Stocks Consolidate As GST Rollout Gathers Pace
Indian stock markets are taking a breather this past month over the implementation of the world’s biggest rollout of the Goods and Services Tax. The stock markets have not been able to scale the mountain of 9700 levels convincingly on the Nifty. For now, it continues to hover a little over the 9600 mark, where it has been meandering for the last one month.
As the GST rollout is underway, concerns on its implementation has been slowly fading away. However, foreign investors have been marginal sellers for the past several weeks. In July, foreign investors logged sales of over Rs 1639 crore worth of shares. In the past four months, foreign investors have pressed sales of Rs 12478 crore worth of shares. And this remains one of the major reasons why stocks are not breaking out on the higher side for now.
Domestic investors, by contrast, continue to remain on the buy side. In the past four months, domestic institutions have poured in nearly Rs 21,301.79 crore into the stock market, which is holding the market up.
Experts are pointing out that the domestic rollout of GST is going smoothly. Some of the larger companies that have been rolling out their systems for some time now have been able to adopt to the new tax systems much better and faster. A large part of the Indian companies have started to issue bills in the new format under the new tax rules.
The Goods and Service Tax is one of the biggest rollout of uniform taxes across the country and is expected to give a fillip to trading and movement of goods across the country. It’s also expected to boost corporate earnings in the coming years. For now, though, earnings growth have been marginal in single digits. The run up in stock prices, therefore, pushed the PE levels of the markets to higher levels of around 23.5 times earnings.
At these valuations, are the markets fully priced? Brokerages believe that GST implementation will enable the markets to sustain the higher re-rating. In a note, Antique noted: “GST is a powerful reform which will reaffirm the markets’ faith in the reforms process initiated by the government. The Nifty is currently trading at 18.5x 1-yr forward earnings. But as we have seen with other reforms the re-rating can sustain as the markets begin to reflect the multiplier effect of such a big reform.”
Analysts expect the GST rollout to usher in more tax compliance that will plug the leakages in the system. In the next two years, the stock markets are expecting an earnings growth of around 18 percent. This is expected to bring down the valuations to more reasonable levels of 19 times at the current market prices.
The sustained inflows into the domestic markets into mutual funds to the tune of over Rs 6000 crore every month is providing the safety net for the markets at lower levels, and is acting as a cushion from a steep sell-off.
Liquidity remains high as oversubscription figures of some of the recent IPOs such as CDSL have shown. The IPO garnered oversubscription to the tune of over 200 times the issue size, while other big issues such as AU Small Finance Bank also convincingly sailed through.
Marketmen are not ruling out the possibility of a correction given that stocks have run up significantly, however, it’s still a market in which investors are continuing to buy the dips.
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