Roy Charles Amara, Scientist and Futurist said  “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”

What does the above quote have to do with the markets?

GST may not be a technology, but it has brought about a structural shift in our economy, akin to what a new technology can do to a business.

The market initially overestimated the impact of GST on many companies, and gave them whopping valuations.

However, many of these “GST beneficiary” stocks lost a lot of their value over the last six months. For example, Year till date: Kajaria Ceramics is down 40%, HSIL is down 34%, Century Ply is down 30%

Now that the euphoria has died down, it is important to focus on the long term as we may now be underestimating the long term impact of GST.

In the second piece in the series of Going to Bed Smarter, I highlight articles and annual reports that I have been reading.

The IMF piece India’s Strong Economy Continues to Lead Global Growth captures the macroeconomic impact of GST very well.

 

 1)   IMF Says GST will improve the long-term growth                     rate in India…

 

It makes the following points:

  • India’s economy is picking up and growth prospects look bright—partly thanks to the implementation of recent policies, such as the nationwide goods and services tax.

 

  • The goods and services tax created a unified national market for the first time by lowering internal barriers to trade—effectively establishing a free trade agreement for a market of over 1.3 billion people. The tax is also expected to increase the amount of economic activity taking place in the formal sector of the economy—leading to better quality and more reliable jobs. As a result, the goods and services tax should improve productivity and boost medium-term potential growth, while also creating room for the government to increase much needed social and infrastructure spending.

 

2)   … as do some of the Large Corporates

 

Scanning through the annual reports of some of the largest corporates, the message is the same.

  • HDFC Bank in their annual report says that “in the long run, GST is expected to give a fillip to the economy as a whole”

 

  • Maruti’s chairman, R. C. Bhargava, in their annual report, says “After the initial misgivings about GST, businessmen are recognising the advantages of tax compliance, in terms of enabling larger investments for modernisation and growth of their companies, and also reducing the interface with various government functionaries. These factors, along with the expected good monsoons are very positive signs for the economy, industry and business.”

 

  • Asian Paint’s chairman Ashwin Choksi, in their annual report, says “The Goods & Services Tax, the long-debated and often delayed tax reform was finally introduced on 1st July, 2017. This is the single biggest structural reform in the country.”

 

  • Kajaria Ceramics’ Management Team, in their annual report, says “We consider ourselves fortunate to have witnessed the roll out of the most decisive and path-breaking fiscal change in post-Independence India – the ONE NATION, ONE TAX regime with the launch of Goods and Services Tax.”

 

  • Anil Rai Gupta, Chairman of Havells, in their annual report, says  “We witnessed the historic roll out of Goods and Services Tax (GST). Initially, it caused certain disruption owing to uncertainty and lack of clarity yet we swiftly dealt with the situation. Today, we are encouraged and enthused the way GST is contributing to the formalisation of the economy.”

 

3)  The Consumer Sector will be the big gainer as the  “Unorganised to Organised Story” unfolds

 

  • Hindustan Unilever’s chairman, Harish Manwani, in their annual report, says 2017-18 “was a transformative year with the introduction of the Goods and Services Tax (GST), an important development that has created a single national market and will benefit both consumers as well as the industry including the Consumer Goods sector.

 

  • Bata India, in their MDA in the annual report, say “The financial year 2017-18 was an eventful year with the adoption of GST. While there were some initial hiccups that were to be expected, the implementation of the GST will act as a boon in the long term for the organized manufacturing industry across the country.”

 

  • The Kajaria Management Team further says “With GST rate reduced to 18%, tiles and sanitaryware have become more affordable for the aspiring Indian. Further, the implementation of the e-way bill promises to make GST more effective. This will create a level-playing field between the informal segment and the branded players and shall assist organised tile players to capture a larger share of the total domestic market over the medium term.”

 

  • Trent Ltd. in their MDA in the annual report, say, GST “being a destination-based tax, it creates a trail of various transactions across the value chain, which is expected to enable robust tracking of movement of goods across states, drive higher compliance and widen the tax base. Over time, GST should also accelerate formalization of the economy, reduce cascading effect of indirect taxes and consequently, further serve as a tailwind to the growth of organized retail.”

 

While reading these pieces, I am getting more comfortable that the impact of GST, in the long run, may be much larger than we can imagine today.

In every sector, organised players have been struggling to gain market-share as they competed with arbitrage-entrepreneurswho avoided paying taxes and bent regulations. This created a glass ceiling on the market and both profits and growth were subdued in several segments.

Now that the playing field is more even – the organised players will invest in growth and expanding market-share. We should watch for players who have fundamental drivers in place for exploiting this opportunity – a combination of strong brands, healthy margins and balance sheet and a management team that can handle growth will generate several multibaggers in the next few years. All of us will be well advised to watch out for companies and their corporate action closely to find the winners. But winners there will be.

 

Also Read:

Going to Bed Smarter # 1