Select stocks surge amid broader weakness on Budget eve

The market extended the few days old correction to one more session, as a defeat in the state polls stares the Congress in the face and weakness in Asian markets embittered sentiment in the Indian market. Nevertheless, select stocks edged up in a weak market, as investors bet on sector-specific budget sops.

The 30-share BSE Sensex lost 170.69 points (1.2%), to 13,478.83. It had bounced back after an initial fall in the morning. From 13,538.67, a drop of 110.85 points for the day, the Sensex surged to 13,689 by 11:20 IST. The recovery, however, proved short-lived. Volatility kept marketmen on tenterhooks for the second day in a row today. The barometer Sensex swung 294.85 points, between a low of 13,408.56 and a high of 13,703.41.

The S&P CNX Nifty lost 48.10 points (1.2%), to 3,893.90. The Nifty March futures were at 3,872 compared to the spot Nifty closing of 3,893.90.

The BSE clocked a turnover of Rs 4007 crore compared to Monday’s Rs 3957 crore.

The incumbent Congress party is set to demit power in Punjab and Uttarakhand. The counting for assembly elections in the three states, including Manipur, began early today. The results in Punjab and Uttarakhand are seen as a barometer of voters' concerns about inflation and economic reforms. However, the results will in anyway not jeopardise the Congress-led UPA Government at the Centre.

The finance minister today also presented the annual economic survey to the Parliament. The pre-Budget Economic Survey 2006-07 on Tuesday expressed concern at rising prices and advised 'calibrated' measures to contain inflation while sustaining high growth - an indication that Wednesday's (28 Feb 2007) Budget may continue the overall trend of moderating taxes.

Weak Asian stocks weighed on domestic markets today. Stocks in China, which topped 3,000 points for the first time on Monday (26 February 2007), plunged almost 9% on Tuesday, their biggest drop in 10 years. China Minsheng Banking Corp led the decline in moneylenders, as the central bank raised the reserve ratio this week for the fifth time in eight months, to cut lendable resources for banks.

Stocks in South Korea, Australia and Singapore fell from record highs on concerns about stronger oil. Shares in Japan also dropped. The BSE Small-Cap Index rose 23.84 points (0.35%), to 6,918.29, and the BSE Mid-Cap Index added 9.69 points (0.17%), to 5,706.40.

All sectoral indices of BSE ended in the red today. The BSE FMCG Index was the biggest loser in percentage terms, shedding 34.88 points (1.9%), to 1,777.38.

Cigarette major ITC lost 3% to Rs 165.25. The key trigger for the ITC scrip, in the near term, is developments pertaining to value added tax (VAT) on cigarettes. A 12.5% VAT on cigarettes will lead to a steep hike in cigarette prices, which may impact volumes. The concern for the cigarette industry is higher taxes may lead to a shift in tobacco consumption, to low-end products such as bidis and chewing tobacco.

The BSE Auto Index shed 60.65 points (1.1%), to 5,305.07. Weakness was conspicuous in two-wheeler shares. Hero Honda dropped 4% to Rs 677, and Bajaj Auto dropped almost 4% to Rs 2702.90. Car major Maruti Udyog advanced expecting cuts in excise duty on cars. The car major gained 1.6% to Rs 888.90. The expectation is that excise duty on all cars will be brought down to 16% from 24%. In the last budget, the excise duty was cut to 16% from 24% only on small cars.

Banking sector benchmark, the BSE Bankex, lost 107.63 points (1.5%), to 6,694.82. The banking sector's budget expectations centre around measures like restoration of tax deduction on interest income up to Rs 15000 under section 80L and reduction in the lock-in period for savings under section 80C from the stipulated five years. Such steps will lure more term deposits for banks. There are also expectations that FII-ceiling for state-run banks may be raised from 20% to 24%.

The BSE IT Index lost 73.02 points (1.3%), to settle at 5,172.40. With regard to the IT sector, the key thing to watch out for is whether tax exemption under section 10A for units set up in software technology parks (STP) is extended beyond 2009. The benefit under this sector expires in 2009.

The BSE Healthcare Index lost 9.23 points (0.25%), to 3,613.07. The pharma sector expects that 150% weighted deduction on expenditure incurred on R&D, a sop available till 31 March 2007, may be extended for another 5 - 10 years.

