China's Engineered Drop
China's Shanghai Composite Index tumbled 8.84 percent Feb. 27, its largest fall in a decade. Its sister index, the Shenzhen Composite Index, fell 8.54 percent. The size of the drop in China is not significant in and of itself. On a number of occasions during the past year, the Shanghai Stock Exchange has experienced 5 percent plus daily reductions, and it has already boomed and busted once this decade.
But that hardly means the development is insignificant. The fall is important both for how it happened and what it triggered.
How it Happened
This was an engineered drop.
The Chinese government has become increasingly concerned about levels of investment in its economy or, more accurately, the sheer amount of money that is chasing projects. State firms with limitless access to subsidized capital from state banks have used that access to launch thousands of nonprofitable firms. This glut in "investment" money drives up the cost of commodities and adds industrial capacity without actually producing anything of much use, making life more difficult for the average Chinese and unduly harming relations with foreign powers that face a glut of otherwise noncompetitive Chinese goods.
This penchant for overinvestment has now spread to the stock market in two ways. First, the same politically connected government officials who started dud companies are taking out loans to buy shares, or are using shares they already hold as collateral for new loans. Second, ordinary Chinese citizens have started borrowing -- sometimes against their homes -- in order to play the market. In January, the number of total traders on the Chinese exchanges grew by 1.38 million, an increase of 134 percent from a month earlier, while stock turnover was up 700 percent from a year earlier.
The net result is an absurd stock surge with no basis in fundamentals. At present, some Chinese banks now have price-to-earnings ratios higher than financial behemoths such as Deutsche Bank and Chase, despite deplorable management and a history of highly questionable lending policies.
For the past few months, the government has been working to drive down this speculative investing. On Feb. 26, China's State Council launched a new "special task force" that accurately could be referred to as the "get-those-idiots-to-stop-borrowing-to-gamble-on-the-stock-exchanges" team. Its express goal is to get the Chinese domestic security brokers to lay off such speculative decision-making, while also putting a crimp in the source of the subsidized capital.
Day one started by the script, and Beijing is likely quite pleased with the way things are going (or at least it was until its actions unintentionally triggered a global meltdown). Also, since the Shanghai exchange is actually still up 3 percent for the past week despite suffering its largest drop in a decade, the State Council probably hopes for more drops in the days ahead.
What it Triggered
But the rest of the world took a different lesson. Why the Chinese stock crash occurred was unimportant to the outside world, only that it did -- and that it affected everyone else.
For the first time, China has become the trendsetter in the global stock community. Normally, the U.S. exchanges -- especially the S&P 500 index and the Dow Jones Industrial Average -- set the tone for global trading patterns. Not on Feb. 27. This time, China led Asia to a wretched day. The wider the contagion spread, the more margin calls were forced to be called in. (If an account's value falls below a minimum required level, the broker will issue a margin call for the account holder to either deposit more cash or sell securities to fix the problem.)
As the drops snowballed, Europe filed in dutifully behind, mixing the China malaise with its own nervousness about overextended markets in Central Europe and the former Soviet Union. By the time markets opened in the United States -- where investors already were fretting about the subprime mortgage markets -- the only question remaining was how far U.S. markets would descend. In the end, the Dow dropped by the most since the fall triggered by the 9/11 attacks.
So why has this not happened before now? As China's market capitalization has increased, its links to the global system have increased apace. These links have developed very quickly, and with few controls. The Shanghai exchange, for example, more than tripled in total value in 2006 to more than $900 billion -- and much of the rapid-fire initial public offerings (IPOs) of Chinese banks on the Hong Kong and other international exchanges are not included in that little factoid. Indeed, China's mainland exchanges are only the tip of the iceberg -- and they certainly do not include foreign firms that are heavily invested in the mainland.
Two years ago, China's market capitalization was too small for its problems to impact the global system. Now, between ridiculous foreign subscriptions to IPOs, irresponsible corporate policies and irrational valuations all around, that capitalization is to a level -- around $1.3 trillion -- where its integration with the global system via funds and margins makes China a sizable chunk of the international financial landscape. The insulation that once protected international exchanges from Chinese policies is gone, which makes the international system more vulnerable to Chinese crashes.
Feb. 28 and Beyond
Follow-on crashes can come from one of three places.
First, the Chinese believe their exchanges are massively overvalued (hence the engineered crash). They will do this again, and are not (yet) particularly concerned with the international consequences. China planned to dampen its own stock market, not the world's markets. Along with the rest of the world, Beijing did not expect the contagion effect to be so extreme. Yet, for now at least, China's own exchanges are its primary concern, and it will act according to that belief.
Second, everyone else now is going to chew on the fact that Beijing did this intentionally. They will either agree with the Chinese that the exchanges are overvalued and that additional measures are needed, or they will be terrified that Beijing did this intentionally and not care about the reasons. Whether what is sold is a domestic Chinese firm or a foreign firm invested in China does not matter much. Neither does it matter if the stock is on an exchange in China or abroad. Either way, the reaction will be the same: Sell.
Third, trading in 800 of the 1,400 stocks on the Shanghai exchange was suspended during the sudden drops Feb. 27; they have a lot farther to fall, even without any engineered drops caused by panicky selling.
Considering the flaws on which the Chinese system is based, this certainly will not be the last engineered drop. In theory, the move will make foreign investors far more cautious before diving into the Chinese system, but as longtime Stratfor readers know, we have been wrong on the timing of that particular development before.
Monday, March 05, 2007
The Last week that was in the financial markets
1. China meltdown due to regulatory tightening on market manipulation
2. SEC charges 14 in insider trading case of 2001
3. Golman Sachs, ML are junk, say own traders
4. Yen carry trades unwinding, some people trying to measure immeasurable
5. Allan Greenspan says US slowdown possible
6. BoJ likely to hike rates forcing Yen carry traders to unwind EM positions
7. Marc Fabre says market yet to bottom, will touch May 2006 lows
8. Astrologers say Saturn opposes Neptune…bring catastrophic market decline
9. Chartists say markets will crash, stay away, and go short
10. Budget – not good, very bad
11. Budget – Narayan Murthy says Chidu missed the opportunity
12. Budget – variety of brokers say budget piches here and little comfort there
13. Chidu has projected lower growth in India's corporate tax collections in 2007-08 budget, which indicates he himself is in 'bear camp' and expects corporate earnings to slow down.
1. China meltdown due to regulatory tightening on market manipulation
2. SEC charges 14 in insider trading case of 2001
3. Golman Sachs, ML are junk, say own traders
4. Yen carry trades unwinding, some people trying to measure immeasurable
5. Allan Greenspan says US slowdown possible
6. BoJ likely to hike rates forcing Yen carry traders to unwind EM positions
7. Marc Fabre says market yet to bottom, will touch May 2006 lows
8. Astrologers say Saturn opposes Neptune…bring catastrophic market decline
9. Chartists say markets will crash, stay away, and go short
10. Budget – not good, very bad
11. Budget – Narayan Murthy says Chidu missed the opportunity
12. Budget – variety of brokers say budget piches here and little comfort there
13. Chidu has projected lower growth in India's corporate tax collections in 2007-08 budget, which indicates he himself is in 'bear camp' and expects corporate earnings to slow down.
Morgan Stanley Research
* Overall, we think the Budget took a few more steps in the right direction. However, we read the indicative message from the Budget measures that although the government is likely to initiate reforms, the pace of implementation is unlikely to be strong enough to sustain the current 9% growth without concurrent emergence of overheating signs.
* Not surprisingly, the Budget avoided the push for privatisation and foreign direct investment (particularly multi-product retail business and insurance sector). More important, in our view, is that while the government will likely initiate some reforms, the pace of implementation is unlikely to be strong enough to sustain the current 9% GDP growth without concurrent emergence of overheating signs.
* We believe that the government needs to anchor a stronger supply response (growth in productive capacity) in order to transition to higher and sustainable growth. The government needs to implement measures to accelerate the supply-side response by investing much larger sums in infrastructure, augmenting resources through privatisation, implementing labour reforms, and strengthening the regulatory and administrative framework.
