After Finance Mininster Nirmala Sitharaman announced a cut in corporate tax, many brokerages have raised the Nifty 2020 target to 12,300-13,500, expecting double-digit growth on hopes of strong earnings going forward
The stellar upside after a cut in corporate tax rate was not restricted only to benchmark indices, but was also seen in broader markets. In fact, investors became wealthier by over Rs 10 lakh crore within just the two sessions.
The rally's strength was quite strong if we compare these indices' past performance. The BSE Midcap and Smallcap indices were down more than 13 percent year-to-date till September 19 and same fell 23 percent and 32 percent, respectively, during the February 1, 2018 to September 19, 2019 period.
But, after such a massive spike, there are lot of questions in investors's minds -- is it still a right time to buy midcaps? Will everything really change in coming quarters? Is it just a hope rally, will it recoup entire losses, etc.?
According to Moneycontrol that conducted a poll of analysts, most of them advised buying midcaps/smallcaps now to get ample returns in the coming quarters as they are betting on earnings and economic growth after this Rs 1.45 lakh crore fiscal package to corporates which would be enough with medium perspective, though they expect more measures in coming days.
"I think one should start buying into midcaps instead of waiting for more time. The fact that these pockets even started to show resilience to go down further over the past few weeks even before this tax announcements were made suggests that money has already started chasing them. And given the kind of attractive valuations these stocks are trading, I think it makes sense to start investing into high quality stocks with strong earnings track record and proven managements," Himanshu Gupta, Head of Research, Globe Capital told Moneycontrol.
However, he said that a word of caution will be to stay away from the highly volatile stocks where the news flow tend to shake the prices drastically every now and then.
Arun Kumar, Market Strategist at Reliance Securities also said the midcaps and smallcaps indices do display some signs of recovery. "Smart investors are nibbling on some of these stocks were value is relatively cheap with limited downside. From a time horizon of two to three years, one can accumulate some of the good stocks over the next few months."
Analysts expect double digit earnings growth in coming years, though the slowdown impact may be seen for couple of quarters more as it was quite bad in terms of earnings and sales data seen in last several months.
Auto sales have been falling month-after-month despite hefty discounts offering by companies, GDP growth for Q1FY20 slowed down to six-year low at 5 percent etc which clearly indicated the current slowdown situation.
"We believe that the current move is much beyond just a cut in tax rates and will have far reaching implications for the economy and positioning of India as a major destination to attract investments. Although we expect the economic benefits to flow in after a lag, it will considerably change the investor sentiments and growth trajectory in the coming periods. We shall change the earnings estimates on getting more clarity from fine prints. We remain positive over next 12-18 months and believe that sustained structural reforms can further re-rate markets," Prabhudas Lilladher said.
The government on September 20 announced a reduction in the corporate tax rate from around 35 percent to 25.17 percent thereby fulfilling its key agenda of implementing the Direct tax Code (DTC).
"This is a massive trigger for revving up growth and, more importantly, resurrecting sentiments that were down in the dumps. The immediate benefit is increased cash flows to Corporate India that will be either channelised into debt reduction or incremental investments in increasing capacity. Also, taxing new production facilities (that come up by 2023) at 15 percent will enable attraction of global capital and spur a beleaguered investment cycle," ICICI direct said.
After government move, brokerages raised their target for Nifty to 12,300-13,500 for next one year, expecting double digit growth on hope of strong earnings going ahead.
"Overall, we remain cautiously constructive on the market. After factoring in a lower corporate tax rate, our FY20/21 Nifty EPS estimate is upgraded by around 6.5 percent (Revised EPS stands at 607/727 for FY20/21). Accordingly, our year end Nifty target is revised upwards to 13,100 (earlier Nifty target of 12,300) based on 1-year forward multiple of 18x," Antique Stock Broking.