Market puts Budget behind

All's well that ends well. 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 today. Bargain-hunting for battered index pivotals and short-covering in the derivatives segment helped to reverse the downtrend.

The 30-shares BSE Sensex settled 221.46 points higher, at 13,159.55. It had also surged to a high of 13,193.13. 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 today.

The S&P CNX Nifty surged 65.90 points, to 3,811.20.

The total turnover on BSE amounted to Rs 4097 crore as compared to Rs 5826 crore on Wednesday (28 February).

The market-breadth, which had turned weak, kept on recovering as the day progressed. On BSE, 1,435 shares were in the red, and 1140 ended in the green, while 67 scrips remained unchanged. The BSE Small-Cap Index closed at 6,712.86, up 7 points (0.1%), while the BSE Mid-Cap Index ended at 5,522.59, 14 points (0.25%) higher.

Among the 30-Sensex pack, 19 advanced while the rest declined.

Private sector HDFC Bank was the top gainer, up 5.10% to Rs 980, on a volume of 1.34 lakh shares.

IT stocks made a solid comeback after Wednesday (28 February 2007)’s meltdown, under the reckoning that their earnings will be impacted only to a small extent following an increase in their tax burden.

While Satyam Computer rose 4.24% to Rs 430, Wipro gained 4.16% to Rs 584. Top software firm TCS added 5% to Rs 1248, and heavyweight Infosys gained 3.40% to Rs 2149.

In Budget 2007-08, the Union Government has extended minimum alternate tax (MAT) to income in respect of which deduction has been claimed under sections 10A and 10B, to the IT sector.

Currently, tax exemption under section 10A is available for units set up in software technology parks (STP). The benefit under this sector expires in 2009. Effective tax rates for IT companies as a result will go up and impact earnings. However, those companies paying tax outside India will get some respite on account of a double taxation avoidance treaty. Such firms can set off the tax paid outside India against the MAT.

To top it, the government also brought employee stock options (ESOPs) under the fringe benefit tax (FBT). FBT will now be charged on the difference between market price and exercise price of the option. This will, consequently, increase the tax outgo of companies that have an ESOP scheme.

CLSA has forecast a small cut in its projected FY-2008 EPS of three IT firms: TCS, Wipro and Satyam Computer, by 1 - 1.5%. It kept the projected EPS of Infosys for FY-2008 unchanged at Rs 88.10.

The outlook for the IT sector remains bright due to strong demand for outsourcing. Indian IT firms are increasingly getting large outsourcing deals. The IT services industry is expected to achieve 31% growth in FY-2007, of which exports alone are expected to grow by more than 33%, to $31 billion.

Meanwhile, Satyam Computer Services’ BPO subsidiary, Nipuna Services, established its fourth facility at Hyderabad. The Hyderabad facility will provide integrated service delivery across industries and processes, and will accommodate three shifts. Its current capacity is 1,730 seats, but is designed for scalability.

Reliance Communications surged 4.5% to Rs 426, on hope of a cut in annual license fees for wireless services in the coming months. The finance minister proposed setting up a committee to consider reduction in fees and spectrum charges for wireless telephony, in order to align them with international rates. At the moment, wireless companies pay 6-10% of net revenues as license fee and 2-6% as spectrum charges, based on the circle and the spectrum used. The Department of Telecom (DoT) favours a 6% annual license fee compared to the existing 6-10%, and is likely to recommend a cut. But the final call on this will be taken by the finance ministry.

Bharti Airtel gained 1.13% to Rs 726.85, on similar expectations.

L&T rose 3.25% to Rs 1535, as the company will not be impacted by withdrawal of tax benefit to civil construction firms. The L&T stock had tumbled on Wednesday (28 February) due to a broad decline in construction shares after a clarification that tax benefit under section 80 IA will not be available for companies engaged only in civil construction work. But since L&T pays corporate tax at the regular rate for its construction business, it has nothing to lose from withdrawal of tax exemption for civil construction firms. The stock surged today after this fact dawned upon the market. L&T is also seen benefiting from the government’s thrust on creating infrastructure.

