News Analysis

GST regime: FMCG sector sees gains, but details remain hazy

Parvatha Vardhini C BL Research Bureau | Updated on January 11, 2018 Published on May 19, 2017

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But more clarity needed on GST rules to determine the extent of benefit

Stocks such as Hindustan Unilever, Dabur, Marico, Colgate and ITC gained 1.5-4 per cent on Friday.

Hopes that the GST rate announced for many FMCG products would cut costs for the companies and also help them pass on the benefit to consumers fuelled the rise in stock prices.

While products such as hair oil, soaps and toothpaste are currently taxed at 22-24 per cent, it is proposed to be taxed at a lower 18 per cent under the GST regime.

Tax rates on edible oil will be 6 per cent, close to the current levels.

While Colgate’s bread and butter business is toothpastes and oral hygiene products, Dabur derives 20 per cent of its domestic revenues from hair oils (Vatika) and toothpastes (Red, Meswak, Babool).

Marico (Parachute, Saffola) and Bajaj Corp have a big presence in the edible oil/hair oil segment.

Hindustan Unilever has a presence across hair oils, soaps and toothpaste through several brands such Close-up, Pepsodent, Lux, Lifebuoy, Rin, Surf and Indulekha, ITC gained more because of the expected neutral impact on cigarettes after the government put out the cess rates for the same.

More clarity needed

However, it is worth noting that the quantum of benefit a company will ultimately get and would pass on to customers, would depend on the rates on their various inputs, on the extent of savings in the logistics/supply chain side as a result of the GST implementation as well as the overall indirect tax rate for the company.

Secondly, it is not that the entire FMCG space will see only an 18 per cent GST rate. Personal care products such as shampoos, hair dyes, cosmetics and deodorants fall in the peak rate of 28 per cent. Companies such as Hindustan Unilever and Godrej Consumer fall in this category.

Besides, the rates for packaged and branded foods, crucial for companies like Britannia, Nestle, Dabur and ITC, also need to be seen with a fine-tooth comb. These two factors will help determine how friendly the new regime will actually be for FMCG companies.

Published on May 19, 2017

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