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Last Updated : Nov 04, 2019 11:36 AM IST | Source:

'Be thoughtful in short-term, market has swiftly rallied near all-time high'

Q2 is giving a hope to the market that the best part of earnings growth will be followed in the second half of the fiscal year due to cut in taxation, post festival season uptick, good monsoon and reduction in interest rate.

Moneycontrol Contributor @moneycontrolcom

Vinod Nair

Market assessed the ongoing Q2 result as marginally better than expected. About 26 companies of Nifty indices declared their results. The outcome is encouraging with a PAT growth of 15 percent year-on-year (YoY) basis compared to the expectation of ~12 percent for the same stocks.

For broad indices like Nifty500, 148 stocks have declared results, similar traction is visible with 15 percent growth in consolidated PAT which is 6.4 percent up on a quarter-on-quarter (QoQ) basis.


This is led by a cut in corporate tax and better performance from sectors like Banking, Cement and FMCG. Weak performances were seen in the Auto and IT sectors.

Based on recent numbers given in media, Auto is seeing some positive signs with traction in retail car sales in the festive season after six consecutive months of fall in sales. Sales have risen by 5 to 7 percent in Navratri, Dussehra and Dhanteras from the last year numbers in the same festive period.

But two-wheeler sales have not improved on a YoY basis, while on a month-on-month (MoM) basis it has. In Q2, the most noticeable are better numbers by the Banking sector, providing a hope that India’s non-performing assets (NPA) problem is normalising.

Q2 is giving hope to the market that the best part of earnings growth will be followed in the second half of the fiscal year due to cut in taxation, post-festival season uptick, good monsoon and reduction in interest rate.

Sentiments in the equity market are also improving due to weak crude oil prices, positive global news from the US-China trade deal and Brexit. In term of valuation, it has reached the high level of 18.5 P/E on a year forward basis for the Nifty.

A part of the recent rally was also in expectation of further reforms from the government with likely cut in direct tax, long-term capital gain tax (LTCG tax), dividend distribution tax, providing an incentive to consumers and the equity market.

The government had cut corporate tax rate which is fuelling the ongoing Q2 result with better than expected PAT growth. While the cut in interest cost and raw materials is providing hope that business outlook will progress further from H2FY20.

Given positive bias, market has edged near to the last high. But we have a real question, based on H1FY20 numbers announced by controller general of accounts, the fiscal position of the government is weak. It will be difficult for the government to provide more stimulus in the near future, since it will impact further tax revenue.

The actual tax revenue for H1FY20 is much below the budget target, net tax revenue growth was only 4.2 percent YoY. The government forecast 25 percent growth in net-tax revenue to Rs 16,496 billion in FY20 from the provisional Rs 13,169 bn of FY19, as per Controller General of Accounts data. It is lower due to the slow economy and cut in corporate tax.

In the last five weeks, the Nifty, Nifty100 and Nifty500 rallied by 11 percent each, respectively. Government’s intention is to become a $5 trillion economy by 2024 and provide more supportive measures. But for more stimulus, the fiscal position of the government needs to be strong.

Going forward it is going to depend on non-tax revenue like divestment and other sources along with control in expenditure.

The market may have to cautious in the short-term and look upon the developments. During the same time, Mid and Small-caps may maintain its positive trend as it has to gap up with the broad market trend.

(The Author is Head of Research at Geojit Financial Services.)

Disclaimer: The views and investment tips expressed by investment experts on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.

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First Published on Nov 4, 2019 11:36 am
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