Corporate tax cut: These stocks can give you up to 34% returns, according to ICICI Direct

SUMMARY

Like a bolt from the blue, the government announced a reduction in the corporate tax rate thereby fulfilling its key agenda of implementing the Direct tax Code (DTC). As per ICICI Direct, this is a massive trigger for reviving growth and, more importantly, resurrecting sentiments that were down. The immediate benefit is increased cash flows to corporate India that will be either channelised into debt reduction or incremental investments in increasing capacity, it added. It will also enable the attraction of global capital and spur a beleaguered investment cycle. The brokerage sees EPS upgrade of 6 percent each for FY20E and FY21E for Nifty. These are the key large, mid and small-cap stock picks by the brokerage:

By Pranati Deva Sept 25, 2019 1:27:55 PM IST (Updated)

ITC is set to benefit to the tune of 780 bps on implementation of new tax rates, as its effective tax rate is 33 percent, the brokerage said. It added that GST Council announced no increase in cess for cigarette companies, which is also positive for ITC. It believes the stable taxation policy should help in positive volume growth for ITC.

Building in the tax rate change, the brokerage's PAT estimates for FY20E and FY21E for the company is revised upward by 12-13 percent. Going ahead, ICICI Direct remains positive on the trajectory of credit growth led by a slew of measures taken by government and RBI.

The effective tax rate of UltraTech Cement is 31-32 percent, which implies 600 bps benefit on the tax rate on implementation of the new tax rate, the brokerage noted. The brokerage is positive on the overall cement space and among large-cap cement stocks, Ultratech Cement is poised for strong growth with the improving utilisation and improving balance sheet strength.

Building in the tax rate change, PAT estimates for FY20E and FY21E have been revised upward by 12-13 percent, the brokerage said. It added that with focus on offering loans with a higher risk-weighted return, credit growth is expected to pick up to 17 percent CAGR for FY19-21E.

The effective tax rate of L&T (standalone) is 29 percent (on current tax basis), which is likely to translate into a benefit of about 550 bps post-implementation of the

new tax rate, leading to an earnings upgrade of 4-4.5 percent on FY20-FY21E each, the brokerage stated. It remains positive on overall capital goods space led by L&T, which is poised to be the biggest beneficiary of any revival in private sector capex across sectors.

For FY19, the effective tax rate of Tata Steel was 35 percent, which implies 980 bps benefit on the tax rate on implementation of the new tax rate, the brokerage said. It remains positive on Tata Steel as it is poised to benefit from the increasing share of domestic business in its overall consolidated operations, thereby aiding overall operating margins.

The effective tax rate of Asian paints is 33 percent, which implies 800 bps benefit on the tax rate on implementation of the new tax rate. The brokerage remains positive on the overall paint industry as it is poised to benefit from strong decorative volume

growth and its lean balance sheet.

PAT estimate for FY20E and FY21E has been revised upward by 14 percent post the tax cut, ICICI Direct said in a report. Going ahead, a slew of measures by RBI and government coupled with the arrival of the festive season, is expected to speed up bank's credit growth in coming quarters, it added.

Building in the tax rate change, PAT estimate for the company has been revised upward by 12 percent for both FY20E and FY21E, the brokerage said. Given the market leadership of Hero MotoCorp in the domestic two-wheeler market place, cash-rich balance sheet, a healthy dividend yield of 3 percent, the brokerage assigned a 'buy' rating on the stock.

Revising the tax rates leads to an 8 percent upgradation in the brokerage's PAT estimates for FY21E. According to the brokerage, M&M is the market leader in the domestic farm equipment space. The brokerage upgraded the stock to 'buy'.

The effective tax rate of Bajaj Finserv is 32-33 percent, which implies 750 bps benefit on the implementation of the new tax rate, it said. The brokerage continues to remain positive on lending as well as the insurance business. Given the cut in the corporate tax rate, earnings estimates are revised upwards by 13 percent in FY20-

21E, it noted.

ICICI Direct's midcap picks include Ramco Cements, M&M Finance, PVR, Bata India, and Kansai Nerolac, among others.

ICICI Direct's top small-cap picks include Sagar Cement, TCI Express, EIH, Inox Leisure, and DCB, among others.