USL faces headwind as concerns over GST on extra neutral alcohol remain
While the stock has gained, analysts say investors should be cautious, given regulatory headwinds and valuations
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The United Spirits stock was up 5.5 per cent on Monday as the Good and Services Tax (GST) Council did not take up the issue of including extra neutral alcohol (ENA) under the GST regime.
The stock had declined about 10 per cent in the last couple of weeks on worries that the ENA will be brought under the ambit of the GST.
Analysts at Deutsche Bank said no decision on the ENA in the GST Council meet on Saturday provided an upside.
The ENA is a key input used in the production of alcohol beverages and for industrial purposes.
According to United Spirits, bringing the ENA under the GST net would have been negative as the company would have to pay the tax on inputs but would not get input credit as final products such as whisky is out of the GST ambit.
So far, liquor makers such as United Spirits were able to offset the value added tax (VAT) paid on the ENA against output taxes on the final product.
The stock has gained but whether the ENA will be included under the indirect tax regime or not in the near term remains a concern area.
Analysts estimate that if an 18 per cent GST is imposed on the ENA and current levies (VAT) are done away with (7-8 per cent), the effect on earnings per share will be about 15 per cent. This is assuming that the company is unable to mitigate the impact of a jump in input costs. Alcoholic beverage makers can mitigate this to an extent as they can set off the duty paid on molasses (part of the GST, attracts 28 per cent rate) for production of the ENA. The other option is to seek price hikes from state governments to overcome the impact.
The stock had declined about 10 per cent in the last couple of weeks on worries that the ENA will be brought under the ambit of the GST.
Analysts at Deutsche Bank said no decision on the ENA in the GST Council meet on Saturday provided an upside.
The ENA is a key input used in the production of alcohol beverages and for industrial purposes.
According to United Spirits, bringing the ENA under the GST net would have been negative as the company would have to pay the tax on inputs but would not get input credit as final products such as whisky is out of the GST ambit.
So far, liquor makers such as United Spirits were able to offset the value added tax (VAT) paid on the ENA against output taxes on the final product.
The stock has gained but whether the ENA will be included under the indirect tax regime or not in the near term remains a concern area.
Analysts estimate that if an 18 per cent GST is imposed on the ENA and current levies (VAT) are done away with (7-8 per cent), the effect on earnings per share will be about 15 per cent. This is assuming that the company is unable to mitigate the impact of a jump in input costs. Alcoholic beverage makers can mitigate this to an extent as they can set off the duty paid on molasses (part of the GST, attracts 28 per cent rate) for production of the ENA. The other option is to seek price hikes from state governments to overcome the impact.