A fiscal stimulus of Rs 1.45 lakh crore has finally come to cheer the markets and the economy, and it is a big boost to honest tax paying companies who were paying full tax rate.
The market clocked biggest single-day gain on September 20 as the bulls got a long-awaited fiscal push that raised hopes of strong earnings and growth.
The government’s decision to cut corporate tax to 25 percent from 35 percent with exemptions, give relief in minimum alternate tax and an attractive rate of 15 percent for new companies being set up after October 1 and commencing operations before 2023 lifted benchmark indices 6 percent.
The BSE Sensex gained nearly 2,300 points to hit 38,000 levels and the Nifty climbed more than 650 points to move towards 11,400 levels intraday, driven by rally in most beaten down stocks such as auto and banks.
The benchmark indices closed with biggest single-day gain in the last 10 years.
Experts described the measures as yet another surgical strike on bears and negative sentiments that would result in corporates getting more money to make investments and also ease their liquidity concerns.
In fact, most of them see the announcements as a historical decision, bigger than Manmohan Singh’s move to open the Indian economy in 1991.
"This is a path-breaking move delivered by Modi 2.0 government in the interest of economy at the cost government exchequer in times of crises which will go down well in the history," Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote, told Moneycontrol.
So, the question now is whether market has priced in all positives or will it see more upsides?
Most experts say the Nifty could hit 11,700 in a couple of months and top the psychological level of 12,200 by end of 2019, citing strong earnings growth ahead.
According to them, after bringing down the repo rate by 110 bps to 5.4 percent in 2019, the RBI is likely to cut rate by another 50 bps in upcoming policy meetings, which along with transmission would give more boost.
"We expect Nifty to move towards 12,200 by December 2019, banking on the strength of blue-chip counters," Amar Ambani, Senior President, Head - Institutional Equities, Yes Securities told Moneycontrol.
But paradoxically, broader markets will remain in a consolidation phase given that that consumption is in a cyclical downtrend, the economy has slowed and liquidity issues remain, he said.
Foram Parekh, Fundamental Analyst at Indiabulls Ventures said, "With all the reforms galore taken to date by our FM in the right direction, we expect Nifty to touch 12,000 levels by December 19."
"The corporate tax cut will expand the bottom line of the companies and the profits will be utilised to start the capex cycle. We further expect the RBI to slash at least 50 bps rate cut till March 20, thereby infusing growth in the system. We believe GDP to bottom out in Q1 and can clock in a 6.5 percent GDP growth rate in FY20," he explained.
Romesh Tiwari, Head of Research at CapitalAim, expects the Nifty at 11,700 soon.
"The immediate impact on the market is due to unexpected cuts on tax rates and a surcharge that has also triggered heavy short covering and long build-up. Short-term trend is changed to bullish and we may see the Nifty crossing 11,700 soon, led by auto, capital goods, realty and infrastructure companies," Tiwari said.
A fiscal stimulus of Rs 1.45 lakh crore has finally come to cheer the markets and the economy, and it is a big boost to honest tax-paying companies.
The effective tax rate of the Nifty companies on an aggregate was 26 percent, which will now come down to 25.17 percent. There are only 20 Nifty companies which paid more than 30 percent effective tax rate and accounted for 43 percent of overall net profit in FY19.
"Any company paying 33 percent tax rate will see its earning go up by 12 percent. Overall, we can see the Nifty earnings going up by around 5-6 percent in FY20, as the effective tax rate was already lower at 26 percent. Add the sentiment booster angle and the way this will be taken positively by FIIs and local investors, we can expect the Nifty to rally by 9-10 percent from today’s low of around 10,700. Hence, 11,500-11,600 is very much possible on the Nifty without considering any other factor," Rusmik Oza, Head of Fundamental Research, Kotak Securities, said.
He said FIIs would take the announcement very positively and flows would drive the market going forward.
Companies paying more than 30 percent effective tax rate will see upside of anywhere between 12-20 percent, based on the changes in earnings estimate (just on Friday’s announcement), he added.
On the technical front also, experts say the Nifty has bottomed out and may move towards 11,600.
"The market maintained its previous low of 10,637, forming a higher bottom today and reversed all losses. Market has turned upward for a longer time and is a classic bottoming out formation on all time frames and we would see the levels of 11,600," Shrikant S Chouhan, Senior Vice-President, Equity Technical Research, Kotak Securities, said.
Buying is advisable at current levels and more on declines at around 11,100/11,000, which would be a major support, he added.
Mustafa Nadeem, CEO, Epic Research also said "10,700-10,800 is now set to be a strong base for the Nifty and we may see continuity in positive momentum on any dips from here on".Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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