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The money that was on the sidelines due to budget uncertainty found its way back to the
bourses after the presentation of the Union Budget 2005-06 on 28 February 2005. In the
four trading sessions between 28 February to 3 March, FIIs pumped in a net Rs 1947.10
crore. The inflow included a massive block deal of Rs 744 crore on the ONGC counter.
Market men partly attribute the strong inflow to investments from some of the newly
registered FIIs in India.
FII inflow in February 2005 totalled Rs 8376.30 crore — a record
monthly inflow. One reason for the record inflow was the massive block deal of
Rs 1350 crore that was executed on the Bharti Tele-Ventures (BTL) counter on 2
February. A slew of FIIs bought BTL shares from private equity fund Warburg Pincus.
On budget day, the BSE Sensex jumped 144.14 points to 6,713.86.
However, as investors pondered over the fine print in the budget including the impact of
fringe benefit tax (FBT) and reduction in depreciation rates to 15% that offset the
reduction in corporate tax to 30% from 35%, the Sensex lost 62.78 points, or 0.94%, on 1
March to end at 6,651.08.
However, after the finance minister’s assurance that FBT would not
cover any legitimate business expenditure incurred by the employer, the market bounced
back once gain. In the next three trading sessions, the barometer index jumped 198.40
points to a lifetime closing high of 6,849.48.
Gains were not restricted to blue chips, spreading to small- and
mid-cap stocks as well. In the five trading sessions since the budget, the CNX Mid-cap 200
index jumped 142.20 points to a lifetime closing high of 2,872.70, from 2,730.50 on 25
February.
Market men say money flow will remain high in the near term as a number
of local mutual funds are sitting on a lot of cash collected from IPOs of equity schemes
launched in the past few weeks. This money would find its way to the market in the coming
days.
F&O trade boost
The derivatives segment is set to get a boost from the budget proposal
to allow FIIs to use shares as collateral for margin payment for futures & options
(F&O) trading. At present, FIIs have to pay only cash and cash-like instruments as
collateral for margin payment. The majority of FIIs’ exposure to the derivatives
market is by way of hedging: they buy a stock in the cash market and simultaneously sell
futures of the stock in the F&O segment. FIIs account for about 30% of the open
interest in the derivatives market.
Another booster for F&O trades has come from changes in taxation
norms. So far, profit derived from this segment was taxed as ‘speculative
profit’. The budget has proposed, taxing profit on F&O trades as short-term
capital gain tax. This would lead to reduction in tax liability as short-term capital
gains tax is charged at a flat rate of 10%, whereas speculative profit is charged at a
rate of 10% to 30%, depending on the tax bracket of the investor.
Block deals continue
On 2 March 2005, a massive 86 lakh shares changed hands on the ONGC
counter at Rs 865 per share within minutes of commencement of trading. A unit of Reliance
Infocomm offloaded the shares in favour of a clutch of FIIs in a block deal valued at Rs
744 crore. The Reliance Infocomm unit had acquired the shares in ONGC’s IPO at Rs 750
per share in March 2004. However, after the execution of the deal, the stock lost nearly
1% to settle at Rs 856.30 at the end of the day.
Next day, the ONGC scrip surged 3.8% to Rs 889.50 following reports
that the oil exploration giant had made a huge gas discovery in the Krishna-Godavari (KG)
basin. The stock gained slightly to end at Rs 889.85 on 4 March. After trading hours, ONGC
confirmed that it had made significant new gas discovery in the KG basin. The oil
exploration major did not give the estimated reserve figure for the new field, but
predicted that drilled and potential resources in blocks it was exploring were estimated
at around 4 trillion cubic feet. The PSU said the new find, along with a previous
discovery in 2003, would be brought into production along with nearby finds, and the first
gas was expected to flow in April 2006.
A day prior to the ONGC deal, another block of shares was traded on
BSE. Citicorp Banking Corporation, Bahrain, acquired 1.35 crore shares of Abhishek
Industries, constituting 7% of the company’s equity, from promoters at Rs 33.10 per
share, a slight premium to the ruling market price of Rs 32.50 (closing price on BSE on 28
February). Following the deal, the stock jumped 11.8% in three trading sessions to settle
at Rs 36.35 on 3 March. The scrip eased slightly to Rs 35.95 next day.
Textiles contribute a majority of the revenue of Abhishek Industries.
The company is the largest producer of terry towels in India and has MNC clients. Its
other key business is paper.
