The latest fiscal booster provided by the Modi government on September 20 has fostered investor sentiment driving the bears out as bulls made a noteworthy entry. The market rallied more than 8 percent in two consecutive sessions, logging the biggest two-day gain.
Among the many measures, FM Nirmala Sitharaman announced, the corporate tax cut from 25 percent (from 35 percent inclusive of surcharge and cess) stood out the most. This has lead brokerages to raise their full-year earnings estimates, turning them bullish on the equity market.
"We are much more excited by these measures purely because of the impact they will have on the earnings trajectory for the immediate and the medium term. They have also just come in at the time when the last of the hopefuls were giving up. Overall, we expect these measures to help put in a bottom for the market valuations as well as worsening sentiments," said DART Research which upgraded its stance on India to positive from negative.
Despite the massive turnaround, the slowdown may persist for the next few months given the deep inroads it has made across sectors, added the brokerage.
Nonetheless, most brokerages raised their Sensex and Nifty target by 15-20 percent from September 19's closing levels and also raised earnings estimates for sectors such as banking & financials, FMCG, auto.
Here is a list of 16 stock where brokerage upgraded their rating to buy:
Brokerage: ICICI Securities
On a standalone basis, the effective tax rate for M&M was at 24.2 percent in FY19. We, however, had built-in 30 percent tax rate for FY20E & FY21E, going forward. Revising the same to 25.2 percent leads to 8 percent upgradation in our PAT estimates for FY21E.
M&M is the market leader in the domestic farm equipment space. We upgrade the stock to buy, valuing the company at Rs 660 on SOTP basis, valuing the base business at 6x EV/EBITDA, 1x book value to investment in MVML & assign 30 percent holding company discount to its other investments.
The effective tax rate of Bajaj Finserv is around 32-33 percent, which implies around 750 bps benefit on the tax rate on implementation of the new tax rate.
We continue to remain positive on lending, as well as, the insurance business. Given the cut in corporate tax, earnings estimates are revised upwards by around 13 percent in FY20-21E.
Therefore, we upgrade our target to Rs 8,800 and rating from hold to buy.
Normal tax rate earlier was around 34-35 percent. With the tax rate change (from 32.4 percent to 25.5 percent), our PAT estimates for FY20E & FY21E is revised upward by around 14 percent.
Going ahead, a slew of measures by RBI & government coupled with the arrival of festive season is expected to speed up banks credit growth in coming quarters. Accordingly, we upgrade our rating from hold to buy with a target price of Rs 1,400 valuing it at 3.7x FY21ABV including Rs 75 per share for HDB Financial Services.
For FY19, tax rate at Goodyear India stood at 35 percent, thereby making it a key beneficiary of reduction in the corporate tax rate.
Building in 25.2 percent tax rate for FY20E & FY21E, our PAT estimates gets upgraded by around 13 percent going forward.
Goodyear is a market leader in the domestic farm equipment tyre space and possess one of the best B/S amongst its peers. With a decline in domestic rubber prices, as well as, upgradation in earning estimates we upgrade the stock to buy. We value Goodyear at Rs 1,135 i.e. 20x FY21E EPS of Rs 56.7/share.
For FY19, the effective tax rate of Tata Steel (standalone operations) was around 35 percent, implying around 980 bps benefit post tax cut
Going forward, on the back of likely improvement in market conditions, we also marginally upgrade our FY20E and FY21E EBITDA per tonne estimates. We model EBITDA/tonne of Rs 11,650 per tonne for FY20E (upward revised from Rs 11,500 per tonne earlier) and Rs 12,500 per tonne for FY21E (upward revised from Rs 12,000 per tonne earlier). We value the stock on an SoTP basis and arrive at a target price of Rs 450. We upgrade the stock to buy.
The recent tax cut by the government from 33 percent to 25.2 percent is likely to boost earnings of Asian Paints (APL) by around 12 percent each for FY20E and FY21E. We change our earnings estimates along with ratings accordingly. We believe a tax cut would help demand revival in the decorative paints segment, especially in the premium category of products. This would also help organised players to gain market share from the unorganised segment, which is around 25 percent of the domestic paint industry.
We model revenue, earnings CAGR of 16 percent, 27 percent, respectively, in FY19-21E led by strong volume growth of around 14 percent. For FY19-21E, we believe APL would report strong earnings growth supported by volume growth, change in product mix and tax cut in FY19-21E. This coupled with strong balance sheet position (with RoE and RoCE of 32 percent and 27 percent in FY20E and 33 percent and 29 percent for FY21E, respectively) and average dividend payout to the tune of around 50 percent (despite heavy capex plan) would justify its premium valuation.
We change our rating from hold to buy with a revised target price of Rs 1,950 per share.
Brokerage: Kotak Institutional Equities
We upgraded ITC to buy and revised the target price to Rs 320 from Rs 315. We upgraded EPS per share to Rs 12.3, Rs 13.7 and Rs 15.1 from Rs 11, Rs 12.2 and Rs 13.4 for FY20-21-22 respectively after cut in corporate tax rate.
Brokerage: Emkay Global
The benefits of corporate tax cuts are expected to be partially passed on to consumers. The increase in corporate profitability due to tax cuts should also reduce concerns of job losses and lower increments in service segment, resulting in better PV and 2W demand.
We expect the auto sales cycle to witness a gradual recovery due to the confluence of factors such as increasing discounts, better rural sentiment, lower interest rates, higher government spending and a possible introduction of the scrappage policy.
We raise target prices of stocks under coverage by up to 44 percent as a result of the reduction in tax expenses, increase in valuation multiples to factor in a gradual recovery of the sales cycle and rollover to Sep'21 estimates (Mar'21 earlier).
We upgraded Maruti to buy with a target price of Rs 7,500 (Rs 5,900 earlier) and Bajaj Auto to buy with a target price of Rs 3,350 (Rs 2,320).
Britannia Industries, Colgate Palmolive
Given the weak demand scenario, we expect companies to partially use the tax benefit to improve volume growth through higher A&P spends. However, unlike GST, the pass-through to the consumer is likely to be less, with most of the benefits being retained by companies.
We increase our FY19-22E EPS by 4-15 percent for our coverage and upgraded Britannia and Colgate Palmolive to buy from hold.
Emkay Global also upgraded rating to buy for Kalpataru Power Transmission, KEC International, Siemens and Triveni Turbines.
Brokerage: Investec Securities
We upgraded TVS Motor to buy (from sell) given the valuation comfort post 29 percent (up 2 percent on Sensex) correction over the last one year. TVS' strong product portfolio and focus on growing segments (premium bikes, scoters, exports) coupled with our expectation of margin gap narrowing with peers should help TVS deliver EPS CAGR of over 23 percent (FY20-22E), best amongst the peers.
Valuation of TVS Motor is attractive considering its ability to deliver strong earnings growth (best amongst peers) driven by a) market share gains and b) EBITDA margin expansion.
Finally, industry checks and strong focus on R&D instils confidence in TVS' ability to successfully navigate into the era of EVs, which could drive massive changes in the industry.
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