Positive budget fires up equity markets

Higher allocations have been made to healthcare,education,agriculture,irrigation,water resource management and rural development. A positive announcement is the definite roadmap on important impending reforms like rollout of the Goods and Services. Tax (GST) and the Direct Tax Code (DTC). A resonating theme is the continuation of efforts to subsidise infrastructure,in particular social and rural infrastructure,development. This is a laudable strategy as continuous economic growth in rural India is what saved us from slipping into a deep recession last year.

Moreover,economic growth can not sustain without participation from the rural and weaker sections of the society.

On the whole,the budget is not as important an event as it was till a couple of years ago. The good thing about the latest one is that there were more positive surprises and fewer negative ones.

Markets: where to from here?

If the global cues do not turn negative again,we have a good base for a sustained rally in future. If global cues turn decisively positive,we are likely to test the index level of 20,000 and perhaps even surpass it provided the momentum remains strong. However,if the sovereign debt default risk that many European countries face balloons into a larger problem,then,in the worst-case scenario,our markets could descend to around the 12,000 level. And if there are no major negative or positive surprises,then our markets are likely to remain range bound between 15,000 and 18,000 levels of the Sensex.

Foreign institutional investors (FIIs) are likely to perceive this budget positively due to the emphasis on containing the fiscal deficit and continuation of reforms. Thus,overall though the markets are likely to remain bullish,the Sensex and the Nifty are likely to remain range bound as global sovereign risks are likely to generate significant headwinds in the near future. A stock- and sector-specific approach appears to be the best way to make money in this market.

Who stands to gain?

Sectors that are likely to gain from the budget are automobile,banking,cement,infrastructure and alternative energy. Metals should continue to do well on account of robust demand from China and India. Capitalisation of PSU banks,increase in interest-rate subvention,and higher credit support to farmers all augur well for banks,particularly public-sector banks. Partial rollback of excise concessions given to the automobile sector last year was expected by market participants. However,the increased focus on rural development and road construction,full exemption of excise on trailers and semi-trailers,and raising of personal tax slabs are all positives for this sector. In particular,stocks like Ashok Leyland and Tata Motors stand to gain.

Several concessions have been given and provisions made to help revive the infrastructure sector. In particular,higher allocation for roads and urban development,focus on slum development,and extension of interest-rate subvention for low cost housing are likely to benefit stocks in sectors like housing,infrastructure,cement and realty.

Power sector companies,especially those that deal with clean energy,stand to gain from the various provisions contained in the budget. We are bullish on the prospects of companies like Suzlon,Indowind,Moser Baer,NHPC and JP Hydro.

Increase in weighted R&D (research and development) deduction is a big positive for companies in the pharma,automobile and other sectors that spend large amounts of money on research.

And who stands to lose?

Various companies,especially in the infrastructure space,which pay the Minimum Alternate Tax (MAT) stand to lose out due to increase in MAT rate from 15 per cent to 18 per cent.

Further,the increase in duty on crude petroleum,diesel and petrol and enhancement of excise make Oil and Gas sector the principal loser after this budget. Lack of any mention of insurance sector deregulation,pension sector reforms,and the New Companies Act are the sore points of an otherwise laudable policy statement.

What should you do?

The markets have rallied smartly post-budget. Investors ought to wait for declines to enter the markets. On declines,you could buy ACC,Ultratech,JP Associates,TISCO,Sterlite,Sesa Goa,ICICI,Axis Bank,PNB,SBI,BHEL,Crompton Greaves,Tata Motors,Bajaj Auto,Tata Motors,Bharat Forge and RIL.

The author is chief executive officer of New Delhi-based Invest Shoppe India