I would not be surprised if we see new record highs on Sensex by Diwali: Vinay Pandit

A. This is a big shot in the arm, though a tax reform should not be counted as a major reform. Short covering will keep the bears busy for now.

The upside in corporate earnings is likely to keep the market momentum positive while we may see some short-term profit-booking by traders.

Despite initial profit-taking, large and mid-cap stocks with solid fundamentals will continue to see 5-10 percent rallies as earnings revisions are captured.

One can expect the next leg of the rally in small and mid-caps with large moves of 20 percent in select quality counters. However, one needs to see this with a bit of pragmatism.

Several key sectors like cement, power, steel and mining have incentives from Capex; while sectors like auto are already in the tax bracket of 27-28 percent. Hence, the beneficiaries of these will be limited to select sectors and companies.

The government had already moved to 25 percent tax (in Budget June 2019) for companies having revenues up to Rs 400 crore which, as per government data, would have covered 99.3 percent of the companies.

We analysed the data of companies listed on BSE with turnover greater than Rs 1 crore – these totalled to 6,082 companies – and the total tax payout by these accounted to Rs 202,592 crore (on a standalone basis)

As many as 80 percent of the companies (with turnover from Rs 1 crore – 400 crore) contribute to 2.4 percent of the total tax paid.

The rest 20 percent of the companies (with a turnover of Rs 400 crore and above) contribute to 97.6 percent of the total tax paid by these companies (Rs 197,737 crore) – now falling under the purview of the new benefit subject to incentives

Further, there will be a write-down of deferred tax assets for companies, hence will impact P&L. The net impact from the tax benefit announced will be lower this year i.e. FY20 in a scenario of DTA write back and higher from FY21 onwards.

For large-format manufacturing, we are now competing with large Asian and South-East Asian counterparts and hence, a positive reform from a ‘Make in India’ perspective.

However, the stated impact of Rs 1.45 lakh crore will impact fiscal deficit numbers and will have to be filled up by significantly large divestments in public sector utilities (PSUs), a listing of some large ones like IRCTC, divestment of landholdings under the central government and their PSUs, amongst others.

The time is running out and the government will have to move fast on these steps. One can expect the pace of divestment now to increase significantly.

The additional benefit given for new manufacturing setups is even bigger and will speed up the Capex cycle for setting up of new plants. This is an opportune time to attract new capacities from players looking to move out of China.

Further, the moves have turned out to be a positive reform for BFSI stocks as well (though not intended for them alone), as they will see a direct reduction in their tax outgo, which will directly and positively impact ROEs and internal accruals, which in turn will add to the core Tier 1 capital.

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. Yes – not only for corporates but also for investors. This will help reverse the bearish pessimism in the markets. We expect huge short covering on September 23 (Monday) as well, which will further give a leg up to the rally seen on September 20 (Friday).

Earnings for listed entities will move up by 10–20 percent adjusted for the loss of other exemptions. However, while this is a sentimentally positive development, demand improvement is going to be a key factor and challenge for the government especially in autos, consumers and consumer durables, retail, apparels, etc.

Also, the impact of Deferred Tax Asset write back will not allow companies to derive the full benefit in FY20. We expect the full benefit of lower tax to be derived only from FY21 onwards.

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

A. If the momentum continues in terms of reforming and improving the current scenario of slowdown, economic reform and addressing key issues, we would not have to wait that long.

A GST clarification and new BSVI introductions in the auto sector, coupled with continued reforms, will help investors see a new high in Diwali 2019 itself.

The all-time high of the Sensex is 40,312, which is just 2,300-odd points from the current level.

With a slew of new announcements to be expected, one can expect this mark to be breached by Diwali itself subject to issues being addressed with respect to demand and economic growth.

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. Going by the news, only those buybacks announced, not completed and not withdrawn before July 5, 2019, should now go through.

We await the fine print for further comment. But, this will not lead to any new buybacks hitting the street except for the ones which were announced and not completed or withdrawn.

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

A. Banking stocks (including NBFCs), auto companies (though minimalistic since already at approx. 27-28 percent), consumer companies (FMCG, retail, consumer discretionary stocks, durables), pharma companies (adjusted for R&D benefits), and PSUs should be some of the key beneficiaries of this slash in corporate tax rate.

However, one should only focus on companies whose turnover was above Rs 400 crore, since all others were already covered in the June 2019 Budget.

The other point to look out for in the fine print would be the adjustment for deferred tax benefits.

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. Proactiveness was needed a bit earlier, which would have not led to the unnecessary mayhem in the markets. The 2,000+ point rally on Sensex (one of the biggest I have seen in my career of 17 years in a day, other than a change in the government) is a clear indication of the extent to which investors were thirsty for positive news.

We expect some common sense to prevail in the next three to four days, although until then the broader markets would have moved up 2-3 percent. We expect individual stocks and portfolios to move up between 10-20 percent depending on their composition.

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

A. I believe FII flows will halt for the moment, not reverse. FIIs will look for the continued commitment of the government for growing the Indian economy, relaxation on the LTCG tax (NIL tax beyond three years) and fiscal prudence before reversing the flows.

However, we expect FDI to increase led by “Setup in India” on account of the lower tax rate for existing businesses, and further lower rates for new capacities. The government has already eased the process of setting up a business which should aid significantly fresh FDI inflows.

Q. What should investors do if they have missed the rally on Friday?

A. Identify the good-quality companies and invest in them for the medium term.

Q. Last 10-year data suggests that bears controlled October as Sensex closed in red in six out of the last 11 years. What are the big events to watch out for, and how do you see markets moving in October?

A. That is almost a 50:50 ratio, so the ball can roll either way depending on which side you are on. The individual tax rate cut, removal of the super-rich surcharge, relaxation on LTCG (nil above 3 years), and reduction in GST for cars below a certain engine capacity or ex-showroom price are further triggers expected by the market.

However, to get the investment cycle moving, the government needs to speed up the delivery of some big capex plans like the linking of rivers, seaways, and waterways, and the modernization of transportation systems.

Overall, I believe we are in for good times, and to reiterate my caption in a recent article: “It’s teji time again”. One has to keep buying quality stocks here.

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