In last budget government announced a key intention to reduce corporate taxes to make India par with other emerging nations

Tax-1

Note this is only proposal and there is no guarantee that this will fructify in next 4 years. Now imagine in 2019 that this becomes a reality

How will it improve CAGR returns from companies ?

5% is big saving and can fill corporate coffers tremendously with direct impact to FCF available to owners

So I did a thought experiment on how this tax edge could impact investor returns

Read carefully – Few key assumptions that you are making when relying on this analysis

  • would stick to its promise of reducing corporate taxes by 5% in 4 years – To me this is biggest risk
  • Predicting profit growth for next few years, in most business this is difficult if not impossible
  • Assigning an PE exit multiple, this requires years of practice, we would be wise to be conservative on this
  • Margins would be remain as 2015, for cyclic business this would lead to faulty outputs again if business had an extremely good or poor 2015 then results would be skewed on either side
  • There would be no equity dilution, which means you can’t use this for most of the finance / growth companies

Download the excel by clicking on any social links before (Note if you are reading this as email in your inbox this would not work click to go on original post on website to download)


My first cut analysis says improvement of 2% in CAGR returns, Some examples

Cera Sanitaryware

An improvement of 2% in CAGR from 4% to 6%

tax-2

VST Tillers

An improvement of 2% in CAGR from 9% to 11%

Tax-3

TCS

An improvement of 2% in CAGR from 12% to 14%

Tax-4

If implemented this is going to improve CAGR improvement of close to ~2% for most companies paying full corporate taxes

2% edge is big deal when compounded over number of years, I am sure I don’t have to tell you that 🙂

compounding-different-rates

Are you getting different results ? share in comments