Consumer durable firms likely to raise prices due to GST rate hike. These two stocks top picks

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From July 18, the GST rate on LED Lamps, lights, and fixtures will be at 18% from the current 12%. This GST hike on these items is likely to impact the earnings of consumer durable companies. To pass on the additional costs, firms are expected to raise prices on their products however demands will face the brunt. Among top picks are Havells India and Crompton Greaves Consumer Electricals in the sector.

In their latest meeting, Finance Ministry said that “all rate changes recommended by the 47th GST Council will be made effective from 18th July 2022.”

Among many goods and services, the council has recommended hiking the GST rate on items like LED Lamps, lights, and fixtures, their metal printed circuits board – to 18% from 12%.

Research analysts, Aniruddha Joshi, Manoj Menon, Karan Bhuwania, and Pranjal Garg at ICICI Securities in their report said, “We believe any increase in taxes in a highly competitive segment like lighting may impact the industry profitability. Smaller/unorganised companies are likely to gain market shares. As most durable companies have raised prices by more than 20% in past 18 months, any further price hikes may impact volumes and /or may result in down-trading.”

“We believe most durable companies will be required to raise prices to pass on additional costs,” analysts said.

According to ICICI Securities analysts, the increase in the GST rate is likely to happen when inflation is already high. Most durable companies have raised prices by over 20% in the past 18 months. They said, “We believe any further increase in prices may hurt demand or it may result in down-trading in the sector. We also believe the smaller/ unorganised sector will be able to gain some market share.”

Talking about the impact on durable companies, the analysts said key companies that generate more than 20% revenue from lighting are Crompton, Bajaj Electricals, and Orient. Other companies such as Dixon and Havells also generate 12% and 10% of revenues from lighting, respectively.

“Any increase in taxes will have a 2-5% impact on earnings,” they said.

Further, the analysts added that considering the strong return ratios, healthy growth potential, and low penetration levels, “we remain structurally positive on the white goods and durables sector.” Also, they said, “We also expect the migration from unorganised to organised sector to steadily generate value.”

“Havells India and Crompton Greaves are our top picks,” ICICI Securities analysts said.

ICICI Securities have kept a buy recommendation on Havells for a target price of 1,644 apiece. While keeping a buy opinion on Crompton, the analysts have set a target of 504 apiece for the company.

On Thursday, Havells stock closed at 1,110.30 apiece up by 10.60 or 0.96% on BSE. At the current market price, it has a market valuation of 69,561.19 crore.

Meanwhile, Crompton finished at 349.85 apiece up by 2.78% on the same exchange. At the current market price, Crompton’s market valuation stood at 22,168.05 crore.

In a year, Havells stock has climbed by 12.29%, however, Crompton’s stock has plunged by over 18.41%. On July 1st last year, Havells stock was around 988.9 apiece and Crompton around 428.8 apiece on BSE.

Among the key risks, ICICI Securities analysts said a higher-than-expected rise in crude oil prices, any delay in price hikes to protect margins, and irrational competition.

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