Published on 14/11/2017 4:35:15 PM | Source: Kotak Securities Ltd
GST Rate Revisions More Earnings Power For Several Names - Kotak Sec
GST rate revisions – more earnings power for several names.
GST council’s decision to revise rate downwards on several items should enhance earnings power of several companies in our universe – (1) directly via partial retention of the lower overall indirect tax incidence, and/or (2) indirectly via volume elasticity driven by consumer price cuts. HUVR, Nestle, GSK-CH, Dabur, GCPL, JYL, Emami and Titan appear the key beneficiaries prima facie. Change in structure to ‘5% GST without input tax credits (ITC)’ from ‘18% with ITC’ is broadly neutral for the QSRs like JUBI.
The event – GST rate revised downwards on several items
In what the official government press release terms as ‘major relief’, the GST council has recommended substantial pruning in the list of goods attracting the highest 28% GST slab rate. Key changes summarized below:
* GST reduced to 18% from 28% - this list includes items like electrical goods (wires, cables, etc.), furniture, plywood, detergents, shampoos, hair dyes (natural as well as synthetic), shaving products, deodorants, perfumes, beauty products, sanitary ware, ceramic tiles, wrist watches, wall papers, glassware, chocolates, chewing gum, malt-based foods, goggles, solvent and thinners.
* GST rate reduced from 28% to 12% - includes, among others, wet grinders, tanks and armored fighting vehicles.
* GST rate reduced from 18% to 12% - includes, among others, condensed milk, refined sugar, pasta, spectacles frames, bamboo/cane furniture and jute/cotton bags.
* Several other items have seen rate reduction 18% to 5%, 12% to 5% and 5% to zero. We are not highlighting these as most of these fall outside our FMCG coverage universe.
* All standalone restaurants (i.e. those not in hotel premises), air-conditioned or otherwise, will now attract a 5% GST rate without input tax credits (ITC). The earlier construct was an 18% GST rate but with ITC.
Exhibit 1 captures some of the key categories that – (1) have seen rate changes in this round of GST council meets and (2) one or more companies in our coverage universe operate in.
The nub – further boost to the earnings power of the organized sector
At the risk of exaggeration, we believe analyzing the impact of GST rate changes has become akin to analyzing the transmission impact of monetary policy decisions. The distribution of direct impact (positive or negative) depends on the extent to which and the pace at which companies effect price changes in the market. In products with MRP construct, pretty much the entire CPG space in India, indirect tax incidence is not the most obvious. This lends an element of flexibility to the pricing decisions taken by companies as we saw during transition to GST a few months back. We are not suggesting profiteering here; what we are highlighting is the challenge we face in analyzing/quantifying the impact of these rate changes.
At this point, we would stop at a generic conclusion that the companies which operate in categories that have seen rate reductions should see further boost in their earnings power either (1) directly; by retaining partly the lower overall indirect tax incidence on the category, and/or (2) indirectly as any price reduction drives a volume growth uptick.
A one-time, but possibly material in some case, benefit could also accrue in 3QFY18 (the current quarter) on transitory old MRP stock (before the companies roll out new reduced MRP packs). GST, being a tax applied on sale, would become lower effective Nov 15, 2017 even as revision in MRP could take a while.
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