Don’t build in margin improvement in auto sector for next few quarters: Ajay Tyagi, UTI Mutual Fund

Given the macro environment and the expectations of the market, how important is this Budget?
Quite frankly, the relevance of Budget has been reducing over the last decade. The presentation of the Budget no longer heralds big bang policy reforms. It is more of laying down the uses of funds and the sources of funds by the Government of India. But in this particular Budget, there does seem to be some expectation around personal income tax rate cut.

Therefore as far as I am concerned, that would be the metric I would be closely watching because if the government has already tried a few things to perk up the economic growth and the results are not really that clearly visible, the only bullet left unused right now by the government is effecting a personal income tax rate cut, that can have very fast impact on domestic consumption. That is the data point I would watch out for.

What were your own expectations on the auto sector? Do you see some green shoots or some more weakness?
I am in the camp which believes that we are very close to the bottom, if we have not already passed the bottom. There are some green shoots available in front of us and the fourth quarter and the first quarter of the upcoming financial year should make us see some positive growth numbers for auto companies.

I would like to understand from you the part of the auto sector which like Bajaj Auto caters to the overseas market. The overseas market is looking shaky again. Is there a cloud there and what do you make of the margin improvement in general?
As far as the export part of the story is concerned, I would say the auto sector in India, barring a few names, predominantly remains a domestic story. We have to be convinced about the domestic consumption growth and the higher penetration in the coming years and decades for both passenger vehicles as well as two wheelers to be bullish on the auto sector.

As I said, it is predominantly a domestic rather than export story for the majority of the players. As far as improving margins are concerned, while companies are undergoing efforts to improve margins, we need to understand that for the next 12 months at least, it will be difficult on account of two factors.

One, customers are shying away from affecting purchases and therefore this would be a bad environment to increase prices to improve margins. I do not think that will be a strategy which many would want to play out. Therefore, discounts would remain high and that will keep the pressure on margins.

The other thing is that companies are moving from BS-IV to BS-VI. That means there is a cost increase for most auto companies. How much of that cost increase they will be able to pass on is yet to be seen. I would conjecture that in the initial quarters at least, they would want to absorb some of this. So ideally, one should not build in a margin improvement in the next few quarters but yes this is an industry with a huge operating leverage. As volumes come back, margins automatically will show propensity to improve.