The Indian auto sector is bracing for a significant transformation as Nomura, a leading brokerage firm, forecasts substantial benefits for key players following anticipated GST reductions. The analysis highlights Mahindra & Mahindra, Maruti Suzuki India, and Ashok Leyland as the companies with the most to gain from these tax cuts.

Expected Impact on Demand and Pricing

Nomura's report suggests that the GST cuts could create a multiplier effect of 1.0-1.5 on demand, potentially leading to a 10-15% increase in overall automotive sales. This surge is expected to be driven by sizeable price reductions on popular models across various segments:

• Maruti Suzuki: Wagon R
• Mahindra: Bolero
• Hyundai: Brezza, Creta, and XUV700

Key Beneficiaries in the Four-Wheeler Segment

The four-wheeler manufacturers are positioned to reap more significant benefits compared to their two-wheeler counterparts. Maruti Suzuki and Mahindra & Mahindra stand out with their substantial exposure to the small car segment:

This positioning is likely to give these companies a competitive edge in capitalizing on the expected demand surge.

Two-Wheeler Segment: A Mixed Bag

While the entire auto sector is set to benefit, the two-wheeler segment faces a unique challenge. The implementation of anti-lock braking systems is expected to erode approximately 50% of the benefits from GST cuts, potentially limiting the positive impact for two-wheeler manufacturers.

Financial Implications for Auto Companies

Nomura estimates that the GST reductions could lead to significant financial improvements for auto manufacturers:

• Margin improvement: 100-150 basis points expected for all OEMs (Original Equipment Manufacturers)

Auto Component Suppliers Set to Gain

The ripple effect of increased demand is expected to benefit auto component suppliers as well. Companies well-positioned to capitalize on this trend include:

• Uno Minda Corp
• Motherson Sumi Wiring India
• Sansera Engineering

These suppliers are anticipated to experience volume growth and improved pricing power as a result of the sector's overall boost.

Potential Setback for Electric Vehicles

While the GST cuts are largely positive for the traditional auto sector, they may present a challenge for the electric vehicle (EV) market. The price gap between EVs and internal combustion engine vehicles is expected to widen, potentially delaying widespread EV adoption by two to three years.

Market Reaction and Current Sales Trend

The auto market is already reacting to the anticipation of GST cuts, with sales experiencing a substantial decline. This trend suggests that potential buyers are postponing their purchases in expectation of better prices following the tax reductions.

Recent Performance of Auto Stocks

The BSE Auto Index has gained nearly 20% in FY26, significantly outpacing the Sensex's 5.5% rise. Eight auto stocks including Hyundai Motor India, Bosch, UNO Minda, Hero MotoCorp, TVS Motor, Ashok Leyland, MRF, and Mahindra & Mahindra have rallied between 25% and 50%.

Sector Financial Performance

The sector posted 7% year-on-year revenue growth in quarterly results, with profits growing 10% despite margin pressures from rising input costs. Two-wheeler exports increased 23% while passenger vehicle exports grew 34%. Domestic two-wheeler sales declined 2%, but tractor and three-wheeler volumes rose 9% and 10% respectively.

Factors Supporting the Rally

The rally in auto stocks is supported by export growth, rural demand revival, premiumization trends, and potential GST rate cuts on vehicles.

Analyst Recommendations

Axis Securities has issued buy recommendations for:

• Hero MotoCorp (target Rs 5,220.00)
• Bajaj Auto (target Rs 9,360.00)
• Ashok Leyland (target Rs 135.00)
• Sansera Engineering (target Rs 1,500.00)

As the auto sector awaits official confirmation of the GST cuts, the industry remains poised for a potential resurgence in demand and profitability. However, the actual impact will depend on the final implementation of the tax reductions and how quickly consumers respond to the new pricing landscape.

The Indian auto sector received a potential boost as the government proposed reducing Goods and Services Tax (GST) rates on two-wheelers under 350 CC and small cars from 28% to 18%. This proposal, which includes creating two rate categories for cars instead of the current varied rates based on cess, has sparked optimism in the industry and led to a rally in auto stocks.

Impact on Two-Wheeler Manufacturers

The proposed GST rate cut is expected to significantly benefit two-wheeler manufacturers, particularly those with a high exposure to the current 28%-31% tax bracket:

• Hero MotoCorp and Eicher Motors emerge as top potential beneficiaries, with 95% and 89% of their domestic sales respectively falling in this bracket.
• Bajaj Auto and TVS Motor also stand to gain, with 52% and 69% of their sales exposed to the higher tax rate.

Four-Wheeler Segment Changes

The proposal also includes potential changes for the four-wheeler segment:

• Hybrid passenger vehicles may see rates reduced from 28% to 18%, benefiting manufacturers like Maruti Suzuki, Mahindra & Mahindra, and Ashok Leyland.
• However, SUVs and luxury cars could face a 40% 'SIN Tax', potentially impacting their pricing and demand.

Market Response and Analyst Views

The auto sector has responded positively to the news:

• The Nifty Auto Index gained 2.50% over the past month.
• Hero MotoCorp and TVS Motor saw significant increases of 7%-11%.
• Maruti Suzuki and Mahindra & Mahindra rose by 4%-6%.

Analysts have weighed in on the potential impact:

• Morgan Stanley noted that similar tax cuts in 2008 led to a 20% increase in demand.
• Nomura estimates that a 10% tax cut could boost demand by 15%-20%.

Potential Challenges

While the proposed rate cut is generally seen as positive for the auto sector, some concerns have been raised:

• The tax reduction may impact electric vehicle (EV) adoption by widening the price gap with internal combustion engine (ICE) vehicles.

Historical Context

The government's proposal brings to mind a similar move in 2008, which resulted in a significant boost to auto demand. This historical precedent adds weight to the potential positive impact of the current proposal.

Conclusion

The proposed GST rate cut for two-wheelers and small cars has injected optimism into the Indian auto sector. While the final implementation and its effects remain to be seen, the market has responded positively, with auto stocks rallying. However, stakeholders will need to carefully consider the potential impacts on various segments of the industry, including the emerging EV market.