The Sensex clocked its second-biggest single-day gain in more than a decade on Friday as it surged 1,921.15 points. Investors cheered the sharp reduction in corporate tax rates, a move that will boost India Inc’s earnings and provide a much-needed boost to the business sentiment.
Analysts were swift at revising earnings estimates for the Sensex. After the cut in corporate tax rate, the Sensex’s FY20 earnings growth has been revised upwards to 25% (from 13% earlier).
According to Axis MF, market consensus for earnings per share impact purely on account of the tax change is 7-10%. One of the biggest problems ailing the investment rate was low corporate savings and, to the extent, now this tax cut is expected to boost corporate savings.
According to Rusmik Oza, head of fundamental research at Kotak Securities, the effective tax rate of Nifty companies on an aggregate basis was 26%, which will now come down to 25.17%. There are only 20 Nifty companies that paid more than 30% effective tax rate and accounted for 43% of overall net profit in FY19.
“Any company paying 33% tax rate will see its earning go up by 12%. Overall, we can see Nifty earnings going up by 5-6% in FY20 as the effective tax rate was already lower at 26%,” Oza said.
While the Sensex rallied 1,921.15 points, or 5.32%, to settle at 38,014.62 points, broader Nifty50 gained 569.40 points to end the session at 11,274.20 points. The broad-based rally on Friday also saw investor wealth swelling by Rs 6.83 lakh crore to Rs 145.37 lakh crore. The Bank Nifty advanced 2,223.90 points – its biggest single day gains ever – to close the session at 28,981.55 points, up 8.3%.
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The Sensex witnessed the biggest single-day gain since May 2009 when the benchmark had hit two upper circuits on the same day following the Congress-led UPA retaining power in the general election. Nirmal Jain, chairman, IIFL Group, said: “The FM’s Rs 1.45-lakh-crore stimulus to reboot India is a bold move to unleash the animal spirit. This can certainly turn the tide for the economy & markets.”
Auto and Bank stocks powered the rally on Friday with over 60% of the Sensex’ gain of 1,921.15 points contributed by these two sectors as they are perceived to be the key beneficiaries of the rate cut. While the stock of Maruti Suzuki and Hero Motcorp rallied up to 13.2% on Friday, HDFC Bank, IndusInd Bank and State Bank of India went up in the range of 9%-11%. The effective tax rate of Hero Motocorp and HDFC Bank for FY19 stood at 32.09 and 34.6%, respectively, Bloomberg data showed.
Meanwhile, foreign portfolio investors (FPIs) resumed buying Indian shares after five sessions of continued selling through Thursday. On Friday, FPIs bought shares worth about $5.04 million, against a net purchase of $423. 02 million by local investors, provisional data on exchanges showed. Foreign investors have sold equities worth $4.5 billion between July 5 and September 19.
The positive sentiment rubbed off on all sectoral indices on Friday. Of the 19 sectoral indices compiled by BSE, barring BSE IT and Tech, all ended the day in green with BSE Auto and BSE Bankex surging 9.9% and 8.2%, respectively.