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Digesting the fine print

Rex Mathew
1 March 2005


The day after the big b-day rally, markets gave up some of the gains as expected. The initial euphoria died as many analysts came out with more sober opinions on the budget. The 'devil in the details' came out overnight and yesterday's big winners in banking, and oil and gas sectors took a beating.

There was all round dissatisfaction about the reduction in depreciation benefits for plant and machinery as well as the move to tax fringe benefits at the hands of the employer. These two steps are widely perceived to take away the benefits of reduction in corporate tax rates. Foreign brokerages CLSA and Merrill Lynch came out with post-budget outlooks which were less than enthusiastic.

Both maintained their general outlook on the economy and the markets but complained about the lost opportunity for grand measures and absence of disinvestment plans. Citigroup maintained the growth target for the coming year at 7.5 per cent. Rating agency Fitch, retained the country's sovereign and foreign exchange rating while expressing some disappointment on the budget and fiscal targets. Standard & Poor's (See: Fiscal deficit a worrying factor: Standard & Poor's) also expressed disappointment over the fiscal condition.

The Sensex closed at 6651, down 63 points and the Nifty at 2084, down 19 points. Nifty futures closed at a discount to the spot index.

US markets remained weak yesterday on firm oil prices. Indian ADR's were a mixed bag. ADR's of HDFC Bank, ICICI Bank, Tata Motors and Wipro ended with gains while Infosys, Satyam and VSNL closed in the red.

RBI came out with the detailed banking roadmap as promised by the finance minister in his budget speech. The roadmap is more in line with the conservative views expressed earlier by the RBI governor than the more liberal views by the finance ministry. The overriding principle seems to be achieving a well diversified ownership structure for banks. Shareholding by a foreign bank in an Indian bank is limited to 5 per cent. Foreign banks can set up fully owned subsidiaries and can expand the existing branch network. Corporate houses will be allowed to own up to 10 per cent in Indian banks. SBI indicated at more acquisitions, both overseas and domestic, while expressing disappointment in not increasing FII investment limits. Bank stocks lost most of yesterday's gains. ICICI Bank lost close to 3 per cent, SBI lost 3 per cent and HDFC Bank lost close to 2 per cent.

IT stocks were the major losers with heavyweights Infosys, TCS and Wipro ending deep in the red. Satyam lost 4 per cent and the second rung IT players also lost ground. The proposed tax on fringe benefits to employees is perceived as a big negative for the IT companies as they are the most liberal in handing out employee benefits.

Indianoil was a big loser, losing more than 4 per cent after the company came out with figure of more than Rs. 6,000 crores as subsidy burden for the next year. The company anticipates that gains in crude duty cuts will be offset by losses in refining margins. Other oil marketing stocks HPCL and BPCL also lost ground while crude producer and yesterday's loser ONGC gained. Standalone refiners Kochi Refineries and Chennai Petroleum also lost ground.

Auto stocks were in the news following the release of February sales data. Maruti turned in a disappointing performance with only 3 per cent volume growth yoy and sales of the bread and butter 800 model dropping by more than 40 per cent. The stock lost more than 2 per cent. Two wheeler biggies Hero Honda and Bajaj posted impressive volume growth, with the latter making substantial gains in the motorcycle segment.

FMCG majors ITC, HLL and P&G all gained on expectations of a demand pickup after reduction in personal income tax rates. ITC gained more than 3 per cent and HLL went up by more than 1 per cent. Tyre companies continued their uptrend after the cut in excise duties. Construction majors L&T and Gammon India notched up significant gains while metal stocks ended weak.

Sugar stocks gave up most of the gains made yesterday after the market realized that the sugar package would benefit the mills in the co-operative sector more. The increase in excise duty on molasses is a negative for the sugar sector. Textile stocks clocked substantial gains on the back of positive budget announcements for the sector.

Asian markets traded positive today, the exceptions being Hong Kong and Malaysia. European markets were firm in opening trades. US markets would take some cues from oil prices. While a correction was anticipated and is healthy after a big rally, the weakness towards the close may be an indicator of a lackluster market tomorrow. Markets can be expected to remain steady with a downward bias over the rest of the week. A buildup in the F&O segment or substantial inflows could affect this outlook.

*Disclaimer: The author does not have any position in the stocks specifically mentioned above at the time of writing this article. This analysis / report is only for the purpose of information and is not an investment advice. Readers are advised to consult a certified financial advisor before taking any investment decisions. While efforts have been made to ensure the accuracy of the information provided in the content the author or publisher shall not be held responsible for any loss caused to any person whatsoever.

Other articles by Rex Mathew

List of general reports on markets

List of reports on Union Budget 2005-06

List of general reports on finance

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Digesting the fine print