Corporate Tax Cut : More fireworks Expected

On Friday (20Sep2019) our finance minister cut the Corporate taxes from 35%  to 25.2%(Effective). It was a long pending demand form industry. After that we witnessed a huge up move in stock prices and indices. Because this cut in tax will impact positively on earning of a company. The approximate change in EPS would be 15%. If the PE of remains same then the valuation is also expected to apricate by 15%.

Suppose if a share with PE multiple 20 has Earnings Per Share (Before Tax): 100Rs.

Case 1: Before Tax cut

Corporate tax : 35%

Earnings Per Share (After Tax): 65 Rs.

Expect valuation in this case: 65*20=1300 Rs.

Case 2: After Tax cut

Corporate tax: 25.2%

Earnings Per Share (After Tax): 74.8 Rs.

Expect valuation in this case: 74.8*20=1496 Rs.

Above calculation explains the reason behind the movement in prices across the board. Historically we can say that is EPS increases then PE also gets improved. So more upside expected. Indices calculation is not so simple but it will have positive impact on EPS and Valuation. Hold tight your equity portfolio. Let them re-rate …..

Hope this will help....