Finance Minister Nirmala Sitharaman on Friday announced that the government proposed to cut corporate tax rates to 22 percent for domestic companies provided they will not avail exemptions or incentives and 15 percent for new domestic manufacturing enterprises as part of a raft of measures to boost economic growth.

The tax cut is important for the FMCG sector primarily because most of the companies have their effective tax rates upwards of 30-35 percent.

ALSO READ:

Government cuts corporate tax to 22%, ends MAT to revive economy

Benefits of the tax cut announced by FM would be three-fold for the FMCG Sector:

The immediate benefit would be an earnings boost due to lower tax outgo. Multinational FMCG Cos like Nestle, HUL, Colgate and GSK Cons pay anywhere between 29-35 percent will now have to pay a lower amount. In fact, not just MNCs, even home grown players like Asian Paints, ITC, Britannia, Titan and Pidilite pay around 30-35 percent of their PBT as taxes. However, they benefit may elude companies like Dabur, Bajaj Corp and Emami that pay anywhere 16-25 percent

Another benefit would be that of possible higher sales. The CFO of Titan said to CNBC-TV18 that they will use this as a tool to pass on benefits to consumers. In a tough environment for consumption sector, lower prices will come as a volume booster. I’ll be watching this space for some price cuts from consumer companies.

The most important benefit from an investment perspective is, while tax cuts across the board are a big positive, FMCG may be first among equals. The high PE Multiple that FMCG sector trades at would imply a higher change in stock price, given incremental growth in EPS. For Example, improvement of EPS by Rs 1 for 20X PE Stock would mean Rs. 20 increase in Stock Price while the same would be higher by Rs. 45 for a stock trading at higher valuations, assuming everything else remains constant.

READ ALSO: Corp leaders, analysts react to Nirmala Sitharaman's tax cut proposal

First Published:Sept 20, 2019 3:12 PM IST