Watch a complete video on our webinar on 'Investing In The Post Covid-19 World. What's Next For Investors?'. Watch Now

12 Jul 2017 by Research and Ranking
Let There Be GST (Newsletter – June 2017)

Indian economy finally made the big switch. With GST, the country has truly taken a step towards the vision of ‘One Country One Tax’ (albeit with different slabs).

The markets have also been bullish about GST prospects. But after making fresh highs ‘again’, the major indices finally saw some red in June and both Sensex and Nifty50 returned -0.7% and -1% respectively.

But this doesn’t indicate any lack of optimism among investors, as this drop comes after five consecutive months of positive returns. So the mood is still bullish.

GST Mode ‘ON’

After multiple postponements, one of India’s biggest economic reforms, i.e. GST, came into effect on 1st July.

This clearly indicates that country and its government are making continuous and genuine efforts to build an efficient, competitive and barrier-free economy, the benefits of which might not be felt immediately, but surely will be realized eventually.

Removal of the tax barriers across states has created a single common market across the nation. The free flow of goods across the states will result in lower logistics costs and lead to a marked change in productivity. More importantly, GST will trigger the much-needed formalization of the economy, as the tax-based interlinking of various entities in the value chain will reduce the tax arbitrage enjoyed by the unorganized sector.

But as is common with such big changes, the adoption hasn’t been smooth and is expected to take time for people to adjust.

Many businesses were finding it tough to move forward due to a lack of clarity about aspects like input credit mechanism, dealing with unorganized suppliers, etc. As a result, with deadlines approaching, there was a conscious effort to reduce inventories and wait out the initial period for more clarity.

There is also fear that supply disruptions and conscious trimming of stocks will lead to lower volume growth in Q1 as well as Q2 of 2017-18.In a bid to reduce pre-GST stocks, businesses tried to attract customers by offering big discounts and offers. This worked pretty well as many customers preponed their big-ticket purchases. So in all likelihood, the consumption growth is expected to dip a little in coming quarters. The demand pattern would also be governed by how prices move after switching to GST.

But any disruption owing to GST will only be near-term in nature. As long term investors, we are keeping a close watch on how businesses adapt at sector as well as individual levels.

For the businesses that adopt well, the incremental benefits in the long term will far outweigh the short-term challenges. Shares of such businesses would make a good case for long term investments for potentially multibagger returns.

Inflation may Spike & prevent Rate Cuts

With inflation numbers under check, the case for a policy rate cut is strong. But one of the key concerns for many is the impact of GST on inflation. It’s unlikely to push up the Consumer Price Index (CPI) much. That is because food items constitute about half of the CPI basket and items such as fuel also have a heavy weight. Therefore, a large part of the basket is exempt from GST.

But for middle and upper class, a large proportion of their final consumption expenditure is of services. And the rate of tax on services under GST has gone up. So even though the consumers might not cut down on necessary expenses (in spite of price hikes), they may still choose to cut down discretionary service-related expenses.

So there is a growing risk that the trend of low-inflation may not continue and it may spike up in near future. If that’s the case, then RBI might once again choose not to lower the policy rates.

R&R View on Economy& Markets

We are of the view that GST can be a game changer for the economy in long term. But in near term, it will be difficult to observe its benefits.

Indian markets are currently trading at higher-than-average valuations. So going forward and at least in near term, markets will keep a close watch on earnings growth of companies - which is something that is still eluding businesses.

It is also expected that in case markets move lower, the constant flow of investments from retail investors will provide ample support and arrest the fall without much damage.

We continue to keep a close watch on the broader macros and important developments (like GST). But our efforts remain directed towards finding fundamentally sound businesses that can become future multibagger stocks.

On that note, we end this newsletter and as always, appreciate you for taking time to read this message. Do share your views/comments by email/comment section below.

Team Equentis

Wish To Know More?

Free Research Reports

Get Free Fundamental Stock Market Research Reports Worth Rs. 10,000 The recommended two fundamental stocks are to demonstrate the depth of research conducted at Research & Ranking. This should not be considered as free trial of our services.