ET INTELLIGENCE GROUP: Indian companies that rely on elaborate distribution networks to reach out to their customers face an unexpected headwind – the GST Introduction of the new levy, billed as India’s biggest indirect-tax reform since Independence, may cause about 45 days of potential sales loss to companies in consumer businesses — cars, white goods, medicines, staple foods, soaps and shampoos, and auto-parts. If the Street’s concerns turn out to be true, projections on the earnings per share (EPS) for the BSE 200 index may have to be whittled down by as much as 7%, as consumer connect businesses have a significant share in the benchmark.“Earnings expectations in the first and second quarters are likely to be revised downward because of transition impact. Although some recovery is expected in the last two quarters of the current year, that will not be enough to offset the decline in the first half,” Mayuresh Joshi, a fund manager at Angel Broking, told ET. “However, the impact on the market will be less as the Street is taking cognizance that the fall is not because of any cyclical factor, but is an outcome of the regulatory changes.”The likely fall, therefore, is not symptomatic of a greater malaise with the long-term demand situation in India: The loss of sale is the result of the lack of clarity on the immediate demand in these consumer-facing industries where both stockists and companies must make procedural adjustments to comply with GST. Most are destocking inventory in the first quarter of the current fiscal ahead of the implementation of the levy, and then planning to re-stock once the GST’s impact is fully understood.The impact of the adjustments is visible across the pharmaceuticals value chain. According to All India Organisation of Chemist and Druggists (AIOCD), which tracks the inventory of pharma companies, average inventory days at the level of stockists fell to 27 in June from 40 days earlier. Similarly, inventory days for white goods and staples have declined by one to two weeks in comparison with the usual average of six to eight weeks.The German automaker Volkswagen has also asked its dealers to discontinue regular stock norms — typically a month after orders have been placed — until June 2017. A leading Japanese carmaker has asked its dealers to place new orders in case of ready customers, and focus on selling existing stock.Credit Suisse in a note said that consumer staples have 30-90 days of channel inventory and stock changes can severely skew growth. The first quarter will see downstocking, while the second will see up-stocking, but weakness in the wholesale business. The extent of channel inventory and wholesale mix varies across companies, and it will be hard to gauge real growth trends over the next three quarters, according to Credit Suisse.Companies with extensive wholesale channel sales and distributor stocks in consumer staples are mostly likely to be hit. Emami, Colgate-Palmolive India, Dabur, and Godrej Consumer may be more affected because of higher wholesale sales, while Bajaj Corp and Dabur have highest distributor inventory.Experts are concerned re-stocking may not fully reverse the impact of inventory liquidation before GST. Companies with high stocks levels at distributor points may take this opportunity to correct their pipelines, which means stock levels after GST will not reach the current levels.Companies, however, say secondary sales may help offset the decline in dispatches. B Thiagarajan, joint managing director at AC maker Bluestar, said: “We have sizeable decline in the primary sales, but secondary sales have been healthy.Our inventory levels at the dealer end are 15-20% lower in May and June, compared with the same period last year. Dealers are dragging their feet due to the documentation required and the concern over refunds on input tax credit.” He further added that the company has factored in lower sales volumes for a quarter.Sunil Shankar, head of AC and LED panel for Mirc Electronics, said dealers’ inventory levels have come down to 10-12% from last year's levels due to apprehension among dealers over margins and input tax credit. A senior member of a consumer appliance association said dealer inventory has come down to four to five weeks in comparison with the average inventory of six to eight weeks.He further added that a large part of inventory liquidation is taking place at the beginning of the lean season and things should ideally recover by August, when the festival season begins in South India.He said if recovery in sales fails to transpire after the lean season, white goods companies may face sales loss for the whole fiscal.Companies are taking several steps to deal with likely disruption.For instance, Crompton Greaves Consumer and Bluestar have enabled the bill generation with excise duty component separately from June 2017. This will make it easier to claim input tax credits under GST. To avoid this, retailers are maintaining lower inventory.Interestingly, manufacturers also favour lower inventories, which would cut down the loss for companies on closing stock. According to a Credit Suisse estimate, if the closing stock is lower by 10 days, the cost of consumer companies will come down around 20 basis points for full year sales.