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The GST Council as part of its exercise to rationalise rates has made notable changes with drastic reduction in key Staples (Foods & Personal care) categories. The segments which saw reduction in Food & Beverages space were: a) from 12% to 5% - Branded namkeens, Bhujia, Instant noodles, Fruit juices and Ayurvedic products and b) from 18% to 5% - Packaged water, Chocolates, Biscuits and Instant coffee. Within Personal care, GST rate for Hair oils, Shampoos, Oral care and Soaps was reduced from 18% to 5%. Key negative surprise was Home care segment (Detergents, Household Insecticides, Dishwash) which did not see any reduction in GST rate (18% currently). On the Sin goods (Aerated beverages & Cigarettes) – GST slab will move to 40% (vs. 28% + cess currently). For Aerated beverages transition to new slab without compensation cess is effectively neutral and on expected lines. On Cigarettes, our initial understanding is that MRP to tax ratio (for ITC) will come down to 40% (vs. currently at 47-48% ex of NCCD). However, we believe we could see some increase in excise duty post the transition either in Union budget or future GST meetings to make tax incidence neutral for Cigarettes. Prima-facie, based on current salience of product segments which have seen reductions within our coverage universe – Britannia, Colgate, Nestle, Dabur, Bikaji, DOMS should see maximum benefit. The impact of lower GST rates on consumer demand or profitability of companies will depend on the extent of pass-through by companies. We expect stocks in all the large beneficiary segments to react positively to this development

• Food & Beverages – Britannia, Nestle, Bikaji are key beneficiaries: Packaged food products like Branded namkeens, Bhujia, Instant noodles, Fruit juices and Ayurvedic products have seen 7% reduction in output tax which is on expected line. Bikaji, Gopal Snacks, Nestle & Dabur are the key beneficiaries given their strong play in some of these segments. Reduction in Packaged water, chocolates, Instant coffee (was a surprise) and Biscuits (on expected lines) from 18% to 5% calls for quite a large price cut to be implemented to pass on the commensurate benefits to the end-consumers – Britannia & Nestle are the large beneficiaries here. The interplay of the need to cut prices to pass on the tax cut benefits on one hand and the need to hike prices to deal with inflationary input costs could make near-term pricing decisions a bit tricky, given that businesses would have to ensure that they do not trigger ‘anti-profiteering’ provisions.
• Essential Personal care sees major reductions; Beauty & Home care remains at 18% – Colgate a key beneficiary: Within HPC, major reductions in GST rate were seen for essential consumption categories like Hair oils, Shampoos, Soaps, Toothpaste and Toothbrush. Colgate will be a key beneficiary given its large salience in Oral care followed by HUL & Dabur which have presence across all these segments. However, Home care segments like Detergents and Household insecticides haven’t seen any reduction in GST rate which is a negative surprise (especially for HUL, GCPL, Jyothy Labs).
• Sin Goods – No bad news is positive: Within our coverage universe two segments fall under Sin goods – Aerated beverages and Cigarettes. For Aerated beverages, GST rate moves to 40% vs. (28% + 12% compensation cess currently), hence it is neutral and on expected lines for Varun Beverages. On Cigarettes, GST rate will also move to 40% on retail sale price – Currently for ITC, MRP to tax per stick ratio is 47-48%, hence its positive. However, we expect government to eventually make tax incidence neutral through changes in excise duty either in Union budget or future GST meetings. While all the GST rate changes will be w.e.f. from Sep’22, current GST structure on Cigarettes & tobacco products will continue till loan (taken to offset to revenue shortage) gets repaid (likely within this year as per FM).
• Reduction in GST rates for stationery items – positive for DOMS: Key stationery items like Pencils, Sharpeners, Crayons, Exercise books have seen reduction in GST rate from 12% to NIL while, GST rate for Geometry box has been reduced from 12% to 5%. This is positive for DOMS as overall these segments accounts for c.50% of its consolidated sales..

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