On 28 February, the promoters of Mahindra Gesco Developers (MGDL)
offloaded 63 lakh shares, constituting 20.3% of the company’s equity, in favour of a
group of FIIs. At around Rs 139 a share, the transaction was at a slight premium to the
closing price of Rs 137.30 recorded on BSE in the previous session on 25 February.
The stock consequently jumped 5% to end the day at Rs 144.15. It,
however, failed to sustain at higher levels as, immediately after the block deal, RBI
barred fresh foreign portfolio investment in the scrip as FII holding in the stock had
reached the 24% ceiling.
Two leading FIIs — HSBC and US-based T Rowe Price — were the
bulk buyers of MGDL shares. HSBC, under its sub-account HSBC Global Investment Funds
(Mauritius), bought 26 lakh shares, constituting 8.38% of the equity of MGDL. T Rowe Price
acquired 22 lakh shares, constituting 7.09% of the capital.
The Mahindra group acquired a stake in Gesco Corporation when
Delhi-based real estate developer Abhishek Dalmia made a hostile open offer a few years
ago. Mahindra Realty played the white knight and stepped in to stave off the threat by
teaming up with the Sheths, the original promoters of Gesco Corporation, and bought out
Dalmia’s stake. Mahindra Realty was then merged into Gesco and the company was
renamed Mahindra Gesco Developers (MGDL). Subsequently, Mahindra Reality bought out the
stake of the Sheths, too, and became the promoters of the company, which was renamed
Mahindra Gesco Developers.
MGDL had a dream run on the bourses in February 2005 ahead of the block
deal on expectation of liberal FDI norms in the real estate sector. From a low of Rs 46 on
12 January, the stock jumped a staggering 207.8% to Rs 141.60 on 18 February. It
dropped to Rs 131.35 by 23 February. Next day, the scrip jumped 5% to Rs 137.90 after
the Union Cabinet cleared 100% FDI in the real estate sector. The scrip eased a bit to
Rs 137.30 on 25 February 2005.
FDI tonic
The budget’s thrust on road and other infrastructure projects has
further fuelled the rise in construction stocks. In one week to 4 March 2005, the combined
market cap of 55 construction scrips jumped 14% to Rs 12426 crore.
One more trigger for construction stocks ahead of the budget was the
liberal FDI norms in the real estate sector announced on 24 February. In the past one
month to 4 March, the combined market cap of the 55 construction companies rose 33.2%.
Earlier, foreign investment was permitted only in integrated townships.
Now, 100% FDI will be allowed in all forms of housing, commercial premises, hotels,
resorts, hospitals, educational institutions, recreational facilities, and city and
regional level infrastructure in order to attract higher investment.
In fact, the construction sector has emerged among the most favoured
sectors for investors, if the solid and sustained rise in construction stocks in the past
few months is anything to go by. In the last one quarter to 4 March, the market cap of the
55 construction scrips have galloped 71%.
Road projects and rural infrastructure projects was a major focus of
the recent budget. The outlay on road projects has been hiked to Rs 19000 crore for FY
2006, from Rs 15440 crore in FY 2005. Further, a capex of Rs 5500 crore would be incurred
on renovation of seven mega cities in FY 2006.
Regarding rural infrastructure, specific targets have been set for
providing roads, housing, drinking water, electricity and telephone connectivity for
villages. The record foreign exchange reserves are proposed to be used to fund domestic
infrastructure projects through a special purpose vehicle (SPV). The borrowing limit of
the SPV has been set at Rs 10000 crore for FY 2006.
Meanwhile, FDI in the real estate sector is expected to spur
construction activity. Already, most construction companies are sitting on healthy order
book positions. In some cases, the orders are two-three times their annual sales. A
majority of the orders are for non-roadway projects. The increased emphasis on irrigation,
water supply and other urban infrastructure projects by both the Central and state
governments has boosted the order flows.
On a dream run
The pre-budget recovery in tyre shares continued post budget following
sops to the tyre industry. Excise duty on replacement tyres was slashed to 16%, from 24%.
In five trading sessions since the budget, Ceat spurted 41.9% to Rs 103.55, from
Rs 72.95 on 25 February 2005. Goodyear jumped 38.8% to Rs 84.80, from Rs 61.10,
whereas MRF advanced 13.8% to Rs 3,063.05, from Rs 2,689.80.
