If cigarette stocks fell on GST, why have auto stocks not risen?

The committee has prescribed a standard goods and services tax, or GST, rate of 17%, is far lower than the current applicable taxes on vehicles. Photo: Bloomberg

The sentiment in the stock market is so bearish that investors are quickly discounting even the hint of negative news, while dragging their feet before pricing in positive news.

Consider the 4.6% drop in the shares of ITC Ltd last week after a government committee recommended a goods and services tax (GST) of 40% on cigarettes.

As this column pointed out, cigarette companies already incur excise duties that are in excess of 40%. Then why fret at all?

On the other hand, automobile manufacturers are expected to benefit immensely from a GST. But all auto stocks fell last week, and the Nifty Auto index fell by 3.6%, higher than the 2.4% drop in the Nifty 500 index.

Of course, it’s a bit premature to come to firm conclusions about GST rates, but it’s worth noting that only a few months ago, such news would have led investors to flock to auto stocks. The committee has prescribed a standard GST rate of 17%, which is likely to be applicable for most automobiles. This is far lower than the current applicable taxes on vehicles.

Analysts at Nomura Research wrote in a recent note to clients, “Currently, the cumulative impact of various taxes (state and central) account for around 30% of a vehicle’s price. As GST would subsume all of these taxes, a standard rate of 17% would mean that prices could come down by >10%.”

In the past, auto manufacturers have passed on tax cuts to customers. And, considering that automobiles are price elastic, such a substantial price cut should lead to a pick-up in volume growth. Besides, the implementation of the seventh pay commission and the one-rank one-pension plan is expected to result in an increase in disposable income, some of which will find its way into automobile purchases.

There are other benefits from GST such as savings on logistics costs. Analysts at Care Ratings say, “Under the GST regime, with no embedded tax costs on the inter-state movement of goods and a shift in the point of taxation to the consumer ultimately, businesses shall have a greater flexibility to re-design their supply chains and, thus, optimize logistics costs.”

But, as pointed out earlier, thanks to the overall bearish sentiment, investors seem hardly impressed. If one were to ignore the herd, this may well be an opportunity to take a calculated bet on the auto sector.

[“source -livemint”]

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