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Going forward, market would look at the benefit that accrues to corporate capex from tax cut: Manishi Raychaudhuri of BNP Paribas

Updated : September 23, 2019 01:48 PM IST

Manishi Raychaudhuri, Asia Pacific Equity Strategist at BNP Paribas, shared his views on the fundamentals of the market.

Talking about the Friday's rally in stocks, Raychaudhuri said, “What we saw on Friday and what we are seeing today is just the first-order effect. It is a direct reflection of the benefit that is coming to the companies’ bottom lines from the lowered tax rate. So, if I combine Friday and today, it is somewhere around 8-8.5 percent up move that we have seen.”

“Going forward the market would look at the benefit that accrues to corporate capex because this is possibly in a long time that we have seen a concerted supply-side effort by the government of India,” he added.

On the corporate tax cut, Raychaudhuri said, “We think that these corporate tax cuts combined with the lower tax rates that are being offered to new investments which are being done from October 2019 to around March 2023, they are being timed exactly with the ongoing US-China trade war and which in turn could lead to significant degree of new investments as well both from domestic Indian companies and from the multinationals, and some from companies that have hitherto not invested in India. So, the second-order and third-order benefits are yet to be captured and we have to watch out for them over the next few months or even the next few years.”

Speaking about the re-rating of the market, Raychaudhuri said, “The supply-side measures that we have seen would have to be combined with further resource raising measures. Some of these would actually need spending some degree of political capital on the part of the government. For example, I think the market would be looking forward to how the government intends to balance the budget, that USD 20.4 billion of revenues that have been lost would have to come in from somewhere. They can come in from monetization of a higher quantum of the deficit, they can also come in from a higher degree of divestment proceeds which the government may look forward to. If it is the latter, if there is a significant degree of higher non-tariff or non-tax revenues that the government is able to raise, that I think would be taken as a significant positive by the market and then even market participants would be able to argue for a further re-rating.”

“For the time being, we are not arguing for a further re-rating from the present levels because we know that the market is at a small premium compared to the last 10 years average. The market is also at a significant premium compared to the other Asian peers. However, even if one factors in the direct benefit from the lower tax rate, one could definitely argue for the present strength to continue,” he added.
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