RIL reverses initial gains on buzz it will raise LyondellBasell bid

The Key benchmark indices erased almost all the gains after an early rally as investors turned cautions ahead of the Union Budget 2010-2011 later this week. The market closed with small gains snapping last two days losses. The BSE 30-share Sensex rose 45.42 points or 0.28%, off close to 185 points from the day's high. Index heavyweights Reliance Industries (RIL) reversed early gains. Consumer durables and realty stocks fell. But rising metal prices on the London Metal Exchange on Friday, 19 February 2010 boosted local metal shares. IT shares also rose. The market breadth was weak. European stocks fell.

After a firm start triggered by higher Asian stocks, the market pared gains in morning trade. It regained strength in mid-morning trade. The Sensex moved in a narrow range in early afternoon trade. The market once again pared gains in mid-afternoon trade. The market cut almost all the intraday gains in late trade.

India VIX, a volatility index based on the S&P CNX Nifty index option prices, rose 0.72% to 32.13. The index had risen sharply on Friday, 19 February 2010. India VIX is a measure of the market's expectation of volatility over the next 30 calendar days. Volatility typically rises ahead of a major event such as the Union Budget etc. The government unveils Union Budget 2010-2011 on Friday, 26 February 2010.

European shares fell on Monday, snapping five consecutive days of gains, led by drugmakers, with GlaxoSmithKline hit by fresh criticism on its diabetes drug Avandia. The key benchmark indices in France and Germany fell by between 0.18% to 0.24%. UK's FTSE 100 rose 0.1%.

Greece is prepared to take additional fiscal measures to ensure it meets its deficit cutting targets, the head of the country's central bank said on Monday. European Union (EU) leaders have given vague assurances of support to Greece in its struggle to stop a debt crisis but it is unclear exactly what action they will take and the EU has told Athens it may need to take further steps itself.

Asian stocks gained on Monday after a smaller-than-estimated increase in US consumer prices eased concern the Federal Reserve will increase interest rates. The key benchmark indices in Hong Kong, Japan, Indonesia, South Korea, Singapore and Taiwan rose by between 0.01% to 2.74%. However China's Shanghai Composite index slipped 0.49%.

Trading in US index futures indicated that the Dow could gain 16 points at the opening bell on Monday, 22 February 2010

US stocks closed higher after a see-saw session on Friday, 19 February 2010 as investors weighed the Federal Reserve decision late Thursday to raise its discount rate for banks by 25 basis point to 0.75%. The Dow Jones industrial average closed up 9.45 points, or 0.09 percent, at 10,402.35. The Standard & Poor's 500 Index was up 2.42 points, or 0.22 percent, at 1,109.17. The Nasdaq Composite Index was up 2.16 points, or 0.10 percent, at 2,243.87.

A government report showed an index of US consumer prices rose 0.2% in January from the previous month, less than the 0.3% projected by economists. New York Federal Reserve President William Dudley indicated on Friday that policy makers are more concerned about maintaining growth than fighting inflation, citing the consumer price data.

Closer home, President Pratibha Patil said on Monday that India's economic growth will accelerate in the coming years after the global downturn. She said the government will push policies to protect millions of poor Indians from the impact of food inflation

The President said economic growth will rise to about 7.5% in the year ending March 2010. Addressing a joint session of the parliament at the onset of the Budget session, Patil said the government is aiming for 8% growth in the year ending March 2011 (FY 2011) and 9% growth in the year ending March 2012 (FY 2012).

She said the government will focus on infrastructure, health, education, and agriculture development. Patil said rising rural incomes and high state-purchase prices have helped stoke food inflation.

Patil said government accords highest importance to helping the common man on food prices. Patil added higher agricultural productivity, reforms in the public distribution system and open market intervention are needed for ensuring food security. The president's speech to the joint session of parliament lays down the government's priorities for the year.

The market is likely to remain highly volatile this week with the focus being on the Railway Budget and the Union Budget 2010-11. Derivatives expiry on Thursday, 25 February 2010 is also likely to add volatility on the bourses.

