A cut in the corporate tax is expected to result in the highest earnings growth for India Inc since 2006. The growth in the Nifty 50’s earnings per share (EPS) may be upgraded by 7-8%. This will be a significant improvement given that the index’s 12-month expected EPS had fallen by 5% to Rs 645 after the June 2019 quarter results – the highest earnings downgrade among the top global equity markets.

Morgan Stanley has upgraded the estimated Sensex earnings growth to 25% for FY20 from 13% earlier.

Kotak Institutional Equities revised upwards its earnings growth for Nifty 50 to 25% from 15% buoyed by the sharp cut in corporate tax rate. According to Kotak estimate, automobiles, banks, capital goods, consumer staples, diversified financials and oil, gas & consumable fuels will be key beneficiaries of the cut while electric utilities, IT and pharmaceuticals will see little or no impact.

At present, there are twenty companies in the Nifty 50 with tax rate higher than 25%. They have a cumulative weight of 39% in the index. The prominent beneficiaries of the tax cut include Bajaj Finance, Britannia Industries, HDFC Bank, Kotak Mahindra Bank, Eicher Motors, Bajaj Auto, ONGC, Asian Paints and Hero MotoCorp. The tax outgo of these companies was more than 30% in FY19 relative to the profit before tax (PBT).

Nestle India, which will be a part of the Nifty 50 soon, will be another big beneficiary considering its tax rate of 34% in FY19.

The average tax rate for the broader BSE 500 index was 31-34% in the past two fiscals with tax outgo of Rs 2.3 lakh crore. It accounted of 34% of the total corporate tax collection, according to Credit Suisse.

The lower corporate tax may also help in improving valuations of Indian equities given the possible improvement in the return on equity. They trade at 40% premium to the MSCI Emerging Market Index, which is close to the 10-year average of 41%. A year ago, it was over 70%. A possibility of superior earnings should help in widening the current premium.

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