Higher earnings hope powers Sensex run; analysts expect it to touch 45,000

The brokerage expects the Sensex to climb to 45,000 - 15% upside from current levels - by June next year

Optimism over economic recovery, sparked by the corporation tax rate cut on Friday, helped the domestic markets extend gains on Monday, with the Sensex logging its second consecutive four-digit gain.

The benchmark index rose 1,075 points, or 2.83 per cent, to end at a two-month high of 39,090. The Nifty closed at 11,600.2, with a gain of 326 points, or 2.9 per cent.

Investor sentiment has taken a dramatic turn from bearish to bullish following the government’s move to lower taxes.

Both the indices last week had dropped to their lowest levels since February. However, with the stellar gains made in the past two sessions, the Sensex is less than 3 per cent away from its all-time high 40,268, which it touched in early-June. Overseas investors were strong buyers on Monday, lapping up shares worth Rs 2,684 crore. In the previous sessions, their buying was muted, even as domestic institutions had pumped in over Rs 3,000 crore into stocks.

Analysts said the lowering the corporation tax from 30 per cent to 22 per cent would boost the Nifty’s earnings by 8-10 per cent this financial year. The Sensex has surged 3,000 points, or 8.3 per cent, since the tax cut announcement as stock prices got realigned to the revised higher earnings estimates. “We expect India’s earnings growth revisions, in terms of both depth and breadth, to turn sharply positive after almost nine years of downgrades,” said Ridham Desai, managing director, Morgan Stanley India.

The brokerage expects the Sensex to climb to 45,000 — 15 per cent upside from current levels — by June next year.

Gautam Chhaochharia, head of India research, UBS said the move by the government sends a strong signal that growth is going to be policy focus going ahead.

“While near-term demand boost may underwhelm, other measures should help and close out the recent negative feedback loop," he said.

Investors are pinning hopes that the move to lower taxes will not just benefit corporate entities, but have a positive spill over impact on the economy, kick start a new investment cycle and boost consumption.

However, after the stellar gains over the past two days, there may not be further room for stocks to edge higher.

Edelweiss in a note said further gains could be modest as the positive impact on the economic could only happen with a lag.

“The economic response in terms of investment and consumption will be a tad lagged even as expectations run upfront,” Edelweiss analysts led by Aditya Narain wrote in a note.

Investors continued to pile onto stocks that could benefit the most from the reduction in tax. Banking, capital goods, automobiles and consumer goods space, where the effective tax rate was the highest, were seen benefiting the most.

Banking shares — which also have the highest weightage in the benchmark indices — have gained the most with the Bank Nifty index surging over 15 per cent in past two sessions.

Consumer goods, capital goods and automobile stocks too have rallied sharply. Meanwhile, shares in the export-oriented technology and pharma space have declined as the new taxation framework is said to impact some companies, particularly those availing avail tax window, negatively.  

Information technology (IT) shares led by Infosys (fell 5 per cent) were among the major losers on Monday. Financial stocks alone accounted for nearly 900-point gain, while the IT stock dragged the index lower by 200 points.