The Auto index has soared over 5 percent this week, driven by reports suggesting that the auto sector could see a reduction in the Goods and Services Tax (GST) rate for small cars and two-wheeler internal combustion engine (ICE) vehicles to 18 percent from the current 28 percent.

The potential GST cut has sparked optimism in the market, with brokerage Nomura identifying Mahindra & Mahindra, Maruti Suzuki, Ashok Leyland, and TVS Motor as the biggest beneficiaries. According to the brokerage, such a reduction could trigger a strong rally in Indian auto stocks.

Nomura said, "Our scenario analysis considers three possible outcomes in the event of a GST reduction, with varying degrees of demand impact. We see scope for upside across all three scenarios from current levels. Based on this analysis, the stocks with the biggest upside potential are Mahindra & Mahindra (Buy), Maruti Suzuki (Neutral), Ashok Leyland (Buy), and TVS Motor (Buy)."

Target Prices and Potential Upside

Nomura has set a target price of ₹3,736 for Mahindra & Mahindra, implying about 11 percent upside from the current ₹3,373.

For Maruti Suzuki, the brokerage set a target of ₹13,113, roughly 8 percent below the current level of ₹14,282.40, while noting that a GST cut could create significant upside potential. Ashok Leyland has a target of ₹144, implying a 10 percent gain from ₹131, whereas Nomura's target of ₹3,231 for TVS Motor is largely in line with the current price of ₹3,279.85, reflecting a modest decline of 1.5 percent.

Demand Boost Expected

Prime Minister Narendra Modi recently stated that the government plans to lower GST rates on several goods and services by Diwali. Proposed cuts include reducing GST on small cars and two-wheeler ICE vehicles to 18 percent from 28 percent, while large cars could see a reduction to 40 percent from 43–50 percent.

Nomura estimates that such a move may have a multiplier effect of 1.0–1.5x on demand, potentially translating into a 5–10 percent increase in sales. Popular models could see meaningful price reductions if the tax cut materializes: Maruti's WagonR could become about 9 percent cheaper, Mahindra's Bolero by roughly 10 percent, Maruti's Brezza and Hyundai's Creta may drop around 3 percent, and Mahindra's XUV700 could see an on-road price reduction of nearly 7 percent.

However, the brokerage estimated that the potential GST revenue loss could reach ₹740 billion at constant volumes, which may decline to ₹540 billion if demand increases by 10 percent. Nomura added, "Sales have slowed significantly in anticipation of a tax cut. In our view, a decision should be made promptly."

Implications for EVs

While positive for traditional automakers, Nomura cautioned that the GST cut could delay electric vehicle (EV) adoption by 2–3 years, as the price gap between electric and conventional vehicles would widen. The brokerage suggested compensating EV makers with demand incentives such as the proposed PM-Edrive scheme.

In an earlier report, Nomura noted, "If the GST cut on ICE vehicles happens, it is likely to significantly impact EV adoption, as the price gap between EVs (taxed at 5 percent) and ICE vehicles (taxed at 28 percent + cess) would increase sharply."

Four-wheelers likely to benefit more

Four-wheeler companies are expected to benefit more than two-wheeler makers due to scope for margin expansion. Nomura estimates nearly 100–150 bps margin improvement potential for all OEMs, even if the full GST benefit is passed on via list price reductions.

For two-wheelers, costs related to ABS implementation may offset around 50 percent ( ₹3,000–4,000) of the benefit next year, meaning companies like Royal Enfield and Eicher Motors, which already have ABS-equipped portfolios, could see larger gains from the GST cut. Four-wheelers typically offer higher discounts and have room to reduce these if the proposed cuts materialize.

The brokerage also highlighted that large cars could see a reduction in tax rates to 40 percent from the current 43–50 percent. Overall, this is expected to positively impact all segments of vehicles. However, motorcycles of more than 350 cc may see an increase in GST to 40 percent from 31 percent (28+3 percent), which presents a risk for certain segments.

Domestic auto component suppliers may also gain from higher volumes, with Nomura highlighting UNO Minda, Motherson Sumi Wiring, and Sansera Engineering as top picks.

"The improved growth outlook should support consumer sentiment," Nomura said, adding that wider economic growth and job creation could follow as a result of the GST rate reduction. The brokerage emphasized that sales have slowed in anticipation of the cut and urged the government to take a swift decision.