Mkts give thumbs up to Budget 2010
Closing

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.

Investors content with Budget this year
01:30 pm

With the Indian markets rising sharply during the previous two hours of trade, it does seem as if the investors are content with this year's Union Budget. Buying activity is being witnessed in stocks across sectors, with gains seen in the heavyweights from various sectors. While stocks from the realty, metal and auto spaces are leading the pack of gainers, the IT pack seems to be left out as the BSE-IT Index is lower by 0.3% at present.

The BSE Sensex and NSE Nifty are trading higher, up by 310 points and 100 points respectively. The BSE Midcap and Smallcap indices are trading in the positive, up by 2% and 1.6% respectively. The rupee is trading at 46.19 to the dollar.

Power stocks are currently trading firm led by CESC, Reliance Power and NTPC. However, Tata Power has not been able to join to party on the back of investors punishing the stocks for its poor results that were announced recently. The company announced its consolidated results for the quarter ending December 2009 yesterday. It reported a 6% YoY decline in sales during the quarter, while its revenues for 9mFY10 stood higher by about 2% YoY. Lower sales in both the power and coal businesses led to the fall in revenues during the quarter. The decline in power sales is mainly attributed to the lower tariffs on the back of passing on the lower fuel costs to customers. The company's operating profits declined by 47% YoY.

Performance at the operating level was impacted by a one-time charge of Rs 350 m for the coal mining business on account of change in some contractual arrangements related to mining costs. On excluding the same, margins (12.6% in 3QFY10 as compared to 22.2% in 3QFY09) would have remained at almost similar levels to last year. On the back of sharp decline in operating margins, Tata Power's consolidated net profits dropped by 81% YoY during 3QFY10. As for 9mFY10, net profits were down by around 22% YoY. Higher depreciation cost is the key reason for the same.

Telecom stocks are currently trading firm led by Idea Cellular, Spice Communication and Reliance Communications. The stock of telecom major Bharti Airtel is also trading higher. The management of Bharti Airtel conducted a conference call yesterday, to give a better insight to the ongoing discussion over acquiring Zain's African assets. The key reason for the company wanting to enter the black continent is the fact that it has crossed its peak capex level in its Indian operations. This indirectly means that the company is now looking for its new growth phase, which in this case is by tapping the African market. In addition, the company's Chairman Mr. Sunil Mittal is of the view that the Bharti's senior management is competent enough to take its expertise, knowledge and experience and use it to transform Zain's African operations. Plus, the management also believes that it would be able to apply its low cost model and help it improve its financial heath going forward.

While Bharti is aiming at funding this acquisition with debt for now, it would be looking at lowering it in the future through the equity route. However, the latter still remains a possibility. It must be noted that the deal is still not final yet. However, the management does seem optimistic about it going through.

Indian stock markets welcome the budget
11:30 am

Union Budget so far appears to cheer the markets as they remain firm on account of persistent buying in index heavy weights. Stocks from the oil and gas, metal, auto and realty are leading the pack of gainers, while stocks from the telecom and IT sectors are the only ones failing to garner investors’ interest.

The BSE Sensex and NSE Nifty are trading higher, up by 90 points and 33 points respectively. The BSE Midcap and Smallcap indices are trading in the positive, up by 0.96% and 0.63% respectively. The rupee is trading at 46.29 to the dollar.

According to a leading business daily, public sector aluminium major Nalco, is planning to undertake expansion plans worth Rs 500 bn over the next 8 to 9 years. The company plans to increase its aluminium capacity from existing 4.6 lakh MT to 5.75 lakh MT, its alumina refinery from 21-lakh MT to 29-lakh MT along with de-bottlenecking of alumina from 21-lakh MT to 22.7-lakh MT. It plans to spend around Rs 15 bn towards capex in FY11. IT will set up a Rs 160 bn greenfield project in Orissa and a Rs 56 bn refinery in Andhra Pradesh. It is also setting up a smelter in Indonesia.

It has no plans for fund raising for next two years as it believes itself to be adequately resourced for expansion. Also it has no plans for follow on public offer in the short term either. It is worth noting that aluminium prices went southwards during last year, denting the company’s topline. Nevertheless, Nalco, being one of the lowest cost metal producers in the world could survive it without cutting its production. Its topline declined by 25.6% YoY during 2QFY10 mainly on account of lower realisations due to weak London Metal Exchange prices. However lately the prices are stabilizing and are expected to remain stable in FY11. We believe that these expansion plans are well timed in light of the growing international and domestic demand for aluminium.

