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Last Updated : Sep 22, 2019 10:39 AM IST | Source: Moneycontrol.com

'Corporate tax cut will boost earnings by 15-20%; HDFC Bank, ONGC, M&M among 20 cos to benefit the most'

"Expect huge FDI inflows into the country in the midst of trade war between the US and China. The bearish trend is over for the market and investors would now look forward to buy stocks in any market correction," said Rusmik Oza, Head of Fundamental Research, Kotak Securities.

Kshitij Anand @kshanand

We expect a 10 percent jump in the Nifty50 and other broader indices based on changes in earnings estimates, and the up move in select high tax-paying companies could range between 15-20 percent based on the revised tax rate, Rusmik Oza, Head of Fundamental Research, Kotak Securities, said in an interview with Moneycontrol’s Kshitij Anand.

edited excerpts:

Q: A big short in the arm by the government to Indian corporate house. Some are even saying that it is the biggest reform since 1991. What are your views on govt slashing tax rate?

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A: This is one big fiscal stimulus which both the market and corporates were looking for. In one shot the Finance Minister has given relief to all the stakeholders.

The effective tax rate of the BSE500 companies works out to be 27 percent for FY19. However, 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.

A 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.

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.

Q: Can we say that the government has given Diwali gift to corporates well in advance and reversed the bearish trend in the markets?

A: Definitely a big YES. This cut in tax rate is the biggest incentive corporates could have wished for. The other measures, when clubbed with the cut in corporate tax rate, is a big sentiment booster.

It will bring in cheers for both local and foreign investors. It would also invite fresh investment in the manufacturing sector as new capacities coming up after Oct 1, 2019 will have only 15 percent tax rate.

We expect huge FDI inflows into the country in the midst of trade war between the US and China. The bearish trend is over for the market and investors would now look forward to buy stocks in any market correction.

Q: If the momentum continues, can we hit a fresh record high by Budget 2020?

A: Yes, we can now look for Nifty possibly hitting a fresh new high by Budget 2020. The impact on earnings will be across future years to that extent stocks prices need to adjust to the higher earnings, keeping valuations parameters same.

A minimum 10 percent upside should get built into future earnings and equivalent upside in Nifty should also come through in future.

Q: What is the fine print on the buyback tax on listed companies? Do you think it will lead to more buyback offers to hit Street?

A: We have not seen the fine print but removal of enhanced tax on buybacks will reinstall confidence in corporates who would like to use excess cash to pay back to shareholders.

Since Dividend Distribution Tax is still very high Buybacks would be the most tax-efficient way of returning capital to shareholders.

Q: Which companies or stocks that are likely to benefit the most from the slash in corporate tax rate?

A: Few companies that have effective corporate tax of more than 35 percent are: ICICI Bank, Vedanta, ONGC, Grasim, BPCL, L&T, Coal India, Zee Entertainment, HDFC Bank, Asian Paints, Britannia, ITC, M&M, IndusInd Bank, Axis Bank, GAIL, IOC, Bajaj Auto, Eicher Motors, and Hero MotoCorp among others.

Q: What are your views on the government which has been proactive at every front to boost the economy and put India back on the $5 trillion economy mark?

A: Till now the government was trying to resolve the issue in bit and pieces focusing on stressed sectors. Those moves were not providing the feel-good factors as they were not amounting to any major fiscal stimulus.

The moves announced on September 20 provides a fiscal room of Rs.1.45 trillion based on the government’s calculation. Reduction in tax and incentives for fresh investment are very broad-based and will lead to actual growth in earnings and feel-good factor.

These measures, when clubbed with the monetary easing being done by RBI, will go a long way in trying to achieve the long term vision of the government.

Q: Do you think FII flows would reverse following the announcements?

A: FIIs will take this move on the tax cut and other announcements, especially on the rollback of enhanced surcharge very positively. We can expect minimum 50-65 percent of the outflows seen post budget (i.e. $ 4.8 billion) to reverse. The moves by other central banks like ECB and Fed are also positive for flows in emerging markets. With today’s moves India could stand out in the emerging markets and we can expect healthy flows in the coming weeks and months.

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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First Published on Sep 22, 2019 10:39 am
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