Edelweiss - Budget Expectations

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Sharekhan Eagle Eye (equities) & Derivatives Info Kit for February 22, 2007

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BMR Advisors - Budget Expectations

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Metal and auto stocks rally

The benchmark Sensex began the trading session with a negative gap of 53 points but staged a smart recovery on buying in select heavyweights and added 60 points to its previous close. The upmove was followed by a strong bout of selling that dragged the index to an intra-day low of 14158. The news that the Bank of Japan has raised the interest rates by 0.25% to 0.50% also affected the market sentiment and triggered a fall in the Sensex. The market recouped the lost ground in the afternoon and rallied sharply adding around 150 points from the day’s low. However, profit booking towards the close saw the Sensex shed 65 points and end the session at 14188. The Nifty declined by 11 points and closed at 4096.

The market breadth was weak. Of the 2,647 stocks traded on the BSE, 1,512 stocks declined, 1,080 stocks advanced and 55 stocks ended unchanged. Among the sectoral indices the BSE IT index shed 1.72% at 5439 while the BSE Teck index declined 0.91% at 3851. The BSE Metal index was the major gainer and was up 0.96% at 8950.

Select heavyweights declined sharply on substantial selling pressure. Ranbaxy tanked 3.29% at Rs383, Satyam Computers dropped 3.16% at Rs462, Infosys fell 2.25% at Rs2,313, HLL shed 2.08% at Rs196, BHEL lost 1.89% at Rs2,317, HDFC Bank declined 1.33% at Rs1,015 and Reliance Communications dipped 1.24% at Rs447. Grasim, TCS, ITC, L&T, Reliance Industries, ACC, Bajaj Auto and ONGC shed around 1% each. Among the select gainers Hero Honda advanced 3.27% at Rs740, Tata Steel added 2.49% at Rs455, Bharti Airtel gained 1.88% at Rs806, Hindalco was up 1.42% at Rs150 and HDFC gained 1.19% at Rs1,673.

Select metal, auto and auto ancillary stocks attracted considerable buying support. Shree Precoated Steels surged 3.54% at Rs462, Jindal Stainless gained 3.06% at Rs125 and Maharashtra Seamless added 1.24% at Rs511. Among the auto ancillary stocks Kirloskar Oil gained 2.22% at Rs262, Sunderam Fasteners added 3.27% at Rs74 and Exide Industries was up 2.82% at Rs47. Escorts, Mahindra & Mahindra and MICO were up around 1% each.

Over 33.09 lakh SAIL shares changed hands on the BSE followed by IDBI (23.43 lakh shares), HLL (22.98 lakh shares), IDFC (22.39 lakh shares) and Hindalco (21.76 lakh shares).

Value-wise Suzlon registered a turnover of Rs92 crore on the BSE followed by L&T (Rs77 crore), Reliance Communications (Rs64 crore), Reliance Industries (Rs60 crore) and Tata Steel (Rs50 crore).

Late sell-off pulls Sensex below 14,200

The BSE Sensex remained volatile throughout the day. Althought trading was devoid of wild swings, the benchmark Sensex frequently moved in and out of the red. After opening weak, the Sensex had recovered but finally succumbed to pressure at higher levels in the late afternoon. Volatility is expected to continue tomorrow (Thursday, 22 February) as well, when the February derivative contracts are scheduled to expire.

The 30-shares BSE Sensex lost 64.89 points, at 14,188.49. It recovered from the day's low (14,157.72), and went on to strike a high of 14,312.88 on back of short-covering.

The S&P CNX Nifty lost 10.75 points (0.26%), to settle at 4,096.2.

The total turnover on BSE amounted to Rs 4086.7 crore, compared to Rs 3886 crore on Tuesday.

The market-breadth, a measure of strength in the broader market, ended negative. Out of the 2,647 shares traded on BSE, 1,079 advanced, and 1,514 declined. Just 54 shares were unchanged. The market-breadth was strong in the opening session, but turned negative, as selling in small-cap and mid-cap stocks set in by early afternoon.

Among the 30-Sensex pack, 15 advanced while the rest declined.

Hero Honda was the top gainer, up 3.27% to Rs 739.5. It had struck a high of Rs 743, and a low of Rs 720.10. Auto stocks are rejoicing after the recent cut in fuel prices. Maruti Udyog (up 0.22% to Rs 896) and Tata Motors (up 0.37% to Rs 858.90) were the other gainers in the auto segment.

Housing finance firm HDFC gained 1.20% to Rs 1672.55, on reports that it may announce a hike in interest rates during this week.

Bharti Airtel (up 1.88% to Rs 806.30) and Gujarat Ambuja Cements (up 0.85% to Rs 131.15) were the other big gainers.

