How Corporate Tax Rate Cut Will Impact India Inc.

India’s decision to slash corporate tax rate is expected to boost corporate profit growth, kick-start private investment cycle and make the nation a more competitive investment destination.

Lower corporate tax will lead to earnings benefit of 11-12 percent for capital goods, metals, banks, automobiles, consumer durables; 10 percent benefit for infrastructure, fast-moving consumer goods makers; and 5-7 percent for non-bank lenders, real estate, logistics; and 4 percent for cement, according to Philip Capital. There’s negligible impact on information technology and pharmaceuticals, it said in a report.

Buoyed by the sharp cut in corporate tax rate, Kotak Institutional Equities expects net profits of the Nifty 50 constituents to grow 25 percent for the ongoing financial year compared with 15 percent earlier.

India cut the corporate tax rate on domestic companies to 22 percent from 30 percent as the Narendra Modi-led government looks to stimulate economic growth from a six-year low. The effective new rate will be 25.2 percent, including all additional levies, Finance Minister Nirmala Sitharaman said on Friday.

BloombergQuint analysed the impact of lower corporate tax on the companies belonging to various sectors. Here’s the list…

Oil & Gas

The oil and gas sector will be one of the major beneficiaries of lower tax rate as the average tax rate for the sector in financial year ended March 2019 was close to 33.4 percent.

Oil & Natural Gas Corporation Ltd., Indian Oil Corporation Ltd. and Castrol India Ltd. would have been the top tax-saving companies based on FY19 tax rates. For Castrol India, tax rates are given for calendar year 2018.

Lower tax rate would result into higher cash flows which could be used by these companies for debt reduction and capex funding.

Telecom

Bharti Airtel Ltd. and Vodafone Idea Ltd. are loss-making and are not required to pay taxes. Bharti Infratel Ltd., Tata Communications Ltd. and Sterlite Technologies Ltd. will realise some benefits due to lower tax rates. Tax cut for Bharti Infratel is expected to aid Bharti Airtel.

According to JM Financial, net profit of Vodafone Idea and Bharti Airtel will come down due to reduction of deferred tax asset. Reduction in net profit for Bharti Airtel would be higher than Vodafone Idea due to higher effective tax rate, the note said.

Logistics

Some of the ports and logistics service providers have lower effective tax rate due to losses or lower tax rate in subsidiaries as they avail minimum alternate tax credits. Taking FY19 tax rate as base, Mahindra Logistics Ltd., TCI Express Ltd. and Blue Dart Express Ltd. would be among the major beneficiaries.

Aviation

Only InterGlobe Aviation Ltd.-operated IndiGo pays taxes among the listed airlines. SpiceJet Ltd. has not been paying taxes due to earlier accumulated losses. In FY19, however, IndiGo suffered losses due to lower ticket prices and higher costs. Taking FY18 tax rate as base, IndiGo would have seen a benefit of 308 basis points.

Automobiles

Automakers may witness a 6 percent increase in earnings per share or net profit on an average due to the corporate tax rate cut, according to Edelweiss. But it’s to be seen if the companies retain the benefits of the tax cut or pass them to consumers by lowering prices at a time Indians are buying less cars and GST Council offered no relief.

Antique Stock Broking, however, said if automakers pass the benefits of lower tax rates to consumers, it can help revive the weak demand and restrict further decline in operating income. However, companies like Tata Motors Ltd. having large global operations will have limited benefit.

Industrials

Companies operating in the industrial space are also expected to benefit from the government’s decision to lower corporate tax rates as increased cash flows will alleviate some of the working capital issues faced over the past few years.

The move, according to Credit Suisse, would benefit “short-cycle industrial companies such as ABB India Ltd., Siemens India Ltd. and Cummins Ltd. in the near term and Larsen & Toubro Ltd. in the long term”.

Antique Stock Broking said the move enhances the relative attractiveness of India as an investment destination and is expected to improve profitability of domestic companies. A revival in private capex would be a tremendous boost for the companies in the capital goods space, it said in a note.

According to Philip Capital, prima facie, this move should make India-based MNCs more competitive against their global peers.

FMCG

Most of the country’s largest consumer goods makers stand to gain from the corporate tax rate cut. The largest companies by market capitalisation—Hindustan Unilever Ltd., ITC Ltd. and Nestle India Ltd.—will see benefits to the tune of 5.5-8.6 percentage points.

