How Lula’s Government Ruling Can Affect Car Rental Companies
Car rental companies could be among those who benefit from the provisional measure published by Lula’s government offering a reduction of R$2,000 to R$8,000 on car prices. According to market analysts, this will turn out beneficial as it results in lower investment expenditure and improved margins for companies in the long run. However, it is a “short blanket” initiative that lasts for four months and is exclusive to an initial purchase for individuals. Thus, the positive impacts of the ruling are limited.
Benefits for Rental Companies
Credit Suisse expects no significant impact for Movida and Localiza, despite the short-term headwinds. Analysts highlight the higher depreciation at the start of the programme, with the devaluation of current fleets; however, long-term depreciation is expected to decrease in the long term. As companies would buy cheaper cars, whose value would increase after the end of the subsidies, the initiative would benefit rental companies in the long term.
A Possible Negative Effect for Localiza
According to experts, Itaú BBA estimates that Localiza’s net result could have a reduced value of R$900 million to R$1.5 billion in 2023. This projection is compared to the bank’s current forecasted amount of R$2.5 billion, considering a decrease of 3% to 5% in the book value of the cars. However, in the short term, the programme could have possible positive impacts, according to Daniel Gasparete, Gabriel Rezende, and Luiz Capistrano.
Normalization of Car Prices
Based on Itaú BBA’s estimate, the normalization of car prices after the end of tax exemption would mean that vehicles bought at lower prices should sell with margins higher than average in the used car division. The additional volume of cars would accelerate fleet rejuvenation and potentially benefit maintenance costs. The sum of all these positive effects could translate into an increase of around 10% for Localiza numbers, even though the duration of the subsidy is limited.
Term and Exclusivity
The initiative is a “short blanket,” as Abla’s president, Marco Aurelio Nazare, calls it, despite its contribution to the reduction in prices. According to Nazare, the program should be extended from 12 to 18 months to bring more direct benefits. Along with this, the exclusivity of the initial purchase for individuals surprised Abla negatively. It is not enough to lower the price; increasing purchasing power and reducing indebtedness and interest rates can improve access to credit and reduce delinquency. The representative of Abla appreciates that the initiative of the government is not enough to solve the problem.
Engaging Piece
According to the Brazilian Car Rental Association, Brazil’s GDP had a value of $1.87 trillion for 2020. The country’s economy was already in distress due to the Covid-19 pandemic, which led to a decrease in consumer spending, a surge in unemployment, and a decline in tourism. The initiative to lower car prices could not have come at a better time, but according to experts, it is still not enough to address the sector’s most significant challenges.
Moreover, this short-term aid may benefit car rental companies only for a limited duration. President Jair Bolsonaro refused to extend the monthly supplemental emergency funds of R$500 ($100) that hit the poorest laborers, whereas the country’s unemployment rate increased to 26.4 million in July 2021. For car rental companies, jobs generated from the program may turn out to be only a temporary benefit.
Considering the macroeconomic scenario, rental companies remain cautious in their demand outlook while waiting for rental prices to adjust. Also, with an increase in taxes, fuel prices may follow suit, making it more expensive for individuals to rent cars.
It is essential to note that this subsidy applies only to individuals’ initial purchase; hence, rental companies will need to invest substantially more to improve the quality of their fleet, a significant expense that can significantly impact their balance sheets. The initiative’s scope only extends to the initial purchase, which, according to experts, can only lead to inflationary patterns in the long term if the economy does not adjust.
Brazil’s economic situation can benefit rental car companies in the long term if the government and its people take the necessary action to address underlying structural issues. The Rental Car Association is advocating for measures that will increase purchasing power, reduce indebtedness, and improve access to credit to reduce delinquency rates. For now, the rental car industry must be patient and wait for more permanent solutions that address the industry’s core challenges.
