Consumer Staples : GST rate cuts augur well for consumption by Kotak Institutional Equities
GST rate cuts augur well for consumption
The government has reduced GST rates on almost all food items and select essential personal care categories to 5% from 12%/18%. This measure could partially revive consumption and improve growth construct (volume/mix-led growth). BRIT, NEST and CLGT are expected to be the key beneficiaries, followed by Dabur and HUVR. We see limited benefit for MRCO, GCPL, Tata Consumer and VBL. For ITC, the existing GST rate (28%) + compensation cess on Cigarettes would continue for some more time, following which the GST rate would increase to 40%, the compensation cess would be discontinued and there could be some other changes to keep aggregate taxation largely intact.
GST rate cut across food and everyday essential personal care categories
The GST council has approved GST rate rationalization to a two-rate structure (standard rate: 18%, merit rate: 5%) from a 4-rate structure (5%, 12%, 18%, 28% + cess) and introduced a special de-merit rate of 40% for select goods/services (cigarettes, CSD). The GST rate for almost all food items (biscuits, instant noodles, nutrition, namkeen, instant coffee, chocolates, ice cream, fruit juices, sauces and cheese) has been cut to 5% from 18%/12% and that for select daily essential personal care categories (soaps, shampoo, hair oil and toothpaste) has been reduced to 5% from 18%. The aggregate tax rate on carbonated beverages remains unchanged at 40% (GST rate up to 40% from 28%; compensation cess of 12% removed). The new GST rates would be implemented from September 22, 2025, with the exception of cigarettes, wherein the existing GST rate and compensation cess would continue until loan/interest payment obligations under the compensation cess account are completely discharged.
GST rate cut could revive consumption partially; expect volume/mix-led growth
The sharp, broad-based reduction in the GST rates of most food and key personal care categories could revive consumption partially. Weak consumption in the past 2-3 years was partly attributable to commodity inflation-led price CAGR tracking ahead of income growth. The deflationary impact of the GST rate cut would partly address this headwind. Further, easing commodity prices (tea palm, coffee), good monsoon, favorable base for urban consumption, the recent personal income tax reduction and the upcoming pay commission augur well for FMCG consumption in the next 12-15 months. We expect most companies to pass on the benefit to consumers (expect anti-profiteering clause) in the form of higher grammage (especially in price point packs). It remains to be seen if companies tweak prices to push premiumization. We expect volume/mix-led revenue growth starting in 3Q. Select food categories (such as namkeen and biscuits) may also see some unorganized-to-organized shift as the lower GST rate could reduce the price gap. Lastly, this GST-rate cut would offer some headroom for price increases in the medium term (2HFY27/FY2028).
BRIT, NEST and CLGT are expected to be key beneficiaries
As shown in Exhibit 1, the key beneficiaries of the GST rate cuts are (1) CLGT (GST rate cut for 97% of domestic sales), (2) NEST (90%), (3) BRIT (88%), (4) Dabur (75%), (5) HUVR (38%) (6) ITC FMCG (59%), (7) GCPL (33%), (7) MRCO (19%), (8) VBL (19%) and (9) Tata Consumer (13%). In the case of ITC, the new GST rate is 40% on MRP (versus 28% on transaction value earlier + compensation cess), lower than GST + compensation cess of ~47% of MRP at present (Exhibit 3). We expect the government to increase NCCD or introduce a new tax (say, a health cess) to keep aggregate taxation on cigarettes broadly unchanged. Most FMCG stocks have run up in the past two weeks and are partly pricing in GST rate cuts. We expect moderate upside from current levels.
We note that the GST rate on QSR is 5% (no input tax credit) at present. The proposed GST rate reduction for cheese (30% of Domino’s RM) and packaging material (6% of RM) should aid JUBI’s EBIT margin by about 75 bps.
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