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....
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