electrification of SUVs rather than smaller cars?

Yes, that would be the starting point. To electrify a Rs 5-lakh car (an entry level car) is far more difficult than electrifying an SUV… When electrifying an entry-level car, the cost goes up by 70-80%. It is not easy to make it cos-effective given the safety concerns that need to be addressed.

Also the ability of customers to pay and become early adopters of a technology is higher among affluent customers. Globally, we have seen that electrification happens at the premium end more than at the lower-end, and the Indian market is no different.

What about the tax differential, between a regular SUV and an E-SUV?

Definitely, EVs are highly subsidised, with just 5% GST, whereas regular SUVs are taxed much higher (up to 50%). Then there is also the Rs 1,50,000 tax rebate that is available on a loan taken to buy an EV. These are enablers put in place to enable faster adoption of EVs, including the PLI (production-linked incentive) scheme. It will be interesting to watch how the trajectory of electrification takes shape as and when the subsidies are exhausted.