Motilal Oswal Securities
* Several sectoral budget announcements impact either earnings estimates in some cases or just sentiment in most other cases. At the end of it all, Sensex EPS estimate for FY08 stands downgraded by 0.6% to Rs830 (from Rs835 earlier), still a year-on-year growth of 17.7%.
Sector and Stocks
* The Budget has a positive impact on engineering and power, FMCG and the telecom sector. The Budget has a negative impact on cement, infrastructure, IT and retail.
* Overweight on automobiles, banking and finance, cement, engineering and power, FMCG and infrastructure, IT, pharma and telecom. At the same time neutral on media, metals, retail and textiles.
* Considering the limited impact on fundamentals and positive long-term outlook, we recommend taking advantage of the sharp correction to buy stocks. Top bets are Bharti Airtel, Reliance Communication, Maruti Udyog, ICICI Bank, Punjab National Bank, Infosys Technologies, Dr Reddy's, SAIL, and Grasim. We also upgrade our ratings of HDFC Bank, Satyam Computers, HCL Technologies and Larsen & Toubro from 'neutral' to 'buy' after the recent correction.
Religare Securities
* A politically correct budget, the fourth by the UPA government, attempting to rein in inflation, while seeking continuation of the growth momentum. Overall, we rate the budget as macro-positive with focus on curbing inflation and ensure long-term sustainable growth. There can be short-term volatility in sectors like cement, infrastructure and IT. However, long-term fundamentals of the sectors still remain strong.
Sector and stocks
* Budget is positive for automobile, construction, FMCG, paper, pharmaceuticals, shipping (dredging) and textiles sectors.
* Preferred stocks: Ashok Leyland, M&M, Nagarjuna Construction, IVRCL, ITC, GAIL, RIL, Ranbaxy.
* The increase in excise duty is likely to affect all the cement companies. A majority of the cement companies have prices above Rs 190. However, cement companies will be able to increase price and extra excise duty will be passed on to consumers. Top sell: ACC, GACL, Ultratech Cement.
* Sugar is a sector left out of the Budget. There is no upside in the sector in the medium-term, hence our outlook remains negative on the sector.
Top sell: Bajaj Hindustan, Dhampur Sugar.
Enam Securities
* Fiscal consolidation strategy which is revenue-led is highly leveraged to economic growth.
* Finance minister's base assumption of FY08 nominal GDP growth at just 13%: corporate and service tax could improve if GDP growth is actually higher.
* Sensex EPS is marginally changed due to Budget for FY 2006-2007 from Rs 728 to Rs 738. For FY 2007-2008 the same has changed from Rs 852 to Rs 850.
* Tax incentive removal in housing finance, infrastructure finance and realty have given negative surprises.
Sector and stocks
* Removal of customs duty on coking coal is positive for JSW steel. Removal from excise duty on biscuits with a price below Rs 50 per KG is good for Britannia as 30% revenue comes from this segment.
* IT services: Not as bad as initially interpreted. MAT rate of 11.33% applicable to Sec 10A/10B income is introduced from FY08. However, the impact is almost neutral.
* ESOP brought under ambit of FBT. Implication negative. Neutral to TCS as no ESOPs. Overall marginally negative for sector.
MAN Financial-Sify Securities
* The Budget tried to maintain growth momentum by enhancing investment in agriculture and infrastructure. Health and education spend is increased further to ensure sustainability of the benefits of demographic divide. Direction on tax reforms is maintained. Stable tax policy to boost growth momentum.
Sector and stocks
* Positives on auto, consumer, engineering, oil & gas, telecom, while the negative impact is seen on cement, construction, IT and petrochemicals. The budget is neutral on financials and metals.
* Excise duty cut on petrol and diesel to reduce under recovery along with extension of 80IA benefits to gas pipeline industries augur well for HPCL, BPCL, IOC. Cairn is expected to be a loser.
* Customs duty cut on polyester and fibres and intermediate makes RIL and IPCL a loser.
Kotak Securities
* The Budget has done the right thing by focusing on sustainable long-term growth of the economy.
* While structural measures to control inflation may have an impact in the longer term, we expect the government to take fiscal and monetary steps to control inflation during the year.
Sector and stocks
* The industries benefiting will be capital goods and engineering, food processing and FMCG, hotels, logistics, oil & gas, pharmaceutical and textiles. Sectors with negative impact includes cement, construction, and information technology.
* Preferred stocks: Siemens, Crompton Greaves, Riddhi Siddhi Gluco Biols, Allcargo, Concor, IGL and Great Offshore.
Networth Stock Broking
* Budget 2007-08 has been favourable for the textiles, FMCG and power sectors and unfavourable for the construction, cement and IT sectors.
* APDRP extension to towns having more than 50,000 population is expected to benefit SEBs and distribution companies. Positive impact on Torrent Power.
* Transmission and distribution equipment manufacturers are likely to benefit from high spending under RGVY. Positive impact on Genus Overseas and EMCO.
* Coal block allocation to government companies to diversify the revenue streams of the PSU companies. Positive impact on NTPC, Neyveli Lignite, GMDC.
* Due to imposition of service tax on rental of immovable property, for retailers and malls the lease rentals might go up, thus further pressurising the EBIDTA margins of key players undertaking major expansions. Negative impact on Pantaloon Retail, Reliance Retail, Titan, Shopper's Stop and Trent.
Sharekhan
* Positive on capital goods and construction sector. BHEL, L&T, Siemens, Crompton Greaves, KEI Industries, Genus Overseas, Bharat Bijlee and Indo Tech Transformers emerge as good bets. On the FMCG sector front, Britannia, ITC, Nestle and Kohinoor, Agro Tech, Ruchi Soya stocks good performers.
* A negative view on the IT sector, Satyam Computer and HCL Tech as the most impacted stocks except TCS (as it has not given any stock options). Positive on the pharmaceuticals sector, Ranbaxy, Dr Reddy's and Cadila strong players. Ansal Properties and Parsvnath as good stocks for the real estate sector. A positive view for the tourism and tyre sector. Indian Hotels, Hotel Leela, Taj GVK and Royal Orchid emerge as promising stocks in the tourism sector.
BRICS Securities
* The Budget cannot be termed as positive for the India Inc. In our view, the ongoing correction in the markets has been primarily due to factors unrelated to the Budget.
* Nervousness on the interest rates, volatility in the global stock markets and rather expensive valuations have fuelled the recent correction. And with no positive indicators from the Budget, the market has seen the correction getting sharper.
* With the current 11.7% fall in the Sensex, we believe that the market valuations have largely corrected for the over-valuation that existed.
* However, we maintain our longstanding view that the annual Budget's influence continues to wane each year – it is the fiscal perspective that is more important. So we expect the market to continue on its natural path save some affected sectors.
Sector and stocks:
Our top picks are therefore, not driven by the Budget but by the price correction that has taken place in the last few days. We would overweight technology (Satyam, TCS and Infosys), energy (Reliance and ONGC) and automobiles (Maruti, Mahindra and Hero Honda).
* We would underweight matetials (primarily due to cement) and banks (given the continuing pressure on interest rates).
* We would be neutral on telecoms (positive weight being Bharti), infrastructure (positive on L&T) pharmaceuticals and media.
Emkay share & stock brokers
* Going ahead, the renewed initiatives announced for agriculture in this budget specifically with regard to increased plan outlays, creation of irrigational facilities, creation of water management cells, improved production due to better utilisation of seeds and fertilisers should ensure a sustainable growth in agriculture. We believe that the food-processing industry would be major beneficiaries of the sustained agriculture credit.
Sector and stocks
* The power sector will benefit from the expected new ultra mega projects, besides the Golden Quadrilateral project is also fast moving towards completion. On the other hand, the water and irrigation projects will not only benefit construction companies but also the domestic capital goods players as well as pumps and generator-set manufacturers.
* The long-term investment time frame and reasonably good risk to reward expectations are primary reasons, which we believe are attracting FII investment in the Indian equity market and we do not see any change in this trend, at least in the medium- to long-term.
