FMCG smiles: Colgate biggest beneficiary of GST; Patanjali, Dabur may cut rates, others neutral

Key Highlights

• Colgate to come out as ‘biggest beneficiary’ of GST with tax rates moving from 28% to 18% on toothpaste.
• Hair oil to become cheaper as it will drop to 18% bracket; however, companies may not stand to benefit.
• Decision on additional cess on beverages is awaited by the GST Council to access price of mineral water.

Readying the nation for its biggest tax reform – Goods and Service Tax (GST) to be rolled out from July 1 the GST Council decided rates for majority of the fast moving consumer goods (FMCG).

While some of the FMCG companies will come out as clear winners of the biggest tax overhaul, others may cut rates of products to match prices; however, this will hurt profits, Kotak Security analysts said on Friday.

The price of toothpaste is anticipated to become cheaper as it is currently charged at 22-24% tax rate and will be brought under 18% slab.

Speaking about the company-wise impact of GST, the analysts said, “Colgate – biggest beneficiary – especially since it pays full 28% - so benefit is direct.”

However, players like Dabur and Patanjali, having ayurvedic products are currently not taxed. Kotak analysts added that GST may be a ‘neutral’ scenario for them.

“Dabur, Patanjali only pay VAT, no excise, hence it’s a neutral scenario for them considering they get excise refund under GST regime (negative if that doesn’t happen). So, while Colgate can cut prices without impacting its profit pool – Dabur and Patanjali may match the cuts but it will hit their profits,” Kotak Securities said.

Soaps are another personal care product that is estimated to become cheaper as it currently attracts a tax rate of 28% and will be brought under 18% GST bracket.

Indian consumer goods major, Hindustan Unilever (HUL), the analysts said would benefit from its sale of toothpaste and soaps that account for nearly 25% of its revenue.

Further the report said, “It does benefit a bit on sauces and soups. Tea and coffee portfolio looks to be neutral for HUL from GST perspective.”

"Many important inputs for the food processing industry like jaggery, cereals and milk have been exempted from GST altogether. On the other hand, products like sugar, tea, coffee and edible oil will carry concessional GST at the rate of 5%. At the same time, the tax bracket on toiletries like hair oil, toothpaste and soaps has been maintained at 18%," Vaibhav Agrawal, Head of Research and ARQ said. 

Godrej Consumer Products Ltd (GCPL), the report said would benefit on the soaps side that accounts for 15% of consolidated revenues and 30% of domestic revenues.

“However, GCPL also operates from tax exempted zones; so this might be neutral for GCPL,” the analysts said.

Hair oil will become cheaper as it will drop 10% from 28% current tax rate to 18% under GST. However the companies selling this product may not benefit the analysts said.

“While hair oils effective rate has been cut to 18% (from 26-28% currently), these players (Dabur/Marico/BJCOR/Emami) may not benefit as most of them operate from exempted zones i.e. they don’t pay excise, only VAT; hence it’s a neutral scenario in case of hair oil players,” Kotak said.

Also Read: A complete guide on products getting cheaper or expensive from July 1

In conversation with Harsh Mariwalla, Chairman, Marico who said that in the case of edible oil products that the company is famous for they observe a neutral stance.

Edible oil that is currently taxed between 3-9% will be brought down to 5% under GST.

“You have to see if GST is benefiting more in unorganised trade or the trade that is evading tax because that will come under GST and that to me is a bigger benefit rather than the rates per se,” Harsh Mariwala, Chairman, Marico said.

Saugata Gupta, MD & CEO, Marico Limited said, "We understand that the GST rate structure is extremely positive, encouraging and augurs well for the industry. It is anti-inflationary in nature and will help drive consumption as well as long-term economic growth."

Pidilite is another consumer goods company that would benefit from lower taxation of 18% under GTS, the report said as current tax rates amount to 26-28%.

“We note adhesives contributes 40-45% to Pidilite’s domestic revenues (including Fevicol, its variants, Fevikwik, Fevicol glue drops and Fevicryl; however, contribution of under 1Kg packs will be lower),” the analysts said.

Further the report added sugar confectionery, corn flakes, sauces and soups to be taxed at 18% down from around 26-28% and namkeens to be taxed at 12% from around 26-28% too.

Nestle and HUL players would benefit from this decision the report said.

With 1,211 items GST rates decided the Council has its work cut out for today as it will deliberate on tax rates of six to seven more categories under GST including biscuits, bio-diesel, biris and cigarettes, footwear, textiles, agricultural implements and gold.

Overall, of the 1,211 items - 7% will be exempted, 19% of items will fall under 28% tax slab, 43% items under 18% slab, 14% items under 5% slab, while 17% items shall fall under 12% tax slab.

Mineral water to be taxed at 18% from around 26-28% currently. However, clarity on cess applicable on beverages is awaited by the industry and its likely benefits to mineral water.

“Whether in terms of absolute price cuts, higher A&SP or better trade margins remains uncertain – all depends on details and clarity on anti-profiteering law. However, most FMCG companies have categorically highlighted in their recent earnings call that benefits will be passed on,” the analysts added.