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GST rate on LED bulbs likely to increase: Passing on of additional cost to consumers when inflation is high

The GST rates on LED bulbs are likely to increase to 18% from 12%, as per media reports (Link). We believe any increase in taxes in a highly competitive segment like lighting may impact the industry profitability. Smaller / unorganised companies are likely to gain market shares. As most durable companies have raised prices by more than 20% in past 18 months, any further price hikes may impact volumes and /or may result in down-trading. Durable companies such as Crompton, Orient and Bajaj Electricals generate more than 20% revenues from lighting segment whereas Havells generates 10% revenue from lighting. Any increase in taxes will have 2-5% impact on earnings. We remain positive on the sector; our top picks are Havells (BUY) and Crompton Greaves (BUY).

* GST rate may move up to 18% from 12% on LED bulbs: As per media reports, GST rate on LED bulbs may move upwards to 18% from 12% now. We believe most durable companies will be required to raise prices to pass on additional costs.

* Increase in taxes when inflation is already high: The increase in GST rate is likely to happen when inflation is already high. Most durable companies have raised prices by 20%+ in past 18 months. We believe any further increase in prices may hurt demand or it may result in down-trading in the sector. We also believe the smaller/ unorganised sector will be able to gain some market share.

* Lighting is low HHI segment: The Herfindahl Hirschman Index (HHI) is less than 0.1 in lighting which indicates very high competitive intensity. We believe any increase in taxes/ costs may hurt the profitability of the sector and the incumbents.

* Impact on durable companies: Key companies that generate more than 20% revenues from lighting are Crompton, Bajaj Electricals and Orient. Other companies such as Dixon and Havells also generate 12% and 10% of revenues from lighting, respectively.

* Sector view and top picks: Considering the strong return ratios, healthy growth potential and low penetration levels, we remain structurally positive on the white goods and durables sector. We also expect the migration from unorganised to organised sector to steadily generate value. Havells India and Crompton Greaves are our top picks. Key risks: Higher-than-expected rise in crude oil prices, any delay in price hikes to protect margins, and irrational competition

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