Metal producers Hindalco (up 1.38% to Rs 150.50) and Tata Steel (up 2.49% to Rs 455.20) gained on the back of firm metal prices globally.

FMCG major Hindustan Lever (HLL) was down 2.10% to Rs 195.50, on high volumes of 22.98 lakh shares. During trading hours on Tuesday, HLL reported 1.9% fall in net profit in the December 2006 quarter to Rs 511 crore from Rs 521 crore in the December 2005 quarter.

Index heavyweight Reliance Industries was down 0.59% to Rs 1406.15, extending Tuesday’s rise.

Ranbaxy Labs was the top loser, down 3.29%, to Rs 382.50. The Indian pharma behemoth had slipped to a low of Rs 381.90, while investors worried over possible equity dilution if Ranbaxy acquired Merck's generics drug business. The company, however, scotched reports that it was planning an issue of shares in the US, or any dilution of stake by founders to fund the acquisition.

Frontline IT stocks were under pressure. Infosys (down 2.25% to Rs 2312.90), TCS (down 0.87% to Rs 1285.95) and Satyam Computers (down 3.16% to Rs 462.20) suffered.

L&T lost 0.63% to Rs 1657.30. It plans to invest Rs 10 billion ($226 million) to build a shipyard for very large crude carriers, a newspaper reported on Wednesday.

Bosch Chassis Systems India (erstwhile Kalyani Brakes) jumped 6.20% to Rs 933.75, after its board recommended a 1:1 bonus issue. Bosch Chassis posted a net profit of 5.97 crore in Q4 December 2006 compared with Rs 11.53 crore in Q4 December 2005. Net sales in Q4 December 2006 rose to Rs 124.65 crore from Rs 112.36 crore in the year ago quarter.

Yokogawa India advanced 3.90% to Rs 466.20, after Yokogawa Electric Corporation, Japan (Acquirer), accepted the offer at the discovered price of Rs 478 per fully paid share and will pay for all the valid shares submitted to delist the company.

Gail India slumped 4.20% to Rs 282.75, on 10.88 lakh shares after it scheduled a meeting of the board of directors on 6 March 2007, to consider the proposal of a special interim dividend for the financial year 2006-07.

IFCI topped the volume chart for the eighth consecutive day since NSE allowed fresh positions in the derivative segment of the scrip last week. IFCI surged 5.02% to close at Rs 30.35 on garnering a huge volume of 3.14 crore shares, while Zee News surged 4.45% to close at Rs 41.05, on a big volume of 74.37 lakh shares for the same reason as IFCI.

Lupin surged 8% to Rs 634.65, after the company on Tuesday inked a pact with Laboratoires Servier, France, for the sale of certain patent applications and intellectual property rights for a blood-pressure drug. The agreement for the drug, perindopril, holds good for multiple countries.

Apollo Hospitals Enterprise gained 3.8% to Rs 498.30, following a report that the company is readying itself for a major acquisition in the United Kingdom.

SKF India gained 3.5% to Rs 311.30. After the company posted a net profit of Rs 31.73 crore for the quarter ended December 2006 compared to Rs 10.25 crore for the quarter ended December 2005. Total income increased from Rs 256.47 crore for the quarter ended December 2005 to Rs 381.66 crore for the quarter ended December 2006.

SKF India also posted a net profit of Rs 101.96 crore for the year ended December 2006 compared to Rs 64.07 crore for the year ended December 2005. Total income for the fiscal increased from Rs 816.01 crore (Rs 1350.83 crore).

Sintex Industries jumped 5.2% to Rs 224.20, after it won an order worth Rs 750 crore from the Gujarat Government.

Manugraph India surged 3.27% to Rs 202, after the company said on Tuesday that Reliance Mutual Fund had acquired a further 3.7% in the company, taking its stake to 5.96%. On 15 February 2007, Reliance Mutual Fund purchased shares of 11.25 lakh shares of Manugraph (3.7% stake) at Rs 185 through the open market purchases on BSE– of which 9.08 lakh shares were obtained from foreign fund Citigroup Global Markets.

Arcelor Mittal, the world's largest steelmaker, reported a 2006 core profit of $15.3 billion on Wednesday, slightly below market expectations. Analysts had estimated EBITDA (earnings before interest, tax, depreciation and amortisation) on average at $15.4 billion.

The steel giant had previously told investors it expected core earnings between $15.2 - 15.4 billion. It was the first time the newly formed group presented annual results after Mittal Steel's successful takeover of Luxembourg-based Arcelor in 2006.

The Hang Seng index was up 0.41%, while the Japanese Nikkei 225 index was down 0.14%.

