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Event update: Consumer Goods - Rate reduction for some; status quo for others – Positive for all

Paints: GST rates reduced to 18% from 28%, positive for organised Paint players

As per the 28th GST council meeting held yesterday, there has been a reduction in the GST rate for Paints & varnishes from 28% to 18%, in line with the rate slab for other adjacent home improvement categories (plywood, flooring, tiles, sanitary ware), which saw rate reduction in rates in GST council meeting held in Nov 2017.  We view the revised GST rates as major positive for organised paint companies (Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel India). We expect organised players to immediately pass on the benefit to the consumers. While the paint industry has a higher organized share as compared to other home improvement categories, (paints is 65% organized), we believe a lower price drives competitive advantage for larger organized players. We view this event as a likely incremental volume growth driver and hence positive for our paints coverage universe constituting Asian Paints, Berger Paints, Kansai Nerolac and Akzo Nobel India. 

Tobacco: No change in cess rates despite anniversarisation of cess hike; major relief for ITC

Given the expected rate cuts across several categories resulting in a loss of revenue to the central and state exchequers, there has always been speculations on a likely relook at cigarette cess before every GST council meeting. This GST council meeting in particular was of greater importance as it marked the one year of the steep increase in cess for organized cigarette players. Given that context, no change in cess rates comes as an interim relief for ITC. While future cess hikes cannot be ruled out, the short term overhang on the stock will now be lifted which could result in a reduction in valuation gap between ITC and the FMCG players and also provide greater visibility to FY19 earnings.

Alcoholic Beverages – No decision on inclusion of ENA, removes near term overhang on IMFL stocks

While Alcoholic beverages continue to stay out of GST, speculations have been rife about inclusion of Extra Neutral Alcohol (ENA) which is a key input for IMFL, in GST. In the past too, the decision to include ENA under GST was deferred as state and centre differed over the legality of the taxation as output is outside the ambit of GST. While there has been no decision made on the same in the 28th GST council meeting and issue remains pending, we believe this clears the near term overhang on the IMFL stocks. Further, we do not see reduction in GST rate on Ethanol for sale to Oil marketing companies for blending with fuel to 5% from 18%, impacting the ENA prices. Hence this development comes as a positive for United Spirits and Radico Khaitan.

Footwear – Extension in ceiling of 5% GST rate upto Rs1,000/pair. Positive for footwear players

Footwear with retail sale price upto Rs500 per pair was taxed at GST rate of 5% while greater than Rs500 per piece was taxed at 18%. GST council has decided to extend the ceiling for GST rate of 5% to footwear with retail sale price upto Rs1,000 per pair. This is positive for footwear sector which has higher unorganised segment (~60% of the industry) and will further drive formalization of the sector. We view this as positive, especially for organised players like Khadim (Rs500-1000 per pair segment accounts for 30-40% of sales), Bata and Relaxo, as proportion of the sub Rs1000 portfolio was significant for these players.

FMCG – Sanitary napkins exempted from GST, increase in ceiling for composition scheme

GST council decided to fully exempt Sanitary napkins from GST, which were earlier taxed at GST rate of 12%. This is positive for P&G Healthcare & Hygiene who is the market leader in the segment. Further, council has also raised the ceiling for composition scheme from turnover of Rs10m to 15m which will ease the compliance burden and benefit the wholesale channel. We see this ruling as beneficial for the sector as a whole as the wholesale distribution channel was worst hit during demonetization and GST.

Our View

From our overage universe we see the GST Council’s decision on either reducing or maintaining rates as positive for ITC, United Spirits, Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel India, Radico Khaitan and Khadim. Outside our coverage universe, key beneficiaries would be Bata, Relaxo Footwear and P&G Hygiene and Healthcare.