"GST Rate Cuts Will Boost Earnings": Goldman Sachs Overweight on Consumer Stocks — Here's Why

Goldman Sachs reiterated its overweight position on consumer-sensitive stocks as it expects these stocks will outperform because of the GST rate cuts, which is anticipated to drive earnings growth. The brokerage has upgraded the rating for cement and consumer durables to marketweight.

Consumer sensitive stocks which are in Goldman Sachs' radar have outperformed the NSE Nifty 50 stocks by 8% since the GST announcement on Aug 15. These stocks have outperformed the overall market by 11% quarter-to-date basis, the brokerage said.

Despite the rally, these stocks are trading flat compared to the markets in over one-year horizon, indicating more room for further surge, Goldman Sachs said.

Goldman Sachs believes that GST rate cut will directly support earnings growth due to the higher volume through price elasticity of demand because of benefit pass through and better profit margin where the companies have pricing power.

Assuming 98% benefit pass on and 0.5 demand elasticity with all factors remaining stable, revenue of MSCI India ex-financials could increase by 0.8%, Goldman Sachs said.

Autos, consumer staples, and consumer durables could see the largest increase in revenue of 2.4%, the brokerage said. Cement, chemicals, and autos could see 4–5% increase in earnings, which is likely highest compared to any other sector, according to Goldman Sachs.

Moreover, earnings for companies in the MSCI India Index may increase by 1%. Ex-financial companies constitute 60% of the index profits, the brokerage said.

India is set to see an effective rate cut of 200 basis points across sectors, according to Goldman Sachs. Consumer durables are set to see the most pronounced rate cuts with effective rate cut ranging from 200 basis points to 900 basis points. About 14% of MSCI India ex-financial stocks are exposed to rate cuts, with the autos and consumer staples exposed the most to the GST rate cuts.