The Goods and Services Tax (GST) Council, in its meeting held on 9th September, has hiked the cess on mid-sized cars (engine <1500cc) by 2%, larger cars (engine >1500cc) by 5% and that for SUVs by 7%. This takes the total tax incidence on these cars to 45%, 48% and 50%, respectively, and will lead to 1-4% price hike. However, cess on hybrid vehicles (for any category) has not been increased, which is a positive. In our view, the overall tax incidence across all categories (except hybrids) is still lower than pre-GST levels, which is a positive. Moreover, with the hybrid tax remaining unchanged, they would be cheaper by 1-4% compared to normal cars in similar segments and this would incentivise companies to make more hybrids depending on cost benefit.
In our coverage universe, the tax difference between small cars and larger cars has inched up further, which should be positive for small car demand. Maruti Suzuki (MSIL IN), with ~92% of portfolio from small car segment, remains our top pick in the sector. Also, slightly lower tax on mild-hybrids will encourage OEMs like MSIL and M&M to continue rolling out more hybrid variants like those for Ciaz, Ertiga and Scorpio. We note the increase in cess is less than initial expectations of up to 10% hike. Prices of mid-sized cars and SUVs are still likely to be lower than pre-GST period by ~2-3% and this should benefit companies like M&M as well.