Key indices continue to correct

The Sensex shrunk below the psychological level of 13,000 for the week ended 2 March 2007. The market declined amid high volatility. Before the market could overcome the pre-Budget blues, a disappointing Union Budget 2007-08 and weak Asian markets pushed the market lower.

The BSE Sensex shed 746.40 points for the week ended 2 March 2007, to settle at 12,886.13, compared with the previous week’s closing of 13,632.53 on 23 February 2007. The S&P CNX Nifty lost 212.20 points, to settle at 3726.75 compared with the previous week’s closing at 3,938.95.

The BSE Mid-Cap shed 198.65 points for the week ended 2 March 2007, to settle at 5,466.24 compared with the previous week’s closing of 5,664.89. The BSE Small-Cap shed 258.62 points, to 6,645.81, compared to the previous week’s closing at 6,904.43.

On Monday (26 February), the day of the Railway Budget, the 30 shares BSE Sensex advanced 16.99 points (0.12%), to 13,649.52. However, the market exeprienced volatility and swung 1,000 points, between some of the vital intra-day tops and bottoms of the day. The market pulled off an almost incredible rebound after a steep intra-day fall in mid-afternoon trade. Cement, banking, auto and steel shares were behind the Sensex’s rebound. The rise in cement and steel shares was due to a cut in rail freight rate on key raw materials in their manufacture.

On Tuesday (27 February), the 30 shares BSE Sensex lost 170.69 points (1.2%), to 13,478.83 on weak Asian markets. Nevertheless, select stocks edged up in a weak market, as investors bet on sector-specific Budget sops.

On 28 February 2007 (Wednesday), the day of the Union Budget, the 30 shares BSE Sensex tumbled 540.74 points, to settle at 12,938.09 on heavy selling across the board. Sensex suffered their biggest fall in eight months after 13 June 2006. Increase in taxes for cement, IT and construction firms and weak global markets caused the huge fall on the bourses.

An increase in dividend distribution tax impacted trading on the bourses, and the market tumbled soon after the announcement. The dividend distribution tax for corporates has been raised to 15% from 12.5%. No changes have been made in corporate tax. The 10% surcharge for firms with a taxable income of Rs 1 crore, or less, has been removed. The market was expecting abolition of 10% surcharge for all corporates.

On the flip side, there is no increase in the securities transaction tax (STT), on short-term capital gain tax and on long-term capital gains tax on sale of shares. Long-term capital gains tax remains zero. The market also expected an increase in STT. Marketmen also had apprehension of an increase in short-term capital gains tax to 12.5- 15% from 10%.

The Sensex, which had been on a downtrend ever since striking an all-time high (14,723.88) on 9 February 2007, rebounded with great force on Thursday (1 March 2007). Bargain-hunting for battered index pivotals and short-covering in the derivatives segment helped to reverse the downtrend. Most of the gains came in the second half of the day’s trading session, triggered by short-covering. Volatility was also at its best.

On Friday (2 March 2007), the Sensex gravitated below the psychological level of 13,000 after a late sell-off gripped the market. The 30 shares BSE Sensex lost 273.42 points (2.08%), to settle at 12,886.13, its lowest closing level since late-October 2006. Index heavyweight Reliance Industries (RIL) dived and so did IT scrips, cement producers, banks and telecom shares.

Ranbaxy was down 2.54% for the week, to Rs 347.40. The stock came under pressure as market men continued to fret over possible equity dilution if Ranbaxy acquired Merck's generic drugs business. The stock has declined even as the company had dismissed media reports that it was planning an issue of shares in the US, or dilution in stake by founders to fund the acquisition.

Reliance Industries (RIL) dropped 6.76% to Rs 1317.35. RIL has a substantial 10.8% weightage in the Sensex. The company had on Friday called a board meeting on 10 March 2007, to consider the payment of interim dividend for FY 2007 (year ending 31 March 2007). The company has also set 22 March 2007, as a record date for paying interim dividend. The company’s announcement comes after the finance minister raised dividend distribution tax to 15% from 12.5% in Union Budget 2007-08. Paying dividend before the end of this financial year will ensure that RIL pays the existing 12.5% tax on dividend distribution.

