Consumer Durables & Apparel Sector Update : Durables/footwear—implications of a potential GST cut by Kotak Institutional Equities
The government’s proposal to rationalize GST rates on consumer goods could benefit some durables companies—room ACs and TVs (>32 inches) could potentially see a cut in the GST rate from 28% to 18%. We expect a partial pass-through of the cut to RAC consumers, after considering the RM inflation on account of upcoming BEE norm changes. Within our coverage, we see an upside risk in EPS of 2-4% for Voltas and 1-2% for Havells. In footwear, to cut the GST rate on products priced sub-Rs1k, the government will need to address the inverted duty structure as well.
Room ACs could benefit from a potential GST rate cut from 28% to 18%
Within the large appliances universe, room ACs, TVs (>32 inches) and dishwashers are some exceptions, which attract a 28% GST rate. The government’s proposal to rationalize GST rates on ‘aspirational’ goods could potentially lead to these products seeing a GST rate cut from 28% to 18%. We note that when the GST rates were reduced from 28% to 18% on refrigerators and washers in July 2018, companies (LG, Samsung, Whirlpool and IFB) immediately passed on the benefit (implied price reduction of ~8%) to consumers. However, this did not result in any sustained improvement in growth or margins (Exhibits 4-6).
Despite high competition, given that the RAC industry is set to witness 5-8% RM inflation from upcoming BEE changes (January 2026E), we believe that the effective pass-through of the GST cut to consumers could be lower. An RAC unit could be 5% less expensive after the GST rate change, assuming 4% net inflation due to BEE and if the brand decides to maintain its GP per unit (Exhibit 3). Thus, a GST rate cut could (1) accelerate the liquidation of excess channel inventory and (2) give more comfort on EBIT margin forecasts for FY2027E. A 4-6% higher sales growth in potential beneficiary categories (RACs and TVs >32 inches) could lead to a 2-4% higher EPS in Voltas and 1-2% for Havells.
Solar and water purifiers (remote possibility) could also be beneficiaries
The portfolio of Crompton, Polycab and Eureka Forbes is largely at an 18% GST rate. Certain solar-related products, including solar water heaters, solar power generators and solar lamps, are currently taxed at a 12% rate. If this moves to 5%, the cost differential versus their non-solar counterparts (18% GST) would increase, potentially driving faster adoption. There is a remote possibility that the government could also rationalize the GST rate (18%) of electric water purifiers, considering the essential nature of the category.
Footwear—inverted duty structure needs to be addressed to cut the GST rate
The government raised GST on all footwear priced sub-Rs1k to 12% (from 5%) in January 2022 to address the inverted duty structure (where tax on RM was higher than the tax on FG). In order to cut the rate back to 5%, the government will have to address the inverted duty structure (reduce the tax on RM). Within our coverage, Campus derived ~22% of its sales from footwear priced sub-Rs1,050 and Metro derived ~4%/8% of its sales from footwear priced sub-Rs500/Rs501-1,500 in FY2025.
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