Published on 14/11/2017 5:00:42 PM | Source: Equirus Securities Private Ltd
GST/ RERA-related issues have hurt near-term demand Revival to be led by better tax compliance and preference for brands - Equirus Sec
We met several listed/unlisted companies at the recently-concluded ACETECH Exhibition in Mumbai. The consensus was that there would be demand pressure and stretched WC cycles in the short term due to GST-related issues and RERA implementation, forcing the real estate industry to pass through a transition phase. At the same time, all organized players were optimistic that GST rates for tiles would be brought down to 18% from 28% currently; this in turn would significantly improve prospects of the tiles industry over the mid-to-long term with the creation of a levelplaying field between organized and unorganized players. Additionally, implementation of the E-Way Bill would be a crucial step for increasing tax compliance in the industry and gradually moving it towards becoming more organized. Key takeaways of company-level interactions are outlined in subsequent pages.
GST-related issues hurt near-term demand; things to stabilize in 1-2 quarters: Our discussions with companies such as Kajaria Ceramics, Somany Sanitaryware, Asian Granito, RAK Ceramics and Exxaro Tiles reveal that post-GST, the working capital cycle for most manufacturers and dealers has increased, as the full 28% GST rate has to be paid in advance while tax credit refunds do not come on time. Due to this, the trade channel in particular is keeping minimal inventory as it cannot finance the excess WC requirement beyond a point. Moreover, there is a lot of confusion over the GST rate on tiles; the industry expects the government to reduce rates from 28% to 18% to pass on benefits in the form of reduced prices to end consumers and boost consumption. Most players expect dealer-level restocking to start by 4QFY18 as channel inventory is very low currently.
E-way Bill implementation crucial for increasing tax compliance in the system: The Eway Bill, meant to be implemented in Oct’17, has now been pushed back to Apr’18. Most players feel that implementation of the bill is very important for increasing tax compliance and reducing the hold of unorganized players who mainly deal in cash. With no state border check-posts after GST, and E-Way bill not implemented, it is difficult to track product movement; consequently, under-billing and partial billing is still rampant.
Realizations in ceramic, PVT to remain stable; GVT to see some realization pressure amid rising competition: Before GST, organized players faced severe pricing competition in mass & mid-market segments in both ceramic and PVT tiles, as unorganized playerspriced their products very aggressively due to the tax arbitrage they enjoyed. However, once this tax arbitrage opportunity is lost post E-way Bill implementation, realizations in both segments should remain stable.
In case of GVT, realizations may see near-term pressure as many new capacities are coming up in Morbi, which would focus on GVT manufacturing; also, second tier branded players are launching new products at competitive prices. However, realizations are unlikely to fall below a threshold as the production process and machinery for all players is same.
RERA implementation slows down private-project launches; govt. projects & infra orders gain momentum: The real estate industry is passing through a transition phase post RERA implementation. Recovery in this segment will take another 2-3 quarters as many smaller and medium-sized players are still in a ‘watch mode’, and new project launches have dried up in the last six months. However, once demand recovers, bigger builders would prefer to deal with branded players, leading to better growth for them. On the other hand, government infra and housing projects are progressing smoothly. One change has been the government increasing allocations for flooring materials, leading to increased preference for double-charge vitrified tiles and GVT instead of soluble salt PVT earlier. Government thrust on affordable housing, smart cities, ‘Housing for All’ and infrastructure projects is likely to generate good demand ahead.
Organized players launching newer, innovative products; retail segment targeted: Most companies used the Exhibition to market their new line of products which are innovative, eye-catching and have superior quality due to improved production technology. They expect these products to lead future growth and also replace existing lower-quality products. Due to the sluggishness in bigger residential projects, many companies are trying to target the retail segment for the past few quarters.
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