In fact, tyre shares had moved up on 25 February — the last
trading session ahead of the budget — on expectation of a cut in excise duty. On that
day, Ceat rose 6% to Rs 72.95, J K Industries gained 3.2% to Rs 85.30 and MRF 2% to Rs
2,689.80.
The recovery in tyre stocks began since November-December 2004 as
rubber prices came off their peaks. Rubber is a key raw material in the making of tyres
and high prices of rubber and other key input had affected tyre makers.
Following the excise reduction in the budget, tyre makers slashed tyre
prices between 2.5% to 6%, which was lower than the 8% excise cut. This is expected to
improve the margin of tyre makers.
Tyre makers have been registering a strong volume growth for some time
now. The demand for tyres from original equipment manufacturers (OEM) remains buoyant as
auto sales continue to rising. Tyre exports have also increased in the last few months.
Moreover, analysts expect a pick-up in demand for tyres in the replacement market in the
next two-three years due to the buoyancy in auto sales.
Charged up
The budget’s thrust on rural electrification sent power equipment
makers surging. Two of the biggest gainers were Crompton Greaves and Kalpataru Power
Transmission. Other winner were Siemens, ABB, KEC International, EMCO, and Jyoti
Structures.
In the five trading sessions since the budget, Kalpataru Power
Transmission jumped 35.1% to Rs 391.40 on 4 March 2005, from Rs 289.55 on 25 February.
Crompton Greaves galloped 27.7% to Rs 476.50, from Rs 373.05, whereas Siemens gained 9.5%
to Rs 1781.25, from Rs 1626.30.
The budget has envisaged the creation of a rural electricity
distribution backbone, with a 33/11 KV substation in each block and at least one
distribution transformer in each village. Rs 1100 crore has been provided for rural
electrification in FY 2006. A huge addition of power generation capacity in India in the
next few years would mean good business for all equipment suppliers in the coming years.
Signs of freedom
In one week to 4 March 2005, the combined market cap of 20 public
sector banks rose 7.3% to Rs 119549 crore, following a boost from the budget. State-run
banks can now go to the market and raise Tier 1 capital by issue of preference shares
without worrying about the government’s stake falling below 51%. The government stake
in a number of banks is close to the 51% level.
Amendments to the Reserve Bank of India Act, 1934, will be made so as
to remove the limits on the cash reserve ratio (CRR) to facilitate more flexible conduct
of the monetary policy. A comprehensive bill to amend the Banking Regulation Act, 1949, is
to be introduced in the budget session
The banking sector has been witnessing better times in recent months
due to the pick-up in credit offtake on increased industrial activity and investment
cycle. Most banks have also reported a surge in the net interest income in Q3 December
2004 as the cost of funds declined due to the fall in deposit rates. Moreover, a number of
banks are witnessing increase in fee-based income. On the flip side, treasury income has
dipped due to hardening of bond yields.
Losing steam
Two PSU oil refining-cum-marketing companies — HPCL and BPCL
— lost ground following a duty rejig in the budget that would affect their marketing
margin. From Rs 427.75 on 28 February 2005, BPCL shed 4.6% in four trading sessions to Rs
407.70 on 4 March. HPCL lost 3.6% to Rs 338.45, from Rs 351.25.
The budget has reduced customs duty on crude, petrol, diesel, kerosene
and LPG by 5%. Excise duty on kerosene and LPG has been reduced to 0%. Simultaneously,
excise duty on diesel was raised to 8% plus Rs 3.25 per litre, from 8% plus
Rs 1.50 per litre. On petrol, excise duty was increased to 8% plus Rs 13 per
litre, from 23% plus Rs 7.50 per litre.
Consequently, the marketing margin of oil refining-cum-marketing
companies will fall as the excise duty increase in diesel and petrol is expected to more
than make up the savings on account of reduction in excise duty in kerosene and LPG.
Surging global crude oil prices are adding to the woes of these
companies due to their inability to raise retail prices of petroleum and diesel. US light
crude crossed $ 55 a barrel last fortnight — a four-month peak.
On a roll
Shares of paper manufacturers like Ballarpur Industries, Tamil Nadu
Newsprint, and Balkrishna Industries gained on expectation of a hike in paper prices. The
post-budget rally in paper scrips was despite the unfavourable budget proposals for the
sector. In one week to 4 March 2005, the combined market cap of 38 paper makers rose 8.4%
to Rs 5372.75 crore.
