Shares of OEMs had a stellar run on the stock exchanges on Monday following the government’s decision to review of current Goods and Services Tax (GST) rates. Maruti Suzuki, Ashok Leyland, TVS Motor, Bajaj Auto and Hero MotoCorp were among the performers on the NIFTY Auto Index as investors were optimistic about a potential cut in the GST rates of vehicles, which could result in higher sales, particularly for entry-level cars and two-wheelers.
The broader NIFTY Auto index rose 4.2% on Monday to 25,127.20 points. Maruti Suzuki, Ashok Leyland, TVS Motor, Hero MotoCorp and Bajaj Auto rose 8.9%, 8.2%, 6.4%, 6% and 4.6%, respectively, on Monday. Shares of Maruti Suzuki, Ashok Leyland and TVS hit their all-time highs during intraday trading. Mahindra & Mahindra and Tata Motors also rose 3.5% and 1.7%.
On Friday, Prime Minister Narendra Modi announced that the government is reviewing the GST structure, and relief can be expected by Diwali this year. Though Modi did not explicitly mention the automobile industry, the potential for a significant overhaul of vehicle taxation is widely anticipated.
It is widely believed that there could be a reduction in the overall tax burden on consumers, particularly for entry-level cars and two-wheelers, and a new structure would also aim to resolve long-standing classification disputes based on a vehicle’s engine capacity and size, which have complicated the existing tax regime.
Most of the vehicles are currently subject to a 28% GST, plus an additional compensation cess that can range from 1% to 22% depending on the vehicle type. This tiered structure results in a wide range of final tax burdens, from around 29% for small petrol cars to as high as 50% for large SUVs. The government has reportedly proposed moving the GST system to a two-tier rate structure of 5% and 18%, and a 40% slab for a few items. The GST on vehicles will reportedly be reduced to 18%.
A reduction in GST, assuming the full benefit is passed on to consumers, would likely boost vehicle demand. According to Raghunandan NL, director at Nuvama Institutional Equities, this could lead to a 2-5% increase in demand. “Assuming a 4% improvement in domestic volume growth, the total revenue improvement could be up to 2-3%, with key beneficiaries such as Hero, TVS, Bajaj, Maruti and Escorts,” he said.
These changes could potentially boost demand in the entry-level segment at a time when the passenger vehicle is struggling for growth. Mass market passenger vehicle makers, including Maruti Suzuki, Hyundai India and Tata Motors, will benefit if the proposed new GST structure is implemented. More than 60% of the sales of these three automakers come from vehicles less than 1,200cc.
Recently, RC Bhargava, the chairman of India’s largest passenger vehicle manufacturer Maruti Suzuki, has raised a red flag on the long-term health of the country’s passenger vehicle industry amid sluggish sales growth and called for government policies that can facilitate the growth of the car industry.
A report from Kotak Institutional Equities said that any price reduction from the GST rate cut is expected to stimulate a recovery in demand, particularly within the mass-market category. The report noted that this shift would benefit auto manufacturers through higher revenue and margins, potentially leading to an upgrade in their earnings.
“In case tax is lowered for the auto sector by 10%, it could boost demand, in our view, by approximately 15-20%. A common rate of tax for small cars and SUVs may also hand a significant advantage to SUVs. A common rate of tax for small cars and SUVs may also hand a significant advantage to SUVs,” Nomura said in a report.