Stock mkt more polarised after tax cut; 91% of gains cornered by 13 firms

The stock market, which has long been polarised between a handful of top-performing large-cap stocks and the rest of the market, has become even more lopsided after the cut in the corporation tax rate, announced on the morning of September 20, during market hours.

The bulk of the gains in market capitalisation after the reduction in the rate has accrued to a handful of companies constituting the BSE 500 index, while more than half — 254 of 501 — have lost market capitalisation in the past two weeks since the tax cut.

The combined m-cap of the BSE 500 companies is up 3.1 per cent, or Rs 4.04 trillion, since September 19, but nearly a third (32.4 per cent) of these gains are accounted for by just two companies — Reliance Industries and HDFC Bank. 

In all, five index companies account for a little more than half the gains (53 per cent) in the broader market since September 19 and 91 per cent of the gain in m-cap has come from 13 top stocks.

Some of these gainers include Bajaj Finance, Hindustan Unilever, Bharat Petroleum Corporation, Axis Bank, Indian Oil, and Maruti Suzuki. 

The analysis is based on the changes in the m-cap of the BSE 500 companies between the close of trade on September 19 and October 7. 

In comparison, some of the biggest losers after the tax cut include State Bank of India, Infosys, Tata Consultancy Services, Aurobindo Pharma, Zee Entertainment, Indiabulls Housing, NTPC, Piramal Enterprises, and Coal India.

Analysts attribute this skew to the difference in the stock ownership of large-cap stocks against second- and third-rung stocks. 
“The skew in the rally shows the poor purchasing power of domestic retail investors against the might of institutional investors. The gains after the tax cut have largely been restricted to large-cap stocks owned by foreign portfolio investors and domestic institutions such as mutual funds and insurance companies. In contrast, mid- and small-cap stocks that are largely owned by retail investors continue to languish,” said G Chokkalingam, founder & MD, Equinomics Research & Advisory.  

According to him, tax cuts will benefit many of the profitable mid- and small-cap companies as well, and it’s a matter of time before their stock prices began to reflect this.

A break up of the rise in m-cap suggests that the gains to winners far outweigh their share in the overall m-cap or corporate revenues and profits prior to the tax cut.

For example, the two biggest gainers — Reliance Industries and HDFC Bank — together accounted for 10.4 per cent of the combined m-cap of BSE 500 companies on the eve of the tax cut. The two companies together accounted for 7.6 per cent and 21.7 per cent of the combined revenues and profits of BSE 500 companies in FY19.

Similarly, the top 13 companies that cornered 91 per cent of the gains accounted for 31 per cent of BSE 500 index companies’ combined m-cap on the eve of the tax cut and 32.3 per cent of the index companies combined net profit in FY19.

Experts attribute this dichotomy to the cautious stance of the equity investors many of whom remain unsure about the long- to medium-term impact of the tax cut on corporate profitability. “Most equity investors are still cautious and waiting for the tax cut to reflect in corporate earnings before they commit additional equity investment. There could be a rally in the broader market later this year and early next year once tax cuts begin to push up earnings beginning December 2019 quarter,” said Dhananjay Sinha, chief strategist and economist, IDFC Securities.

According to Sinha corporate earnings are likely to remain soft in the second quarter putting a lid on a market rally in the near-term. “Third quarter could see much better corporate earnings as companies will get tax refunds for higher taxes paid in the first two quarters,” said Sinha.

Corporate earnings for FY19, however, suggest that maximum gains from the tax cut is likely to accrue to private sector banks led by HDFC Bank and retail non-bank lenders such as Bajaj Finance. Reliance Industries would also benefit if it chooses to the new lower rate of minimum alternate tax (MAT).

In contrast, gains are likely to be limited for companies in infrastructure, manufacturing, and information technology services space as their effective corporate tax rate in FY19 was closer to the new tax rate of 25.17 per cent. Companies in exports-driven or capital intensive sectors enjoy various tax shelters and investment incentives under the old tax laws. These companies would have to forego these incentives if they were to avail of the new lower rate of tax.

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