* Stocks from FMCG, food processing, telecom, hotels, capital goods, power, oil & gas/allied services players to be impacted positively.
* Infrastructure, consumption and agri related sectors will be the major beneficiaries of the process.
First Global
* GDP growth may well slow down in the coming year -- we have two takes on this. The first is conventional: (i) the interest cycle is set to accelerate further on the upside. This will crimp growth, no doubt. But (ii) is perhaps even more relevant: in the new service tax regime, there is now virtually no service one can render in India (within boundaries, of course!) that is exempt from service tax.
* Overall, the finance minister may achieve his growth objectives in agriculture, and attract investments into infrastructure development with his Budget proposals; some of his direct and indirect tax initiatives may have seriously dampened business sentiment. The move to impose MAT on IT service companies and the increase in dividend distribution tax from 12.5% to 15% are expected to adversely impact several companies. Corporate India is certainly not pleased, nor are the markets.
Sector and stocks
* Auto components is a sector that is brimming with huge potential in the 'global outsourcing in manufacturing' story. Given its cost advantage, engineering skills, delivery capabilities and strong client base, India is well poised to play a significant role in global auto component outsourcing. Preferred stocks: Amtek Auto, Bharat Forge, MICO, Sundram Fasteners, Sona Koyo, Lumax.
* The Budget has by and large met the expectations of the FMCG sector with its pro-agriculture stance and its incentives for the food processing business. Preferred stocks: Marico, Dabur and HLL.
ASK-Raymond James
* Unless inflation "seasonally" falls off by end-March or so, expect more drastic steps on the monetary front - further interest rate hikes and liquidity contraction.
* Forthcoming assembly elections in vital states like UP can accelerate the time-frame for such action to tame inflation at any cost.
* We do not expect any significant reforms or policy initiatives over the next two years with election fever rising over time and the lack of political consensus or will, within the UPA and Congress itself.
* So, as we move into the new fiscal year, the economy is largely on auto pilot with two major risks to growth and liquidity:
* In sum, the risks facing equity markets today are higher than before in the last 3-4 years of a highly benign macro and global environment and the Indian market is unlikely to recover in any hurry.
Sector and stocks
* A positive scenario will emerge in the automobiles and oil & gas sector and the hospitality sector.
* Recommended stocks are Tata Motors, M&M, Bajaj Auto and RIL, IPCL, GAIL, and IOC for automobiles and oil & gas sector respectively as the best bets.
* As regards banking sector, it holds a neutral view and recommends HDFC, ICICI and SBI as strong beneficiaries. For cement and the FMCG sector and the IT sector and the construction, the report holds a negative view.
* For media/entertainment, pharmaceuticals, real estate and metals, it has a neutral view.
Deutsche Bank
* The 2007 Budget was neither overly negative nor positive in our view.
Instead, the recent market correction was driven more by the global equity sell-off – and investors ought to look beyond the Budget noise to assess whether India's underlying fundamental outlook has changed. We believe it hasn't, and this is an opportunity for long-term investors to start buying – especially those who missed the boat on the way up.
* The short-term outlook depends on global carry-trade unwind prospects. Typically, the risk lies in carry currencies with high yields where currencies are significantly above fair value, as well as those with large current account deficits. Our emerging market strategists believe the risk is greater with Turkey, Brazil, South Africa, Mexico, Hungary, Indonesia and the Philippines. India looks much better.
* Our economist believes lower tariffs, a tighter fiscal policy and higher borrowing costs will slow GDP growth over the next few quarters. However, the significant fiscal correction in recent years has tempered a major structural macroeconomic risk with India. In addition, the latest Economic Survey shows the savings rate has jumped to 32.4% of GDP in FY06 and is likely to cross 40% by 2020 – which can fund rapid growth in the financial system, infrastructure and manufacturing.
* On current estimates, the Sensex is now at around 15x March 2008 P/E. The market may still undershoot on the downside, but the froth appears to be largely out now.
Sector and stocks:
* Positive on the banking sector. State Bank of India, Punjab National Bank and Bank of Baroda emerge as lucrative scrips. Uncertainty looms over HDFC stock.
* Negative on IT sector with HCL Tech and Satyam Computers as uncertain scrips.
* Uncertainty over the retail sector with Pantaloon emerging as a laggard.
* Negative on the property sector with Ishaan emerging as an easily ignorable proposition.
* Neutral on the metals sector with Sesa Goa stock as unattractive scrip.
Anand Rathi Securities
* The budget for 2007-08 is overall neutral from the equity market perspective. Overall, it warrants a tag of being a 'non-event'.
* Last year we had argued that an event like Budget should be a non-event from an investment decision perspective.
Sector and stocks
* Five-year tax holiday for hotels in NCR region between April 2007 and March 2010, will benefit Royal Orchid Hotels Ltd, which is planning to build a 4-star property in this region in the near future.
* We expect the decrease in customs duty to have a positive impact on steel producers.
* Sectors benefiting from the Budget include agro-products, steel, hospitality, FMCG, pharmaceutical, pipes and textiles. The industries getting negative impact includes construction and real estate, information technology and logistics and offshore.
* Monsanto, Jain Irrigation, Tata steel, Britannia, Royal Orchid Hotel Ltd, Cipla, PSL, Sangam India are preferred stocks.
* Overall, we think the Budget took a few more steps in the right direction. However, we read the indicative message from the Budget measures that although the government is likely to initiate reforms, the pace of implementation is unlikely to be strong enough to sustain the current 9% growth without concurrent emergence of overheating signs.
* Not surprisingly, the Budget avoided the push for privatisation and foreign direct investment (particularly multi-product retail business and insurance sector). More important, in our view, is that while the government will likely initiate some reforms, the pace of implementation is unlikely to be strong enough to sustain the current 9% GDP growth without concurrent emergence of overheating signs.
* We believe that the government needs to anchor a stronger supply response (growth in productive capacity) in order to transition to higher and sustainable growth. The government needs to implement measures to accelerate the supply-side response by investing much larger sums in infrastructure, augmenting resources through privatisation, implementing labour reforms, and strengthening the regulatory and administrative framework.
Motilal Oswal Securities
* Several sectoral budget announcements impact either earnings estimates in some cases or just sentiment in most other cases. At the end of it all, Sensex EPS estimate for FY08 stands downgraded by 0.6% to Rs830 (from Rs835 earlier), still a year-on-year growth of 17.7%.
Sector and Stocks
* The Budget has a positive impact on engineering and power, FMCG and the telecom sector. The Budget has a negative impact on cement, infrastructure, IT and retail.
* Overweight on automobiles, banking and finance, cement, engineering and power, FMCG and infrastructure, IT, pharma and telecom. At the same time neutral on media, metals, retail and textiles.
* Considering the limited impact on fundamentals and positive long-term outlook, we recommend taking advantage of the sharp correction to buy stocks. Top bets are Bharti Airtel, Reliance Communication, Maruti Udyog, ICICI Bank, Punjab National Bank, Infosys Technologies, Dr Reddy's, SAIL, and Grasim. We also upgrade our ratings of HDFC Bank, Satyam Computers, HCL Technologies and Larsen & Toubro from 'neutral' to 'buy' after the recent correction.
Religare Securities
* A politically correct budget, the fourth by the UPA government, attempting to rein in inflation, while seeking continuation of the growth momentum. Overall, we rate the budget as macro-positive with focus on curbing inflation and ensure long-term sustainable growth. There can be short-term volatility in sectors like cement, infrastructure and IT. However, long-term fundamentals of the sectors still remain strong.
Sector and stocks
* Budget is positive for automobile, construction, FMCG, paper, pharmaceuticals, shipping (dredging) and textiles sectors.
* Preferred stocks: Ashok Leyland, M&M, Nagarjuna Construction, IVRCL, ITC, GAIL, RIL, Ranbaxy.
