Sharekhan says Key beneficiaries of the scrappage policy will be CV players. Sharekhan likes Ashok Leyland and Tata Motors in that space. Other OEMs, which are expected to benefit from the proposed policy, are Maruti Suzuki and M&M. As a proxy play to the scrappage policy in the auto ancillary space, Sharekhan prefers Bosch, Sundram Fasteners, and GNA Axles as their picks. Ashok Leyland share price today is Rs 111, down Rs 2.2 or 1.9%.

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The Government of India has proposed ‘Voluntary Vehicle-Fleet Modernisation Program’ or ‘Vehicle Scrapping Policy’ in the House of People (Lok Sabha) on March 18, 2021. The proposed policy aims to reduce old and defective vehicles from the road and achieve reduction in vehicular air pollutants. The government has laid down a basic framework for setting up a formal system for vehicle scrapping and supporting people economically, while buying new vehicles. Besides removing the existing older vehicles running on roads, the Government aims to formalise the scrapping industry, which would be aiming to create a chain of vehicle fitness and scrapping centres across the country.

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The government is expected to publish draft notification over the next few weeks and has given a tentative timeline for application of proposed scrapping policy, which will lay down rules for fitness tests and scrapping centres by October 2021, and scrapping of government and PSU vehicles above 15 years of age by April 2022. The policies for mandatory fitness testing for heavy commercial vehicles (CVs) and other categories are expected to come by April 2023 and June 2024, respectively. The proposed policy covers CVs of over 15 years of age and private vehicles of over 20 years of age, which either fails fitness tests or failure to re registration.

The criteria for a vehicle to be scrapped is primarily based on the fitness of vehicles through automated fitness centres in case of CVs and non-renewal of registration in case of private vehicles. As per government estimates, the country has 51 lakh light motor vehicles (LMVs) which are older than 20 years and 34 lakh LMVs older than 15 years. Around 17 lakh medium and heavy commercial vehicles (M&HCVs) are older than 15 years without valid fitness certificate.

Further, the Government of India expects the new scrappage policy is likely to boost sales of the automobile industry by 30%. The industry’s domestic turnover is estimated to go up to Rs 10 lakh cr as compared to Rs 4.5 lakh cr over the next few years. The export component of this, which at present is Rs 1.5 lakh cr, is expected to go up to Rs 3 lakh cr, as the practice of scrapping would reduce cost of auto parts by 30%-40%. The government has also proposed to levy a ‘Green Tax’ on older vehicles, which are polluting the environment. The proposal will go to the states for consultation before it is formally notified and the policy will come into effect from April 1, 2022.

The Green Tax Policy will be part of the scrappage policy and would work towards a cleaner vehicular environment. In our view, the proposed fee hikes for fitness certificate and re-registration are a welcome step by the government. Sharekhan believes these fee hikes need to be supported by favourable incentives for scraping older vehicles. There are few missing links such as incentives or subsidies for auto manufacturers. The proposed policy expects auto manufacturers to give additional 5% discounts to customers providing a scrapping certificate.

Sharekhan needs to understand these modalities in detail and will await till the final draft of the policy, which is expected to be announced over the next few weeks. The immediate benefit for the industry would come from the policy of deregistration and scrapping of vehicles owned by government departments and PSUs. The intention of the government is directionally clear and would benefit the automobile sector across the segments in the medium to long run.