How GST will mean good business for leading commercial vehicle players

Post GST – Smart Management of Working Capital Warranted

Today, sourcing, distribution and warehousing decisions are planned based on state-level tax avoidance mechanisms instead of operational efficiencies.

Many companies resort to a lot of inter-branch transfers as these transfers are tax free. Under GST, the same will prove costly.

GST needs to be paid in the month when the transfer is done and although the tax paid on stock transfer will be fully available as input tax credit (ITC), the credit can be utilised only during the month in which the sale is done, blocking working capital. Thus, the working capital requirements will go up unless the backend is rationalised. Eventually, companies will restructure their storage infrastructure such that goods move from the primary warehouse to the dealer, thereby eliminating the need for multiple points of storage.

Efficiency the Sole Criteria, not Tax Avoidance

Post GST, companies will focus on leveraging efficiencies of scale, location and other factors relevant to the business. Since GST would eliminate the existing taxes on inter-state sales transactions it should facilitate consolidation of vendors and suppliers.

A more certain fall-out of the changes in the long-term would be reduction in the number of warehouses, improved efficiencies, better control and reduction in inventory due to lesser numbers of stocking points. This would allow a firm to take advantage of economies of scale.

Larger warehouses can benefit from technological sophistication by deploying state-of-the-art planning and warehousing systems which are not feasible in smaller, scattered warehouses. A rationalization similar to warehousing can also be done in distribution and transportation routes as tax ceases to become the deciding factor.

Logistics and supply chains will, therefore, see a major change. We envisage the emergence of a hub- and- spoke model.

So, the point-to-point or direct-route operations is going to be replaced by a mode whereby goods are sourced from a few large warehouses and distributed directly to the market. The hub is the strategic centre of the network, and the spokes radiating out to connect it with several points.

Dealing with a New Kid – E-way Bills

So far, GST has also introduced another new concept of E-way bills. The implementation time line is unclear, however. Thus, post GST, freight worth over Rs 50,000 will require obtaining a prior registration and generation of an e-way bill.

The validity period of the E-way bill has also been defined.

The rather ambitious timeline assumes seamless flow of vehicles as the inefficiency pertaining to border check posts gets eliminated.

What does all this Mean for the Commercial Vehicles Sector?

With the improvement in efficiency, the productivity per vehicle would certainly improve. Hence, some experts are of the opinion that this will bring down the demand for commercial vehicles.

However, the GST on stock transfer and one-nation-one-tax will force rationalisation of storage infrastructure and the emergence of a hub-and-spoke model. We envisage that the movement of vehicles would certainly increase centering on the hub. Hence, we do not see any negative impact on overall commercial vehicles sales.

On the contrary, we expect the last mile connectivity model to gather steam which might lead to more demand for lower tonnage vehicles.

Commercial vehicles sector is in the midst of challenges aggravated by the transition to BS IV norms. However, for most leading players like Tata Motors, Volvo Eicher, SML Isuzu and Ashok Leyland, albeit the initial hiccups, GST can throw up new opportunities. Investors might like to pay heed to such long-term upside while the Street still focuses on near-term challenges.