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Union Budget 2020-21 is unlikely to provide significant boost to rural consumption (rural spend budgeted to decline 1%) or provide material tax benefits to middle class consumers (both urban and rural). Amongst the individual stock gainers and losers, ITC likely faces a potential derating spiral now that the central government has chosen to increase taxes despite cigarettes tax regime was moved to GST in 2017 (note that taxes on bidis are unchanged). There are some positives also. NCCD collection from cigarettes is likely to compensate states (a tad teleological though!) and therefore risk of tax hike on alcohol reduces (positive for United Spirits). Increase in customs duty on footwear should reduce competitive intensity for Bata while reduction in personal income tax rates for individuals earning less than Rs1.5mn somewhat benefits JUBI and Westlife and retail in general.
* Bata: Customs duty on import of footwear has been increased to 35% from 20%. We see this as a key positive for Bata as this helps reduce the price gap between imports and domestic manufacturing. We believe that this step makes Bata’s products more competitive against the imported footwear being sold online and is likely to aid volume growth.
* JUBI and Westlife: Effective cut in personal income tax for individuals earning less than Rs1.5mn somewhat benefits JUBI, Westlife and retail in general.
* ITC: Taxes on cigarettes increased c.11% as per our calculations. We see this as a negative for ITC. Increase in taxes on cigarettes in the Union Budget despite it now being a GST subject increases uncertainty (both on timing of tax increase as well as possibility of increase in GST, cess, excise and NCCD) and is likely a headwind for valuation multiple. On the other hand, we believe that price hikes (require 8% to maintain EBIT per stick) is now manageable given the rising inflation (Figures 1-2). That said, there will be price elasticity issues with coinage price of Rs10/stick for 69mmm cigarette moving up to Rs11 or Rs12. Although this could result in volume decline in the short-term, it increases ITC’s ability to get back to double-digit EBIT growth in the medium-term (leverage benefits in P&L).
* GCPL, HUL and Jyothy Labs: Increase in customs duty to 44% from 37.5% on crude palm oil import could necessitate further price hikes at a time commodity has just turned inflationary.
* Titan: Tanishq’s customers are predominantly white collar and tax paying. Removal of Dividend Distribution Tax effectively increases the tax outgo for the super rich who are in the peak tax rate. This may have a marginal impact on their disposable income.
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