GST is here. Is it time to look at logistics stocks?

Business Standard By Puneet Wadhwa & Deepak Korgaonkar May 24, 2017. 14:04 IST

Given the recent run-up in some of these stocks, analysts do not see gains sustaining for long

GST: New tax reform to draw Indian businesses into digital economy

As the nation prepares for the implementation of the goods and services tax (GST) bill, the performance of transport & logistics companies at the bourses - once considered as one of the key beneficiaries under the one nation, one tax regime - has been mixed bagged thus far in the calendar year 2017 (CY17), with four out of nine stocks in the sector underperforming the market.

While Blue Dart Express, Gateway Distriparks and Allcargo Logistics have recorded a negative return during this period, Snowman Logistics has gained 13%. Among others, Arshiya and Transport Corporation of India (TCI) have outperformed the market by surging more than 70%, while Sical Logistics and Gati have gained 18%.

By comparison, the S&P BSE Sensex has gained 14% thus far in CY17. The Mid and Small-cap indices on the Bombay Stock Exchange (BSE) moved up 18% and 23%, respectively.

Given the recent run-up in some of these stocks, analysts remain cautious as they do not see gains sustaining for long. Actual benefit to the companies from GST bill implementation will start to accrue only after 6 - 12 months from now, they say.

"Even if the GST is implemented from July, its impact to be visible on the financial performance of logistics firms will take time. Now that the tax rates are known, the movement of goods can be impacted. There can be some destocking where the rates are higher than the existing and the purchase of goods can get postponed where the rates will be lower post the GST implementation. All this will not have a significant impact on the fortunes of logistics firms," explains A K Prabhakar, head of research at IDBI Capital.

Meanwhile, markets have punished the stocks where the corporate earnings failed to meet expectations. Excluding Arshiya, the combined net profit of the remaining eight companies has declined 21.5% to Rs 151 crore in March quarter, as against Rs 193 crore in the previous corresponding period.

For instance, VRL Logistics dipped 9% to Rs 305 on May 22, after the company reported 30% year- on-year (y-o-y) drop in consolidated net profit at Rs 8.38 crore for the quarter ended March 2017 (Q4FY17). It had reported profit of Rs 11.93 crore in the same quarter year ago.

On the other hand, Arshiya's consolidated net loss narrowed to Rs 103 crore in March 2017 quarter from Rs 284 crore in the year ago period. The stock has rallied over 100% thus far in CY17 to Rs 61 levels on the BSE.

The road ahead

Going ahead, analysts see more pain in store for logistics stocks over the next 6 - 12 months as the economy and corporates assess the impact of GST implementation. Even then, they do not expect a runaway rally in these counters.

"The real benefit will start to accrue in the fourth quarter of FY18. There is more pain in store for these companies in the next two quarters. The stocks have already run up on hope. In case there is a disappointment in earnings, the markets will punish these stocks severely. We have seen this in the case of VRL Logistics," Prabhakar says.

That apart, analysts are now getting cautious of the entire mid-and small-cap segments, where most of the logistics stocks operate in. From a near-term perspective they advise taking some money off the table in these counters.

"We do agree that the midcap space is the one which creates a lot of wealth in the long-term. However, the current valuations in select mid-caps is a major concern to us. Silently, wealth has started evaporating in some of the midcap stocks," says G Chokkalingam, founder and managing director of Equinomics Research & Advisory.

Adding: "We continue to advise our clients to play safe - be contend with profits already made in the midcap stocks, including the logistics related counters, and park at least 50% of equity assets in the quality large cap stocks."

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