All eyes on S&P BSE Auto index stocks after scrappage policy approval

Market

Stocks in the S&P BSE Auto index that rallied over 12 percent in 2020, will be in focus after the policy to scrap more than 15-year-old vehicles owned by government departments and PSUs was approved. The policy is expected to be notified soon.

The government proposed amendments to the Motor Vehicle Act in July 2019, allowing scrapping of vehicles older than 15 years. The much-awaited scrappage policy will be implemented from April 1, 2022, the government said on Monday.

The step is aimed at getting older, more polluting vehicles off the road by providing incentives to vehicle owners to switch to Bharat Stage VI standard, which is the latest emission norm.

As per various estimates, there are 6-8 million vehicles in India that would be above the age of 15 years. Conservative estimates by ICICI Securities puts the figure at 6 million.

An HDFC Bank study has estimated that around nine million vehicles would be fit to be taken off the roads by FY21 and 28 million by FY25.

The Ministry of Road Transport and Highways (MoRTH) has cleared the scheme’s proposal, which is now with the Finance Ministry.

Union Road Transport and Highways Minister Nitin Gadkari had, in September last year, said the scrappage policy was one of the government’s top priorities. The move is expected to reduce air pollution, while simultaneously spurring demand in the automobile sector.

The scheme proposes to provide financial incentives to the owners of vehicles to scrap outdated models of over 15 years and replace them with newer models. It is proposed to cover all categories of vehicles – two-wheelers (2W), cars, and commercial vehicles (CV).

Experts believe the policy decision has a two-fold advantage; one, the commercial vehicle industry will be the biggest beneficiary of the move, which will also help to revive demand in the ailing auto industry affected by the COVID-19 outbreak last year and two, it would help reduce pollution.

“With prices of fresh trucks rising post scrappage, the rural demand could shift towards the tractors, which would relatively be cheaper. Therefore, we expect companies like M&M & Escorts to be key beneficiaries,” Dolat Capital said in a report.

“The other key beneficiaries would be Ashok Leyland, Tata Motors, Eicher, MRF, Apollo Tyre, Bharat Forge, RK Forgings and Jamna Auto,” the report added.

In another report, Axis Capital said that the commercial vehicle industry is expected to be the biggest beneficiary of the scrappage policy. Stocks like Hero MotoCorp, Bajaj Auto, Escorts, Maruti Suzuki, Ashok Leyland, Minda Industries could see an upward jump.

Green Tax

In a related move to cut down on vehicular pollution, the MoRTH had on January 25 approved a proposal for Green Tax on old vehicles.

Under the new norm, transport vehicles which are older than eight years could be taxed at the rate of 10-25 percent of road tax. These taxes will be imposed at the time of renewal of fitness certificate.

Written by Rakesh Sashmal