The government’s last week announcement of reduction in the corporate tax rate from close to 35 per cent to 25.17 per cent may not see the consumption of consumer durable goods going up, but corporate earnings will rise tremendously, experts opine.
The government’s last week announcement of reduction in the corporate tax rate from close to 35 per cent to 25.17 per cent may not see the consumption of consumer durable goods going up, but corporate earnings will rise tremendously, experts opine.
The move is expected to benefit goods companies such as Crompton Greaves Electricals, Johnson, Hitachi, V-Guard, Polycab, Blue Star, Havells—whose consolidated FY19 tax rate were more than 31 per cent— however, for companies like Voltas may not see any tangible benefits as their current effective tax rate is lower.
“Generally, the effective tax rate depends on the current tax rate companies are currently paying. For companies which are paying 25 per cent or lower tax rate, there would be no impact as such; but for companies which were paying more than 30 per cent, their profitability is expected to go up,” said Abhishek Bansal, Chairman, Abans Group.
He further opined, “Tax cut may further lead to buy back from promoters because they know that their profitability is going to increase as they can clearly see their savings from the tax, with increase in valuation. But I doubt that there would be an increase in the demand or consumption of goods because of it."
However, Bhavin Patel, CEO, LenDenClub is hopeful that the tax cuts will result in higher demands and push for more consumption of goods. He said, “The tax cut will give leverage to companies in terms of price reduction, distribution strengthening, advertisement spending, etc. Push by brands and loan options will result into rising demand of consumer goods.”
Sunil Damania, Chief Investment Officer, MarketsMojo also shared a similar opinion. He said, “Whenever the Sensex goes up, there’s a feel-good factor in the economy. The tax rate cut has actually improved the sentiment on the market and in turn for consumers. People who had postponed their purchases because of the economy slowdown will start making purchases. The same will see companies benefit from Dussehra and Diwali, which might extend till Christmas.”
“I would not be surprised if some of these consumer durable companies see 15-20 per cent growth,” he added. Meanwhile, online trading company, Philip Capital has projected that the corporate tax rate cut would lead to an earnings benefit of 11-12 per cent for consumer durables makers.
The S&P BSE consumer durables index was at 25,785.51 at the time of filing this report. The index has witnessed 11.4 per cent rise over the last 30 days.