Stock prices of nearly half of the BSE500 firms back to pre-tax cut levels

Concerns about financial sector health weigh on investors' minds

The euphoria created by the surprise reduction in the corporate tax rate is waning as concerns about the health of the country’s financial sector roils the stock market. Stock prices of nearly half of the BSE500 companies are back to pre-tax cut levels. 

The turmoil in the financial sector has erased all the gains made by several companies after September 19, when Finance Minister Nirmala Sitharaman cut the corporate tax rate to 22 per cent (excluding surcharges) from 30 per cent earlier. Following the announcement, the Sensex had surged over 8 per cent in two days as analysts raised earnings estimates and stock price targets. Over 85 per cent of the members of the BSE500 universe had seen their stock prices jump in the two trading sessions after the tax cut. However, only 55 per cent of them have managed to hold on to those gains.  Share prices of 230 of the 501 companies are currently lower than what they were before the fiscal stimulus was provided by the government. 

Companies whose share prices have fallen much below the September 19 levels are mainly financial stocks or those experiencing financial stress.

“Stock prices are ultimately a function of earnings. For the market to go up on a sustained basis, you need the economy to do well and earnings growth to start coming in. In the interim, there will be worries about the issues in the financial sector,” said Jyotivardhan Jaipuria, founder, Valentis Advisors.

“There was a feeling a few months back that the bad loan problem could be behind us, but those worries are coming back,” said Jaipuria.

YES Bank, DHFL, Coffee Day Enterprises, Indiabulls Housing, and Reliance Capital are some of the stocks that have corrected the most as investors have pulled out from these counters amid mounting concerns around stress in the financial system and risks of defaults.

“It is not surprising that many of the BSE500 stocks are back to the September 19 levels. The underlying issues that were ailing the market, such as liquidity crunch at NBFCs, rising instances of corporate default, and sluggish earnings growth, have remained unchanged even after the tax cut. Because of these issues, you have a lot of margin calls which get hit. Moreover, the September quarter numbers are not going to be great for the BSE500 companies because August was a whitewash for the entire economy because of the erratic monsoon,” said Abhimanyu Sofat, head of research, IIFL.

There are still several companies whose share prices are trading sustainably above the levels seen before the tax cut. Analysts say investors are opting for companies where there is good earnings visibility, and that lower tax rates will boost earnings and dividends. 

“Investors are becoming more and more obsessed about the quality of the management and business. Some have taken the post-tax rate cut rise in other stocks as an opportunity to exit,” said Deepak Jasani, head of retail research at HDFC Securities.

“This quest for quality could continue until the economy goes back to normal growth rates and liquidity in the system is restored to earlier levels.”