Jewellery, tractor makers to gain from revised GST

Lower price hikes, coupled with market share gains from unorganised entities, would be key positives

The Goods and Services Tax (GST) Council's decision to lower rates on 66 items brought cheer to a host of companies in the jewellery, cinema and pharmaceutical sectors.

Take jewellery companies. While a lower than expected rate of three per cent on gold was a positive, the earlier decision was to have 18 per cent (from two-three per cent) on making jewellery from plain gold. This would have meant price increases by jewellery makers, which could have impacted the volume. Importantly, it would have further widened the price differential between jewellery sold by organised entities like Titan, PC Jeweller and TBZ from counterparts in the unorganised sector.

With this rate now down to five per cent, the organised sector entities can take calibrated price hikes and still gain market share from the others, who will see elevated compliance-related costs with GST implementation.

Multiplex companies such as PVR and Inox Leisure will not be impacted much from the reduced rates (18 per cent versus the 28 per cent decided earlier) on tickets priced below Rs 100, as those in this category constitute less than seven per cent of their revenue. For Mukta Arts, the impact is larger, as the segment constitutes a fifth of their revenue. Analysts say after including the higher tax on food and beverages, as well as availability of input tax credit, the impact would be neutral to positive for multiplex companies.

The GST rate on inputs used for tractors has been lowered from 28 per cent to 18 per cent, and will lead to savings on working capital and on cash flow, for tractor makers such as Mahindra & Mahindra or Escorts. While they might have to still raise prices of their end-products, this will be much lower. In its next meeting on June 18, the Council could re-look at the rates on hybrid vehicles

Publishing companies such as Navneet Education and S Chand will have to raise the prices of exercise books, text books and drawing books. While the GST rates on these were lowered to 12 per cent (from 18 per cent earlier), this is more than double the five per cent value added tax rate these attract before GST.

In the pharma space, Biocon, Sanofi and other makers of diabetes drugs stand to gain from the lower rate on insulin, to five per cent from the earlier 12 per cent.

While the GST rate on food items such as salt, ketchups and pickles has also been reduced, these segments form a much smaller part of the revenue of listed consumer staples companies like Hindustan Unilever or Nestle India. They don't disclose actual revenue share from these segments but analysts estimate it at eight to 10 per cent. Thus, the impact for these companies will not be material, reflected in their flattish stock price performance on Monday.

Stocks of most of the beneficiary companies mentioned above were trading in the green at the start of trading but ended flat, while the benchmark Sensex saw a half per cent fall.

As there is an anti-profiteering clause in GST, analysts believe most of the gains could be passed on to end-consumers and not reflect much in the margins of corporate entities, while possibly pushing up volume growth by a bit.