Mumbai: The rally that’s made India the best-performing stock market in Asia is up against a new tax law.Businesses were forced to adjust inventories as the government slotted goods and services into nationwide tax slabs that became effective 1 July. The juggling, along with lower oil prices, means the almost 130 companies tracked by Citigroup Inc. will post a 12% decline in quarterly profits in the three months ended June, according to the brokerage.

The decline in earnings may weigh on the optimism that’s pushed the 30-member S&P BSE Sensex about 20% higher this year as domestic and overseas funds pumped about $15 billion into the Indian stocks. Still, the effects of the GST may only be transitory, investors and analysts say, as both businesses and consumers adapt to the new system.“We don’t expect a great quarter looking at the impact of GST,” said A. K. Prabhakar, head of research at IDBI Capital Market Services Ltd. “It is only by December that earnings will revive after GST is implemented in full swing.”

Software exporters Tata Consultancy Services Ltd. and Infosys Ltd. kick off earnings season this week. Technology stocks are trailing the Sensex this year amid gains in the rupee and US President Donald Trump’s crackdown on a visa program.

“We remain positive on IT as companies may announce buybacks and offer dividends,” IDBI’s Prabhakar said. For consumer-focused industries, there may be a “big spurt” in demand if the monsoon season stays on track, he said.The latest government forecast puts the June-September monsoon season, which waters more than half of all farmland, at 98% of normal. Last year’s season was the first regular one in three. And yet consumer companies could record a decline in profitability because of the GST, Citi says.

“There is substantial uncertainty over the quantum of impact” of how businesses girded for the levy, analysts Surendra Goyal and Vijit Jain said in a note this week, adding the effect could be “substantial but temporary.” Sensex companies will post a 2.4% drop in profit, the analysts estimate.

Multiple records

Bets on consumption and growth have propelled India’s stock market to rival Canada and Germany in size. Shares took only about two months to erase losses stemming from the previous disruption — Prime Minister Narendra’s Modi surprise currency ban in November.

The Sensex has ploughed through multiple records in 2017 even after data showed the economy slowed because of the so-called demonetisation. Accounting for that policy and the GST is going to make it tricky to compare earnings reports, Deutsche Bank AG said in a note to clients last week.

“We are entering a phase of no like-for-like results for the next six quarters,” analysts Manoj Menon and Mihir P. Shah wrote. As a result, they “expect heightened volatility and hawk-like focus on management commentary.” Bloomberg

Source:livemint.com