Finance Minister Nirmala Sitharaman
Finance Minister Nirmala Sitharaman

Why Budget 2019 may not suffice for broad-based earnings revival

  • From the stock market perspective, Budget 2019 seems to be lacking the firepower to drive earnings in the broader economy
  • Stock markets held for most of the budget speech, the indices nosed-dived during the latter part of the Budget presentation. The NSE-50 lost about 144 points or about 1.2%

Mumbai: From the stock market perspective, this Budget seems to be lacking the firepower to drive earnings in the broader economy.

Stock markets were looking forward to a stimulus to revive growth. More concessions were expected to boost consumption and increase spending in the economy. Besides, the market would have liked the abolition of capital gains tax on equity sales, and double taxation on dividends.

But none of that was proposed.

Instead, the Budget introduced a distribution tax on buybacks of listed companies. And it also seeks to increase free-float of stocks by making it mandatory for companies to reduce promoter shareholding to 65%. This is currently at about 75%.

So, while stock markets held for most of the budget speech, the indices nosed-dived during the latter part of the Budget presentation. The frontline NSE-50 lost about 144 points, or about 1.2%.

In fact, excluding banking, the picture on the earnings front is quite gloomy. For FY20, analysts expect around 24% growth in earnings, but hardly any growth is expected in manufacturing and services.

“Banks are likely to contribute to ~65% of further profits of the NSE-50 in FY20. Within banks, ICICI Bank and SBI could contribute almost 50% of the additional profits of NSE-50 in FY20," said analysts at Kotak Private Client Group, a part of Kotak Securities Ltd.

Some additional earnings are expected from oil and gas. “IT services and Oil, Gas & Consumable Fuels’ contributions to the additional profits of the NSE-50 in FY20 are expected to come down to 12%," said the report.

This means that sectors such as consumption, auto and metals will contribute barely 27% to earnings growth in FY20.

"The government’s approach has been prudent and it has continued to stick to the path of fiscal consolidation even though revenue estimates are a bit aggressive. Markets will be range bound as there are positives for the banks while for sectors like IT there will be challenges. Further increase in the tax rate for the super-rich could pose long-term challenges. Markets from Monday will be focused on corporate earnings, which at this juncture appear to be a mixed bag," said Naveen Kulkarni, head of research, Reliance Securities Ltd.

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