The 2% excise duty cut announced on Tuesday would have very little impact on the auto industry. The excise duty cut is applicable only to products where the excise duty rate is 10%. Trucks are the only category paying this rate.

The auto industry is one of the hardest hit on account of slowdown. Lower demand and tight finances have impacted sales volumes of all auto companies sharply. The government cut excise duty rates so that the companies can pass on the benefit of rate cut to end consumers, thus boosting demand for the industry.

However, analysts maintain that apart from some impact on commercial vehicle (CV) makers, the move is unlikely to benefit auto companies. The reason?

For one, excise duty on small cars and two-wheelers is around 8% and that on large cars at 20% currently. The rates on two-wheelers, small cars and large cars remain unchanged; there would be no impact on those categories. This means, there is no benefit that companies can pass on to consumers. Sales of carmakers were already helped by the 4% cut in the excise duty rate in December.

As far as CV makers are concerned, the benefit that would be passed on to consumers could be in the range of Rs 15,000-30,000 per vehicle. This is not a big benefit to increase demand substantially. Besides, demand for CVs depends greatly on factors such as interest rates, availability of finance and health of the economy.

While companies saw an increase in January sales volumes compared with December, volumes still look poor against the previous year. Auto stocks have fallen sharply as demand declined in the last one year.

Nevertheless, the development is positive and shares of auto companies moved up post the announcement.

But, near-term outperformance looks limited for auto stocks.

Pallavi Pengonda/ DNA-Daily News & Analysis Source: 3D Syndication