INA000003197 | Grab these 10 stocks which will benefit the most
The single tax would replace 17 indirect tax levies and improve taxation
efficiency. Most goods are placed under the four slabs of services tax
i.e. 5, 12, 18 and 28 percent.INA00003197
The goods & services tax (GST), which is likely to play a big role in boosting growth in Asia’s third-largest economy, is likely to boost earnings of many companies in sectors which have a high presence of an unorganised market.
The GST rates for 1,211 products do not show any
major deviation from the current effective tax rates except in the case
of a few consumer products in which the council tried to minimize
inflationary impact.
The single tax would replace 17 indirect tax levies and improve taxation efficiency. Most goods are placed under the four slabs of services tax i.e. 5, 12, 18 and 28 percent.
“Though four slabs for manufacturing and services does appear to be little more complex structure than expected earlier. The uniformity of taxes across states (across entire country) is one of the most important tax reforms and would immensely benefit businesses in the long run,” Gaurav Dua, Head of Research at Sharekhan told bonazcapital.
“Historic experience shows that the implementation of GST could result in disruption for short period of time as businesses adjust to the new tax regime and results in an uptick in inflation,” he said.
The biggest beneficiary of the GST implementation would be the sectors that have a high share of unorganized segment. It will bring about lower tax incidence, reduction in logistics costs, higher compliance etc.
“We feel consumables like FMCG, dairy industry would largely benefit; logistics and warehousing sector would benefit both qualitatively and quantitatively as the time spent on the state borders drops thus saving both fuel and time to reach the destination,” Arun Thukral, MD & CEO, Axis Securities told bonazcapital.
“Small cars will get slightly costlier, while SUVs will attract an additional cess. The power sector will gain as the rate for thermal coal has been categorized under 5 percent vs 11.7 percent earlier,” he said.
We have collated a list of 10 stocks which analysts think could benefit the most from the implementation of GST.
Hindustan Unilever (HUL):-
HUL is expected to gain market share with the implementation of GST as business shifts from unorganised to organised segment. HUL will benefit from moving to a moderately lower 18 percent tax slab and its major raw materials- consumer staples falling in the lowest tax labs (0-5 percent).
Further, incremental benefits may arise from the input tax credits. Broad-based portfolio of brands, innovative pipeline, robust distribution network (enhanced focus on direct reach expansion) & government thrust to stimulate the rural economy will help HUL.
Dabur India:-
Major segments of Dabur soaps and hair oil falls under lower tax slab of 18 percent compared to the current effective rate of 26-28 percent. The largest segment honey continues to fall under the exempt category.
Dabur can be an indirect beneficiary if GST helps in bringing down the rural inflation as major consumer staples coming under the exempt category which could impetus to the rural demand.
ITC:-
Apprehension over the GST rates has been an overhang on the stock for a while. The final GST rates with a cap on Cess leads to a lower incidence of taxes than the current effective tax rate. Leadership position in cigarette category, continuous investment behind brand building & innovations in other FMCG business will also drive the business growth.
Ashok Leyland:-
The Strong volume growth and market share gains continued with Ashok Leyland (AL’s) domestic M&HCV volume growth compared with industry growth. While the recent growth has been driven by replacement demand (replacing over 10 years old diesel vehicles by government order) and infra demand.
Moreover, the management expects improvement in mining/infra sector to be the next drivers for growth. Apart from a revival in M&HCV demand, the management expects exports and defense as the next major growth driver - management targets 33 percent of revenues in the medium-term from the export segment.
According to the management, the hub and spoke model of transport of goods is likely to gain with the implementation of the GST regime and it will boost the sales of vehicles, driven by requirements in the logistics sector.
Godrej Industries:-
The company has reported good quarter earning with commendable growth in the majority of the businesses. Major contributors to the growth have been the real estate, consumer, and chemicals businesses.
The management expects in FY18, implementation of GST would provide strong momentum for a much better economic environment and stronger consumer demand. Going forward, through its CREATE strategy, the company would continue to strengthen its position in all its core businesses while fostering an inspiring place to work.
Prabhat Diary
Value added products of the company are specialty dairy powder, ghee, condensed milk, and cheese. Nonvalue-added products are liquid milk. Net debt is around Rs 250 crore. cheese capacity utilization is presently around 18-20 percent.
The management expects an increase in capacity utilization for the cheese to be 40-50 percent for next year. Almost 65-70 percent of milk procurement is direct. The company is present in both B2B and a B2C segment with contribution 70 percent and 30 percent, respectively.
It plans to contribute in ratio 50:50 from both by 2020.The company plans to expand its distribution network from 25 states in the b2C segment to be a pan-India player.
Foodgrains, milk and other articles of daily use have been exempted from taxation under the GST regime, which would give a good boost up to the company.
