GST relief talk propels two-wheelers; Hero MotoCorp poised to benefit2 min read . Updated: 26 Aug 2020, 10:09 PM IST
A cut in tax rates from the present 28% can bring down prices of two-wheelers, which in turn would boost sales, especially in the price-sensitive entry level and economy segments. If approved by states, it will aid demand recovery
Shares of two-wheeler majors Hero MotoCorp Ltd, Bajaj Auto Ltd and TVS Motor Co Ltd gained 2-6% on Wednesday after finance minister Nirmala Sitharaman endorsed the need for a reduction in the goods and services tax (GST) for two-wheelers.
The industry is seeking GST relief to offset the increase in vehicle prices, driven up by a transition to new emission norms, a rise in insurance premiums and state levies.
A reduction of GST to 18% from the current 28% can lower vehicle prices by 8%, provided the tax cut is applicable for the entire two-wheeler value chain, according to analysts at ICICI Direct Research.
If approved by states, the tax cuts will aid two-wheeler sales, especially the entry level and economy segment vehicles, where the above-mentioned companies have good presence.
“Consumers are sensitive to prices. So, definitely a price cut will create a certain interest from buyers," said Mahantesh Sabarad, head-retail research, SBICAP Securities.
Of course, the quantum and the nature of the cut are important.
Analysts at ICICI Direct believe that the tax rate should be lowered not just for the final product but also along the value chain. Further, the reaction of states to the rate cut proposal has to be watched. Similar to the central government, revenues of states have also been hit by covid.
“A tax cut would mean lower revenues for them. States may as well compensate the revenue loss by raising the road tax. So, we have to wait for the end result," added Sabarad of SBICAP Securities.
If the cut comes through, then Hero MotoCorp is well placed to capitalize on it. Its monthly sales are recovering faster and it is gaining market share.
Compared to Bajaj Auto and TVS Motor, Hero MotoCorp has a bigger presence in rural and semi-urban regions, where the hit to demand has been less. Being a market leader in the price-sensitive entry and executive segment motorcycles also helps the company.
“Motorcycles up to 125cc, which have a higher presence in rural and semi-urban markets, continue to perform better than those over 125cc. Backed by a strong rural focus coupled with a portfolio focused towards motorcycles up to 125cc, Hero MotoCorp’s 2W market share was up in July 2020," India Ratings and Research Pvt Ltd said in a note.
Not surprisingly investors are enthused. The Hero MotoCorp stock hit a new 52-week high on Wednesday. While maintaining the market share gains are important, many see the company achieving previous fiscal’s revenues next year.
“We forecast Hero MotoCorp’s earnings to achieve its FY20 level by FY22, aided by rising rural demand, benefit of operating leverage and savings in discretionary costs," analysts at Kim Eng Securities said in a note.