Close: Global meltdown and Budget blues

Market started on the backfoot given the global meltdown triggered by China. Chinese stock market hit down 10% yesterday and that started the meltdown in US and spread to all of Asia. Global markets have been hitting highs and there seems to be some profit taking spreading across the globe. Investors in India have been jittery sitting on high valuations and worries about the global meltdown hit markets hard.

It was not only the Global markets. In such a situation most good news is ignored and bad news gets amplified. The cement stocks were shot by a double barrel excise gun by the FM and IT was put on the Mat quite literally. The construction companies got a shock of their lives as a tax rule was set to be implemented from retrospective effect. ACC, Ambuja, Infosys, Wipro, TCS, Nagarjuna Construction, HCC, IVRCL hit dirt on the back of this. ITC saw gains surprisingly as there was no VAT suggested and only a 5% increase in excise duty. All in all there was no boost to growth in any way and the spend on Infrastructure was talk as always. Education got some thrust and Irrigation plans seemed to offer some hope for future. A non event it was expected to be and thats what it turned out as a missed opportunity. However the positive takeaway was that Long term Capital Gains has not been introduced and thats what the market feared. Service tax also has been kept steady.

Sensex closed down over 541 points down at 12938. There was only one positive in the Sensex and that was ITC. Rest all saw a meltdown. Satyam down 8% at 412; Gujarat Ambuja down 8% to 116, ACC down 6% to 900, Wipro down 7% to 560 , HDFC down 6% at 1500 were the drags on the Sensex .

Sectors which lose out ; Cement, Construction, Cigarettes, IT, Petrochemicals, Mutual Funds

Cement has been imposed with a dual excise duty structure. Cement selling below Rs 190 per bag will face Rs 350 excise duty and above that will see excise duty at Rs 600 (earlier Rs 406). This implies that clearly Rs 10 per bag extra a big negative.

IT companies will now have to pay MAT (Minimum Alternative Tax) of 11.2% on Book profits. Also ESOPs to employees would fall under the FBT (fringe benefit tax). The STP benefits would not be extended beyond 2009 and thats the big negative.

Construction companies having availed of benefits under the section 80 I A for construction done in backward areas as contractors would now have to pay tax from earnings since year 2000 as these benefits have been disallowed to them from retrospective effect.

Dividend Distribution tax has been introduced for Mutual Funds as well and the rate overall has been increased from 12.5% to 15%. This is a big hit really. Mutual Fund industry will see slower growth. They were earlier competing with the Banks for consumers savings and this puts them at par really as dividend schemes would certainly find the going tough.

Import duty for PSF, POY and polyester intermediates PAT, MEG, DMT has been cut from 10% to 7.5%. Negative for Gail, Reliance and IPCL.. albeit only marginally.

Service tax introduced on Office Rentals and that means that costs for all commercial spaces would go up by 12.36%.

Sectors which find some positives : Refineries ; Textiles, Gas pipeline companies; Biscuits; Telecom

Refineries benefit from cut in excise duties on Petrol and diesel from 6-8% which means higher realisations by around 40 paise per litre. 4% CVD on Crude has been done away with as well.

The Textile sector has seen positives in the form of Textile Upgradation fund extended by 5 years and also the allocation increased. Textile parks allocation has been increased. Prices of man made fibre would be lower. The negative is that specified Textile machinery would see 8% excise duty against 0 earlier.

80IA benefit have been extended for cross country gas networks, pipeline projects and storage facilities which helps Gail, Reliance

Biscuits at less than Rs 50 / kg will see no excise. Positive for Britannia, Parle, ITC as it should help fight the unorganised sector. Benefits of food processing sector also in terms of lower duties on edible oil etc.

A committee to look into a lower licence fee regime for the Telecom sector... by and large that should happen. Thats a positive for the Telecom sector.

Technically Sensex took support at 12800 levels which was a gap support. Going ahead, Sensex is in a bit of oversold region.. though directionally its headed down. Supports are at 12720 and if thats gone the next big support would be at 12150. Resistance will now be seen at 13300.

Markets are a combination of valuation, sentiment and prospects. Clearly in the near term it loses out on perception of valuation and sentiment. Prospects continue to be bright. Is this an opportunity..Yes we believe but the opportunity will keep getting better as we move along.