Colgate Palmolive India
GST impact on consumer sector is largely positive. In addition, many companies in the sector will also gain as a result of the potential shift from unorganized segment to organized segment as a result of GST implementation. "Clear benefits are to toothpaste and soaps players as well as cigarette players for whom no increase in effective rates is always good news," Gautam Duggad, Head of Research, MOSL told bonazcapital.
"Colgate pays an effective tax of 25-26 percent and so 18 percent tax on toothpaste (80 percent of sales) is a positive, particularly as it levels the playing field against two players Dabur and Patanjali who enjoys tax benefits," he said.
Kajaria Ceramics
ICICI Securities maintains a hold rating on Kajaria and see a modest upside towards Rs725 in the next 12 months post Q4 results. The GST rate for ceramic tiles has been fixed at 28 percent, which would largely be a neutral rate for Kajaria as the current incidence of the indirect tax is between 26.5 percent & 29 percent.
However, on a positive note, GST will benefit the sector as it would provide a level playing field for organised players (unorganised players have a 50 percent share in tiles market) and bring in consolidation in the sector.
Furthermore, tiles industry is set to benefit from various government initiatives like ‘Swachh Bharat Abhiyaan’, ‘Housing for All by 2022’ & ‘Smart City Mission’ as they would drive demand for tiles. The domestic brokerage firm believes that Kajaria, being the market leader, would be a major beneficiary of these initiatives.
Britannia Industries
ICICI Securities maintain a buy rating on Britannia with a target price of Rs4270 to be achieved in the next 3 months and a stop loss of Rs3315. Most of the FMCG products have been subsumed in the nearest slab of existing indirect tax.
However, for toothpaste, hair oil & soaps, it would come down from current 23 percent to 18 percent. Dairy milk products will also be at lower end of tax implication.
With the anti-profiteering clause in place, companies would be required to pass on the benefit of tax rates to the consumer in the form of lower prices. "We believe this could result in faster consumption shift from unbranded to branded products, spurring the volume growth for FMCG companies," said the report.
Relaxo Footwear
Shrekhan maintains a buy rating on Relaxo Footwear with a target price of Rs525. Relaxo has a superior portfolio of footwear brands and its relentless focus on driving sales through the expansion of distribution and improving the brand presence (270 Company Owned & Company Operated stores and over 50,000 retailers across India) augurs well for the company to achieve good growth in the backdrop of better demand environment.
The GST implementation (likely to be from July 1, 2017) will be a key growth lever for Relaxo, as a large part of the Indian footwear market is unorganised (60 percent). The GST rollout will reduce the pricing difference between branded and non-branded players in the near future. Relaxo's stock price is currently trading at 29x its FY2019 Earnings.
The goods & services tax (GST), which is likely to play a big role in boosting growth in Asia’s third-largest economy, is likely to boost earnings of many companies in sectors which have a high presence of an unorganised market.
The single tax would replace 17 indirect tax levies and improve taxation efficiency. Most goods are placed under the four slabs of services tax i.e. 5, 12, 18 and 28 percent.
“Though four slabs for manufacturing and services does appear to be little more complex structure than expected earlier. The uniformity of taxes across states (across entire country) is one of the most important tax reforms and would immensely benefit businesses in the long run,” Gaurav Dua, Head of Research at Sharekhan told bonazcapital.
“Historic experience shows that the implementation of GST could result in disruption for short period of time as businesses adjust to the new tax regime and results in an uptick in inflation,” he said.
The biggest beneficiary of the GST implementation would be the sectors that have a high share of unorganized segment. It will bring about lower tax incidence, reduction in logistics costs, higher compliance etc.
“We feel consumables like FMCG, dairy industry would largely benefit; logistics and warehousing sector would benefit both qualitatively and quantitatively as the time spent on the state borders drops thus saving both fuel and time to reach the destination,” Arun Thukral, MD & CEO, Axis Securities told bonazcapital.
“Small cars will get slightly costlier, while SUVs will attract an additional cess. The power sector will gain as the rate for thermal coal has been categorized under 5 percent vs 11.7 percent earlier,” he said.
We have collated a list of 10 stocks which analysts think could benefit the most from the implementation of GST.
Hindustan Unilever (HUL):-
HUL is expected to gain market share with the implementation of GST as business shifts from unorganised to organised segment. HUL will benefit from moving to a moderately lower 18 percent tax slab and its major raw materials- consumer staples falling in the lowest tax labs (0-5 percent).
Further, incremental benefits may arise from the input tax credits. Broad-based portfolio of brands, innovative pipeline, robust distribution network (enhanced focus on direct reach expansion) & government thrust to stimulate the rural economy will help HUL.
Dabur India:-
Major segments of Dabur soaps and hair oil falls under lower tax slab of 18 percent compared to the current effective rate of 26-28 percent. The largest segment honey continues to fall under the exempt category.
