Goods and Services Tax
August 4, 2016
Goods and Services Tax Update
GST now a reality
The long impending Goods and Services Tax (GST) will now see the light of day
and be enforced from April 2017 as the Rajya Sabha has finally passed the GST
Constitutional Amendment Act. The GST’s enactment would potentially be the
most resilient tax reform in recent years as it would do away with the intricacies of
a multilayer and differential tax system for various good and services across
different states. The final rate of GST will be decided upon in Nov-Dec of 2016
and coherence among various political parties on the bill suggests at its smooth
enforcement going ahead.
The GST will widen the tax base and streamline the tax system, which will broadly
ease off the concerns for businesses from the taxation perspective. The GST will
clearly pronounce the applicable tax rates for various goods and services and
also define a uniform service tax.
The Revenue Neutral Committee, headed by the Chief Economic Adviser
Dr Arvind Subramanian, appointed by the Government of India had suggested a
revenue neutral rate of 15-15.5%, with the highest rate of 40% on the demerit
goods (a lower rate of 12% on essential goods). The standard rate has been
recommended at 16.9%-18.9%.
In the near term, there wouldn’t be any substantial increase in the tax revenue for
the government as the Revenue Neutral Rate for GST is likely to be 17-18%. But
as more firms, mainly the ones in the unorganised sector, come under the tax
purview, we can expect enhanced tax revenue collection by the government in the
medium to long term.
The GST entails two components:
(A) The Central GST (CGST), which will be levied and collected by the Central
Government - The CGST will replace the Central Excise Duty, Service Tax,
and Additional Custom Duties.
(B) The State GST (SGST), which will be levied and collected by the State
Government - The SGST will replace the VAT, Entertainment Tax, Luxury Tax,
Lottery Tax and Electricity Duty.
The impact of the GST’s implementation would be diverse with several sectors
getting favorably impacted while there would be some to get negatively impacted
as well. The two key themes that shall evolve post the GST’s enactment would be
(I) Gradual shift of trade from unorganised to organised players, and
(II) Seamless inter-state flow of goods
We feel the broader consumer oriented companies would stand to be gainers
as there would be a demand shift in favour of the organised sector at the cost
of unorganised players triggered by cost dynamics. For instance the
rationalisation of effective tax rates for FMCG companies in the organised
sector will add to their bottom-line margins while costs of unorganised players
will inch up with them falling in a similar tax purview, thus leading to
Research Team
unfavourable cost dynamics for them.
Please refer to important disclosures at the end of this report
1
Goods and Services Tax
This in turn will lead to the pricing gap between products of organised and
unorganised players getting bridged and lead to market share trends tilting in
favour of large players. Further, reduction in logistics costs and lower inventory
costs due to warehouse rationalisation can bring in efficiency and overall cost
reduction. Within the FMCG/Building materials space, a significant market
share is still held by the unorganised players, which can see a gradual
transition towards the organised larger players with the implementation of the
GST.
The logistics/transport sector will emerge as one of the significant beneficiaries
of the GST as the entire Indian economy will operate as a single market with
its implementation, and this will reduce incremental warehousing expenses for
organised players across states. The transit time of goods will see substantial
reduction with the abolition of state level entry tax and this will de-bottleneck
surface transport, which in turn will translate into more business for freight
operators.
Currently there exist some loopholes in the tax structure which are exploited by
small players; with the implementation of the GST their competitive advantage
on this account will subside and large players will get favourably placed in the
competitive landscape.
Among the key sectors which we believe will benefit from the implementation
of the GST are auto, consumer durables, electrical goods, and building
materials. An important mention is that sectors like petroleum, alcohol, and
tobacco would be out of purview of the GST and will continue to attract
differential tax rates. While the implementation of the GST could see some
initial hiccups, we believe in the long run it can be a game changer for the
economy. Although it’s a little too early to discuss the exact impact of the GST
on various sectors and specific stocks at the current juncture, still we have
attempted to pick up some stocks which stand out to be distinct beneficiaries of
the GST.
