The corporate earnings cycle is unlikely to rebound in the near term with the Union Budget doing little even as the finance minister has tried to revive the growth and investment cycle.
Also, the increase in corporate taxation rate in the Budget is likely to impact earnings per share for Sensex companies by 1.5% to 2% and negate any benefits arising from the increase in bottomline due to investment allowance, believe experts.
The Finance minister P Chidambaram in his budget has tried to improve investment climate by announcing a Cabinet Committee for Investments and giving corporates an investment allowance of 15% to boost capital expenditure.
Ajay Bodke, head - investment strategy & advisory at Prabhudas Lilladher believes toplines are likely to see some improvement given the fact that the Budget does try to give sops to revive moribund growth in the form of increased allocations to various infrastructure projects and also investment allowance for corporate.
“Also on the expenditure side for corporates, there is likely to be improvement in terms of lower interest rates post the government’s efforts to keep net borrowing same for the next fiscal. This is likely to goad the Reserve Bank of India to a dovish stance. So on the margin, it looks like corporate may benefit marginally,” he said.
Bharat Iyer, Bijay Kumar, Gunjan Prithyani and Adrian Mowat, analysts at JP Morgan, however believe that increase in surcharge on income tax payable and distribution tax paid by companies may undo the above benefits.
“While the Budget for fiscal 2014 attempts to reconcile the substantive asks facing the government that include pursuing social objectives, balancing the fiscal position and boosting growth, particularly the investment cycle , this increase in surcharge on corporate profits will, however, shave off about 1-2% from corporate earnings growth,” they wrote in a note on Friday.
Ritika Mankar Mukherjee, economist at Ambit Capital believes that the Budget has not send right signal to corporate by raising corporate surcharge.
“The fact that the finance minister chose to tax corporates to support plan expenditure growth at a time when private corporate capex growth is compromised is another ugly part of the Budget. Given that 30% on-year increase in discretionary spends was accompanied by an increase in corporate surcharge, sent an adverse signal to India Inc, which is being forced to fund government’s populism at a time when its own profitability is under pressure,” she wrote in a report.
Experts believe that going forward we may continue to see more earning downgrades.
“Factoring the increase in surcharge on corporate tax rate, our next fiscal Sensex EPS would see a marginal downgrade of 1.5%. However no change in subsidy sharing mechanism leading to upgrades for ONGC and GAIL would offset the impact of the downgrade on increase in surcharge. But the recent trends in macro economic growth environment are showing greater signs of deceleration. This, in our view, will lead to further downgrades in our estimates for next fiscal,” wrote Rajat Rajgarhia, director of research at Motilal Oswal Securities in his post budget report.
R Murali Krishnan, head, institutional equity at Karvy broking too believes that budget has not done anything to boost earnings.
“The higher corporate taxes would hit earnings growth. Amid the high inflation and interest rates, we expect earnings downgrades as the global economies still remain shaky. The earnings cycle is still very weak and the investment cycle has to begin in right earnest to depict earnings growth,” he said.