* The increase in excise duty is likely to affect all the cement companies. A majority of the cement companies have prices above Rs 190. However, cement companies will be able to increase price and extra excise duty will be passed on to consumers. Top sell: ACC, GACL, Ultratech Cement.
* Sugar is a sector left out of the Budget. There is no upside in the sector in the medium-term, hence our outlook remains negative on the sector.
Top sell: Bajaj Hindustan, Dhampur Sugar.
Enam Securities
* Fiscal consolidation strategy which is revenue-led is highly leveraged to economic growth.
* Finance minister's base assumption of FY08 nominal GDP growth at just 13%: corporate and service tax could improve if GDP growth is actually higher.
* Sensex EPS is marginally changed due to Budget for FY 2006-2007 from Rs 728 to Rs 738. For FY 2007-2008 the same has changed from Rs 852 to Rs 850.
* Tax incentive removal in housing finance, infrastructure finance and realty have given negative surprises.
Sector and stocks
* Removal of customs duty on coking coal is positive for JSW steel. Removal from excise duty on biscuits with a price below Rs 50 per KG is good for Britannia as 30% revenue comes from this segment.
* IT services: Not as bad as initially interpreted. MAT rate of 11.33% applicable to Sec 10A/10B income is introduced from FY08. However, the impact is almost neutral.
* ESOP brought under ambit of FBT. Implication negative. Neutral to TCS as no ESOPs. Overall marginally negative for sector.
MAN Financial-Sify Securities
* The Budget tried to maintain growth momentum by enhancing investment in agriculture and infrastructure. Health and education spend is increased further to ensure sustainability of the benefits of demographic divide. Direction on tax reforms is maintained. Stable tax policy to boost growth momentum.
Sector and stocks
* Positives on auto, consumer, engineering, oil & gas, telecom, while the negative impact is seen on cement, construction, IT and petrochemicals. The budget is neutral on financials and metals.
* Excise duty cut on petrol and diesel to reduce under recovery along with extension of 80IA benefits to gas pipeline industries augur well for HPCL, BPCL, IOC. Cairn is expected to be a loser.
* Customs duty cut on polyester and fibres and intermediate makes RIL and IPCL a loser.
Kotak Securities
* The Budget has done the right thing by focusing on sustainable long-term growth of the economy.
* While structural measures to control inflation may have an impact in the longer term, we expect the government to take fiscal and monetary steps to control inflation during the year.
Sector and stocks
* The industries benefiting will be capital goods and engineering, food processing and FMCG, hotels, logistics, oil & gas, pharmaceutical and textiles. Sectors with negative impact includes cement, construction, and information technology.
* Preferred stocks: Siemens, Crompton Greaves, Riddhi Siddhi Gluco Biols, Allcargo, Concor, IGL and Great Offshore.
Networth Stock Broking
* Budget 2007-08 has been favourable for the textiles, FMCG and power sectors and unfavourable for the construction, cement and IT sectors.
* APDRP extension to towns having more than 50,000 population is expected to benefit SEBs and distribution companies. Positive impact on Torrent Power.
* Transmission and distribution equipment manufacturers are likely to benefit from high spending under RGVY. Positive impact on Genus Overseas and EMCO.
* Coal block allocation to government companies to diversify the revenue streams of the PSU companies. Positive impact on NTPC, Neyveli Lignite, GMDC.
* Due to imposition of service tax on rental of immovable property, for retailers and malls the lease rentals might go up, thus further pressurising the EBIDTA margins of key players undertaking major expansions. Negative impact on Pantaloon Retail, Reliance Retail, Titan, Shopper's Stop and Trent.
Sharekhan
* Positive on capital goods and construction sector. BHEL, L&T, Siemens, Crompton Greaves, KEI Industries, Genus Overseas, Bharat Bijlee and Indo Tech Transformers emerge as good bets. On the FMCG sector front, Britannia, ITC, Nestle and Kohinoor, Agro Tech, Ruchi Soya stocks good performers.
* A negative view on the IT sector, Satyam Computer and HCL Tech as the most impacted stocks except TCS (as it has not given any stock options). Positive on the pharmaceuticals sector, Ranbaxy, Dr Reddy's and Cadila strong players. Ansal Properties and Parsvnath as good stocks for the real estate sector. A positive view for the tourism and tyre sector. Indian Hotels, Hotel Leela, Taj GVK and Royal Orchid emerge as promising stocks in the tourism sector.
BRICS Securities
* The Budget cannot be termed as positive for the India Inc. In our view, the ongoing correction in the markets has been primarily due to factors unrelated to the Budget.
* Nervousness on the interest rates, volatility in the global stock markets and rather expensive valuations have fuelled the recent correction. And with no positive indicators from the Budget, the market has seen the correction getting sharper.
* With the current 11.7% fall in the Sensex, we believe that the market valuations have largely corrected for the over-valuation that existed.
* However, we maintain our longstanding view that the annual Budget's influence continues to wane each year – it is the fiscal perspective that is more important. So we expect the market to continue on its natural path save some affected sectors.
Sector and stocks:
Our top picks are therefore, not driven by the Budget but by the price correction that has taken place in the last few days. We would overweight technology (Satyam, TCS and Infosys), energy (Reliance and ONGC) and automobiles (Maruti, Mahindra and Hero Honda).
* We would underweight matetials (primarily due to cement) and banks (given the continuing pressure on interest rates).
* We would be neutral on telecoms (positive weight being Bharti), infrastructure (positive on L&T) pharmaceuticals and media.
Emkay share & stock brokers
* Going ahead, the renewed initiatives announced for agriculture in this budget specifically with regard to increased plan outlays, creation of irrigational facilities, creation of water management cells, improved production due to better utilisation of seeds and fertilisers should ensure a sustainable growth in agriculture. We believe that the food-processing industry would be major beneficiaries of the sustained agriculture credit.
Sector and stocks
* The power sector will benefit from the expected new ultra mega projects, besides the Golden Quadrilateral project is also fast moving towards completion. On the other hand, the water and irrigation projects will not only benefit construction companies but also the domestic capital goods players as well as pumps and generator-set manufacturers.
* The long-term investment time frame and reasonably good risk to reward expectations are primary reasons, which we believe are attracting FII investment in the Indian equity market and we do not see any change in this trend, at least in the medium- to long-term.
* Stocks from FMCG, food processing, telecom, hotels, capital goods, power, oil & gas/allied services players to be impacted positively.
* Infrastructure, consumption and agri related sectors will be the major beneficiaries of the process.
First Global
* GDP growth may well slow down in the coming year -- we have two takes on this. The first is conventional: (i) the interest cycle is set to accelerate further on the upside. This will crimp growth, no doubt. But (ii) is perhaps even more relevant: in the new service tax regime, there is now virtually no service one can render in India (within boundaries, of course!) that is exempt from service tax.
* Overall, the finance minister may achieve his growth objectives in agriculture, and attract investments into infrastructure development with his Budget proposals; some of his direct and indirect tax initiatives may have seriously dampened business sentiment. The move to impose MAT on IT service companies and the increase in dividend distribution tax from 12.5% to 15% are expected to adversely impact several companies. Corporate India is certainly not pleased, nor are the markets.
Sector and stocks
* Auto components is a sector that is brimming with huge potential in the 'global outsourcing in manufacturing' story. Given its cost advantage, engineering skills, delivery capabilities and strong client base, India is well poised to play a significant role in global auto component outsourcing. Preferred stocks: Amtek Auto, Bharat Forge, MICO, Sundram Fasteners, Sona Koyo, Lumax.
* The Budget has by and large met the expectations of the FMCG sector with its pro-agriculture stance and its incentives for the food processing business. Preferred stocks: Marico, Dabur and HLL.
ASK-Raymond James
* Unless inflation "seasonally" falls off by end-March or so, expect more drastic steps on the monetary front - further interest rate hikes and liquidity contraction.
* Forthcoming assembly elections in vital states like UP can accelerate the time-frame for such action to tame inflation at any cost.
* We do not expect any significant reforms or policy initiatives over the next two years with election fever rising over time and the lack of political consensus or will, within the UPA and Congress itself.
