In its latest India Strategy report titled ‘GST 2.0 – Unleashing growth’, Emkay called GST rationalisation as a landmark, growth-accretive reform that could become a potential market mover.
The six-week downtrend should reverse, supported by i) a materially improved earnings outlook, and ii) valuations reflecting the broader positives of this landmark reform. Emkay’s sector stance remains unchanged: OW Consumer Discretionary, with a preference for SMIDs in Staples and Cement within Materials.
In Emkay’s view, the second-order effects will be significant, accelerating formalisation of the economy and enhancing the global competitiveness of the domestic companies. This brokerage believes the government should absorb the near-term revenue loss through a higher deficit, as the growth boost is likely to offset the shortfall within 2–3 years.
In his Independence Day address on Friday, August 15, Prime Minister Narendra Modi announced about the reform, aiming to condense the current structure into two slabs.
From the four-rate tax regime, the government could retain just two slabs of 5% and 18% while doing away with 12% and 12% slabs. There could be a higher 40% sin tax on alcohol, cigarette, and gaming companies.“This reform is a significant positive for India as it provides a consumption boost, simplifies business operations through fewer tax slabs, and drives greater formalisation of the economy by making tax evasion less attractive,” the brokerage note said.
Beneficiary sectors
Calling it a big boost for autos, durables, and cement, Emkay sees passenger vehicles (PVs), 2Ws, ACs, cement, and packaged foods categories to likely benefit from the GST move. Emkay’s advice to investors is to best play these themes through companies addressing mass-segment brands in each category –
Stocks to buy
Emkay picks Hero Motocorp, Maruti Suzuki, Voltas, and Ultratech as key stocks; Bikaji is a small-cap idea.
“The benefits accrue to a narrow segment of the market (9.5% of Nifty) with a negligible (below 1%) direct EPS impact for the Nifty,” Emkay said, estimating 10-15% EPS revisions for the companies in the relevant sectors.
Emkay caveats
Emkay expects the Centre to absorb a fiscal slippage of 0.1%/0.2% in FY26/FY27, which should be partly offset by revenue buoyancy and asset sales.
Emkay said that nearly 70–75% of GST revenue is derived from items under the 18% slab, while the 28%, 12%, and 5% slabs contribute 14%, 5%, and 7%, respectively and the preliminary estimates suggest that the proposed rate rationalisation could cost the exchequer over Rs 1.2 trillion annually (0.4% of GDP).
The BJP-led government will need to push the reform by bringing the states on board.
Implementation timelines remain uncertain, given the multi-step approval process. In
S&P’s upgrade of India’s sovereign rating to BBB is another major positive.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)