Income tax cut unlikely to translate into higher auto sales, says Nomura. Here’s why
While the 2025 Union Budget's tax relief is expected to aid sectors like automobiles, Nomura cautions that the benefits might be limited, as 60% of tax filers do not pay taxes. Rural demand and capital expenditure are projected to positively influence vehicle sales.
The increase in the income tax exemption limit for salaried taxpayers up to ₹12 lakh in the Union Budget 2025 has sparked expectations that this tax relief will benefit industries such as automobiles, consumer electronics, FMCG, and travel & entertainment, driven by the assumption that the middle class will direct their tax savings towards both essential and discretionary goods.
Stocks in these sectors have reacted positively to the budget, with prices trading higher since the announcement. However, Japanese brokerage firm Nomura holds a different view on the income tax cut's potential impact on the Indian automobile sector.
The brokerage, in its recent note, explains that while the change in personal income taxes may have a positive impact on the auto sector,gains may not be very large.
It points out that 60% of the 80 million tax filers in India do not actually pay taxes. "While the savings will be large for taxpayers in the New Tax regime, in our assessment a large percentage of people who actually pay taxes are in the old tax regime," said Nomura.
For these taxpayers, the savings may be lower because they currently claim deductions. As a result, higher-income individuals, who are more likely to already own automobiles, are expected to benefit more. Consequently, premium segments like SUVs may see more demand than budget-friendly small cars, according to the brokerage.
Nomura further stated that the increase in the Kisan Credit Card limit from ₹300k to ₹500k and the rural development budget increase of 27% YoY could also be positive for rural demand for PVs, 2Ws, and tractors.
Similarly, the execution on planned capital expenditure would be a positive for MHCVs. "Overall, we currently factor in FY26F volume growth of 6% for PVs, 5% for MHCVs, 7% for 2Ws, and 5% for tractors. We had already factored in some positive measures in our growth assumptions, so at this stage, we don’t see any significant change to our estimates," said Nomura.
The brokerage's top picks are Mahindra and Mahindra and TVS Motor Company, on which it has 'buy' ratings, with a target price of ₹3,664 and ₹2,689, respectively.
Auto sales in January
Most companies in the auto sector posted a strong performance in January, supported by robust rural sales, bolstered by positive cash flow momentum from the Kharif harvest and favourable reservoir levels, which led to good sowing for the Rabi season, further driving tractor sales.
Maruti Suzuki reported a 6.5% year-on-year (YoY) growth in total sales on a high base, exceeding Nomura's estimates. Mahindra and Mahindra's UV volumes showed strong 17.6% YoY growth at 50.6k units. Hyundai's domestic sales came in slightly below the brokerage's estimate at 65.6k units in January 2025, down 3% YoY, while exports were at 11.6k units.
Tata Motors reported domestic PV sales of 48k units in January 2025, reflecting a 10.4% YoY decline. EV sales were 5.2k units, down 6% MoM. On the 2W front, TVS reported 17% YoY growth in total sales, driven by substantial growth in scooter sales at 29.3%, while motorcycles grew by 12.1% YoY.
Bajaj Auto reported 7% YoY growth in total sales, primarily driven by stellar 36.7% growth in exports. Eicher Motors’ total sales showed a 20% rise in the VECV segment, with domestic sales growing by 21% and exports rising by 27% YoY.
Hero MotoCorp's sales were up by 2.1% YoY and 36% MoM. Ola regained its number one position in January 2025, as its sales grew by 76% MoM.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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