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MUMBAI: Shares of two-wheeler majors Hero MotoCorp Ltd, Bajaj Auto Ltd, and TVS Motor Co Ltd gained 2-5% on Wednesday after finance minister Nirmala Sitharaman endorsed the need for a cut in goods and services (GST) tax on two-wheelers. “This will be taken up with the GST Council,” Sitharaman said at an industry event.
A cut in tax rates from the present 28% can bring down prices of two-wheelers, which in turn would boost sales, especially in the price-sensitive entry level and economy segments.
“Consumers are sensitive to prices. So definitely a price cut will create a certain interest from buyers,” said Mahantesh Sabarad, head-retail research, SBICAP Securities.
If approved by states, the tax cut will aid demand recovery of two-wheelers. Of the three listed manufacturers Hero MotorCorp derives a greater portion of its revenues from India. It has greater exposure to rural and semi-urban regions where demand has been less hit and is a market leader in the price-sensitive entry and executive segment motorcycles. Comparatively Bajaj Auto and TVS Motor have sizable three-wheeler and export businesses.
This will help Hero MotoCorp capitalise better on a tax cut. Monthly sales numbers also indicate a faster recovery for the company. While Hero MotoCorp’s domestic two-wheeler July sales nearly caught up with year-ago numbers, down just 1%, Bajaj Auto and TVS Motor clocked 9-11% fall.
Not surprisingly investors are enthused. The stock hit a new 52-week high on Wednesday.
“Hero MotoCorp is more rural facing than its peers and hence should benefit from rising farm income and government measures to support farmers through employment schemes and reforms,” Kim Eng Securities said in a note. “We forecast Hero MotoCorp’s earnings to achieve its FY20 level by FY22, aided by rising rural demand, benefit of operating leverage and savings in discretionary costs.”
Still, caution is warranted.
Much depends on the quantum of the rate cut. Also states have to agree to the Centre’s proposal. “Tax cut would mean lower revenues for them. States may as well compensate the revenue loss by raising road tax. So, we have to await the end result,” added Sabarad of SBICAP Securities.
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