Dabur can be an indirect beneficiary if GST helps in bringing down the rural inflation as major consumer staples coming under the exempt category which could impetus to the rural demand.
ITC:-
Apprehension over the GST rates has been an overhang on the stock for a while. The final GST rates with a cap on Cess leads to a lower incidence of taxes than the current effective tax rate. Leadership position in cigarette category, continuous investment behind brand building & innovations in other FMCG business will also drive the business growth.
Ashok Leyland:-
The Strong volume growth and market share gains continued with Ashok Leyland (AL’s) domestic M&HCV volume growth compared with industry growth. While the recent growth has been driven by replacement demand (replacing over 10 years old diesel vehicles by government order) and infra demand.
Moreover, the management expects improvement in mining/infra sector to be the next drivers for growth. Apart from a revival in M&HCV demand, the management expects exports and defense as the next major growth driver - management targets 33 percent of revenues in the medium-term from the export segment.
According to the management, the hub and spoke model of transport of goods is likely to gain with the implementation of the GST regime and it will boost the sales of vehicles, driven by requirements in the logistics sector.
Godrej Industries:-
The company has reported good quarter earning with commendable growth in the majority of the businesses. Major contributors to the growth have been the real estate, consumer, and chemicals businesses.
The management expects in FY18, implementation of GST would provide strong momentum for a much better economic environment and stronger consumer demand. Going forward, through its CREATE strategy, the company would continue to strengthen its position in all its core businesses while fostering an inspiring place to work.
Prabhat Diary
Value added products of the company are specialty dairy powder, ghee, condensed milk, and cheese. Nonvalue-added products are liquid milk. Net debt is around Rs 250 crore. cheese capacity utilization is presently around 18-20 percent.
The management expects an increase in capacity utilization for the cheese to be 40-50 percent for next year. Almost 65-70 percent of milk procurement is direct. The company is present in both B2B and a B2C segment with contribution 70 percent and 30 percent, respectively.
It plans to contribute in ratio 50:50 from both by 2020.The company plans to expand its distribution network from 25 states in the b2C segment to be a pan-India player.
Foodgrains, milk and other articles of daily use have been exempted from taxation under the GST regime, which would give a good boost up to the company.
Colgate Palmolive India
GST impact on consumer sector is largely positive. In addition, many companies in the sector will also gain as a result of the potential shift from unorganized segment to organized segment as a result of GST implementation. "Clear benefits are to toothpaste and soaps players as well as cigarette players for whom no increase in effective rates is always good news," Gautam Duggad, Head of Research, MOSL told bonazcapital.
"Colgate pays an effective tax of 25-26 percent and so 18 percent tax on toothpaste (80 percent of sales) is a positive, particularly as it levels the playing field against two players Dabur and Patanjali who enjoys tax benefits," he said.
Kajaria Ceramics
ICICI Securities maintains a hold rating on Kajaria and see a modest upside towards Rs725 in the next 12 months post Q4 results. The GST rate for ceramic tiles has been fixed at 28 percent, which would largely be a neutral rate for Kajaria as the current incidence of the indirect tax is between 26.5 percent & 29 percent.
However, on a positive note, GST will benefit the sector as it would provide a level playing field for organised players (unorganised players have a 50 percent share in tiles market) and bring in consolidation in the sector.
Furthermore, tiles industry is set to benefit from various government initiatives like ‘Swachh Bharat Abhiyaan’, ‘Housing for All by 2022’ & ‘Smart City Mission’ as they would drive demand for tiles. The domestic brokerage firm believes that Kajaria, being the market leader, would be a major beneficiary of these initiatives.
Britannia Industries
ICICI Securities maintain a buy rating on Britannia with a target price of Rs4270 to be achieved in the next 3 months and a stop loss of Rs3315. Most of the FMCG products have been subsumed in the nearest slab of existing indirect tax.
However, for toothpaste, hair oil & soaps, it would come down from current 23 percent to 18 percent. Dairy milk products will also be at lower end of tax implication.
With the anti-profiteering clause in place, companies would be required to pass on the benefit of tax rates to the consumer in the form of lower prices. "We believe this could result in faster consumption shift from unbranded to branded products, spurring the volume growth for FMCG companies," said the report.
Relaxo Footwear
Shrekhan maintains a buy rating on Relaxo Footwear with a target price of Rs525. Relaxo has a superior portfolio of footwear brands and its relentless focus on driving sales through the expansion of distribution and improving the brand presence (270 Company Owned & Company Operated stores and over 50,000 retailers across India) augurs well for the company to achieve good growth in the backdrop of better demand environment.
The GST implementation (likely to be from July 1, 2017) will be a key growth lever for Relaxo, as a large part of the Indian footwear market is unorganised (60 percent). The GST rollout will reduce the pricing difference between branded and non-branded players in the near future. Relaxo's stock price is currently trading at 29x its FY2019 Earnings.
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