Bhavin Shah of JP Morgan said the Software Technology Parks of India (STPI) extension in the budget will benefit companies by 3-4% in FY11. He sees limited upside in Infosys but finds TCS still undervalued.
On the Q1 results of IT companies, Shah said he does not expect big surprises from IT this quarter. "IT companies are likely to see low single-digit revenue decline. We expect margin erosion based on hedged positions and would look out for the Q2 FY10 outlook." He sees some resumption of growth in Q2 FY10.
Speaking on Infosys' Q1 numbers which are expected tomorrow, Shah expects some margin erosion on visa; and selling, general and administrative costs. "We see a better chance of upside in dollar revenues."
He does not expect a meaningful diversion from guided EPS. "We see FY10 and FY11 EPS at Rs 106.5 and Rs 126.8 respectively."
Shah does not expect Infy to increase its full-year guidance. "We may see some guidance revision from Q3 FY10."
Here is a verbatim transcript of the exclusive interview with Bhavin Shah
Q: Will the Software Technology Park of India (STPI) extension in the budget change your forecast at all for the next year?
A: I believe the government has essentially answered most requests from the technology sector. I think the extension of STPI should help different companies depending on which company you are looking at, maybe from a marginal impact to 3-4% benefit in FY11.
While Fringe Benefit Tax (FBT) is not a big number, it suddenly removes some of the procedural headaches, so some small benefit from there as well. Also, there is some simplification on the service tax related matter for export companies. I think there are multiple things that seem to have been addressed.
Q: Before we speak about Infosys specifically, tell me what are you expecting from the IT sector per se during this quarter?
A: We don’t expect any big surprises from this quarter itself. I think we are going to see anywhere from one to low single to mid-single digit revenue decline depending on how well some companies are hedged and obviously some small rupee appreciation, So depending on that, you will see some margin erosion. Also, some companies have one-off cost in Q1 like visa and selling, general and administrative expenses (SG&A). So, that itself is not going to be a big surprise. I think what companies come out and say about the September quarter is going to be a lot more interesting. We do expect companies to talk about resumption of some sort of growth in the September quarter, not a huge growth but some sort of low single-digit growth.
Q: What about Infosys specifically, do you expect it to change its guidance at all for the full year tomorrow?
A: We do not expect them to increase their yearly guidance. While there is slightly better probability of an upside to the revenues on a dollar basis, I think they will probably keep in mind some sort of the rupee appreciation as well. So, it is unlikely that we see any material change to their full-year guidance. For the September quarter, we expect a low to mid single-digit kind of growth outlook.
Q: What are you going with in terms of rupee EPS number for the full year?
A: We have Rs 106.5 for FY10 and Rs 126.8 for FY11. Our FY10 earnings per share (EPS) is above their guidance. We don’t think that there is going to be any material change to their guidance this year, not yet. Maybe come October they could consider further revisions.
Q: What’s your general call on the sector now? Do you have buys out on most of the top stocks in coverage in the IT sector at current prices?
A: We like the sector in general and do believe that over the last several months with a slowdown in demand there has been a fair bit of slag that has been developed in the system. Companies will be able to hire people a lot more easily over the next couple of years. In the meantime, we have had increase in capacity in terms of engineering costs. So, the labour pool availability is going to be significantly improved over the next several years. As far as the demand goes, obviously we have experienced some slowdown. The general offshore trend remains pretty firm. So, we continue to be overall positive on the sector. When you think about individual stocks, Infosys has done well and we have limited near term upside for Infosys per se. We do think that TCS still remains somewhat undervalued and so expect higher upside on TCS. We obviously have Satyam. On this one, we expect meaningful upside and have an Rs 100 price target on Satyam.
Q: What about midcaps. You just alluded to Satyam, if you come down from Infosys, TCS, Wipro and HCL Technologies, how do you look at the next rung in IT now?
A: When I look at the target price versus current share prices there has been a fair bit of improvement in the midcap stocks as well, so that is why we continue to focus on companies where we still feel that there is meaningful upside. I think Satyam and Tech Mahindra come to the mind. There is significant room for margin improvement in Satyam. If you look at it from an FY11 basis, those two looks particularly cheap.
Q: Give us target prices both for Satyam and for some of the other stocks under coverage for you now?