IT shares drifted lower. IT major TCS lost 5.24% to Rs 1208.45, Infosys shed 6% to Rs 2103.15 and Wipro lost 8.03% to Rs 573.20. IT shares witnessed a heavy fall on the Budget after units set up in software technology parks were brought under minimum alternate tax (MAT) net. They had staged a rebound the next day under the reckoning that their earnings will be impacted only to a small extent following an increase in tax after the Budget.

Banks lost further ground. State Bank of India lost 4.72% to Rs 1008.45, HDFC Bank lost 1.02% to Rs 947.70, and ICICI Bank shed 6.84% to Rs 845.85. The wholesale price index rose 6.05% in the 12 months to 17 February 2007, sharply lower than previous week's annual increase of 6.63% due to a fall in fuel and food prices. The figure was lower than an expected 6.25%. The BSE Bankex lost 312.25% to 6,447.33 compared to the previous week’s closing at 6,759.58.

A sell-off gripped construction shares after the Budget proposed withdrawing tax breaks on construction contracts. Nagarjuna Construction slumped 14.02% to Rs 152.05, Gammon India plunged 21% to Rs 305.45, IVRCL Infrastructures dropped 9.65% to Rs 290.65 and Hindustan Construction dropped 11.02% to Rs 101.35. 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.

Cement makers were hammered after the government announced changes in excise duty based on retail prices. Higher duty will be levied for more expensive varieties of cement. Gujarat Ambuja Cements (down 10.79% to Rs 109.60), ACC (down 6.56% to Rs 855.55), Grasim (down 7.60% to Rs 2098.40), UltraTech Cement Company (down 2.81% to Rs 872) and Shree Cements (down 3.99% to Rs 1190) were the major losers in this sector.

Maruti Udyog flopped 3.40% to Rs 833.95, after the dream about the finance minister cutting excise duty on cars turned sour. In the previous Budget, excise duty was cut to 16% from 24% on small cars.

Cigarette major ITC edged up by 0.27% to Rs 166.55. Cigarette firms are seen passing on a 5% hike in excise duty the Budget proposed on cigarettes. The worst fears of the market were that cigarettes will be brought under value added tax with 12.5% VAT, spawning concerns that higher tax may lead to a shift in tobacco consumption, to low-end products such as bidis and chewing tobacco.

Further, the complete exemption of excise duty on all instant food mixes and biscuits, whose retail price does not exceed Rs 50 a kilo has also turned out to be a boon for ITC. Besides being the top cigarette maker, ITC also makes biscuits and ready-to-eat food. Relief from excise duty for biscuits and ready-to-eat foods augurs well for the company. The Budget also proposed a cut in duty on food processing machinery to 5%.

Gas transporter, Gujarat Gas Company, ended flat at Rs 1301.01. The company said on 23 February 2007 its net profit jumped 67% to Rs 18.23 crore (Rs 10.90 crore). Net sales for the same quarter surged 46.5% to Rs 234.49 crore (Rs 159.96 crore).

Copper producer Sterlite Industries lost 6.03% to Rs 508.05. Hindustan Zinc lost nearly 2.49% to Rs 604.05, despite the company raising prices by 4.2% Saturday (24 February 2007) onwards.

Oil exploration major, ONGC, dropped even as global crude oil held firm. The stock was down 3.64%, to Rs 800.

IFCI topped the volume chart on BSE in almost all of the trading sessions of the week. The scrip gained 2.16%, to close at Rs 28.40.

Four IPOs debuted this week. Indian Bank debuted at Rs 105 on BSE on 1 March 2007, compared to the IPO price of Rs 91. It settled at Rs 98.30 on the day of its debut.

In the Budget, the finance minister also said that measures will be taken to allow short-selling by institutional investors, which will have to be backed by delivery.

With regard to personal income tax, there is some relief to the taxpayers as the exemption limit went up to Rs 1,10,000 from Rs 1,00,000 earlier.

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.