With upcoming long festival season after witnessing two quarters of muted growth, we could see increase in competitive intensity, increased spend on marketing and deeper discounts from companies to garner volume growth.
The second term of Prime Minister Modi has brought most of the much-awaited reforms - be it social, political or financial in a very short time as compared to any previous terms.
Coming to the financial reforms, the two key important decisions taken in the past few days are one the transfer of reserves from the Reserve Bank of India (RBI) to the government. The second biggest reform done last week was the corporate tax cut where the Centre reduced the tax rates for almost all listed companies.
Both these decisions are significant on their own and invoke a varying degree of thought, perception and debate from different market participants. These decisions also signal unshackling of India’s financial policy and a shift in its thought.
Coming to the corporate tax reforms, the government has again shown a shift from popular demand-side response to revive economic growth and has opted for more nuanced and structural supply-side reforms. This could not only revive economic growth but could also keep inflation in check. This reform has at the outset been taken positively by corporate India which are expected to benefit most in terms of higher earnings growth.
In terms of data based on the latest financial year, the business-to-business (B2B), especially domestic manufacturing companies are visibly the key beneficiaries.
Sectors ranging from core manufacturing companies in Metals & mining, Telecom, Paper, Hospitality, Agri, Electricals, and Engineering amongst others could be getting more than 15 percent of the nominal increase in their profits after tax.
While most companies downstream manufacturing companies, services, export dominant businesses, and business-to-consumer (B2C) businesses stand at the lower end of the list in terms of nominal benefits post new tax rule.
However, if we look more closely the dynamics of how this tax relief could play out in the medium-term and analyse strengths, weaknesses and pricing power of each sector and companies within these sectors and also include the subjective role played by the different management style and choices they make. Then relying on the above data-based analysis becomes more of like missing woods for the trees.
Generally, B2B businesses and core manufacturing industries lack significant pricing power due to the nature of their businesses as it is more focused on volumes and economies of scale than the pricing alone.
Better pricing, of course, is beneficial but not crucial and definitely not permanent and adds to cyclicality. Thus, at the most, the benefit could be one half in the near term and almost about one fourth in medium-term and rest could flow towards more downstream companies and B2C businesses.
The B2C and services based businesses seemingly look like they are getting lower benefits as many are already around the new tax regime. But, the actual gains could in medium-term be higher than what is perceived today as most of these businesses have significant barriers, technological intensity, pricing power and specialisation built-in their product portfolios.
With the upcoming long festival season after witnessing two-quarters of muted growth, we could see an increase in competitive intensity, increased spend on marketing and deeper discounts from companies to garner volume growth.
Hence, the questions arising for investors and market participants are how this new taxation disruption could actually unravel going ahead in the medium term and how exactly they should position their investments to generate alpha for long term.
Well, for long term investors, we have found few key themes they should keep in mind while identifying for the potential investment in a stock.
Firstly, what we are witnessing in the Indian economy is more of a gradual disruption happening in many areas and less of a structural slowdown. Secondly, the increased role technology is playing in every sphere of business is also changing dynamics of the businesses along with reducing response time for the incumbent to adjust and react, making them vulnerable.
Hence, the simple strategy small and medium investors should currently follow is to invest in very simple business model, high technology intensity like patents etc., businesses with large brands, large distribution network and in sectors which has higher regression coefficient with GDP like consumers, services, banking, technology and similar characteristics and leave the complex and cyclical business for more complex strategy which demands more attention to details.
The author is Head Fundamental Research (Investment Services) - AVP Equity Research at Anand Rathi Shares & Stock Brokers.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.The Great Diwali Discount!
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