* So, as we move into the new fiscal year, the economy is largely on auto pilot with two major risks to growth and liquidity:
* In sum, the risks facing equity markets today are higher than before in the last 3-4 years of a highly benign macro and global environment and the Indian market is unlikely to recover in any hurry.
Sector and stocks
* A positive scenario will emerge in the automobiles and oil & gas sector and the hospitality sector.
* Recommended stocks are Tata Motors, M&M, Bajaj Auto and RIL, IPCL, GAIL, and IOC for automobiles and oil & gas sector respectively as the best bets.
* As regards banking sector, it holds a neutral view and recommends HDFC, ICICI and SBI as strong beneficiaries. For cement and the FMCG sector and the IT sector and the construction, the report holds a negative view.
* For media/entertainment, pharmaceuticals, real estate and metals, it has a neutral view.
Deutsche Bank
* The 2007 Budget was neither overly negative nor positive in our view.
Instead, the recent market correction was driven more by the global equity sell-off – and investors ought to look beyond the Budget noise to assess whether India's underlying fundamental outlook has changed. We believe it hasn't, and this is an opportunity for long-term investors to start buying – especially those who missed the boat on the way up.
* The short-term outlook depends on global carry-trade unwind prospects. Typically, the risk lies in carry currencies with high yields where currencies are significantly above fair value, as well as those with large current account deficits. Our emerging market strategists believe the risk is greater with Turkey, Brazil, South Africa, Mexico, Hungary, Indonesia and the Philippines. India looks much better.
* Our economist believes lower tariffs, a tighter fiscal policy and higher borrowing costs will slow GDP growth over the next few quarters. However, the significant fiscal correction in recent years has tempered a major structural macroeconomic risk with India. In addition, the latest Economic Survey shows the savings rate has jumped to 32.4% of GDP in FY06 and is likely to cross 40% by 2020 – which can fund rapid growth in the financial system, infrastructure and manufacturing.
* On current estimates, the Sensex is now at around 15x March 2008 P/E. The market may still undershoot on the downside, but the froth appears to be largely out now.
Sector and stocks:
* Positive on the banking sector. State Bank of India, Punjab National Bank and Bank of Baroda emerge as lucrative scrips. Uncertainty looms over HDFC stock.
* Negative on IT sector with HCL Tech and Satyam Computers as uncertain scrips.
* Uncertainty over the retail sector with Pantaloon emerging as a laggard.
* Negative on the property sector with Ishaan emerging as an easily ignorable proposition.
* Neutral on the metals sector with Sesa Goa stock as unattractive scrip.
Anand Rathi Securities
* The budget for 2007-08 is overall neutral from the equity market perspective. Overall, it warrants a tag of being a 'non-event'.
* Last year we had argued that an event like Budget should be a non-event from an investment decision perspective.
Sector and stocks
* Five-year tax holiday for hotels in NCR region between April 2007 and March 2010, will benefit Royal Orchid Hotels Ltd, which is planning to build a 4-star property in this region in the near future.
* We expect the decrease in customs duty to have a positive impact on steel producers.
* Sectors benefiting from the Budget include agro-products, steel, hospitality, FMCG, pharmaceutical, pipes and textiles. The industries getting negative impact includes construction and real estate, information technology and logistics and offshore.
* Monsanto, Jain Irrigation, Tata steel, Britannia, Royal Orchid Hotel Ltd, Cipla, PSL, Sangam India are preferred stocks.
Thursday, March 01, 2007
China And India's Tuesday Bust:
A Local's Perspective
Editor's Note: After the bust in Chinese stocks yesterday, which turned into a global bust, I called on DailyWealth's "Man in Asia" to give us his perspective. Rahul Saraogi manages Atyant Capital (www.atyantcapital.com), a hedge fund specializing in small-cap Indian stocks.
Steve Sjuggerud
"Shanghai Index Plunges 8.8%," read a Wall Street Journal headline yesterday. At the same time, the Japanese yen strengthened by 3%.I was surprised to see that the Journal's 1,000-word article didn't mention the word "yen." It should have. It is my opinion that the fall in Chinese stocks and the rise in
the yen are strongly related
Up until yesterday, Wall Street thought it had discovered a perpetual money-making machine, called the Yen Carry Trade. As much as $1 trillion is thought to be in this trade, which has been incredibly profitable so far.
The Yen Carry Trade is simple
Right now, big investors can borrow Japanese yen at an interest rate of 0.5%. As long as they can invest that in something that pays more, they can earn the spread, or "carry." It's usually done by investing in U.S. dollars that pay 5%.In other words, big investors simply borrow yen at 0.5%, invest in dollars paying 5%, and pocket the difference. They do it with leverage, so the returns are magnified to be phenomenally profitable.
As long as the dollar and the yen are relatively stable, the profits are huge. At first, investors just did it by selling yen and buying U.S. Treasuries. But steadily, investors have borrowed yen to take on more and more risk including buying stocks in China and my home country of India.
The leverage these guys take on magnifies the risks...
If the dollar strengthens versus the yen, the profits just get silly. But if the yen strengthens versus the dollar, these big investors can lose a substantial amount of money. The yen has been weakening for a long time, so this risk hadn't shown itself until yesterday
Yesterday, investors in China (and then the rest of the world) got scared. The market was falling. If you had borrowed a mountain of money in yen, you were now in the red, big time. You absolutely had to close out your carry trade to cut your losses before they became too great.
The initial trade was to buy Chinese stocks and sell the yen (the carry trade portion). So to close out that trade, investors had to sell Chinese stocks and buy the yen. Therefore, yesterday Chinese stocks crashed (triggering a domino effect throughout the world), and the yen soared.
The success of the Yen Carry Trade created a self-perpetuating cycle. The trade's success attracts more people, which weakens the yen and makes the trade more profitable. That, in turn, attracts even more people. The yen is now incredibly weak it's cheaper than it was before the Plaza Accord in 1985 (on a trade-weighted basis). It soared by 100% against the dollar after that.
In short, the Yen Carry Trade has created a flood of money around the world, looking for any investment that can make more than 0.5%. In other words, just about anything For example, high-yielding currencies, like the New Zealand dollar, have appreciated significantly. Yields on real estate in developed markets have fallen to all-time lows.
And debt-funded private-equity deals have risen to all-time highs.
Asian economies like Thailand, China, and India are now facing an unprecedented "problem" of excessive money inflows.
India, for its part, appears to have benefited significantly from the carry trade The huge influx of money has created a benign interest rate environment that has fueled consumption and investment. All the easy money entering India has fueled a boom that has used up all the "slack" in the economy. India has the raw human capital and the potential to produce all the goods and services that are in now in short supply. But there are numerous structural problems with the economy, mostly related to the government.
These problems are easy to gloss over when money is easy, as it is now. But to me, the structural problems and the easy money combined are a potent mix that will become a problem for the Indian economy. It's already starting. For example, wages are growing at 20% a year. Property prices and housing costs for urban India are exploding. Headline inflation is at 6.73% (which grossly understates real inflation), but short-term interest rates are excessively low at 7.5%.
I am not bearish on India; I believe it is one of the best economic growth stories for this century. It also has one of the best pools of human talent, entrepreneurs, and companies in the world. But the excess speculative money that's now here, caused significantly by the Yen Carry Trade, is getting carried away with the India story. It ultimately will do a disservice to India, causing our economy to overheat.
The financial community is driven by fads and trends just like any other social community. Shifts between fads can be sudden and unpredictable and can have serious implications for investors, particularly in emerging markets. Given the problems the carry trade is beginning to create everywhere in the world, and given the almost one-sidedness of the trade, it is time to start taking the opposite view and to hold tight for what is likely to be the mother of allreversals.
The unwinding of the Yen Carry Trade, when it finally arrives, could be scary. I don't know if the 8.8% one-day fall in China or the fall in the Dow yesterday was the beginning of the end of the carry trade. But its time will come.
Therefore, I think it is time to take money out of the top-down India play, the China play, and other risk plays. The risk isn't worth the reward now.
