De­mand re­cov­ery holds the key

Financial Chronicle - - DEEP DIVE -

In a pos­i­tive move, the GST Coun­cil has rec­om­mended the re­duc­tion of GST rates for build­ing ma­te­ri­als – ply­wood, MDF, par­ti­cle board, ve­neer, tiles and sanitaryware – and some con­sumer elec­tri­cals like fans, switches/switchgears, sta­bilis­ers and ca­bles and wires, from 28 per cent to 18 per cent im­ply­ing 10 per cent re­duc­tion in end con­sumer prices in ad­di­tion to the ex­cess ben­e­fit to be passed on in lieu of higher in­put tax cred­its. How­ever, the coun­cil has not re­duced rates for do­mes­tic elec­tri­cal ap­pli­ances like mix­ers, food pro­ces­sors, elec­tric wa­ter heaters and oth­ers (pre-GST rates were c.24-27%), which oth­er­wise would have been a boost to con­sump­tion.

While this move will cer­tainly re­duce price dif­fer­en­tial be­tween branded and un­branded play­ers, thereby cre­at­ing a level play­ing field, it should be recog­nised that sig­nif­i­cant mar­ket share shift will be a func­tion of higher tax com­pli­ance on be­half of un­or­gan­ised play­ers which will in turn de­pend upon strict and ef­fec­tive im­ple­men­ta­tion of law to check tax evaders. Also, de­mand for build­ing ma­te­ri­als and elec­tri­cals, like switchgears and wires, would be a func­tion of re­vival in con­struc­tion ac­tiv­ity. Nonethe­less, it would pro­vide an op­por­tu­nity for com­pa­nies to im­prove mar­gins.

* Build­ing ma­te­ri­als to be taxed at 18%; con­struc­tion sec­tor re­vival key for higher off-take:

GST coun­cil re­duced rates for build­ing ma­te­ri­als like ply­wood, MDF, par­ti­cle board, ve­neer, tiles and sanitaryware (lam­i­nates, com­mer­cial ve­neer and faucets were al­ready at 18%) re­sult­ing in re­duced prices for end con­sumers and pos­si­bly shift to­wards branded goods on lower price dif­fer­en­tial with un­or­gan­ised play­ers. How­ever, de­mand off-take is ex­pected to be a func­tion of re­vival in the con­struc­tion sec­tor for the coun­try. Re­duc­tion in rates alone can­not pro­pel growth for the com­pa­nies. Dur­ing 2QFY18 earn­ings call, com­pa­nies have high­lighted that re­tail de­mand is yet to pickup.

* Do­mes­tic elec­tric kitchen ap­pli­ances and wa­ter heaters con­tinue to be taxed at 28%: The GST Coun­cil has not re­duced rates for do­mes­tic elec­tric ap­pli­ances like elec­tric wa­ter heaters, mixer grinders, food pro­ces­sors, toast­ers, iron, in­duc­tion cook­tops and other such items which will con­tinue to be taxed at 28 per cent GST (preGST rate of 24-27%). A lower rate would have in­creased end-con­sumer de­mand for these prod­ucts, how­ever, a higher rate would con­tinue to im­pact de­mand sce­nario in the short-term as high­lighted by com­pa­nies dur­ing 2QFY18 earn­ings call (higher printed tax on in­voices i.e. 28 per cent GST vs ear­lier 14 per cent VAT cre­at­ing per­cep­tion that ap­pli­ances have be­come ex­pen­sive post GST).

Nonethe­less, tax rate for fans, switches/switchgears, sta­bilis­ers (all these had pre-GST rate of 24-27%) and ca­bles and wires (raised from pre-GST rate of c.18 per cent to 28 per cent in July this year) have been re­duced to 18 per cent. While, this should sup­port the de­clin­ing mar­ket for fans (com­pa­nies high­lighted in the 2QFY18 earn­ings), growth in switchgears and wires will be de­pen­dent upon re­vival in con­struc­tion sec­tor.

* Tax rates cut but mar­ket share shift to or­gan­ised play­ers still de­pen­dent upon strict im­ple­men­ta­tion to in­crease tax com­pli­ance: The GST coun­cil has re­duced rates for the ma­jor­ity of items in build­ing ma­te­rial and con­sumer elec­tri­cal space which will lead to lower prices of branded goods for con­sumers and uptick in de­mand. How­ever, the mar­ket share shift from un­or­gan­ised to or­gan­ised play­ers would be de­pen­dent upon the strict im­ple­men­ta­tion of the law on be­half of tax au­thor­i­ties to in­crease tax com­pli­ance on part of un­or­gan­ised play­ers.

With the de­lay in in­tro­duc­tion of e-way bill to at least April 2018, from the ear­lier time­line of Oc­to­ber 2018, and con­sid­er­able time/data re­quired for per­form­ing ef­fec­tive in­put-out­put ra­tio an­a­lyt­ics on data cap­tured from in­voice-wise match­ing mech­a­nism in GSTN for in­put tax credit, ben­e­fits of GST would be avail­able for or­gan­ised play­ers over a longer term.

* Stock view: 10 per cent lower prices and re­duced price dif­fer­en­tial with un­or­gan­ised play­ers would be highly pos­i­tive for V-Guard (BUY), Havells (HOLD), Cromp­ton (Not Rated) and all build­ing ma­te­rial com­pa­nies; though sig­nif­i­cant mar­ket share shift would be vis­i­ble once tax com­pli­ance in­creases for un­or­gan­ised play­ers on stricter im­ple­men­ta­tion by tax au­thor­i­ties.

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