The Bank of Japan (BoJ) raised its key short-term interest rate from 0.25% to 0.5% - the first hike since July 2006. The hike is in line with analysts' expectations. The move came after the country's economy was confirmed to have recorded stronger-than-expected growth during October-December 2006.

The nine-member BoJ Policy Board voted 8-1 in favour of a rate hike at the end of a two-day meeting. The bank had refrained from tightening credit for seven months after ending its zero-interest-rate policy.

Japan's gross domestic product grew an annualised 4.8% in the October-December period from the preceding three months in real terms, extending its rising streak to eight quarters. The pace of expansion was faster than the average market projection of an annualised 3.8%, and 0.8% marked in the July-September period.

US stocks rose on Tuesday, as investors scooped up recently battered tech shares amid a flurry of merger deals, including one between Sirius Satellite Radio and XM Satellite Radio, and as oil prices eased. The Dow Jones industrial average gained 19.07 points, or 0.15%, to a record 12,786.64. The Standard & Poor's 500 Index added 4.14 points, or 0.28%, to 1,459.68. The Nasdaq Composite Index climbed 16.73 points, or 0.67%, to 2,513.04. The Dow earlier touched 12,795.93, a new lifetime high for the average.

US crude prices fell for a third day, down 22 cents, to $58.63 a barrel, after a cold spell in the world's top consumer ended, with some forecasters expecting moderate March weather.

Meanwhile, companies are expected to breathe a bit easy as statutory taxation rates are likely to be reduced by 3% in the Union Budget, either through abolition of 10% surcharge, or reduction of corporate tax from the current level of 30%. Either corporate tax rate is likely to be reduced to 27%, or surcharge will be abolished to give 3% relief to companies, reports said.

The statutory rate of taxes on companies stands at about 33.66% with corporate tax of 30% and surcharge of 10% along with education cess of 2%. Corporates are demanding around 5% cut in taxes, which is not likely to be accepted entirely, sources said adding the cut may be limited to 3% only.

The government collected close to 50% more corporate tax, at Rs 97,315 crore during the first 10 months of this fiscal against Rs 65,094 crore during April-January period of the previous fiscal.

In the previous Union Budget, Finance Minister P Chidambaram had cut corporate tax rate to 30% from earlier 35%, but increased surcharge to 10% from 2.5%.

Meanwhile, gold was locked in sideways trade amid extreme volatility in the currency markets, COMEX gold slipped after hitting a high of $665 and was currently trading at $662, up $1 as markets concentrated on the upcoming US CPI data, which can spell a further sell off for the US dollar, assisting Gold. MCX gold also traded in a sideways manner following these moves. MCX April was confined to a range of Rs 9459 -9509 and shed 1.81% in open interest.

Local bullion markets weakened sharply today, as a result of the sharp all in last night's trading in New York. 0.999 gold lost Rs 130 to trade at Rs 9471 pr 10 grams in Mumbai, while silver also shed Rs 145, changing hands at Rs 20055 per kg in Delhi.

The currency markets showed an extraordinary fluctuation today following the Bank of Japan's (BOJ) decision to raise its benchmark interest rates, stirring the markets in Asian trading.

Data released last week showed that Japan's gross domestic product in the October to December quarter rose 1.2% from the previous quarter in price adjusted terms, or 4.8% on an annualized basis, the fastest rate of expansion in nearly three years.

Following this move, the US dollar weakened initially against the yen, but recovered substantially afterwards as traders still continued to bet on the carry trade advantage. However, the Euro remained on a firm footing against the US currency, trading above 1.3100 and keeping Gold supported at lower levels.

Tax exemption likely for savings up to Rs 1.50 lakh

With the government exploring various options to attract long-term funds for infrastructure, savings in certain categories up to Rs 1,30,000-1,50,000 a year may qualify for income tax exemption in the coming Budget against Rs 1,00,000 currently.

Over and above Rs 1,00,000, income tax exemption might be given for another Rs 30,000-50,000, especially for infrastructure, sources told PTI. Or alternatively, there might be consolidated savings limit of Rs 1,30,000-1,50,000 they said.

The finance ministry might also go for raising zero income tax slab to Rs 1,50,000 against the current level of Rs 1,00,000, they said.

The Ministry is looking at these three options and one of them may figure in the Budget, the sources said. However, the possibility of raising the income tax slab to Rs 1,50,000 is remote, they said.

In the Budget 2005-06, Finance Minister P Chidambaram raised the savings limit to Rs 1,00,000, which would qualify for income tax exemption under Section 80 C.

The Section provides for tax exemption for investments like insurance premia, contributions to provident fund or schemes for deferred annuities, purchase of infrastructure bonds, payment of tuition fees, repayment of principal amount of housing loans.

