Maruti, HUL, Hyundai among a host of shares that may benefit from GST cuts, in the medium and long term

In a major taxation reform, the GST council has done away with the 12% and 28% Goods and Services Taxes (GST) slab rates. Now only two GST tax slabs will be there – that of 5% and 18%. There will be an additional tax slab of 40% for goods classified as super luxury goods and sin goods.  The new GST rates will come into effect from 22^nd September.

FMCG stocks like HUL, ITC may benefit

The price of a host of items will come down for common people because of this reduction in GST rates. Around 90% of the items that fall in the 28% GST category will move to the 18% GST category. According to one estimate, 99% of the items that currently fall in the 12% GST bracket will move to the 5% GST bracket. These items include butter, ghee, a number of dairy products like cheese etc. FMCG goods such as soaps, toilets, hair oil will also now fall under the 5% GST tax rate. FMCG stocks such as HUL, ITC may get some boost in the near and medium term because of this cut.

Consumer durable stocks will also benefit

Air-conditioners, TVs with screen sizes of more than 32 inches, cement, small cars, motorcycles with engine capacity of less than 300 cc will now be taxed at 18% instead of 28%. This will come as a major relief for small car manufacturers like Maruti Suzuki. Sales of small cars have significantly slowed down in the past some time. With this GST tax rate, prices of small cars are likely to come down significantly. This will increase demand for them. Auto stocks such as Maruti Suzuki and Hyundai Motors India may get a boost because of this rate cut. With this rate cut coming into effect right in the festival season, demand for small cars may get a boost in the very near term.

Reduction in GST rates on consumer durable goods will also give further boost to stocks of consumer durable companies. These include stocks of companies such as Blue Star, Crompton Greaves etc. Stocks in Nifty Consumer Durables index are already trading at a very high average P/E valuation of 71.73.

Some relief for pharma companies

In order to provide relief to the pharmaceutical sector, GST on around 33 drugs has been reduced from 12% to 0%. Indian pharmaceutical sector has been especially hit hard by the higher US tariffs. The US market is the biggest market for generic drugs of Indian pharmaceutical companies. With the 50% tariff imposed on them, Indian pharma companies will lose a big chunk of the cost advantage that their generic drugs had till now in the US market.

GST reforms in the face of economic crisis caused by higher US tariffs

The government is implementing these GST reforms in the face of the economic crisis that India is facing because of the 50% tariff that US has imposed on Indian exports, The GST rate cuts will reduce the price level in general for Indian consumers. This in turn will have the impact of increasing their disposable income. Higher disposable income will increase consumption in the Indian economy. Higher consumption will offset some of the adverse impact of reduction in India’s net exports because of higher US tariffs.

These reductions in GST rates will also put downward pressure on inflation in the Indian economy. This will give more room to the RBI to go for another interest rate cut soon. Indian economy also needs a rate cut boost at this critical juncture.

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