New Delhi: Foreign brokerages have given a big thumbs up to the Indian government’s recent move to slash corporate tax rate for domestic companies to nearly 25% from 35% earlier. After surging 5.3% on Friday, Indian stock markets have extended the gains on Monday as well, trading over 3% higher in afternoon session.
While mentioning that it sees green shoots in the offing, Morgan Stanley raised the target for the benchmark S&P BSE Sensex to 45,000 by June 2020. “Corporate tax cuts create room for improved earnings growth, so we raise earnings growth estimates for Sensex to 25% in FY20 and 23% in FY21,” said the foreign brokerage firm.
Citi also raised the March 2020 target for the Sensex to 40,500 from 39,000 earlier. Citi said that slashing of corporate tax could reset coverage earnings up by as much as 8-9%. The ambitious scope of the reforms could also act as a sentiment booster to equities, it added.
Another brokerage firm Macquarie was also positive on India and said that the government has brought the economy back in clear focus with $20 billion in corporate tax cuts. It added that a 70 basis points slippage in fiscal deficit is tolerable and should not hurt sentiment. While it didn’t give any targets for the Sensex or Nifty, Macquarie seemed bullish on domestic cyclicals like banks, industrials and autos, while remaining ‘underweight’ on consumer sector. It mentioned HDFC Bank, Larsen and Toubro (L&T) and Maruti Suzuki as its top large-cap picks.
Meanwhile, for the Nifty 50 index, Goldman Sachs raised target to 13,000 from 12,500 earlier, JP Morgan revised it upwards to 12,200, while Nomura raised the March 2020 target to 12,545.
CLSA said lower corporate tax rate implies a 7-8% EPS (earnings per share) upgrade for the Nifty. According to the brokerage, companies that benefit the most are HDFC Bank, Kotak Bank, ITC, Colgate, Britannia, ONGC, BPCL, ICICI Lombard, L&T, Bajaj Auto, Hero, Eicher, Zee, Bharat Forge and Pidilite.
Credit Suisse was, however, cautious in its outlook. A sharp cut in the corporate tax rate is aimed to make India globally competitive but it won’t help near-term economic momentum, it said. “The market may be choppy, as weak earnings meet structural changes. September 2019 results may have bleak commentary despite good earnings growth,” said Credit Suisse. The brokerage remains ‘underweight’ on consumption and ‘overweight’ on financials. Lower taxes will help ICICI Bank, IndusInd Bank, HDFC Bank, and L&T, it added.
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