The highly eventful week begins with the Railway Budget on 24 February 2010. It will be followed by tabling of Economic Survey on 25 February 2010 and the Union Budget on 26 February 2010.

As far as railway budget is concerned, the Railway minister Mamata Banerjee is likely to present a populist budget leaving passenger fares untouched, but rationalise the freight rates of certain commodities like iron ore, coal and cement. Banerjee is unlikely to tinker with the freight rates of essential commodities including food grains.

As far the Union Budget 2010-2011 is concerned, the government may announce increase in excise duties as a first step towards a gradual winding down of fiscal stimulus measures. It may also raise the service tax rate to 12% from 10%. It may be recalled that the government had slashed the Central Value Added Tax (Cenvat) rate for excise duty from 14% to 8% in two rounds starting in December 2008. It had also cut service tax by 2 percentage points. These reductions were effected in order to provide a stimulus to domestic industry. Since the overall prospects for growth are much brighter today, the finance minister may withdraw a part of the stimulus in order to boost tax revenue.

The Finance Minster may project a lower fiscal deficit for 2010-11 based on higher revenue projections due to economic rebound. It remains to be seen if there are structural reforms to reduce the subsidy burden such as decontrol of petrol and diesel prices as recommended by the Kirit Parikh committee recently.

The fate of three important fiscal bills, which had been stalled by the Left parties, will be closely watched. These are the Pension Fund Regulatory and Development Authority (PFRDA) Bill, Insurance Bill and Banking Regulation (Amendment) Bill.

Meanwhile, the recommendations of the 13th Finance Commission will be tabled in the parliament on 25 February 2010, just a day ahead of the budget. Analysts and economists expect the Finance Minister to provide a road map for the introduction of the key direct and indirect tax reforms viz. the direct tax code (DTC) and the Goods & Services Tax (GST) in the Budget.

As far as government expenditure is concerned, the thrust areas could be agriculture, water resources, power, roads & other infrastructure projects and social sector schemes.

Chairman of the Economic Advisory Council to the Prime Minister and former Reserve Bank governor C. Rangarajan, on Friday said it would take up to three months for soaring food prices to ease even with imports. Farm minister Sharad Pawar has repeatedly said the food situation was under control, helped by government measures such as easier imports and restrictions on stocks.

The government should begin to lower its fiscal deficit in the budget set to be announced this week but should not cut capital spending on infrastructure, the prime minister's economic advisory council said in a report released on Friday. The panel also projected economic growth of at least 8.2% in 2010/11, from over 7.2 % forecast for the current fiscal year. The fiscal deficit, running at a 16-year high of 6.8% of GDP this year, threatens to push up long-term market interest rates and constrain the setting of monetary policy, the prime minister's economic advisory council said. The panel also warned about the spread of food price inflation to the broader economy.

Meanwhile, the follow-on public offer of Rural Electrification Corporation (REC) was subscribed 53% by 16:00 IST on the second day of the bidding for the IPO today, 22 February 2010, NSE data showed. The government has set the floor price of the follow-on public offer of Rural Electrification Corporation (REC) at Rs 203 per share. The issue, which is open till 23 February 2010, will see the sale of 12.87 crore equity shares and an offer for sale of 4.29 crore government owned shares.

The BSE 30-share Sensex rose 45.42 points or 0.28% to 16,237.05. The barometer index rose 231.60 points at the day's high of 16,423.23 in early trade. The Sensex fell 0.31 points at the day's low of 16,191.32 in early trade.

The S&P CNX Nifty rose 11.50 points or 0.24% to 4856.40.

The market breadth, indicating the overall health of the market was weak. The breadth was strong earlier in the day. On BSE, 898 shares advanced as compared with 1913 that declined. A total of 73 shares remained unchanged.

From the 30 share Sensex pack, 18 rose while rest of the stocks declined.

The BSE Mid-Cap index fell 0.59% and the BSE Small-Cap index fell 1.05%. Both the indices underperformed the Sensex.

