The combination of a comfortable trust vote and reduced GST rates led to Nifty rallying to the 11,085 mark led by consumer oriented companies. Heavyweights like ITC, Maruti, Bharti and ICICI Bank resulted in the Nifty rallying sharply on Monday. The sector that really looked challenged was the two-wheeler space. Two wheeler stocks corrected sharply on price war fears. Two wheeler stocks have been under pressure as higher input costs are already putting strain on margins. Bajaj Auto, Hero and TVS were sharply down. It looks like the two wheeler space could now see a price war to gain market share.
There was pressure on oil prices after Iran threatened to retaliate against the US if the sanctions actually materialized. Crude oil moves higher on rising US-Iran tensions over sanctions. Iran has threatened to block Gulf oil shipments through the Straits of Hormuz, which controls 30% of the world oil trade. Iran could incur huge losses if US sanctions take effect in a big way. Iran had just been admitted back into the international oil market after a gap of over 4 years and this force Iran back into trouble. Iran is India’s third largest oil trading partner after Iraq and Saudi Arabia.
The Piramal Group is now looking at funding the hotels and hospitality sector in a big way. Piramal Capital is to lend nearly Rs.10,000 crore to hotel projects. Its hotel funding book has already touched Rs.2000 crore and plans to expand the book to Rs.10,000 crore in the next 3 years. All loans have been given against operational assets. The recent GST announcement actually rationalized the GST stipulations for hotels and made it more business friendly. Most hotels have now completed their capital expansion plans and are now looking to leverage on their properties.
Kharif production of paddy could be negatively impacted in India if the monsoon does not progress fast in the Eastern region of India. Paddy sowing in Eastern India has been badly hit by rainfall deficits. In fact, the rainfall deficit in parts of Eastern UP and Bihar is as high as 40% and is likely to negatively impact the paddy output. This could negatively hit the government plans on enhancing rural incomes. Also this could have a negative impact on food inflation, which is already threatening to go up because of higher MSP at 150% of the cost of production offered by the government in its last budget.
One of the big beneficiaries of the GST rate cuts is likely to be the home paints segment where GST rates have been brought down or rather rationalized. The second level of paint companies are ready to cut paint prices after GST rate cut. Companies like Berger Paints and Kansai Nerolac have agreed to cut paint prices by up to 10% in the aftermath of the GST rate cut on paints. Apart from lower rates of GST, the paint companies in the organized sector are also likely to benefit substantially from shift in favour of the organized sector post GST. This is a big merit point for the paints companies since this sector has a fairly large unorganized sector at work. Paint companies see a major demand spurt as a result of the price cut and are expecting a major demand push ahead of the festival season starting in October.
The US Federal Reserve under Jerome Powell may have a piquant problem on hand. The Fed may actually have a tough task when its meet concludes on August 01st. While inflation and growth make a case for a rate hike by the Fed, the big worry could be the flattening to inversion of the yield curve, which hints at an economic slowdown. The inverted yield curve is normally a signal that the economic confidence is not too strong in the long run and is normally an indicator of long run pessimism on the business front. Fed is expected to hold status quo in its August meet and review in September.
