Consumer discretionary to gain on account of GST rate reduction: 13 Nov 2017

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The government, on November 10, 2017, reduced GST rates across various consumer discretionary categories including restaurants, building materials,
mattresses, and watches.

The rate reduction will aid market share gains for organized peers as the price differential vs unorganized reduces.

Key players benefiting from the discretionary space include:

Quick Service Restaurants (QSR) such as Jubilant, Westlife, Coffee Day Enterprises; Titan (on the lower rate for watches and eyewear) and Shankara (as the reduction in rates across tiles, sanitary ware, plywood, cables aids growth).

Other beneficiaries include Sheela Foam (GST on mattresses reduced from 28% to 18%), VIP Industries (10% GST reduction) and building material players like Kajaria, Cera, Century Ply.

The GST rate reduction for restaurants from 18% to 5% should lead to an increase in frequency in eating-out and in turn aid SSS (same-store sales) growth for QSR players such as Jubilant and Westlife. Although removal of input tax credit would necessitate 6-7% price increase, consumer-level prices would still fall 6-7%, given 13% cut in GST rate. This is estimated as per the below table:

Figure 1: Our calculations suggest c600‐700bps input tax credit

Cost item % of JUBI’s FY17 sales GST rate Input tax (% of sales)
Cheese 8.1 12% 100bps
Beverages 2.3 40% 90bps
Packaging material 3.3 12% 40bps
Royalty 3.3 18% 60bps
Rent 11.7 18% 210bps
Freight costs 3.0 18% 50bps
Advertising 5.6 18% 100bps
Total     650bps

Westlife’s “all inclusive” menu pricing would make it easier to take such price increases and Jubilant may also move towards such pricing regime, although margins may suffer during such transition. Material impact of reduction is not expected in pricing competitiveness vs. unorganized peers (where input credit was not significant) as brand affinity retains footfalls. However, with GST rate change effective from November 15, near-term margins may suffer from the potential delay in taking such price increases.

Titan to benefit from the lower rate on watches and eyewear on account of expected increase in EPS; to factor in gains from the lower rate on watches where the company is yet to take pricing actions to pass on an increase in GST rate. Also, the reduction in eyewear segment should aid growth.

VIP Industries (branded luggage player) should also benefit from the reduction in GST rate on luggage from 28% to 18%.

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