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A GST cut may prove to be a shot in the arm for two-wheeler companies

August, 28th 2020
The observation by the finance ministry that the two-wheeler sector merits a lower GST (goods and services tax) rate may result in another round of stock re-rating for the two-wheeler companies. Two-wheelers currently attract 28 per cent GST. Lower tax reduces the cost of ownership, thereby supporting sales volume The two-wheeler stocks on average trade at one-year forward price-earnings (P/E) multiple of 20, a 44 per cent premium to the long-term average. The P/E multiples have expanded by four-seven times in the past four months following a gradual improvement in the monthly sales volumes and improving plant utilisation. The BSE Auto index has outperformed the Sensex 30 by 13 per cent in the last three months. The next GST council meeting is slated on September 19 where the GST fitment committee recommendations will decide whether the two-wheeler sector makes a case for the rate reduction. The two-wheeler sales contribute around Rs 30,000-35000 crore to the GST kitty annually. A rate cut to 18 per cent may reduce the GST collection by $ 1.4 billion (Rs 10,500 crore) according to Credit Suisse. The two-wheeler sales volume needs to improve by at least 55 per cent to make for this loss. The prices of two-wheelers have increased by 15-20 per cent in the past two years due to new emission norms, higher insurance cost and added safety equipment. If the GST is reduced, it may lower the impact of incremental prices on consumers thereby improving revenue visibility of the two-wheeler companies. In addition, rising preference to affordable personal mobility over the public transport due to the spread of coronavirus would further support the volume growth. The share of entry level 100-125cc bikes in the total two-wheeler volume rose to 55.2 per cent in the June quarter compared with 50.2 per cent in FY20. This bodes well for Hero MotoCorp NSE -1.04 % which is a market leader in the economy and executive segments of bikes. Its market share in the below 125 cc segment rose by 350 basis points year-on-year to 70 per cent in June quarter. The higher volume visibility may result in higher allocation of two-wheeler stocks over the four wheelers in the institutional portfolios. The allocation of the auto sector in the institutional portfolios dropped to the decade low of around 5 per cent in March 2020. It increased by 50-70 basis points in the June quarter. Analysts expect 15-20 per cent contraction in two-wheeler volume for FY21 and 10-15 per cent growth for FY22. The absolute sales volume of two-wheelers in FY21 is likely to be s ..