'Awareness levels are much higher after demonetisation. Disruption will also be far lower now, as the tax rates in GST are going to be similar to the existing ones.'
'Investors shouldn't have high expectations on corporate earnings.'
In a conversation with Vishal Chhabria and Hamsini Karthik, Gautam Chhaochharia, bottom, left, executive director & head, India Research, UBS, explains why implementing goods and services tax (GST) may not be as disruptive as many perceive it to be. But, he warns investors shouldn't have high expectations on corporate earnings. Excerpts:
How disruptive will GST be?
Given the complexity, it has to be disruptive in the short term. The system can never be 100 per cent prepared for a change like this. The question is whether the disruption can last longer and the level of preparedness. From a short-term perspective, the impact is going to be far less than it would have been last year.
Continuous delays in rolling it out means the bigger part of the ecosystem is better prepared. Now, the challenge is how the smaller businesses, informal business, supply chain, etc, behave.
Awareness levels are much higher after demonetisation. Disruption will also be far lower now, as the tax rates in GST are going to be similar to the existing ones.
But, whether the disruption prolongs beyond three to six months needs to be seen. How the informal sector will respond - whether by paying taxes and still be viable or shut down because they are unviable, we don’t know yet.
Some consumption-based mid-cap stocks have rallied on expectations that organised players will gain market share due to GST.
We did an exercise to find the impact of formalisation. The valuations might have already captured the impact. However, stocks can still do well so long as these keep delivering numbers and assuming they don’t de-rate from the current rich valuations.
Companies in general will be able to gain market share because broadly the consumption space has informal players, too. The hope is high among big companies. Gradual formalisation is good. Overnight formalisation might be tricky.
Is the market factoring in for likely disruption due to GST?
The Street expectation for FY18 earnings doesn’t factor in the impact of GST, as it may be a one quarter event.
GST is a short-term disruption. People won’t stop consuming things because of GST. This was the argument we used for demonetisation impact, saying pessimism was overdone.
From earnings reporting perspective, there could be over-reporting or under-reporting for two quarters but it is not a permanent destruction of demand.
Earnings have been disappointing in recent years. The FY18 growth expectation is 16-20 per cent. Is is optimistic?
We will see earnings cut in FY18 . In the past one month, we have seen earnings cut for FY18 by two per cent. We are looking at 12 per cent earnings growth for Nifty companies, building in a reduction in credit cost for banks.
But, if the same level of provisioning continues, then even this will be at risk. We will see similar sectors like FY17 - pockets of financials, consumer and automobiles do ok. FY17 was helped by metals and mining, which could moderate in FY18.
But, our view hasn’t changed, which is that local macros are solid and stable. Growth recovery will still be delayed. What we have seen now in Q4 is a bit of post-note ban recovery. We see normalising activity now, but an accelerated earnings growth in FY18 seems unlikely.
Affordable housing is talked about as the next high-growth space. You agree?
Affordable housing for the poor has been there even historically. The government is trying to give it a push. It has the big challenge of funding and execution. Execution record there is far behind what the government is planning.
The government is planning to build 20x urban homes on an annualised basis and 5x rural houses versus what they have delivered over the past three years. Private sector viability in small-ticket houses is debatable.
Middle income (up to Rs 18 lakh household income) where you get interest subsidy may do better as the ticket size there is around Rs 50 lakh and there is already enough inventory.
This scheme may induce the households to leverage and can be significant for macro growth.
When government is spending one rupee, it is forcing the household to spend 10 times more.
But, the challenge here is the budgetary allocation - Rs 1,000 crore (Rs 10 billion) is peanuts as 60 per cent of those who can avail mortgages will anyway avail it. So, unless the spending is more than Rs 27,000 crore (Rs 270 billion), the tool may not be powerful.
Your overall view on the market now?
Markets are very stretched and that holds true for most sectors. Our approach is where we see visibility for sharp earnings growth.
In current environment, if earnings growth is there, the valuations will at least not de-rate. So, within that, select financials (retail and non-banks), home improvement, and select automobiles and as tactical call, IT are something which we prefer.
Photograph: Rupak De Chowdhuri/Reuters
