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Are high Advance Tax Paying stocks are good good stocks to Invest?

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Most of us treat income tax outgo as undesirable and try to reduce it to the minimum. In the same way, companies use tax-planning tools efficiently in an attempt to bring their tax liabilities under control.


However, stock investors treat corporate tax outgo differently and usually reward the companies with a higher tax outgo (as a percentage of net profit) with higher valuation multiples. This is because a high tax outgo removes investors’ doubts about a company’s accounting practices. One does not have to wonder whether the company’s profit is real or cooked up since no management will manipulate the accounts to show higher profit and then pay tax on it.


The advance tax payment, especially the amount companies pay in the first few quarters, reveals another crucial bit of information for investors. Companies usually pay advance tax according to the entire year’s expected profit, and any additional tax liability is provided in the fourth quarter. This means that a higher advance tax in the initial quarters indicates the company’s optimistic outlook for the entire year, and investors can expect good results in the coming quarters. Therefore, while analysing the interim numbers, it is important to concentrate on the increase in tax outgo as well as the rise in net profit.


However, India Inc has not performed too well in the past two quarters of 2013-14 in terms of the tax outgo. For instance, the consolidated first quarter advance tax outgo of BSE-500 companies had gone up only by 4% despite a 54% increase in net profit for this period compared with the same duration last year. As indicated by the muted first quarter tax outgo, the consolidated net profit came down by 15% on yearon-year (y-o-y) basis in the second quarter.


The situation appears equally bad for the entire first half (H1), for though the consolidated H1 net profit has gone up by 6% on a y-oy basis, the consolidated tax outgo remained flat. This indicates muted performance in the second half (H2) of 2013-14 as well.


The H1 performance would have been much worse without the export push in the second quarter, which was triggered by a fall in the rupee. Sectors like IT and pharma, and other exporters were clear beneficiaries of the rupee fall. Metals, an import substitute and, hence, a beneficiary of the rupee fall, is another sector that performed well in the second quarter.


While the auto and auto component sector was a mixed bag, with the companies relying on the export market benefiting and those on the domestic market suffering, Maruti Suzuki stood apart due to the weakening of Japanese Yen. While the auto company is expected to do well in H2 as well, one should not expect the kind of stellar performance it showed in the first half.


The public-sector (PSU) banks continued to suffer during the second quarter due to asset quality issues and the hit they took on the treasury income after the sudden jump in interest rates due to the RBI’s efforts to stabilise the rupee. For example, the net profit and advance tax outgo of the SBI came down by 22% and 40%, respectively, in H1 (see Top 10 taxpayers). Private-sector banks, on the other hand, continued to give a good performance. HDFC Bank showed a net profit and advance tax outgo increase of 29% and 40%, respectively, in H1, while the corresponding growth figures for ICICI Bank were 23% and 30%, respectively.


With companies like L&T also showing margin pressures, the capital goods/infra pack is at the bottom of the performance cycle and a similar trend is expected in H2. Cement is another sector that will continue to show lacklustre performance in H2 due to increased cost pressures.


The energy sector, especially the PSU oil marketing companies, is suffering due to government control. Though the natural gas price increase may be notified soon, diesel price decontrol is not expected before the new government takes over. Unlike other oil marketing PSUs, BPCL reported a profit of 1,081 crore, compared to a loss of 3,602 crore y-o-y. It also paid a tax of 440 crore, compared to no tax in the same period last year. With large oil assets abroad, BPCL is slowly shifting from being an oil marketing company to an oil exploration firm and, hence, it is expected to do well in the coming quarters as well. Sectors like IT, metal and private-sector banks will continue to be the winners in second half.


Though the advance tax outgo is a good indicator, investors should understand its limitations. Any sudden jump in other income can result in a tax spike in that quarter. There can also be an increase in advance tax on the removal of tax benefits enjoyed previously. So, while some manufacturing companies have taken advantage of tax incentives in the past, the government is slowly cutting them down. The export-oriented sectors like IT and pharma are another case in point. They used to pay very little tax, but have increased the outgo now.

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