Small-cap, mid-cap indices nudge lower as caution prevails ahead of the Budget

The key benchmark indices registered marginal gains after moving in a tight range throughout the day. The market gained for the second straight day. However, the market breadth was weak indicating a cautious undertone ahead of the Union Budget 2010-2011 later this week. The BSE 30-share Sensex rose 49.27 points or 0.3%, up close to 110 points from the day's low and off close to 50 points from the day's high.

India's largest car maker by sales Maruti Suzuki India fell more than 3% after the company said it has recalled 1 lakh A-star cars to fix fuel leakage problems. European stocks reversed early gains. In contrast, Asian stocks recovered from initial losses. US index futures rose.

IT and banking stocks rose. Realty shares gained on expectations of favorable measures for the sector in the upcoming Union Budget 2010-11 on 26 February 2010. But auto stocks fell on fears of hike in excise duties in the Budget. Index heavyweight Reliance Industries (RIL) also edged lower.

The follow-on public offer of Rural Electrification Corporation (REC) was subscribed 2.29 times by 15:00 IST on the last day of the bidding for the issue today, 23 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 closes today, 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.

Junior Finance Minister S S Palanimanickam today said the government has so far raised Rs 12740 crore from selling stakes in state-run companies since May 2009. The government raised Rs 8516 crore in six years to March 2009, he said.

Meanwhile, reports citing Joint Secretary Sidhartha Pradhan indicated the government will not defer plans to sell stakes in state-run firms despite a poor market response to stake sales in state-run firms REC and NTPC.

The market dropped in early trade tracking weak Asian stocks. The market recovered in morning trade as some Asian stocks rebounded. It moved in a narrow range in mid-morning trade. The market pared gains after hitting fresh intraday high in early afternoon trade. The market erased almost its entire gains in early afternoon trade. The market recovered later.

India VIX, a volatility index based on the S&P CNX Nifty index option prices, dropped after a recent sharp surge. The index declined 3.55% to 30.99. India VIX is a measure of the market's expectation of volatility over the next 30 calendar days.

European shares edged down on Tuesday, with weakness in banks offsetting gains in food producers, while Carlsberg rose after upgrading its medium-term profit margin guidance. The key benchmark indices in France, Germany and UK fell by between 0.16% to 0.77%.

Asian share markets were mixed today, 23 February 2010 with banks' fund raising plans weighing on China while disappointing corporate earnings hurt the Australian market. The key benchmark in Hong Kong, Singapore, South Korea and Taiwan rose by between 0.11% to 1.21%. However, indices in China and Japan fell 0.69% and 0.47% respectively.

US index futures reversed early losses. Trading in US index futures indicated that the Dow could rise 23 points at the opening bell on Tuesday, 23 February 2010.

US stocks ended slightly lower on Monday 22 February 2010 as investors held back ahead of congressional testimony by Federal Reserve chairman Ben Bernanke. Health insurers' shares rose after President Obama proposed a revised overhaul of US healthcare system. Energy shares were under pressure. The Dow Jones industrial average lost 18.97 points, or 0.18%, to close at 10,383.38. The Standard & Poor's 500 Index slipped 1.16 points, or 0.10%, to end at 1,108.01. The Nasdaq Composite Index slipped 1.84 points, or 0.08%, to close at 2,242.03.

In key events to watch out for today, the US Federal Reserve chairman Ben Bernanke is scheduled to testify before house and senate committees later today and tomorrow about monetary policy. Last week the Fed announced a surprise increase in the rate it charges banks for emergency loans.

Closer home, finance minister Pranab Mukherjee said today the government will continue measures to tame inflation in the financial year ending March 2011.

President Pratibha Patil on Monday, 22 February 2010 said the economy will accelerate in the coming years as it recovers from the global downturn and the government will act to protect the poor from the impact of food inflation.

The President said the economy was likely to grow about 7.5% in the current fiscal year ending in March, and the government would aim for annual growth rate of 8% in the next fiscal year and 9% in 2011/12.