A: We continue to think of meaningful upsides on Satyam. Rs 100 price target versus Rs 70 current price, so that is a pretty big gap. TCS is another one which we find somewhat undervalued compared to Infosys and Wipro. We have an Rs 550 price target on TCS, so that is another one that we would recommend.
Thursday, July 9, 2009
Budget By Udayan Mukherjee
A game of patience
Hope is a dangerous thing, as investors found out yesterday. If the Finance Minister was guilty of presenting an insipid budget that was low on the detail that the market wanted, investors too were perhaps guilty of expecting too much, too soon. That doesn't absolve the Finance Minister of a budget that is low on ambition, boldness and vision but at least it teaches investors to not hope for the moon going into a policy event.
The real damage was done when the FM spelt out the 6.8% deficit number implying a large market borrowing programme with little detail on how he "would get back on the FRBM path". Global rating agencies will pass their judgement in the next few days but the bond market didn't wait that long. The benchmark bond yield shot past 7% raising fears of interest rate spikes and triggering off a collapse in stock prices. At a macro level, that perhaps was the undoing of the market. At a more micro level, a lot of sectors had run up expecting substantial boosts from the budget. Education, real estate, textile and fertiliser stocks which had meaningful rallies leading up to the event collapsed completely . The surprise was Infrastructure, where stocks sold off as well, as apart from an increased outlay for the NHAI the budget was a bit low on bold moves.
Then there was disinvestment, which the market had pinned some hopes on. The pitiful Rs 1100 crore figure which the FM unveiled dashed those hopes. That number is truly inexplicable.
Not that this budget had nothing postive for the stock market and corporate India. The scrapping of FBT, extension of 10A/10B for IT companies, removal of CTT and no rollback of excise cuts were all positives, partly offset by the hike in MAT. The scrapping of the surcharge on personal income taxes may even be a limited consumption trigger. Tobacco companies were spared the axe this time and ITC was one of the few stocks that ended in the green, contrary to investor fears.
Yet what the market wanted was a green signal, that finally the drought on reforms is over. That a government, shorn of the Left, will press ahead with bold policy moves. The charitable view is to accord the FM the benefit of doubt : he didn't have enough time to unveil a big bang budget and the best is yet to come, over the next few months and in the next February budget. The cynical view is that the market is running ahead of itself; despite the electoral surprise, things will improve only incrementally and over a much longer duration than investors want. The truth, as often, perhaps lies somewhere in the middle. While investing in India, the virtue of patience cannot be overstated.
Hope is a dangerous thing, as investors found out yesterday. If the Finance Minister was guilty of presenting an insipid budget that was low on the detail that the market wanted, investors too were perhaps guilty of expecting too much, too soon. That doesn't absolve the Finance Minister of a budget that is low on ambition, boldness and vision but at least it teaches investors to not hope for the moon going into a policy event.
The real damage was done when the FM spelt out the 6.8% deficit number implying a large market borrowing programme with little detail on how he "would get back on the FRBM path". Global rating agencies will pass their judgement in the next few days but the bond market didn't wait that long. The benchmark bond yield shot past 7% raising fears of interest rate spikes and triggering off a collapse in stock prices. At a macro level, that perhaps was the undoing of the market. At a more micro level, a lot of sectors had run up expecting substantial boosts from the budget. Education, real estate, textile and fertiliser stocks which had meaningful rallies leading up to the event collapsed completely . The surprise was Infrastructure, where stocks sold off as well, as apart from an increased outlay for the NHAI the budget was a bit low on bold moves.
Then there was disinvestment, which the market had pinned some hopes on. The pitiful Rs 1100 crore figure which the FM unveiled dashed those hopes. That number is truly inexplicable.
Not that this budget had nothing postive for the stock market and corporate India. The scrapping of FBT, extension of 10A/10B for IT companies, removal of CTT and no rollback of excise cuts were all positives, partly offset by the hike in MAT. The scrapping of the surcharge on personal income taxes may even be a limited consumption trigger. Tobacco companies were spared the axe this time and ITC was one of the few stocks that ended in the green, contrary to investor fears.
Yet what the market wanted was a green signal, that finally the drought on reforms is over. That a government, shorn of the Left, will press ahead with bold policy moves. The charitable view is to accord the FM the benefit of doubt : he didn't have enough time to unveil a big bang budget and the best is yet to come, over the next few months and in the next February budget. The cynical view is that the market is running ahead of itself; despite the electoral surprise, things will improve only incrementally and over a much longer duration than investors want. The truth, as often, perhaps lies somewhere in the middle. While investing in India, the virtue of patience cannot be overstated.
