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MOSL: AUTOMOBILES | Tax cut: Structurally positive than temporary GST cuts

Automobiles |  Tax cut: Structurally positive than temporary GST cuts; EIM & AL – Biggest beneficiaries | Localization for EVs gets big boost

 

The reduction in corporate tax rates in India is more structurally positive than the temporary cut in GST rates, in our opinion. We expect the Auto sector to see material gains due to the tax cut; however, a few players with increased investments in R&D and capex should see lesser benefits. Further, unlike the GST cut, the corporate tax reduction is not expected to drive near-term demand revival. In this note, we discuss the likely earnings impact, key monitorables and changes in our stock views.

 

• The corporate tax cut should result in PAT upgrade of ~7% for our auto universe companies in FY20/21E (ceteris paribus). EIM, AL, ESC, HMCL, BOS, AMRJ, EXID and CEAT (11-13% PAT upgrades) will gain the most from the tax rate cut; we expect MSIL and TTMT (2-4% benefit) to benefit the least.
• For OEMs, the tax savings have come at the right time (start of the festive season). With no GST cut announced for the auto industry, OEMs might consider using the tax savings to directly/indirectly spur demand. MSIL has today announced price reduction of ~INR5,000 for select models.
• Assuming that OEMs will cut prices (on PAT neutral basis) to pass on the entire tax savings to customers, we estimate price cuts of 0.5-2.7% in 2Ws, up to 1.1% in PVs, ~0.8% in CVs and ~1.1% in Tractors.