The freezing of rates for the goods and services tax (GST), while being a mixed bag in terms of expectations, will yield benefits in the medium to long term. The GST regime is expected to streamline the system to replace the multitude of central and state taxes into a single one, helping bring down the cascading effect. This will be possible as prior stage taxes can be used as input credit, irrespective of the transaction taking place within or between states.
While the simplified system will help bring efficiencies, especially in the logistic costs for fast-moving consumer goods (FMCG) players, the higher rates in some cases could be detrimental and contrary to market expectations. Krishnan Sambamoorthy, consumer analyst at Motilal Oswal Securities, says, “A 28 per cent rate (versus the current 25-28 per cent) is likely to slightly increase the product price differential between unorganised and organised players, boosting competitiveness of unorganised players.” The same applies to the building materials space, which Nitin Bhasin, head of research at Ambit Capital, explains, is particularly negative for plywood and tiles sectors, as the final rates (28 per cent) were much higher than the 18 per cent expected.
This means the earlier expectation of the formal sector gaining market share from unorganised players might not come easily. Analysts say in such cases as well as where rates have been increased, volume growth expectations across categories should be moderated, given the low scope for price cuts. Organised players will have to make a choice of margins or volumes. Strategies companies adopt to gain market share will be key.
The Street was factoring in a GST rate of 18 per cent for plywood but the actual rate is 28 per cent, which will further reduce the price competitiveness of organised players such as Century Plywood and Greenply Industries as compared to unorganised peers. They will have to create a fine balance the price-value equation, while passing on the higher rates to consumers.
The industry leader in toothpastes, Colgate has been struggling to grow in recent times, given the rising competitive intensity from Patanjali, Dabur and others. Lower GST rates on toothpastes will enable it to reduce some of the pressure. The company might decide to pass on these gains to the end-consumer or reinvest in brand building or sales promotion — both of which will aid toothpaste volume growth.
GST brought mixed news for Dabur. The 12 per cent rate on ayurvedic products was against expectations of five per cent. The rate though, is very close to existing levels and might not have much impact on the company in the ayurvedic segment. But, Dabur stands to gain from the reduction in toothpaste. Also, it will benefit from the gap between rates on natural honey (five per cent) and artificial honey (12 per cent), believe Motilal Oswal analysts . The company can drive market share gains in its natural honey portfolio. The rate on juices has gone up from six-eight per cent to 12 per cent, which the it is likely to pass on to the end consumers. Overall, Dabur is expected to benefit.
With one of the largest basket is of electrical equipment for consumers, Havells would face multiple hurdles from the GST rates given its presence across categories compared to players in individual product space. In the air conditioner category, Havells will have to take price hikes similar to Voltas, Blue Star and Whirlpool. The key disappointment for Havells is in the fans space, as it faces a rate of 28 per cent as compared to 26 per cent previously (and expectations of 18 per cent). It will have to adjust its pricing in line with others such as Bajaj Electricals and Crompton Greaves Consumer. In cables, the rate hike will result in a higher differential with the unorganised sector, say analysts at Motilal Oswal. No change in GST rates for pumps, LED bulbs, etc, is a respite.
For Hindustan Unilever (HUL), the GST impact will be mixed. The positive one is the 18 per cent rate on soaps, toothpastes, ice-creams, noodles and jams, which will rub-off favourably, as the company currently pays higher tax on these items. It will also benefit from the cut in rates for toothpaste, which has been under pressure recently. A key disappointment though came in the 12 per cent rate on ayurvedic products against the expectations of five per cent. However, the rate is close to existing levels and hence may not have much impact. While a higher rate on detergents disappointed, HUL’s leadership position in this segment lends comfort. Higher rates on coffee and shampoos are another negative. Overall, the company stands to garner higher share in soaps by passing on the rate benefits.
Both companies will face the heat given the GST rates due to a couple of reasons. Against the expectations of 18 per cent rate for sanitaryware and the high-margin vitrified tiles, the actual rate has come in much higher at 28 per cent. However, the rate on basic ceramic tiles is lowered to 18 per cent and could offset some of this pressure. If these companies pass on the higher burden to end consumers, the price differential between their products vis-à-vis unorganised peers will widen further, say analysts. This will dampen all expectations of shift of consumers from unorganised to organised players, already factored into their stock prices to some extent.
Mahindra & Mahindra
In the automobiles space, Mahindra & Mahindra (M&M) is a clear winner, as the proposed rates are lower for a majority of vehicles the company manufactures. Its portfolio of large sports utility vehicles (SUVs) such as Bolero and XUV500 will now be taxed at 43 per cent, which comprises the basic 28 per cent and a cess of 15 per cent, as against the previous 55.3 per cent peak rate. Given the higher sales momentum for SUVs as compared to other passenger vehicle categories, the benefit should result in a boost in overall volumes, though the competition in the SUV segment is the highest in recent years. The impact on its most profitable segment, tractors, is neutral.
For Maruti, the overall impact is positive. The good news is that its petrol portfolio, which accounts for most of its volumes, will see tax rates decline. The current one on small petrol cars is about 30 per cent, while the GST rate is pegged at 29 per cent (including one per cent cess), a marginal positive benefit. The higher cess on small diesel cars (three per cent) could lead to higher on-road prices for customers. Small diesel cars contribute about 15 per cent of the company’s volumes, according to Motilal Oswal Securities.
The reduction in rates on adhesives will benefit Pidilite, while the increase in sealants will be negative. The market leader in several products, Pidilite continues to witness strong demand from the consumer and bazaar (retail, carpenters) segments, indicating strong consumption demand. Pidilite’s strong leadership position coupled with continued focus on maintaining of margins are its strengths. Interestingly, most of the segments Pidilite operates in offers scope for increasing penetration, and is also largely dominated by informal players.
Indirect taxes for India’s largest commercial vehicles player will fall to 28 per cent as compared to the earlier 30.2 per cent. About 70 per cent of its revenue in the standalone entity comes from the commercial vehicle segment. In the mid and large car space, too, Tata Motors will benefit from the 43 per cent rate (including cess) as compared to the previous 47-49 per cent. There will be a marginally negative impact on the diesel part of its small car portfolio (Tiago, Tigor, Indica, and Indigo) given higher rates.