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Cess hike on large cars will not dent volumes, say analysts

Mahindra & Mahindra, which is the most exposed to the SUV segment, was the sole loser

Aprajita Sharma  |  New Delhi 

Maruti Suzuki
Auto and auto ancillary stocks ended higher on Wednesday even after the Cabinet cleared an ordinance to hike cess on luxury cars and sport-utility vehicles to 25% from 15% under the goods and services tax (GST) regime at present. 

The move came after the GST Council earlier this month approved increasing cess on SUVs, mid-sized, large and luxury cars that had become cheaper post GST rollout on 1 July. 

The Nifty Auto index settled 0.6% higher at 10,572, led by gains in Bosch, Amara Raja Batteries and TVS Motor Company, which added between 2% and 6% on the National Stock Exchange (NSE).  

Mahindra & Mahindra, which is the most exposed to the SUV segment, was leading loser on the index and slipped over 1% to Rs 1,360.      

In the calandar year 2017 so far, the Nifty Auto index has rallied nearly 15% against over 19% surge in benchamrk Nifty50, data available with database AceEquity showed.

TVS Motor Company, Eicher Motors, Maruti Suzuki and Motherson Sumi Systems were the leading gainers advanced between 40% and 64% during the same period. Mahindra & Mahindra was also up 16% year-to-date.

Meanwhile, Ankur Varman, AVP - Institutional Equity sales at SBI Capital Markets maintained his bullish on the auto stocks, saying cess hike wouldn't impact volumes.  

"The cess hike doesn't change our outlook on the auto stocks. We’re particularly bullish on Maruti Suzuki in the four-wheeler space and Hero MotoCorp among the two-wheelers," said Varman. 

"If you look at Maruti, initially we realised that the prices might fall post GST implementation and people will buy more cars, but that did not happen and we are back to original tax rates. However, entry segment cars such as Alto and WagonR are no longer Maruti’s bread and butter. Value-adding and models such as Baleno and Brezza have come into play. These are EBITDA accretive. So, the company may pass on the prices to consumers but it would not have much impact on the volumes," he elaborated.

AK Prabhakar of IDBI Capital also believes the cess hike wouldn't hit the profitability. 

"As auto companies will pass on the cess hike to consumers, it will not impact their margin, but sales will take a hit in short-term. Consumers into SUVs may delay their purchases for three to four months, but they won't change their preferences. So, I believe only one quarter of topline may get impacted." 

First Published: Wed, August 30 2017. 16:03 IST