Construction shares surged as the sector is seen benefiting from an increased thrust on infrastructure development. Nagarjuna Construction jumped 5% to Rs 189.90, Tantia Construction rose 6.7% to Rs 124.75, Patel Engineering gained 5% to Rs 385, Pratibha Industries gained 5% to Rs 188.90, Hindustan Construction rose 4.5% to Rs 122.25 and Jaiprakash Associates rose 2.2% to Rs 594. Market men also expect tax benefits available to build, operate and transfer (BOT) projects and power projects under sector 80 IA to be extended to other infrastructure projects.

Select cement shares edged higher. ACC rose 1.7% to Rs 962, UltraTech Cement gained 4% to Rs 943, Madras Cement rose 2% to Rs 3100 and Birla Corporation advanced 2.7% to Rs 265. With regard to the cement sector, a ban on exports is being expected from the budget. Changes are also expected in the excise duty on cement, which is currently pegged at Rs 408 per tonne.

Oil exploration major, ONGC, dropped even as global crude oil held firm. The stock was down 2.4%, to Rs 814.90.

Gujarat Ambuja Cements lost 2.3% to Rs 124.50, after the cement maker said it sold 11% stake in Ambuja Cements India to Swiss cement maker, Holcim, for Rs 527 crore.

Index heavyweight Reliance Industries (RIL) shed 0.2% to Rs 1401. The stock moved between a low of Rs 1390.15 and a high of 1414.40. A newspaper report on Tuesday said the company aims to acquire a global petrochemical giant, or a 300,000 barrels per day US refinery.

The annual economic survey warned that the monetary policies aimed at containing inflation were also behind hardening rates of interest. In the current year, the survey speculates, pressure on inflation may persist due to a mismatch in supply and demand for some primary articles and firm international prices.

The expectations of higher corporate investment and earnings, robust GDP growth and government's commitment to carry forward economic reforms are also expected to scale up foreign institutional investors interest to retain India as one of the preferred destinations, the economic survey states.

High volatility has made Indian stock markets more 'uncertain' than their counterparts in developed economies like the US and South Korea, and the government should firm up regulatory mechanisms to usher in stability, the finance ministry's survey said on Tuesday. The survey also called for regulatory and other necessary steps to further facilitate enhanced institutional investment in equity markets, pointing out that this would counter-balance and cushion the impact of swings in stock prices. The price-to-earnings ratio, which partly reflects the investors' expectations of future corporate earnings, was higher than 20% at end-2006, compared to 17-18% a year ago, it said.

Fears of nasty surprises in the Union Budget 2007-08, have caused a sharp correction on the bourses in the past few days. The fall has also been due to concerns that rising interest rates may impact equity valuations and big IPO pipeline may suck out liquidity from secondary market. At current 13,478.83, Sensex is off 8% from the lifetime high of 14,652.09 attained on 8 February 2007. It is down 2.2% in calendar 2007 so far.

Marketmen fear that short-term capital gains tax on the sale of shares may be hiked from 10% to between 12.5%-15% in the Budget. The securities transaction tax (STT) may also go up further. The STT was raised in the previous budget. The removal of 10% corporate surcharge may be offset by removal of certain open-ended exemptions. On the flip side, analysts also expect the finance minister to give a big impetus to agriculture and infrastructure in the budget

Earnings growth for India Inc remains strong. Growth in recent years has hovered near the breakneck pace of more than 20%. The long term India story remains intact. India’s long-term growth drivers are a favourable demography (large share of young population), robust domestic consumption and acceleration in infrastructure creation.

The Securities & Exchange Board of India (Sebi) said on Tuesday it had raised the amount of foreign portfolio investment inflow into India so far in 2007 by Rs 3430.75 crore ($773.91 million) due to capturing of fresh data under the new reporting system. The restatement led to the revision of net inflow into equities this year to Rs 8729.50 crore ($1.96 billion), data on Sebi website showed on Tuesday. The adjustments reflected on the data for Monday (26 February 2007), showed net inflows by foreign funds on that day at Rs 4287.20 crore ($967.10 million).