The Nifty Auto index zoomed 10% on Friday, making it the highest gainer among sectoral and broad market indices after the government announced a ₹1.45 trillion fiscal stimulus package.
The cheer is not misplaced as automobile original equipment manufacturers (OEMs) and auto component makers, especially in the listed universe, have high tax outflows.
Lauding the government’s move to cut corporate tax, RC Bhargava, chairman, Maruti Suzuki India Ltd said, “Companies will now have the leeway to cut prices and become more competitive in the market place. They can (if they want to) reduce prices or use any other measure to the extent of anticipated profits to make a comeback in the market."
The government on Friday cut corporate tax rate for companies that do not avail of any tax incentive to 22%. Effective corporate tax rate after surcharge will be 25.17%.
New manufacturing companies will have to pay an even lower corporate tax rate of 15%.
Any price reduction will help stimulate domestic demand. Such measures will go a long way in boosting sentiment, especially at a time when the industry and investors are anxiously awaiting a goods and services tax (GST) rate cut on automobiles.
For now, it is worth noting that the effective tax rate for companies such as Bharat Forge Ltd and Motherson Sumi Systems Ltd was 35% and 37% , respectively, in FY19. OEMs such as Eicher Motors Ltd., TVS Motors Ltd., Hero Motocorp Ltd., Bajaj Auto Ltd., Maruti Suzuki India Ltd and Mahindra & Mahindra Ltd., all have tax outgo ranging from 27% to 33% of their profits earned before tax.
S Krishnakumar, chief investment officer, equities, Sundaram Mutual Fund, was upbeat about the implications for the auto sector. “Auto companies are definitely going to use the extra profits to pass price cuts and help improve demand and clear channel inventories," he said.
This will help improve the overall health of the auto sector, which has been battling mounting inventory levels, falling sales, production cuts, and layoffs.
According to Rajan Wadhera, president of Society of Indian Automobile Manufacturers, “expansion of scope CSR expenditure to include incubation centers and R&D activities will also help with R&D expenditures in automobile sector."
That said, the decision on how to utilize the tax cuts and the extra profits thereof, remains the prerogative of the companies.