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‘Target Blue Chips Selectively’

Long-term investors should utilize this market opportunity optimally

The Union Budget for FY2009-10 announced by Finance Minister Pranab Mukherjee has turned out to be more of a common man’s budget with the core focus being the continuation of efforts to achieve a 9 per cent GDP growth in future while aiming at all-round inclusive growth as well as social spending.

Market Expectations Remained Unfulfilled

The market which was keen awaiting wide ranging announcements ranging from a expected cut in the STT, a cut in Capital gains taxes, and also some big bang announcements on PSU divestments was disappointed that nothing of these actually materialized in the budget. In fact on the negative side MAT rate has been increased to 15% from 10% with some minor benefits like FBT being taken off and individual tax payers also given the benefits of surcharge of 10% being taken away in this budget.
Nevertheless corporate tax rates have remained unchanged which is a silver lining considering the tight financial resource crunch with the government.

Technical View Post-Budget 2009-10

Nifty scaled a high of 4693.20 on 12th June 2009. Since then till the presentation of the Union Budget markets exhibited a cautious approach, without any significant directional move. Markets went into today's Budget with High hopes on Disinvestment programme, aggressive Reforms and Market-friendly announcements. But 'build-up' of positions was clearly absent in pre-budget action. The expectations of markets were not met in today's 'socially oriented' budget. Absence of big ticket announcements sent a wave of 'disappointment' among players. The result was a sharp knee-jerk reaction from marketmen. FIIs were seen off-loading aggressively, showing concerns on rising 'fiscal deficit'.

Technically speaking 'Support' around 4150 levels of Nifty is crucial and the 'Risk' in markets will go up substantially if Nifty slips below the mentioned levels (on closing basis) during the week. Next significant support for Nifty exists far lower around levels of 3800. We however believe that despite the market disappointment over the budget, the probability of emergence of 'value buying' at lower levels from domestic Institutions is very high.

We believe the Union Budget for 2009-10 has been on expected lines notwithstanding the fact that several big bang announcements related to FDI, Pension Reforms, Education Reforms, Insurance and PSU divestment were eagerly awaited but failed to prominently come up in this budget.

We believe that long-term investors should utilize this market opportunity optimally by selectively investing in blue chips for a medium to long term horizon.

•    We expect stocks like Mahindra & Mahindra, Maruti Suzuki, Ashok Leyland and Tata Motors to benefit moderately from these measures over the medium term announced in the Union Budget.

•    We believe that Increase in farm credit target by 13% to Rs.325000cr would continue to drive demand for tractors and is a positive for companies like M&M. Also increase in provision for the NHDP will increase the highway network in India and is positive for demand growth for commercial vehicles in the long term.

    There not been any big increase in allocation to Education sector for 2009-10 over interim budget presented in February 2009, nevertheless sector continues to be government thrust area for spending and would benefits players' operating in the sector as a whole.
•    Increase in MAT to 15% from 10% is likely to increase tax outgo for companies like NIIT, however increase in the number of years for carried forward of tax credit from 7 years to 10 years would offset some impact. No major impact for other players like Educomp and Everonn.
•    Abolition of FBT is a relief sector, would reduce the operational and compliance issues associated with FBT. Companies having higher ESOPs issues are likely to benefits more.
•    Union Budget 2009-10, does not bring any big bang announcements for the education sector as market participants are expecting. Nevertheless, education sector has already got a substantial allocation in the interim budget earlier during the year, coupled with more reforms are outlined in the HRD ministry 100 days plans, which gives more thrust on public private partnerships.

We believe as most of the stocks in the education space has already run up sharply in the last three months, which leaves little room for appreciation in the medium term. Nevertheless, we continue to remain positive on the sector for a longer term perspective and recommend investors to enter at lower levels for two years perspective. We remain positive on Everonn Systems, Educomp Solutions.

