Stock Market

Heavily-leveraged metal comapnies unlikely to gain from tax cut

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ET Intelligence Group: Metal stocks are unlikely see any major run-up after the corporate tax cuts as they are not expected benefit in the short term.

Most of the metal companies may stick to the existing tax norms due to prevailing tax benefits.

Even if the companies shift, the gains would be negligible to have any meaningful impact on the heavilyleveraged balance sheets of most metal companies. Most companies in the sector have accumulated losses of the past and have been paying tax at MAT.

Besides, companies including Tata Steel, JSW Steel and Vedanta will also add losses from their recent acquisitions. These companies may want to exhaust the tax exemptions of the existing norms before adopting the new tax rates.

JSW Steel, Tata Steel, Hindalco, JSPL, SAIL and Vedanta also get tax benefits from the capacity expansions done over the past few years. "The balancing act between the existing benefits and the future ones from the shift to the new tax rate is likely to delay the adoption by most players,” said Amit Dixit, metals analyst with Edelweiss.

“Companies are still analysing the relative benefits of the new scheme, including one-time (non-cash) gain on deferred tax liabilities adjustment and treatment of upcoming capacities/acquisitions.” In addition, high debt levels and strong capacity addition through organic and inorganic routes in the recent past, will restrict their capabilities to expand further.

Most metal companies are heavily leveraged and some companies including Tata Steel, Jindal Steel and Power and SAIL are expected to slip into losses from the current quarter.

For Hindalco, its US-based subsidiary Novelis contributes three-fourth of the total profit before tax and hence, the gains may not meaningful. “Lower tax is unlikely to re-rate sector multiples.

Further, given the stretched balance sheets, we do not expect any further capex in FY20-22 beyond what is already announced,” said Sumangal Nevatia, metals analyst at Kotak Securities. Among sectoral indices, the Nifty Metal index is the lowest gainer since the announcements with 8 per cent gains, after the Nifty Pharma and Nifty IT indices.

The momentum is unlikely to sustain. Vedanta is an exception with its stock gaining 13.4 per cent.

However, the spurt is mainly due to rumours of the government planning to sell its 29.5 per cent stake sale in company’s cash rich subsidiary Hindustan Zinc.




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Category: Stock Market


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