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With GST imminent, what stocks could gain and what could lose?


Posted on 16-May-2017 Comments  0

With GST imminent, what stocks could gain 

and what could lose?

Even as the Indian economy prepares for the official launch of GST on 01stJuly 2017, there is still uncertainty on the subject of the specific rates of GST. While the broad ranges of GST and the mean rate have been defined, the actual product specific rates are yet to be announced. However, the indicators are available and that will give aclue of which sectors and stocks will benefit and which of them will lose. Sectors that will be subject to tax rates higher than their current rates of taxation will stand to benefit from the GST. Additionally, there are going to be structural benefits for certain segments. Here is a look at some of them…


Key beneficiaries of GST…


  • Cement could be the sector to benefit substantially from GST. The current rates of excise and VAT combined are well over 27% in case of cement companies. As GST converges to a mean rate of 18%, cement could be a huge beneficiary. Focus will be on established players like Ultra Tech and Shree Cement. We will have to look at ACC and Ambujain terms of their post-merger equations.

  • FMCG could be the other big sector to benefit. Apart from the benefits on certain rates, the big benefit for FMCG will be the ramping up of their logistics and distribution network towards a model that places emphasis on optimal logistics rather than logistics based on state level taxes. We expect Hindustan Unilever to be the big beneficiary.

  • Auto could be another sector to benefit from this shift to GST. Like cement, auto will also see its overall incidence of tax coming down.Like the FMCG companies, the auto companies will also benefit from economics of distribution. Our preferred stocks will be Tata Motors and Mahindra & Mahindra in this space.

  • Lastly,there are other sectors like multiplexes and logistics companies that will benefit. Multiplexes will see their plethora of taxes getting subsumed into a single tax reducing their overall incidence.Logistics companies will open up new opportunities for revamping logistics and also in terms of consultancy services. We like PVR in the multiplex space and All cargo in the logistics space.


Key losers in the post-GST scenario…


  • The big loser in the post GST scenario could be the manufacturers of sin products. Products like cigarettes and other luxury products could come in for penal rates of tax and that could be higher than the already prohibitive rates of tax that they are paying right now.Other luxury products like high-end perfumes, high-end cars and exclusive textile products could all come under this banner. ITC and Godfrey Philips may be among the losers in the post-GST scenario.

  • Food products could lose in the post GST scenario. Food products currently attract very low levels of taxation. With the GST moving towards a standard uniform rate of 18% average, these food companies could see a higher tax incidence. Companies like Britannia could be the losers in the post-GST scenario but that may be compensated by the other benefits that FMCG companies will derive by way of logistic efficiencies.

  • Service companies are likely to be badly hit by the higher incidence of tax.Currently service tax is paid at 14% with an additional 1% impost in the form of Swacch Bharat Cess and Kisan Kalyan Cess, taking the total impost to 15%. In the post-GST scenario, the impost on service tax will go up to 18%. This will make services more expensive.Telecom companies like Bharti and Idea could be the worst hit. These companies are already under pressure due to stiff price competition after the entry of Reliance Jio.


Broadly,it needs to be remembered that GST will have many hidden benefits,which may not be apparent purely on the basis of rates. Firstly, the introduction will bring about a lot of simplicity in regulation and compliance for companies. Secondly, GST implies seamless credit for inputs. Currently, a telecom company that pays service tax does not get the input credit of taxes on equipment. GST will make the credits across products and services more seamless and that will be a big benefit for service companies. Lastly, GST means more efficient use of logistics and will bring out more optimal usage of resources. That is why it is estimated that notwithstanding the gainers and losers from GST, the overall impact on GDP will be positive in the medium term. That could be the key takeaway from GST!

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