Quarterly results from companies will determine the direction for record-setting Indian shares, with the pace of sales and profit growth for manufacturing sector in particular seen losing momentum due to emphasis on clearing of inventories ahead of the Goods and Services Tax (GST).

A survey of companies in the Nifty-50 undertaken by ET Intelligence Group forecast year-on-year revenue growth at four per cent for the June quarter, down from 12 per cent rise in the three-months ended March. Profit was seen rising six per cent, compared with 29 per cent in the previous quarter.

Many companies had offered heavy discounts to clear their stockpile before the GST kicked off on July 1, putting pressure on profit margins. Consumer goods makers were among the ones that led the drive to offload their inventories. Export-driven companies such as pharmaceuticals and information technology were probably weighed down by tougher market conditions and a firmer rupee.

However, benign inflation would have provided some comfort. Growth is expected to pick up only by the December quarter because of some disruption seen during July-September as companies come to terms with the GST, the biggest tax overhaul in 70 years.

“The earnings numbers should largely be unexciting,” said equity strategist V. Venugopal. “It could trigger profit-taking in record-hugging stocks but don’t expect a prolonged downtrend. Actually, it would provide an opportunity for new funds to get a piece of the action.”

The top-30 Sensex rose 1.4 per cent in the five days to Friday to 31,360.63 and the 50-share Nifty climbed 1.5 per cent to 9,665.80.

Tata Consultancy Services, India’s largest software services exporter, releases its June quarter results on Thursday, followed by rival Infosys Ltd the following day. Both the companies are expected to show the bruises from higher costs in their main US market after President Donald Trump tightened hiring rules.

IndusInd Bank and South Indian Bank are scheduled to unveil their earnings on Tuesday.

Domestic liquidity

The ranks of equity investors in India, home to the world’s second largest population, are expanding at a fast clip thanks to bullish share prices. Big gains by early birds are drawing more funds into the market. This trend is set to stay the course in the foreseeable future because of falling interest rates and dwindling income from other investment avenues.

Unlike earlier bull rallies when retail investors jumped into the fray purely on hearsay and stock tips leading to much grief later, this time around there is maturity at play. Cash is being routed through institutional funds that are run by professional money managers. A cursory glance at stock market trading data shows domestic funds were buys for eight succession sessions even as foreign portfolio investors turned sellers.

Surging domestic liquidity has underpinned the rise in share prices to multiple record highs, and considering the consensus among pundits for robust growth in the years ahead, any pullback in prices would draw other funds waiting on the sidelines.

“I have always been taking a stance that India for the first time since independence is changing in a significant manner both politically and economically, and both these are very much connected as far as the stock investors are concerned,” Porinju Veliyath, a highly rated portfolio manager who heads Equity Intelligence India, told ET Now television channel.

“It is just the beginning of a new India. We have a long way to go from a $2 trillion economy to a $5-6 trillion economy in the next few years. So, thinking about a crash or waiting for a crash is just foolish.”

New themes

The launch of GST, which has replaced multiple levies from central, state, municipalities and local with a uniform tax across the country, is a revolutionary concept for the nation. It has set in motion for a common market for the subcontinent, dismantling stifling controls and hurdles in the way of smooth transportation of goods.

On a wider and deeper scale, the GST has ushered in a fundamental change in the way businesses are conducted in India. Until now the vast majority of economic activity — from production of tiny items to big components as well as a host of services — was the domain of unorganised sector and they rarely paid taxes. The GST will compel the unorganised sector to register and be counted in economic activity.

In other words, not only will the government benefit from better tax compliance, but there would be improvement in economic data efficiency as this would now capture hitherto unaccounted output. There will be gains for the units in the unorganised sector too. By registering and being seen would given them greater exposure and more business.

Veliyath, whose stock picks have won him and his clients laurels, is upbeat about two sectors — footwear and construction materials, both currently swamp the unorganised sector.

“In the footwear and leather segment, around 60 per cent to 65 per cent of the business is in unorganised sector and that will change now and 40 per cent organised business can grow to 70-75-80 per cent in the coming years. That is a huge unprecedented jump in their business volumes and profitability.”

With 1.3 billion people the potential demand for slippers and shoes are massive. The same holds true for construction materials such as home improvement products like ceramic tiles, paint, plywood, light electrical, cables and wires and sanitary ware. Keep an eye on the companies that emerge from these sectors.

“We are definitely at a huge inflection point which although just started a few months ago, is at different level from the point the country is heading to. The stock pickers have got enormous opportunity to pick stocks and make 20 per cent, 30 per cent and perhaps even 40 per cent CAGR (compounded annual growth rate) for next four-five years,” Veliyath says.

The writer is a journalist based in India.