Published on 14/11/2017 5:21:48 PM | Source: Kotak Securities Ltd

Building material players to benefit tiles the most, we believe - Kotak Sec

Posted in Broking Firm Views - Sector Report| #Kotak Securities Ltd #Real Estate Sector #Sector Report

A welcome change for some... The proposed changes in GST rates for certain building material products is a positive for the industry, especially for the tiles sector. We expect organized players to benefit from the pricing hedge versus unorganized companies and hence better volumes in the retail segment. Real estate continues to remain affected /and in confusion, especially in Maharashtra, Haryana and UP from higher taxation and mechanism for rebates post project completion.


Building material players to benefit – tiles the most, we believe

The downward revision of GST rates on tiles, sanitaryware, and plywood amongst other items is a welcome step for organized players, we believe. For retail sales, this will reduce the price gap versus the unorganized sector and aide the shift to the organized sector, thus improving volumes. We believe this change will benefit the national players, especially the tiles sector (with an estimated market size of `270 bn), as it has more unorganized players. Listed players in the tiles segment are focused more on the retail segment (versus institutional). Better volumes with dealers will also ease the working capital requirements, stretched in 2QFY18.

But overall industry demand dynamics still remain weak, especially in institutional projects (private developer projects). Weak real estate demand has been reducing launches across cities. While organized developers tend to benefit in a weak market and tightening regulations (implementation of RERA), the overall industry size is shrinking for new supply which does affect the demand for building material products. Hence, the focus of most organized players is growing the retail segment and expanding presence to newer geographies. Certain players (for instance HSIL) are also expanding into newer businesses on account of limited market size of their core business (sanitaryware market size is estimated to be between `40-42 bn).

…but real estate still suffering the GST shock

Unlike media reports of a possible revision /change in GST on real estate, the council maintained the rates as guided earlier. Real estate taxation continues to remain complex /confusing for buyers as well as developers. The new GST regime (i) varies for stages of construction for which a developer can claim /pass benefits of costs, (ii) is not applicable for completed projects (while there is an added tax on account of deemed rental income for unsold ready units), and (iii) input credit to be passed back to the buyer at the end of the project (depends on the vendor billings). Our channel checks with local developers suggest them offering (marketing to offer) rebates at the end of the project, but unclear of the quantum yet.

Land is a state subject and each state (even cities within states) has varying norms for real estate development. Earlier, buyers were subject to three major taxes while purchasing apartments, Stamp duty (state), service tax and VAT (now replaced by GST).

While 2Q of a FY is usually a weak quarter on sales, our channel checks suggest slower sales volumes and price drops across states following a composite method for taxation. Like seen in 2005 (post implementation of service tax), Mumbai /Pune have seen price drops (in addition to GST adjustments). Increase in transaction costs, even post adjusting for any possible gains on input credit in GST still reflect a cost increase between 1.8 to 7.2% (See Exhibit 2 and 3).

For South Indian states, the impact is neutral as most developers followed a regular scheme for taxation which added to be 10% (excluding stamp duty); now 12%. But, for states like Maharashtra, Haryana and Uttar Pradesh, developers followed a composite scheme added to 4.5% (service tax) and 1% (VAT) on the total sales value. This has now increased to 12% of sales value under GST (18% with one third abatement for land).


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