Amara Raja Batteries (ARBL): ARBL is the second largest lead acid storage
battery manufacturer in the country. It has been outpacing the market leader
Exide (ARBL grew at a 21% CAGR over FY2010-16 as compared to Exide's
growth of 10%), leading to its market share improving from 25% in FY2010 to
about 35% currently. We believe that the company would benefit from the
implementation of the GST as the resultant cost savings accrued due to lower
tax expenses will enable the company to compete better and garner market
share from unorganised players across markets. This in turn could potentially
lead to further market share gains for the company.
Bajaj Electricals (BE): BE is among the top 4 players in the consumer durables
space across all its product categories (leader in small appliances; number-4
in fans and lighting). It has a strong brand recall and distribution reach with
4,000 distributors reaching out to 4,00,000 retailers. We believe that the
company would benefit from the implementation of the GST as cost savings on
account of lower taxes will help it bridge the pricing gap vis-a-vis products of
unorganised players and this in turn will lead to market share gains for the
company.
August 4, 2016
2
Goods and Services Tax
Century Ply: The plywood industry in India is majorly dominated by
unorganized players, which command 65-70% of the total market share. With
the implementation of the GST, we expect the organised and unorganised
players to come on a common floor in terms of tax liabilities, and the latter will
no longer enjoy cost benefits on account of tax savings. With the organised
and unorganised players now getting priced closely, we expect consumer
preference to shift towards Century Ply, given that it enjoys strong brand recall
and a quality product portfolio.
HSIL: HSIL derives ~50% of its top-line from the Faucets & Sanitaryware
business. In the domestic markets, unorganised Faucets & Sanitaryware
players command 55-60%/35-40% of the total market, respectively. Within the
organised Faucets & Sanitaryware market, HSIL is amongst the top 2-3 market
players. HSIL derives ~45% of its revenues from the Packaging Products
division. Over 70% of the domestic Packaging market in India is dominated by
unorganised players (with
>40,000 smaller market participants). On
implementation of the GST, the pricing differential between products of
organised and unorganised players will narrow down and companies with
strong brand names like HSIL will benefit.
Maruti Suzuki: For most of the entry-level passenger vehicle models, we expect
reduction in incidence of indirect taxes at the consumer level. This could lead
to demand expansion, thereby benefitting players like Maruti Suzuki which
enjoys >80% market share in the entry level passenger vehicle segment.
Transport Corporation of India (TCIL): TCI is one of India’s premier organized
freight service providers with a pan-India presence in road freight and supply
chain services segments. The company generates ~68% (FY2016) of its
revenues from both these divisions. Currently, transit time is severely affected
owing to down time at state check points. But the implementation of the GST
will eliminate many such check points and reduce down time significantly,
thereby optimizing road freight delivery times. Further, for the supply chain
services segment, post the GST roll-out, a new network design will emerge
which will provide greater flexibility in terms of supply and demand matching.
As a result, many smaller warehouses would consolidate/merge, resulting in
bigger, fewer, and highly efficient warehouses. Given TCIL’s pan-India
presence and large fleet size, we see these two developments to translate to
efficiency improvement within the organisation.
V-Guard: V-Guard derives ~66% of its revenues from Electrical/ Electro
Mechanical division, which is into manufacture of pumps, cables & wires,
water heaters and fans. Further, the company derives ~30% of its revenues
from the Electronics segment, which is into the manufacture of UPS, and
voltage stabilizers. The unorganised market in these segments on a blended
basis accounts for ~40% of the total market size. Given the strong market
positioning of V-Guard in areas it operates in, we expect the company to
further gain market share from the unorganised players.
August 4, 2016
3
Goods and Services Tax
Research Team Tel: 022 - 39357800
DISCLAIMER
Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,
Bombay Stock Exchange Limited and Metropolitan Stock Exchange Limited. It is also registered as a Depository Participant with CDSL
and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a
registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number
INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing
/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public
offering of securities of the company covered by Analyst during the past twelve months.
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should
make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the
companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine
the merits and risks of such an investment.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
fundamentals. Investors are advised to refer the Fundamental and Technical Research Reports available on our website to evaluate the
contrary view, if any.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot
testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.
While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be
regulatory, compliance, or other reasons that prevent us from doing so.
This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,
redistributed or passed on, directly or indirectly.
Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from
or in connection with the use of this information.
August 4, 2016
4