Shares from the cement sector, which have borne the brunt of the market's wrath of late, continued to fare badly despite news reports that producers had raised cement prices. While Gujarat Ambuja Cements dropped 2.37% to Rs 113.20, Grasim lost 0.60% to Rs 2200 and ACC shed 2.67% to Rs 876.

ACC saw cumulative volume of 13.80 lakh shares, after two block deals of 2.70 lakh shares each, were struck in the counter at an average Rs 902.50 per share in opening trade.

Cement scrips had tumbled on Wednesday (28 February 2007), after the government announced a differential excise duty structure for the commodity based on retail prices. Cement makers hiked prices as the differential excise duty raised the excise duty burden for cement makers by Rs 12 per 50 kg bag. The excise duty has been raised to Rs 600 per tonne against a retail price of above Rs 190 per bag.

On Wednesday (28 February 2007), ACC had lost 6.3% to Rs 900.05, Grasim 5% to Rs 2212.60 and Gujarat Ambuja Cements 7.7% to Rs 115.95.

Cement scrips have turned bearish with the government keeping a tab on spiralling cement prices. In late-January 2007, the Central Government had abolished 12.5% import duty on cement, in a bid to rein in domestic cement prices.

As per media reports, cement makers have raised product prices. Prices in western and northern India have been raised by Rs 12 per 50 kilogram bag from 1 March 2007. The average wholesale price of cement in Mumbai, after the increase, will be Rs 233 per 50 kg bag, and the retail price Rs 245 per bag.

Just before the latest hike, the average retail cement prices in India hovered at Rs 210 per bag, necessitating a price rise following the hike in excise duty. The current demand-supply situation distinctly favours the cement sector. While no major supply is expected for some time, demand remains strong.

The passing of the additional excise duty burden to customers will protect margins, which are currently quite high due to firm year-on-year cement prices, but may not be enough to bring down inflation. This may force the government to take more stringent steps such as a ban on exports, analysts reckon.

Analysts also opine that the Budget's thrust on farming and infrastructure augurs well for cement firms. Moreover, the abolishing of customs duty on import of coking coal will lower cost of power for cement companies. It will thus enhance the efficiencies of cement companies.

Maruti Udyog (MUL) slipped sharply from the day’s high of Rs 870, and closed 0.32% lower to Rs 837. The car maker suffered on Wednesday (post-Budget). The company had struck an intra-day high on reporting robust sales for February 2007.

MUL said on Thursday it sold 62,999 vehicles in February 2007, up 53% from 41,095 units in the same month a year earlier. Maruti sold 59,095 units in the domestic market in February 2007, up 61% from 36,608 units in the same month a year earlier. However, MUL's exports fell 13% to 3,904 units in Feb 2007 from 4,487 units in the same month a year earlier.

MUL said after trading hours on Wednesday, it will raise prices of vehicles from 15 March 2007, after the government imposed an additional cess to raise funds for education. As per the Budget, for the fiscal year starting 1 April 2007, the government will levy 1% cess on all taxes to fund secondary and higher education, in addition to the existing 2% cess, which raises funds for basic education.

MUL added it was not raising prices immediately and consumers could buy cars at pre-Budget prices, but did not specify the extent of the increase, or specify which models the hike would apply to. "In the run-up to the Budget, there was speculation that certain taxes or duties may come down," MUL explained in a statement, referring to the expectation of an excise duty cut on passenger vehicles.

Index heavyweight Reliance Industries (RIL) recovered smartly from the day’s low of Rs 1319.40. It settled 0.87% higher, at Rs 1366.35, on a volume of 15.09 lakh shares. The counter was marred by high volatility, and moved in a wide range (Rs 1319.40 - Rs 1400).

Ranbaxy Laboratories gained 1.90% to Rs 344. The Delhi-based generic drugs giant announced that PPD had acquired a worldwide license to develop, manufacture and market Ranabxy's novel statin for the treatment of dyslipidemia.

Under the terms of the agreement, Ranbaxy will be entitled to receive milestone payments upon the occurrence of specified clinical events. In the event of approval for a drug product, the Indian firm will be entitled to royalties on sales of the drug and sales-based milestones. PPD will be responsible for all costs and expenses associated with the development and commercialisation of the compound, including preclinical and clinical studies.

