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Proposed rate cuts likely to revive sector demand from this festive season

Auto demand has been weak in the first four months of FY26, with all segments, except tractors, trailing growth estimates. In terms of volume, the domestic 2W industry is down 4% YoY (earlier estimate of high single-digit growth), PVs are down 1% YoY (est. of 2-4% growth) and CVs are flat YoY (est. of mid-single-digit growth). In such a muted situation, the government’s proposal to rationalize GST rates comes as a much-needed booster dose for the sector given that the bulk of the auto sector falls under the 28% slab, which is proposed to be reduced to 18%. This is expected to reduce vehicle prices by ~7%, hence leading to a demand revival. This is in addition to several tailwinds for the sector such as: 1) positive progress of monsoon driving up rural sentiment, 2) income tax benefits, and 3) interest rate cuts. Thus, if the GST rate rationalization happens on expected grounds, it is likely to drive a pick-up in auto demand from this festive season and is also likely to drive a re-rating for the sector. Segmental beneficiaries include small cars (as SUVs are likely to be taxed higher) and 3Ws and CVs (as benefit for 2Ws would be partially offset by ABS mandate). We would wait to understand the finer details of this proposal before changing our estimates and recommendations. Our top OEM picks in the sector remain Maruti Suzuki, Hyundai India and M&M, and our top auto ancillary picks are Endurance, SAMIL and Happy Forgings.

While the stocks have moved up 2-9% on 18th Aug’25, we elaborate our thoughts on different sub-segments after interacting with a few companies and experts.

GST rate rationalization proposal – understanding sectoral nuances

Passenger Vehicles (PVs)

* All PVs currently fall under the 28% GST bracket.

* However, there are multiple sub-segments, and each gets taxed at a different rate depending on the fuel mix and the cess levied on each vehicle.

* Simply put, small cars (up to 4 meters in length) are taxed at 28%, whereas large cars (above 4 meters) are taxed in the range of 43-50%.

* As per our understanding, the GST rates would be reduced only for small cars, while large cars are likely to be classified as “luxury” and hence would remain in the higher tax slab.

* Moreover, given that the government’s target is to benefit the middle class and it would have limited fiscal room, we think large vehicles are likely to be taxed at a higher rate.

* Hence, we believe MSIL is likely to be one of the major beneficiaries of this move compared to peers.

Two Wheelers (2Ws)

* 2Ws up to 350cc get taxed at 28%, and 2Ws above 350cc attract another 3% cess and hence get taxed at 31%.

* This segment is also likely to see a reduced GST rate of 18%.

* However, the government also wants to implement ABS for all 2Ws, which the government may push along with a cut in GST rates.

* Thus, assuming the government’s push for its ABS mandate, the net benefit from the GST rationalisation would be limited for 2Ws.

Commercial Vehicles (CVs)

* This segment is also taxed at a 28% GST rate.

* It will benefit both from a reduction in GST rates and a general pick-up in consumption.

* However, the only pure-play CV company that would benefit from this is Ashok Leyland.

Tractors

* Tractors are currently taxed at 12%.

* This segment already suffers the inverted duty structure as majority of its components are taxed at 18%. Hence, the entire input tax credit cannot be claimed, which leads to working capital blockage.

* Hence, even if the GST rate is reduced to 5% for tractors, it remains to be seen if this sector will see a commensurate benefit, as we do not expect the tax rate on components to be reduced to 5%.

Quick observation on few auto ancillaries

* We understand that tyres (except farm) and batteries attract a GST rate of 28%. These segments have a huge replacement market. Thus, they stand to benefit from the GST reduction.

* The GST rate on segments like forgings and wiring harness is 18%, which may remain unchanged.

* Overall, the GST restructuring would be a pass-through for all auto ancillaries, though we believe domestic-focused companies are likely to be indirect beneficiaries of this rationalisation given the expected demand revival. Since export-focused companies continue to face headwinds in their end markets, we think the final benefit of this measure is unlikely to be material for them.

* Hence, key auto ancillaries within our coverage universe that are expected to benefit include all tyre companies, battery companies, Bosch, Endurance, Happy Forgings and MSWIL.

* A quick take on Endurance: Endurance enjoys a dual benefit: 1) first is the indirect effect of auto demand recovery 2) the possible implementation of ABS on all 2Ws.

Near-term factors to watch out for

* While the GST rate rationalisation is going to drive long-term demand for the sectors where it is applicable, it is likely to have some teething issues in the interim.

* For instance, if these rates are not implemented soon, customers are unlikely to buy vehicles before this move in anticipation of the rate cut.

* At a time when OEMs were looking to push dealer stock in anticipation of a demand revival in the festive, this move is likely to put OEMs in a spot in the interim.

* Further, beyond the dealer stocks, it remains to be seen what happens to the working capital in the system in this transition period and who bears the impact of the same. We wait for clarity on these issues.

Understanding the timelines

* The GoM will be meeting to discuss the GST rate rationalization on 20-21 Aug.

* If the Centre’s proposal is accepted by the GoM, it is likely to be placed before the GST Council in its meeting scheduled for next month.

Our View

* FY26 has started off on a weak note for the auto sector as most segments, except tractors, are currently trailing growth expectations.

* After the first four months of FY26, domestic 2W industry is down 4% YoY (earlier estimate of high single digit growth), PVs are down 1% YoY (est of 2-4% growth) and CVs are flat YoY (estimate of mid-single digit growth).

* The proposed GST cut rationalisation is a much-needed booster shot for the sector. This is in addition to upcoming favorable tailwinds such as: 1) positive progress of monsoon driving up rural sentiment, 2) income tax benefits, and 3) interest rate cuts.

* Thus, if the GST rate rationalisation happens on expected grounds, it is likely to drive a pick-up in auto demand from this festive season and is also likely to drive a re-rating for the sector.

* We would wait to understand the finer details of this proposed move before changing our estimates/recommendations.

* Our top OEM picks in the sector remain Maruti Suzuki, Hyundai India and M&M and our top auto ancillary picks are Endurance, SAMIL and Happy Forgings.

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