Even as the headline indices Sensex and Nifty extend gains following Narendra Modi-led government’s Corporate tax booster, global brokerages say that the barometers could touch new highs in the coming months. Sensex and Nifty registered their biggest one-day gain in over a decade after FM Nirmala Sitharaman announced a slew of big-bang reforms to revive the ailing economy on Friday. Taking stock of the development, global brokerage firm CLSA said that the lowering of corporate tax implies a 6-7% EPS upgrade for Nifty. The main winners would be capex plays like ICICI Bank, Axis Bank, SBI and L&T. According to Rusmik Oza of Kotak Securities, any company paying 33% tax rate will see its earning go up by 12%.
“Overall, we can see Nifty earnings going up by ~5-6% in FY20 as the effective tax rate was already lower at 26%. Companies paying more than 30% effective tax rate will see upside of anywhere between 12-20% based on the changes in earnings estimate (just on today’s announcement),” Rusmik Oza, Head of Fundamental Research, Kotak Securities said. Global firm Morgan Stanley has upped the target on Sensex to 45,000 by June 2020. Ridham Desai, Managing Director at Morgan Stanley India noted that the tax cut is a permanent relief, and it will directly alter cash flows by 6-7%. “I believe that the demand will see a sharp pick up in next quarter. Won’t be surprised if RBI cuts rate by 25 bps,” Desai told CNBC Tv18 in an interview.
Global firm Nomura has increased the target on Nifty to 12,545 by June 2020. UBS has a target of 12,300, while JP Morgan sees Nifty at 12,200 in the same time-frame. Jefferies said that it sees a potential earnings boost of 11-14% for companies including Asian Paints, Britannia, Avenue Supermarts and Colgate. According to Credit Suisse, the sharp cut to the corporate tax rate is aimed to make India globally competitive, however, the brokerage feels that the markets will continue to be choppy.
On Friday, FM Nirmala Sitharaman had announced four key measures including cutting corporate tax rate, withdrawing tax on share buyback, reducing the minimum alternate tax and providing tax relief to FPIs on capital gains. The finance minister slashed effective corporate tax to 25.17% inclusive of all cess and surcharges for domestic companies, subject to condition that such companies will not avail any exemption/incentive. Further, the firms opting for 22% income tax slab would not have to pay a minimum alternative tax (MAT). The domestic manufacturing companies incorporated after October 1, can now pay MAT at a rate of 15% without any incentives. With this, the effective tax rate for new manufacturing companies will be 17.01 per cent inclusive of surcharge and cess, according to the latest rules.
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