A cut in corporation tax to an effective 25.2 per cent on Friday triggered a rally at the bourses, with the S&P BSE Sensex surging over 3,000 points in just two days. In this backdrop, most brokerages – domestic and foreign – have recast their target levels for the frontline indices.
While they acknowledge a possible rise in the fiscal deficit as a result of this measure, they do suggest investors who with a long-term investment horizon use the opportunity to buy, especially on any decline in the index levels.
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"We estimate that net revenue shortfall for the Union government could be ~0.75 per cent of GDP. But some of it could be neutralized by a likely around 0.45 per cent of gross domestic product (GDP) shortfall in budgeted expenditure. So the net fiscal impact could be around 0.3 per cent of GDP, taking the central government’s fiscal deficit in FY20 to 3.6 per cent of GDP," wrote Samiran Chakraborty, chief economist for India at Citibank in a recent report.
Here are the sectors leading research and brokerage firms are bullish on and the stocks on their shopping list.
Remain underweight on autos; move IT to underweight and remain Overweight (OW) Financials, Property, Oil & gas.
Credit Suisse Wealth Management
We recommend buying banking stocks, which are the primary beneficiaries of lower corporate taxes and improving sentiment as well as investment climate. HDFC Bank, State Bank of India, Bandhan Bank and ICICI Bank will be better placed to capture a future pick-up in growth. We also like non-banking financial companies focused on auto financing rather than original equipment manufacturers (OEMs).ALSO READ: FM's bounty on corporate tax props up sentiment for HDFC Bank stock
Information technology (IT) is a good defensive area to consider, but given substantial outperformance already, the sector could be subject to some selling pressure as the rupee could see some strength in the near term given our expectation of higher FPI flows into India. We expect a stronger rotation out of IT companies into banks and FMCG.
FMCG companies could see one of the worst September volume growth rates in recent years. However, given a better monsoon season – already 5 per cent above long-term average – and improving Kharif crop sowing coupled with significant tax cuts, the earnings outlook has improved for the sector.
We prefer mid-caps over large-caps, value over quality and momentum and domestic cyclicals over defensives. We are overweight Consumer Discretionary, Industrials and Financials.
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We reduce our weight in healthcare and utilities, though still remain overweight on these two segments. We continue to remain overweight on infra and construction. We are underweight autos and consumers. Though these sectors are large beneficiaries of the tax cut, we think there is the risk of these being passed on to customers due to weak demand and competitive pressure in the near-term. We see limited scope for valuation expansion, and the stock price rally after the tax cut announcement has already factored in the potential earnings impact. We replace Minda Industries with Ashok Leyland in autos given valuations comfort and potential investment-led economic growth in the medium-term. Top picks include ICICI Bank, Axis Bank, Larsen & Toubro, Dr Reddy's and ICICI Prudential Life Insurance — all 'Buy-rated'.
BNP Paribas Research
The tax cut announcements have a direct impact on several inputs to our Quality list models. Thus, despite only recently rebalancing our lists, we are forced to make changes to them yet again. The prominent large-cap additions are Britannia, UltraTech Cement, Power Grid, GAIL and Hero MotoCorp, while the mid-cap ones are Nestle India, GSK Consumer and AU Small Finance Bank. Our small-cap additions include Manappuram Finance, Repco Home Finance and Symphony.
ALSO READ: Underestimates & overreactions: The math behind FM's corporation tax cuts
Antique Stock Broking
Large-cap: HDFC Bank, ICICI Bank, Larsen & Toubro (L&T), Asian Paints, Ultratech Cement, Hindustan Zinc, Bajaj Auto, Adani Ports, GAIL India, Marico, Eicher Motors, Siemens, Dr Reddy, UPL, Cipla, Bharat Electronics and Muthoot Finance.
Mid-cap: Honeywell Automation, TVS Motor, Federal Bank, Gujarat Gas, Phoenix Mill, Natco Pharma, Kajaria Ceramics, NALCO, Timken India, Johnson Control, CCL Products, MOIL, TCIL and Dhanuka Agritech.
We are increasing overweight on capital Goods and increase underweight on IT. We are adding ABB, Ashok Leyland and HCL Tech in our model portfolio. We are reducing weights of ITC, Britannia, IndusInd bank, TCS and HDFC post recent stock movement.