Ashok Leyland, Tata Motors, TVS likely to gain most from GST Cut

Auto stocks have gained 6-11 per cent in the past month on hopes of a possible cut in taxes during the GST Council meet on September 20. However, selecting the right stocks may be tricky since sales volumes across segments have fallen by 2-31 per cent for the first five months of the current fiscal.

To benefit from a possible cut in the goods and services tax (GST), investors may increase exposure to companies having higher fixed cost as a percentage of sales. According to Kotak Institutional Equities, Ashok Leyland, Tata Motors, and TVS Motor Company fit the bill. The brokerage estimates 5-13 per cent increase in the FY21 expected earnings per share (EPS) assuming 5 per cent higher volume due to GST cut.

The earnings growth trajectory of the auto companies will depend upon the extent of the tax cut and the duration of this change. Vehicle prices are expected to increase by 5-15 per cent due to new emission norms that come into force from April 2020. Therefore, GST rate cut for longer tenure will be preferred. However, given the fiscal constraints, tax cut for an extended period appears unlikely.


On the flip side, if the GST council does not propose any cut, it may put more pressure on the auto stocks, erasing the past month’s gains.