GST auto cess hike: Will carmakers’ party end before it began?

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After cigarettes, it is the turn of the auto industry to bear the brunt of the whims of the Goods and Services Tax (GST) Council. The sudden move to hike cess on large cars that are 400 metres in length and of 1,500cc engine capacity will puncture the euphoria of the carmakers.

Besides, the inconvenience of raising the prices of cars to pass on the cess hike and the fickle approach of the government may impact demand in the near term too, if the GST’s recommendations are implemented.

What changes can one foresee? Prices of sedans, racing cars, special utility vehicles and luxury cars that were slashed by about 5-7% to pass on the benefit of lower cess will now be rolled back.

Effective rates that dropped from 52-54% before GST to a maximum of 43% (28% GST + 15% cess) will now be back to 53% (28% +25%), if the government implements it.

In most cases, the prices may go back to earlier levels, but in some models, prices may rise 2-3% higher too.

SUVs may bear the biggest brunt. In the listed universe, the biggest blow will be for Mahindra & Mahindra (M&M) Ltd. Utility vehicles comprise about a third of its sales volumes.

Investors were just rejoicing over the 20% year-on-year (y-o-y) growth in company UV sales during July. The cess hike will be a dampener.

The drop in volumes may weigh on operating margins, which were already being dragged down by the auto segment in the last few quarters.

Analysts could revise earnings estimates down by 1-2% in the case of M&M as FY2018 and FY2019 estimates had incorporated higher volumes following the steep price drop post the initial GST rates in July. Also, Tata Motors Ltd (TML) and Maruti Suzuki India Ltd (MSIL) will be affected marginally as the segment under consideration accounts for less than 5% of their sales.

According to Bharat Gianani, research analyst, auto/auto ancillaries, Sharekhan, “There may be a marginal change in growth estimates for M&M, but no change for MSIL and TML.”

The Street was quick to react in a discerning manner. On Monday, while M&M’s stock price closed lower both on the back of weak results and the news of a possible cess hike, MSIL and TML closed flat from the earlier trading session.

Shares of these firms could be range-bound until further clarity emerges on price hikes.

Meanwhile, the segment as a whole may see a slowdown after the festive season. Players like Toyota Kirloskar Motors and Renault Nissan Automotive are also big in the league of sedans and UVs that are impacted by the cess hike.

Some analysts also reckon that the hike in car prices following the cess hike may see an era of higher discounts again, to push sales.