The one year of the GST regime, India’s biggest tax reform since Independence may have seen rapid transformation in many areas of trade and commerce, but the shift of market share from unorganised to organised sector has been slower than anticipated. 

During GST rollout, this shift was touted to be a big investment theme for equity investors. But the numbers for the sectors believed to be major beneficiaries of GST do not suggest the same. 

Analysts say the government is closing the loopholes with the introduction of e-way bill and other anti- tax evasion measures, and this long-term theme may eventually play out in the days ahead. 

“While the government initiatives have been in the right direction, we continue believing that the shift will be prompt for some sectors, gradual for others and might remain challenging for a few,” said Motilal Oswal Securities. 

The biggest disappointment from GST has been for the building material sectors, such as ceramics, tiles, plywood and plastic products, where there has been an increase in unorganised trade post GST due to free movement of goods and lack of surveillance. 

In case of tiles, tax evasion by the Morbi cluster has increased, as unorganised firms are able to create an entire value chain in cash after the discontinuation of inter-state check posts, Elara Capital said. 

“Even after the implementation of e-Way bill, there has been no major impact on prices, as the same e-Way invoices are used by multiple trucks to dispatch different consignments. While the industry has made representations to the tax authority for creation of check posts at Morbi, where e-Way bill data could be captured, unorganised firms can under-invoice to reduce tax incidence,” the brokerage said. 

About 50 per cent of tiles and ceramic market is unorganised. The percentage stays as high as 70 per cent for plywood, and 55 per cent for laminates. 

Analysts said the GST rate on finished ceramic tiles products stood at 18 per cent and input tax credit for the industry is in the 4-8 per cent range. Unorganised firms may have to take a price hike of 10-14 per cent, if there is 100 per cent compliance, they said.

Among tile and ceramic stocks, shares of Somany Ceramics are down 34 per cent in last one year, while those of Kajaria Ceramics, Cera Sanitaryware, HSIL, Asian Granito have dropped up to 30 per cent during this period. Plywood stocks Century Ply and Green Ply have dropped 16 per cent each in last one year. 

These companies saw low volume growth in FY18 due to issues of GST transition, delay in e-way bill implementation and higher taxes under GST at 28 per cent, later cut to 18 per cent in November 2017. 

Among textile stocks, Arvind (up 9 per cent), Kewal Kiran (down 1 per cent), Nandan Denim (down 39 per cent) have underperformed Sensex’s 13 per cent return in last one year. 

Shares of Lux Industries and Page Industries have surged 62 per cent during this period, but innerwear stock Rupa is down 17 per cent in the same period. 

In case of electrical equipment and appliances, such as lighting (40 per cent unorganised segment), fans (25 per cent), pumps (30 per cent) and switchgears (not known), unorganised trade has became more active than earlier and there have been no major gains due to GST, experts said. 

But that’s not the case with the jewellery sector where, a significant shift towards the organised sector is already visible and Titan has been a major beneficiary. Analysts have gone bullish on the counter even as it surged 65 per cent in last one year.

Plastic stocks such as Nilkamal, Wim Plast and Supreme Industries (Cello brand) have fallen up to 40 per cent in last one year. The unorganised market accounts for 40 per cent of this sector. An effective implementation of GST and e-way bill can plug loopholes like bill-to-ship-to, geography-based exemptions and unrecorded purchases in the near term, said Motilal Oswal Securities. 

That said, Equirus Capital believes industries such as retail, FMCG and textile & garments may witness biggest drop, mainly because of structural shift in supply chain design and economies of scale across the logistics space, but it may take some years to materialise.

Due to realignment of supply-chain designs and logistics expenses, shares of most FMCG and white goods players may decline 15 to 20 per cent over next 2-3 years, it said. 

Brokerage IIFL believes in the theme on business shift to the organised sector. 

Source: Economic Times

 

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