GST: Ignore the Noise in the Market, Focus on the Genuine Sound(ness) Test of Companies
GST — the Goods and Services Tax — is being hailed as a Tryst with Destiny at the stroke of the midnight hour, equivalent economically to the political independence of India from the British. Others are decrying it as an ill-thought, ill-prepared move which will put the economy in disarray. In the latter’s opinion the Indian economy is yet to recover from another ill-thought, ill-prepared move, i.e. demonetization. According to this camp, in exactly 6 months after the completion of the demonetization process, the Modi government has put the economy to another challenge, the GST.
The OmniView is that it is a landmark decision and will have huge, positive, long-term implications for the Indian economy. Yes, in the near term there will be challenges for the next 2 months for most listed companies and possibly for next 2 quarters for some highly unorganized, typically, unlisted companies or small traders. For the organized the challenges will be related to the understanding of the process and the nitty-gritty details of the forms and their submissions, verifications, reconciling and timing. Some of these companies might need to hand hold some of their lesser-organized vendors and suppliers, educating them as to the process and reconciling some mismatched transactions etc. This will definitely take up some time and resources for the next couple of months.
For the lesser organized companies, they will need to spend time, money and resources getting organized and getting used to the new way of doing business and paying taxes. For companies that do enjoy some persistent competitive advantage in the economy, this will only create more efficiencies in their operations. Their capital efficiency is only likely to go up further and result in enhanced intrinsic value. The segment which will be at the highest disadvantage will be the companies which had a competitive advantage based on tax evasion. Companies whose margins were equivalent to the tax evaded are going to face extinction unless they are ready to work hard and develop some persistent competitive advantages. A lot of unlisted companies in the unorganized sector might be in this category. They are the biggest losers of GST.
What does that imply from the investment perspective?
The market is acting volatile signalling that analysts are expecting some turmoil in the economy because of which the revenues and earnings of the companies should be impacted for the July to September quarter. However, the OmniView is that times of temporary turmoil in the economy, which translate into volatility in the capital markets are the best time to tune out the noise. Stop paying attention to the macro-economic chatter and the specific impact on the next quarterly earnings — that is irrelevant from the long-term value of the listed companies. What is important is to do a bottom-up analysis of each company or what we are calling GST — the Genuine Soundness Test. The OmniView GST is to focus on companies with stable businesses (i.e. businesses which will be impacted less due to the economic turmoil, if any, in the next quarter), strong balance sheets (i.e. businesses with few financial liabilities and lots of strong, liquid financial assets), and persistent advantage (i.e. secular competitive advantages). In short, focus on the Supernormal companies. Finally, and most importantly, identify which of these Supernormal companies are available at Supernormal prices, i.e. at a discount to their intrinsic value. More the turmoil, more the fear and noise in the market, more likely that ore companies are available at Supernormal prices. These Supernormal companies at Supernormal prices are the ones which passed the GST test!
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