The goods and services tax (GST) rate changes are largely positive for the Indian automobile sector. Still, the finer nuances have to be understood before deciding the prime beneficiaries.
GST rates for premium large cars – petrol cars above 1200 cc, diesel cars above 1500 cc and cars exceeding a length of 4,000 mm – have been increased to 40% from 28%. Sure, the compensation cess of 15% has been removed, which will make it cheaper than the earlier rate of 28% plus cess of 15%.
What’s more exciting is that customer interest could once again revive in small cars below the specifications mentioned earlier as the GST for them has been reduced to 18% from 28%. It would mean a drop of about 7% in prices for the buyer.
Maruti Suzuki India Ltd, the domestic small car champion, is likely to benefit the most as at least 50% of its sales volume falls under the new 18% GST rate now, while it’s 40% for Hyundai Motor India Ltd.
Tata Motors Ltd remains a bigger play on Jaguar Land Rover, so it’s not an actionable idea on GST rate alone. Tata Motors’ commercial vehicle business benefits from the GST rate cut from 28% to 18%.
But here, Ashok Leyland Ltd has an edge as it is a pure-play CV company. A similar argument can be made for the tractor business of Escorts Kubota Ltd, with GST cut from 12% to 5%. Mahindra & Mahindra Ltd (M&M) benefits to a lesser extent as tractors contribute less than 25% of its total revenue.
Within M&M’s SUV business, most of its models fall in the premium, large-car category, except XUV 300 and XUV 3XO. However, M&M shares jumped 6% on Thursday as they hadn’t gained post-Prime Minister Narendra Modi’s Independence Day speech, unlike Maruti and Hyundai, due to fears of a differential GST rate – a higher rate on electric cars costing more than ₹20 lakh – which did not materialize. All electric cars will continue with 5% GST.
Two-wheelers
GST has been slashed from 28% to 18% for most two-wheelers using conventional fuel (excluding those with 350cc engines) and three-wheelers. Hero MotoCorp Ltd is the only pure play on two-wheelers. But combining two-wheelers and three-wheelers, Bajaj Auto Ltd is the clear winner. Its conventional fuel three-wheeler market share in the June quarter (Q1FY26) was about 70%.
The biggest beneficiaries of the GST rate cut are Maruti, Ashok Leyland, Escorts and Bajaj Auto. Sure, these stocks have already risen in the run-up to Wednesday’s GST announcement.
Thus, it may be good to evaluate the stocks of some proxy plays such as non-banking financial companies that have a large exposure to vehicle-financing, which haven’t risen ahead of the announcement. NBFCs also have another tailwind as they benefit more than banks when interest rates go through a down cycle.
Cases in point are Mahindra & Mahindra Financial Services Ltd and Shriram Finance Ltd, which have 86% and 74% of their Q1FY26 loan books, respectively, from vehicle-financing. If the demand for vehicles increases post the GST rate cut, these two have the potential to gain from increased lending opportunities.
Based on PL Capital’s estimates, M&M Financial trades at a price-to-adjusted book value of 1.6x for FY26 whereas Shriram is at 2x. While the former appears cheaper, it also has a much lower return on average assets at 1.9% versus 3.2% for the latter for FY26.
