Weak fiscal position and premium valuation could give a resistance to market in the short-term…

Reduction in corporate tax and global risk from factors like trade-tensions and Brexit provided a breather to the market in the last two months. A good part of the rally was in expectation of further reforms from the government with a cut in direct tax, long-term capital gain tax and dividend distribution tax in the future. The Government’s intention is to reach 5 trillion dollar economy by 2024 and provide more supportive measures. Government had previously cut the corporate tax which is fueling the ongoing Q2 results. In addition, cut in interest and raw material costs are also providing a hope that business outlook will improve further from H2FY20.

However, based on H1FY20 actual number announced by controller general of accounts, the fiscal position of the government looks weak. It will be difficult for the government to provide more stimulus in the near future, since it will further impact its tax-revenue target. The actual tax revenue for H1FY20 is much below the budget target which is only 4.2% YoY up verses 25% growth forecasted in the union budget. It is projected that it will grow to Rs16,496bn in FY20E from the provisional Rs13,169bn of FY19 provided by Controller General of Accounts. The actual tax revenue is much lower due to further slowdown in the economy and cut in corporate tax. To reach this target the government will depend a lot on non-tax revenue like divestment and other sources like dividend along with control in expenditure to maintain the fiscal target of 3.3%.

So far, about 31 companies of Nifty 50 indices have declared the result. The outcome has been good with a PAT growth of 14% on a YoY basis compared to expectation of ~10% for the same stocks. In the case of Nifty 500, 200 stocks have declared results, with traction of 25% growth in consolidated PAT which is 12% on QoQ basis. This in fact is led by cut in corporate tax and better performance from sectors like Banking, Cement and FMCG while weak performance is seen in Auto and IT sector. The most noticeable is the better numbers by banking sector, providing a hope that India’s NPA problem is normalizing.

Q2 results is giving hope that the best part of the earnings growth will be in the second half of the fiscal year supported by post festival season uptick, good monsoon and reduction in interest rate. Sentiments in equity market are also improving due to weak crude oil prices, positive global news from US-China trade deal and Brexit. Since 19^th September, Nifty 50, Nifty 100 and Nifty 500 have rallied by 11% respectively. Market may have to be cautious in the short-term and look into developments like the final trade deal between US and China, premium valuation which has touched a high of 19x P/E on a one-year forward basis for Nifty 50 and weak fiscal position.

Posted: November 2019.