China And India's Tuesday Bust:
A Local's Perspective
Editor's Note: After the bust in Chinese stocks yesterday, which turned into a global
bust, I called on DailyWealth's "Man in Asia" to give us his perspective. Rahul
Saraogi manages Atyant Capital (www.atyantcapital.com), a hedge fund specializing
in small-cap Indian stocks.
Steve Sjuggerud
"Shanghai Index Plunges 8.8%," read a Wall Street Journal headline yesterday. At
the same time, the Japanese yen strengthened by 3%.
I was surprised to see that the Journal's 1,000-word article didn't mention the word
"yen." It should have. It is my opinion that the fall in Chinese stocks and the rise in
the yen are strongly related
Up until yesterday, Wall Street thought it had discovered a perpetual money-making
machine, called the Yen Carry Trade. As much as $1 trillion is thought to be in this
trade, which has been incredibly profitable so far.
The Yen Carry Trade is simple
Right now, big investors can borrow Japanese yen at an interest rate of 0.5%. As
long as they can invest that in something that pays more, they can earn the spread,
or "carry." It's usually done by investing in U.S. dollars that pay 5%.
In other words, big investors simply borrow yen at 0.5%, invest in dollars paying
5%, and pocket the difference. They do it with leverage, so the returns are
magnified to be phenomenally profitable.
As long as the dollar and the yen are relatively stable, the profits are huge.
At first, investors just did it by selling yen and buying U.S. Treasuries. But steadily,
investors have borrowed yen to take on more and more risk including buying
stocks in China and my home country of India.
The leverage these guys take on magnifies the risks...
If the dollar strengthens versus the yen, the profits just get silly. But if the yen
strengthens versus the dollar, these big investors can lose a substantial amount of
money. The yen has been weakening for a long time, so this risk hadn't shown
itself
until yesterday
Yesterday, investors in China (and then the rest of the world) got scared. The market
was falling. If you had borrowed a mountain of money in yen, you were now in the
red, big time. You absolutely had to close out your carry trade to cut your losses
before they became too great.
The initial trade was to buy Chinese stocks and sell the yen (the carry trade portion).
So to close out that trade, investors had to sell Chinese stocks and buy the yen.
Therefore, yesterday Chinese stocks crashed (triggering a domino effect throughout
the world), and the yen soared. Plain as day.
The success of the Yen Carry Trade created a self-perpetuating cycle. The trade's
success attracts more people, which weakens the yen and makes the trade more
profitable. That, in turn, attracts even more people. The yen is now incredibly weak
it's cheaper than it was before the Plaza Accord in 1985 (on a trade-weighted
basis). It soared by 100% against the dollar after that.
In short, the Yen Carry Trade has created a flood of money around the world, looking
for any investment that can make more than 0.5%. In other words, just about
anything
For example, high-yielding currencies, like the New Zealand dollar, have appreciated
significantly. Yields on real estate in developed markets have fallen to all-time lows.
And debt-funded private-equity deals have risen to all-time highs.
Page 2
Asian economies like Thailand, China, and India are now facing an unprecedented
"problem" of excessive money inflows.
India, for its part, appears to have benefited significantly from the carry trade The
huge influx of money has created a benign interest rate environment that has fueled
consumption and investment.
All the easy money entering India has fueled a boom that has used up all the "slack"
in the economy. India has the raw human capital and the potential to produce all the
goods and services that are in now in short supply. But there are numerous
structural problems with the economy, mostly related to the government.
These problems are easy to gloss over when money is easy, as it is now. But to me,
the structural problems and the easy money combined are a potent mix that will
become a problem for the Indian economy. It's already starting. For example, wages
are growing at 20% a year. Property prices and housing costs for urban India are
exploding. Headline inflation is at 6.73% (which grossly understates real inflation),
but short-term interest rates are excessively low at 7.5%.
I am not bearish on India; I believe it is one of the best economic growth stories for
this century. It also has one of the best pools of human talent, entrepreneurs, and
companies in the world. But the excess speculative money that's now here, caused
significantly by the Yen Carry Trade, is getting carried away with the India story. It
ultimately will do a disservice to India, causing our economy to overheat.
The financial community is driven by fads and trends just like any other social
community. Shifts between fads can be sudden and unpredictable and can have
serious implications for investors, particularly in emerging markets.
Given the problems the carry trade is beginning to create everywhere in the world,
and given the almost one-sidedness of the trade, it is time to start taking the
opposite view and to hold tight for what is likely to be the mother of all
reversals.
The unwinding of the Yen Carry Trade, when it finally arrives, could be scary. I don't
know if the 8.8% one-day fall in China or the fall in the Dow yesterday was the
beginning of the end of the carry trade. But its time will come.
Therefore, I think it is time to take money out of the top-down India play, the China
play, and other risk plays. The risk isn't worth the reward now.
A Local's Perspective
Editor's Note: After the bust in Chinese stocks yesterday, which turned into a global
bust, I called on DailyWealth's "Man in Asia" to give us his perspective. Rahul
Saraogi manages Atyant Capital (www.atyantcapital.com), a hedge fund specializing
in small-cap Indian stocks.
Steve Sjuggerud
"Shanghai Index Plunges 8.8%," read a Wall Street Journal headline yesterday. At
the same time, the Japanese yen strengthened by 3%.
I was surprised to see that the Journal's 1,000-word article didn't mention the word
"yen." It should have. It is my opinion that the fall in Chinese stocks and the rise in
the yen are strongly related
Up until yesterday, Wall Street thought it had discovered a perpetual money-making
machine, called the Yen Carry Trade. As much as $1 trillion is thought to be in this
trade, which has been incredibly profitable so far.
The Yen Carry Trade is simple
Right now, big investors can borrow Japanese yen at an interest rate of 0.5%. As
long as they can invest that in something that pays more, they can earn the spread,
or "carry." It's usually done by investing in U.S. dollars that pay 5%.
In other words, big investors simply borrow yen at 0.5%, invest in dollars paying
5%, and pocket the difference. They do it with leverage, so the returns are
magnified to be phenomenally profitable.
As long as the dollar and the yen are relatively stable, the profits are huge.
At first, investors just did it by selling yen and buying U.S. Treasuries. But steadily,
investors have borrowed yen to take on more and more risk including buying
stocks in China and my home country of India.
The leverage these guys take on magnifies the risks...
If the dollar strengthens versus the yen, the profits just get silly. But if the yen
strengthens versus the dollar, these big investors can lose a substantial amount of
money. The yen has been weakening for a long time, so this risk hadn't shown
itself
until yesterday
Yesterday, investors in China (and then the rest of the world) got scared. The market
was falling. If you had borrowed a mountain of money in yen, you were now in the
red, big time. You absolutely had to close out your carry trade to cut your losses
before they became too great.
The initial trade was to buy Chinese stocks and sell the yen (the carry trade portion).
So to close out that trade, investors had to sell Chinese stocks and buy the yen.
Therefore, yesterday Chinese stocks crashed (triggering a domino effect throughout
the world), and the yen soared. Plain as day.
The success of the Yen Carry Trade created a self-perpetuating cycle. The trade's
success attracts more people, which weakens the yen and makes the trade more
profitable. That, in turn, attracts even more people. The yen is now incredibly weak
it's cheaper than it was before the Plaza Accord in 1985 (on a trade-weighted
basis). It soared by 100% against the dollar after that.
In short, the Yen Carry Trade has created a flood of money around the world, looking
for any investment that can make more than 0.5%. In other words, just about
anything
For example, high-yielding currencies, like the New Zealand dollar, have appreciated
significantly. Yields on real estate in developed markets have fallen to all-time lows.
And debt-funded private-equity deals have risen to all-time highs.
Page 2
Asian economies like Thailand, China, and India are now facing an unprecedented
"problem" of excessive money inflows.
India, for its part, appears to have benefited significantly from the carry trade The
huge influx of money has created a benign interest rate environment that has fueled
consumption and investment.
