Tax windfall: India Inc to increase capex spending, retire high-cost loans

With a surprise tax windfall in its kitty, Corporate India is redrawing its capital allocation strategy, plans to retire high-cost bank loans and, in a few cases, even giving the green signal to capacity expansion projects. 

While the tax cut will help companies across most sectors, energy, financials, metals, and mining are going to see major improvement in their 2019-20 (FY20) bottom line. Oil-marketing firms would gain 17 per cent on their 2020 earnings, while the retail banks are expected to gain 14 per cent in FY20, according to an analysis by Edelweiss. 

Among the profit-making companies which would gain the most in absolute terms are Reliance Industries (RIL), Oil and Natural Gas Corporation, and Indian Oil Corporation. 

RIL is reaching the end of its investment cycle in telecom and its joint venture with BP for natural gas has planned an investment of Rs 35,000 crore in the three deepwater fields in this block. The company is now busy reducing its debt as it hives off its fibre and tower assets to infrastructure investment trusts and a partial stake sale in refining business to Saudi Aramco. 

"The incremental cash generated would be used towards investment-led growth by our group companies. This tax cut will certainly help us relook at taking capital expenditure (capex) investment decisions that we had deferred due to the slower economic growth and tepid demand," said Harsh Goenka, chairman of RPG Enterprises. 

T V Narendran, chief executive officer (CEO) and managing director (MD), Tata Steel, said, "This (windfall) will help us continue with our investments, while we continue to focus on deleveraging."

The company's India capex is largely focused on its Kalinganagar plant, which is undergoing its second phase of expansion by 5 million tonnes (mt) to 8 mt costing Rs 23,500 crore. At the same time, Tata Steel is committed to deleveraging its balance sheet.

Tata Steel's effective tax rate will fall by 18 per cent to 25 per cent, an analysis by Edelweiss shows.

According to Sanjiv Puri, chairman and MD, ITC, the move would trigger a virtuous cycle of investment, consumption and employment. Investments channelled to the food processing sector and competitive agri-value chains will also provide significant fillip to the agri and rural economy benefitting farmers and local communities," he said. 

ITC is already in the process of investing Rs 25,000 crore across 65 projects. 

Top officials of non-banking financial companies (NBFCs) say the industry can use the additional tax savings to create provisions against potential bad debts and to fortify the balance sheet. "If not, then the NBFCs can selectively reinvest it in business for growth or pay higher dividends. But considering the state of the industry, the best option is to fortify their balance sheets," said a CEO of a leading NBFC. 

According to an analysis of Nifty50 stocks by brokerage firm, Emkay, about 20 Nifty stocks should see more than 10 per cent earnings upsides due to this announcement, while the Nifty as a whole should see 8 per cent earnings per share increase in 2020-21. "The last time corporate tax rates were cut in India in 2010-11 Budget, it led to a 22 per cent corporate tax growth - a surprise of 2 per cent growth over Budget expectations. However, that may not be an apt comparison as the economy at that period was already in an accelerating phase," said Emkay. 

H M Bangur, MD, Shree Cement, said, "The money so saved can be used only in two ways - to repay existing debt or it can be invested back in the company as part of the Make In India initiative.  For Shree Cement, we are yet to understand the actual gain and then decide how to use it." 

CEOs of the pharmaceutical industry said the sudden tax windfall is unlikely to be used for capex. "Investments are planned based on our plan to enter a particular product segment (for example injectables) or a market (US or any other regulated market). So, the windfall from the finance minister's announcement won't be used for investment purposes unless there was a plan already," said the chairman of a leading export-driven pharma company. 

Another industry veteran who has worked as a finance executive in a top pharma firm felt that the companies may use this gain to retire some debt and make the balance sheet stronger. 
With inputs from Ishita Ayan Dutt, Avishek Rakshit & Sohini Das

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