GST holds lot of promise for company earnings! AxisDirect
Essence of the Week
Jun 12, 2017 | Source: AxisDirect
Equity markets seem to have become insensitive to offshore events like the Qatar blockade, UK election, ECB policy and potential ramifications from ex. US FBI director’s testimony. This apathy is nothing to be concerned about since it could just be the right reaction. Focus has, quite appropriately, shifted to domestic events like GST that hold a lot of promise for company earnings.
Besides, there were enough positive news flow on the domestic front (like monsoon upgrade and policy rate cut potential) for investors to afford to shrug off external events.
Latest set of quarterly corporate performance shows healthy sales growth in the post-demonetization quarter, but operating profits fell which suggests weak pricing power and the need for discounts to push sales. Headline earnings growth was robust, but this mainly came from PSU banks and resources companies; excluding them, earnings growth was a paltry 1% y-o-y.
This trend may continue for another quarter as firms’ discount to clear stocks ahead of GST. So the actual underlying strength of consumption demand could take more time to ascertain.
Watch out for:
May CPI & IIP (12th): CPI inflation could come below 3%, while IIP will be keenly watched for signs of improvement in manufacturing
US Fed (14th): To hike policy rates by 25bp and detail shrinking of balance sheet size. Note: market interest rates have gone in opposite direction to Fed’s action.
MSP policy for kharif (June): For the past few years, the government has been cautious with under 5% increase for paddy and slightly higher for wheat. Have to see if the government responds to pressure from farmers
RBI policy minutes (21st): Professor Dholakia has reportedly dissented in the latest MPC ruling, the first for this new decision making body. His arguments for a rate cut (most likely) is highly anticipated
GST progress (end June): There are calls for postponement as the 1 July rollout deadline approaches. Status on registrations of businesses with GSTN would give an indication of preparedness