Ashika Monthly Insight August 2016

STRONG ON CONSUMPTION
Strong influx of global funds since the month of March
has lifted Indian markets to record high levels. However,
as always the rally is at risk if the liquidity dries up or
the corporate earnings falter cold turkey. Foreign
institutional investors (FII) have poured in so far Rs
~41,300 crore since March till date. The markets have
been building positive consensus over GST while the
corporate results so far includes more hits than misses.
Of 40 odd BSE 100 companies that have declared results
so far, more than 50% of them bettered market
expectations. Similarly, majority of the Nifty companies
that have released their earnings have also bettered
street expectations. Although, there could be a silver
lining since meaningful margin expansion despite offer
robust volume growth, one time other income, could be
savior in most cases. However, strong surge in volume
and revenue growth is still to be witnessed meaningfully
for instance in cement sector whose price increase has
led to meaningful bottomline expansion despite of
healthy volume growth. As for the IT sector, automation,
lower margins and transformation of the business model
towards more value added work like cloud computing,
big data analytics, IOT etc. impending on the growth.
Nevertheless, most market experts expect meaningful
recovery in the second half of the year. As far as the GST
is concerned, the ruling government seemed to have
strategically given more importance to the regional
parties than the main opposition – Congress. Besides, the
BJP has also given the Congress importance being the
original proponents of the GST. The central government is
keen that a consensus emerges on the bill and that it
gets tabled and passed in the ongoing monsoon session
of Parliament, which is scheduled to end on 12 August.
Senior ministers of the ruling NDA met key opposition
leaders—including those from the Congress, the Left
parties and prominent regional parties—over the passage
of the constitutional amendment bill that will start the
roll-out of the GST. On 27th July 2016, the Union cabinet
accepted some of the recommendations given by a Rajya
Sabha select committee, including doing away with the
contentious 1% additional levy on supply of goods, one
of the Congress party’s three demands, and proposing full
compensation to states for five years for any revenue loss
arising from the transition to GST. However, the
government did not concede to two of the Congress’s key
demands to cap the GST rate at 18% and to include a
provision for a dispute resolution panel in the bill. Both
these demands are strongly opposed by the state
governments as well. However, finance minister Arun
Jaitley has maintained that making these changes is
neither feasible nor practical. The good news is that most
parties other than the Congress and the Left have already
assured the government of their support for the GST bill.
The passage of the crucial bill however still remains at the
mercy of the Congress which has 60 MPs in the Rajya
Sabha.
The other factor is monsoon which has already been
discounted by the markets but the actual outcome as and
how it spreads will provide fillip to consumption
particularly rural consumption which has remained muted
for the last two years. No wonder, the consumption based
stocks have already rallied in anticipation. India
Meteorological Department (IMD) on 28th July 2016 said
rainfall was 4% below the long-period average (the
average of rainfall over the past 50 years) for the country
as a whole. Only the southern peninsula, east and northeast
India recorded above-normal rainfall. Regions in
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