GST regime: More gainers than losers

If the Bill is passed, many sectors and companies will gain, especially the ones dominated by the unorganised players

The passage of the Goods and Services Tax (GST) Bill has been pending for a long time now. But, of late, expectations have increased that the Bill may be passed in the forthcoming monsoon session of parliament on improving political consensus. If the Bill is indeed passed, many sectors and companies will gain, especially the ones dominated by the unorganised players as GST Bill will shrink differential tax rates and increases tax compliance.

Given the recent buzz around the Bill, certain companies in the logistics and realty players have already seen some run-up in their share price partly. Once passed, it will lead to more clarity on date of implementation and tax rates applicable. However, based on the proposal, various sectors that can benefit include automobile, auto-ancillaries, consumer goods and FMCG, retail and logistics as well as infrastructure and building materials to name a few.

Logistics is being looked as a major beneficiary amongst sectors. Sandeep Upadhyay, MD & CEO, Centrum Infrastructure Advisory Limited says that all those in logistic services will be beneficiaries while indirect impact may be seen for larger toll operators. The increased profitability of truckers, etc will drive traffic movement. Amongst logistics companies, Gati, Allcargo Logistics, Container Corporation of India, VRL Logistics, etc have seen surge in the stock prices and could see more gains as the street turns more bullish.

For cement and building materials majors, even as their prospects are improving led by expected upsurge in demand post monsoon, the new tax proposed can bring further respite. Currently, the companies are paying effective tax at the rate of 24.5 per cent including VAT and excise. Under the new regime, the GST rate will be about 18 per cent. For regions where demand is soft the same may be passed through to customers in the interim. UltraTech being a pan-India player always is the top pick of analysts, though other cement companies too will benefit.

Construction and material players such as ceramics and paints makers too will benefit. Leading tile manufacturers like Kajaria Ceramics and Somany Ceramics, which are likely to witness healthy expansion in their operating margins amid benign LNG prices, will gain visibly and possible win market share from unorganised players that are currently paying low taxes. Companies as Asian Paints, Berger, Havells, Pidilite, etc are to benefit says an Emkay Research note and so will all consumer companies including Hindustan Unilever (HUL), Colgate, GSK Consumer, Nestle, Dabur, Emami, Marico, Godrej Consumer, etc helped by gains on the supply chain and logistic front as well as due to reduction in indirect taxes.

Paint companies as well as consumer companies will stand to benefit as GST rate is pegged at 18 per cent levels versus current tax (excise plus VAT) rate of 22-23 per cent.

"Our assessment shows the consumer durables sector will be the biggest beneficiary of GST, potentially saving 30 per cent of logistics costs from current levels of 7-8 per cent of sales," says CRISIL Research. It further adds that cost gains in the FMCG and pharmaceutical companies may be a relatively lower at 15-20 per cent.

"Asian Paints, Berger, Pidilite, HUL and Colgate will benefit in the FMCG pack," says Abneesh Roy of Edelweiss Securities.

In the auto space, the indirect tax for two wheelers, small cars and commercial vehicles currently works out to the tune of up to 26 per cent, while for mid-sized cars and SUVs (sports utility vehicles) this can range from 35 to 45 per cent. While the manufacturers in the first three categories (Maruti, Bajaj Auto, Hero MotoCorp, TVS Motor, Ashok Leyland, Tata Motors, Eicher) will benefit given the proposed lower tax rate of 18 per cent, a demerit tax would mean M&M could like see rates come down by just 5 per cent to about 40 per cent, say analysts.

The impact for media companies - PVR and Inox Leisure - will be mixed as PVR, which currently pays entertainment tax of about 22 per cent, stands to gain whereas for Inox which pays 18 per cent entertainment tax the new tax regime will be neutral. That's because, the GST rate proposed is 18 per cent. Analysts at IDFC Securities estimate that margins of multiplex companies can improve by 100-200 basis points under GST regime.

The combined tax rate of cable companies such as Hathway, Den Cable, etc stands at 25 per cent currently while for direct-to-home players such as Dish TV is about 23 per cent. A lower GST rate will thus be a positive for these companies as well.

For telecom companies, the current service tax rate of 15 per cent on telecom bills will inch up to the standard GST rates thereby increasing the cost to the consumer marginally, said Kotak Institutional Equities in a June 3, 2016 note. The impact for tobacco companies though is uncertain given that there are no clear indications on the GST rate. A higher rate would certain impact volumes, which have already been under pressure due to sharp increase in central and state taxes in recent years.