GST Likely To Spur Auto Sector Growth

Nikita Singh and Lohit Bharambe scan the auto sector for investment opportunities in the GST era, even as the sector continues on its growth momentum.

Talk of the town is 'GST' in India right now and all the stakeholders, including businessmen and consumers, are trying to assess the financial impact the major tax reform may have. 

Automobile sector in one such sector which is impacted by the GST. Apart from being one of the biggest sectors in India and being the third largest automobile sector in the world, Indian automobile sector is also one of the fastest growing sectors in India. 

Whether GST will further infuse momentum to the already growing sector is something that will be interesting for investors. The impact of GST on earnings will be known only after couple of quarters and it may be too early to objectively quantify the impact. Prima facie, it does look like GST is all set to further spur growth for the automobile sector in India which contributes over 7 per cent to the country’s GDP. 

With GST being implemented, the sector witnessed a subsuming of excise, VAT, sales tax, road tax, motor vehicles tax as well as registration duty on cars and bikes. 

Car being categorized as a 'luxury', a standard tax rate of 28 per cent is levied on the automobile sector which includes small car segment, mid-sized cars, luxury cars, two-wheelers, commercial vehicles and passenger vehicles. 

The passenger vehicles in sector will also attract an additional cess between 1 to 15 per cent, different for different ranges of automobiles.

The small car segment, defined as a car with an engine capacity of 1200cc, was earlier subjected to a 12.5 per cent excise, 1.1 per cent cess, 14 per cent VAT along with the state governments' road tax and motor vehicle tax, all summing up to about 28 per cent. 

However, under the GST, the petroleum small cars will attract a total tax of 29 per cent, break up into a standard tax of 28 per cent and a one per cent cess. The diesel small cars will be subjected to a tax of 31 per cent, attracting a 3 per cent cess in addition to the 28 per cent standard tax rate. 

Mid-sized cars, characterized as cars with engine capacity between 1200cc and 1500cc, earlier attracted an excise of 24 per cent in addition 1.1 per cent cess, 14 per cent VAT and state based road tax, and motor vehicle tax, summing to about 39 per cent. Post GST, the segment will be charged with a 43 per cent tax, including a 15 per cent cess.

However, post GST implementation, the markets witnessed a marginal reduction in prices of most of the small and mid-sized cars offered by India’s largest auto manufacturer Maruti Suzuki including Maruti Suzuki Alto 800 and Maruti Suzuki Dzire, due to the effect of reduced manufacturing cost and increased efficiency of supply chain with the implementation of GST. 

The luxury car segment, SUVs and hybrid vehicles are charged at the same rate under GST as the mid-sized cars, that is, total tax of 43 per cent. 

The luxury car segment and SUVs characterised as cars with over 1500cc engine capacity will reap the most amount of benefits, as the erstwhile tax regime subjected these segments to a tax rate of up to 45 per cent. Tata Motors, with an SUV launch line up in the current fiscal, is likely to make the most of the affordable price tag. 

The hybrid car manufacturers, including major auto players such as Mahindra & Mahindra with its Mahindra Scorpio and Maruti Suzuki with Maruti Ertiga and Maruti Ciaz, will be the most hit by the GST implementation. 

The two-wheeler segment of the Indian automobile sector, which has grown  into one of the biggest two-wheeler markets in the world, is split into two categories under the GST. The first category constituting of vehicles with engine size below 350cc, will attract a total tax of 28 per cent under the GST, which is lower than the earlier tax of over 30 per cent. 

The two-wheeler with an engine size of over 350cc will attract 31 per cent tax under the GST, which is slightly higher than a tax of 30.5 per cent levied earlier. This,will result in varied price revision with the Royal Enfield Classic 350 becoming cheaper, while Royal Enfield Classic 500 becoming pricier post-GST. 

However, the GST roll-out will only have either a positive or a neutral effect on the two-wheeler manufacturers, with the manufacturers retaining the benefits of lower production cost as an impact of GST.   

The auto ancillary sector, which benefits from the growth in automobile sector and accounts for nearly 22 per cent of country’s manufacturing GDP, is all set to get a boost due to GST implementation.

The auto ancillary sector's tax levy has been reduced from 28-30 per cent to 18 per cent under the new tax regime. While some speculate the new tax rate will be revenue-neutral for the sector, the prospects do look promising for the sector post-GST. 