Asia's third-largest economy is recovering, with factory output surging, but food prices are growing at the fastest pace in 11 years. The president's annual speech, which lays down the priorities of the government for the year, reflected those concerns over inflation as food prices keep rising at an annual rate of nearly 20%, primarily because of a poor summer harvest. The prime minister's economic advisory council last week said surging food prices threatened to fan broader inflation and endanger the economic recovery.

With growing evidence of economic recovery, including a record 16.8% jump in factory output in December, the government is under pressure to rollback the fiscal stimulus deployed to soften the impact of the global financial crisis. Analysts expect Finance Minister Pranab Mukherjee to announce the expiry of some of the emergency measures in the budget speech as he looks to cut the fiscal deficit, which is on track to balloon to a 16-year high in the current financial 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.

Rollover in Nifty futures from February 2010 series to March 2010 series was about 29% at the end of Monday's trading. Rollover in Mini Nifty futures was also at the same level. The near-month February 2010 contracts expire on Thursday, 25 February 2010, just a day ahead of the presentation of the Budget on Friday, 26 February 2010.

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.

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 19 February 2010. 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.

The BSE 30-share Sensex rose 49.27 points or 0.3% to 16,286.32. The barometer index rose 87.88 points at the day's high of 16,324.93 in early afternoon trade. The Sensex fell 58.14 points at the day's low of 16,178.91 in early trade.

The S&P CNX Nifty rose 13.65 points or 0.28% to 4870.05. Nifty February 2010 futures were at 4,880, at a premium of 9.95 points as compared to the spot closing of 4,870.05. Turnover in NSE's futures & options (F&O) segment rose to Rs 82,264 crore from Rs 81,018.24 crore on Monday, 22 February 2010.

BSE clocked a turnover of Rs 3094 crore, lower than Rs 3421.87 crore on Monday, 22 February 2010.

Small-cap and mid-cap indices nudged lower for the second day in a row. The BSE Mid-Cap index fell 0.59% and the BSE Small-Cap index fell 0.92%. Both these indices underperformed the Sensex.

The BSE Realty index (up 0.96%), BSE Metal index (up 0.72%), BSE Healthcare index (up 0.66%), BSE IT index (up 0.52%), BSE Bankex (up 0.37%) outperformed the Sensex.

The BSE Auto index (down 1.82%), BSE Consumer Durables index (down 0.66%), BSE Oil & Gas index (down 0.41%), BSE PSU index (down 0.4%), BSE FMCG index (down 0.1%),BSE Power index (up 0.07%), BSE Capital Goods index (up 0.1%), underperformed the Sensex.

The market breadth, indicating the overall health of the market was weak. On BSE, 1915 shares declined as compared with 870 that rose. A total of 92 shares remained unchanged.

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

Index heavyweight Reliance Industries (RIL) fell 0.41% to Rs 974.90. The stock oscillated in a tight range Rs 971 and Rs 983.45. As per reports, RIL may raise its offer for bankrupt petrochemicals maker LyondellBasell to about $14.5 billion. RIL had previously offered a deal that valued Lyondell at $13.5 billion. The rise in offer comes after 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 upcoming 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 1.64%, extending gains for the second straight day. Its ADR fell 0.47% on Monday.

India's largest private sector bank by operating income HDFC Bank rose 0.15%. The bank has increased fixed deposit (FD) rates across nine maturities by 25-150 basis points. 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. HDFC Bank ADR rose 0.26% on Monday.

Bu, India's largest bank by net profit and branch network State Bank of India fell 0.1%. State Bank of India (SBI), on Monday said banks' lending rates are expected to remain stable in the next 5-6 months because of the slow credit offtake despite RBI hiking the cash reserve ratio by 75 basis points.

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.

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.

Rate sensitive realty shares rose on bargain hunting. Indiabulls Real Estate, Ackruti City, Housing Development & Infrastructure, Orbit Corporation, Unitech, Akruti City, Ansal Properties and Infrastructure and DLF rose by between 0.25% to 1.67%.

