Today was a momentous day for Indian markets. Not only did we see a
huge upmove, we also saw a complete U-turn in policy stance. The
government had been projecting a very aggressive tax stance during
the budget and after it. I think the realization that the economy was
really in big trouble had not sunk in. Today's announcements of
reduced corporate taxes come as a relief to me simply because this
is the first real "action" the government has taken. I am
ignoring the small tinkering with minor policies over the last few
weeks as inconsequential.
The action is really
big and bold. Cutting peak tax rates for corporates this drastically
is HUGE. It signals that the government is willing to bite the
bullet, take the pain of much higher fiscal deficit to spur growth.
Some of the larger corporates were paying upwards of 33%-35% and a
reduction to 25% means a 33% reduction in their tax outflows. This
is itself would boost earnings growth significantly (around 8%-10%).
Earnings growth was what has been missing from corporate India for a
couple of years now. So, the markets should re-price stocks at least
10%-15% higher wherever the tax benefits are significant.
But. And there is
always a but.
But, that is a one
time benefit. Say a company was earning Rs 100 as PAT today after
paying Rs 35 as tax. If their tax reduces to Rs 25, then the PAT
directly jumps to Rs 110. Now the company has an extra Rs 10 in hand. So, those
companies which are able to reinvest this additional money most
efficiently would reap the most long term benefit.
Companies will have
multiple options to decide what they do with the additional cash.
Some could be:
- repay debt
- invest in capex
- reduce prices to
spur growth
- pay more dividends
/ do buybacks
- incentivise
employees to produce / sell more
- waste it by
splurging on inconsequential or reckless spending
- all of the above
Any or all of the
moves would have second and third order consequences most of which
should be good.
A major beneficiary
of this move could be that as the markets become more buoyant, it
will be possible to carry on large disinvestment programs of PSUs.
The other major
benefit is that we will become a much more tax competitive nation for
global corporates when they decide on moving their supply chain to.
Today, there is significant issues in China (China-US trade war has
spurred an uncertain environment for global companies who have very
large setups in China. Now, they are aggressively looking at
alternative locations to hedge their bets. India will now be a
possible favourable destination. If we can get our act together on
land and labour reforms we will be unbeatable, but that is probably
asking for too much!!
The global situation
continues to be problematic. Large countries are facing severe
economic headwinds. Close to $18 trillion dollars are currently in
negative yield and projections are there that US will have to
continue to cut policy rates significantly. All the large economies
are struggling. China, which fuelled, the last global commodity rally
by its consumption, is facing tough times of its own. China-US trade
war, the drone strike on Aramco, Brexit looming its head again
continue to pose serious challenges to the macro environment. We will
keep that at the back of our minds but continue to focus on
individual companies that we own and would like to own.
My sense is that we
will move from a negative growth spiral which we had got ourselves
into and into a positive growth spiral now. Our job of identifying
good quality, well managed, growing companies do not change. I will
be reviewing the portfolio stocks and the allocations over the
weekend and will communicate any changes. If nothing else, today’s
announcement has boosted my sentiments from cautious for somewhat
more bullish!! ;-)
Hoping for the best!
P.S.: If you think you or someone you know will benefit from the equity advisory, you can visit www.intelsense.in
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