Calls for the day 9th july
RESEARCH -Nifty (FUT) R-4125/4185/4275 S-4085/4030/3995 ;Sensex (CASH)
R-13970/14170/14510 S-13835/13630/13495 ;MARKET OUTLOOK:
VOLATILE)(09.03A)
12:11 PM 7/9 RESEARCH : INTRADAY CALL ( CASH ): BUY ABB ABOVE 715.50 TGT 735 SL 705
1:12 PM 7/9 RESEARCH : INTRADAY CALL ( CASH ): BOOK PROFITS TRIVENI
R-13970/14170/14510 S-13835/13630/13495 ;MARKET OUTLOOK:
VOLATILE)(09.03A)
12:11 PM 7/9 RESEARCH : INTRADAY CALL ( CASH ): BUY ABB ABOVE 715.50 TGT 735 SL 705
1:12 PM 7/9 RESEARCH : INTRADAY CALL ( CASH ): BOOK PROFITS TRIVENI
Wednesday, July 8, 2009
Call for the days 8th july 2009
RESEARCH -Nifty (FUT) R- 4230/4265/4340 S-4150/4110/4035; Sensex
(CASH) R- 14280/14390/14645 S- 14030/13890/13640; MARKET OUTLOOK:
VOLATILE WITH NEGATIVEBIAS
7/8 RESEARCH: MARKET OUTLOOK: -Nifty (FUT) R- 4230/4265/4340 S- 4150/4110/4035; Sensex (CASH) R- 14280/14390/14645 S- 14030/13890/13640; MARKET OUTLOOK: VOLATILE WITH NEGATIVE BIAS
11:01 AM 7/8 RESEARCH: INTRADAY CALL (CASH) : BUY MADRAS CEMENTS ABOVE 107 TGT 111 SL 105
1:31 PM 7/8 RESEARCH : INTRADAY CALL (CASH) : BUY SUBROS ABOVE 25.75 TGT 27 SL 25.
1:32 PM 7/8 RESEARCH : INTRADAY CALL (CASH) : SUBROS TGT ACHIEVED
(CASH) R- 14280/14390/14645 S- 14030/13890/13640; MARKET OUTLOOK:
VOLATILE WITH NEGATIVEBIAS
7/8 RESEARCH: MARKET OUTLOOK: -Nifty (FUT) R- 4230/4265/4340 S- 4150/4110/4035; Sensex (CASH) R- 14280/14390/14645 S- 14030/13890/13640; MARKET OUTLOOK: VOLATILE WITH NEGATIVE BIAS
11:01 AM 7/8 RESEARCH: INTRADAY CALL (CASH) : BUY MADRAS CEMENTS ABOVE 107 TGT 111 SL 105
1:31 PM 7/8 RESEARCH : INTRADAY CALL (CASH) : BUY SUBROS ABOVE 25.75 TGT 27 SL 25.
1:32 PM 7/8 RESEARCH : INTRADAY CALL (CASH) : SUBROS TGT ACHIEVED
Tuesday, July 7, 2009
Calls of the day 7th july 2009
RESEARCH -Nifty (FUT) R-4385/4615/4975 S-4250/4020/3890; Sensex (CASH)
R-14775/15500/16640 S-14365/13635/13225; MARKET OUTLOOK: VOLATILE
A8.55A
R-14775/15500/16640 S-14365/13635/13225; MARKET OUTLOOK: VOLATILE
A8.55A
--
RESEARCH: MARKET OUTLOOK: The market is expected to open on a flat note today. The index is expected to find support close to 4092 levels. NIFTY may take resistance at 4292 and 4312 levels. An upside bounce back can be expected between 4090 – 4130 levels on the back of expectations on short covering. Those who are holding for short or medium term bet are advised to average at lower levels.