The BSE IT index (up 1.01%), BSE Metal index (up 0.68%), outperformed the Sensex. The BSE Realty index (down 1.77%), BSE BSE Consumer Durables index (down 1.04%), BSE Healthcare index (down 0.68%), BSE PSU index (down 0.46%), BSE Oil & Gas index (down 0.24%), BSE Power index (down 0.2%), BSE FMCG index (down 0.07%), BSE Capital Goods index (up 0.05%), BSE Bankex (up 0.06%), BSE Auto index (up 0.12%), underperformed the Sensex.

BSE clocked a turnover of Rs 3411 crore, lower than Rs 3833 crore on Friday, 19 February 2010.

Index heavyweight Reliance Industries (RIL) fell 0.54% to Rs 978.90, with the stock declining for the third straight day. The stock came off the day's high of Rs 1000. As per reports, RIL will raise its offer for bankrupt petrochemicals maker LyondellBasell to about $14.5 billion. Reliance, had previously offered a deal that valued Lyondell at $13.5 billion. Lyondell recently settled a dispute with creditors that paved the way for its exit from bankruptcy.

Meanwhile, industry watchers opine that the finance minister may give infrastructure status to the oil & gas sector to promote investments with tax sops in the coming budget. There may be tax benefits for city gas distribution and extension in tax holiday for new refineries. He may also announce declared goods status to the natural gas. The finance minister may abolish service tax on exploration and production activities.

Rate sensitive banking shares rose after the central bank said recently it will introduce from 1 April 2010 a new base rate to price credit more transparently, replacing the existing benchmark prime lending rate (BPLR). India's largest private sector bank by net profit ICICI Bank rose 0.14%. India's largest bank by net profit and branch network State Bank of India rose 0.51%.

But, India's largest private sector bank by operating income HDFC Bank fell 0.14% after the bank increased fixed deposit (FD) rates across nine maturities by 25-150 basis points. The stock came off the day's high of Rs 1692. The rate hike comes three weeks after the third-quarter monetary policy review of the Reserve Bank of India (RBI), when the central bank increased the cash Reserve ratio by 75 basis points. In a rising rate scenario, where the credit growth is expected to improve in the coming quarters, the bank has decided to align its deposit rates with the market.

The Reserve Bank of India said the base rate will be the new reference rate for determining lending rates. According to draft guidelines, the RBI has proposed that the actual lending rate charged to borrowers would be the base rate plus borrower-specific charges including product-specific operating cost, credit-risk premium and tenure premium said.

The Reserve Bank on Friday 19 February 2010 slashed the maximum interest rate banks can charge on foreign currency loans extended to exporters to 200 basis points above global benchmark benchmark Libor, a move to boost sagging exports.

For the banking sector, industry watchers expect relaxation in the lock-in period for fixed deposits - from five to three years - to qualify for tax benefits under Sec.80C. There might be an increase in the (Foreign Direct Investment) FDI in insurance sector from 26% to 49%. Expectations are also that the finance minister will allow banks to raise tax-free infrastructure funds.

Metal stocks rose after LMEX, a gauge of six metals traded on the London Metal Exchange, rose 1.87% on Friday, 19 February 2010. Hindalco Industries, Sterlite Industries, Steel Authority of India, National Aluminum Company, Hindustan Zinc , Jindal Steel & Power, JSW Steel rose by between 0.15% to 2.6%.

Tata Steel, the world's number 8 steelmaker by capacity rose 1.68%. Tata Steel last week posted its first consolidated quarterly profit in four quarters and said reviving global demand would further boost earnings in the three months to March 2010. Tata Steel said its consolidated net profit for the December 2009 quarter, which includes its UK unit Corus, fell 42%, although higher prices and increased volumes led to a rise in its operating profit margins.

Tata Steel said its consolidated net profit in the October-December period fell to Rs 473 crore from Rs 814 crore last year. Revenue fell 20% to Rs 26,069 crore.

Industry watchers expect that in the coming budget there may be an increase in excise duty cut to 10% from current 8%. There might be no change in customs duty structure. There may also be a removal of the 5% import duty on stainless steel and alloy steel scraps.

