Equities rallied for a second day as sentiment reversed following the unexpected corporate tax announcements last Friday.
Sensex shot up by over another 1000 points, and traders point out that the rally has been picking up specifically on the likely beneficiaries of the lower taxes. While Friday’s rally was mostly short covering, Monday moves pointed to stock picking from banking, finance, oil companies and consumer space.
"This isn't a bubble, this rally is based on the tangible fact of tax cuts. There are definite gains on the earnings side for companies from the tax cuts. That is why even among mid-caps it is select stocks that have moved up,” said a veteran trader.
Sensex has gained 3000 points in two sessions reclaiming 39,000 and Nifty above 11,600 inching closer towards their all-time high.
Market sentiments, for now, have changed towards the positive for equities. Though the two-day rally isn’t a reason for worry, investors need to be cautious if this continues without a correction in days ahead, experts advice.
“Agree that what is going to be a benefit derived from tax cuts is already discounted in the prices. But, in the US the tax cuts did percolate into earnings, which was discounted in advance,” said Anita Gandhi, Director, Arihant Securities. Right now the rally is based on the immediate gains of the tax cuts, and the impact of it on the economy would determine the future course.
“The corporate tax rate cut is a structural move, it would improve the corporate earnings estimates by around 10-15% thus giving a northwards inflection (to the flat earnings so far), which would further continue backed by investments and subsequently consumption-driven demand," Arun Thukral, MD & CEO, Axis Securities.
Nifty Earnings Per Share to see 8 per cent upward revision from the corporate tax cuts, Motilal Oswal estimated. “Out of 50 Nifty companies, 21 will see an EPS revision upwards of 10 per cent and 9 companies between 5-10 per cent ceteris paribus (other things being equal),” it said pointing out that private banks, auto and consumers to be the biggest beneficiaries.
Among the consumer stocks large gains seen accruing to Avenue Supermarkets, Colgate, Nestle, Page, Asian Paints, Crompton, Jubilant, Britannia, HUL and low gains for Marico, Titan, Dabur, Emami as they had exemptions, Credit Suisse said. There is a question mark it has put over ITC’s gains, if the corporate tax benefits be taken away by a raise in cigarette taxes.
IT stocks that were picked up as safety bets when the markets were down aren't the beneficiaries of this rally – Infosys, TCS, Wipro HCL, Tech Mahindra all ended in red on Monday. Even among financials the banks that save on tax with latest cuts have moved up, but the insurance stocks haven’t moved up.
Despite uncertainty over Saudi Arabia’s oil supplies and volatility in crude oil prices the three public sector refining and marketing companies posted handsome gains on Monday. BPCL which has been in the news as a potential candidate for privatisation gained the most, 12 per cent to close at Rs 454. IOC gained around 7 per cent at Rs 142 and HPCL 4 per cent at Rs 289.