Emami, Colgate-Palmolive, and Britannia Industries were among the key consumer goods stocks that ended Thursday’s trading session with strong gains of up to 4%, following the GST Council, chaired by Union Finance Minister Nirmala Sitharaman, announcing a festival bonanza on Wednesday with reduced GST rates on key FMCG items, expected to drive urban consumption potentially.
The rate cut also lifted sentiment that it would boost volumes for FMCG companies, as many of them have been relying on price hikes to sustain growth, while sharp increases in commodity costs have weighed on their margins.
Urban consumption, which contributes 50–60% of FMCG sales, remained subdued in the recent quarter, with companies relying on rural demand, which continued to be resilient. However, the latest GST move raises hopes that urban growth will begin to align with rural trends.
The government and the RBI have been taking a series of steps to stimulate consumption in the economy, starting with income tax cuts in February and now rationalizing indirect taxes, reflecting a shift in focus from capital expenditure to consumption.
Rate cuts to support consumption: Analysts
Domestic brokerage JM Financial noted that Bikaji, Gopal Snacks, Nestle, and Dabur are likely to be key beneficiaries from the GST cut on packaged food products, given their strong presence in these segments, which has been reduced from 12% to 5%.
Britannia and Nestle are expected to gain the most from reductions in packaged water, chocolates, instant coffee (a surprise), and biscuits (as expected), from 18% to 5%.
Within personal care, JM Financial expects Colgate to be a key beneficiary from GST reductions in essential consumption categories such as hair oils, shampoos, soaps, toothpaste, and toothbrushes, followed by HUL and Dabur, which have a presence across all these segments.
However, home care segments like detergents and household insecticides have not seen any GST reduction, which is a negative surprise for companies such as HUL, GCPL, and Jyothy Labs, the brokerage added.
Meanwhile, GST on aerated beverages will move to 40% (from 28% plus 12% compensation cess), which is neutral and in line with expectations for Varun Beverages. For cigarettes, the GST rate will also rise to 40% of the retail sale price; for ITC, as per the brokerage, the current MRP-to-tax ratio is 47–48%, making this a positive development.
JM Financial expects the government to eventually neutralize the tax incidence through changes in excise duty, either in the Union Budget or future GST meetings.
While all GST rate changes will be effective from September 2022, the current GST structure for cigarettes and tobacco products will continue until the loan taken to offset the revenue shortfall is repaid, likely within this year, according to the Finance Ministry.
FMCG players welcome govt move on GST rate cut
Companies operating in the fast moving consumer goods (FMCG) segment have hailed the government’s move to cut GST on several items which would spur consumption demand in the economy.
The structural reforms will undoubtedly benefit MSMEs and farmers who form the backbone of the economy, Chairman and Managing Director of ITC Limited Sanjiv Puri said.
“I would like to compliment the finance minister for ushering in a transformative, bold and comprehensive next-generation GST architecture. The GST rate rationalisation across various sectors will bring relief to the consumers through enhanced affordability and will spur consumption, drive investment and growth in the economy, leading to employment generation,” Puri said.
Vice-chairman and MD of Emami Limited, Harsha Varshan Agarwal, said the proactive step to reduce GST is a “game-changing” move that will significantly boost consumption in rural India.
“GST rate cuts, coupled with income tax relaxation, lower repo rates and a good monsoon will create a powerful ecosystem to drive growth,” Agarwal said.
“For Emami, the priority is to pass on the GST benefits to the consumers as soon as possible so that greater value is created for them. This move has the potential to boost consumption across segments in the country,” he said.
CFO of Godrej Consumer Products Limited (GCPL) Aasif Malbari said, “We welcome the government initiative of lowering taxes to boost consumption.”
This is a positive trigger for demand creation, he said.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
