We expect Nifty50 to move towards 12,200 by December 2019, banking on the strength of blue-chip counters.
The government has provided big fiscal stimulus to the economy through a large cut in the corporate tax rate. The effective tax rate is now 25.17 percent from 30 percent for regular tax-paying corporates, and 15 percent from 18 percent for minimum alternate tax (MAT) paying ones.
Assuming all 487 companies in the NSE list, move over to the new effective tax rate, it will have a 7 percent positive impact of their annual standalone EPS.
Assuming these tax benefits come into play for the full year ended March 2020, the earnings growth estimate for the Nifty universe would be 12 percent year-on-year (YoY), compared to an earlier expectation of around five percent.
FY20 Fiscal deficit at 3.7 percent
With nominal FY20 GDP projected to grow by 9.3 percent to Rs 207.8 trillion, tax revenue forgone of Rs1.45 trillion (due to the reduction in corporate tax rate) will translate into an impact of 70 basis points (bps) on the fiscal deficit.
As a result, the fiscal deficit can rise to four percent of GDP for FY20, as a worst-case scenario, when compared with budgeted projections of 3.3 percent.
However, transfer of Reserve Bank of India (RBI) excess reserves to the government’s kitty can soften the blow on the fiscal front to an extent.
In addition to the regular dividend income, the transfer of Rs 526 billion (~0.3 percent of GDP) is a clear windfall gain for the government as this was not Budgeted.
This is likely to partially offset the buildup of fiscal consolidation risk from likely shortfall in tax revenue collection this year.
Moreover, we sense a decent chance of government attaining disinvestment target of Rs 1.05 trillion given a likely congenial environment in the capital markets after the corporate tax cuts.
Additionally, the tax buoyancy of the various stimulus measures undertaken by the government such as upfront recapitalisation of public sector banks by Rs 70,000 cr (~0.3 percent of GDP) will have a fiscal impact.
Considering the evolving dynamics, we see the fiscal deficit for FY20 at 3.7 percent of GDP.
Private Capex benefits on the margin – full-blown recovery still some time away.
Although this will have some positive rub off on private investments and competitiveness for new manufacturing enterprises, the recovery in both these engines of the economy will be gradual.
Pickup in private Capex hinges on the rise in capacity utilisation which is still not at an optimal level (current 76 percent). Availability of assets through the National Company Law Tribunal (NCLT) mechanism may also dissuade proclivity towards greenfield expansion.
Floor for Bond yields
On the impact on bond markets, we see 10-year yields scaling higher, with the overall trajectory for the balance of this year seen in the range of 6.7-7.1 percent.
Hefty fiscal stimulus from the government will dissuade the RBI from aggressively trimming the interest rates further.
With RBI already delivering a cumulative rate cut of 110 bps during this calendar year, we see a floor for the repo rate at 5-5.15 percent. The bond markets will remain indifferent to a likely final rate cut of 25-40 bps by the RBI for this fiscal year.
View on Equities
We expect the Nifty to move towards 12,200 by December 2019, banking on the strength of blue-chip counters.
Paradoxically, broader markets will remain in a consolidation phase given that that consumption is in a cyclical downtrend, the economy has slowed and liquidity issues remain.
The market is in a consolidation phase since early 2018 and this should last till mid-2020 before we embark on a sustainable rally.
Technical charts, weak GDP reading, damaged earnings profile and the unfolding stress of incremental non-performing assets (NPA) corroborate our hypothesis, notwithstanding the one-time boost on account of tax cuts.
On the midcap front, though the bulk of the froth on midcaps has dissipated after the massive retracement in 2018, a sustainable resumption of rally in this counter will take another 12-15 months at least.
The author is Senior President, Head - Institutional Equities, Yes SecuritiesDisclaimer: 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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