Consumer Durables & Apparel Sector Update : Durables/footwear-GST cut likely to aid demandby Kotak Institutional Equities
Durables/footwear—GST cut likely to aid demand
As expected, the government has cut the GST rate on room ACs, TVs (>32 inches) and dishwashers from 28% to 18%, bringing them at par with other home appliances. We expect a partial pass-through of the cut to RAC consumers, after considering the RM inflation and the upcoming BEE norm change. We see an upside risk in EPS of 2-4% for Voltas and 1-2% for Havells. In footwear, the GST rates on products (1) priced up to Rs2.5k will now be 5% (versus 12%/18% on products priced up to Rs1k/above Rs1k earlier) and (2) priced above Rs2.5k will remain at 18%.
Room ACs will benefit from the GST rate cut from 28% to 18%
The government has cut the GST rate on room ACs, TVs (>32 inches) and dishwashers from 28% to 18% (on expected lines), bringing them at par with other home appliances. The new rates will be effective from September 22, 2025, ahead of the festive season. We note that when the GST rates were reduced from 28% to 18% on refrigerators and washers in July 2018, companies (LG, Samsung, Whirlpool, IFB) had immediately passed on the benefit (implied price reduction of ~8%) to consumers. However, that did not result in any sustained improvement in growth or margins.
Given that the RAC industry is set to witness 5-8% RM inflation from the upcoming BEE change (Jan-26E), we believe that the effective passthrough of the GST cut to consumers could be lower. An RAC unit could be 5% less expensive after the GST rate change, assuming 4% net inflation due to BEE and if the brand decides to maintain its GP per unit. The rate cut will (1) help accelerate liquidation of excess channel inventory and (2) give more comfort on EBIT margin forecasts for FY2027E. A 4-6% higher sales growth in beneficiary categories (RACs and TVs > 32 inches) could lead to 2-4% higher EPS in Voltas and 1-2% for Havells.
No changes made in GST rates of other categories, except for solar products
None of the other major categories in the durables/electricals sector (such as fans, W&C, lighting, etc.) have seen any changes in GST rates. The GST rate on certain solar products such as solar water heaters, solar cookers, solar lamps, and other solar power-based devices has been reduced from 12% to 5%. Since the contribution of these would be negligible for our covered names (Polycab, Crompton, Havells), we do not expect any material benefit from this change.
Footwear—meaningful cut in GST rate to 5% for products priced up to Rs2.5k
The GST rate of footwear priced up to Rs2.5k will now be at 5% versus 12%/18% on products priced up to Rs1k/above Rs1k earlier, whereas the rate on products above Rs2.5k will remain at 18%. Thus, footwear priced up to Rs1k/Rs1-2.5k could see a price cut of ~6%/11%. For Campus, we estimate over 20%/90% of sales contribution from sub-Rs1k/sub-Rs2.5k price points. Metro derives ~4%/8%/34%/54% of sales from products priced sub-Rs500/Rs0.5-1.5k/Rs1.5-3k/>Rs3k. At the economy price points, we expect organized players to gain volume share from unorganized ones through price cuts, whereas at premium price points, we expect a relatively lower price elasticity.
Above views are of the author and not of the website kindly read disclaimer
