Moneycontrol Pro Panorama | GST reset fuels auto engine

Has GST rate cuts nudged auto sales on to the fast lane?

Dear Reader,

November automobile wholesale numbers proved naysayers wrong. Much to everyone’s surprise, a broad-based double-digit increase in vehicle sales across all segments indicated that demand spilled over after the festive season.

Perhaps, the sharp reduction in goods and services tax (GST) and its quick implementation across most mass market auto segments did the trick. At a glance, average wholesales for November were up 20 percent plus year-on-year (yoy) for most original auto equipment manufacturers (OEMs), that too, in spite of a high year-ago base that included festive season sales.

Diving deeper, a segmental sales break-up reveals that passenger vehicles (PVs) switched from slow to the fast lane, on the back of a strong comeback in demand for entry-level cars. What does it show? Affordable prices following GST cuts attracted aspirational consumers, most of whom would be first-time buyers and may have also upgraded from two-wheelers to cars.

A report by Emkay Global Financial Services had earlier highlighted that the entry level segment would drive sales expansion in PVs and two-wheelers (2W), post-GST rate cut. “The GST-led 10 percent effective price rollback is being viewed as the biggest sentiment driver in decades, making both — cars and entry commuter 2Ws — significantly more reachable to consumers,” it said. Barring Hyundai Motor, which lost ground compared to peers in recent months, other PV makers Maruti, Mahindra and Tata Motors PV, did well.

The euphoric growth in PVs was supported by utility vehicles (UVs) that continue to keep factory production lines humming. Note that UVs continue to enjoy a princely two-thirds share of overall PV dispatches.

However, 2W wholesales in domestic markets was led by two major OEMs —  TVS and Hero MotoCorp — revving up overall industry numbers, even as Bajaj Auto’s domestic sales were lacklustre. A revival in some export markets did some heavy lifting for 2Ws, too.

The biggest surprise and indication that confidence in business activity is improving came from commercial vehicles (CVs), with wholesales recording the best-in-sector 30 percent plus year-on-year (yoy) growth in November. Lower prices due to GST cuts, along with a rebound in truck rentals, revved up replacement sales in trucks — Ashok Leyland, Tata Motors and Eicher Motors.

The moot question then is this: Has GST rate cuts nudged auto sales on to the fast lane? Indeed, for the next few months, the road ahead looks smooth. Vibrant retail sales in PVs and CVs (except 2Ws that saw retails decline), healthy booking backlog and low inventory will support higher production. The December wedding season will continue to support retails in PVs and 2Ws while aging trucks due to prolonged slowdown so far, could lift CV demand.

The optimism is reflected even in auto OEM stock prices. Since the GST cuts announcement till date, the Nifty auto index is up about 13 percent, about twice that of the Nifty index return.

One can’t brush away the odds though. The sales, per some dealers, were tepid compared to October which had most festivals packed in this year. In other words, month-on-month comparison showed sales losing momentum.

Following the GST reduction and stable commodity prices, it is unclear whether OEMs will take the routine January price hike. Furthermore, the proposed Corporate Average Fuel Efficiency-3 (CAFÉ 3) norms for vehicles, if implemented, would raise costs and hence, price of vehicles.  If so, would demand peter out? While the transition to electric vehicles (EVs) remains a long-term goal, that it commands less than 10 percent share at present of the market makes it less material to the overall sales growth of auto companies.

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