23 May 2017
Iron and steel:
Average tax rate for iron and steel industry has increased from 12.5% to 18%. The steel industry is a prominent industry, even more due to the ongoing infrastructure push. Moreover, this industry is under pressure due to higher contribution in NPAs. Therefore, SMERA believes that to an extent, higher GST rate would have an adverse impact over the industry. However, lower tax on raw materials such as Iron Ore, Coal and Other metals (zinc, lead, uranium, copper, etc.) will be an offset, nonetheless.
Agriculture commodities such as edible oil will be marginally cheaper. Whereas, oil abstracted from animal would attract a 6% incremental tax after the implementation of the GST. The higher tax on certain agriculture commodities is however expected to be offset by efficiencies attained through supply chain management. Therefore, the revised tax rate is unlikely to push the prices up.
The automobile sector is perhaps the biggest beneficiary of the GST, as the tax is significantly lower than the prevalent structure. This indicates that price of most automobiles (especially luxury cars & SUVs) will be cheaper post July 1. This will further accelerate the growth rate of this sector and aligns with both Make in India plan as well as Automotive Mission Plan.
The essential pharma products such as diagnostic kits, drugs and medicine will be taxed 5% under the GST. On the other hand, packing for retail sale of medical, surgical, dental veterinary purpose, medicine devices, and X-ray will face 12% as against 13% under existing rate structure. Raw material costs will however be higher as API, which is largely imported - will be taxed 18%. This is expected to impact formulator margins adversely. Therefore, SMERA believes that the new indirect rate is expected to be inflationary for the sector.
Nearly 80% of labor engaged in the sector is unorganized and the implementation of the new tax structure is expected to bring about a structure. More players will be forced to become organized in order to access Input Tax Credits (ITC) due to the nature of the value chain. Though the current rate is not much different from the one proposed by the GST, we reckon that the provision of ITC will enable significant savings for transport service providers. Also, the role of transport is expected to expand in the new GST era as there will be smaller number of logistic hubs. This is due to complexities arising out of multiple registered entities, corporates will reduce the number of hubs and depend on transportation instead (at least shorter distances). Road construction activity and the development of efficient inter-state highways will be a positive to this development.
With a higher tax, the infrastructure and construction space may be adversely impacted but we believe that since the industry value chain is extensive, there will be offsets by way of ITCs and shear economies of scale. We maintain our overall production growth expectation for the sector at over 3% in FY18; growth in demand continues to be pegged at 5%.
Amidst consolidations, there has been massive capacity augmentations taking place in the sector. According to CMIE data, new projects worth Rs. 9,290 crore came online in FY16 recording a growth of nearly 127% over the previous year. In the current financial year, the figure is expected to be more than Rs. 10,000 crore. However, with capacity utilization levels hovering at 65% and a relative de-growth in credit offtake, we believe that it will be a while until Capex cycle will realistically translate into reduced stress levels and higher margins. The budget’s allocation of Rs. 2.4 lakh crore for the development of India’s Transport Sector alone will generate tremendous incremental value for players. Cement contributes to over 30% of the cost involved in creating transport infrastructure. Impetus on raising standards of living and the resultant inclusion of affordable housing under infrastructure will be a major consideration for the sector as well.
Source: SMERA Research