Strategy: GST cuts: Higher profitability or higher volumes, not both by Kotak Institutional Equities
GST cuts: Higher profitability or higher volumes, not both
The recent GST rationalization has led to a broad-based rerating across consumption-oriented stocks and resulted in Rs5 tn of incremental market cap. creation since August 14, 2025. While GST rate cuts may aid in the improvement in volumes/mix, we see a low probability of improvement in profitability from extant elevated levels. 4W auto companies have announced the full pass-through of GST rate cuts to consumers.
GST rationalization: Rs5 tn increase in market capitalization
The market cap. of consumption-oriented stocks in our coverage has risen sharply on GST rate cuts (see Exhibit 1). The large re-rating reflects market expectations of higher profitability and/or higher volumes. The automobiles & components sector, particularly, has witnessed a significant uptick, with market capitalization rising around 13% since August 14, with the bulk of the returns coming from a rerating in multiples (see Exhibits 2-4).
Autos: Positive impact on volumes in the short term
The large 15-20% increase in market cap. of several automobile companies (see Exhibit 5) since the announcement of GST rationalization effectively implies 15-20% higher EPS in perpetuity, which seems quite optimistic. It is obvious that (1) volumes of all players are not going to be 15-20% higher in perpetuity and (2) profitability may not increase significantly with 4W companies passing the full benefit of GST cuts through price reductions (see Exhibit 6) and high profitability and return ratios (see Exhibit 7). We see a moderate impact on short-term earnings between volumes and mix improvement (premiumization).
Consumer durables: Moderate volume impact, low profitability impact
We see a moderate increase in volumes, but limited impact on the profitability of consumer durable companies, given the competitive nature of the industry. Additionally, we note that (1) ACs and others may not see much of a demand boost, given the oncoming winter season and (2) weak sentiment among households with workers in export-oriented sectors that employ large numbers of workers may hold back demand. (1) The IT sector faces continued demand uncertainty and (2) the jewelry and textile sectors face an effective embargo on exports to the US.
Consumer staples and retailing sectors: Low volume impact
We see a low impact on volumes and likely modest impact on the profitability of the consumer staples and retailing sectors, given (1) variable demand elasticities for households depending on income—near zero for high-income households to near 1 for low-income households and (2) high competition across product categories between D2C, retailing, regional and traditional players (see Exhibits 8-9). Retail and regional players may use the price lever to increase volumes. Companies will probably cut prices and increase grammage, which may make it hard for the market to assess the actual impact on profitability and volumes. We build a moderate margin improvement (see Exhibit 10).
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