BNP sees second-order boost on corporate tax cut, tweaks stock picks

A surprise cut in the corporation tax rate will lay the groundwork for “second order benefits” to the economy over the next several months or even years, providing a favourable backdrop for broader stock selection at the same time, according to BNP Paribas Securities India.

The brokerage has re-balanced its “quality list” of stocks again, after having made adjustments a day before the government reduced corporation tax rates (September 20). 

This time, it added firms ranging from large-cap stocks such as Britannia Industries to smaller names like Manappuram Finance, wrote  Abhiram Eleswarapu, head (equity research), BNP Paribas Securities, in a note published on September 24.

“The rally in stocks following the tax rate 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.”

The surprise tax rate 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 mid-cap and small-cap indices are still below their means, according to the BNP report.Since the tax rate cut, mid-cap stocks have jumped 9 per cent, while small-cap names have gained 7 per cent. The benchmark Sensex has had climbed 8.3 per cent in the last three sessions before seeing a slump on Wednesday.

The gains show that the “first round impact” of the tax rate cut on company earnings has been factored in, according to Eleswarapu.