GST regime: More gainers than losers

Host of companies from the logistics, cement, automobile, consumer and media sectors stand to benefit once the Bill goes through and gets implemented
Passage of the goods and services tax ( GST) Bill has been pending for a long time but the expectations have now increased on its passage in the next session of Parliament.

If so, many sectors and companies will gain, especially those dominated by unorganised entities. For, the Bill will shrink differential tax rates and increase tax compliance.

Given the recent buzz, certain companies in the logistics and realty segments have already seen some run- up in their share price. Once passed, it will lead to more clarity on date of implementation and rates applicable. However, based on the proposal, sectors that can benefit include automobiles, ancillaries, consumer goods, retailing and logistics, beside infrastructure and building material.

Logistics is being looked on as a major beneficiary among sectors. Sandeep Upadhyay, managing director, Centrum Infrastructure Advisory, says all those in logistics services will be beneficiaries.

An indirect impact might be seen for larger toll operators. The increased profitability of truckers, etc, will drive traffic movement.

Among logistics companies, Gati, Allcargo Logistics, Container Corporation of India and VRL have seen a surge in the stock prices and could see more gains as the Street turns more bullish.

For cement and building material majors, even as their prospects improve, led by the expected rise in demand after the monsoon, the new tax can bring further respite. Currently, the companies pay an effective tax at 24.5 per cent, including value added tax ( VAT) and excise. Under the new regime, the GST rate will be about 18 per cent. For regions where demand is soft, this could be passed to customers in the interim.

UltraTech, being a pan- India entity, is always the top pick of analysts, though other cement companies will also benefit.

Construction and material players such as ceramics and paints makers will benefit, too. Leading tile manufacturers like Kajaria Ceramics and Somany Ceramics, likely to witness healthy expansion in their operating margins amid benign gas prices, will gain visibly and possible win market share from unorganised players that currently pay low taxes.

Asian Paints, Berger, Havells and Pidilite are all set to benefit, says an Emkay Research note. So will all consumer goods majors, helped by gains on the supply chain and logistics fronts, as well as reduction in indirect taxes. Paint and consumer companies will benefit as the GST rate is pegged at 18 per cent versus the current ( 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 the current seven- eight per cent of sales,” says CRISIL Research. And, that cost gains for fast moving consumer goods ( FMCG) and pharmaceutical companies could be relatively lower at 15- 20 per cent.

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

In automobiles, the indirect tax for two- wheelers, small cars and commercial vehicles is currently up to 26 per cent; for mid- sized cars and 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 see see rates come down by only five per cent to about 40 per cent, say analysts.

The impact for media companies PVR and Inox Leisure will be mixed. PVR currently pays entertainment tax of about 22 per cent and stands to gain. Inox which pays 18 per cent entertainment tax and the new regime will be taxneutral.

That’s because the GST rate proposed is 18 per cent. Analysts at IDFC Securities estimate the margins of multiplex companies can improve by 100- 200 basis points under GST.

The combined tax rate of cable companies such as Hathway and Den Cable is 25 per cent currently; for directtohome television players such as Dish TV, it is about 23 per cent. A lower GST rate will thus be a positive for these.

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

Business Standard New Delhi,10th June 2016