(Bloomberg) -- A surprise corporate tax cut will lay groundwork for “second order benefits” for India’s economy over the next several months or even years, while providing a favorable backdrop for broader stock selection, according to BNP Paribas Securities India Pvt.
The brokerage has re-balanced its “quality list” of stocks again after having made adjustments a day before the Indian government reduced corporate tax rates on Sept. 20. This time around it added companies ranging from large-cap stocks such as Britannia Industries Ltd. to smaller names including Manappuram Finance Ltd., Abhiram Eleswarapu, head of equity research at BNP Paribas Securities, wrote in a note published on Sept. 24.
“The rally in stocks after the tax reduction has provided immediate money in the hands of investors,” he said by phone. “It provides confidence that the government is willing to do whatever it takes and will provide equity investors a chance to broaden the basket of stocks.”
India’s surprise tax cut came after economic growth in the April-June quarter slumped to its lowest level in six years, hitting the nation’s smaller stocks the hardest. While the implied valuations of 10-15 Nifty stocks are still at a premium to historical averages, the medium and smallcap indexes are still below their means, according to the BNP report.
Since the tax cut, mid cap stocks have jumped 9% while small cap names gained 7%. The benchmark S&P BSE Sensex has climbed 8.3% in the last three sessions.
The gains show that the “first round impact” of the tax cut on company earnings has been factored in, according to Eleswarapu.
Here are the key insights from the report
- Overweight India; retain Sensex target of 40,500 by December which is 3.6% above Tuesday’s close
- Tax cut to widen fiscal deficit by about 0.75% of GDP though it could be partly recovered through higher collections, divestment
- Quality list additions: Britannia Industries, UltraTech Cement, GAIL, Hero MotoCorp, AU Small Finance Bank, Nestle India, Manappuram Finance, Repco Home Finance, Symphony, Power Grid, GlaxoSmithkline Consumer
- Deletions from list: Sun Pharma, HDFC Ltd., Cipla, JSW Steel, L&T Infotech, Sun TV, TeamLease Services, Can Fin Homes, Eris Lifesciences, Adani Ports, Reliance Industries, Crompton Greaves, InterGlobe Aviation
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