Sector Update - Auto - ICICI Securities

Media reports say that the government is considering reducing GST rate on 2-W, recognising that vehicles are neither 'luxury' nor 'sin' goods and, hence, should not attract a high GST rate. It is said that the GST Fitment Committee has been asked for its recommendations in this regard, with the decision to then be ratified by GST Council.

Our View

Our interaction with leading 2-W companies suggests the decision could lead to lowering of prices at the consumer level provided the cut is implemented for the entire 2-W ecosystem (i.e. including components and materials) and not just the final product produced by OEMs. Lowering of tax on final product without a corresponding reduction in components used to manufacture it (i.e. inverted duty structure) would not really benefit end consumers. If the change is made applicable for the entire 2-W value chain, however, there would be a reduction in final prices by ~8% (on ceteris paribus basis, reduced rate assumed to be 18%). However, there is a case wherein the benefit may not be extended to premium motorcycles (e.g. >150 cc) and prices for those products would remain unchanged. Our present target prices for 2-W OEM coverage universe i.e. Hero MotoCorp (HMCL), Bajaj Auto (BAL), Eicher Motors (EML) adequately reflects our outlook on demand, operational parameters. Hence, we leave them unchanged. Post stock price run up since our last updates, HMCL has been downgraded from BUY to HOLD while we maintain HOLD on BAL, EML.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_Auto_SectorUpdate_Aug20.pdf

Source : Equity Bulls

Keywords