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Budget bang! - Views on News from Equitymaster
 
 
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  • Mar 5, 2005

    Budget bang!

    After three weeks of apprehensiveness on the bourses, wherein the indices refrained from making any decisive move, this week was sheer euphoria with the indices ending the week with over 4% gains. There was buying witnessed across most sectors as Foreign Institutional Investors (FIIs) continued to pour money into Indian equities. Ample buying was witnessed in the mid-cap segment also, which is evident from the gains witnessed in the BSE-100, BSE-200 and BSE-500 indices (all up by over 4% each). Strong India Inc. fundamentals and promising growth prospects now supported by a favourable Budget 2005-06 have led to FII monies chasing Indian stocks.

    Continuing to display a trend similar to the previous three weeks, the indices opened on a cautiously positive footing on Monday morning and remained volatile as the Finance Minister (FM) read out his budget speech. However, as soon as the FM ended his speech, the markets heaved a sigh of relief seemingly at the absence of any adverse announcement, pushing the indices into a new trajectory. Monday’s second-half trading saw the indices gain from strength to strength by the hour, as markets gave a thumbs-up to the Budget. It must be noted that it was a week of records for the Indian indices, as they continued to make new all-time highs almost everyday. While FIIs have been the key drivers of the rally in recent times, domestic participation also aided the momentum.

    Key indices over the week
    Index % change
    BSE BANKEX 6.8%
    BSE AUTO 5.1%
    BSE FMCG 4.7%
    BSE OIL&GAS 4.4%
    BSE METAL 4.4%
    BSE Sensex 4.3%
    BSE PSU 3.5%
    BSE IT 2.5%

    However, after the smart rally of Monday, investors were equally quick to book profits on Tuesday. While there was no specific reason that could have triggered the sell-off, seemingly the budget announcement of a fringe benefit tax on corporates did not go down well with the markets. However, since this was not a good enough reason to overshadow the slew of other positive announcements, including those with respect to personal income tax and corporate tax, made in the budget, it was just one-way up for the Indian bourses over the next three trading sessions. The budget announcements were followed by the announcements pertaining to banking reforms, which welcomed foreign banks into the country, albeit in a phased manner. Also, the FM on Friday indicated considering raising the foreign investment cap of the insurance sector from the current 26% to 49% and also allowing more leeway to FII investments! All of this provided the markets with a strong impetus to rise into a new orbit.

    Let us now consider some sector/stock specific news during the week.

    A shot in the arm for the banking sector this week was the beginning of the materializing of the expected banking sectoral reforms in the country with the Ministry of Finance granting autonomy to the RBI to amend the Banking regulation Act. In turn, the RBI has laid the road map for the entry of foreign entities into the country. The guidelines not only pave way for more competition and prudential supervision of foreign banking entities, but also provide for 'restructuring' of select Indian private sector banks. The news had a big positive impact on the sector this week with the BSE Bankex ending the week higher by 7%. Banking stocks this week.

    Key gainers over the week (NSE-50)
    Company Price on Feb 25 (Rs) Price on Mar 4 (Rs) % Change 52-Week H/L (Rs)
    BSE-SENSEX 6,570 6,849 4.3% 6,865 / 4,228
    S&P CNX NIFTY 2,061 2,148 4.2% 2,153 / 1,292
    PNB 438 475 8.6% 484 / 212
    ICICI BANK 368 398 8.2% 404 / 212
    BAJAJ AUTO 1,020 1,102 8.1% 1,160 / 765
    HERO HONDA 519 560 7.9% 616 / 320
    BHARTI TELE 220 236 7.4% 250 / 114

    Bharti Tele was amongst the key gainers on the bourses this week, seemingly on the back of the favourable budget announcements targeted at the growth of the sector. The announcements include the reduction of customs duty on optic fibre cables from 20% to 10%, which will benefit national long distance telephony service providers significantly, considering their expansion plans. Further, the 'Bharat Nirman' project, through which the government will provide connectivity to the remaining 66,822 villages through BSNL, underscores the government's commitment to leveraging telecom as a powerful instrument to propel the country towards a higher growth path. Telecom stocks this week.

    Key losers over the week (NSE-50)
    Company Price on Feb 25 (Rs) Price on Mar 4 (Rs) % Change 52-Week H/L (Rs)
    HPCL 344 339 -1.6% 542 / 262
    BPCL 413 408 -1.3% 519 / 230
    VSNL 221 220 -0.6% 252 / 110
    NALCO 175 174 -0.3% 209 / 95

    International crude prices have continued to soar and are currently within striking distance of their 2004 highs of US$ 56 per barrel. While upstream majors like ONGC (up 6% this week) would benefit from this development, it is the oil marketing majors like HPCL and BPCL that will be taking a hit owing to their inability (read government control) at passing on the increase to consumers. Energy stocks this week.

    While it is without doubt that the current rally is based on the fundamental strength of the Indian economy and also its prospects going forward, the fact that FII money has been the key driver of this rally needs to be borne in mind. This is because with interest rates expected to increase at a faster rate in key developed markets (including US), there are inherent risks to the pace of flow of money in the near-term. While we do not intend to play the role of a doomsayer at the current juncture, we feel it is pertinent to look at both the upside and the downside to equity investments with a fundamental view i.e. earnings growth and relative valuations. Further, while we continue to remain positive over the longer-term prospects of India and Indian equities, we believe that a selective and staggered investment approach is the need of the hour. After all, prevention is better than cure! Happy investing!

     

     

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