Summary
The recent provisional measure published by Lula’s government resulted in reduced car prices by R$2,000 to R$8,000. According to experts, this can lead to lower investment expenditure and improved margins for rental car companies in the long term; however, the short-term headwinds are possible. Although the long-term depreciation will decrease, the higher depreciation at the start of the program will cost more. Furthermore, the initiative’s short exclusivity, only available during the initial purchase of a vehicle, limits its scope to the short term. Despite the possible positive impact on rental companies in the short term, there are still underlying structural issues that require a more permanent solution.
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Car rental companies may be among the potential beneficiaries of the provisional measure announced by the Lula government, which establishes discounts of R$2,000 to R$8,000 on car prices. Analysts cite a lower need for investment and an improvement in company margins as possible advantages.
The four-month duration of the subsidy, however, and the exclusivity of initial purchase for individuals limit the positive impacts, according to market analysts and representatives of the segment.
For rental companies, the initiative should bring headwinds at first, but favorable winds in the long term, according to Credit Suisse, which does not expect significant impacts for Localiza and Movida.
Analysts highlight the higher depreciation at the beginning, with the devaluation of the current fleets. On the other hand, long-term depreciation would decrease as companies would buy cheaper cars, whose value would increase when the subsidies ended.
In a report on possible MP impacts for Localiza, Itaú BBA estimates a negative impact on the company’s net result of R$ 900 million to R$ 1.5 billion in 2023, compared to the bank’s current forecast of R$ 2 .5 billion, considering a decrease of 3% to 5% in the book value of the cars.
“On the other hand, the market seems to be more focused on 2024 than on 2023. This negative effect should be dwarfed by possible positive impacts in the short term,” write Daniel Gasparete, Gabriel Rezende and Luiz Capistrano.
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Itaú BBA estimates that, with the normalization of car prices after the end of the tax exemption, vehicles bought at lower prices (or renamed, but not put up for sale) should sell with higher-than-average margins in the used division.
“The additional volume of cars would accelerate fleet rejuvenation and potentially benefit maintenance costs. The sum of all these positive effects can translate into an increase of around 10% for our Localiza numbers”.
Term and exclusivity
Despite contributing to the reduction of prices, the initiative is a “short blanket”, assesses the president of the National Council of the Brazilian Association of Car Rental Companies (Abla), Marco Aurélio Nazaré.
“There will be a reduction in capex (investments), but it will also reduce the value of the assets of companies in the sector,” he says. The spokesperson estimates that to bring more concrete benefits, the program would have to be extended from 12 to 18 months, a period that he considers adequate for the renewal and rebalancing of the fleet.
The Credit team calculates that the initiative may have an even shorter life than initially planned, considering that the R$ 500 million implies subsidies for 62,000 to 250,000 cars, compared to around 6,000 light vehicles produced per day in 2022.
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“It is unlikely that the program will last much more than a quarter, possibly reaching its limit in less than two months”, project Régis Cardoso and Henrique Simões.
Santander, for its part, classifies the initiative as a slightly negative point for companies in the sector, since discounts for new cars should have an impact on used car sales by rental companies for the duration of the program. . In the first quarter of 2023, the pre-owned segment weighed heavily on the balance sheets of Movida and Localiza.
Rental companies could partially offset this effect by buying cheaper new cars, Santander analysts Lucas Barbosa, Lucas Esteves and Gabriel Tinem add. “But that is if the government extends the benefits to corporate buyers (which, at least in the first 15 days, will not be allowed).”
The exclusivity of the initial purchase for individuals surprised Abla negatively, according to Nazaré. “We understand the need for measures to reduce prices, but this has to be done fairly, because it is not the individual customer who will solve the problem,” he says, noting that rental companies plan to buy around 600,000 cars in 2023. .
Levante Investimentos industry analyst Flávio Conde sees positive potential for rental companies in the MP. However, he cites the limited extension and the macroeconomic scenario as sore points. “The main incentive will only come when interest rates drop below 10%, which we don’t expect to happen before 2025, he says.
In the same line, the representative of Abla appreciates that the initiative of the Government is not enough to solve the problem. “It is not enough to simply lower the price. It is necessary to increase purchasing power and reduce indebtedness and interest rates to improve access to credit and reduce delinquency”, says Marco Aurélio Nazaré.
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