The commercial vehicles manufacturers have a reason to cheer as the new tax rate under the GST regime will be 28 per cent. The commercial vehicle segment earlier attracted a total of 30.2 per cent tax that included 12.5 per cent excise and 12.5 per cent VAT. 

GST is expected to fuel growth for the commercial vehicles on account of revival in logistics sector. Tata Motors, Ashok Leyland, Swaraj Mazda, Eicher, Hindustan Motors, Mahindra & Mahindra and Volvo will stand to benefit. However, buses with a capacity of accommodating 10 to 13 people will face the brunt of GST with an increase in its tax rate by over 12 per cent, from a 30.2 per cent in the past to a 43 per cent under the GST.    

Even as most of the sector will enjoy a positive impact of GST roll-out, the manufacturers will lose most of the incentives provided by various state governments before the implementation of GST. Most of the state incentives are extended by the state governments on current value added tax (VAT) and CST, which is now subsumed in the GST, needing a relook at the incentives. 

Further the valuation of old stocks of spares with the dealers will suffer in the absence of input credit provisions. The dealers are expected to incur substantial loss in case credit cannot be availed for the one-year-old stock. The hike in the cost of insurance and loan EMIs with an 18 per cent tax levied on banking and financial services, the market may be battling with a disincentive.   

Eliminating the effect of crushing taxes, the industry will benefit from operational efficiencies, reduced production costs and smoother supply chain in the longer run.  

The auto sector is moving towards becoming a top-of-the-line industry of the economy and the implementation of the GST will make it a hotter destination for investments. 

It is a stock-pickers market with Indian benchmark indices scaling new highs. Even though the rally is broad-based, investors need to place their bets on sectors showing high growth. 

Automobile sector is ripe for investment and the GST regime promises to place the sector at an advantage and make it one of the major beneficiaries of the new tax regime. Investors looking at buying opportunities in the auto sector need to also focus on auto ancillary space, as it seems to be one of the major beneficiaries. 

The benefits of GST have been well documented but market participants need to be patient and wait for at least couple of quarters to fully understand the impact of GST on the earnings and sales growth in the automobiles sector in India. 

Implementation of  GST would reduce the cost of  manufacturing of cars and bikes due  to the subsuming of different taxes levied currently. Under the GST, the taxes would be charged on consumption state rather than the origin state, which would give  a boost to the growth rate of the automobile industry

GST Will Have A Positive Impact On The Auto Sector 

In your view, how will GST impact auto sector? Will auto ancillaries be affected more owing to GST implementation? 

Under GST, there will be no excise duty and VAT for cars, but the road tax will remain. The government announced a 28% GST plus an additional duty for passenger vehicles ranging from 1% to 15%. Small petrol cars will attract 1% additional duty, diesel variants 3%, and most large cars/SUVs 15%. 

In my view, GST has and will have a positive impact on the auto sector. This has been visible from the fact most of the auto companies have passed the benefits and cut prices from July 1. Maruti Suzuki has reduced prices by upto 3% across its brands except the smart hybrid Ciaz diesel and smart hybrid Ertiga diesel. Similarly, Hyundai has cut prices by upto 5.9%. Similarly, Hero Moto Corp has cut prices by 1-2%. Its peer TVS Motor Company has also taken similar price cut.

For auto ancillary, GST has been largely neutral. For the battery segment, GST has resulted in slight increase in taxes which like Exide and Amara Raja have been passed on through price hikes. For tyre companies, the rates are largely similar to current tax slabs, while for auto component companies the statewise levy would be different, it would be largely neutral. Any adverse impact would be only on working capital, which we expect to be only for the short term.

We believe that four-wheelers would stand to benefit the most. We believe that the price cuts done by them will only add to our positive outlook on volume growth. 

We have a positive outlook on the auto sector, especially on four-wheelers as we believe that the long-term structural growth remains intact. Our view is based on – 1) lower penetration of fourwheelers, 2) favourable demographics, 3) interest rates trending downwards and 4) expectation of good monsoon for 2017. As regards stock preference, within four-wheeler we like Mahindra and Mahindra and Maruti. While we are not positive on the two-wheeler segment, we prefer being stock-specific and prefer Eicher Motors and TVS Motor Company.