All the easy money entering India has fueled a boom that has used up all the "slack"
in the economy. India has the raw human capital and the potential to produce all the
goods and services that are in now in short supply. But there are numerous
structural problems with the economy, mostly related to the government.
These problems are easy to gloss over when money is easy, as it is now. But to me,
the structural problems and the easy money combined are a potent mix that will
become a problem for the Indian economy. It's already starting. For example, wages
are growing at 20% a year. Property prices and housing costs for urban India are
exploding. Headline inflation is at 6.73% (which grossly understates real inflation),
but short-term interest rates are excessively low at 7.5%.
I am not bearish on India; I believe it is one of the best economic growth stories for
this century. It also has one of the best pools of human talent, entrepreneurs, and
companies in the world. But the excess speculative money that's now here, caused
significantly by the Yen Carry Trade, is getting carried away with the India story. It
ultimately will do a disservice to India, causing our economy to overheat.
The financial community is driven by fads and trends just like any other social
community. Shifts between fads can be sudden and unpredictable and can have
serious implications for investors, particularly in emerging markets.
Given the problems the carry trade is beginning to create everywhere in the world,
and given the almost one-sidedness of the trade, it is time to start taking the
opposite view and to hold tight for what is likely to be the mother of all
reversals.
The unwinding of the Yen Carry Trade, when it finally arrives, could be scary. I don't
know if the 8.8% one-day fall in China or the fall in the Dow yesterday was the
beginning of the end of the carry trade. But its time will come.
Therefore, I think it is time to take money out of the top-down India play, the China
play, and other risk plays. The risk isn't worth the reward now.
1st Cut of Union Budget 07-08
General
Dividend distribution tax raised to 15% from 12.5%: negative for all dividend paying companies
Dividends distributed by money market mutual funds and liquid mutual funds will now be paying dividend distribution tax at 25%.
Levy of additional 1% cess for funding of secondary and higher education
Cement
Overall impact : Negative
Increasing excise duty from Rs400 to Rs600 for price above Rs190 per bag and reducing from Rs400 to Rs350 is a negative as cement price per bag in most of the places is above Rs190 at present. With demand strong we believe the increase in the duty would be largely passed on, but continous efforts by the Government to curb the price increase and reduce the profitability of the industry is visible.
Increase in allocation for Bharat Nirman, Rural housing and roads is positive for the industry from demand side.
Oil and Gas, Petrochemicals - overall positive
Ø Reduction in ad valorem excise duties for petrol and diesel - positive for Oil Marketing Companies IOC, BPCL and HPCL.
Ø Reduction in custom duties on Plastics, polyester and intermediates - positive for Reliance Industries, GAIL, IOC and IPCL
Ø Infrastructure status to cross-country pipeline projects - positive for Reliance Industries, GAIL, GSPL, Gujarat Gas and Indraprastha Gas Ltd.
Ø Extension of service tax to mining of oil and gas - marginally negative for ONGC, Reliance, and Cairn India
Healthcare: Positive
Announcement
Impact on Companies
Healthcare allocation increased
Positive for Apollo Group, Max India
Allocation for immunization program
Positive for Panacea Biotech
HIV eradication to gain momentum
Positive for MNC, Cipla, Wockhardt
150% weighted average tax deduction for R&D expenses extended for 5 years
Positive for research driven pharma companies-Ranbaxy, DRRL, Sun Pharma, Cadila Healthcare, Biocon, Glenmark
Peak customs duty on chemicals reduced from 12.5% to 7.5%
Positive for API manufacturing companies
Removal of clinical trials from service tax net
Positive for research and CRO companies
Medical insurance deduction u/s 80DD increased to Rs15,000
Positive for Apollo Group, Max India as more population would be covered by medical insurance
Telecom: Positive
Announcement
Impact on Companies
Committee to be formed to move towards a uniform licensee fee regime from 6-10% to an estimated 6%
Positive for all telecom companies, benefit to
IT
Impact - Negative (as surprising, the impact can be deeper and sharper)
· Higher education allocation by 34.2% to Rs32,352cr to be positive for IT education companies like NIIT, Aptech, Educomp Solutions, etc.
· Almost doubling of e-Governance outlay both at centre and state level to benefit companies like Vakrangee to major extent and TCS and other Government focused companies to some extent
· MAT to be applied to IT companies to 11.2% on book profits
· Inclusion of ESOPs under the FBT net negative for the sector
· Non-extension of STP benefits beyond 2009 negative especially for medium & smaller sized IT companies
Steel
Impact - Positive
· Custom duty unchanged at 5% as expected
· All coking-coal import irrespective of ash content to be fully exempt from custom duty to be positive across the sector as most companies (small & large) have exposure to coking coal imports
· Export duty of Rs300/MT levied on iron ore and concentrates: Negative for Sesa Goa esp. and large integrated players like Tata Steel and SAIL to some extent.
FMCG - Overall impact - Positive
Ø No implementation of VAT on cigarettes. Specific excise duty on cigarettes increased by about 5%.
Ø Excise duty (excluding cess) on biris, will be raised from Rs7 to Rs11 per thousand for non-machine made biris and from Rs17 to Rs24 per thousand for machine made biris. There is an exemption from excise duty for unbranded biris up to 20 lakh biris in a year.
Ø Pan masala containing tobacco will continue to bear an excise duty of 66%. However, in the case of pan masala not containing tobacco, the duty will be reduced from 66% to 45%.
Ø A Special Purpose Tea Fund launched for re-plantation and rejuvenation of tea. Government plans to soon put in place similar financial mechanisms for coffee.
Ø Excise duty biscuits fully exempted whose retail sale price does not exceed Rs50 per kilogram.
Ø Excise duty on all kinds of food mixes including instant mixes including idli and dosa mixes fully exempt.
Ø Duty on food processing machinery reduced from 7.5% to 5%.
Ø Crude as well as refined edible oils exempt from the additional CV duty of 4%.
Ø Duty on sunflower oil, both crude and refined reduced by 15 percentage points.
Ø Excise duty on parts of footwear reduced from 16% to 8%.
Power sector: Neutral
The government under achieved its Xth Five Year Plan target in capacity addition which was targeted initially to be 46,000MW, then lowered to 41,100MW and finally to 34,024MW. It achieved 23,163MW during the period. It has not made mention of the addition during the year except that they expect two more UMPP's to be allotted by July 07.
Tata power, reliance energy, lanco, ntpc to be likely beneficiaries - dependent on competitive bidding route.
Increase in budgetary support for APDRP from Rs650crs in 2006-07 to Rs800crs next year, will help to monitor usage of power being consumed by the users - meters could likely benefit.
Meter mfg companies viz genus, emco to be likely beneficiaries
Upped allocation under Rajiv Gandhi Grameen Vidyutikaran Yojana from Rs3000crs to Rs3983crs.
No mention made for the years target in capacity addition
Pipe mfg: Positive
Section 80IA of the Income Tax Act lists the infrastructure facilities that are entitled to tax concessions. Cross country natural gas distribution network, including gas pipeline and storage facilities integrated to the network. Pipe manufacturing companies to be likely beneficiaries
Customs duty cut announced in Jan on nonferrous metals remain same. Benefit to the capital goods segment.
Real Estate: Neutral
Service tax on Office space rentals
Impact- Negative. This is likely to increase rentals in the Metro cities which are already in the range of Rs300-350. This will negatively impact commercial real estate demand in metro cities and would percolate in the lower tier cities in the long run.
No mention of extension of Sec80 (IB) 10 for qualified projects
Impact- Neutral. This was on expected lines and we do not see this as a negative. Qualified projects receiving approval after March 2007 will not receive deduction in income tax.
Tax exemption on hotels and convention centres in the NCR region - Positive
Impact- Positive. Many NCR based real estate developers are in the process of developing 3-4-5 star hotels over the next 2-3 years. The government has provided a 5 year tax holiday for companies developing 2-3-4 star hotels and convention centres with minimum sitting capacity of 3000 persons and operational by March 2010 in the NCR region.