Software majors rose on positive economic data in the US. US is the biggest export market for Indian IT firms. India's second largest IT exporter by sales TCS rose 0.73%. India's largest IT exporter by sales Infosys Technologies rose 1.53%. India's third largest IT exporter by sales Wipro rose 0.23%.

Tata Consultancy Services (TCS) and Wipro are reportedly among the 37 global organisations, including IBM and HP, vying for the UK government's cloud computing project. Out of the total project, the cloud component alone is valued at Rs 2,200 crore.

The IT sector is looking for an extension of the tax holiday for the Software Technology Park of India (STPI) scheme. The government provides tax benefits under Section 10 (A) of Income Tax Act for units set up in the Software Technology Parks of India (STPIs), which is due to expire on 31 March 2011 (FY 2011). If the scheme is extended by one more year till 31 March 2012 (FY 2012), it will boost projected FY 2012 earnings of IT firms

Rate sensitive realty shares reversed early gains on worries the central bank may hike interest rates to tame inflation. Indiabulls Real Estate, Sobha Developers, Housing Development & Infrastructure, Omaxe, Orbit Corporation, Unitech, Ansal Properties and Infrastructure and DLF fell by between 0.55% to 2.74%.

Unitech and DLF would be the chief beneficiaries if the government providers thrust to affordable housing projects in the Union Budget 2010-11 next week.

Industry watchers expect that in the coming budget finance minister may increase priority sector housing loans to Rs 30 lakh from existing Rs 20 lakh. There may be a greater thrust on public private partnership (PPP) projects in housing. There may be an increase in allotment to the Rajiv Gandhi Awas Yojana (slum rehabilitation programme). Increase in tax breaks provided to housing finance and infrastructure lending companies is also expected. There may be a re-introduction of tax holiday for housing projects under Sec 80 IB (10). The increase in income tax deduction under Sec 80 C on home loan principal re-payment from Rs 1 lakh to Rs 2- 3 lakh is also expected.

Consumer durable stocks fell on profit taking. Asian Star Company, Titan Industries, Videocon Industries and Blue Star fell by between 0.01% to 2.62%.

Some infrastructure stocks gained on speculation of higher spending likely to be announced in the upcoming Union Budget 2010-2011. Jaiprakash Associates, Punj Lloyd industan Construction Company and Gayatri Projects rose by between 0.39% to 1.36%.

Some FMCG stocks rose on bargain hunting. Britannia Industries, Hindustan Unilever, Tata Tea rose by between 0.09% to 1.68%.

Excise duty on fast moving consumer goods (FMCG) is expected to go up by 200-300 basis points in the 2010-11 Budget. Higher excise duty may result in margin pressure on some companies. Companies may resort to price hikes with a lag of one or two quarters. Firms such as Dabur India, Godrej Consumer Products and Marico will be relatively less impacted as they do have production units in excise-exempt locations.

India's largest power utility firm by sales NTPC rose 0.25%. The company's follow on public offer managed to scrape through early this month with the issue getting subscribed 1.2 times. The issue, through which the government is divesting 5% of its stake, at a floor price of Rs 201 a share, opened on 3 February 2010 and closed on 5 February 2010. At the floor price, the follow-on-public offer (FPO) is valued at Rs 8,286 crore.

Among other power stocks, Torrent Power, Tata Power Company, CESC rose by between 0.14% to 1.14%.

The Budget expectations for the power sector include extension of income tax exemption for mega power generation projects. Among other expectations are an increase in the allocation towards the government-led electrical infrastructure augmentation schemes viz. Rajeev Gandhi Grameen Viyuktikaran Yojana (RGGVY) and Restructured Acclerated Power Development and Reforms Programme (R-APDRP) and reduction of import duty on thermal coal.

India's largest drug maker by sales Ranbaxy Laboratories fell 0.2%. Daiichi Sankyo recently said it will launch new innovative products in Mexico through the marketing division of Ranbaxy's Mexican subsidiary Ranbaxy Mexico.

Among other healthcare stocks. Dr Reddy's Laboratories, Biocon, Divi's Laboratories, Lupin, Pfizer, Cipla fell by between 0.28% to 1.98%.

