GST Cut Gives a Boost to Consumption Stocks

BETTER DAYS Lower prices ahead of the festive season will allow companies to up volumes

The government’s decision to slash rates of GST on a wide range of consumer goods is being cheered by analysts. Tax rates were cut from 28% to 18% across items, including consumer durables such as washing machines, television sets, vacuum cleaners and refrigerators, apart from sharp cuts in smaller items such as footwear, paints, leather products and textiles. This is expected to spur demand and give a fillip to the consumption theme.

Of the 50 items that are under the highest tax slab of 28%, 19 will see a cut in taxes. Rates on select items from other slabs of 18% and 12% have also been lowered. Analysts say this cut will be passed on to consumers through cut in prices in the range of 8-12%. With the festive season round the corner, lower prices of more than 50 items will allow companies to boost volumes, giving a push to the discretionary consumption theme that has been a prominent play in the market for the past few years.

“The broader implication of the changes is that, along with other reflationary fiscal measures taken, they will boost our overweight stance on the consumption theme. One can expect this reduction in GST rates to create a positive consumer sentiment ahead of state elections,” says Dhananjay Sinha, head of research, economist and strategist, Emkay Global Financial Services. “The cut in tax rates will expand the market with some households that held back discretionary spend coming into the fold,” adds Vikas Gupta, CEO, OmniScience Capital.

The consumption theme gained prominence about 3-4 years ago in the midst of a benign interest rate environment that allowed for lowcost borrowing for purchase of consumer durables. It benefitted from a rise in the disposable income following implementation of the 7th Pay Commission and, more recently, higher rural consumption supported by strong monsoon in the past two years.

However, consumption growth hit a bump last year after demonetisation and rollout of the GST regime that initially led to supply channel disruptions. Demand has since recovered in most pockets and is on track to revert to earlier growth rates. “A pick up in consumption from a low base was on the anvil, irrespective of any tax cuts. The relaxation in GST rates on select items will help further,” says Anand Shah, head of investments, BNP Paribas Mutual Fund.

Already, the GST rate cut has triggered a rally in stocks of companies manufacturing consumer electronics, footwear and paints. Stocks of Bata India, Relaxo Footwears and Khadim’s are in focus after the move to cut tax on footwear priced at ?500-1,000 to 5% from the earlier 18%. However, Gupta feels that the tax cut will not materially move the needle for smaller-ticket items such as footwear and leather goods. These are non-discretionary in nature and are not likely to see a big spurt in volumes purely on account of lower prices. He is more positive on the prospects of durables where even a 8-10% cut in prices will lead to a better off-take.

“There is a possibility of trading up in certain white goods, which will lead to a pick up in sales volume,” says Gupta. Companies such as Bajaj Electricals, Crompton Greaves Consumer Electricals, Whirlpool of India, Havells India and IFB Industries will benefit from higher volumes. Analysts feel there is more room for upside in shares of consumer discretionary companies, whereas the growth is priced in for consumer non-discretionary stocks. Paint makers will also see a boost in volumes after the reduction in tax rate, say analysts. Kansai Nerolac Paints and AkzoNobel shares are relatively cheaper than that of Asian Paints.

While investors may find a reason to continue to favour consumer stocks, they will have to be mindful about overplaying this theme. They will need to be more selective and identify sub-segments within the broader consumption space that provide more room for growth. Much of the consumption play is also represented in the high pace of growth among NBFCs such as Bajaj Finance and Edelweiss Finance, among others. These lenders have grown their loan books manifold by tapping into the demand for low-ticket consumer durables. Gupta feels there is overcrowding in NBFC stocks and says the frenetic pace of loan book growth could put stress on asset quality in the future.

The Economic Times, 20th August 2018