Auto stocks have not reacted negatively to the decision to not extend excise duty cuts beyond December 31. And rightly so.
At this point in time, the auto industry has nothing to lose from increased duties. Vehicle manufacturers enjoy high pricing power even at times of a slowdown, so passing on duty hikes to customers has never been an issue.
Secondly, the industry has come a long way from the tough times it faced last fiscal. Sales volumes in all segments (cars, UVs, trucks, bikes ) put together have grown by 10 per cent so far this year, compared with 2-3 per cent growth in 2013-14. Few macro-economic factors stand in favour of a continuation of this trend.
First, low inflation and interest rate cuts expected in early 2015, will boost the demand for segments such as cars, UVs and two-wheelers. Drop in fuel prices will be an added advantage. Pick-up in commercial vehicle sales seen in the months since April 2014 will also continue.
Freight rates
Going by the higher freight rates prevailing now compared to 2013, demand for goods transport has improved. Improving industrial growth will further create demand for freight carriage. Besides, truck operators will also see the benefit of low running costs from moderation in fuel prices and interest rate cuts.
Hence, duty hikes are unlikely to impact sales volumes. Auto makers also have the headroom to not pass on the full impact of duty hikes, given the prevailing low raw material prices.