This fiscal's budget extended these benefits to fixed deposits of five years of maturity in banks. Banks are demanding that this benefit now be extended to three years of deposits as well.

Infrastructure development requires a whopping $320 billion in the next five years. The finance ministry is evaluating various options to attract funds for infrastructure.

Recently, US-based Citi Group and Blackstone have joined hands with infrastructure finance companies--IDFC and IFCL to raise long term funds for infrastructure.

So far as the slabs are concerned, currently, income up to Rs 1,00,000 does not attract any tax with Rs 1,00,000-1,50,000 drawing tax at the rate of 10 per cent.

Income from Rs 1,50,000 -2,50,000 attract 20 per cent income tax and 30 per cent above Rs 2,50,000. Besides, there is surcharge of 10 per cent on Rs 10 lakh taxable income.

For women, income up to Rs 1,35,000 does not attract income tax and Rs 1,35,000-1,50,000 draws 10 per cent tax rate. Above this level, the tax rates are same as that for men.

Senior citizens get tax exemption up to Rs 1,85,000 and do not have 10 per cent tax slab. There is also likelihood that the Budget 2007-08 would lower the age for senior citizens from 65 years to 60 years, the sources added

Sharekhan Commodities Buzz dated February 21, 2007

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Sharekhan Highnoon dated February 21, 2007

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Investsmart - Oil Prices Cut Impact

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Investsmart - Hero Honda Motors Q3FY07 Result Update (Hold)

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Edelweiss Market Scan (EMS) - 15th February 2007

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Edelweiss - Daily PCG Call

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PowerYourTrade Trading Calls

Ashwani Gujral

Sell JP Associates with stop loss of Rs 660 for a target of Rs 570
Sell Parsvnath Developers with stop loss of Rs 340 for a target of Rs 220

Deepak Mohoni

Buy Sesa Goa below Rs 1932 with stop loss of Rs 1915. This is a day-trading recommendation
Sell Parsvnath above Rs 311.15 with stop loss of Rs 319. This is a day-trading recommendation.

Rajat K Bose

Buy Indian Oil around the last close with a stop loss below Rs 444.75 for target of Rs 461
Sell GE Shipping around the last close with a stop loss above Rs 212.20 for target of Rs 202.

Daily Fundamental Snippets

Hindustan Lever Ltd (HLL) has reported a 31.8% growth in calendar 2006.

Ranbaxy Laboratories plans to raise $2 billion via American Depository Shares (ADS) to fund the proposed acquisition of Merck's generics business valued at $5.2 billion.

ICI India has divested a portion of its auto refinish paints business to PPG Industries of the US.

Nitesh Estates has reported that New York-based Och-Ziff Capital Management Group has picked up 25 per cent stake in the company for $51 million.

Lupin Ltd has entered into an agreement with Laboratoires Servier of France for the sale of certain patent applications and related intellectual property (IP) of blood-pressure drug Perindopril for multiple countries.


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Edelweiss - Daily Market Outlook Feb 21

Market Snapshot

The Sensex opened on a positive note. However, selling pressure at higher levels with concerns arising from a hike in domestic interest rates and worries that the government may raise short-term capital gains tax in the budget saw the index slip into negative zone. Selling re-emerged in late noon deals and the index slipped to a low of 14,230. The Sensex finally settled with a loss of 150 points at 14,253 while Nifty lost 58 points settling at 4,106.

The NSE cash volumes were slightly better compared to the previous day at INR 78 bn while the BSE cash volumes were lower at INR 38 bn. The F&O volumes were significantly higher compared to the previous day at INR 394 bn.

Sentiment Indicators

The Implied Volatility (IV) across Nifty strikes has increased to 26-29% levels. The WPCR of Nifty Options decreased to 1.00 compared to the previous day while the 5 day average is 1.10. The February futures are now trading at 9 points premium. The Nifty Futures OI has increased by 2%.

Outlook

We expect the market to remain volatile ahead of the expiry and the fiscal budget. Yesterday’s fall was triggered by ONGC and the markets can take cues from the Bank of Japan’s decision on the interest rates. However, we see limited downside from these levels with intraday volatility being observed till the budget.

The market wide rollovers at 41% marginally lower than the previous expiries. However Nifty rollover continues to see the shift in March at 48% on the second day of expiry week. The roll cost has been slightly lower at around 68 bps.

On Nifty rolls, we expect the pressure to continue from the short rollers and would thus advise short rollers to aggressively roll their positions at the current levels. Long rollers can see some contraction as the current levels might go up to 4 plus points.

Nifty has an immediate support at 4067 and believe the uptrend to continue until the Nifty sustains above this trend line support. Nifty will face an immediate resistance at 4160 followed by 4176.


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