IMPACT: Neutral for markets

My view is that the budget has been neutral to the markets over all. The negatives have been balanced out by the positives. Skeptics may argue for a marginally negative view, but we had rather stay clear of the argument and take comfort in the growth story. Current valuations vis-à-vis growth is still attractive enough for investors.

Sector / Stock impact:

Positive for

• Textile – TUF extension by 5 years to 2012 will improve the dwindling sentiments in textile sector and would be positive for the sector as a whole. The valuations have come-off significantly and one could look forward to better risk-return profile in this sector.
• Hotels – Parsvnath, Anant Raj and Royal Orchid Hotels have intentions of hotel projects in NCR region and thus benefit from the 5-year tax holidays announced for 2/3/4 star/convention centers.
• Biscuit – Low cost biscuit (
• Pipes & drip Irrigation – Jain Irrigation & Finolex pipes benefit from the excise duty reduction from 7.5% to 5%. Jain Irrigation further benefits from irrigation initiative announced under the Bharat Nirman Project.
• Coffee/Spice/Rubber – Special purpose funds for re-plantation would be positive for Tata Coffee & Mcleod Russel
• Oil & Gas – Sec-80IA extended to gas pipelines. Likely beneficiaries would be GAIL and GSPL.
• Cigarettes – Excise duty has been hiked. Normally this is negative for cigarette manufactures. However, each hike in past has resulted in cigarette manufactures taking this as an opportunity to hike prices more than the duty and hence gaining overall. Thus another opportunity for them to benefit from price hikes this time. Major gainers are ITC, Godfrey Phillips & VST.

Negative for

• Technology – Companies getting tax benefits under Sec-10 A / B would now fall under MAT. This would result in higher tax outflows in next 2 years as this section related benefits were to expire in 2009. Post 2009, the companies would anyway be required to pay tax and claim credit for whatever they had paid in earlier years (under this new MAT). Over all this implies that the cash outflows will shift from 2009 to next two years. This may not impact the overall liability of a company but may impact the time-value of the out flow as it is getting preponed. Moreover, companies having higher effective taxes will not get covered under MAT. The likely companies to get adversely impacted are HCL Tech (effective tax rate of 2.1% on TTM) and Tech Mahindra (3.5%) amongst the larger companies. Smaller companies are mostly impacted like Prithvi (0.5%), Zensar (0.3%), Hexaware (1.3%), Nucleus (1.7%), 3i Infotech (1.8%) and Northgate (3.9%). All other smaller companies like Mastek, Aztec, Mphasis, Cranes, i-Gate also will be adversely impacted as their effective tax rates are between 5-10%.
• Cement – Excise duty is now at Rs350/Tn (if MRP <>

Overview: "Overall a non-event"

This year's budget has focused on the following:

• Targeting inflation: High weight WPI constituents have benefited by way of reduction of duties. Clearly this government is now serious in tackling inflation. This does not come as a surprise.
• "Stable & growth inductive" tax structure: Not much change in major items.
  • The surprise was on dividend distribution tax which should impact the market sentiments negatively.
  • In another move the tax arbitrage enjoyed by investors in mutual funds was further reduced.
  • However, the mutual funds / institutional investors can create delivery based short positions. This should result in new thematic mutual fund products (like long-short funds etc).
  • MAT being made applicable to companies enjoying benefits under Sec-10 A/B is likely to impact some IT and Gems & Jewelry companies negatively.
  • Excise duty structure for cement companies is likely to have negative impact on cement companies as cement prices are much higher than the cut-off price of Rs190/bag (for lower excise duty of Rs350/Tn instead of current Rs400/Tn). Over all the excise duties will go up by Rs10/bag (assuming no pass on).
  • Low priced biscuit manufactures to get benefit of 0% excise duty. Main beneficiary would be Britannia.
• Social sectors and infrastructure continues to attract major attention. However, visibility of change or impact of measures would be long-term in nature and not measurable on immediate basis
• TUF (discounted funding scheme for Textile companies) has been extended till 2012 (March). Extension of one year was expected. The extension of five years comes as a pleasant surprise for textile companies.
• Upcoming hotel projects in NCR (and neighboring regions) get a boost by way of 5-year tax holidays.