As per a leading business daily, Mindtree, is planning to revamp its presence in Asia Pacific, Middle East and India. It recently indicated of an increased focus on the UAE’s IT market which is estimated to be growing at 7% annually to reach US$ 1 bn by 2011. In its target markets, it plans to ramp up its sales force, reinforce strategic partnerships with local companies and focus on specific segments like government and the manufacturing industry. It has also hinted of plans to raise debt upto US$ 100 mn soon, which we believe will go towards these initiatives and inorganic foray. It may be noted that the company generates around 17% of its revenue outside the US and European markets. In 3QFY10, Mindtree’s revenue from India and other markets like Middle East, Asia Pacific and Africa (MEA) grew by 27% QoQ and 52% QoQ. We believe that these focused efforts towards strengthening its foothold outside the core markets will help the company in de-risking its growth from the mature IT markets in the West.

Markets open strong on budget day
09:30 am

The Indian markets have started today's session on a positive note. The benchmark indices opened above the breakeven mark and have managed to move further into the positive territory since then. Other key Asian markets are trading a mixed bag with Hong Kong (up 1%) leading the pack of gainers. The US markets closed lower by 0.5% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading a mixed bag with banking and energy stocks attracting buying interest. However, select software stocks are in the red. The BSE-Sensex is trading higher by around 70 points, while the NSE-Nifty is up by about 25 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.4% and 0.3% respectively. The rupee is trading at 46.31 to the US dollar.

Auto stocks have opened the day on a mixed note. Gainers here include Ashok Leyland and Bajaj Auto. However, Tata Motors is trading in the red. As per a leading business daily, Tata Motors has obtained a £340 m (approx. Rs 24 bn) loan facility for its luxury brands Jaguar Land Rover (JLR) from European investment banks. The eight-year loan is meant to finance the development of micro and full hybrid vehicles as well as research into more energy-efficient premium cars, leading to lower CO2 emissions. The loan has guarantee supports from international banks as well as Indian banks such as SBI and Bank of Baroda. Interestingly, Tata Motors had first approached the UK government for the guarantee support. The talks broke down as the UK government laid down tough conditions for the support. It may be noted that ever since the crisis broke out and sales of luxury vehicles plummeted, the management of JLR has been trying hard to keep the company afloat and resort to strong cost cutting measures like laying-off excess workforce. Hence, the completion of this loan facility will help Tata Motors to create enough value out of JLR in order to justify the price it paid for it.

Pharma stocks have opened the day on a negative note. Losers here include Ranbaxy and Panacea Biotech. Ranbaxy announced its CY09 results yesterday. Revenues grew by 2.5% YoY during the year led by India and the emerging markets and launch of 2 first-to-file (FTF) products in the US. Several cost rationalization measures lead to an improvement in operating margins by 1.5% to 9.4% during the year. With interest costs falling substantially and the company recording forex gains of Rs 3.4 bn as against forex losses of Rs 18.5 bn in CY08, it posted a net profit of Rs 3.1 bn during the year as against a loss of Rs 9.3 bn in CY08.

Great expectations from the budget
Pre-Open

In a few hours from now, all eyes will be on the Finance Minister Pranab Mukherjee as he presents the Union Budget 2011. Last year's Budget was presented by a newly re-elected government with the global economic slowdown knocking on the doors. Little wonder then that it was painted in a decidedly socialistic hue.

This time around though, the focus should be different. With economic growth no longer a worry, it is time to start rolling back the stimulus package. Certainly, the Economic survey points in that direction . It will help contain the burgeoning fiscal deficit and slowly move us towards the target of 3% of the GDP in the next four years. Inflation in food prices also needs urgent attention. Closely linked is the question of government control over food prices. In any case, the benefit from such indirect subsidies remains doubtful. Another area that will be keenly watched is the freeing of fuel prices. Recently the Kirit Parikh committee recommended such a move, but nothing has happened on that front.

Then there will be expectations on the direct tax structure – the exemption limits, the deductions on investment and specific sops for various industries. Changes in indirect taxes and their impact will also be keenly awaited.

But what are even more important for the long term are policy announcements relating to education and infrastructure. The Economic Survey has pointed out the worrying pace of execution in road and power projects, which should also figure in the budget speech. There will also be expectations on the reforms front. From auction of 3G spectrum to investment in the insurance sector. From increased participation in the retail sector to public sector disinvestment. As mentioned earlier, the government was just settling down during last year's budget. In the previous term, the presence of the Left parties in the coalition put limitations on the government. No such excuses apply this time.

Given the space in which the government finds itself and given that the Union Budget is its main policy document for the year, it is natural to have great expectations from the announcements today. We hope they will come through and even more importantly, will be implemented thereafter.