Vehicle scrapping policy back on table; these auto stocks stand to gain as vehicles go off road

With the central government bringing the auto scrapping policy back on the table the volume of medium and heavy commercial vehicles on the road could come down significantly, said HDFC Securities in a report. This shrinking volume of commercial vehicles might not be all bad, as it opens pockets of opportunity with commercial vehicle (CV) sales gaining momentum as the on-road volumes decline. The report adds that the slowing loan growth and falling auto sales for the past two years could change rapidly with the scrapping policy in space. The move could benefit auto financiers as loan growth may surge while consumers look to buy new vehicles.

Nitin Gadkari, Minister of Road Transportation, earlier this month said that the scheme is being finalised and could be expected by next month. “While the intention is evident, little is known about the details of the scheme. These details would entirely determine the extent of the impact of the scheme on auto OEMs and auto financiers alike,” the report said. Analysts at HDFC Securities expect the scheme to be mandatory for all, however it is still unclear whether the government will offer incentives to owners at this juncture when the government’s financials are not too strong.

“We believe the announcement of this scheme will be beneficial as CV sales have been impacted by the increase in axle load norms, the introduction of BSVI vehicles and the COVID-related downturn,” HDFC Securities said. It estimates that around 6.5 lakh CVs were sold between financial year 2001-15 and 5.63 lakh between financial year 1996-2000. “The scrapping scheme would be an important driver of sales, in our view. Both the OEMs, Tata Motors and Ashok Leyland, will benefit from the above,” the report adds. Additionally it says that Eicher Motors and Mahindra & Mahindra could also benefit. HDFC Securities has an ‘Add’ rating on Tata Motors.

The benefit of the scrapping policy will also be enjoyed by auto financiers who have in the recent years witnessed slowing loan growth as auto sales succumbed during the slowdown in the country’s economic growth. “Regardless of the vintage of vehicles covered, the scrapping policy will result in up-trading which bodes well for the growth prospects of vehicle financiers in the long-run,” HDFC Securities said. Financiers of used vehicles could also see strong demand with consumers lining up to buy pre-used vehicles at the current juncture. Although the report does not estimate the changes in assets under management for vehicle financiers without knowing the details of the policy, Cholamandalam Investment and Finance Company and Au Small Finance Bank remain the preferred picks in vehicle financing space.