Tax Cut to Benefit Media Companies: Kotak Securities
The announced sharp cut in corporate tax could bring twin benefits for media companies, Kotak Securities said in a report.
According to the report, while reduction in corporate tax rate would result in tax savings, media companies may also see an increase in their top line should corporates reinvest a part of these tax savings in advertising.
The government last week slashed corporate tax from 30 per cent to 22 per cent for the current fiscal. As a result of the sharp cut, the effective corporate tax rate has come down to 25.17 per cent, inclusive of surcharge and cess.
Companies opting for the new tax rate would have to forego exemptions they are currently availing.
"The companies that decide to move to the new marginal/effective tax rate would have to forego availing any exemption that they are currently availing. All media companies in our coverage universe (except Dish TV) are paying peak effective tax rate of about 34-35 per cent. These companies would benefit from this development," Kotak said.
The brokerage firm expects a few corporates, especially consumer companies, to plough back a part of tax savings in TV and digital advertising and promotions, akin to that observed during the GST rate cuts.
It, however, noted that the increase in advertising and promotions (A&P) spends post the GST rate cuts was partly due to the non-profiteering clause.
"As there is no such mandatory requirement to pass on savings to consumers, the increase in A&P spends could be modest this time around. Further, the companies may prefer promotions over advertising in order to drive volume growth given the weak underlying demand environment," said the report.
While no material upside in advertising spends from this development is expected, Kotak said that it would certainly mitigate the downside risks to its advertisement growth forecast.
"We raise ratings of media companies by up to 13 per cent as we factor in tax savings. We cut ad growth and operating profit forecast of print media companies given weaker-than-expected outlook and no sight of improvement," it said.