Corporate Tax Rate Cut To Restore India’s Earnings Growth, Say Market Experts
India’s equity markets surged the most in five years following unexpected corporate tax rate cuts announced by Finance Minister Nirmala Sitharaman today to stimulate economic growth from a six-year low.
The benchmark S&P BSE Sensex Index rose by over 2000 points (6 percent) while the NSE Nifty 50 Index jumped over 630 points (6 percent), by afternoon.
Finance Minister Nirmala Sitharaman today proposed to cut corporate tax rates for domestic companies to 22 percent and new domestic manufacturing companies to 15 percent. She also announced tax cuts on buybacks announced before July 5, 2019, among other announcements.
Today’s developments are positive for the market at large and the consensus is that this may induce the awaited rebound in India’s corporate earnings.
Here’s how India’s wealth managers and market analysts reacted to the news.
The changes announced today will affect corporate profitability in India, said Maheshwari, partner and co-founder at Basant Maheshwari Wealth Advisers LLP.
“Right now, we just heard about things that were going to affect sentiment. It’s a huge change and there would be companies benefiting up to 15 percent. But ultimately, the benefit would come to those companies that show earnings growth for the next few years.”
While the entire market is gaining right now, investors need to choose their stocks carefully, he warned.
You have to buy companies that are going to make profits for the next several years. If you buy junk right now, those companies won’t make profits and neither would the investors.Basant Maheshwari, Partner & Co-Founder, Basant Maheshwari Wealth Advisers LLP
Morgan Stanley’s Ridham Desai said the government’s stimulus has led to an upward revision of earnings expectations.
We estimate FY20 earnings per share growth at 25 percent (from 13 percent earlier). One the biggest problems ailing the investment rate was low corporate savings and, to the extent, this tax cut boosts corporate savings, this is good for the forward private sector investment rate – we are not capturing this in our earnings estimate for now.Ridham Desai, India Equity Strategist, Morgan Stanley
The managing director and chief investment officer of TCG Advisory said today’s moves will boost consumption, credit and investment in the economy.
The government has taken a meaningful stake by reducing the tax rate, which will allow many companies to undertake certain capital expenditure plans. With corporate tax rate going down, consumer facing companies will also benefit. Lower tax rate will allow manufacturing and financial service sector companies to proceed with capex plans and credit growth.Chakri Lokpriya, MD & CIO, TCG Advisory Services
The tax cut on buybacks will also remove the overhang in the market, which he now expects to sustain at higher levels.
This is the best government could do under the current circumstances, said the managing director of Dalton Capital.
In due course when corporates are able to increase sales, profitability might increase. Demand has to really catch-up, unless there is demand generation, there might not be new investors irrespective of the tax cut.UR Bhatt, Managing Director, Dalton Capital Advisors
Rajeev Thakkar, PPFAS Mutual Fund
Cut in tax rate announced will boost the earnings of the tax paying companies, said the chief investment officer of PPFAS Mutual Fund.
The move will be beneficial over the long run as the tax rate is competitive compared with other countries, he told BloombergQuint.
It will incentivise new companies to set up manufacturing units in India. However, the actual benefits will take time to realise.Rajeev Thakkar, Chief Investment Officer and Director, PPFAS Mutual Fund
Mihir Vora, Max Life Insurance
This will have a positive impact on corporate profitability and a potential impact of kick-starting the investment cycle which we need.Mihir Vora, Chief Investment Officer, Max Life Insurance
Sanjiv Bhasin, IIFL
We were the only analysts holding a positive view in a falling market. Stand is vindicated. Expect Nifty to hit 12,000 by Diwali as fear turns to greed.Sanjiv Bhasin, Executive Vice President, IIFL
Rusmik Oza, Kotak Securities
Overall, we can see Nifty earnings going up by ~5-6% in FY20 as the effective tax rate was already lower at 26%. Add the sentiment booster angle and the way this will be taken positively by FIIs and local investors we can expect the Nifty to rally by 9-10% from today’s low of ~10,700. Hence, 11,500-11,600 is very much possible on the Nifty without considering any other factor.Rusmik Oza, Head of Fundamental Research, Kotak Securities
Nandita Parker, Karma Capital (FPI)
The corporate tax cut rate is a very bold move. This was the kind of fiscal measure we were looking for inthe budget in July. This is exactly what FPIs were looking from the stupendous mandate of BJP government. The new tax rate is also a tremendous boost to “Make in India”. This is a strong message to the world that India is open for business and cash in on the advantages arising out of U.S.-China trade war.Nandita Parker, CEO, Karma Capital
From an equity perspective, what investors look for is an increase in return on capital, increase in growth and risk premium, said Vikas Khemani, Founder, Carnelian Capital Advisors. All of these elements are coming together, he said. “From now on you will only see things getting better,” he told BloombergQuint.
This is a big change in the sentiment, animal spirits could be back...This could lead to India de-rating story and be growth enabling.Vikas Khemani, Founder, Carnelian Capital Advisors
There is a lot of short covering that is happening at this time or has already happened, Ajay Srivastava, managing director of Dimensions Corporate Finance Services, said.
“For the near term, I would say I don’t think a GST cut is coming or is required,” he said. From an investment standpoint, “with the buoyancy that we have seen today, investors should pause to reflect, as to what happens to the numbers in the future”, he said.
One would temper your purchases through time and not go whole hog and see how it plays out. Let’s not extrapolate from a short covering to a fundamental change.Ajay Srivastava, MD, Dimensions Corporate Finance Services
While everyone is concentrating on the near-term bump in earnings expected from this tax cut, Hiren Ved, director and CIO, Alchemy Capital, Management, said its effect will be much more pronounced later on.
What is so powerful about this is that this is perpetual and right now we are at an earnings which is structurally at lows. When demand and earnings revive in FY21, FY22, FY23, and then on top of that you have a lower tax rate, it really has a disproportionate impact which is longer lasting than just one year.Hiren Ved, Director And CIO, Alchemy Capital