Mkts give thumbs up to Budget 2010

Fri, 26 Feb Closing

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The Union Budget 2010 brought some cheers to the Indian markets, which had been reeling under fear for the past few days with respect to the government's stimulus withdrawal. However, the Finance Minister did not tinker much with the stimulus but for partially rolling back some excise duty benefits. However, much of this seemed in line with what the markets had been expecting. Anyways, realty, auto, and metals stocks led today's gains.

The BSE Sensex and NSE Nifty closed with gains of around 175 points (1.1%) and 65 points (1.4%) respectively. Mid and small cap stocks also closed with gains. The BSE Midcap and BSE Smallcap indices closed higher by 1.5% and 1.1% respectively. On the broader BSE, one stock lost today for every two that closed in the positive.

Among other key Asian markets, while China closed marginally in the red, Hong Kong (up 1%) and Japan (up 0.2%) were among the gainers. European markets have opened today on a positive note.

Apart from just a small rollback of the stimulus, one of the key reasons for today's gains was the clear roadmap announced by the government with respect to reducing its fiscal deficit over the next 3-4 years. As against an estimated figure of 6.9% and 5.5% of GDP in FY10 and FY11 respectively, the rolling targets for fiscal deficit are pegged at 4.8% and 4.1% for FY12 and FY13 respectively. Also, as the Budget notes, taking into account the various other financing items for fiscal deficit, the actual net market borrowing of the government in FY11 would be around Rs 3,450 bn, which would leave enough space to meet the credit needs of the private sector.

Auto stocks gained strongly today, Key gainers here included Bajaj Auto, Tata Motors, and Ashok Leyland. A lower than expected rollback of excise duty seemingly enthused investors in these stocks. Then there was the lowering of personal income taxes that we believe might foster increased spending by consumers on discretionary items like automobiles. But for the increase in the ad valorem component of excise duty on large cars and multi-utility vehicles by 2% points to 22%, today's was a positive budget for the auto sector as a whole. We also believe that the extension of R&D benefits will encourage more investments in the sector and will make it competitive in the long run.

Realty stocks were amongst the biggest gainers on the broader markets today. The BSE-realty index closed up by almost 3%. Key gainers here included HDIL, DLF, and Unitech. These gains were on the back of some relief provided by the Budget to real estate companies. As the Finance Minister announced, with a view to provide one time interim relief to the housing and real estate sector that was impacted by the global recession, the government has allowed pending projects to be completed within a period of five years instead of four years for claiming a deduction on their profits. The Budget has also proposed to relax the norms for built-up area of shops and other commercial establishments in housing projects to enable basic facilities for their residents. The realty firms couldn't have asked for more!

This is given that these companies have already been amongst the biggest beneficiaries of the government's fiscal stimulus programme that has helped them restructure their strained balance sheets. The interesting thing is that these realty companies have come back to their greedy ways by not lowering property prices by keeping them artificially inflated through hoarding. Some like Deepak Parekh of HDFC have come out heavily on these companies' tactics. But now, given that the Finance Minister has allowed them some more time to relax, real estate companies and their investors are making merry.