Companies such as Britannia Industries Ltd., GSK Consumer Healthcare Ltd., Tata Global Beverages Ltd. and United Breweries Ltd., which pay tax at least 35 percent rate, stand to benefit the most.

However, companies like Dabur India Ltd., Marico Ltd., Godrej Consumer Products Ltd. and Jyothy Laboratories Ltd. will not get any benefit as their current tax rate is below the revised one on the back of concessions availed in terms of operating in special economic zones.

The companies can pass on some of these benefits to consumers through price cuts and invest in sales promotions to spur demand in weak macro environment, JM Financial said in a note.

Paints

Kansai Nerolac is expected to benefit the most. ICICI Securities Ltd. revised the full-year earnings estimates of the paintmaker by 12 percent for the ongoing financial year and 15 percent for FY21.

Paintmakers, according to the brokerage, may pass on the benefits to consumers in the form of price cuts, which would increase the demand especially in rural India. The average tax rate for the sector in FY19 stood at around 34.5 percent.

Agro Chemicals

The government’s move to lower tax rates should improve earnings and reduce the working capital needs for most agro-chemical makers, Phillip Capital said in a report.

Still, companies catering to the domestic market is set to benefit more than export-focused firms such as UPL Ltd. and PI Industries Ltd. as they already enjoy lower tax rates.

Antique Stock Broking revised higher its earnings estimates for FY20/21 by 6.9 percent for Rallis India Ltd. and 12 percent for Dhanuka Agritech Ltd. and Bayer Cropsciences Ltd.

Metals

A cut in corporate tax rates is positive for the metals sector amid a domestic slowdown, the U.S.-China trade war and a stronger dollar bringing down metal prices.

Corporate tax rate cuts will increase earnings per share and improve cash flows of metal companies facing higher leverage and rising working capital costs. With this move, the entire pack will benefit between 4-17 percentage points, BloombergQuint’s calculations showed. But, Tata Steel Ltd., National Aluminium Company Ltd. and NMDC Ltd. would be the top tax-saving companies.

The government also allowed new companies to pay taxes at a lower rate. That’s expected to bring in fresh capex in the manufacturing sector and boost metal demand.

Cement

Full tax-paying companies such as UltraTech Cement Ltd., JK Cement Ltd. and Orient Cement Ltd. are likely to benefit the most.

Still, the move is unlikely to have any impact on the capex cycle, as the sector is now cautious on capacity additions. Impact on working capital cycle, though positive, may not be material, according to UBS.

Infrastructure

A cut in corporate tax is a positive for construction companies as most of them are paying full tax rate. All these companies will move to 25 percent tax regime, boosting their EPS by 7-12 percent, according to Phillip Capital. Reduction in tax rate will also enhance cash flow, and hence ease the working capital situation, the brokerage said.

Financial

The financial sector will be a primary beneficiary of the corporate tax rate cuts. Some of the biggest beneficiaries among banks would be State Bank of India, HDFC Bank Ltd., IndusInd Bank Ltd., DCB Bank Ltd. Among non-bank lenders, Bajaj Finance Ltd., Bajaj Finserv Ltd., M&M Financial Ltd. and Cholamandalam Investment and Finance Company Ltd. will benefit the most. The average tax rate for the sector for FY19 stood at 32.5 percent.

Improved cash flows in the system will have a positive impact on asset quality of the banks, according to a report by Antique Stock Broking. Some of this benefit, it said, is likely to be “neutralised by hardening of G-sec yields and pressure emanating on margins due to repo rate-linked lending rate” (pressure to keep cost of capital lower for the borrowers). “Nevertheless, banking performance elasticity to economic growth is higher than to interest rate and if this move ignites investment cycle, then it would have a far reaching effect on sustainable profitability of the banks.”

Brokerage UBS said that the lower tax rates imply higher return-on-equity and if banks decide to pass on the full tax benefits, the lending rate may fall 20-30 basis points ceteris paribus (other things remaining constant).

Consumer Durables

Philip Capital said the corporate tax rate cut would lead to an earnings benefit of 11-12 percent for consumer durables makers. In the white goods category, companies like Whirlpool, CG Consumer Electricals Ltd. and Johnson Hitachi are expected to benefit the most. The average tax rate for the sector stood at 32 percent in 2018-19.

(The analysis referred to research reports of Emkay Global Research, Edelweiss, Antique Stock Broking, Kotak Institutional Equities, Morgan Stanley, Philip Capital and UBS.)