 "Market traders struggle to fully price in GST gains")
Stocks in sectors such as logistics, automobile, auto-ancillaries, and multiplexes have run up in recent months on expectation of passage of GST Bill in the Rajya Sabha. GST is goods and services tax. But will this rally sustain after the minor correction on Thursday?
Experts say the minor correction can be attributed to profit-booking. Given the long-term benefits, investors could look at quality stocks. Manoj Bahety, deputy head of research, Edelweiss Securities, says, "In the short term, GST is priced in. But GST can have an impact for the next decade in the form of structural reforms, which will have multi-fold benefits for these companies, so it will be unfair to say this is already priced in."
He believes these factors are not fully priced in: Savings on logistics costs and transit time, and a level-playing field for organised and unorganised firms. Experts believe investors shouldn’t not overestimate gains from lower tax rates as those will be most likely passed on to consumers. Gautam Chhaochharia, India research head, UBS Securities, says, "Not fair to assume everything (tax gains) will be retained in the margins. If margins go up, earnings (profit) impact will be material. We will play the GST theme via companies likely to gain from a level-playing field with unorganised firms.”
The goods and services tax may impact these 14 stocks the most
POSITIVE IMPACT
ACC
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While most analysts believe cement companies will pass on the benefits of lower taxes to the end-consumers, these companies could still witness higher volumes
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Savings on logistics costs will aid earnings
- Analysts estimate that every Rs 50 per tonne saved on logistics costs could aid earnings by three-five per cent
ASIAN PAINTS
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Paints companies including the leader in decorative segment, Asian Paints, will benefit on two parameters from GST implementation
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One, Asian Paints’ tax rate likely to come down from 26-28 per cent to 18 per cent, which it can either retain in its margins or pass on to boost volumes
EXIDE
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A shift away from unorganised to organised players will aid prospects of battery makers such as Exide and Amara Raja in the replacement market as well as the commercial vehicle segment; Exide being the leader across segments should benefit more
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Reducing price difference between organised and unorganised segments will be a key positive
- Analysts estimate a 2.5 to three per cent increase in market share for Exide could push up its earnings by three-3.5 per cent
GATI
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Consolidation of warehouses and creation of a national market will boost supply chain efficiencies and aid growth of Gati's supply chain management solutions business
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Lower tax rates could give flexibility to Gati to outsource warehouse management and focus on its core strengths
- Higher penetration of e-commerce will fuel growth of Gati's e-commerce solutions business
HAVELLS
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Lowering of tax rates on consumer electricals from 26-29 per cent levels currently will be a key positive
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Increase in addressable market in segments dominated by unorganised players such as lighting, fans, water heaters, air coolers, etc
- The company will also benefit from lower logistics as well as supply chain costs
HERO MOTOCORP
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Tax rate on two-wheelers could come down from 24 per cent and aid company's margins and volumes
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Price-sensitive products in the 100cc and entry-level motorbikes could witness higher demand
- Discontinuation of excise exemption at its Haridwar plant from FY19 could offset some of these gains
MARUTI SUZUKI
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Analysts believe there will be a nine per cent price reduction in Maruti's entry-level passenger cars
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This segment will witness higher demand and volumes
- However, if a 40 per cent GST rate is imposed on mid-sized cars, it could push up prices of such vehicles
PIDILITE
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Lower tax rate could lead to higher margins for Pidilite as it enjoys good pricing power in the adhesives sector
PVR
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Multiplex companies such as PVR will benefit from subsuming of entertainment tax (26.9 per cent) under GST
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Availability of input credit on services will be another positive
- Analysts believe the company's margins should expand 440 basis points assuming a GST rate of 18 per cent
SHOPPERS STOP
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A GST regime will enable Shoppers Stop to avail input credits on service tax on rent and infrastructure
- The company also stands to benefit from increased preference for organised retailers
NEGATIVE IMPACT
ASHOK LEYLAND
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Improving efficiency in logistics as well as better supply chain management could lead to lower demand for commercial vehicles (CVs)
- Ashok Leyland, with majority of revenues coming from the CV segment, could be affected by GST implementation
BHARTI AIRTEL, IDEA CELLULAR
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Service tax could go up from 15 per cent currently to 18 per cent and impact earnings if not passed fully
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While analysts believe companies will pass on the tax increase to post-paid customers, high competitive intensity could limit their ability to raise prices of lower-denominated pre-paid packs which are price-sensitive
- Consequently, analysts believe revenues of these companies could be hit by 1-1.5 per cent each, profit impact could be slightly higher
ITC
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There is uncertainty regarding the impact of GST on ITC and other cigarette makers around implementation of 40 per cent sin tax
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Estimates suggest ITC currently pays blended weighted average VAT (value-added tax) of 24 per cent whereas blended central excise is 38.5 per cent
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Tobacco is proposed to be included in GST, with tax rate at 40 per cent, while central excise on cigarettes may continue
- A higher rate may hurt volumes
TITAN
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Titan and other jewellery companies could be hit by two-six per cent GST rate on precious metals
- While no excise duty on jewellery currently, a one per cent VAT rate is applicable for jewellery companies
