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Markets may see multiple re-ratings on govt’s boosters: Experts

Mint, Sep 20, 2019

• According to analysts, the effective corporate tax rate reducing to 25.17% will improve profitability of full tax-paying companies

• This will lead to change in return on equity and multiple re-rating

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Market RatingSensexNifty

Finance Minister Nirmala Sitharaman’s big bang announcements on cutting corporate tax rate to 22% and a 15% rate for new manufacturing companies catapulted the Sensex by 1955 points, its biggest single-day gain in a decade. Analysts said that effective corporate tax rate reducing to 25.17% will significantly improve profitability of full tax-paying companies, leading to change in return on equity (ROE) and multiple re-rating.

Among the sectors, analysts expect banking, FMCG, consumer durables, and auto companies to be major beneficiaries. The manufacturing sector is expected to become attractive with a 15% corporate tax rate for new manufacturing companies in India especially in the times when the world is going through several trade, most significant being the one between the US and China.

Here are what market analysts commented:

Abhimanyu Sofat, Head of Research, IIFL Securities

The announcement made by FM, are expected to have maximum impact to improve market sentiment and address concerns of slowdown in the economy. Effective tax rate reducing to 25.17% will significantly improve profitability of full tax paying companies leading to change in ROE leading to multiple re-rating. Reduction in minimum a minimum alternate tax (MAT) as well lower rate of tax for a new company which does investment in manufacturing till 2023 should lead to higher capex. Further removal of enhanced surcharge on capital gains should be a big positive for investors. Though, the overall revenue loss of ₹1.45 lakh crore may be considered negative from the bond market perspective but we believe that getting the growth back should be a priority for the government.

Rajiv Singh, CEO, Karvy Stock Broking

Reduction of corporate tax has been on the agenda for a while, and this should help in boosting the capex cycle, also it gives companies space to cut prices to boost demand. The corporate tax cut should go a long way in a revival of the economy. The government estimates the fiscal impact to be about 0.7% of GDP, and bond yields have gone up as a result. The measures will benefit the economy with a lag and the boost to the economy as a result of the tax cuts should help offset much of the lower tax rates later in the year and next fiscal year. Among the sectors, I expect banking, FMCG, consumer durables, and auto companies will be major beneficiaries. The manufacturing sector will become attractive with a 15% corporate tax rate for new manufacturing companies in India especially in the times when the world is in the phase of trade wars.

Ajay Bodke, CEO PMS, Prabhudas Lilladher

In a major boost to revive flagging animal spirits & position India as one of the most attractive business destinations, government of India has announced a slew of measures that would act as a force multiplier for the flagging economic engine. By slashing corporate tax rate to 25% from 35 % (22% from 30% without exemptions) for existing domestic companies and an extremely attractive rate of 15% for new companies setting up manufacturing operations after 1st October 2019 and commencing operations before 2023, government has rolled out a red carpet that would ensure hundreds of billions of dollars of FDI and FII flows over the medium term.

Ajit Mishra, Vice-President, Research, Religare Broking

The finance minister has finally taken strong measures to kick start the economy. The corporate earnings had worsened in the last few quarters mainly due to the ongoing slowdown. The cut in corporate tax rate would mean more income for corporates. This would have a direct positive impact on the EPS on all domestic companies. Further, this move along with the easing of enhanced surcharge has the potential to revive FII sentiments as well, as the corporate tax rate makes Indian companies more competitive in the global markets.

Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management

We welcome the announcement by the Finance Minister. This was a much needed measure, and clearly demonstrates the government’s commitment to rejuvenate domestic growth. With fiscal and monetary forces working in tandem, and meaningful big bang reforms being announced, alongside monetary easing, we believe the pervasive negative sentiment that exists today has bottomed and will begin to revive. The markets will also deliver a positive wealth effect. The move in the markets will also deliver a positive wealth effect and will spur further financialisation, and engender efficient capital allocation.

Motilal Oswal, CMD, Motilal Oswal Financial Services

“We do believe that we need fiscal stimulus to get out of this slowdown and monetary policy alone could not do that. Hence this move is very good for the country and markets. This is positive for all companies.

Vishal Kampani, Managing Director, JM Financial Group

The bold and positive move to rationalise the corporate tax structure will kickstart the next big economic upcycle. The new tax rates will help boost corporate earnings during the current fiscal which will lead to the revival of the consumption story. The government has already ensured adequate liquidity to NBFCs, HFCs. These steps will facilitate higher economic expansion which will lead to higher tax revenue to meet its fiscal targets. The fiscal stimulus combined with the likely wealth effect from a buoyant stock market will take India closer to its dream of a $5 trillion economy.

Rahul Gupta, Currency Research Head, Emkay Global Financial Services Ltd

The news of the government lowering the corporate tax has cheered the market, stocks rallied sharply with the Bank Nifty posting its biggest single-day gain in 10 years. This gave the rupee a big boost and the USD/Indian rupee spot dropped to 70.67. The move was imperative as we are in a low demand cycle amid global idiosyncrasies. The RBI has been providing support to the economy by reducing interest rates since 2019. However, the economy needed some boost from the fiscal front as well. Meanwhile, the bond market did not take the fiscal announcement very well. Also, the finance minister was unable to justify the fiscal concerns, thus the 10-year yield surged nearly 25 bps, keeping rupee gains under check. Thus, unless USD/Indian rupee spot doesn’t end below 70.80, we expect prices to bounce 71.50 in next week.

Shrikant Chouhan, Senior Vice-President, Equity Technical Research, Kotak Securities

On Thursday, we mentioned in our report that the market is entering into an extreme pessimistic territory and such market gives golden opportunity to invest. Markets did exactly as per our expectation where it maintained its previous low of 10,637, forming a higher bottom today and reversed all losses. Markets turned upward for a longer time and is a classic example of bottoming out on all time frames and we would see the levels of 11,600. Buying is advisable at current levels and more on declines at around 11,100/11,000, which would be a major support area.

Vikas Vasal, Partner and National Leader, Tax, Grant Thornton India LLP

The reduction in the corporate tax rate is a significant move to boost investor confidence and revive business sentiment. With this, the government has addressed the key demand of businesses to align India’s corporate tax rate with the current economic reality where most large economies like the US and the UK have taken similar measures to attract capital and investments. To give credit to the government, it is heartening to note that these rates have been announced now and the government did not wait for the next budget. Hopefully, this should be followed by a similar tax rate reduction for individuals and other taxpayers soon as the festival season approaches. This would leave more money in the hands of taxpayers, which in turn would boost overall demand and consumption in the economy.

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