GST Rationalization

Sectors-stocks most benefited

• Auto rates rationalized: In a major boost to push auto demand, GST rates on small cars (below 4 metre and less than 1200cc for petrol and less than 1500cc for diesel), two-wheelers (below 350cc), three-wheelers, CVs and components have been reduced from 28% (plus cess in some cases) to a uniform 18%. Higher length or engine capacity vehicles for PVs (than erstwhile mentioned) would attract 40% GST. We believe that despite the GST hike, it lowers the effective burden. All Electric vehicles continue at 5% GST (no change). The following are industry wide implications:
  • 2 wheelers: Positive for all OEMs. Impact on Eicher (RE) to be limited as approx. 10% of domestic sale is derived from greater than 350cc vehicles.
    MNCL Coverage: Positive for ASK Automotive (largely 2w dependent and approx. 1/3rd exposure to aftermarket segment in the braking division), Fiem Inds (largely 2W dependent), Pricol Ltd (65% 2W revenue share), SJS Enterprises (39% 2W revenue share).
  • Passenger Vehicles: Positive for the OEM basket - Maruti, M&M, Hyundai, Tata Motors. High UV exposed M&M relieved from cess burden.
    MNCL Coverage: Positive for SJS (37% revenue share), Pricol (less than 10% exposure), Fiem Inds. (less than 5% exposure). Car dealer - Landmark Cars should benefit following reduction in GST rates on smaller cars & EV vehicles.
  • Tractors: GST on tractors and tractor parts has been slashed to 5%, compared with the earlier 12% and 18% (positive surprise).
    MNCL Coverage: Positive for Kirloskar Ferrous and Happy forgings.
• Staples and discretionary: With a multi-sectoral and multi-thematic reforms on cards and thrust at common-man, small traders and businessmen, GST rates on consumer facing sectors have been slashed from 18% or 12% to 5% or NIL. Rate on essentials reduced to NIL; tableware, kitchenware, other household slashed to 5%; tax on discretionary items like ACs, washing machine, dishwashing reduced to 18% (vs. 28% earlier). This reduction should pave a way for increased consumption.
  • Consumer staples: Reduction in GST rates on essentials viz Indian breads, Prepackaged and labelled chena or paneer, UTH milk should benefit confectionary and dairy companies.
    MNCL Coverage: Positive for Mrs. Bector Foods; La Opala, Borosil Ltd & Cello to benefit following the reduction in GST on tableware. Reduction in GST rates on footware (not exceeding Rs2,500 sale value) will be positive for PVC leather manufacturer – Mayur Uniquoters.
  • Consumer discretionary: Reduction in rates on Acs, washing & dishwashing machine should benefit durable & ODM manufacturers. We await clarity on rate on luxury watches and the potential impact on Ethos Ltd.
• Healthcare, textile, and financials: NIL rates on Life & health Insurance is a step in a right-direction as it pushes insurance penetration; increased end-user consumption coupled with RBI rate cut and its transmission in our view should propel banking credit (personal / consumer durable loans). Textile sector, burdened under tariff trade should get benefited as rates have been redued to 5% (Vs. 18% or 12% earlier). Fertilizers, renewable energy, medical equipment’s will also get benefited on back of rate rationalisation to 5%.
• Our view: GST rate rationalisation is a step in the right direction and will propel consumption demand, factor vital from GDP growth. Auto & auto-ancillary, financials, consumption (staples & discretionary) remain most benefited. Prefer: FIEM Inds, Pricol, SJS Enterprises, Landmark Cars, La Opala, Cello, Borosil & Mayur Uniquoters. We await clarity on GST impact, if any on Ethos Ltd and forging players, also given exposure to US.