02

Indian markets remained stable during the month with both large-cap and mid-caps remaining range bound.
Energy prices remained weak with crude correcting 5% while base metals rose by 5-8%. Key Europe indices were down 2-3%, while the US markets remained range bound.

GDP Growth: India’s GDP growth for FY17 came in at 7.1% y/o/y against 8.2% in the previous year. This was partially due to demonetisation effects in Q3 and Q4 of FY17. Q4 FY2017 was at 6.1%. Growth is expected to normalise in FY2018.

GST: Implemented with effect from July 1, 2017. It may cause temporary slowdown in the economy due to inventory destocking, however, things should normalise over the next two quarters. It will lead to far higher tax compliance in due course and improved tax collections in the coming times. Will also lead to several supply chain and business efficiencies. Key benefits from a business and sector perspective are:

1)  Complete tax set-offs to lower cost: India’s tax structure was compartmentalised leading to loss of input tax credits and inefficiencies in the supply chain. GST integrates the country under a single taxation regime ironing out these inefficiencies.

2) Plugging the tax leakages: More than the shift from unorganised to organised sector, the tax leakage at the semi-organised level was a bigger problem. In this regard, the robust filing system will plug the leakages and improve tax compliance in the coming years.

3) Rationalisation of supply chain: Will be significant improvement in inter-state trade and supply chain efficiencies. Businesses can realign their supply chain and warehousing to become more agile. The most apparent beneficiary is likely to be the express logistics sector.

Monsoon: This year’s monsoon thus far is better than the previous year in terms of total and spatial distribution. For the week ended June 21, the cumulative rainfall was 4.0% above normal with 26 out of 36 sub-divisions receiving excess/normal rainfall as compared to 23 sub-divisions last year. Overall sowing is up 9.6% y-o-y till June 23, which is encouraging.

Q4FY2017 Nifty Earnings: Q4FY2017 net profits of the Nifty-50 Index grew 23% vs Ebitda grew 9.4% y-o-y led by turnaround in PSU Banks and commodity companies with some exceptional gains in oil companies.

FM Commentary

The present government completed three years of its functioning with many successes to its credit. The key success has been achievement of Macroeconomic stability in an otherwise volatile global environment over the last three years especially among emerging markets. Taming of inflation (supported by benign crude oil prices) coupled with controlled twin deficits – and stable currencies are notable in the past three years. This has provided a resilient backdrop for foreign capital inflows to the Indian economy (reflected in the highest-ever FDI inflows). The stable macroeconomic backdrop augurs well from the “growth-inflation” perspective.

Key initiatives of past three years: In the last three years, the government has implemented / initiated several important reforms. Goods and Services Tax (GST), easing of FDI limits in various sectors, Direct Benefit Transfer (subsidy reforms), financial inclusion and digitisation, ‘Make in India’, power sector reforms are some of its signature initiatives.

Valuations: As on June 30, 2017, Nifty-50 Index is trading at almost 20x FY2018, i.e., one-year forward earnings and 16.3x FY2019, i.e., two-year forward earnings with earnings growth expectations at 19% CARG. Reforms which have been implemented in the last three years will start positively impacting growth and ease of business in India materially over the next few years. Earnings growth is expected to be high due to low base effect of earnings, acceleration of economic growth and GST implementation. Inflows to domestic equities continues to remain robust with monthly inflows are all time highs as investors reallocate their assets to financial assets over physical assets which have off late lost favour. Monthly SIP (systematic investment plan) inflows in India are now over $800 million from retail investors and are rising sharply month on month with over 12 million investors participating.

Initial GST related implementation challenges are likely to impact earnings for 1-2 quarters depending on sectors. But the far-reaching benefits of this reform will percolate over the next 2-3 years in terms of faster economic growth and improved tax collections.  Markets are optimistically looking at earnings rebound in the H2 as companies benefit from the festive season demand, supported by good rainfall, rural income and low base of H2 FY2017 earnings.

-The writer is the CIO - Equity Investments at Reliance Mutual Fund .