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The wait is over

Jul 10, 2004

The much-awaited event is finally over. Budget 2004-05 has passed, but not without putting the markets through an ordeal. Of course, one should not expect that every budget of the Finance Minister (FM) have to be a 'dream budget'. While we rate the budget as satisfactory, as usual, there are two distinct opposite factions in the market justifying their take on the budget. Nonetheless, the markets ended the week amidst gains.

Key gainers over the week (NSE-50)
COMPANY Price on
July 2 (Rs)
Price on
July 9 (Rs)
%
CHANGE
52-WEEK
H/L (Rs)
BSE-Sensex 4,871 4,945 1.5% 6,250 / 3,457
S&P CNX NIFTY 1,538 1,553 1.0% 2,015 / 1,084
ITC 909 1,051 15.7% 1,199 / 690
GAIL 169 187 10.4% 312 / 100
BHARTI TELE 144 158 10.0% 189 / 36
M&M 465 511 9.8% 525 / 145
DABUR 64 69 7.8% 98 / 50

The indices behaved cautiously for the first half of this week. The tentative behaviour could have been primarily attributed to their apprehensions with respect to the impending budget. While the new government's tenure did not kick-off on a positive note owing to it's (and its allies) views on various issues like divestment, FDI, etc, investors exercised utmost caution, hoping to not get caught on the wrong foot this time around.

Finally, the FM presented his Budget in the Parliament on Thursday, wherein unlike the recent previous budgets, the emphasis in this budget was towards the agricultural sector and rural development, which is in line with the CMP. Issues like improving education and healthcare standards were also among top priorities. However, despite an overall positive budget, which included investor friendly announcements like making long-term capital gains tax free and reducing the tax on short-term capital gains to 10%, the markets tanked post the Budget. This was primarily because of the announcement pertaining to the implementation of the turnover tax at 0.15% of transaction value. Post this statement by the FM; the trading in G-Sec markets came to virtual halt owing to this move being unfavourable (as per market participants) for a market where the spreads are around 0.05%.

Key losers over the week (NSE-50)
COMPANY Price on
July 2 (Rs)
Price on
July 9 (Rs)
%
CHANGE
52-WEEK
H/L (Rs)
HPCL 329 289 -12.2% 542 / 262
PNB 269 245 -9.0% 397 / 148
OBC 246 224 -8.7% 367 / 149
BPCL 354 325 -8.2% 533 / 230
SUN PHARMA 368 345 -6.3% 420 / 161

However, Friday's market behaviour was exactly opposite to the previous day, despite a very weak opening. Certain clarifications on Friday with respect to turnover tax helped market participants put aside a slew of negative news pertaining to strengthening crude prices, 21-week high domestic inflation numbers and delayed monsoons. The announcement that primary dealers and brokers would be exempt from turnover tax and also that it would come into force only after the Finance Bill is passed, provided temporary relief to the markets. Further, amidst reports of the ministry's willingness to reconsider the turnover tax and the FM's meet with market participants early next week regarding this issue, also helped the markets.

Other key movers during the week
COMPANY Price on
July 2 (Rs)
Price on
July 9 (Rs)
%
CHANGE
BSE-SENSEX 4,871 4,945 1.5%
GAINERS      
INDIAN RAYON 203 249 22.6%
BHARAT ELECTRONICS 391 449 14.8%
PUNJAB TRACTORS 205 229 11.6%
HCL INFOSYS 553 613 10.8%
LOSERS      
HPCL 329 289 -12.2%
ASHOK LEYLAND 23 21 -10.9%
IOC 371 334 -9.9%
OBC 246 224 -8.6%

Let us consider in brief the budget impact on few stocks:

The gains in ITC was on account of the FM maintaining status quo over the hike in excise duty on cigarettes. There were apprehensions amongst investors regarding this measure affecting the bottomline of the company. Further, with the government laying thrust on agriculture in the budget, players like ITC, which have a presence in the agri-commodities segment also, are likely to benefit. Further, it must be noted that ITC also has a presence in the hospitality segment and tourist arrivals have shown a 24% YoY increase in 1H2004, which is a positive for the hotel segment of the company.

Further, while the gains in Bharti Tele was due to the hike in FDI to 74% permitted in the telecom sector, M&M and Punjab Tractors gained on the back of the full exemption provided to excise duties on tractors. Tractor manufacturers will benefit from increased demand for tractors once they pass on the benefits of excise duty exemption to the end consumers. The Indian rayon stock gained owing to two counts i.e. no mandatory excise duty on cotton (the company has a presence in textiles) and hike in FDI limit in insurance to 49% (the company has a 75% stake in Birla Sun Life Insurance). Further, while Bharat Electronics gained on the optimism created by the substantial increased allocation to the defence sector, HCL Infosys is likely to benefit from the full excise exemption on computers, which will aid PC penetration in the country, a positive for the company owing to its presence in computer hardware.

On the other hand, energy stocks such as HPCL, BPCL and IOC tumbled during the week, as the pre-budget anticipations of a price band, custom duty cuts and subsidy sharing hike on the part of the government did not materialise. In fact, the government's share in subsidies on LPG and kerosene has reduced and as a result, these oil companies are likely to bear a burden of another Rs 30 bn. Ashok Leyland witnessed profit booking owing to poor June sales numbers.

Going forward, while market participants and the government grapple to find a solution to the turnover tax issue, which has stood out amongst all the budget announcements, we feel that this will not affect long-term investors much and is likely to pinch short-term players, day traders and arbitrageurs. However, the fact that the FM has announced the withdrawal of long-term capital gains tax is a big positive for long-term investors, vindicating the long-term investing strategy. Further, we believe that the chaos being witnessed on account of the implementation of turnover tax is a short-term phenomenon and would do no harm to the fundamentals of companies. We continue to maintain our positive outlook towards India Inc. and Indian stock markets.

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