Tax reduction may boost profitability of companies
MUMBAI: Analysts have upgraded earnings growth estimates of companies after the government slashed corporate tax on Friday.
Analysts expect the tax cut to help companies improve profitability. They expect some of the gains made by companies to be reinvested in their businesses, though a part of it may be passed on to consumers to boost demand.
“The effective tax rate of Nifty companies on an aggregate basis was 26% which will now come down to 25.17%. There are only 20 Nifty companies that paid more than 30% effective tax rate and accounted for 43% of overall net profit in FY19. Any company paying 33% tax rate will see its earning go up by 12%,” Rusmik Oza, head of fundamental research at Kotak Securities, said in a note on Friday. According to Oza, members of the National Stock Exchange’s Nifty index may see a growth of 5-6% in FY20.
Oza expects the index to gain 9-10% from its low of 10,700 as inflows from foreign institutional investors (FIIS) will drive the market from hereon.
On Friday, Indian stocks posted their biggest daily gain in more than a decade.
Phillipcapital (India) Institutional Equities has increased its Nifty earnings per share (EPS) estimate for FY20 and FY21 by 7% (each) to ₹600 and ₹705, respectively from ₹562 and ₹661 earlier), indicating an annual growth of 24% and 18%.
Analysts at Phillipcapital (India) Institutional Equities estimate the corporate tax reduction to lead to earnings benefit of 11-12% for capital goods, metals, banks, automobiles, and consumer durables, 10% benefit for infrastructure and fast-moving consumer goods, 5-7% for nonbanking financial companies, real estate, logistics, with the least being cement at 4%. There is negligible impact on IT and pharma companies.
“We will keenly watch for demand recovery and management commentary (on the impact of this corporate tax cut) after Q2FY20. At the current price, Nifty is trading at rich valuations of 17.5 times one-year forward price to earnings,” it said in a report on 20 September.
Elara Securities (India) Pvt. Ltd estimates that the tax rate cut will to lead to a 6.6% expansion in Nifty earnings. “Eighteen of Nifty 50 companies are likely to experience an earnings expansion in excess of 10%, due to the tax rate cut,” it said. The brokerage expects the measure to improve corporate savings, attract private investment, boost the competitiveness of India as a manufacturing hub, and support demand at margin as tax benefits are passed on to end-consumers.
Others concur. JM Financial Institutional Securities Ltd expects Nifty companies to improve earnings by an average 7% with the benefits mainly accruing to consumer, financials, and state-run companies.
“Most of these companies are in the pink of health and could primarily utilise the benefits for balance sheet strengthening (banks, levered companies), passing-on the savings to consumers (autos, staples) and investing in business expansion. A broadbased revival in investment from
the incentives for manufacturing, on the other hand, is likely only in the medium term given the overcapacity across capex intensive sectors in India or unless this is married to a separate trade pact,” it said in a note on 20 September.
Nomura, however, does not expect lower corporate tax to have any meaningful near-term growth impact as it will boost corporate profits and sentiment, but is unlikely to trigger investment given global uncertainties and balance sheet headwinds. It expects the measure to be positive in the medium term.