Paper scrips witnessed a surge around mid-February. However, the shares
pared their gains ahead of the budget. In one month to 4 March 2005, the combined market
cap of 38 paper companies rose 20.5%.
The budget has cut the peak import duty to 15%, from 20%. As a result,
import duty on paper came down to 15% as a paper attracted a peak import duty of 20%.
Though the reduction in duty protection is bad news for the industry, in the current
scenario of rising global prices, the impact would be minimal. Domestic paper prices have
risen in the past few months in line with the robust increase in global prices on buoyant
demand for pulp in the US, Europe and China, apart from increasing fuel costs.
The current domestic demand-supply situation is conducive for an upward
revision of writing & printing (W&P) paper prices as fresh buying support from the
textbook publishing and educational sectors is set to pick up due to seasonal demand.
The long-term story for the paper sector in encouraging as it is known
to have a 1:1 correlation with the economy. With an estimated GDP growth of 6.9%, demand
for paper is expected to follow suit.
However, one concern for the industry is the falling margin largely due
to the disproportionate rise in the cost of inputs like pulp, chlorine and fuels such as
coal.
Retaining their gloss
Expectation of infrastructure-led demand growth and possibility of a
increase in prices to pass on the excise duty rise announced in the budget spurred steel
scrips, riding on firm global prices and strong Q3 results in the period between middle of
January till early February 2005, before turning range bound. In one week to 1 March 2005,
the combined market cap of 45 large steel makers rose 5.8% to Rs 65923.25.
In the budget, excise duty on all iron and steel has been raised to
16%, from 12%. Flat steel producers are expected to pass on the hike to consumers due to
availability of modvat benefit to users. But long steel products may have to absorb the
price rise as long steel finds application in the construction sector, which cannot avail
the credit of excise (modvat credit) on input material as it does not consume steel for
further manufacturing.
However, even long steel producers like Tisco and Sail will be able
pass on the excise hike to some extent as global steel prices are ruling firm. Local steel
prices take a cue from overseas prices.
On the flip side, customs duty on non-coking coal with fly ash content
of over 12% has been cut 5%, from 15%. This would be a major relief to importers like Sail
and Jindal Iron & Steel at a time when non-coking coal prices have spurted abroad.
Further, the increased thrust on
infrastructure and enhanced outlay for rural development would lead to improved domestic
demand for steel.
Global steel prices are expected to hold firm in the medium term. The
Japanese economy is moving on a growth path. Steel demand is also strong in the US, and
European steel markets, too, are showing signs of improvement.
Forging ahead
Bharat Forge (BFL) jumped 10.28 % in three trading sessions to Rs
1460.60 on 4 March 2005, from Rs 1324.40 on 1 March, after the company announced a stock
split, hike in FII ceiling and a proposal to raise additional funds.
A couple of major global acquisitions and a strong financial
performance had sent the scrip surging in the past few months. From Rs 579.26 on 24 June
2004, the stock jumped 139% to Rs 1389.05 on 2 February 2005. It has moved between a low
of Rs 1282 to a high of Rs 1390 since 3 February.
BFL has decided to split its equity shares from a nominal value of Rs
10 to 5 equity shares of Rs 2 each. A stock-split is generally resorted to boost liquidity
on the counter. Another reason for the stock-split is to make it affordable to investors
(in absolute terms).
The board of directors has approved an increase in FII limit to 40%
from 24%. End December 2004, FII holding in BFL was 15.02%. BFL is planning to raise up to
$ 300 million by issue of appropriate securities on terms to be decided by the board.
In mid-December 2004, BFL acquired 100% ownership interest in German
company CDP Aluminium technik GmbH & Co KG (CDP AT). CDP AT belongs to the renowned
CDP group and is a significant manufacturer in Europe of aluminium forged components used
in passenger cars and other automotive application.
In Q3 December 2004, BFL reported a 26% growth in the net profit to
Rs 41.40 crore on a 47% growth in sales to Rs 310.90 crore.
Third highest weightage
Software major TCS entered the
50-share S&P CNX Nifty from 25 February 2005. It replaced another Tata group company,
Indian Hotels, in the Nifty. Given its large market cap, TCS emerged as the third highest
scrip in terms of weightage in the Nifty.
As on 4 March, TCS had a weightage of 6.69%, next only to ONGC’s 12.73% and
Reliance Industries’s Rs 7.98%. TCS’s weightage was slightly higher than
Infosys’s 6.03%. |
