GST cut: Jefferies upgrades Hero Motocorp but bearish on Hyundai and Tata Motors

Jefferies says a possible GST cut could boost auto demand, upgrading Hero Motocorp while retaining cautious views on Hyundai and Tata Motors.

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Global brokerage Jefferies has said that a potential cut in Goods and Services Tax (GST) rates could provide a major boost to auto demand, particularly in two-wheelers and small passenger vehicles, and has revised earnings estimates for leading automakers. In its report, the firm upgraded Hero Motocorp (HMCL) to ‘Hold’ from ‘Underperform’ but retained an ‘Underperform’ stance on Hyundai and Tata Motors.

The brokerage lifted its target price for Hero Motocorp to Rs 5,200 from Rs 3,800, citing higher earnings potential. “We upgrade HMCL from Underperform to Hold as we believe it will be a key beneficiary of potential GST cuts, although with a limited positive stance due to concerns over falling market share. We raise HMCL PT from Rs 3,800 to Rs 5,200 as we factor in higher earnings and increase our target PE multiple from 13x to 15x.”

At the same time, Jefferies reiterated its cautious stance on Hyundai and Tata Motors, saying it retained Underperform ratings on both. It also maintained Hold ratings on Bajaj Auto and Ashok Leyland.

“A potential GST cut should provide a boost to auto demand, especially in 2Ws and small PVs. We raise FY26–28E 2W and PV industry volumes by 2–6 per cent, driving 2–8 per cent EPS upgrades for TVSL, HMCL, Maruti Suzuki India (MSIL) and Hyundai. We expect TVSL and MM to deliver the highest 27 per cent and 19 per cent FY25–28E EPS CAGR, respectively. Our FY26–28E EPS are 5–22 per cent above Street estimates for TVSL, MM and MSIL. Our preferred Buys are TVSL, MM and MSIL. We upgrade HMCL from UNPF to HOLD but retain UNPF on Hyundai and TTMT,” the brokerage said.

Jefferies pointed out that GST rate rationalisation appears to be on track for the festive season and does not require major legislative or parliamentary changes.

“The tax cuts (28 per cent to 18 per cent and 12 per cent to 5 per cent) are likely to be funded by the conversion of ‘GST Cess’ (not required from FY27) into ‘GST’ on currently cess-ed items like tobacco, coal, SUVs, aerated beverages, and the likely addition of some lower-ticket luxury items,” it noted.

Beneficiaries of a GST cut

According to Jefferies, two-wheelers and small passenger vehicles (sub-4m cars and SUVs) would be among the biggest beneficiaries.“Two-wheelers and small PVs (sub-4m cars & SUVs), currently taxed at 28–31 per cent, are likely to benefit the most from a possible GST cut. Large SUVs are presently taxed at 45–50 per cent (28 per cent GST + cess), which could also come down close to 40 per cent. Tractors are most likely to see a reduction from 12 per cent to 5 per cent GST,” the report said.It added that a change in the indirect tax structure on raw materials and components could further drive down costs. GST on commercial vehicles could also be reduced from 28 per cent to 18 per cent, although freight rates and leasing are likely to remain the bigger drivers of truck purchases than lower vehicle prices.The brokerage firm believes that a 7–10 per cent GST cut can result in an 8–10 per cent reduction in on-road prices for most models. Hybrid vehicles currently attract a similar GST rate as ICE vehicles, compared to 5 per cent for BEVs, and any reduction could be particularly positive for MSIL.

Industry outlook

Jefferies raised its volume growth expectations for the auto sector.

“We raise FY26–28E 2W and PV industry volumes by 2–6 per cent. We expect 2Ws to grow at a faster 10 per cent CAGR over FY25–28E vs 8 per cent for PVs, as 2Ws also have a longer recovery base with FY25 volumes still 6 per cent below the pre-Covid peak of FY19. We retain our FY25–28E volume CAGR estimate of 9 per cent for tractors and 3 per cent for CVs.”

The brokerage also noted that industry demand has been subdued in recent months, with April–July registrations showing just 2–3 per cent year-on-year growth in 2Ws and PVs, while tractors rose 7 per cent YoY. It expects the pick-up ahead to be aided by tailwinds from GST cuts, tax reduction, cash liquidity, and cost efficiencies.

Jefferies said the competitive landscape has shifted significantly in recent years. “In PVs, MM has risen to the #2 OEM position, while market shares of MSIL and Hyundai have slipped to multi-year lows. In 2Ws, TVSL’s market share has risen to a 22-year high domestically and a new high in exports.”

On the earnings side, Jefferies explained: “We raise our FY26–28E EPS estimates by 2–8 per cent for TVSL, HMCL, MSIL, and Hyundai, but broadly retain estimates for other OEMs. Among our covered OEMs, we believe TVS will deliver the strongest 27 per cent EPS CAGR over FY25–28E, followed by Mahindra at 19 per cent; we expect 10–15 per cent CAGR for other OEMs, excluding TTMT (-2 per cent).”

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