Given the disruptions in FY17 — dry summer in H1FY17, demonetisation and run-up to the GST in H2FY17 — companies achieved volume growth by extending credit to the trade. Despite this, execution-oriented companies improved their cash cycles and maintained dividend yields y-o-y. GST is likely to increase compliance with tax regulations and help formalize the sector. It could also help lower inefficiencies and costs for compliant companies. In effect, it could help narrow the price gap between the formal and informal industries.
A key hiccup in the formalisation process is the wholesale sector: Companies that depend more on wholesale could face greater disruption in implementation. We believe price cuts could come through in the sector, assuming full anti-profiteering compliance. We estimate the pricing differential between organised and unorganised companies could fall 2-3%, improving the scope for market share acquisition and, therefore, volume growth.
Inflationary pressure can be negated though price increases. Decreased competitive intensity will be a secular trend, as the cost of non-compliance will remain high post-GST. The anti-profiteering step will be a blessing in disguise, helping firms achieve volume growth without compromising on margins.
The GST could create a level-playing field vs unorganised and regional players. Winners post-GST are likely to be companies that have proven to have the best execution. We create a framework to rank execution among covered companies. Consensus still does not fully appreciate the impact GST can have in delivering volume-led profitable growth, which is reflected by the fact that the sector is still not outperforming the benchmark indices despite historical outperformance. Most investors believe there should be a reduction in competitive intensity post-GST. GST is an opportunity for the best executors to take market share from unorganised players.