The GST council in its recent meeting which was held in Chandigarh last month has withdrawn exceptions from taxations on many food items and grains. The consumer pricing of milk will rise to cope with the impact of additional costs. Heritage Foods and Dodla Dairy are two hot stocks in the sector. The GST council has withdrawn exceptions on several grains and food items. These include milk items such as pre-packed, pre-labeled, curd, lassi, and buttermilk.
In the recently held 47th meeting of GST Council chaired by Finance Minister Nirmala Sitharaman, the council withdrew several exceptions on specified food items, grains, etc when not branded, or right on the brand has been foregone. It was recommended in the meeting to revise the scope of the exemption. Also, it was recommended to remove taxation exemptions on many pre-packaged and pre-labeled retail packs, including other milk products such as curd, lassi, and buttermilk.
According to the research analysts, Aniruddha Joshi, Manoj Menon, Karun Bhuwania, and Pranjal Garg at ICICI Securities in the research note said that the GST rates on curd and lassi will likely to levy at the rate of 5 percent from nil currently. They also added that dairy companies need to pass on additional costs to end consumers via price hikes. They also stated that the curd and lassi account for 15-20% of the GST revenues of dairy companies as these two are essential milk products.
According to the analysts, with the levying of 5% of GST on curd, dairy companies will be able to achieve input tax credit (Also known as ITC), (Packaging material, some raw materials, ad-spend, transportation, and freight costs, etc). According to them, the net impact of the GST levy will be in the range of 2-3 percent.
According to them, with the increased GST rates on milk products, there will not be much impact on the volume as most of the consumers in India prefer buying unorganized milk. And as people consume curd directly, they will prefer buying organized curd. They also see a low possibility of losing curd volumes to unorganized players even though there’s a sharp difference between the pricing of organized and unorganized curds.
Dairy products such as ice cream, cheese, ghee, and paneer are already under the purview of Goods and Service Tax. Now, with this decision, most dairy products are under the ambit of the GST umbrella. However, there is still no GST on packaged milk.
Further, the analysts also stated that they are being positive about the dairy sector because of its strong return ratios and growth potential. They also expect a potential migration of the consumers from unorganized to organized sectors. Their hot top picks are Heritage and Dodla Dairy.
ICICI Securities have given a good buy rating on Heritage and Dodla. They expect a return on equity at 23.4 percent on Heritage by the end of the financial year of 2023, while RoE is seen at 21.5% by the end of the financial year 2024. On Dodla, the analysts estimate RoE of 15% and 15.9% at the end of the financial years 2023 and 2024 respectively. On the Bombay Stock Exchange, Heritage closed at Rs. 264.20 apiece marginally down while Dodla finished at Rs. 479.90 apiece down by 0.9% on Friday.
However, the analysts have given their recommendations on Hatsun Agro Products and Parag Milk Foods.
In a nutshell, as per the analysts, key risks for the industry would be a higher than expected rise in milk prices, delay in price hikes, and irrational competitive pressures.