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.

Rate sensitive auto shares fell as the government is widely expected to raise excise duties on automobiles in Union Budget 2010-2011 this week. India's biggest tractor maker by sales Mahindra & Mahindra (M&M) fell 1.25%, extending losses for the second straight day.

India's largest commercial vehicle maker by sales Tata Motors fell 0.83%. 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 fell 3.24% on reports the company is recalling 100,000 A-Star hatchbacks to fix a fuel leakage problem. The recall of cars had begun in November 2009 and problem of more than half cars have been fixed.

A hike in excise duty in the Budget 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

Software majors rose as the US economy is showing a sign of recovery. US is the biggest export market for Indian IT firms. India's second largest IT exporter by sales TCS rose 0.76%, gaining for the second straight day. India's largest IT exporter by sales Infosys Technologies rose 0.34%, gaining for the second straight day. Its ADR fell 0.13% on Monday. India's third largest IT exporter by sales Wipro rose 1.15%, gaining for the second straight day. Its ADR rose 0.52% on Monday.

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

Consumer durable stocks fell on profit taking. Asian Star Company, Titan Industries, Videocon Industries and Lloyd Industries, Rajesh Exports fell by between 0.29% to 4.27%.

Some infrastructure stocks gained on speculation of higher spending for the infrastructure sector in the upcoming Union Budget 2010-2011. Jaiprakash Associates, Valecha Engineering, Hindustan Construction Company and Gayatri Projects rose by between 0.65% to 2.23%.

For the infrastructure sector, there may be an increase in government spending in infrastructure, especially for roads and urban projects in the coming budget. There may be also clarity on refinancing for India Infrastructure Finance Company (IIFCL) funding. Further clarity on minimum alternate tax provisions under a new Direct Tax code, to be implemented in FY 2012 is also expected. There may be an improved availability and mechanism of financing for infrastructure projects and national project status may be given for state government projects

FMCG stocks fell as excise duty on fast moving consumer goods (FMCG) is expected to go up by 200-300 basis points in the 2010-11 Budget.. Britannia Industries, Hindustan Unilever, Tata Tea, Dabur India, Nestle India and United Spirits fell by between 0.07% to 1.55%.

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 fell 0.32%. 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, Reliance Infrastructure fell by between 0.27% to 1.32%.

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 power equipment maker by sale Bharat Heavy Electricals (Bhel) rose 1.07%. India's largest engineering and construction firm by sales Larsen & Toubro rose 0.05%. Larsen & Toubro (L&T) will finalise plans to unlock value in its financial services arm in the next 12 months, the engineering to software conglomerate's whole-time director and chief financial officer (CFO) said on Monday.

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.

Telecom stocks rose as the multi-billion dollar auction of 3G spectrum to help plug India's budget deficit may kick off in the next financial year. Telecoms minister Andimuthu Raja said on Monday the government would give formal notice of the oft-delayed auction within a week but bidding might only start after March 2010. India's second largest mobile services operator by sales Reliance Communications rose 0.1%.

India's largest mobile services operator by sales Bharti Airtel rose 1.05%. 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.

The telecom industry experts expect unification of tax regime from current differential taxation methods and a reduction in license fee to 6% in Union Budget 2010-2011. They also expect that government may use Universal Service Obligation funds for rural and broadband penetration and there may be an increase in Minimum Alternate Tax from the present 16.5%.

Aqua Logistics clocked the highest volume of 1.9 crore shares on BSE. Cals Refineries (1.56 crore shares), U/nitech (0.55 crore shares), Ruchi Soya Industries (0.51 crore shares) and Greenearkt Resources (0.4 crore shares) were the other volume toppers in that order.

Aqua Logistics clocked the highest turnover of Rs 465.71 crore on BSE. Titagarh Wagons (Rs 111.64 crore), Monsanto India (Rs 103.15 crore), Tata Steel (Rs 86.68 crore) and DLF (Rs 70.95 crore) were the other turnover toppers in that order.