GST rate rejig above expectation, stocks price in most positives: Analysts

The recast of goods and services tax (GST) rates on Wednesday exceeded expectations in select product categories, but the markets had priced in most positives ahead of the outcome, suggest analysts.

Once the GST-triggered euphoria settles, analysts believe the markets will start to focus on India Inc’s earnings trajectory and developments on the US tariff front. The key, however, will be how quickly companies pass on the benefits of GST rate rejig to customers. If done well, this move could lift both market sentiment and spending.

That said, Nilesh Shah, managing director at Kotak Mahindra AMC believes that the rationalization of GST rates will partially help offset the adverse impact of US tariff in the quarters to come.

The GST Council on Wednesday approved the new two-slab tax structure, doing away with the 12 per cent and 28 per cent slabs, while reducing tax on several essential goods, and placed higher levies on select ‘sin’ items.

The breadth and depth of the new rate cuts, analysts at Bernstein said, especially in the fast-moving consumer goods (FMCG) categories saw rate reductions well beyond what they thought was possible.

Cuts for essentials such as shampoo, hair oil, toothpaste, and soaps from 18 per cent to just 5 per cent came as a clear positive surprise, Bernstein said, as these categories were widely expected to retain higher rates. The rate on life and health insurance premiums was slashed to zero, which they believe will improve adoption.

Categories with higher penetration such as entry-level motorcycles may see a relatively muted demand response, analysts at Bernstein believe, while discretionary products like air-conditioners could see more notable volume growth.


“Consumer stocks already reflect elevated valuations; we see continued potential upside in related stocks driven by earnings momentum rather than a structural multi-year re-rating of the entire consumer sector. Distinction between staple FMCG and discretionary segments should also be considered. The direct impact of the GST cut on consumption is likely to vary by product," wrote Venugopal Garre, managing director and India head of research at Bernstein in a coauthored note with Nikhil Arela.

At the bourses, meanwhile, Nifty Auto and Nifty FMCG indices were the top gainers on Thursday, rallying around 1.6 per cent and 1.1 per cent in intraday deals. Nifty Consumer Durables index, too, moved 0.5 per cent higher. In comparison, the Nifty 50 gained nearly 1 per cent in intraday.

Since the GST rate cut comes ahead of the festival season, analysts at Jefferies expect a boost for consumption in the months ahead. The new rates, they too believe, were on expected lines and most positives from this development are priced in.

“Most GST rate changes were on expected lines. Positive surprise came in for staples and ITC. Cement stocks haven't really moved since August 15 and should bounce now, and so should Mahindra & Mahindra (M&M). A strong positive for other autos also, but stocks have moved up already,” wrote Mahesh Nandurkar, managing director at Jefferies in a coauthored note with Abhinav Sinha and Priyank Shah.

The other beneficiaries in the consumer space according to Jefferies include QSRs (lower input costs on dairy, chicken), apparel (rate cut on apparel from Rs 1,000-2,500) and footwear.

Tobacco/ITC, the Jefferies note said, could also potentially benefit as the shift to ad-valorem rate of 40 per cent (likely by year end) implies around 5 percentage point (ppt) tax cut. "Also, the regime potentially removes tax uncertainty, a positive for ITC," Nandurkar said.