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Budget 2020: Income tax cuts can revive sentiment and boost D-Street

We also expect the government to provide some relief on LTGC/DD. Yes, personal income tax cuts can revive market sentiment and provide a boost for markets.

December 28, 2019 / 08:41 AM IST
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We expect personal tax cuts in the Budget 2020, and we also expect the government to focus more on growth revival and take a more liberal approach on the fiscal deficit front, said Gautam Duggad, Head – Institutional Research, Motilal Oswal Financial Services, in an interview with Moneycontrol’s Kshitij Anand.

Q) What is your outlook for the year 2020? The year 2019 ended with gains of 10 percent, do you think we could do better in 2020?

A) I expect 2020 to be a story of two halves. The first half will be dominated by growth slowdown and concerns around fiscal stress.

The second half can see some recovery in macro growth and pick-up in corporate earnings. As far as the index level is concerned, we believe the Nifty50 can trade in a range of 11,000 – 13,500.

We also expect the market divergence/polarisation to improve and markets to get more broad-based in the second half.

Q) What are your expectations from the Budget? Do you think we could see a personal tax cut in the coming year? If yes, will it be a major booster for equity markets?


A) We expect personal tax cuts in the Budget 2020. We also expect the government to focus more on growth revival and take a more liberal approach on the fiscal deficit front.

We also expect the government to provide some relief on LTGC/DD. Yes, personal income tax cuts can revive market sentiment and provide a boost for markets.

Q) What are the sectors which are likely to hog limelight in the year 2020 and why?

A) Banking: Market share gains for private banks from PSU banks and NBFC to continue. The asset quality cycle turned around and can drive write-backs.

Telecom: Repairing of balance sheets of telecom players as a consequence of easing competitive intensity in the sector.

Automobiles: BS6 transition and rebound in Auto monthly numbers.

Q) Any top 5 stocks which you think are available at attractive valuations and can still be considered a buy on dips?

A) Here is a list of top 5 stocks which we think are trading at attractive valuations:


ICICI Bank appears firmly positioned to deliver healthy sustainable growth supported by continued investments in technology and expansion in its digital offerings.

The bank has navigated well through the challenging macro environment with limited exposure to newly surfaced stressed names.

It has in fact built one of the highest provisioning coverage in the banking sector. ICICI Bank remains one of our top ideas in the BFSI space, and we estimate RoA/RoE to improve to 1.6 percent/15.7 percent in FY21.

State Bank of India:

SBI is well poised for an earnings recovery, led by its steady operating performance at the PPoP level (15 percent CAGR over FY19-21), recoveries from large NCLT resolutions, and normalization in credit cost to 2.2 percent/1.3 percent in FY20/21 (v/s average of 3.0 percent over FY16-19).

SBI inarguably has one of the best liability franchise (Its CASA mix: 45.1 percent). This puts it in a better position to manage yield pressure due to linking of loans to external benchmark.

SBI is aiming for 0.9 percent-1 percent RoA by FY21, while we conservatively expect RoA/RoE to improve to 0.7 percent/13.0 percent by FY21. Adjusted for subsidiaries, the standalone bank trades at 0.9x FY21E ABV.


Since FY17, UltraTech Cement has grown its capacity by 65 percent to 109.4mmtpa, accounting for 23 percent of its all-India capacity. The company also has one of the highest exposures to the north and central regions, which have the best utilization and pricing outlook.

We expect OCF to be strong at >Rs 80 billion annually. At the same time, capex should be limited to ~ Rs 20 billion each in FY20 and FY21, driving strong FCF generation of > Rs 60 billion  per annum (5 percent yield).

As a result, net debt is expected to reduce from Rs 191 billion in FY19 to Rs 135 billion in FY21. We forecast a CAGR of 30 percent in EBITDA and 42 percent in EPS over FY19-21, driven by a 14 percent CAGR in volumes and better margins. The stock trades at a reasonable valuations of 11x EV/EBITDA.

Crompton Greaves Consumer Electricals:

It is the largest player in the fans and the residential pumps market. We expect rising premiumization in its existing portfolio. Crompton has been able to generate a healthy free cash flow of over Rs 8.2 billion from FY16 to FY19 v/s adj. PAT of Rs 9.8 billion over the same period, indicating FCF/PAT conversion at 0.8.

With strong profitability and an asset-light business model, return ratios are healthy – RoE/RoCE of 40 percent/28 percent in FY19. We expect the return ratios to remain at these levels going ahead.

We like the company for its strong product portfolio, established brand, market leadership, wide distribution network, robust RoE/RoCE profile and healthy free cash flow generating business model.

Ashok Leyland:

We expect cycles within cycles for commercial vehicles (CVs), with good growth during H2 CY19 and weak H1 CY20, though scrappage policy can boost volumes in FY21.

Unlike in the previous cycles, AL is on very strong footing (as it has a lean cost structure and net cash balance sheet) and is focused on adding new revenue/profit pools.

We believe that the worst is over for the CV industry though volumes will remain volatile due to upcoming BS6 transition. Valuations at ~22.7x FY21 EPS and ~11.5x EV/EBITDA are reasonable in view of early recovery cycle earnings.

Q) What should be the investment philosophy for investors in the year 2020?

A) Stick to leaders in categories where the growth horizon is not under threat. Focus on earnings visibility, management quality and yet do not overpay for the same.

Q) Do you think growth has bottomed out in the September quarter? And, the likely outperformers could be the small & midcaps in 2020 compared to largecaps?

A) We expect growth to have bottomed out at 4.5 percent for GDP in the September quarter. However, we believe the recovery will be very gradual. We expect Mid-caps to do better vs. Large-caps in 2020 as growth revives and earnings improve.

Q) Do you think earnings growth will start looking up from FY21?

A) Yes, we do expect the earnings to start looking up from FY21 led by low base of financials and pick-up in automobiles after 3 years of tepid performance. Our Nifty EPS estimates for FY20/21 are at Rs 538/683.

Q) What are your key takeaways or lessons for investors for the year 2019?

A) Markets and the economy can remain divergent in the short term.

During periods of a growth slowdown, valuations for select stocks can defy gravity if their growth and balance sheet is intact.

Management quality makes a huge difference to returns.

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.

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