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Informist, Monday, Aug. 18, 2025

 

By Anjana Therese Antony

 

MUMBAI – The stock market was Monday happy with Prime Minister Narendra Modi's proposed Diwali bonanza on goods and services tax, but the changes alone are unlikely to speed up earnings growth of companies in the current financial year. This is because only certain pockets of some sectors are likely to benefit from the proposed changes in the near term and consumers will likely defer their decisions to buy, say a car or electronic goods, market experts said. The fog around US tariffs continues to dim the near-term earnings growth outlook, analysts said, though the long-term view continues to echo optimism given the country's strong growth prospects, they added.

 

"My sense is that any revival in the private capex, any revival in the government capex, any revival in the global trade policies are going to reflect in the earnings, not this thing (GST changes)," the head of research at a large domestic broking firm said. The proposed idea "looks good on paper" and directionally looks good for specific sectors, but one needs to wait and watch how it is really going to reflect in earnings, he said. Some impact of the GST changes, if implemented, will reflect in the March quarter earnings, he added.

 

Some media reports said GST will likely be reduced for sectors such as consumer durables, fast-moving consumer goods, automobile, cement, pharma, and banking, financial services, and insurance. No major rate changes are anticipated for real estate, infrastructure, metals, telecom, and paints.

 

The news about the proposed GST cut may further slowdown consumption temporarily in certain big-ticket categories such as automobiles and air conditioners, Nomura Global Markets Research said in its report. Dealers carrying inventory may bear inventory loss, which companies may need to compensate, it said.

 

Research analysts have not yet revised their earnings estimates for 2025-26 (Apr-Mar) after the announcement about the GST reforms. Analysts said they will look at the actual GST announcement and the quantum of benefit companies will possibly pass on to their customers before revising their outlook.

 

The government's capital expenditure has not picked up as expected and average real wages have stagnated over the past six years, market experts said. "...incremental nominal income over the past seven years has been half of the rise in government debt, highlighting the debt sustainability problem," Systematix Research said in its report Monday. High indirect taxes and reduced subsidies have further strained household disposable income, leading to demand compression, the broking firm said.

 

The June quarter earnings failed to give any major fillip to the bulls and were largely along expected lines. However, some analysts said the quantum of downgrades in the reporting quarter was lower than in the previous quarters and that the "downgrade cycle" has likely peaked.

 

The aggregate revenue of companies in the Nifty 50 index grew almost 6% on year in the June quarter, slower than the 7% rise each in the previous two quarters and the 8% increase in the year-ago period. The revenue of the Nifty 200 index companies rose 5.6% on year in the quarter, also slower than the 6.3% rise a quarter ago and the 9.5% increase in the year-ago quarter.

 

The prime minister had Friday said next generation GST reforms will be announced by Diwali. Citing a senior government source, Informist had Friday reported the government proposes to continue with the 5% and the 18% tax slabs and eliminate the 12% and 28% slabs. The Group of Ministers will discuss the government's GST proposal Thursday and the GST Council is expected to meet next month to finalise the rate structure.

 

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Analysts believe there will be a broad-based volume growth for FMCG companies due to lower prices once the proposal is approved and implement. Some of these companies had also said there are green shoots in urban demand, which led to positive outlook for the sector for the second half of FY26.

 

"Basically, this will improve the demand...overall, the input prices will also get some benefit," Vincent K. Andrews, equity research analyst - fundamental at Geojit Financial Services, said. FMCG companies are likely to pass on the benefit of lower raw material prices to consumers in an attempt to further support demand recovery, he said. If the GST rate on cigarettes is increased to 40% from the current 28%, it may lead to a fall in demand in the short term, Andrews said.

 

The GST on food and beverages categories is expected to be reduced to 5% from the current 12% and on consumer durables it is likely to be cut to 18% from 28%. Meanwhile, the home and personal care segment is unlikely to see any benefit as most products fall under the 18% slab and no revisions are anticipated.

 

However, Gaurang Shah, senior vice president at Geojit Financial, said that companies are unlikely to pass the benefits to consumers if the margin spread is not big as they are currently "not enjoying the luxury of big, fat margins." Prices of commodities such as coffee and cocoa are expected to remain elevated, Shah said.

 

The consumer sector has been feeling the heat of weakness in demand from urban areas and only gradual growth in rural demand. Even though the government had announced a major income tax relief in its Union Budget in February, analysts had said its impact was not reflecting in the sector's growth in the short term. The GST rate rationalisation is expected to foster the sector's long-term growth.

 

The GST reform proposal is expected to boost the automobile sector's growth as it will lead to price reductions which will drive demand. Reports said the 28% GST on most automobiles is likely to be reduced to 18% and the 12% tax on tractors may be reduced to 5%.

 

"In case tax is lowered for the auto sector by 10%, it could boost demand, in our view, by 15-20%," Nomura said in its report. A common rate of tax for small cars and sport utility vehicles may also hand a significant advantage to SUVs, the report said.

 

The likely GST changes are also expected to benefit the financial sector as these will likely drive credit growth. It is expected that the general insurance GST will be reduced to 5% from 18% and NBFCs will have a second order impact on vehicle and white goods sales, ICICI Securities said in its report. "Reduction in GST rates on select financial products is seen to create cross-sell opportunities aiding fee-based income."

 

For insurers, rationalisation or removal of GST on health insurance is seen boosting penetration by improving affordability and thus sustain healthy business growth for standalone health insurance, ICICI Securities said in a report. "However, the immediate impact on insurers will be determined from the fine print, considering there will also be GST on costs borne by the insurers," the broking firm said. If there is an adverse mismatch between inbound and outbound GST for insurers, it could hit their earnings in the near-term, it added.

 

Despite not being a luxury good, cement is currently taxed at 28%, which is now expected to fall under the 18% GST slab. However, some analysts expect cement companies to increase their prices in September. Nothing major will happen for the next six months and that augurs very well for the industry overall, Jyoti Gupta, lead research analyst at Nirmal Bang Securities, said. "You have already seen the impact of stable prices since November...the first quarter (Apr-Jun) has been excellent. If this continues, the third and fourth quarters will be even better."

 

In fact, post-GST changes, net sales realisation will improve, driven by blended cement, Gupta said. Eventually, margins will likely improve in the March quarter due to higher volumes, which will drive higher fixed cost absorption, she added.  End

 

With inputs from Shakshi Jain and Narayana Krishna

Edited by Ashish Shirke

 

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