• 13 Jul 2023 05:20 PM
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Utility vehicles may see price hikes but demand to be in top gear

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Higher-end passenger vehicles (PVs) will likely see price hikes following changes in taxation rules by the GST Council, which has modified the definition of vehicles that will attract a compensation cess of 22%, additional to the 28% tax rate.

Higher-end passenger vehicles (PVs) will likely see price hikes following changes in taxation rules by the GST Council, which has modified the definition of vehicles that will attract a compensation cess of 22%, additional to the 28% tax rate.

As per the new definition, a vehicle will qualify as a utility vehicle, thus attracting a 22% cess, if it satisfies certain criteria: a length exceeding four mtr, an engine capacity of 1500cc or more, and an unladen ground clearance of 170mm or above. In the previous rule, a vehicle was recognized as an SUV, if it was popularly known as such, and the ground clearance measurement was taken with passenger weight. However, this condition has been eliminated in the revised guidelines.

There is need for clarity regarding the interpretation of unladen ground clearance and how to accurately measure. "There is a risk that some models of Tata Motors Ltd, Mahindra & Mahindra Ltd (M&M), Toyota and other higher-end brands may see about 2% price hike in case they are not able to meet unladen ground clearance definition," said analysts at Nomura Financial Advisory and Securities (India) in a report on 12 July. The broking firm does see any impact on Maruti Suzuki India Ltd.

However, given the robust demand for utility vehicles amid ongoing premiumization trends in the industry, such price hikes would have only a minor impact. Nomura analysts note that at higher price points, more than 15 lakh, price elasticity may not be high, and consumers may be unwilling to downgrade.

Against this backdrop, industry experts await management commentary from PV companies in their forthcoming Q1FY24 earnings call, where potential price hikes will be a focal point.

In Q1, Tata Motors saw nearly 8% year-on-year growth in PV volumes, while those of Maruti rose 6%. M&M clocked a growth of 31%. "PV inquiries waned though wholesales/retails still saw good growth due to strong order book," note analysts at Motilal Oswal Financial Services in a Q1 preview report on automobiles.

Shares of Tata Motors, M&M and Maruti are flirting with their respective 52-week highs. A positive surprise on the margin front in Q1 would aid investor sentiment.