Impact of Corporate Tax Reduction on Nifty PE multiple

On Friday, 20th September, 2019, the government’s announcement related to corporate tax reforms boosted the market sentiments amid slowdown. The government reduced the corporate tax to 22% (effective maximum tax rate 25.17%) for FY 2020.

In just 2 days, Nifty appreciated 8.48%, from 10696.75 on Friday to 11603.4 at closing on Monday, and fell 150 points on Wednesday.

Nifty Performance – 20th September – 23rd September

This stimulus was a much awaited measure that has positively impacted the investors’ confidence. The tax cut measure will also help in improving the earnings of the companies in the coming quarters. The sectors like automobiles, banks, capital goods, consumer staples, diversified financials and oil, gas & consumable fuels are expected to be key beneficiaries of this rate cut.

Previous vs. New Tax Structure

Turnover < Rs. 400 Cr.

Effective rate before (%)

Effective rate now (%)

Tax Cut Advantage

Taxable Income < Rs. 1 Cr.

26.0

22.9

3.1

Taxable Income > Rs. 1 Cr.

27.8

24.5

3.3

Turnover > Rs. 400 Cr.

Taxable Income < Rs. 1 Cr.

31.2

22.9

8.3

Taxable Income > Rs. 1 -100 Cr.

33.4

24.5

8.9

Taxable Income > Rs. 100 Cr.

34.9

25.6

9.3

Impact of Corporate Tax Reduction on Nifty Companies

On 24th September 2019, based on previous EPS TTM, Nifty PE multiple was at 28.49. Considering, the change in EPS TTM after tax cut, new Nifty PE multiple comes to be 20.49.

(Nifty PE ratio is calculated by dividing the sum of market capitalization by the sum of earnings of all companies which constitute the S&P CNX Nifty i.e. (8,451,484.44/412429.32))

Read – Nifty PE Ratio as an Indicator of Stock Market Valuation

Company Name

Industry

Previous Tax Rate

New Tax Rate

Previous EPS TTM

EPS TTM After Tax Cut

Change in EPS

Bajaj Auto

Automobile

30.3%

25.6%

158.25

168.67

10.42

Eicher Motors

Automobile

35.4%

25.6%

761.92

786.28

24.36

Hero MotoCorp

Automobile

32.4%

25.6%

186.91

206.44

19.53

Mahindra & Mahindra

Automobile

22.7%

25.1%

49.43

46.47

-2.96

Maruti Suzuki India

Automobile

28.3%

25.6%

230.49

233.83

3.34

Tata Motors

Automobile

-4.1%

25.6%

Axis Bank

Banking and Finance

32.9%

25.6%

20.69

22.78

2.09

Bajaj Finance

Banking and Finance

35.3%

25.6%

72.44

83.45

11.01

Bajaj Finserv

Banking and Finance

34.1%

25.6%

203.5

393.60

190.10

HDFC

Banking and Finance

26.6%

25.0%

62.02

67.55

5.53

HDFC Bank

Banking and Finance

34.5%

25.6%

70.76

113.05

42.29

ICICI Bank

Banking and Finance

19.9%

25.6%

10.98

10.20

-0.78

IndusInd Bank

Banking and Finance

33.7%

25.6%

61.38

77.36

15.98

Kotak Mahindra Bank

Banking and Finance

34.7%

25.6%

39.63

43.54

3.91

State Bank of India

Banking and Finance

46.4%

25.6%

9.02

10.92

1.90

Yes Bank

Banking and Finance

27.0%

25.6%

2.39

2.05

-0.34

Grasim Industries

Cement

49.5%

25.6%

28.69

69.95

41.26

UltraTech Cement

Cement

31.3%

25.6%

109.64

121.37

11.73

ITC

Cigarettes

32.2%

25.6%

10.46

11.52

1.06

Larsen & Toubro

Construction

30.4%

25.6%

65.34

80.85

15.51

Asian Paints

Consumer Goods

33.6%

25.6%

23.53

26.71

3.18

Britannia Industries

Consumer Goods

34.6%

25.6%

47.94

54.71

6.77

Hindustan Unilever

Consumer Goods

30.7%

25.6%

28.93

30.56

1.63

Nestle

Consumer Goods

33.8%

25.6%

175.17

197.12

21.95

Titan Company

Consumer Goods

30.3%

25.6%

16.20

16.86

0.66

UPL

Fertilizers

9.9%

14.2%

25.78

24.55

-1.23

HCL Technologies

IT

19.7%

24.1%

72.65

69.88

-2.77

Infosys

IT

26.8%

25.6%

36.01

37.10

1.09

TCS

IT

24.1%

23.7%

86.03

86.25

0.22

Tech Mahindra

IT

22.4%

25.6%

49.41

43.52

-5.89

Wipro

IT

21.9%

21.7%

15.37

16.77

1.40

Zee Entertainment

Media

35.7%

25.60%

18.45

20.47

2.02

Coal India

Metals

35.6%

25.6%

29.62

33.86

4.24

Hindalco Industries

Metals

32.0%

30.4%

24.67

26.88

2.21

JSW Steel

Metals

32.5%

25.6%

26.26

29.60

3.34

Tata Steel

Metals

42.8%

25.6%

78.42

96.45

18.03

Vedanta

Metals

28.5%

23.0%

18.5

27.28

8.78

BPCL

Oil & Gas

31.7%

25.6%

30.08

41.05

10.97

GAIL (India)

Oil & Gas

33.7%

25.6%

23.99

30.11

6.12

Indian Oil

Oil & Gas

32.8%

25.6%

14.75

15.16

0.41

NTPC

Oil & Gas

31.2%

25.2%

8.92

9.69

0.78

ONGC

Oil & Gas

36.8%

25.6%

20.78

23.30

2.52

Power Grid Corp

Oil & Gas

33.3%

18.8%

15.50

18.87

3.37

Reliance Industries

Oil & Gas

27.6%

25.6%

65.24

67.03

1.78

Cipla

Pharma

27.4%

27.0%

19.05

19.24

0.19

Dr. Reddy’s Lab

Pharma

16.5%

24.5%

129.49

139.17

9.68

Sun Pharma

Pharma

15.8%

13.7%

12.7

15.05

2.35

Adani Ports

Ports

21.1%

24.2%

20.87

20.37

-0.50

Bharti Airtel

Telecom

66.4%

Bharti Infratel

Telecom

39.1%

26.5%

8.62

10.41

1.78

Total

     

3296.86

3797.89

501.03

The corporate tax reduction is expected to boost corporate profit growth and increase the private investment cycle. The lower tax rate would result into higher profits/ surplus cash and it will depend on companies how they plan to utilize this.  Various options available can be capex expenditure/ capacity expansion, lowering prices to increase demand, paying out higher dividends or repaying debt etc.

However, any/ all of this will not be accomplished before 8-12 quarters. The new tax rates in general will take time to really have a growth impact and the expectation related to increase in investment or capex activities is very subjective.

The current euphoria in the market is just news based and on ground, it may take 1-2 years to really have a sustainable impact.