Auto stocks rally up to 7% post Corporate tax cut; Maruti expects sales to pick up in festive season

Ashok Leyland was the top gainer, up over 7 percent followed by Eicher Motors and Exide Industries which spiked over 6 percent each.

The Indian benchmark indices had a strong start to the September 23 session with heavy buying from both foreign, as well as, domestic investors. The recent wave of buying started on September 20 when Finance Minister Nirmala Sitharaman slashed corporate tax among other measures.

Benchmark indices the Nifty and Sensex were up 2 percent each in the morning session on Monday. Nifty50 jumped 253 points and was trading at 11,527 while the Sensex zoomed 818 points and was trading at 38,832 mark.

Among the sectoral indices, Nifty Auto spiked close to 3 percent and is of the many sectors which will benefit from the corporate tax cut. With the effective tax rate coming down from 34 percent to 25.17 percent, the Auto OEMS are likely to witness higher earnings benefit in FY20/21E. The biggest jump could be seen in Eicher Motors, Hero MotoCorp, Maruti Suzuki, Bajaj Auto and TVS Motor Company, said a report by Joindre Capital Services.

Auto component players like Bharat Forge, GNA Axles, Motherson Sumi Systems and Sundram Fasteners could be also benefit ahead. With the industry already witnessing a slowdown and production cuts, the OEMs may not deploy the excess cash into capex, although tax rate cut will not improve the demand sentiment immediately, but can improve the financial situation of a lot of middlemen in the complete chain of the Auto industry. This in the medium term will lead to improvement in business sentiment and consumer confidence.

Ashok Leyland was the top gainer, up over 7 percent followed by Eicher Motors and Exide Industries which spiked over 6 percent each. The other gainers included Maruti Suzuki, Bahart Forge, Bosch, Mahindra & Mahindra, Motherson Sumi Systems and MRF.

Finance Minister Nirmala Sitharaman made no mentions of any rate cuts for the auto sector except a GST cess on 10-13 seater passenger vehicles (PVs) that has been cut to 1-3 percent.

In an interview to CNBC-TV18, RC Bhargava, Chairman of Maruti Suzuki said that there is not much scope for price cuts from tax savings as auto companies are giving big discounts already. He said that tax cut will definitely bring huge investments in India while capex will not happen immediately but over time.

Overhang with respect to GST cut on auto is gone and expect sales to pick up in festive season along with better retail sales in September and October, he added.

Pawan Kumar Goenka, Managing Director at Mahindra & Mahindra said that FM’s announcements make India competitive globally. He does not see any room for auto companies to pass significant incentives to customers.Capex and investment cycles should see an upswing post tax cuts, he added.

Source: Money Control

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