Auto sector may have another tough quarter according to Japanese brokerage firm, Nomura. According to Nomura, the June quarter could be another weak growth period for automobile companies as negative operating leverage and liquidity constraints are likely to weigh against these companies. According to Nomura, the revenue fall may be in single digits but the fall in profits could be quite drastic for most of the auto companies due to higher input costs and weak demand. Auto companies have been among the worst performers in terms of stock market returns in the last 1 year.
Despite a sharp revival in monsoons in the first 10 days of July, the outlook for the rest of July does not appear to be too encouraging and India is likely to receive below average rains in next 2 weeks according to the Met Department. In fact, the deficit in rainfall in the next 2 weeks is likely to impact the central regions, which principally grows cotton and soybeans. Rains are crucial since over 55% of crops in India are rain-fed. Interestingly, India had received 28% more than the long term average rainfall in the first 10 days of July, but the damage may have been done due to late sowing.
Nifty made a tentative bounce on Thursday even as the DJIA scaled historic high levels of27,000. This bullishness was largely on the back of hopes that the dovish statement of Jerome Powell will restart a rate cut cycle across the world. The Fed meets on July 31st while the RBI meets in the first week of August to decide on rates. Apart from the rate cut hopes in the US, Trump’s decision to put off elimination of drug rebates gave a boost to healthcare stocks. Indian markets, meanwhile, are awaiting clarity on the FPI tax front even as buyback tax and public shareholding is an overhang.
With the Union Budget announcing salivating benefits for EV companies, Indian auto companies will conduct a study on EV migration post budget EV push. The auto industry has committed to the Niti Aayog to appoint an external agency to chart out a roadmap for migration to electrical vehicles. Instead of the 2 weeks time given by Niti Aayog, the auto industry has asked for 4 months to prepare the roadmap. The transition will begin with 3-wheelers by 2023 and two-wheelers by 2025 with cars likely to follow closer to 2030. The Tata Group has already identified this as the next big opportunity.
Global trade war and the global geopolitical scenario continued to be on the edge. On the trade war front, Donald Trump has blamed China over agricultural purchase commitments . The Osaka Summit opened hopes of a rapprochement but now Trump has accused China of not living up to its commitments on agri purchases, which is a major item of export from the US to China, especially soybean and beef. The freeze on tariffs was subject to China meeting its commitment on agri purchases. Meanwhile, in the Middle East Iran tried to block British oil tanker but backed off after a warning by the Royal Navy. This was in retaliation to the UK government detaining an Iranian tanker near the Strait of Gibraltar. Oil traded higher on Gulf of Mexico storm and lower US stockpiles.
FPIs may find it difficult it difficult to dodge the higher incidence of tax post-Budget or even convert them to corporates as suggested by the CBDT chairman. A day after the CBDT chairman called upon the FPIs to convert into corporates, tax experts have pointed out technical challenges. Currently, 40% of the FPIs are registered as trusts or as AOPs. These FPIs are hit by the higher surcharge. However, experts feel that shifting to corporates will not only mean payment of STT but invite provisions of GAAR, including retrospective taxation concerns. That may not be really appreciated.
