GST: A Khatta-Meetha blend to drive long term economic growth: Angel Broking

Views of Mr. Mayuresh Joshi (Fund Manager, Angel Broking):

GST: At midnight on June 30 the entire ecosystem including manufacturers, distributors, retailers as well as end consumers are grappling with the ramification the new system shall bring about. For manufacturers of goods along with providers of service across different categories the implications of getting their interconnected supply chain right down to the end consumer starting with the process of getting registrations, having the requisite software and back-end in place, ensuring their suppliers, dealers, retailers have the same in place in order to avail the input tax credit on the same to be claimed are the first initial steps in the entire process. Secondly, the government has gone all out in its efforts to impress upon industry with the entire process flow chart to allay nerves of the industry and is burning the midnight oil to ensure that the same gets implemented with the minimal of glitches and hassles. There would obviously be minor teething issues for the first few weeks with implementation at the user end but with strong assurances from the government in terms of support and assistance the same shall be ironed out. From a streets perspective the implications are two-fold: what happens to the industry and the implications for each sector and the cost/benefit analysis for the end consumer availing goods/services for any/each sector. The general rationale is the obvious implication of discounts coming through to dispose of unsold inventory till the end of June as lot of goods shall not be eligible for availing input tax credit on the unsold part. This shall result in subdued earnings for the 1st quarter and the repercussions can be carried forward to the second quarter as the entire supply chain comes to grip with the requirements and compliances to be followed under the new regime.

Consumer durables: White good players are currently taxed at 27% (including 13.5% VAT) against 28% under the new GST regime. Also manufacturers can avail input tax credit as well as service tax paid on advertisements. The overall impact seems to be neutral in terms of tax implications though discounts being doled out to clear inventory can be obvious. The discounts announced by the companies are expected to see higher sales in the June quarter but this may impact their margins. With GST coming in picture, there will slight upward revision in the prices of most consumer durable items. We however do not expect any significant impact on the margins of the consumer durable companies post GST implementation.

Airlines: The airline travel for the business class is set to become expensive. The GST on the economy class tickets is set at 5%, lower than the current service tax rate of 6% however the same for the business class is increased from 9% to 12%. Additionally, the Aviation Turbine Fuel (ATF) is also kept out of the GST regime which will see the current indirect tax structure continued. So for the airlines, there will be two different taxes indirect taxes on fuel and GST on the other items which complicates the tax matters for the airline companies. Also under GST, tax input credit is only available on input services for economy class travel. For the business class, full input tax credit is available. We believe that lowering the taxes for economy class is a welcome move as it will help in promoting the airline travel. Also the higher taxes on the business class are not expected to impact the demand as higher class tickets are not price sensitive.

Cement: GST implementation is expected to be neutral for the cement industry. Currently cement is taxed at 12.5% excise and VAT rates between 12.5-15.5%. Under GST, the cement will be taxed at 28%, which is nearly the same as the current tax structure. GST however would benefit the cement companies in lowering logistics costs as most cement companies have build state level warehouses which will now change to the large warehouses at the regional level. This will help in reducing the logistics costs which will benefit the cement companies. Reduction in the tax on coal is also expected to benefit the cement companies. Also cement being a voluminous commodity, inventory turnover is high hence any destocking impact is also not expected.

Real estate: Under the current tax structure, service tax and VAT is applicable in different states, combined together these taxes are between 11-15%. Current tax on land value is 4.5%. In GST regime, 12% tax would be applicable on the sale value with input tax credit. The building materials like ceramic tiles, sanitary ware, etc will be taxed at the higher rate of 28%. The affordable housing scheme is currently exempt from the service tax and under GST, most services for affordable housing are exempt. Overall we believe that GST is expected to be a neutral to the real estate sector.

Telecom: The telecom sector is already under pressure due to the hyper competition which has led to the price wars. Under the GST, telecom services will be taxed at 18% as against current 15%. This is expected to add further worries for telecom players. With the competition taking a huge toll on the players, any price increase would not be take positively by the customers hence companies may be forced to bear the extra cost which may impact their already fragile performance. We believe that the GST rates for telecom services would be negative for the sector.

Automobile: The GST rates are mostly expected to be neutral to the auto sector except for the hybrid cars which will be taxed at the 28% GST +15% cess., Most other vehicle categories will not see significant change from the current tax structure. Tractors category will be taxed at 12% vs. current 6-7% which will be negative for the tractor companies. Auto sector has already seen two major events since last November that have led to disruption i.e demonetisation and ban on BSIII vehicles. Under the GST, input tax credit will not be available for the dealers for the stocks existing before 1st July hence companies are offering discounts on their vehicles. This is expected to result in margin pressure in the June quarter. The GST will be mostly neutral for the auto ancillary. The organized players in the battery segment will see some positive due to the sizable presence of organized players.

FMCG: We believe that FMCG sector stands to gain from the GST due to the significantly large unorganized segment. The GST rates of the FMCG products like hair oil, tooth paste, soaps, toothpaste, etc has been lowered by 500-600 bps from the current rates. This is expected to benefit the FMCG companies the fruit/milk beverages will be taxed at 12% which is lower than the current rates and hence it is also expected to be positive for the companies in this space. Additionally, companies due to the uniform tax rates will see efficiency in the logistics which will be margin accretive.

Pharma and healthcare: Under the GST, pharmaceutical products will see 12% GST as against current rate of 10%. We believe companies will be able to pass on this full impact to the patients however destocking is expected to impact the near term sales of pharma companies. The healthcare sector will remain exempt from the GST however the inputs by the healthcare sector will be taxed at 18% leading to rise in the operating costs.

All in all, we expect GST to have a neutral impact on the most sectors while some sectors will see positive or negative impact. GST is likely to result in a near term disruption as this is a massive reform which is getting implemented in our economy. Due to the uncertain nature of its impact, there will be some destocking by the dealers which can result in lower sales in next 6 months. Also some companies are already offering discounts to clear their inventory which will also put margin pressure. We expect some pressure on the companies for next two quarters as companies will try to adjust to the new normal in the economy.

During this period, we expect markets to remain volatile and track the management commentary on how they are adjusting to the issues arisen due to the GST. The government's commentary will be watched most crucially as GST offers better transparency and has potential to improve our ease of doing business ranking and add 1-2% growth in GDP growth. Investors should keep watch of this as a successful implementation of GST would lead to strong returns from the equity investments.

Source : Equity Bulls

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