GST is the biggest tax reform in decades. Currently indirect tax regime in India has different types of taxes like service, excise, VAT, entertainment, Octroi etc. levied by central, state and local authorities. Proposed GST (Goods and Service tax) will subsume different types of indirect taxes and there will be one single tax rates on all transactions.
There are 3 main channels through which GST is expected to benefit certain sectors:
- Lowering of Effective tax rate: Sectors where current tax burden is very high and is expected to come down under GST
- Benefits to organized players in large unorganized sectors: Organized players are expected to gain market share in the sectors with presence of large unorganized segment. This is because under GST, small unorganized players will not enjoy exemption benefits levelling the playing field between large and small players.
- Cost savings on logistics and transportation operations: Under GST all different types of state taxes will be eliminated resulting in seamless movement of goods across various states. This will reduce various checkpoints on state borders and number of warehouses, resulting in lower transportation and labour cost.
The government on 13th June 2017 put all speculation to rest and clarified that the goods and services tax (GST) will keep its July 1 date for countrywide rollout. Market experts said, when implemented, GST would be dream come true for the stock market.
There are expectations that the immediate benefit of GST would be felt across sectors, but the biggest beneficiaries would be industries where the unorganised sector has a large market share.
Couple of Stocks that can be kept under the radar:
Steel industry is likely to benefit from the new GST rate for steel which has been finalised at 18%, also the slab that includes most number of items. With key inputs like coal, iron ore pegged at 5%, which is the lowest slab under GST, steel companies could be looking at lower input costs.
At present, the company pays an effective tax of 25-26% and post-GST the tax rate will get reduced to 18% on toothpastes, which is a big positive. Colgate may gain market share by reducing prices, as its peers like Patanjali and Dabur are already paying lower taxes due to tax benefits.
The hub-and-spoke model of transport of goods is likely to gain with the implementation of the GST regime and it will boost the sales of vehicles, driven by requirements in the logistics sector. Ashok Leyland is a pure play on the truck business.
The GST rate for ceramic tiles has been fixed at 28%, which would largely be a neutral rate for Kajaria as the current incidence of the indirect tax is between 26.5% and 29%. However, on a positive note, GST will benefit the sector as it would provide a level playing field for organised players (unorganised players have a 50% share in tiles market) and bring in consolidation in the sector.
Industries that have a high unorganised market share would stand to benefit from the new GST regime. The air-cooler segment has around 70-80% of the market in the unorganised sector. Moreover, the current indirect rate incidence in the industry is around 27-28% and post the GST regime the rates are expected to come down to 18%. The segment would significantly gain from the lower GST rates and also more formalisation in the sector.
The GST rate regime has a lower rate of 5% for garments under Rs 1,000 selling price. This is positive for the innerwear segment, for example Page Industries that have current GST tax incidence of around 8-9%.
Crystalware and tableware is another segment that benefits from the new GST regime. The current tax incidence in the sector is around 27-28%, and now the GST system is proposed at 18%. Branded players like La Opala stand to benefit from more formalisation. The company has seen strong growth in the sector, growing at above industry growth rates and the brand has strong recall among consumers.
The GST rate of 3% for gold and diamond jewellery is significantly lower than the market’s expectation of 5-6%. The lower rate will increase more compliance among the unorganised sector and plug tax leakage. This is likely to help organised sector to expand market share.
‘Tax on tax’ imposed by various states on cigarettes and also the fear of states individually changing taxes each year will removed by GST. The revenue secretary’s statement that excise duty would not change for 5 years is another positive for the company. The final GST rate with a cap on cess leads to a lower incidence of taxes than the current effective tax rate
Lower tax on soaps and toothpastes will benefit HUL, given their contribution of nearly 25% to revenue. In the near term, consumer sentiment will improve and input costs are stable. Further, incremental benefits may arise from the input tax credits.
At present, GMDC incurs 37% tax on lignite, including VAT and excise duty. It will be a major beneficiary as a result of implementation of GST as the tax rate fell to 5% from 37%.
Marico’s long term strategy is geared to ride the changing consumption patterns and the rise in rural consumption. It has transitioned from the commodity business of manufacturing coconut oil to being a dominant player in the branded hair care and edible oil segments. In recent times, rural sales for the company have grown at a faster pace as compared to the growth on the urban side. The rural growth in turn is dependent on the normal monsoons. The company will benefit from the overall lower tax rate in the GST regime, further supported by the input credit.
Emami is a niche FMCG player focusing on herbal products in personal care and healthcare space, it operates mainly into the skincare and hair oils segments. Emami has built strong brands like Boroplus, Fair and Handsome, Navratna and has acquired strong ayurvedic brands like Zandu. It has positioned itself well in the natural/ ayurvedic products. To its credit, it has created niche categories like Cooling Oil/ Talc and Men’s Fairness Cream. Further, it leads the antiseptic cream category under its blockbuster brand Boro-Plus. Four of its Rs 100 crore turnover brands are leaders in their respective categories and contribute more than 70% to its sales.
Future Retail is the retailing arm of the Future Group, selling products ranging from food, apparels, and appliances to general merchandise through large and small store formats including Big Bazaar (BB), Easyday (ED), Foodhall, Fashion at Big Bazaar (FBB), and ezone. We like FRL’s leadership position in the fast growing modern retail space; focus on improving profitability; and the strong expansion plans within the retail space.
Future Consumer (FCL) is the food and FMCG arm of the Future Group. Post the Group level restructuring, FCL has been largely focusing on the food space since FY14. Food and beverages formed about 94% of the brands business with the balance coming in from its home and personal care stable. FCL’s key brands include Golden Harvest, Premium Harvest, Kosh, Nilgiris, Tasty Treat, and Fresh & Pure. Growth is expected to be exponential as it would be driven by expansion of product portfolio, incremental penetration of existing products within Future Retail stores, expansion of distribution network both at FRL level as well as other tie-ups.