•    Rural sector contributes to a significant portion of FMCG companies spends. Governments continued focus on rural sector will improve the rural income which in turn will provide a great boost to the demand in rural areas and thereby increase sales. Almost all companies within the FMCG space are expected to benefit from this move especially companies like Dabur and HUL which derive more than 45% of their revenues from rural areas.
•    On the flipside, FMCG companies falling under MAT will see their bottom-line being hit as the MAT rate has increased by 50% to 15%. To be specific Dabur India and Godrej Consumer Products are currently under MAT that may see an adverse earning impact. However, we believe, FMCG (likely to be benefited from indirect demand coming from rural growth and FBT abolishment ) would remain neutral to the Budget developments.

    Higher allocation to Infrastructure sector will benefit Infrastructure players in the long run and the government measures will help these infrastructure companies to finance their projects with ease. Cost of funds to be reduced due to availability of funds made through IIFCL.
•    Increased order book expected from NHAI and Railways which would benefit companies like Reliance Infra, Gammon India, Nagarjuna Constructions, IVRCL,etc.

•    One year extension U/S 10(A)/(B) is a welcome relief for the IT industry, however its comes short of industry expectations of 2 year extension. Nevertheless, it would likely to benefits more to companies in mid-tier than the larger companies like Infosys, HCL Technologies.
•    Increase in MAT to 15% from 10% is likely to increase tax outgo for smaller and Midtier IT companies , however increase in the number of years for carried forward of tax credit from 7 years to 10 years would offset some impact. Marginal impact for larger IT companies.
•    Would benefit large IT companies, having substantial exposure in SEZs.
•    Abolition of FBT is a huge relief for the IT sector, would reduce the operational and compliance issues associated with FBT. Companies having higher ESOPs issues are likely to benefits more.
•    We believe most of the good news is already discounted in the stock prices. We continue to remain cautious on the sector and expect a correction in the medium term. We expect with extension of STPI benefits would impact the earning for FY11 by 1%-5%. We continue to remain positive on Infosys , TCS and Glodyne .

•    Extension on stimulus package for six months would have marginal positive impact for Print media companies like HT media and Jagran Prakashan.
•    Abolition of FBT would reduce the operational and compliance issues associated with FBT. Companies having higher ESOPs issues are likely to benefits more.
•    Introduction of 5% custom duty on Set Top boxes would have marginal negative impact on the WWIL and Dish TV, as the price of Set Top box will increase, however it is likely to pass over to the end customers.
•    There is no mention of FDI policy for Media sectors in the union budget, which is a big disappointment for sector. On the other hand, there is no stimulus package for Media sector apart from Print media. Nevertheless, we believe print media and broadcasting will likely see revival in next 12 months. We continue to remain positive on ZEEL and ZEE News.

•    Finance Minister has maintained a status-quo on the duty structure for Steel and Iron ore. Hence, no effect would be seen on the companies' bottom line in the Steel & mining sector for the current financial year.
•    Enhanced funds for Rural housing will help the companies having deeper penetration in rural market, viz. JSW Steel which has exposure to flat products used in rural markets.

•    Though the increased allocation of funds towards Healthcare sector and abolishment of FBT is positive for Indian Pharma, the 50% increase in FBT from 10% of book profit to 15% comes as a big blow for most of Indian Pharma companies operating under MAT in the near term. It would be negative for companies including - Sun Pharma, Dishman, Cadila and Biocon.
•    However, the amendment in IT section - 10AA(7) that provides 100% profit exemption effective from FY2011 for business units operating from SEZs could prove to be a positive development for Indian Pharma in longer term. Divis Laboratories and Biocon are visible beneficiaries of the said development, as they currently operates from their SEZs. Also, few more domestic pharma peers like - Dishman, Cipla, Jubilant Organosys, Cadila Healthcare etc are setting their SEZs
•    The reduction in custom duty on discussed life saving drugs and devices may impact MNCs (like Aventis, GlaxoSmithkline etc) positively. Overall we believe the rising MAT would play a lead role and have a adverse impact on Indian Pharma in near term.

Reliance Money, a comprehensive financial services and solution provider, digs deep into the Union Budget and reveals the effects on the various sectors.