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Investors cheer retailers facing lower tax rates
June, 06th 2017

Shares of retailers of affordably priced footwear and apparels soared in a flat market after the government announced a lower goods and services tax (GST) rate for cheaper products in these sectors.The new GST rates are expected to boost margins and also allow some of these companies to cut prices that could boost demand. Comparatively , retailers of premium brands may have to take larger price hikes to maintain margins, said analysts based on their preliminary reading of the tax rates.

Shares of companies like Relaxo Footwears and Bata India gained 4.31% and 0.94%, respectively, on Monday. Apparel manufacturers and retailers like Aditya Birla Fashion and Retail, Arvind and Future Retail ended the day 4.84%, 3.14% and 5.08% higher, respectively.

Analysts said stocks across both the sectors rose as the overhang from uncertainty in GST rate is now over.

Footwear costing up to Rs 500 currently attracts tax rate of 9.5%.Under GST, this would fall to 5% and footwear above Rs500 will be taxed at 18%. Similarly , all apparels below Rs 1,000 would attract 5%.Currently, the tax on apparels is 6-7%. The GST rate, however, for apparels costing above Rs 1,000 would continue to be 12%.

Analysts said the 5% tax on textiles was encouraging for the entire textile value chain and would augur well for the manufacturing segments of companies like Arvind and Raymond.

“Mass market companies like V-Mart Retail, Future Retail, etc.will benefit more because they have more products priced below the Rs1,000-range compared to branded apparel makers like Aditya Birla Fashion and Retail, Arvind or Raymond, which may have to hike rates of products in their premium segment by 1.5-2%,“ said Himanshu Nayyar, vice-president consumer and retail at Systematix Shares & Stocks.

Page Industries, the exclusive licensee of Jockey International in India, would be a key beneficiary of the new rate, said analysts. Most of Page's products are below Rs 1,000 while the company pays indirect taxes at 7-7.5%. A reduction in end prices may aid volume growth as consumers are expected to shift to premium brands.

Within the footwear segment, analysts said the new tax rate would be between neutral and positive for brands like Relaxo Footwear. “70% of Relaxo's portfolio is under Rs 800, therefore, it has a significant benefit in that sense. The high competition from the unorganised sector in lowpriced footwear will also take a hit overall and the company will benefit from it,“ said Sachin Bobade, analyst at Dolat Capital.

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