A Silver lining in the dark clouds for Tata Motors with China’s expected tax relaxation

On Monday, 29 October 2018, Shares of Global automobile companies having business in China went up reaching a new level in the last 4 months after a Bloomberg report said that the regulator of China’s economy was planning to cut car purchase tax by 5 universal most of them0%. Earlier the tax levied was 10% now it may be reduced to 5% if the reports happen to be true. The tax reduction will be applicable only for cars with engines with a maximum capacity of 1.6 liters. Following the Bloomberg reports, European auto stocks index .SXAP surged by 3.4% with major German carmakers Daimler, BMW, and Volkswagen skyrocketing by an average 4.6%.

During the initial weeks of October 2018, Reuters reported new that the China Automobile Dealers Association (CADA) has given a request application with attached relevant documents to China’s Finance & Commerce Ministries to reduce the auto purchase tax to 5% from 10%. If the price cut is to happen in the coming weeks then it will have similar kind of effects vis-a-vis similar price cut happened in September 2015. During that time the industry sales had gone up by 25% from 2 million units to 2.5 million units.

Due to trade tensions between the US and China, German automakers had to cut down their forecast for the coming years. As a part of retaliation strategy, China had imposed more taxes on the US than other importers of the World. If the price cut happens as expected then it would be a great support for the Chinese economy to stand up gradually from fall. As per reports of September by the Passenger car Association, it disclosed Passenger Car purchases by dealerships slumped by 13% reaching 1.9 million units.

Tata Motors

Indian Stock Tata Motors(TTM) following the Bloomberg reports of China purchase price cuts soared by approximately 7% on Monday. In our last article about TTM reaching its 7-year low price: whether a buy or not?, we have written about Tata Motors and how its sales are under high risk, reducing the forecast numbers. Now, this news about the probable step of China shows a positive sign for the Company. If this kind of relaxation is offered by every other Sales provider of Tata Motors, then things may seem to recover slowly and steadily.

Source: Tata Motors Annual Report 2017-18

As we can see, China accounts for around 14-15% sales of TTM. With already existing revenue pressures by US, UK, and EU, China may help to ease the grip. Still, there remains diesel uncertainty among many of the Global countries as they are slowly adapting to electric vehicles. This has drastically reduced the Diesel Vehicle sales for the Company.

In a nutshell, if China cuts the purchase price then the TTM shares are expected to gain from the situation along with other global car makers having sales from China.