Indian markets have under-performed for a while due to both domestic and global factors. The recent measures taken by the government, rate cuts by the Reserve Bank of India and a reasonably good monsoon will attract fresh inflows and provide strength to the market, Himanshu Gupta, Vice President, Research, Globe Capital Markets, said in an exclusive interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpts:
Q: What are your thoughts on the government’s move to cut corporate tax? Some are even saying that it is the biggest reform since 1991.
A: Absolutely yes, it shows the firm commitment of the government to adopting whatever-it-takes attitude. It is the first major favourable step taken on the economic front. This rate cut is a structural fixing and is going to help companies to invest back into businesses, improve the liquidity, reduce debt, distribute higher dividends and improve the capex cycle. On the other hand, it is likely to encourage foreign funds to invest in India, especially in manufacturing.
Q: What is the impact you see on earnings in FY20 and which sectors and stocks will see major earnings upgrade?
A: We see this tax cut to transform into an 8-10 percent upward revision of the Nifty earnings in FY20. Domestic focussed sectors such as auto, FMCG and banks are likely to get major upgrades, while few sectors like telecom, oil marketing, retail banks and metals are also likely to get a potential benefit in FY20 earnings estimates and are likely to see a 10-20 percent EPS upgrade.
On the stocks front, Bharti Infratel, ONGC, BPCL, Tata Steel, Eicher Motors, IndusInd Bank, Asian Paints and Britannia are likely to get earnings upgrade on account of lower taxes. In addition to recurring benefits from the tax cuts, few stocks like Reliance Industries and UltraTech Cement will also get onetime benefit from deferred tax liability and can therefore get earnings upgrades as well.
Q: Do you expect the upward momentum to continue and can we hit a new record high by Budget 2020? What are levels you see for the Sensex and the Nifty by Budget 2020?
A: Indian markets have been underperforming for a while due to both domestic and global factors. I think host of steps taken by the government, rate cuts by RBI and a reasonably good monsoon will attract fresh inflows and provide strength to the market.
We expect the Nifty to test 12,500 by March 2020, while the Sensex is also expected to move higher towards 43,000 in the same time frame. Having said that, levels of 11,800 still remain a supply zone, once the Nifty clears this range decisively, it is likely to gain further broad-based momentum on the upside.
Q: Do you expect more buyback offers to hit Street after the relaxation in the buyback tax?
A: Yes, IT services firms often opt to return surplus cash to shareholders through the buyback route and the announcement of a 20 percent tax in the budget seemed to have dampened the plans of many IT companies that were piling on huge cash and surpluses.
The step would definitely help the listed companies that have not factored the tax while announcing the scheme. Since the buyback is usually aimed to return the wealth of the shareholder and boost the share price, we expect that the rolling back of the tax will attract more buybacks in future.
Q: Which companies or stocks are likely to benefit the most from the corporate tax cut? Which are the stocks to pick for the next one year?
A: Well, we have already discussed the beneficiary sectors. As far as the top picks are concerned. we like ICICI Bank and Kotak Mahindra Bank from the private banking space, in consumption HUL and Nestle are likely to get benefitted by a revival in rural demand. D-Mart, Naukri, Bata India, VIP Industries are few midcaps that are expected to outperform over next one year.
Q: What are your views on the government which has been proactive in boosting the economy and putting India back on the $5-trillion economy mark?
A: The government has finally woken up to the fact that there is a slowdown and serious efforts need to be put in to keep the ball rolling. The good news is that the government has realised the need to push hard for economic reforms, boost exports and incentivise manufacturing, create more jobs and boost spending.
I think despite the challenging environment the basic reforms announced in its first tenure would now start bearing fruits and a slew of stimulus measures will ensure a pickup in the activity. So let us see if there is a recovery in the corporate earnings, manufacturing and easy liquidity. We would like to believe that $ 5 trillion is still achievable.
Q: Do you think FII flows will reverse following the announcements and will they go past Rs 1 lakh crore for FY20?
A: FIIs have been net sellers till August and it is only after the corporate tax cuts that they have started to buy actively. A rebalancing in the MSCI index will attract more flows in India. However, Rs 1 lakh crore is a big figure to think at this point in time, even if half of it happens, we will hit new all-time highs real soon.
Q: Do you advise buying midcaps now or should it be wait and watch for some more time?
A: I think one should start buying into midcaps instead of waiting for more time. The fact that these pockets even started to show resilience to go down further over the past few weeks, even before these tax announcements were made, suggests that money has already started chasing them. And, given the kind of attractive valuations these stocks are trading, I think it makes sense to start investing into high-quality stocks with strong earnings track record and proven managements.
A word of caution will be to stay away from the highly volatile stocks, where the news flow tend to shake the prices drastically every now and then.
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