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The benefits of the Goods and Services Tax (GST) rate rationalization are yet to play out meaningfully, and its impact on domestic-focused automobile companies is expected to be visible only from the third quarter of FY25, according to a report by HDFC Securities.
The report stated that while the rationalization is likely to give a fillip to auto companies catering to the domestic market, leading to a revival in growth rates, the real impact will be seen gradually. "We will only see it play out meaningfully from Q3FY25," the report noted. The report highlighted that a shortage of truck trailers used for vehicle transport has led to the deferment of some wholesales from September to October, which capped wholesale volumes in the second quarter of FY25. The delay in vehicle transportation has impacted the distribution cycle, keeping near-term wholesale numbers under pressure. On the global front, the report said that key auto ancillary companies continue to face headwinds due to softer demand and the partial absorption of tariff-related costs. "Global demand continues to remain soft, while tariff uncertainty is still impacting medium to long-term business planning," the report mentioned. It added that the recent negative commentary on demand from large global original equipment manufacturers (OEMs) does not augur well for major global-facing ancillaries. The report also touched upon the issue of rare-earth magnets, which, though forming a small percentage of the overall vehicle cost, are essential for production. These magnets are used in electric vehicle (EV) motors as well as in internal combustion engine (ICE) components such as ignition coils, sensors, speedometers, and power steering systems. Most of these magnets are processed in China, as the procedure is radioactive and expensive. While several OEMs have managed to find solutions to the shortage, some temporary and others long-term, a few continue to face disruptions. Overall, the report suggested that while structural positives such as GST rationalization and domestic demand recovery are on the horizon, supply-side challenges and global uncertainties continue to weigh on the automobile sector in the near term. (ANI)
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