Sunday, July 12, 2009

Closing bell 6 July 2009

Closing bell 6 July 2009

Not so content with the budget measures announced today, market participants reacted hard by engaging in a mass sell-off. Just an hour before noon, the indices’ downward journey began and subsequently continued till the close. The Sensex ended the day lower by about 870 points (5.8%), while the NSE-Nifty closed lower by around 260 points (5.8%). Barring stocks from the FMCG sector, selling activity was witnessed across the board, led by stocks from the banking, realty and capital good spaces, whose respective indices were down in the range of 7% to 8%. The overall decline to advance ratio was stood at 3.5 to 1 on the BSE.

Most of the other Asian markets also ended the day on a weak note today. Stocks in Europe are also trading in the red currently. Rupee was trading at 48.49 against the US dollar at the time of writing.

Out of all the stocks that form part of the BSE-Sensex, only two - ITC and HUL - closed in the positive at the time of writing. The gains in ITC were mainly on account of the Finance Minister (FM) not tinkering with the taxes on cigarettes. That seemingly came as a relief for investors as the government in the past has been steadily increasing the excise duties, which have indirectly impacted volumes. Further, the FM has also kept excise duties on paper and paperboards unchanged at 4%. This will help the company reduce its cost. Further, the increased focus on rural India will help it increase revenues from these markets, which currently form around 20% to 25% of the company’s income.

The BSE-FMCG Index ended higher by about 0.9% today. This was mainly on account of the government’s focus on the aam aadmi. In today’s Budget, the government increased its allocation to the NREGS (National Rural Employment Guarantee Scheme) by 144% to Rs 391 bn for FY10. The NREGS focus on increasing employment through the NREGA (National Rural Employment Guarantee Act). Amongst other measures, it also took a measure of providing sufficient food security to BPL (below poverty line) families apart from allocating Rs 70 bn under Rajiv Gandhi Grameen Viduytikaran Yojana (RGGVY). The increased focus on rural markets through higher employment generation and infrastructure spending will improve rural income. It may be noted that rural India accounts for more than 40% consumption for major FMCG categories. Also the fact that FMCG companies are witnessing 40% annual growth in rural sales as against 25% in urban areas cannot be ignored.

The BSE-Oil and Gas Index ended the day lower by around 5.8% today. In today’s Budget, the FM announced that the tax holiday under section 80-IB (9) of the Income Tax Act on the profits from production or refining of mineral oil, has been extended to natural gas. This will be available to blocks under the NELP-VIII round of bidding. It will also be retrospectively provided to existing blocks. This comes in as good news for upstream energy companies such as ONGC and RILwho are significant producers of natural gas and will now benefit from the tax exemption on production of natural gas in India. In addition, companies looking to enter into joint ventures with foreign energy majors for bidding in the forthcoming NELP rounds will find it easier to find partners. The list includes almost all the major oil and gas companies in India.

The Indian markets continued to go down-hill during the previous two hours of trade on account of a spurt in selling activity triggered by lack of enthusiasm over the Union Budget. The BSE Sensex and NSE Nifty have plunged significantly and are trading down by 770 points and 239 points respectively. The BSE Midcap and BSE Smallcap indices are also trading in the red, down by 3.59% and 2.9% respectively.

Stocks from all the sectors are trading in the red with banking and metal stocks leading the pack of losers, while select stocks from FMCG sector are trading in the green. The overall decline to advance ratio is poised at 0.4 to 1 on the BSE. The Rupee is trading at 48.35 to the Dollar.

The Finance Minister (FM) tabled the Union Budget for 2009-10 today whose theme revolved around ‘inclusive growth’. The Budget outlined measures to speed up infrastructure development and disclosed increased spending for farmers and poor in the country. The government is targeting to increase investments in the infrastructure sector to over 9% of GDP by 2014. The FM also emphasized the need to restore a growth rate of 9% at the earliest. However, fiscal deficit which remains a concern is expected to increase from 6.2% to 6.8% in 2010. On the tax front, Fringe benefit tax (FBT) has been abolished while no changes have been made to the corporate tax rates which the industry was anticipating. Minimum alternate tax (MAT) has been increased from 10% to 15% but with a provision of carrying forward the tax credit on MAT to ten years.

Power Stocks are trading lower led by NTPC and Power Grid. The government has doled out some incentives for the sector today in the Union Budget. The measures announced for the power sector includes 160% increase in allocation under Accelerated Power Development and Reform Programme (APDRP). This is likely to benefit power generation companies like NTPC, Tata Power, and Reliance Infrastructure. Also, allocation to the Rajiv Gandhi Grameen Viduytikaran Yojana (RGGVY) has been increased to Rs 70 bn which is likely to benefit the transmission sector. Excise duty on naphtha has been reduced to 14%. Excise duty on naphtha has been reduced to 14%, thus lowering the cost of generation for power companies.

The Indian markets lost ground during the previous two hours of trade as they reacted negatively to the Union Budget 2010. Barring ITC all other stocks are trading weak in the NSE-Nifty. The pack of losers is led by stocks from the banking, realty and metal sectors. The overall decline to advance ratio was poised at 2.1 to 1 on the BSE.

