M&M, Ashok Leyland, Maruti Suzuki Poised For Most Gains On Sector Boost Over GST Cuts: Nomura

Nomura is seeing the biggest upside potential for Mahindra & Mahindra Ltd., Maruti Suzuki India Ltd., and Ashok Leyland while estimating new positives for the auto sector over the upcoming GST reductions and its varying effect.

Within supplier segment, the brokerage sees potential for good growth from Uno Minda Corp Ltd., Motherson Sumi Wiring India, and Sansera Engineering Ltd. Nomura expects that the GST reduction will trigger a multiplier effect of 1.0–1.5 on demand which will result in 10–15% rise in demand.

Popular models like Maruti Suzuki India's Wagnor, Mahindra & Mahindra's Bolero, and Hyundai India's Brezza, Creta, and XUV700 will see a sizeable price cuts. In terms of original equipment manufacturers, the brokerage is estimating the exposure to small car slab at 68% and 52% for Maruti Suzuki India and Mahindra & Mahindra, respectively.

The improved growth outlook is likely to be supportive of consumer sentiment, wider economic growth, and job creation, Nomura said in a note on Tuesday. Meanwhile, in anticipation of a GST cut, sales have declined substantially.

Nomura sees four-wheeler OEMs benefitting more than two-wheeler OEMs. The reason is two-wheeler will gave to face the cost from the implementation of anti lock breaking system. It will likely erode 50% benefit off by next year. Moreover, two-wheeler penetration is higher at a rate of 121/100, and this will peak out over the next decade.

Four-wheelers usually offer higher discounts which provides a scope to reduce them soon. Hence, Nomura is estimating a chance of margin improvement by 100–150 basis points for all OEMs even if companies decide to pass on the entire GST reduction.

Now, auto component suppliers are likely to see the benefit in the form of higher volume. While they are require to full pass on the GST reduction to the OEMs, they are likely to enjoy better pricing power, according to Nomura.

For electric vehicles, GST reduction is negative. The price gap between internal combustion engine and EVs will increase. This will push back the EV adoption by two-to-three years, according to Nomura. The brokerage suggests demand incentives for to EVs.