Mumba-based Godrej Industries Ltd (GIL) can benefit in a big way from the union budget announcement of the abolition of dividend distribution tax, according to ICICI Securities report.

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The brokerage has raised the target price of GIL to Rs 845 from Rs 819 per share while maintaining ‘Buy’ call on the stock. The stock currently trades at Rs 406 levels and the brokerage expects 108 percent upside from current prices.

As of now, GIL trades at a discount of 62 percent to the market value of its investments compared to a historical discount of 47 percent, ICICI Securities said.

According to the budget proposal, the dividend henceforth will be taxed in the hands of the person receiving the dividend as per the normal tax rates.

Earlier, GIL used to get tax free dividends from its listed subsidiaries and associates, viz. Godrej Consumer Products Ltd (GCPL), Godrej Properties Ltd (GPL), and Godrej Agrovet Ltd (GAVL). However, now it will be required to pay taxes on dividends received.

The company can save these additional taxes due to accumulated losses and unabsorbed depreciation of earlier years and increase in dividend payout to its shareholders, ICICI Securities said.

With the removal of dividend distribution tax, the brokerage expects Godrej Industries’ dividend income should increase and the company will be required to pay income tax on the retained dividends.

The company received a total dividend of Rs 198.7 crore in FY18 and Rs 341.5 crore in FY19. "We expect GCPL, GAVL and GPL to pay additional dividends with the removal of dividend distribution tax. GIL is required to pay income taxes at 25.17 percent rate on the dividends received," ICICI Securities said.

However, with accumulated losses and unabsorbed depreciation of earlier years, the brokerage does not expect any tax to be paid over FY21-22.

GIL will also get tax exemption for the dividends distributed to its shareholders. In FY19, GIL distributed dividends of Rs 58.9 crore and retained a dividend of Rs 282.6 crore.

Once the accumulated losses are over, GIL will be required to pay the taxes at 25.17 percent on retained dividends. However, GIL can raise the dividend payout to avail exemption.

At 12:40 pm, shares of Godrej Industries traded 1.02 percent higher at Rs 404.60 on the BSE.

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