India Profits Seen Emerging From the Shadow of New Tax, Cash Ban

(Bloomberg) -- Corporate India is forecast to swing back to profit growth as businesses resume stocking up shelves after getting a better handle on the new countrywide tax regime.

Earnings for the three months ended in September will increase 10 percent from a year ago, according to CLSA India Pvt. forecasts for the 104 companies it tracks, a turnaround from the 18 percent decline in the previous three months. Citigroup Global Markets India Pvt. expects profits for the 131 companies it covers to increase 13 percent.

Government flip-flops on the goods and services tax, or GST that went into effect on July 1, compounded uncertainties lingering on from November’s cash ban. That contributed to a slowdown in growth in Asia’s third-largest economy. But, equity investors remain bullish, pushing the 30-member S&P BSE Sensex Index up 20 percent this year.

“Domestic growth is likely to improve in the second half of the year,” said Dhananjay Sinha, head of institutional research at Emkay Global Financial Services Pvt. Businesses are gradually adjusting to GST rules, while the effects of the so-called demonetization of currency notes are fading, he said.

Shipping volumes for the consumer staples industry have improved after the implementation of the GST, Citi analysts Surendra Goyal and Vijit Jain wrote in a report this week. Profit growth for the July-September period will be driven by companies in the steel and energy industries, they said.

Tata Consultancy Services Ltd., Asia’s biggest software services provider, kicks off India’s earnings season later Thursday.

To be sure, some profit projections have been too optimistic. Earnings at NSE Nifty 50 Index constituents have trailed consensus forecasts for most of this decade, data compiled by Bloomberg show, prompting some investors to warn that valuations are too high.

That’s one reason foreigners have been pulling money out of Indian stocks, selling net $3 billion of shares in the September quarter, the biggest three-month outflow this year, according to data compiled by Bloomberg. Overseas funds are instead investing in places like South Korea, China and Taiwan, where stocks are cheaper and offer better earnings growth, CLSA says.

Still, local investors in India appear sanguine. They pumped in 189 billion rupees ($2.9 billion) into domestic funds in September, following a record 203 billion rupees the month before, the Association of Mutual Funds in India said last week.

--With assistance from Ravil Shirodkar

To contact the reporter on this story: Nupur Acharya in Mumbai at nacharya7@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Vivek Shankar, Kurt Schussler