In general, what is your outlook on equity markets? 

We are very positive on market with 12,000 as Nifty target by March 2018 and by Diwali we should be above 10,800. GST will be a major trigger which will lead to earning upgrade towards second half of this financial year.

VST Tillers Tractors Limited is a company engaged in the manufacture of power tiller and tractor. The products of the company include rice transplanter, power reaper, engines, precision/auto components and agriculture implements. Over the next five years, the company is looking at strong market share gains in the tractor space. It is focusing on increasing its market share in tractors from 2 per cent to approx 5 per cent on the back of new launches. Recently, the company launched a Virat Plus (an upgraded version of the 27HP tractor) and received a strong positive response. In FY17, the company sold 2,200 units of 27HP tractors and it expects to increase this to near about 3,500 units in FY18. Inspite of this, VST has also launched a 17HP tractor and in FY18, it is looking to launching a higher HP tiller.

The company is also likely to generate strong double-digit CAGR earnings over FY18-19, backed by the upcoming new product launches across different segments. On quarter-on-quarter basis, VST Tillers Tractors Limited’s topline increased 11.77 per cent to Rs197.86 crore in the Q4FY17, as compared to Rs177.03 crore in the Q4FY16. However, the operating profit of the company was down by 8.24 per cent to Rs31.30 crore in the quarter ended March 2017, as compared to Rs34.11 crore of the previous year quarter ended March 2016. Also, the company’s profit after tax decreased by 10.08 per cent to Rs17.49 crore in the Q4FY17 as compared to Rs19.45 crore for the quarter ended March 2016. 

On an annual basis, the topline of the company stood at Rs696.01 crore, up by 7.71 per cent in FY17 as against Rs646.20 crore for FY16. However, the company’s operating profit declined 8.62 per cent to Rs114.34 crore of FY17, as compared to Rs125.13 crore of the FY16. The profit after tax (PAT) of the company also decreased 7.66 per cent, from Rs74.13 crore of the FY2015-16 to Rs68.45 crore of the FY 2016-17. For the financial year 2017, the profit after tax margin decreased by about 14.30 per cent. 

Keeping in mind the underlying growth potential and the new product launches, VST Tillers can surprise on the upside. Good monsoon this season will surely help company's sales growth.

 Market Cap (F.F.): Rs701.03 Crore

SML Isuzu, erstwhile Swaraj Mazda, is India’s major manufacturer of commercial vehicles and vehicle spares. It produces light and medium commercial vehicles, including state transport buses, specialised ambulances and customised vehicles such as prison vans, refrigerated vans and troop carriers. 

On the financial front, SML Isuzu reported an increase in net revenue by 16.2 per cent to Rs371 crore in the fourth quarter of FY17 on a yearly basis. However, the company posted a decline in its operational profit by 30.8 per cent to Rs19.6 crore in the fourth quarter of FY17, as against an operational profit of  Rs28.3 crore in Q4FY16. The net profit of the company also declined by 46.9 per cent to Rs8.8 crore in Q4FY17 as an  impact of the introduction of BS-IV norms in the fourth quarter. The company had posted a net profit of Rs16.7 crore in Q4FY16.  

On an annual basis, the revenue of the company increased 17.4 per cent to Rs1,369 crore for FY17 on a year-on-year basis. The company’s net profit witnessed an increase of up to 22.8 per cent to Rs63 crore as compared to the net profit in the previous year. Its EBITDA also rose 24.4 per cent on a yearly basis to  Rs108 crore in FY17.       

The company’s financial performance is likely to improve in the current fiscal with the BS-IV conversion cost wearing off. In the long run, the company is expected to benefit from the GST, as also reap the fruits of its generous investments in technological upgradations, improvement in plant infrastructure and expansion in capacity from an earlier capacity of 18,000 units to the current capacity of 24,000 units. The company is also expected to benefit from the government's thrust on urban infrastructure development, which will brighten the demand outlook for the company. The company had witnessed an increase in its market share in the bus segment to 8.1 per cent in the fourth quarter of FY17 from 7.3 per cent in Q4FY16. The company’s sales volumes in the cargo segment also surged 21 per cent in FY17, as against industry growth of 4 per cent.