9:45 AM 7/7 RESEARCH-Global Market (in %): DOW JONES (+0.53%), S&P 500 (+0.26%), NASDAQ (-0.51%), FTSE (-0.98%), DAX (-1.20%), NIKKEI (+0.02%), HANG SENG (+0.45%) & SGX NIFTY (+13 POINTS)
10:45 AM 7/7 RESEARCH: INTRADAY CALL (CASH) : BUY HINDUNILEVER ABOVE 285.25 TGT 295 SL 280
12:18 PM 7/7 RESEARCH - INTRADAY CALL ( CASH ) : SHORT SELL PUNJLLOYD BELOW 193 TGT 187 SL 196
1:23 PM 7/7 RESEARCH - INTRADAY CALL ( CASH ) : SHORT SELL PNB BELOW 619 TGT 600 SL 628
(7/7/2009 2:24:36 PM): RESEARCH - INTRADAY CALL ( CASH ) : BUY MADRAS CEMENTS ABOVE 102.40 TGT 105 SL 101
Monday, July 6, 2009
BUDGET ANALYSIS – FY 10
OVERVIEW ON ECONOMY
To sustain a growth rate of of 9% per annum at the earliest.
Ensure that Indian agriculture continues to grow at an annual rate of 4%.
BUDGET ESTIMATES
Budget Estimates provide for a total expenditure of Rs.10,20,838 crore
consisting of Rs.6,95,689 crore under Non-plan and Rs.3,25,149 crore under
Plan registering an increase of 37%in Non-plan expenditure and 34% in Plan
expenditure over Budget Estimates (B.E) 2008-09.
Gross Budgetary Support for Annual Plan 2009-10 enhanced by Rs.40, 000
crore over Interim B.E. 2009-10.
Outlay for Defence up from Rs.1, 05,600 crore in B.E. 2008-09 to Rs.1,
41,703 crore in B.E. 2009-10.
Fiscal deficit as a percentage of GDP is projected at 6.8 % for FY10
compared to 2.5 % in B.E. 2008-09 and 6.2 % as per provisional accounts
2008-09.
BUDGET HIGHLIGHTS
INFRASTRUCTURE
India Infrastructure Finance Corpn Ltd (IIFCL) to evolve a takeout financing
scheme in consultation with banks to facilitate incremental lending to
infrastructure sector.
IIFCL to refinance 60 % of commercial bank loans for Public Pvt Parternship
projects in critical sectors over the next 15 to 18 months.
IIFCL and banks in position to support Rs 1,00,000 cr in infrastructure.
NATIONAL HIGH WAYS
Allocation to National Highways Authority of India (NHAI) for the National
Highway Development Programme (NHDP) increased by 23% over B.E.
2008-09.
POWER
Duty on Wind power equipment down to 5% from 7.5%.
Allocation under Accelerated Power Development and Reform Programme
increased by 160 %to Rs.2, 080 crore in B.E. 2009-10 over B.E. 2008-09.
DISINVESTMENT
To retain at least 51 % Government equity in PSUs.
PSU enterprises such as banks and insurance companies will remain in the
public sector.
Estimated disinvestments proceeds of Rs.1120 cr in FY10 which includes
disinvestments in RITES, Cochin Ship Yard, Telecommunications
Consultants India, Manganese Core India, Rashtriya Ispat Nigam and Satluj
Jal Vidyut Nigam.
AGRICULTURE
Target for agriculture credit flow set at Rs.3,25,000 crore for the year 2009-10
vs. Rs.2,87,000 crore In 2008-09 .
To provide additional 1000 crore rupees over interim budget for irrigation
Extended agriculture debt waiver by 6 months.
Interest subvention scheme for short term crop loans up to Rs.3 lakh per
farmer at the interest rate of 7% per annum to be continued.
Additional subvention of 1% to be paid from this year, as incentive to those
farmers who repay short term loans on schedule
EXPORT
Adjustment assistance scheme to provide enhanced Export Credit and
Guarantee Corporation (ECGC) cover at 95%to badly hit sectors extended
upto March 2010.
Interest subvention of 2 % on pre-shipment credit for seven employment
oriented export sectors to March 31, 2010.
PETROLEUM AND DIESEL
To set up an expert group to advise on a viable and sustainable system of
pricing petroleum products.
MEDIA
Customs duty of 5% to be imposed on Set Top Box.
TEXTILE
Excise duty on manmade fibre and yarn to be increased from 4% to 8%.
JEWELLERY
Excise duty on branded articles of jewellery to be reduced from 2% to Nil.
Customs duty on serially numbered gold bars (other than tola bars) and gold
coins to be increased from Rs.100 per 10 gram to Rs.200 per 10 gram.
Customs duty on other forms of gold to be increased from Rs.250 per 10
gram to Rs.500 per 10 gram.
Custom duty on silver, excluding jewellery, hiked by Rs 500/ kg to Rs 1,000/
kg.