Bajaj Auto was the top loser, down 4.47% to Rs 2500, after reporting a 2% decline in vehicle sales for February 2007. BAL said on Thursday vehicle sales in February 2007 fell 2% to 202,212 units from 205,776 units in the same month a year earlier. The company said sales of motorcycles fell 2% to 171,780 units in February 2007 from 175,256 units, and sales of all two-wheelers fell 3% to 174,220 units from 179,880 units in the same month a year earlier.

Sales of three-wheelers rose 8% to 27,992 units in February 2007 from 25,896 units in the same month a year earlier. The company said exports rose 46% to 38,228 units in February 2007 from 26,237 units in the same month a year earlier.

BAL has been continuously gaining in share in the motorcycle market for the last five years. This gain became more pronounced in the last 18 months, and the market share today stands at 34.3%.

Hindalco Industries slipped 2.10% to Rs 136.75, after it announced that its board of directors will meet on 2 March 2007 to consider an issue of equity shares / equity linked instruments on a preferential basis.

Indian Bank settled at Rs 98.30 on BSE, a decent premium over the IPO price of Rs 91. The stock debuted at premium at Rs 105 on BSE, also its day's high. The scrip also fell to a low of Rs 77.

The Indian Bank counter saw high volumes of 3.08 crore shares. Indian Bank had priced its IPO at Rs 91, the upper end of the Rs 77 - Rs 91 price band. The issue had received strong investor response, and had been subscribed over 30 times. The face value per share is Rs 10 and the equity capital is Rs 429.77 crore. Indian Bank also entered the F&O segement from today with a lot size of 2,200 shares.

Sops extended to the food processing sector saw Britannia Industries firm up 0.50% to Rs 1242, Nestle India rising 0.14% to Rs 959.70. These stocks came-off from higher levels though.

The finance minister, in the Union Budget 2007-08, offered sops to the food processing industry such as full exemption of excise duty on biscuits whose retail price does not exceed Rs 50 per kilogram, lifting of excise duty on all kinds of food mixes, including instant mixes, such as idli and dosa mixes, while cutting duty on food processing machinery from 7.5% to 5%, and slashing customs duty on plastics and PTA/MEG from 10% to 7.5%.

The exemption of excise duty on biscuits will have no effect on biscuits whose MRP exceeds Rs 50 per kilograms. Thus, low-end biscuits like Parle-G brand of Parle and Tiger brand of Britannia, which cost Rs 4 per 100 gms (Rs 40 per kg), and some of ITC’s biscuits will benefit.

Further, this will give cost advantage to small players, including the unorganised ones in the industry.

While customs duty on crude sunflower oil has been reduced from 65% to 50%, that on refined sunflower oil has been reduced from 75% to 60%. This should lead to reduction in cost of sunflower oil, and hence a reduction in cost of fats and oils used in biscuits.

Also, a reduction in the peak customs duty of plastics from 10% to 7.5%, should facilitate reduction in packaging costs.

The food-processing sector has been given the right push in the current Budget. A growing population, powered by rising disposable incomes and rising popularity of processed foods point to a better future for the food processing industry.

Construction firm Gammon India slipped 2.12% to Rs 311, after Franklin Templeton Mutual Fund sold off 0.85% stake in the company. Post-sales, Franklin Templeton's holding in the company came down to 2.63%.

Patel Engineering plunged 10% to Rs 312.80, after the finance minister withdrew the 10-year tax exemption on firms engaged in civil construction. Construction companies are exempt from paying tax for 10 years. However, the finance minister chose to revoke this benefit for companies engaged only in civil construction.

State-run IFCI surged 11.40% to Rs 30.55, on huge volumes of 4.96 crore shares, after a substantial raise in non-plan allocation in the Union Budget. The amount for non-plan allocations has risen from Rs 225 crore in 2006/07 to Rs 1300 crore in 2007/08. The Budget document said the support will help in meeting restructuring liabilities.

Sesa Goa plunged 7.48% to Rs 1650, hit by reports that the Rs 300-export duty on iron ore will become effective immediately. It however recovered, after plunging to a low of Rs 1485.

CMC jumped 10.7% to Rs 1221.80, as the company is seen benefiting from the Budget’s emphasis on e-governance. The allocation for e-governance in the Union Budget presented on Wednesday (28 February 2007) was increased from Rs 395 crore in 2006-07 to Rs 719 crore in 2007-08.

