Investors on Friday lapped up shares on optimism that the lower corporation tax rate would boost corporate earnings and the economy. The benchmark indices Sensex and Nifty rose more than 5 per cent each — their biggest single-day stride since May 2009 — even as bond yields soared on worries that the move would widen the fiscal deficit and increase inflationary pressure.
The Sensex rallied 1,922 points, or 5.3 per cent, to end at 38,015, while the Nifty surged 569 points, or 5.3 per cent, to close at 11,274.2 — recovering from a 3.4 per cent loss for the week, to end with a 2 per cent gain. A day earlier, both indices had hit their seven-month lows, as investors fretted over slowing economic growth.
In the past few weeks, Finance Minister Nirmala Sitharaman had announced a slew of measures to boost the economy. However, the latest move to cut the corporation tax rate to 22 per cent was hailed as a much-needed shot in the arm for companies struggling to keep pace with earnings expectations.
Nirmal Jain, chairman of IIFL Group, called it a bold move that would “unleash the animal spirit”.
“This can certainly turn the tide for the economy and the markets,” he said. “The economy needed fiscal stimulus to get out of this slowdown,” said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services. The surge in the market added nearly Rs 7 trillion to India’s market capitalisation. Analysts said the gains in stocks were a re-adjustment to factor in the earnings boost resulting from the tax cut. Back-of-the-envelope calculations showed Nifty earnings were set for an 8 per cent boost on account of the lower tax rate.
Many analysts were in the process of revising the earnings estimates for firms upwards. Some said the lower taxes will boost profitability by as much as 20 per cent for some companies, such as HDFC Bank.
However, not all companies were seen benefiting.
Loss-making firms, or those with an already-low effective tax rate, didn’t have much to look forward to from the announcement. Shares of the technology pack, led by Infosys and TCS, ended with a near-2 per cent loss.
Banking shares rallied the most, with their sector gaining close to 10 per cent. Analysts said corporate banks have among the highest effective tax rates and could benefit the most. The BSE Auto index, too, gained close to 10 per cent. Shares of HDFC Bank rallied 9 per cent, and contributed to nearly a fifth of Sensex gains. Among other top gainers were Hero MotoCorp and Maruti Suzuki, each gaining over 10 per cent. Trading volumes in the market were nearly three times more than its one-month average, signalling frantic trading activity.
The combined cash market volumes on the NSE and BSE were over Rs 88,000 crore, compared to the one-month average of Rs 33,000 crore.
Most of the buying seemed to be driven by domestic investors. Provisional data provided by the stock exchanges showed domestic institutional investors were net buyers to the tune of Rs 3,001 crore. Meanwhile, buying by overseas investors was muted at Rs 36 crore. So far in this quarter, foreign investors have pulled out a record $5 billion.