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The Nifty gained 1.5 percent during the week to end at 9,666 after several sessions of consolidation as investors took the rollout of India’s new tax system in their stride. Positive monsoon data also lifted sentiments. Markets continued to ignore geopolitical tensions due to North Korea’s missile test and the border row between India and China. Macro data also continues to be a cause of concern but liquidity continues to be high.
Crude oil prices ended sharply lower by 4 percent for the week on oversupply concerns after Russia opposed deeper supply cuts by OPEC and its partners. The rise in Saudi as well as U.S. crude production added to the woes of oil-producing nations.
Meanwhile, minutes of the Fed's last policy meeting suggests that policymakers were increasingly split on the outlook for inflation and how it might affect the future pace of interest rate rises. Expectations are that the Fed may begin shrinking its balance sheet at its September meet. However, a Bank of America Merrill Lynch report suggests a “Humpty Dumpty-style fall” - U.S. rate hikes combined with the prospects of the ECB scaling back its stimulus means markets were at a "massive inflection point" in the decade-long easy money trade.
Following the implemention of GST, several companies in the auto and FMCG space changed prices to pass on benefits to customers. We could see a near-term impact on margins due to price cuts, though it is positive for the long term as volume growth will see an uptick and drive the topline.
Automobile companies’ June sales trend were mixed ahead of GST implementation – the two-wheeler segment reported a decent yearly volume growth of 5 percent due to wedding season and upbeat rural demand on expectations of normal monsoons. The passenger vehicles segment reported a drop of 8-9 percent due to lower wholesale dispatches.
In stock specific action, Interglobe Aviation was in focus after expressing interest for a stake in Air India after the cabinet gave its approval to privatise the debt-laden carrier. ITC was also in the limelight after the Central Board of Excise and Customs removed excise and additional excise duty on cigarettes. Any price cuts are expected to help volume growth for the company. IDFC, IDFC Bank and Shriram Group stocks were in focus on media reports that they are in talks to combine their businesses that could include traditional banking, consumer lending and truck financing. They have now officially entered into a 90-day merger talk.
The combined entity would have a market cap of 620 billion rupees to form a financial services giant. The merger is expected to be beneficial for the entities as the businesses are complimentary in nature. SBI was also in the limelight after media reports indicated that SBI Life will soon come out with an initial public offering, which could value it around 650-700 billion rupees.
On the macro data front, manufacturing PMI data highlighted a slowdown in growth across India's manufacturing sector during June. It fell to a four-month low of 50.9, down from 51.6 in May. Services PMI climbed to 53.1 in June from the previous month's 52.2, making it the fifth consecutive month the index has been above the 50 mark that separates growth from contraction. The output of eight core infrastructure industries improved 3.6 percent in May. However, fresh investment growth hit a 25-year low, which also means that credit offtake will take a longer time to improve.
In the coming week, IIP for May and CPI data for June will be announced on Wednesday, while WPI for June is set to be released on Friday. Globally, Eurozone IIP for May is scheduled to be released on Wednesday while U.S. non-farm payroll data for June and IIP data for May will be announced on Friday.
The coming week will also mark the beginning of the first quarter earnings season for India Inc, with IndusInd Bank, TCS and Infosys the key companies to report their numbers during the week. Management commentary on impact of GST on volume growth, margins and various ongoing price revisions will be in focus.
The GST rollout seems to have started on a positive note and this could be the simplest stage of the implementation. The next phase is the more complicated one which includes reporting and reconcilation across the GST chain. The IT back-end would face its acid test - there are already reports of pile-up of goods meant for exports due to confusion on treatment for goods.
Investors need to stay cautious until the second phase of GST implementation in over – hopefully without any major glitch, coupled with positive commentaries from companies after reporting their Q1 earnings.
Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.