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TRANSCRIPT
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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.