File photo: Pradeep Gaur/Mint
File photo: Pradeep Gaur/Mint

Corporate tax cut to benefit organized retail sector with pricing power most: report

  • The corporate tax cut would reduce the reach of the unorganized retail sector as they lose their edge of tax evasion, a 2Point2 Capital report says
  • Companies that face a lot of foreign competition will benefit from the tax cuts, the report says

NEW DELHI : The corporate tax cut to 22% from 30% will only benefit companies in the organized sector, especially those with high pricing power, investment firm 2Point2 Capital Advisors said in a report. For most, however, it is likely to be a non-event for most, it said.

Instead, the tax cut would reduce the reach of the unorganized sector as they lose their edge of tax evasion, the investment firm said.

“The lower tax rates should lead to further formalization of the economy as unorganized players lose a part of their edge stemming from tax evasion. For instance, retailers like D-Mart in the highly competitive grocery retail benefit as their competitiveness vis-à-vis unorganized players increase," 2Point2 Capital Advisors said.

However, even among the organized players, the tax cut will only benefit companies which have market power, and may work to the detriment of weaker firms in that sector, it said.

If the stronger player undertakes a price cut, they may still make a higher profit, but the weaker player who is forced to also reduce prices of their product may see a fall in profit margin, the firm said.

Companies that face a lot of foreign competition will also benefit from the tax cuts, with Indian exporters having no foreign competition benefitting the most, it said.

“The tax reduction will make Indian players more competitive vs foreign players. The benefit will be particularly high for companies that only have foreign competition and little competition from other Indian companies," 2Point2 said.

The investment firm added that companies with a lower return on equity (RoE) would be able to invest more in their business, thereby generating more earnings growth.

“In fact, counter-intuitive as it may sound, a company with a lower ROE (but with an ability to retain the tax cut benefits) should see a higher % increase in intrinsic value than that with a higher ROE," the investment firm said.

The Amit Mantri-led investment firm argued that companies with higher RoE are usually cash surplus with very few avenues for growth, and distribute the extra cash as dividends and other benefits to shareholders. The extra cash saved on account of the tax cut will only lead to more dividends and will not be invested for earnings growth, it said.

Mantri is most famous for analyzing Manpasand Beverages Ltd’s business in a blog in December 2016, where he called out called out the company for alleged fraud, including forged sales, and false claims over distribution networks.

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