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No fireworks for auto sector in Budget; Escorts, Ashok Leyland among top brokerage picks

The Budget announced an increase in basic customs duty on CBU, SKD units of electric motor vehicles from commercial, passenger, three-wheelers and two-wheelers segment which is a negative for EV importing OEMs.

February 06, 2020 / 02:38 PM IST
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Automakers did not receive much in the Budget 2020.

While the hopes of income tax cut were dashed, higher customs duty on auto parts added to the injury.

The Budget announced an increase in basic customs duty on CBU, SKD units of electric motor vehicles from commercial, passenger, three-wheelers and two-wheelers segment which is a negative for EV importing OEMs.

On the other hand, a decrease in custom duty on platinum and palladium from 12.5 percent to 7.5 percent and an increase in BCD from 5 percent to 7.5 percent on catalytic convertors are seen as not of much help for the sector even as the lowering of raw material cost is a positive, but the increase in component import cost could limit the benefit.


The problems of the sector - from falling sales to piling up inventories - seem to have refused to fade away.

As the Budget is over now, analysts and brokerages advise looking at the sector with a long-term view as the sector is likely to gain from the government's push to revive rural demand and strengthen the agri sector.

Let's take a look at what some analysts and brokerages have to say about the sector and what stocks they recommend to buy:

Brokerage: Reliance Securities

Mitul Shah, Senior Research Analyst, Reliance Securities, sais: “BSE Auto index fell over 4 percent in January due to volume slowdown and BS-VI transition coming closer, which created uncertainty for the sector. Moreover, the China virus issue has a higher impact on the Chinese automobile industry. Tata Motors-owned JLR has sizable dependence on the Chinese Automobile industry."

Shah added that all these factors impacted the overall automobile index. However, he said he was positive on the sector from a long-term perspective and would recommend buy on selected stocks such as Escorts and Ashok Leyland.

Brokerage: Kotak Securities

Rusmik Oza, Sr. VP (Head of Fundamental Research – PCG) at Kotak Securities is of the view that the March quarter will see a jump in production as BS-VI vehicles will get manufactured and dispatched from factories.

"As prices of BS-VI will be higher than that of BS-IV, it is difficult to gauge the negative impact on demand and sales volume after March. After the first quarter of FY21 things will stabilise and buyers will get used to the new pricing," Oza said.

"We prefer two-wheeler companies in the auto space on the back of revival in rural consumption (due to bumper Rabi output and better farm prices) and commercial vehicles (on the back of likely scrappage policy). Tractor companies also stand to benefit in the theme of rural consumption pick-up. Our preferred picks are Mahindra & Mahindra, Escorts, Ashok Leyland and Tata Motors," Oza said.

Brokerage: IndiaNivesh

Vinay Pandit, Head - Institutional Equities at IndiaNivesh said the Budget has offered significant focus on the agri and rural space. Coupled with a higher area under cultivation for the Rabi season, he expects a revival in volumes especially in the 2 wheelers and tractor space.

His top picks are Hero MotoCorp, TVS Motor, Escorts and VST Tillers.

Brokerage: Prabhudas Lilladher

The brokerage said an increase in duty on catalytic converters used in manufacturing BS-VI component SCR is neutral to negative as most of them are manufactured in-house.

Besides, a scheme of Rs 1,000 crore for technical assistance to auto companies for technology upgradations are neutral to positive as it will only benefit SMEs.

The top picks of the brokerage from the sector include Maruti Suzuki, Motherson Sumi and Exide.

Brokerage: Globe Capital Market

The brokerage sees push to rural and agri sector good for the automobile sector. The top picks are Mahindra & Mahindra, Escorts, Hero MotoCorp, Bajaj Auto, TVS Motor Company.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Feb 6, 2020 10:48 am

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