Banking: Neutral
No mention of lowering the maturity ceiling on tax free deposits from current 5 years
Impact- Neutral. There has been no mention on lowering maturity from the existing 5 years ceiling on tax free bank deposits. This would have increased deposit mobilization in the banking sector.
Infrastructure & Construction
Overall impact: Positive
National Highway allocation increased to Rs126bn from Rs99.55bn
Outlay for accelerated irrigation benefit programme at Rs110bn
Allocated Rs40bn for rural roads
Scheme to use forex reserves for infrastructure development
MF's allowed to launch dedicated infrastructure funds
31.6% increase in allocation Bharat Nirman programme
Additional 2.4mn hectares of irrigated area to be created by FY08
Golden Quadrilateral nearly complete, targeted completion for NSEW 2009
NHDP phase-III, V and VI in advanced stages
General
Dividend distribution tax raised to 15% from 12.5%: negative for all dividend paying companies
Dividends distributed by money market mutual funds and liquid mutual funds will now be paying dividend distribution tax at 25%.
Levy of additional 1% cess for funding of secondary and higher education
Cement
Overall impact : Negative
Increasing excise duty from Rs400 to Rs600 for price above Rs190 per bag and reducing from Rs400 to Rs350 is a negative as cement price per bag in most of the places is above Rs190 at present. With demand strong we believe the increase in the duty would be largely passed on, but continous efforts by the Government to curb the price increase and reduce the profitability of the industry is visible.
Increase in allocation for Bharat Nirman, Rural housing and roads is positive for the industry from demand side.
Oil and Gas, Petrochemicals - overall positive
Ø Reduction in ad valorem excise duties for petrol and diesel - positive for Oil Marketing Companies IOC, BPCL and HPCL.
Ø Reduction in custom duties on Plastics, polyester and intermediates - positive for Reliance Industries, GAIL, IOC and IPCL
Ø Infrastructure status to cross-country pipeline projects - positive for Reliance Industries, GAIL, GSPL, Gujarat Gas and Indraprastha Gas Ltd.
Ø Extension of service tax to mining of oil and gas - marginally negative for ONGC, Reliance, and Cairn India
Healthcare: Positive
Announcement
Impact on Companies
Healthcare allocation increased
Positive for Apollo Group, Max India
Allocation for immunization program
Positive for Panacea Biotech
HIV eradication to gain momentum
Positive for MNC, Cipla, Wockhardt
150% weighted average tax deduction for R&D expenses extended for 5 years
Positive for research driven pharma companies-Ranbaxy, DRRL, Sun Pharma, Cadila Healthcare, Biocon, Glenmark
Peak customs duty on chemicals reduced from 12.5% to 7.5%
Positive for API manufacturing companies
Removal of clinical trials from service tax net
Positive for research and CRO companies
Medical insurance deduction u/s 80DD increased to Rs15,000
Positive for Apollo Group, Max India as more population would be covered by medical insurance
Telecom: Positive
Announcement
Impact on Companies
Committee to be formed to move towards a uniform licensee fee regime from 6-10% to an estimated 6%
Positive for all telecom companies, benefit to
IT
Impact - Negative (as surprising, the impact can be deeper and sharper)
· Higher education allocation by 34.2% to Rs32,352cr to be positive for IT education companies like NIIT, Aptech, Educomp Solutions, etc.
· Almost doubling of e-Governance outlay both at centre and state level to benefit companies like Vakrangee to major extent and TCS and other Government focused companies to some extent
· MAT to be applied to IT companies to 11.2% on book profits
· Inclusion of ESOPs under the FBT net negative for the sector
· Non-extension of STP benefits beyond 2009 negative especially for medium & smaller sized IT companies
Steel
Impact - Positive
· Custom duty unchanged at 5% as expected
· All coking-coal import irrespective of ash content to be fully exempt from custom duty to be positive across the sector as most companies (small & large) have exposure to coking coal imports
· Export duty of Rs300/MT levied on iron ore and concentrates: Negative for Sesa Goa esp. and large integrated players like Tata Steel and SAIL to some extent.
FMCG - Overall impact - Positive
Ø No implementation of VAT on cigarettes. Specific excise duty on cigarettes increased by about 5%.
Ø Excise duty (excluding cess) on biris, will be raised from Rs7 to Rs11 per thousand for non-machine made biris and from Rs17 to Rs24 per thousand for machine made biris. There is an exemption from excise duty for unbranded biris up to 20 lakh biris in a year.
Ø Pan masala containing tobacco will continue to bear an excise duty of 66%. However, in the case of pan masala not containing tobacco, the duty will be reduced from 66% to 45%.
Ø A Special Purpose Tea Fund launched for re-plantation and rejuvenation of tea. Government plans to soon put in place similar financial mechanisms for coffee.
Ø Excise duty biscuits fully exempted whose retail sale price does not exceed Rs50 per kilogram.
Ø Excise duty on all kinds of food mixes including instant mixes including idli and dosa mixes fully exempt.
Ø Duty on food processing machinery reduced from 7.5% to 5%.
Ø Crude as well as refined edible oils exempt from the additional CV duty of 4%.
Ø Duty on sunflower oil, both crude and refined reduced by 15 percentage points.
Ø Excise duty on parts of footwear reduced from 16% to 8%.
Power sector: Neutral
The government under achieved its Xth Five Year Plan target in capacity addition which was targeted initially to be 46,000MW, then lowered to 41,100MW and finally to 34,024MW. It achieved 23,163MW during the period. It has not made mention of the addition during the year except that they expect two more UMPP's to be allotted by July 07.
Tata power, reliance energy, lanco, ntpc to be likely beneficiaries - dependent on competitive bidding route.
Increase in budgetary support for APDRP from Rs650crs in 2006-07 to Rs800crs next year, will help to monitor usage of power being consumed by the users - meters could likely benefit.
Meter mfg companies viz genus, emco to be likely beneficiaries
Upped allocation under Rajiv Gandhi Grameen Vidyutikaran Yojana from Rs3000crs to Rs3983crs.
No mention made for the years target in capacity addition
Pipe mfg: Positive
Section 80IA of the Income Tax Act lists the infrastructure facilities that are entitled to tax concessions. Cross country natural gas distribution network, including gas pipeline and storage facilities integrated to the network. Pipe manufacturing companies to be likely beneficiaries
Customs duty cut announced in Jan on nonferrous metals remain same. Benefit to the capital goods segment.
Real Estate: Neutral
Service tax on Office space rentals
Impact- Negative. This is likely to increase rentals in the Metro cities which are already in the range of Rs300-350. This will negatively impact commercial real estate demand in metro cities and would percolate in the lower tier cities in the long run.
No mention of extension of Sec80 (IB) 10 for qualified projects
Impact- Neutral. This was on expected lines and we do not see this as a negative. Qualified projects receiving approval after March 2007 will not receive deduction in income tax.
Tax exemption on hotels and convention centres in the NCR region - Positive
Impact- Positive. Many NCR based real estate developers are in the process of developing 3-4-5 star hotels over the next 2-3 years. The government has provided a 5 year tax holiday for companies developing 2-3-4 star hotels and convention centres with minimum sitting capacity of 3000 persons and operational by March 2010 in the NCR region.
Banking: Neutral
No mention of lowering the maturity ceiling on tax free deposits from current 5 years
Impact- Neutral. There has been no mention on lowering maturity from the existing 5 years ceiling on tax free bank deposits. This would have increased deposit mobilization in the banking sector.
Infrastructure & Construction
Overall impact: Positive
National Highway allocation increased to Rs126bn from Rs99.55bn
Outlay for accelerated irrigation benefit programme at Rs110bn
Allocated Rs40bn for rural roads
Scheme to use forex reserves for infrastructure development
MF's allowed to launch dedicated infrastructure funds
31.6% increase in allocation Bharat Nirman programme
Additional 2.4mn hectares of irrigated area to be created by FY08
Golden Quadrilateral nearly complete, targeted completion for NSEW 2009
NHDP phase-III, V and VI in advanced stages
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