In a pre-budget article earlier today, we indicated that what the finance minister (FM) says today for the 40% of us Indians must not be your guide to investment into India's future! Rather, what he says for the upliftment of the remaining 60% (those dependent on agriculture and allied activites) in terms of provisioning for their education and healthcare is what will determine our future - the future of this country and 'all' its citizens. While the FM announced a slew of measures for the ‘people unlike us’ who are not really bothered about the change in income tax and corporate tax rates, what he failed to do was to disclose as to what percentage of the total expenditure is to be spent towards these ‘inclusiveness’ initiatives.
We also indicated that as far as India Inc. is concerned, it is already in the 'pink of its health' and a tinkering here and there (with respect to taxes and all) won't be of much significance in the long term. While the FM responded by raising the dividend distribution tax from 12.5% to 15% for dividend distributed by companies, as also raising the education cess by 1%, these could not be called as ‘extraordinary’ measures that could significantly impact India Inc.’s profitability and free cash flows.
What was the theme of the Budget 2007-08?
“If ploughmen keep their hands folded, even sages claiming renunciation cannot find salvation” could well summarise the theme of today’s budget, which included a lot of talk on the ploughman, the farmer. Increased allocations were announced for providing him with greater access to primary and secondary education and basic healthcare. Proposals also flooded for improving the rural infrastructure in terms of greater allocations to rural electrification, road construction and mobile telephony. As for corporate India, the FM raised the rate of dividend distribution tax from 12.5% to 15% on dividends distributed by companies. Also, to reduce the huge arbitrage opportunities available to money market mutual funds and liquid mutual funds that enjoy concessional tax rates, he has raised the dividend distribution tax on dividends to 25% for all investors.
Not much for India Inc.
This years’ budget was sort of status quo for most of the sectors, with major announcements made for only two sectors – construction and textiles. However, there was not much meat for sectors like software, telecom and financial services, which are among the largest employment generators in the country.
Construction: Since government spending on infrastructure is the most important growth driver for construction companies, we believe that the proposed increase in allocation towards rural and urban infrastructure development will translate into awarding of more projects for companies in the sector. Further, leveraging of foreign exchange reserves for infrastructure development will result in increased availability of funds with the government and thereby result in faster infrastructure growth for the country. However, despite huge order backlogs, timely execution of orders by construction companies remains our major concern. Rising raw material prices are also likely to be a tough nut to crack for these companies.
Textiles: Identification of the textile sector as a priority one for ‘job creation’ by the government certainly augurs well for the long-term. This is particularly a positive for players in the garmenting side, the same being very labour-intensive. Tax sops by way of lower excise duties on polyester fibre are likely to reduce the raw material cost. Given the latent opportunities present in the global scenario, the measures are likely to help the textile companies become more competent and attract sizeable orders from the US and European markets. More importantly, it would enable textile companies to increase capacities and gain scale, which is critical element while bidding for global orders.
What is the post-budget equity strategy?
Speculators and short-term traders must be happy that the FM did not tinker with the STT (securities transaction tax). Long-term investors, those with three to five year view, will benefit from implementation of progressive policies on education and healthcare. As we had indicated in an earlier article, the key to today's budget would have been to understand where the government spends, rather than from where it generates its income. While the FM did well to announce a slew of measures for agriculture, education and healthcare, what he failed to do was to disclose as to what percentage of the total expenditure is to be spent towards these ‘inclusiveness’ initiatives.
Our broader view on equities remains that of high-risk. However, we continue to believe that long terms investors can still find good opportunities. One is required to continue to invest by understanding the businesses of companies, quality of managements, and with a strict regard to valuations. Leave speculation to speculators! If the job is done correctly when a common stock is purchased, the time to sell it is - never! Not even in panic situations like the one we were witness to today.
While it might not be a one-way ride for stocks going forward, what is more important to note is that equities will provide attractive inflation adjusted returns in the long term. You just have to be rational in your choices and not follow the herd, and you need to value stocks not beyond any accurate or rational reflection of their actual worth. This is not to say that your equity investments cannot legitimately enjoy a huge leap in value, but this leap should be justified by the prospects of the underlying companies, and not just by a mass of investors following each other.
The unreasonable belief in the possibility of getting 'rich' quickly is the primary reason people burn their fingers in market crashes. One tends to neglect the fact that there is a direct correlation between high risk and high returns. While the history of market crashes does not in any way foretell anything dire for the future, the best thing that you, as an investor, can do is to keep yourself educated, well informed and well practiced in doing your homework.