The Indian stock markets welcomed the Corporate Tax rate cut and rallied 8% within a week of the news. With the tax rate slashed by 10% for the new companies and 8% for existing ones, we can expect a long-term positive impact on the economy. Now, a tax of 25% will be levied on the existing companies while new companies will pay 17.1% against the former rates of 35% and 25%, respectively.
This translates into a clear upside for companies, whether they choose to use it for scaling up their net profits or to design a lower pricing strategy and pass the benefit to customers, subsequently boosting their top lines and thereby, profitability. Either way, the decision comes as a much-desired breakthrough for the economy and warranted a positive reaction.
It seems so, given the fact that the tax cut has led to Earning Per Share (EPS) re-rating and improved the Returns on Equity (ROE). Though investors may continue to see volatility in the market in the months ahead, things are likely to stabilize over a period of 6-12 months with the ongoing policy announcements and actions. Thus, we maintain a positive outlook for the longterm.
The Indian government is taking aggressive steps on a warfront to give impetus to the economy and improve liquidity. This includes the returning of Rs. 40,000 crores of GST dues and asking the Ministries to provide CAPEX plans, four months in advance. Further, now that India has the most competitive taxation rates for new companies, amongst the Asian tigers, we can expect big investments over the next 3 years. We could also look forward to a major fillip in the manufacturing sector.
With the tax rate cut, the improvements in EPS and changing policy environment, here is how we expect the fortunes of some Nifty50 stocks in major sectors to pan out...
As per the data, Bajaj Auto, Eicher Motors & Hero Motor Corp were taxed above 30%, which makes them the biggest beneficiaries post a slash in Corporate Tax. Of these, Hero Motor Corp had recently given a 12% discount to clear its inventory and also has the biggest share in the domestic markets. At the same time, major business volumes of Bajaj Auto come from the international markets, which is currently amidst a turmoil. So, all things considered, it is best to stay away from automobile stocks at the present.
ONGC, GAIL (India), Indian Oil Corp, Bharat Pet Corp pay corporate taxes above the 30% mark and will, therefore, benefit from the tax cut. Their P/E levels look attractive and their EPS have already been re-rated and have improved by 12-15%. Their refining margins are also improving. IOC & BPCL also seem to have huge potential for value unlocking. Given the fact that strategic disinvestment looks like the government’s best bet to remedy its financial position, these stocks are expected to gain in valuation. Investors can consider buying them in small lots at various levels.
Axis Bank, HDFC Bank, IndusInd Bank and Kotak Mahindra are the biggest beneficiaries in this sector due to the corporate tax rate cut; though most of these have already moved up. HDFC Bank is likely to be impacted the most given its quality of management and business. Axis Bank & ICICI bank are cheaper compared to others in the sector and might rise from their current levels.
ITC could be the best pick amongst FMCGs, owing to the tax rate cut and various other factors. The tourism industry should pick up in India because of the GST rate cut on hotels &the resolution of the Kashmir issue. Further, as ITC is the largest player in paper and its consumption is expected to rise after the recent ban on plastics. The current EPS & ROE are also favourable and indicate good potential. Though the stock may face some backlash on the FMCG front, the overall outlook appears positive.
Metal stocks have been suffering at a global level and are not recommended in general. Coal India can be considered as a pure defensive play owing to its monopoly and a dividend yield of 6.6% in the face of plunging FD rates. The government’s focus on overhauling the mining sector and increasing coal production can also add to the stock’s profitability. A small allocation in it can be considered.
Asian Paints seems to be the only beneficiary from the tax cut and with its P/E at 46, it doesn’t look cheap at current levels.
All stocks other than Infosys fall below the 25% taxation level and will, accordingly, see zero impact due to the corporate tax rate cut. However, the domestic story in the sector is growing and the currency may grow stronger from here on, due to more FDI expected in IT. Thus, investors could indulge in some profit-making here.
L&T and Ultratech cement are the biggest beneficiaries of the corporate tax cut. While Ultratech is quite expensive in terms of valuation, L&T can be a good buy, given its current P/E (15.5), which is still far from the market’s average P/E.
From an investor’s perspective stocks from Oil & Gas and IT & ITES look good. ITC and Coal India can prove to be valuable additions to a portfolio. On the flip side, investments in Automobile and Pharmaceutical companies seem avoidable at the moment. Other good picks include Deepak Nitrate, ADF Foods, Mahanagar Gas and INOX Leisure. Petronet LNG could be considered once clarity emerges from the government, on its management deal. From the pipes sector, Ratnamani Metals Tubes and Maharashtra Seamless also look promising. Overall, the market looks good from a long-term investment perspective and we expect valuations to move up further.
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Disclaimer:
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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