Companies that would be benefited the most from GST

By     |     July 12, 2017     |     6 Comments

Till date, you might have already come across various articles about the benefits of GST. There are several reports stating the sectors having advantages and disadvantages from GST implementation. I am going to present a different perspective. No sector specific view, rather few stocks from every sector are going to be benefitted in the stock market.

Few stocks across all sectors would be benefitted from GST. Here’s how-

Let’s me present you with an easy to understand example. If you follow any small or medium business, you will realise that most of them (maybe all) under-report their sales for tax saving. If a business person selling hardware products (or anything else) of 10 Lacs, he might show sales of 4 Lacs for reducing tax outgo. Although the original sales figure stands at 10 Lacs, in the books of accounts it is recorded as 4 Lacs! Till date, almost all business persons can do it easily because a major part of the sales comes in cash. Whatever a customer pays in cash, most likely that amount is not recorded in the books and no tax on it! Demonetization, Digital India had attempted for increasing digital transaction, removing black money but again the business community turned back mostly to the cash-based transactions. Surely, it is next to impossible for reducing cash transaction in a country like India. Now, what if a system comes in which business persons are forced to record cash based transactions for their own benefit! Sounds interesting, right? GST is exactly the same system. Under GST, business persons would be benefitted for showing all transactions (cash-based and non-cash based) due to the interesting concept of “Input Tax Credit” and “Invoice Matching”. Now, you might already be heard about both the terms. I am not going to describe those in complex accountancy language. Let’s have a look how the business will be affected if they still avoid tax in a cash-based transaction and don’t report original sales in the “Profit and Loss” statement.

  1. If a wholesaler can’t provide formal GST invoice even in cash based transaction then most likely maximum retailers (customers) won’t purchase from him because the retailer (customer) won’t get “Input Tax Credit” benefit. So, all the retailers will try for dealing with only tax-compliant merchants otherwise they can’t sell their product at a competitive rate.
  2. All invoices of B2B transactions must have to be uploaded and matched. So, once the wholesaler input the details of the retailer then retailers can’t avoid reporting the sales even in the cash-based transaction. Once a raw material producer pays tax then, from now onwards, nobody in the value chain can avoid it. This is the beauty of the destination based new tax system GST!

In short, being tax-complaint is becoming more profitable than tax evasion! Starting 1st July 2017, a business can grow only if they follow compliances (paying full tax by recording original sales) on any cash-based or non-cash based transactions. Otherwise, it is hard for the survival! So, the business person selling products of 10 Lacs was earlier reporting 4 Lacs as his “Sales” now must have to report the exact 10 Lacs as “Sales”. It means although there is no real jump in sales, still in the “Profit and Loss Statement” the revenue is increased by 6 Lacs! This is how many listed companies in the stock market will witness a significant jump in sales numbers in this financial year! Generally, maximum big companies (largecap stocks) are fully tax compliant so they may not notice significant jump. However, many midcaps and small-cap stocks will witness the “Surprise Jump” in Sales! Look out for companies those have following characteristics –

  1. Present in the segment where cash based transactions mostly take place like building materials, clothing, footwear, few commodity chemicals, few plastic products manufacturer, companies mainly supply food/retail market etc.
  2. Promoter Group having the record of Income Tax related issues (like raid, search) in the past and shady corporate governance practice. I am not talking about promoters those had the primary target of syphoning out shareholder’s money or bank loan like Kingfisher, Essar Steel, Videocon Industries, Educomp, Unitech etc. I am talking about promoters those had a reluctance of paying tax and altering (under reporting) “Profit and Loss” statement accordingly. Now onwards, “Surprise Jump” in revenue would take place.

For few companies “Surprise Jump in Revenue” would be witnessed from Q1FY18 itself because many companies changed themselves knowing the certainty of GST implementation. The entire FY18 is going to be an interesting year in which (perhaps the first time) companies having bad management reputation would report a significant jump in financial numbers!

GST benefit example from our recommended stock –

In the last month (June 2017), we had recommended a stock to our “Advanced Package” subscribers. To our surprise, the company reported more than 100% jump in the revenue growth in Q1FY18 numbers. The stock price also responded well with two consecutive upper circuits. The said company is involved in such a business in which cash transactions are an integral part of it. Moreover, a few years back Income Tax department raided the business group for tax evasion. So, although there is no confirmation, still we can assume that the entire 100% revenue growth is not purely organic. Earlier many cash-based transactions were not recorded for tax evasion. However, starting from the current financial year every cash-based transactions are coming in the formal books. There are virtually no ways to hide it out and that fuelled “Surprise Jump” in revenue to some extent!

Finding out such companies is always a tricky subject because there can’t be any confirmation that the company was involved in under-reporting “Sales”. Going forward, many of our stock recommendations to paid members would come from this theme. Click here to know more about our service offering in details.

Inspite of GST positive, we are a bit worried about the current market level –

Undoubtedly GST is perhaps the most significant tax reform that will help Indian Stock Market over the very long term. However, we are little worried about the current market level (Nifty 9815). It seems the market is going ahead of the fundamentals. Any disappointment in Q1FY18 result would bring significant correction. At the current level, Nifty P.E stands at 24.98. However, Sensex P.E stands at 23.31. Once both the P.E cross 25 level then that might form a bubble in the market. A few days back, I was reading in The Economic Times that a group of analysts are predicting that Nifty might cross 10,000 level in July 2017 itself. If that happens then we would suggest taking cautionary steps to our members. Over the last few months, many of our recommended stocks already jumped significantly. Our members can expect a dozen of profit booking calls if Nifty cross 10,000 level in July 2017. We still believe crossing 10,000 is an unlikely event in this month.

 

By     |     July 12, 2017     |     6 Comments

6 comments on “Companies that would be benefited the most from GST

  1. “Surprise jump in Revenue” mentioned, will it lead to high growth numbers in net profit? If so, then nifty forward earning will be high. Market it seems is trying to discount this and now trading at ~25 PE (TTM). But looking at nifty forward PE it doesn’t seem too expensive. GST is sure the biggest breakthrough in Indian economy. But Indian businesses always find ways to escape main stream economy and erects a parallel black economy.

  2. Hi, I have 1 doubt as per max all writeup everyone mentioned strongly that transport sector will also be benefited much from the gst movement, but even in the strong bull run also this sector doesnt hv much movement, can we assume this could be the left beneficiary of gst and after correction (if any) it may rally?

    1. In the above post, we didn’t mention that Transport sector related stocks would be benefitted, so can’t comment on this.

  3. Hi Paul,
    Good article.
    The sudden jump will be seen only for a year to compensate for under-reporting. It may not repeat each year as full sales were reported in earlier year. So, the only organic growth (10-15%) will be seen year on year (if business performs) and stock will follow this growth later. Could you please confirm if my understanding is correct?
    Thanks,
    Trupti

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