June 2017 volumes: PVs to decline on pre-GST inventory de-stocking; MHCVs impacted by weak demand; 2Ws only to see growth. We note that initially GST implementation would raise costs for the auto sector, because: for the inventory on hand as of June 2017-end, input tax credit for taxes like central sales tax (~2%), infra cess (~1-4%) and National Calamity Contingency Duty (NCCD) will not be available under the GST regime. Unavailability of this tax-credit refund is likely to impact on the margins of companies. The cost of inventory holding will increase substantially, as inventory would include full value of GST (12%-43% vs 0%-30% earlier for various segments.
Compliance costs would go up for the OEMs, dealers and vendors. Taxes on some segments like hybrid cars would rise and parts sales may also be affected initially, though later there will be scope to improve market share of genuine spares and accessories. The positives like streamlined logistics and input credits would take time to flow in and may be difficult to quantify for OEMs until they actually flow in.
There will be a reduction in prices across most segments which will support demand. We expect Maruti Suzuki (MSIL IN) to report flat y-o-y domestic volumes, while overall volumes to increase ~3% y-o-y. M&M UV volumes are likely to decline ~5% y-o-y. Among the unlisted subsidiaries of global peers, most are likely to see sharp y-o-y decline due to inventory de-stocking. Also, vehicle prices, especially ones of >4m length and SUVs, are likely to come down by ~3-7% post GST due to lower taxes.
Demand uncertainty due to upcoming GST and slower industrial activity to keep volumes subdued. Thus, we maintain our anti-consensus view of a 5% y-o-y decline in industry volumes in FY18F. We expect Ashok Leyland (AL IN) to report ~19% y-o-y volume decline for its overall MHCV segment. Tata Motors (TTMT IN) is likely to see a ~11% y-o-y decline. Eicher (VECV) overall CV volumes are likely to be down ~16% y-o-y.