Bears are clearly on the back foot after the government announced a reduction in the corporate tax rate from ~34 percent to 25.17 percent thereby fulfilling its key agenda of implementing the Direct tax Code (DTC) last week.
Indian market witnessed its single biggest intraday gain in the last 10 years which caught bears on the wrong side of the road last week. The S&P BSE Sensex rallied by nearly 2,000 points to climb Mount 38,000 while the Nifty50 reclaimed 11,200 levels.
Bears are clearly on the back foot after the government announced a reduction in the corporate tax rate from 34 percent to 25.17 percent, thereby fulfilling its key agenda of implementing the Direct tax Code (DTC) last week.
The reform amounts to tax savings of Rs 1.45 lakh crore (21 percednt of the total corporate tax base of FY 2019) or US$20 billion, said a Sharekhan report. This is a significant amount of cash that could considerably boost sentiment and also encourage the start of an industrial capital investment cycle.
This is a massive trigger for revving up growth and, more importantly, resurrecting sentiments that were down in the dumps, suggest experts. The move will not only boost earnings but also revive demand and lift investor sentiment, they said.
“Our back of the envelope analysis of the Nifty earnings suggests an EPS upgrade of 6 percent each for FY20E and FY21E. We now expect Nifty EPS to grow at a CAGR of 20.3 percent in FY19-21E versus 16.9 percent earlier,” Pankaj Pandey, Head Research at ICICIdirect said in a report.
“However, from a granular perspective, sectors like banking and FMCG are expected to grow at a CAGR of 48.2 percent and 18 percent, respectively versus earlier CAGR of 42.2 percent and 12.2 percent. On the flip side, sectors like IT and pharma are not expected to see any upgrades on account of existing lower tax rates, which is making the Nifty EPS upgrade optically look to be in single digit,” he said.
The measures announced by the government will be a game changer for the economy and markets, and create a new normal. The markets and specific stocks will readjust to new earnings estimates – so plenty of action is expected on D-Street in September as well as in October.
There are 262 companies in the BSE500 whose effective tax rate has been above 30 percent. These 262 companies account for 89 percent of the overall tax of BSE500 companies. The average tax rate of these 262 companies works to be about 37 percent.
“Assuming 25.17 percent tax rate means a huge jump of more than 18 percent in earnings for these 262 companies. Overall, we can expect 8-9 percent jump in earnings of the BSE500 companies assuming the new tax rate,” Rusmik Oza, Head of Fundamental Research, Kotak Securities told Moneycontrol.
“We also expect a 10 percent jump in the Nifty50 and other broader indices based on changes in earnings estimates. The up move in select high tax-paying companies could range between 15-20 percent based on the revised tax rate,” he added.
We have collated a list of stocks which are likely to benefit the most from the corporate tax cuts:
The measures taken have the potential to be a game-changer, both for the economy and the equity markets. We see it as the beginning of a new growth cycle.
Our top preferred picks, that also would gain from the tax cuts, are Axis Bank, Kotak Mahindra Bank, Bajaj Finance, Larsen & Toubro, Jubilant FoodWorks, Mahanagar Gas, Bata India, Kalpataru Power, and Polycab India.
Amar Ambani, Senior President, Head – Institutional Equities, YES Securities
The market is in a consolidation phase since early 2018 and the consolidation should last till mid-2020 before we embark on a sustainable rally. On midcap stocks, though the bulk of the froth on midcaps has dissipated after the massive retracement in 2018, a sustainable resumption of rally in this counter will take another 12-15 months at least.
Among largecaps, we like Kotak Mahindra Bank, ICICI Bank, RIL, and HDFC Bank. In the midcap space, we like Cochin Shipyard, and Birla Corp.
Prayesh Jain, Lead Analyst, Yes Securities
Many companies were paying more than 30 percent tax after the expiry of tax benefits for their plants. Hence, these companies would benefit from the reduced overall corporate tax rate cut.
These measures will increase the room for additional discount offerings by these companies (current discounts already at an all-time high), which can possibly drive volumes in the ensuing festive season.
Auto Sector can see increased FDI inflow considering the lower tax rate of 15 percent for new manufacturing units. The biggest beneficiaries include stocks like Ashok Leyland, Eicher Motors, and Hero MotoCorp.
Cement companies, which currently have higher tax rates would benefit significantly from the reduction in the corporate tax cuts. ACC and UltraTech are expected to benefit the most.
While the EBITDA remains unchanged by the tax cuts, we value the companies using implied P/E multiple based on our earlier targets. Accordingly, ACC and Mangalam Cement get upgraded to Buy from Hold while other companies’ ratings remain the same.
Titan, Bata, Page Industries and TTK Prestige will be major beneficiaries of lowering of the corporate tax rate within our retail and textile sector coverage as these companies are paying tax in the range of 29-35 percent. The tax cuts would lead to enhanced profitability for these companies.
Source: Money Control