In the upcoming budget, the industry watchers expect that the 150% weighted deduction enjoyed by in-house R&D expenses should be extended to expenses on outsourced studies such as clinical trials and specific laboratory studies. The weighted deduction should also be raised to 200%. State excise duty on certain formulations should be cut to 8% from present 16%. Central excise duty on drugs should to be restored to 8% from the present 4%. Among other demand of the industry include, a substantial increase in allocation for the National Rural Health Mission programme.

India's largest power equipment maker by sale Bharat Heavy Electricals (Bhel) fell 0.33%. Among other capital goods stocks, Siemens, Praj Industries, BEML, ABB, Thermax fell by between 0.27% to 3%.

But, India's largest engineering and construction firm by sales Larsen & Toubro rose 0.81%. The company said recently it won orders worth Rs 582 crore.

The government may levy customs duty on import of equipment for power projects in Union Budget 2010-11, which may give a fillip to domestic manufacturers of boilers, turbines and generators. The levy of import duty on equipment for power projects will benefit companies such as Bhel and L&T.

Rate sensitive auto shares were mixed. India's biggest tractor maker by sales Mahindra & Mahindra (M&M) fell 0.6%.

But, India's largest commercial vehicle maker by sales Tata Motors rose 1.01%. Tata Motors said recently it will hike commercial vehicle prices by up to 2% on account of new emission norms. The company also announced plans of bidding for a Rs 350-crore defense contract to supply light bullet-proof vehicles.

The company said recently its global vehicle sales for January nearly doubled to 85,714 units from a year earlier. The sales include UK-based luxury brands Jaguar and Land Rover, whose sales nearly trebled in the month to 16,269 units from a year ago, the company said in a statement. It had earlier said domestic sales, including trucks, buses and cars, jumped an annual 77 % in January.

India's largest car maker by sales Maruti Suzuki India rose 0.83% gaining for the second straight day. A senior official of the company said last week the firm will add 3,000 employees in the next three years. Maruti Suzuki's head of human resources, S.Y.Siddiqui was quoted by the media as saying that the company is also investing Rs 200 crore to add showrooms and stockyards.

The government is widely expected to raise excise duties on automobiles in Union Budget 2010-2011 this week. A hike in excise duty will raise the cost of owning new vehicles. Coupled with the recent price hikes across segments, and the price increases likely in April 2010 on account of the change in emission norms, these potential price increases on excise duty increase may dampen demand.

On the flip side, bus makers Ashok Leyland and Tata Motors may benefit in case of further allocation of government expenditure towards the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) in the Union Budget 2010-11. Bus demand has been boosted this year by an order for 15,000 buses under JNNURM

Telecom stocks fell even as the government said it will kickstart in a week its long-pending 3G spectrum auction process by issuing notice inviting applications from bidders. India's largest mobile services operator by sales Bharti Airtel fell 0.5% reversing early gains after a Kuwaiti newspaper reported on Sunday that telecoms firm Zain and Bharti Airtel are expected to sign a letter of intent for the $9 billion African assets deal this week.

Bharti is in exclusive talks until 25 March 2010 to buy Zain's African business, excluding Morocco and Sudan. It is the Indian firm's third attempt at gaining a foothold in a continent that offers a last opportunity for major subscriber growth. India's second largest mobile services operator by sales Reliance Communications fell 0.87%.

Cals Refineries clocked the highest volume of 2.01 crore shares on BSE. Unitech (66.35 lakh shares), Greenearth Resources (52.5 lakh shares), Inox Leisure (47.37 lakh shares) and Ruchi Soya Industries (42.46 lakh shares) were the other volume toppers in that order.

Bajaj Holdings clocked the highest turnover of Rs 140.51 crore on BSE. State Bank of India (Rs 106.06 crore), Titagarh Wagons (Rs 89.7 crore), Shree Renuka Sugars (Rs 68.8 crore) and Tata Steel (Rs 67.43 lakh shares) were the other turnover toppers in that order.