Wockhardt jumped 8.6% to Rs 385.25, following government’s focus on the pharma sector in the Budget. The weighted average deduction of 150% under section 35 (2AB) of the income tax act for expenditure relating to in-house research and development (R&D), has been extended by five years up to 31 March 2012. This will encourage companies to focus on R&D. Excise duty exemption on life saving vaccines will benefit manufacturing companies, Wockhardt being one of them.

Mphasis BFL surged 7.7% to Rs 278.90, on value-buying after a recent steep fall in the counter. Also the open-offer from EDS met with poor response. Hence a section of the market expects a fresh open-offer at a much higher price, as compared to the ruling market price, from EDS shortly.

GMR Infrastructure gained 6.6% to Rs 379.15, under the reckoning that it being an developer of infrastructure projects, will continue to get the 10-year tax benefit under section 80 IA.

Neyveli Lignite surged 6.41% to Rs 57.25, as the Budget raised total outlay for the company to Rs 2007 crore from Rs 945 crore in 2006/07.

Kothari Products surged 3.48% to Rs 566.10, as excise duty on tobacco-free pan masalas has been reduced from 66% to 45% in the Union Budget presented on Wednesday. Kothari Products, the flagship company of the Kothari Group, is a top player in pan-masala and gutkha. The company manufactures and exports ‘Pan Parag’ pan masala, gutkha and parag zarda in India.

The market sell-off on Wednesday was not only due to the Budget. Global factors also played a big role. Moves by the regulator to curb ‘excesses’ triggered a sell-off in global markets. If the global markets stabilise, and there is no big delivery-based selling by FIIs, a sharp short covering rally is on the cards.

The market had come down steeply after presentation of the Union Budget 2007-08 on Wednesday. A hike in dividend distribution tax from 12.5% to 15%, added to the general gloom. That equities worldwide were weak also did not help. Nifty March futures settled at 3,726 on Wednesday, a discount of 19.30 over the spot Nifty closing of 3,745.30.

A recovery in key Indian ADRs, and a recovery in the US market may support the market today. However, the upside may be capped due to FII-sales. Among key Indian ADRs, HDFC Bank's ADR jumped 5% to $66.36 and ICICI Bank's ADR rose almost 5% to $38.36. Infosys' ADR gained 1.4% to $54.26, while Tata Motors' ADR gained 2.5% to $18.51.

Meanwhile, Chinese stocks, which have been extremely volatile this week, fell modestly on Thursday morning amid heavy trading, hit by profit-taking and weak performances by other key markets.

The benchmark Shanghai Composite Index fell 2.91%, to 2,797.19. On Tuesday, the Shanghai Index tumbled nearly 9%, triggering a sell-off in global markets, before rebounding almost 4% on Wednesday.

The Hang Seng Index was down 1.55%, while the Japanese Nikkei 225 Index was down 0.86%.

As per provisional data, FIIs pressed huge sales to the tune of Rs 1932 crore on Wednesday, the day when the Sensex tanked 541 points. They were net sellers to the tune of Rs 415.70 crore on Tuesday (27 February 2007) compared to an outflow of Rs 582.10 crore on Monday (26 February 2007).

US stocks bounced back on Wednesday. Their recovery on Wednesday hit its stride after Federal Reserve Chairman Ben Bernanke told Congress there did not appear to be a single trigger for Tuesday's global stock slump. The Dow Jones industrial average rose 52.39 points, or 0.43%, to end at 12,268.63. The Standard & Poor's 500 Index gained 7.78 points, or 0.56%, to finish at 1,406.82. The Nasdaq advanced 8.29 points, or 0.34%, to close at 2,416.15.

Crude oil fell from a two-month high in New York, as traders sold contracts to book profits from the past week. Crude oil for April delivery declined as many as 36 cents, or 0.6%, to $61.43 a barrel in after-hours trading on the New York Mercantile Exchange. Crude Oil Futures closed at $61.79 a barrel yesterday, the highest since 22 December 2006.

In London, Brent oil for April settlement declined as many as 37 cents, or 0.6%, to $61.52 a barrel in electronic trading on the ICE Futures Exchange.