Portfolio

GST - Auto: Inventory liquidation can hurt

Parvatha Vardhini C | Updated on January 12, 2018

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The GST rates for the automobile sector has not caused any major upsets, except in bringing the treatment of hybrids on par with petrol/diesel vehicles. Status quo or at best a negligible impact on prices is expected for small cars, bikes, commercial vehicles.

Surprisingly, the new regime bats for large cars and SUVs, which are expected to be taxed at a lower 43 per cent (28 per cent + 15 per cent cess). Total indirect taxes add up to 50-55 per cent currently. Listed manufacturers with vehicles in this space such as Tata Motors (Jaguar Land Rover) and Mahindra and Mahindra will see good demand from this move, as these vehicles will get cheaper under GST.

However, it is not all rosy for companies as they will be impacted on the financial front in a few ways. For one, full credit of all input taxes paid on stocks existing as of July 1 will not be available to dealers. Hence, companies are going all out to woo customers with discounts to liquidate existing stocks.

This will take its toll on realisations and operating margins in the June 2017 quarter. It must be remembered that most auto companies already had similar pressures in the March 2017 quarter too, due to discounts offered to liquidate BS III inventory and increase in raw material prices. To clear inventory before July 1, Bajaj Auto is offering discounts up to ₹4,500.

Maruti Suzuki too is offering discounts of ₹25,000-35,000 across models. But the company’s more profitable models such as the Baleno, Brezza and new Dzire have wait periods and hence, inventory is unlikely to be available in huge numbers with dealers. This may cushion the impact on margins, to an extent.

Secondly, with the rush to sell existing inventory and a lull on taking in new stocks till June 30, wholesale volume growth for the industry could take a beating in June.

Pre-buying in June due to discounts may also slow down the demand a bit for the next quarter too ( July-September).

Thirdly, auto manufacturers have a supply chain through various tiers of component makers. Temporary cash flow pressures from having to bear taxes in case of unregistered suppliers and imports may arise for auto companies once the GST regime kicks in.

Published on June 24, 2017

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