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

As the nation prepares for implementation of the goods and services tax (GST) laws, the performance at the bourses of transport and logistics companies – once considered as one of the key beneficiaries under the one nation, one tax regime – has been a mixed bag thus far in calendar year 2017 (CY17).

Five of the 10 stocks in the sector have been underperforming the market. While Blue Dart Express, Gateway Distriparks and Allcargo Logistics have recorded a negative return in this period, Arshiya and Transport Corporation of India have outperformed, surging over 60 per cent. By comparison, the S&P BSE Sensex has gained 13.8 per cent thus far in CY17. The mid-and small-cap indices on the BSE have moved up 17 per cent and 21 per cent, 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 implementation will start to accrue only after six to 12 months from now, they say.

“Even if GST is implemented from July, the impact on financial performance 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 ones and the purchase of goods can get postponed where the rates will be lower after 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.

The markets have punished stocks where corporate earnings failed to meet expectations. VRL Logistics dipped nine per cent to Rs 305 on May 22, after the company reported a 30 per cent year-on-year (y-o-y) drop in consolidated net profit at Rs 8.4 crore for the quarter ended March. Arshiya's consolidated net loss narrowed to Rs 103 crore in the quarter from Rs 284 crore in the year-ago period; the stock has rallied over 100 per cent thus far in CY17.

Analysts see more pain in store for logistics stocks over the next six to 12 months as the economy and companies 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 companies in the next two quarters. 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.

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

“We agree that the mid-cap space is the one which creates a lot of wealth in the long term. However, the current valuation in select mid-caps is a major concern to us. Silently, wealth has started evaporating in some of these stocks,” says G Chokkalingam, managing director of Equinomics Research & Advisory. “We continue to advise our clients to play safe - be content with profits already made in mid-cap stocks, including the logistics-related counters.”

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