The recent measures taken by the government can help revive the capex cycle and increase profitability. With an economic revival, corporate earnings should recover and a fresh high in Q4 is possible, Rajiv Singh, CEO, Karvy Stock Broking, said in an exclusive interview to Moneycontrol's Kshitij Anand.
Edited excerpts
Q: What are your views on the government reducing the corporate tax rate? Some are even saying this is the biggest reform since 1991.
A: Definitely, this is one of the biggest reforms since 1991. A high corporate tax rate meant that Indian companies were not competitive and this move helps address this issue, and should also boost FDI. Reduction of corporate tax has been on the agenda for a while, but this is a strong and decisive move. The cut should help in boosting the capex cycle, also, it gives companies space to cut prices to boost demand. The corporate tax cut should go a long way in a revival of the economy.
Q: Can we say that government has given the corporates a Diwali gift in advance and reversed the bearish trend in the market?
A: The immediate impact will be a boost to business confidence, which had taken a hit in the last couple of quarters. The measures can help revive animal spirits in the economy, and this will help in reviving the capex cycle, which has suffered in the last two quarters. Now the companies have two choices, first, they can retain tax benefits, or secondly they can reduce the price of their goods and services, increasing volumes, leading to better results from corporate India. This move should reverse the negative trend in capital markets.
- Q) If the momentum continues, can we hit a fresh record high by Budget 2020?
A: The measures can help in reviving the capex cycle, increasing profitability of firms. With an economic recovery, corporate earnings should recover, and a fresh high in Q4 FY2019-20 is a possibility. However, there are risks to watch out for which may affect the markets in the next few months.
The movement of the crude oil and currency prices will be vital, followed by the tensions in the Middle East and developments between the US and China on the ongoing trade war. I believe that despite these risks, equities can post a strong rally.
Q: What do you make of the buyback tax move? Do you think it will lead to more buyback offers?
A: The buyback tax will not apply to companies which had announced it before July 5, and these companies should not complete buybacks. However, it will apply on buybacks announced after July 6, so I don't expect an increase on buyback announcement. For investors, another notable change, however, is the rollback of the enhanced surcharge on capital gains, which should enhance returns.
Q: Which companies or stocks are likely to benefit the most from the corporate-tax cut?
A: With the double bonanza of festive cheer and reduced tax rate, companies like Asian Paints, Pidilite Industries, Hindustan Unilever, Avenue Supermarts, Bata India, Havells, Voltas, L&T, ACC, Bajaj Finance and Cummins India are likely to do well in the medium term. Among the other largecap stocks, counters like Reliance Industries, M&M, Maruti Suzuki and Bajaj Auto may generate good returns due to their valuation comfort.
Q: What are your views on the government being proactive to boost the economy and putting India back on the $5-trillion economy mark?
A: With a number of measures like corporate tax rate cut, instructing the PSU bankers to go for loan melas and recasting the debt to address the NPAs in MSMEs, the government has started to target both near-term sentimental issue and long-term private investments growth which can benefit economy in the long run.
I also believe that a number of measures will be forthcoming in the coming days-- these may include FDI liberalisation, privatisation of PSUs and move on labour and land reforms. The announcements over the last few days make me believe that the government is putting in all efforts to make sure that we achieve 5-trillion dollar economy.
Q: Do you think FII flows will reverse following the announcements?
A: Most long-only funds remain positive, but were hesitant in committing money on account of the economic slowdown as well as global uncertainty. I expect that FIIs should start investing in the Indian market over the coming months, however, a global slowdown and an escalation of trade wars is a risk.
- Q) What should investors do if they have missed the September 20 rally?
A: Investing is always a continuous process and nobody can time the market. Volatility is a part of the investing process. The Nifty witnessed its biggest move in the last 10 years after the announcement, gaining more than 5 percent in a single day. But, still medium to long-term investors can invest in the companies with strong balance sheets, sound growth and leader in their respective sectors. While short-term movements are harder to predict, the undertone of the markets will remain strong in the short to medium-term perspective.
Q: Data suggests that bears control October, as the Sensex closed in the red in six of the last 11 years. What are the big events to watch out for, and how do you see the market moving in October?
A: I believe that markets should start moving up from now on, in anticipation of an economic recovery. I expect the RBI to cut rates in its meeting in October. I would watch out for central bank meeting, the US Fed, ECB and BoJ have meetings scheduled towards the end of the month. I would also watch out for the US-China trade negotiations.
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