The BSE-Sensex and NSE-Nifty are trading weak, down by around 660 points and 200 points respectively. The BSE-Midcap and BSE-Smallcap indices are also trading weak, down by around 3.0% and 2.4% respectively. The Rupee is trading at 48.33 to the Dollar.

As per a leading business daily, pre-owned commercial vehicles financier major, Shriram Transport plans to raise up to Rs 10 bn in non-convertible debentures (NCD) in order to augment its financial capabilities. For this, the company has already filed the draft prospectus with the NSE for issuance of Rs 5 bn NCD along with an option to retain up to Rs 5 bn further in case of over subscription. It may be noted that the company expects to increase its market share in the pre-owned commercial vehicles segment to 40% from the current level of around 22% over the next four years. This development will help Shriram Transport to fund its future growth . The stock of Shriram Transport is currently trading weak on the bourses.

Media stocks are trading firm led by HT Media and Jagran Prakashan. The Union Budget 2010 has further extended the exemption on special customs duty for the newspaper and magazine publishing industry for six months. the industry has been facing severe pressure on account of higher newsprint prices. It may be noted that newsprint costs contribute to as high as 40% to 45% of total costs. This move by the government will help print media companies to mitigate some cost pressures for the time being.

Ahead of the Union budget, the Indian indices have opened the week’s proceedings on a positive note. Engineering and power stocks are leading the pack of gainers, while select energy stocks are witnessing some selling. The overall advance to decline ratio is at 2.7: 1 on the NSE. As regards global markets, the US markets remained closed last Friday for the Independence Day holiday. The European markets ended lower last Friday, while the Asian markets are also trading weak currently.

The BSE Sensex is trading higher by around 110 points. The NSE Nifty is up 30 points. The BSE Midcap and the BSE Smallcap indices are trading higher by 1% each. The rupee is trading at 47.96 to the dollar.

Pharma stocks are trading firm. With the budget to be announced today, the pharmaceutical sector is hoping for the removal of price regulations. The Economic Survey announced last week had proposed that the government should control prices of essential drugs that have limited manufacturers and decontrol all other medicines. This is in sharp contrast to what the NPPA has been proposing namely bringing 354 medicines under price control. If what is proposed in the Economic Survey is implemented, it would be a big boon for the pharma companies. Looking at the other side of the coin, over 800 m of the country's poor are struggling to pay medical costs. In addition to this, as has been the case in the past, around 80% of the medical costs are borne by individuals. This percentage stands at around 10% to 30% in the developed markets. Given that intense competition in the Indian pharma market has already made prices of drugs one of the lowest in the world, what the government needs to do is to focus more on the accessibility of medicines to all.

As per a leading business daily, SAIL has terminated a Rs 20 bn order given to a Posco unit for construction of a blast furnace at Bhilai steel plant. The move comes on the back of Posco’s failure to sign the contract despite several reminders. Posco E&C last year won a bid to construct a blast furnace on an EPC (Engineering, Procurement and Construction) turnkey basis for SAIL's Bhilai steel plant. The company will float a new tender now. The steel maker is likely to get a cheaper deal in the new tender. This may help it to reduce its cost of expansion, which at present is pegged at Rs 550 bn. The Bhilai steel plant is undertaking a Rs 120 bn expansion programmeto double its production capacity to around 3 million tonnes (MT) per annum. As per industry reports, between 2003 and 2015, the demand for steel is expected to log in a healthy CAGR of 10%. Thus, in order to cash in on the India growth story, the company has announced ambitious expansion plans as well as modernisation plans for the future. Steel stocks are currently trading mixed.

As the Finance Minister, Mr. Pranab Mukherjee, rises today to present his fourth regular budget (he presented three while being the finance minister in the Indira Gandhi cabinet from 1982-84), the nation's eyes will be on him as to what he pronounces in the name of reforms. This, while having his hands tied down by the mammoth fiscal deficit.

Things are quite different than they were when Mr. Mukhrejee held this role full-time in the 1980s. India was then a closed economy. Today, it's a part of a highly globalised world where economic barriers are relatively non-existent and the role of a finance minister is much more dynamic and challenging. Over that, he inherits an economy that is now exposed to the worst worldwide recession since the Great Depression of the 1930s.

Expectations from him seem to be running sky high. A quarter of a century after he presented his last regular budget, he is now once again being asked to steer the economy through choppy waters. His success in doing so will go a long way in determining India's ascent to the higher echelons of the global economic order over the next five years. But do not expect the sky in the short to medium term, as the media would have made you believe. This isn't India's 'biggest budget ever' as it is made out to be. Yes, for the size of our fiscal problems or for the sheer count of those involved in the budget making exercise itself, this could still be India's biggest budget ever!

Expectations are running high for the finance minister to spell out the 'reform package' and investors might turn euphoric or despondent going by what the minister actually delivers today. But for you dear investor, all we can wish for is sanity, caution and discipline in whatever investment decisions you take.

You need to stand still and weigh your stock investing options very carefully, and only after considering the environment around. And more importantly, the company's real worth. After all, a budget is but an annual exercise and must not define your long term investing objectives.