Category: Economy, Markets and Macro Views

Looks like the FM had directions from Italian Lady to slowdown the growth and focus on “Common Man“, especially with UP elections around the corner. FM rightly said, Budget is presented in a context of Economic and Political conditions. Here are some thoughts,

Sector Cement: [Negative]
These guys have had an extended honeymoon and thus its good that they are punished hard.Increasing excise duty from Rs400 to Rs600 for price above Rs190 per bag and reducing from Rs400 to Rs350 is a negative as cement price per bag in most of the places is above Rs190 at present. With demand strong we believe the increase in the duty would be largely passed on, but continuous efforts by the Government to curb the price increase and reduce the profitability of the industry is visible.

Sector Oil & Gas: [Positive]
Reduction in ad valorem excise duties for petrol and diesel – positive for Oil Marketing Companies IOC, BPCL and HPCL. Reduction in custom duties on Plastics, polyester and intermediates – positive for Reliance Industries, GAIL, IOC and IPCL
Infrastructure status to cross-country pipeline projects – positive for Reliance Industries, GAIL, GSPL, Gujarat Gas and Indraprastha Gas Ltd.
Extension of service tax to mining of oil and gas – marginally negative for ONGC, Reliance, and Cairn India

Healthcare: [Positive]
Healthcare allocation increased. Allocation for immunization program is Positive for Panacea Biotech. HIV eradication to gain momentum – Positive for MNC, Cipla, Wockhardt. 150% weighted average tax deduction for R&D expenses extended for 5 years is Positive for research driven pharma companies-Ranbaxy, DR Reddys Labs, Sun Pharma, Cadila Healthcare, Biocon and Glenmark. Clinical trials out of service tax net. Medical insurance deduction u/s 80DD increased to Rs15,000 is positive for Apollo Group, Max India as more population would be covered by medical insurance.

Information Technology: [Negative] End of Honeymoon
The pampered kid of the Indian industry is all set to face some uphill tasks. Minimum Alternate Tax to be applied to IT companies to 11.2% on book profits. Inclusion of ESOPs under the FBT net negative for the sector. Non-extension of STP benefits beyond 2009 negative especially for medium & smaller sized IT companies. SEZ operations will be spared.

Construction: [Negative]
The budget proposed withdrawing the ten-year income tax breaks on infrastructure construction contracts available under section 80 IA, with retrospective effect from April 2000. WTF ? Am I Kidding ? No way. Before you do business in India be prepared to pay Taxes in retrospective LOL. What a D**k Head 🙂

The withdrawal of the benefit will raise the tax liability of construction firms which in turn will impact their profit margins, analysts say. Further, their short-term cash-flow may also be affected due to tax payment for previous years as the tax benefit has been withdrawn from April 2000. One of my favorite stock Punj Lloyd is also in the constructions business but more than half of its contracts are outside India just like L&T.

Real Estate:
Commercial Real Estate rentals bought under Service Tax net. Tax exemptions for Hotels and Convention centers in Delhi and NCR regions. But who knows after the commonwealth games, some other D**k Head Finance Minister may impose tax collections in retrospective. LOL

Their were no significant announcements for Banking, Telecom and Power Sectors in this budget.

FirstSource Solutions Ltd which recently completed its IPO got listed on the NSE with ticker “FSL” at Rs 83.0, a 30% premium to its issue price of Rs 64.

You can check the allotment status of FirstSource Solutions here. Long term investors can continue to hold the stock. Short Term investors must hold and book profit only when the IT stocks rally, i.e Q4 results will be out in April-07.

DalalStreet.Biz has a calculation of how rising interest rates by the RBI has raised the EMIs of Indian home loan borrowers.

Loan Amount: Rs 25,00,000
Inception Jan – 1 – 2004
Floating Rate @ inception – 7%
Tenure of the Loan – 20 years
EMI at inception Rs 19,400

Since Jan-1-2004, the Indian central bank, Reserve Bank of India has hiked the interest rates 6 times. The table below shows how your EMI has shot up by 26% in 3 years.

Jan-2005, Interest Rate 7.5% EMI Rs 20,100
July-2005, Interest Rate 8.0% EMI Rs 20,800
Jan-2006, Interest Rate 8.5% EMI Rs 21,600
April-2006, Interest Rate 9.0% EMI Rs 22,300
July-2006, Interest Rate 9.5% EMI Rs 23,000
Feb-2007, Interest Rate 10.5% EMI Rs 24,500

Plus their is a blood sucking Service Tax on the part of interest paid to the bank.

Sure, our Real Estate Sector is headed for a trouble now.

BSE and NSE finally shutdown their systems at midnight and till then they had received 577662585 bids against an offer of 5593300 subscribing the MindTree issue 103 times. We had a blind subscription rating on MindTree IPO.

The retail portion of the issue is subscribed by 30 times. The fate of Rs 1 Lakh application by retail investor will also be decided by lottery in the ratio of 1:2. Here is the breakup of subscription.

Cinemax listed on NSE today and the shares closed below the offer price. DalalStreet.Biz had an expensive rating on the issue. I wouldn’t BUY as the Great Indian Multiplex story is melting down.

With the Indian inflation at record high, 6.58 %, the Finance Minsitry had no other option but to cool the overheated economy. The Reserve Bank of India, just minutes ago announced the hike in Cash Reserve Ratio by 50 bps to 6%. This hike would suck Rs 14,000 crore away from the system.

In order to manage short term liquidity crisis, RBI has proposed the CRR hike in two phases with the second phase to come into effect after Budget on March-3rd.

RBI in a press release said,

It may be recalled that in the Third Quarter Review of the Annual Statement on Monetary Policy for the year 2006-07, the stance of monetary policy was set out. The Review inter alia stated :

“Hence, a determined and co-ordinated effort by all to contain inflation without unduly impacting the growth momentum is not only an economic necessity but also a moral compulsion. To the extent the current inflationary pressures are attributable to monetary conditions, it is essential to undertake appropriate measures, in continuation of those already taken and in the light of anticipated developments.” (paragraph 77)

SBI CFO said that the lending rates will increase not just to the overheated Real Estate borrowers but also to all other borrowers. Banking stocks will be under pressure and the market correction is likely to continue tomorrow.

The sensex has fallen close to 600 points in 3 trading sessions. Infrastructure & Real Estate stocks are the worst hit. Brokers attribute the correction due to the rise in interest rates and also their is a widespread speculation that some of the concessions given to Infrastructure sector linked to lands banks will be withdrawn in the current budget.

Capital Goods and Cement stocks are also amongst the top losers. Auto stock is driving in the reveres gear as well. FII interest in the market has been lackluster but they have been selectively picking stocks.

The IPO market is also expected to cool down and markets are expected to be volatile until the budget.