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Last Updated : Sep 28, 2019 06:40 PM IST | Source: Moneycontrol.com

Mutual funds Wrap: Corporate tax cuts to benefit struggling sectors

The government seems to have provided a major fillip to the economy and market sentiment, along with the 110 bps rate cut by RBI.

Mutual fund (MF) investors has stayed loyal to MF schemes during the downslide in equity markets and it is time for them to be rewarded by fund managers after taking advantage of corporate tax cuts.

During the strong correction seen from July to August 2019, systematic investment plan (SIP) contributions stood at Rs 8,231 crore in August 2019, which was 7.5 percent higher than August 2018.

For July 2019, the SIP figure was Rs 8,324 crore, a tad higher than June 2019 amount of Rs 8,122 crore. Thus, SIP has seen incremental flows despite markets in prolonged downturn.

The dramatic announcement of the corporate tax cut to 22 percent, down from 30 percent on September 20 2019 saw the Nifty and Sensex move up by near 5 percent plus the same day.

The consensus among investment circles is that this will be a game changer in terms of shifting the increased corporate profits into new investments, price discounts in consumer facing goods to increase demand, and stimulate the general economic environments.

India being a large domestic facing economy and only part of it being export oriented, some sectors will derive greater advantage over others from the corporate tax cut rates.

“For the near term, it reduces tax incidence on companies and boosts profitability, assuming a portion of tax reduction is retained,” said Nilesh Shetty , Associate Fund Manager Quantum Mutual Fund.

“For the long term, given that global supply chains are getting disrupted, the lower tax rates is an incentive for foreign manufacturers to look at India as a possible base for manufacturing,” he added.

The MF industry has multi sector diversified funds and nearly equal number of sector-based thematic funds.

The sectoral thematic funds were added later as the industry grew on a fast track, especially since 2006-07. The sectoral funds carried a higher risk to reward ratio, and accordingly, disclosures specific to sector and minimum equity exposure to mentioned sector at 80 percent in sectoral funds was prescribed by SEBI, said a former SEBI DGM who worked in the mutual fund department.

Following the corporate tax cut announcement, there is a buzz in investment circles about the immediate advantage to fast moving consumer goods (FMCG) and auto sectors.

Struggling Sectors

The sad story of small biscuit packets seeing sluggish demand may be re-written if FMCG companies can pass on large parts of corporate tax cut (down to 25 percent from the earlier 33 percent) to the retail consumer.

The auto sector was hit by a lack of consumer financing options after the non banking finance companies' (NBFC) fiasco and has put heavy discounts in the upcoming festive quarter to revive demand. Recently Maruti had discount price of its mid market brand Baleno by Rs 1 lakh.

Additionally the banking sector, especially private banks, stand to benefit with more funds availability on their balance sheet. Having been taxed so far at 30-35 percent as per estimates, they will now be paying at approximately 25 percent.

The lack of lending plaguing banks gets a liquidity boost from tax cut can translate into higher consumer lending in festive season.

According to reports, PSU banks are organising loan melas at 400 centers in coming three months.

Sectoral banking ETF mutual funds have been approved by SEBI since 2007-08 to let investors take advantage of investment in vast financialization potential of India, according to the ex-SEBI officer.

The global services and global trade facing sectors like pharma and IT may have a mixed impact, being more sensitive to exchange rate movements and foreign approvals.

How much of corporate tax cut adds to higher corporate earnings onwards adding to shareholder value remains to be seen by mutual fund managers , especially over the next two quarters till the end of FY20.

The fund managers optimism range from buying in select scrips to being a tad sceptic about benefits from the tax reduction.

“We do not make investments based on tax changes. How much of the tax cut will be retained has to be seen,” Shetty said.

“Given that it is a supply side measure and demand continues to remain weak. But yes since net profits can be potentially higher in the future due to lower tax incidence there is a possible valuation upside in profitable companies that could lead to a valuation re-rating,” he added.

The government seems to have provided a major fillip to the economy and market sentiment, along with the 110 bps rate cut by RBI.

The baton has now been passed on to corporate to convert this to economic expansion and to astute fund managers to enhance ownership of the right stocks in their portfolios.

First Published on Sep 28, 2019 03:58 pm