Automobiles & Components Sector Update : GST reset—incremental sector support by Kotak Institutional Equities
Potential GST cuts to 18%, with cess removal, could lower on-road prices by 5-8% across segments, potentially driving demand recovery. OEMs stand to gain through higher volumes and earnings upgrades (4-20% depending on the scenario). Domestic ancillaries benefit from 5-11% EPS potential upgrades through operating leverage, while global suppliers see only marginal gains, given export-heavy exposure and tariff-related uncertainty.
Another dose to revive auto demand
After announcing a slew of measures to boost consumption demand, income tax cuts and interest rate cuts, the government has proposed GST reform, moving to two slabs (likely 5% and 18%) and eliminating cess that could materially benefit the auto sector. Tractors, 3Ws and CVs may see 5-8% on-road price cuts, whereas PVs may see 6-13% price cuts (13% cuts if GST is reduced to 18% for all segments). 2Ws may see 8% price cuts, but ABS implementation may result in lower price cuts of 4% (<125 cc segment). Lower prices would stimulate demand recovery across segments, particularly in the mass-market categories. OEMs may gain from higher volumes and a potential margin upside, while suppliers may incrementally benefit from improved working capital.
GST rationalization—broad-based demand stimulus for auto OEMs
We believe multiple government initiatives, including potential GST cuts, will drive auto demand. A shift to 18% GST (across most segments) could reduce on-road prices by 3-8% across 2Ws, PVs, CVs and tractors, which may stimulate volumes. For 2Ws, ABS implementation may offset some benefit, but Royal Enfield and TVS Motors may gain meaningfully, whereas Bajaj Auto sees limited upside, given a higher export mix. PV OEMs (MSIL, HMIL, MM and TTMT) stand to benefit with potential earning upgrades of 4-8% in the GST cut to 18% for select segments and 12-20% if GST moves to 18% across models. CVs could see a cycle revival, while the tractor segment may maintain momentum. Retain BUY on M&M and HMIL, ADD on MSIL and SELL on HMCL, BJAUT and EIM. Upgrade TVS to ADD (from REDUCE) and AL to BUY (from ADD).
Domestic ancillaries poised to gain
Domestic auto ancillaries are set to benefit through higher OEM demand, strong replacement volumes and operating leverage, with a 5-11% EPS uplift for ENDU, VARRC and UNOMNDA. Tire makers also gain from replacement demand (except BKT due to higher global exposure), while battery companies may also benefit due to an uptick in OEM, replacement and industrial demand. Bearings may see a limited upside (3-4%), as GST is already set at 18% for the replacement segment and higher exposure to exports and the industrial segment. By contrast, global ancillaries (BHFC, SAMIL and SONACOMS) see marginal gains due to export-heavy exposure and global headwinds. Retain cautious rating on global ancillaries, battery and bearing companies. Upgrade ENDU to ADD (from REDUCE) and VARROC, CIEINDIA, CEAT and APTY to REDUCE (from SELL). Retain SELL on UNOMNDA due to expensive valuations.
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