India Inc. Earnings Get Up to 10% Boost From Modi’s Tax Cut

(Bloomberg) -- India’s key stock gauges’ earnings estimates have been raised by as much as 10% by analysts after Finance Minister Nirmala Sitharaman delivered a $20 billion tax break in her latest attempt to boost economic growth from a six-year low.

The surprise reduction in corporate tax drove a 5.3% surge in the S&P BSE Sensex Index to 38,014.62 on Friday, its biggest gain since May 2009. The government’s move may improve earnings, margins and help initiate capacity expansion before a potential improvement in consumer demand in the festival season starting next month, according to analysts and fund managers. The NSE Nifty 50 Index also climbed 5.3% Friday, to 11,274.2.

“Consensus for EPS impact purely on account of the tax change is 7-10%” analysts at Axis Mutual Fund wrote in a note last week. “A demand recovery during the upcoming festival season will further improve corporate earnings over the next few quarters,” the note added.

Here is what analysts are saying:

Bank of America (NYSE:BAC)

• Calculations suggest the Nifty index’s 1-year forward consensus earnings estimate for FY20 could rise by 7%
• Capital expenditure may only pick up with some lag
• Prefers bank stocks on hopes of improved businesses

Citigroup (NYSE:C)

• Cut in the corporate tax rate could increase earnings of companies under coverage by as much as 8-9% from FY20
• Investors “will likely expect more big-ticket announcements”
• Raises March 2020 Sensex index target to 40,500 from 39,000
• Increases overweight on financial services and underweight on consumer, IT and utilities stocks

ICICI Securities

• Analysis of Nifty earnings suggest an EPS upgrade of 6% each for FY20, FY21
• Expects Nifty EPS to grow at a CAGR of 20.3% in FY19-21 from 16.9% before the cut
• Banking and consumer stocks likely to grow at CAGR of 48.2% and 18%, respectively
• Software exporters, pharma not expected to see any upgrades due to existing lower tax rates
• Nifty target based on FY21 EPS is 13,150, Sensex 43,000

Credit Suisse (SIX:CSGN)

• Of the total revenue foregone, 58% of will be borne by the federal government while 42% will be a loss for states
• Among consumer stocks, large tax-cut gains for Avenue Supermarts, Colgate, Nestle, Page Industries, Asian Paints, Crompton, Jubilant Foodworks, Britannia, Hindustan Unilever (LON:ULVR)
  • Lower gains seen for Marico, Titan, Dabur, Emami, Godrej Consumer
• Expects most consumer companies to retain gains, at best spread over two years
• Industrial companies with shorter production cycles, like ABB, Siemens, Cummins (NYSE:CMI) to benefit in near term; L&T and those with longer cycles to benefit over longer term
• Auto companies may ask ancillary companies to pass on benefits to customers in current weak demand environment
• Banks to see 10%-12% earnings impact, RoEs to improve by 100-200 bps
• Prefers better capitalized banks to capture pick-up in growth

Kotak Institutional Equities

• Expects profit for Nifty 50 Index to grow 25% for FY20 and 19% for FY21
• Automobiles, banks, capital goods, staples, diversified financial and energy sector to be key beneficiaries
• Electric utilities, software exporters and pharma to see little or no impact
• FY20 EPS for Nifty 50 Index will increase by 10% from previous estimate

Philip Capital

• Expects some benefits to be passed on to consumers and some getting reinvested in business expansion
• Expects exports to receive a meaningful boost in the long-run
• Upped Nifty EPS estimate for FY20/21 by 7% each; retain long-held target of 11,300-11,700