In spite of the tax rate cut, Q2 preview suggests that earnings growth is not underway …

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The downside risk of the market had reduced post the huge cut in corporate tax of ~10% for existing entities and ~18% for new ones. But market is still consolidating since it is not able to find any incentives to invest in equities which is seen as a growth asset. The outlook for equity as an asset has turned subdued since growth has reduced in the short-term. This is in-spite of the government’s stimuli; the domestic economic engine continues to be weak with an insight that it will be so in the next one to two quarters. The outlook for corporate earnings growth got better due to cut in tax rates but without any operational gains in demand, price and profitability, the overall trend of PAT growth remains subdued. As per the initial preview of Q2FY20, the expectation for corporate profit continue to be weak at Profit Before Tax level.

Due to sharp deceleration in consumer demand and tepid investment, India’s gross domestic product (GDP) has been downgraded further. The economic growth has been impacted by a combination of domestic as well as global headwinds. Domestically, the key factors are weakness in real estate, infrastructure, contraction in capital goods and consumer durables and banking crisis. On the basis of weak macro environment, benign oil prices and comfortable CPI inflation, the RBI cut the repo rate by 25bps to 5.15%, to support the economy. In-spite of this market was disappointed since the transmission of the cut in interest rate which happened during the year was not disbursed to the corporate and household. While a huge downward revision in GDP growth estimate to 6.1% from 6.9% and stress in the banking system put the market under stress. One-year corporate bond yield continues to be high at around 8.5% to 10% due to increase in the systematic risk of industries like NBFCs, Real-Estate and Banking.

Today, even defensive stocks are being dragged by the bear grip. In the last one-month sectors like Pharma and IT slid by 11% and 5% respectively. The global trade uncertainties are impacting whole export-oriented sectors in which increased US FDA observations pulled pharma down whereas lower deal wins in BFSI segment and wage hike is impacting IT stocks. The recent corporate tax cut won’t make much difference to their earnings outlook as the effective tax rate of most IT and Pharma companies are either below or at par with the new tax rate. The second quarter earnings season will kick start by IT bellwethers where expectation remain mixed due to weak spending and rising sub-contracting expenses. Globally the latest development regarding trade-war is damaging the confidence that it will not find a remedy soon whereas the world economy has slowed down due to trade issues. FIIs are selling due to risk-off in the emerging markets owing to slow-down in their economy while risk-less return in developed countries is much lucrative compared to EM equity. It is also noticed that FIIs are reducing their exposure in equity and shifting to Debt and Gold. In India, MF’s continue to be the highest and best buyer of Indian market for long-term gains.

1 COMMENT

  1. In this scenario,the market may come down to previous range of nifty 8000 to 10000 in the coming years since a global recession can be expected due to fall in exports and US, China Cold War,Turkey Syria issues and less domestic consumption for want of liquidity.

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