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Economy

Podcast: Will Corporate Tax Cuts Fix India’s Bruised Economy? (Ep-11)

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“In the US, there was a talk of something called a Nifty50 in the early 1970s. A lot of those stocks traded at ridiculous P/E multiples. And people were told that these companies will never die. Just six years later, a portfolio of these 50 stocks was down some 60%. Not because these companies died and some of them never died or actually became bigger. But the point was that when you overpaid for the valuation, you ended up having too high expectations. Nobody would have thought Britannia will have to reduce the price of it’s biscuits, and they had to” – Deepak Shenoy

Host Deepak Shenoy (CEO) and Aditya Jaiswal discuss the corporate tax cut and it’s impact on the economy and most importantly, on our portfolios.

We discussed seven questions in the Podcast:

  1. Corporate tax cuts are fine but why aren’t we talking about the consumption demand? (1:26)
  2. Why corporate tax cuts? why not cut personal taxes? (9:15)
  3. How will the government bell the fiscal Cat? (13:00)
  4. Will India finally become the factory to the world? (16:58)
  5. Will the improving profitability lead to re-rating of the Indian market? (21:26)
  6. Why are the Megacaps rallying? (28:30)
  7. Are the good times back for our portfolios? (32:33)

Excerpts:

Everyone is talking about how the reduced taxes will lead to more cash in hand for corporates. Crisil even came up with a report that top 1,000 companies would save nearly INR 37,000 crore every year.
What will corporates do with the money?
Basically, reduced taxes should lead to tax savings for corporates. They will either cut prices, pay dividends or put up new plants. However, do corporates have any incentive to do capex today? A lot of these companies are already sitting on cash, be it Maruti Suzuki, Bajaj Auto, Nestle India. The reason there was no capex from their side was because the underlying demand itself wasn’t there. So, what about the revival of consumption? I can’t consume more unless my income goes up.

Why corporate tax cuts why not cut personal taxes?

This stimulus is definitely not a consumption stimulus, However, it aims to be an investment stimulus. Even if existing firms speed up the capex cycle, it is going to take at least the next 1-2 years for new capacities to set up, and wages to pick up. Would it have been better had the government had gone for cuts in personal taxes?

“If you provide a tax cut at a personal income tax level, it will benefit only a small percentage of the population. Is that going to change anything dramatically? But if one company decides to put up one plant, it’s going to hire 150 workers in order to just put up the plant. Each of those jobs will probably be below the taxable bracket, but they will consume more.” – Deepak Shenoy

How will the government bell the fiscal Cat? (13:00)
The tax cut is estimated to cost 1.45 lakh crore in lost tax revenue, now they govt clearly not in a position to let the fiscal deficit go up. Where will this money come from? If the government fails to maintain the fiscal deficit then it will have to borrow more, how will the interest rates go down if the govt borrows more- this becomes a vicious cycle! Is aggressive divestment by the govt is going to be the solution? (BPCL)

Will India finally become the factory to the world?

“if Apple were to make iPhones (in India), it won’t make iPhones only for the world, it will also make iPhones for Indians, but Indians can’t afford them. Chinese couldn’t afford them too. But now China is one of the largest buyers of iPhones because their per capita income has gone up to a point where they can afford iPhones… a 17% tax is a very competitive rate, But what this doesn’t do is address the fact that these companies are going to come in and compete with Indian companies that are doing the same thing…But this is a good problem to have” – Deepak Shenoy

The govt had announced Make In India policy in 2014 but what they have done now, the 15% tax rate for new manufacturing firms is the real Make in India push. Wages in China have grown to an average of $700 per month, in India it is less than $200/ month. Now with the ongoing trade war, can we compete with not only China but Bangladesh and Vietnam as well?

Will the improving profitability lead to re-rating of the Indian market?

Morgan Stanley and UBS both are turning positive on Indian corporate earnings and are talking about a cyclical recovery. Since, this tax cut is a permanent step, it is going to lead to a profitability jump and ROE expansion, does this calls for a rerating of the Indian market as a whole?

Why are the Megacaps rallying?

All the mega-cap stocks are moving as if there is no tomorrow. Asian paints is trading at a P/E of 75, DMART is at 115 P/E, Britannia at 64 P/E, and not just consumption stocks, even Bajaj finance is trading at 12x BV. Why is this happening? Is it like DIIs are willing to pay top dollar for quality companies or is this clearly mis-pricing?

“In the US, there was a talk of something called a Nifty50 in the early 1970s. A lot of those stocks traded at ridiculous P/E multiples. And people were told that these companies will never die. Just six years later, a portfolio of these 50 stocks was down some 60%. Not because these companies died and some of them never died or actually became bigger. But the point was that when you overpaid for the valuation, you ended up having too high expectations. Nobody would have thought Britannia will have to reduce the price of it’s biscuits, and they had to” – Deepak Shenoy

Are the good times back for the portfolios? Is this the time when we start using the cash and the debt we had kept aside till the weakness was over?

As long as you know that you’re walking on eggs, it’s easier to understand that you have to be nimble- Deepak Shenoy

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