Ban on Big Diesel Cars Hits Mahindra Hardest

The Supreme Court on Wednesday imposed a ban on registration of diesel cars with over 2000 cc engine in Delhi till March 31, 2016. Shares of top carmakers underperformed the broader markets today with the auto sub-index of the Bombay Stock Exchange falling 0.5 per cent as compared to 0.7 per cent gain in the broader Sensex.

How the ban of big diesel cars will impact automakers:

1) Delhi is a big market for diesel cars with 7 per cent of total 2.6 million four wheelers and 8,000 luxury cars being sold in Delhi on an annual basis, according to Maybank.

2) India's biggest utility vehicle manufacturer M&M, which sells popular SUVs such as Bolero, Scorpio and XUV500, will be the "worst affected" because of the court's decision, Maybank said. Japanese major Toyota, which sells the popular Innova MUV and Fortuner SUV, will also be impacted, analysts say.

3) M&M, whose 98.6 per cent of portfolio will be impacted by the ban, closed 5.5 per cent lower at Rs 1,218 on the National Stock Exchange. The stock was the top Nifty loser.
 

(Source: Religare Capital Markets)

4) The sharp fall in M&M shares was a kneejerk reaction, analysts say. According to Religare, the impact for M&M would be "minor" as Delhi accounts for just 2 per cent of the company's passenger vehicle sales. Angel Broking said impact on M&M could be "limited" because Delhi contributes just 2-3 per cent of the country's overall diesel car sales.

5) M&M Chairman Anand Mahindra said that the decision on diesel vehicles isn't "optimal", but added that his company will develop vehicles that comply with stipulations.

6) The extension of Delhi ban to other large Indian cities could lead to an industry-wide impact, analysts say. "Larger issue is it may impact consumer sentiment for buying a diesel vehicle and whether this ban could percolate to other regions. Hence the overhang on the (M&M) stock," said Mihir Jhaveri of Religare Capital Markets.

7) The auto industry should negotiate with the government for a permanent solution, said Bharat Gianani of Angel Broking. A better option would be to ban older, more polluting vehicles or further improving the emission for new vehicles, he added.

8) The ban of bigger diesel cars will not impact Maruti Suzuki, the country's biggest carmaker, analysts said. Most cars in Maruti Suzuki's stable have smaller, petrol engines. It will also not impact Tata Motors, whose Safari SUV runs on 2200 cc diesel engine. Tata Motors gets most of its revenues and profits from its Jaguar Land Rover division that makes high-end cars.

9) The court's decision to ban diesel commercial vehicles registered prior to 2005 from plying in Delhi will benefit commercial vehicle maker Ashok Leyland, analysts say. Ashok Leyland will benefit "replacement demand" as older vehicles are discarded. The stock closed 0.7 per cent higher at Rs 87.95.

10) The court also ordered all taxis in the capital to replace diesel with natural gas. This is likely to boost demand for compressed natural gas (CNG) in the national capital region. Shares of Indraprastha Gas closed 7 per cent higher at Rs 500.35 today.