Quick Take

Jumping the gun

| Updated on September 23, 2019

Even as India Inc is still evaluating how it will deploy the Finance Minister’s tax bonanza, the analyst community appears quite gung-ho that these cuts will flow straight through to corporate bottom-lines, paving the way for the next leg of the bull run. Weighing in with instant analysis on the tax cuts in the last couple of days, leading brokerages have put out brand-new profit growth estimates for the Nifty50 that now expect earnings for these leading lights of India Inc to vault by 25 per cent in the current fiscal, in place of the previously projected 15-16 per cent.

In a sharp mood swing from the gloom and doom projected just a couple of weeks ago, fanciful targets of 45,000 for the Sensex30 and 14,000 for the Nifty50 are now being bandied about. But given the excess capacity and weak demand environment that India Inc is currently grappling with, it is by no means a given that companies can pocket the tax cuts they earn to shore up their profits.

Given dodgy demand, consumer-facing companies - the biggest beneficiaries of the tax cuts - are quite likely to pass on some of the tax savings to their beleaguered distributors (by way of higher trade margins) or end-consumers (by way of retail price cuts) to stimulate buying.

Companies in the infrastructure, commodity and industrial packs may prefer to use this tax bonanza to repair their damaged balance sheets, before contemplating the next round of capex. In both cases, one must expect a considerable time lag before these tax cuts translate into better profit growth. Both policymakers and retail investors would do well not to get carried away by these fanciful targets.

Published on September 23, 2019

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