While the sentiment in the market has turned quite a bit and there have been more enquiries happening in auto dealerships, we have not seen major demand revival in consumer goods and services. Hence, no significant improvement in sales and earnings may be expected, Rajat Bose of rajatkbose.com tells Moneycontrol's Sandip Das in an interview.
Q. Some are saying the corporate tax cut it is the biggest reform since 1991. What are your views on the government slashing tax rate?
A. Definitely, these corporate tax cuts are among the most significant reform measures over the last three decades but hailing it as the biggest reform since 1991 is an overstatement.
The Union Budget of 1997 also contained several significant reforms apart from the initial reforms to usher in economic liberalisation in 1991.
However, it must be said that the low effective corporate tax rate of 17.1 percent for new manufacturing set-ups would go a long way in attracting both domestic and overseas direct investments.
Q. Can we say that the government has given a Diwali gift to corporates and reversed the bearish trend in the markets?
A. Surely, the corporate sector has received a great bonanza in the form of steep tax rate cuts, and it would surely boost their profitability. However, as the initial estimates are made by the credit rating agency, CRISIL, the tax giveaway amounts to roughly Rs 37,000 crore and not Rs 1,45 lakh crore as stated by the finance minister during the announcements.
Assuming CRISIL has done a fair job post the tax cut announcements, their Rs 37,000 crore figure is a little of one-fourth of the Rs 1.45 trillion. The earnings boost will thus not be as great as we initially thought. One thing, of course, is that unlike the last five years there may not be earnings downgrades this year.
Has it reversed the bearish trend in the equity market? Well, initial sharp recovery notwithstanding only time alone will tell if it truly ended the bear market.
While the tax cuts might count as structural reform and they surely are a welcome gesture in terms of fulfilling the Make in India initiative, they do not immediately boost the sorely needed demand revival for these measures are essentially supply-side initiatives.
Moreover, be it GSK Pharma, Maruti Suzuki or Bajaj Auto they all said that with the money saved they would either go technology up-gradation or new corporate social responsibility (CSR) projects.
No big product price cuts were announced to boost demand. Any such move of big price cuts would depend on a case by case basis, blanket price cuts by corporates to revive demand are still not visible.
Q. Which companies or stocks are likely to benefit the most from the slash in corporate tax rate?
A. Pharma, auto, steel, financial services and mining stocks - the last three sectors top in both in terms of taxes paid and highest savings in tax outgo after the new measures.
In terms of high tax savings the auto components, power equipment, media and entertainment, paints, capital goods, fertilizers, distilleries and breweries, paper and consumer electronics belong to the upper echelon.
Q. Companies are scheduled to come out with Q2 earnings. How do you see the results pan out, and what are your expectations?
A. While the sentiment in the market has turned quite a bit but we have heard that only in September there had been more enquiries happening in auto dealerships. But we have not seen any major demand revival in consumer goods and services. Hence, no significant improvement in sales and earnings may be expected.
Q. With gold at a six-year high, where do you see the yellow metal heading, and how will you trade it?
A. While it is too early to call a top in gold prices but it should not be bought at current prices but only on some significant declines - a 5-7 percent slip in international gold prices would make it quite attractive again.
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