GST: Earnings likely to be impacted in the first half of current fiscal

Further rally in the Indian equity market (read Nifty 50), which has gained 16 per cent year-to-date, will be delayed as earnings growth will be hit on account of implementation of the Goods and Services Tax (GST) — the second-biggest reform in nine months (after demonetisation) — from July 1.

Motilal Oswal, Chairman and MD, Motilal Oswal Financial Services, sees Nifty correcting to 9,200-9,250 levels as a knee-jerk reaction to issues surrounding GST. “The street will react to the initial disruption, not because it is very severe but more because Nifty is trading at rich levels and pregnant with expectations of better corporate earnings,” he said.

Vinod Nair, Head of Research, Geojit Financial Services, expects the broad indices to correct by 4-8 per cent in a worst case scenario.

Bank of America Merrill Lynch prefers to stay cautious in the near term as it expects the impact of GST on listed company volumes and earnings to extend beyond the June quarter. “At rich valuations, any hiccup in numbers could be a risk,” it said.

In an interview with BusinessLine earlier this month, Andrew Holland, CEO , Avendus Capital Alternate Strategies, pointed out that GST could lead to at least three months of disruption but it could be more than six months in case of India. “FY18 growth could be hit as transitional economic disruption due to GST may neutralise the lower base of demonetisation in FY17,” he said.

Major surveys conducted by brokerages and media reports suggest that companies, especially small and medium enterprises, are not fully ready for the execution. Kotak Institutional Equities is cautious on economic growth for the next one to two quarters.

“Primary sales in the B2C segments will be sluggish in the transition period, but we expect a pick-up from the festival season in Q3,” PhillipCapital pointed out in a note.

However, the second half of FY18 looks rosier. Bank of America Merrill Lynch estimates that companies can report year-on-year growth numbers in the December quarter due to a combination of factors, including seasonal pick up in sales (festive season in October), re-stocking post GST, better consumer appetite (monsoons, farm loan waiver) and the base created by demonetisation.

Cost of compliance across the value chain will be a deterrent for higher participation in GST. Also, large companies, especially those operating in industries amid the unorganised market, will gain market share as they are likely to be better-prepared for GST.

According to brokerages, companies such as Hindustan Unilever, Colgate-Palmolive (India), Havells India, Asian Paints, Titan Company, Bajaj Electricals, Crompton Greaves, Kajaria Ceramics, Pidilite Industries, Heritage Foods and V Guard will be some of the beneficiaries of GST.

While most of the risks were known ever since the kick-off date of GST was announced, the market is still holding its base towards higher levels so far because of the fact that at least it is finally becoming a reality in whatever form and shape. As the old adage goes: Something is better than nothing!