Tag - Corporate Tax Rate

Blue Star Limited (BLUESTARCO): Will use the extra money from corporate tax cut in capital expenses

Update on the Indian Market:

On Friday, Market was more or less flat. Nifty closed 0.5% lower at Rs 11,512. Bharti Airtel (+2.89%), Bajaj Finance (+1.61%), ITC (1.36%) were among the biggest gainers. IndusInd bank (-4.92%), Yes bank (-5.0%), Vedanta (-5.69%) were the losers. Among the sectoral indices Pharma (-2.06%), Realty (-2.28%), Metal (-2.84) closed lower while there were no gainers.

Excerpts from the interview by Mr. B Thiagarajan, MD – Blue Star

  • Effective tax rate was 32% in FY19 and would have been ~ 31% in FY20. So, setting aside certain concessions they will forego if they move to this regime, they should be gaining around 4.5 percent and 5 percent in terms of EPS.
  • They will pump in this extra money into the capital expenses. They have been on an indigenization mode and they will accelerate indigenization or reduce in-China dependency.
  • In FY20, they are looking at indigenizing deep freezers. So ~ Rs 120 cr is being invested in Vada in Maharashtra. Sri City plant which they had acquired the land there, they would have looked at FY22-23, they may end up accelerating that because the room air conditioner market continues to be good.
  • Plastic injection moulding, compressor manufacturing industry will benefit due to indigenization drive.
  • They will accelerate the capital investment there. So the entire Sri City plant should get frozen sometime in January-February 2020.
  • Unlike many other durables, air conditioners have been witnessing and even during Onam season they witnessed good growth. He thinks that will further grow.
  • The Onam season is an indication because there were floods. He thought Onam season will be a washout, the markets are priced close to around 40% growth over last year, but last year also there were floods. The year before there was around 12% growth.
  • Going forward, the festival season should be ~ 12-15% growth. Having said that, the demand is for lower-end products and 40% of the sales have been through consumer finance schemes.
  • According to him, there is no room for more discounts because the dollar has moved up. They have to keep a close watch on the exchange rates because copper and quite a few components still get imported.
  • The competition is stiff and the reach is becoming very complex; with 65% of the market for them are tier III, tier IV, and tier V.
  • To reach out, they have to pump up the advertising expenses. So, there won’t be price dilution. He expects that they would maintain last year margin levels and marginally improve that.

Consensus Estimate (Source: market screener website)

  • The closing price of BLUESTARCO was ₹ 794/- as of 27-September-19. It traded at 34x / 28x / 22x the consensus EPS for FY20E/ FY21E/ FY22E of ₹ 23.1 / 28.3 / 36.1 respectively.
  • Consensus target price of ₹ 792/- implies a PE multiple of 22x on FY22E EPS of ₹ 36.1/-

More needs to be done

Update on the Indian market:

On Tuesday, NIFTY lost its winning streak. It closed -0.10% lower. Among sectoral indices NIFTY PSU Banks (-2.34%), NIFTY BANK (-1.25%), NIFTY Financial services (-1.9%), NIFTY Auto (-0.38%) and NIFTY Metal (-1.63%) closed lower while NIFTY IT (+1.98%), NIFTY Pharma (+0.44%) NIFTY FMCG (+0.62%) ended on a positive note. The biggest gainers were Infosys (+3.88%), Zeel (+3.66%), Tech M (+3.11%) whereas Eicher motors (-3.84%), State Bank of India (-4.06%), JSW steel (-4.19%) ended with high losses.

Excerpts from a panel discussion with R.C. Bhargava, chairman, Maruti Suzuki India Ltd; Pawan Goenka, managing director of Mahindra and Mahindra; and Rajiv Bajaj, managing director of Bajaj Auto Ltd with CNBC TV18.

  • Finance Minister in a totally unexpected move reduced corporate tax on Friday. Effective tax rate now stands at 25.17%, inclusive of surcharge and cess. This move will help companies to increase their profitability. FM quoted that it will lead to revenue loss of ₹1.45tn.
  • Speaking about further discounts in auto sector, Mr Bhargava (Chairman, Maruti Suzuki) rules out the scope of further price cuts out of the tax savings. He says if we take a look at savings from the tax cut it is about one-fifth or one-sixth of total tax payment.
  • Mr Bhargava believes, it is better to pump benefits back in the company in the form of capex, more investments rather than more discounts in an environment where the discounts are at a peak.
  • Mr Bhargava says, Manufacturing in India has never grown at a high rate. The tax cuts will make manufacturing industry competitive. Moreover, customers don’t buy during uncertainty. Now that GST overhang is out of the way, we can see people making decisions.
  • Mr Bhargava believes, coming October will see much better retail sales than in the previous months.
  • Mr Goenka (MD, Mahindra & Mahindra), also praises the corporate tax cut as it will make Indian companies globally competitive.
  • He says, a wrong expectation has been coming out in the last two-three days that because of this, auto companies would be able to reduce prices. Tax cut is a stimulus which will help in mid and long term in the form of higher capacity, increase in employment rate.
  • On discounts he believes that even if entire benefit is transferred, M&M will be able to reduce vehicle price by about 0.5%, which means on a ₹8 lakh car by about ₹3,000.
  • Mr Goenka believes that there is a sentiment boost in the market which was needed in current scenario.
  • Mr Rajiv Bajaj (MD, Bajaj Auto) is also of the same opinion that this will benefit in the long run. Talking about its immediate effect on Bajaj Auto, the heavy investment in consumer offers and media spends that they have undertaken in a quarter will be reimbursed because of the lower tax rate.
  • Taking about reduction in tax for new entities, he says it might help Bajaj as it is about to sign-up with Triumph. How it turns out is a matter to look at.