FERTILISER
Government intends to move towards a nutrient based subsidy regime so as
to cover larger basket of fertilizers with innovative fertilizer products available
in the market at reasonable prices.
It is intended to move to a system of direct transfer of subsidy to the farmers
in due course.
Excise duty on naphtha to be reduced to 14%.
HEALTH CARE
Allocation under National Rural Health Mission (NRHM) increased by
Rs.2,057 crore.
Customs duty on 10 specified life saving drugs/vaccine and their bulk drugs to
be reduced from 10% to 5% with Nil CVD.
Customs duty on specified heart devices, namely artificial heart and
PDA/ASD occlusion device, to be reduced from 7.5% to 5% with Nil CVD (by
way of excise duty exemption).
ALLOCATION UNDER COMMONWEALTH GAMES
Outlay to be stepped up from Rs.2, 112 crore in Interim Budget to Rs.3,472
crore in regular Budget 2009-10.
GAS
Government will develop long distance gas pipelines to develop national grid.
LNG infrastructure in the country to be expanded.
Tax holiday on commercial production of mineral oil and natural gas on NELP
VIII
AUTO
Specific component of excise duty applicable to large cars/utility vehicles of
engine capacity 2000 cc and above to be reduced from Rs. 20,000/- per
vehicle to Rs.15,000 per vehicle.
Excise duty on petrol driven trucks/lorries to be reduced from 20% to 8%.
Excise duty on chassis of such trucks/lorries to be reduced from ‘20% +
Rs.10000’ to ‘8% + Rs.10000’.
SOFTWARE
Sunset clause for Software Technology Parks of India (STPIs) extended by 1
year.
INDIRECT TAXES
Goods & services tax to come into effect from April 2010
Customs duty on LCD Panels for manufacture of LCD televisions to be
reduced from 10% to 5%.
Customs duty on bio-diesel to be reduced from 7.5% to 2.5%.
DIRECT TAXES
Income tax slabs changed.
Standard deduction increased
For women – Rs. 190,000 Vs. Rs. 180,000
For senior citizen – Rs. 240,000 Vs. 225,000
For other assesses– to Rs. 160,000 from Rs. 150,000
Income Tax rate
160001 - 300000 10%
300001 - 500000 20%
Above 500000 30%
No change in corporate income tax rate.
Surcharge on personal Income Tax removed
Fringe Benefit Tax on the value of certain fringe benefits provided by
employers to their employees to be abolished.
Minimum Alternate Tax (MAT) to be increased to 15 per cent of book
profits from 10 per cent.
Commodity Transaction Tax (CTT) to be abolished.
CONCLUSION: Overall the FY 10 budget seems to be a populist budget favouring
the rural population and the individual taxpayers. However, the capital market
did not welcome the budget as widely expected measures such as removal of
security transaction tax (STT), deregulation of oil sector, FDI in insurance,
reduction in surcharge on corporate tax were not touched upon. Further hike in
Minimum Alternative Tax (MAT) rate from 15% to10% also disappointed the
markets. Though measures like introduction of GST and abolition of fringe
benefit tax were positive steps, but was not enough to cheer the markets.
To sustain a growth rate of of 9% per annum at the earliest.
Ensure that Indian agriculture continues to grow at an annual rate of 4%.
BUDGET ESTIMATES
Budget Estimates provide for a total expenditure of Rs.10,20,838 crore
consisting of Rs.6,95,689 crore under Non-plan and Rs.3,25,149 crore under
Plan registering an increase of 37%in Non-plan expenditure and 34% in Plan
expenditure over Budget Estimates (B.E) 2008-09.
Gross Budgetary Support for Annual Plan 2009-10 enhanced by Rs.40, 000
crore over Interim B.E. 2009-10.
Outlay for Defence up from Rs.1, 05,600 crore in B.E. 2008-09 to Rs.1,
41,703 crore in B.E. 2009-10.
Fiscal deficit as a percentage of GDP is projected at 6.8 % for FY10
compared to 2.5 % in B.E. 2008-09 and 6.2 % as per provisional accounts
2008-09.
BUDGET HIGHLIGHTS
INFRASTRUCTURE
India Infrastructure Finance Corpn Ltd (IIFCL) to evolve a takeout financing
scheme in consultation with banks to facilitate incremental lending to
infrastructure sector.
IIFCL to refinance 60 % of commercial bank loans for Public Pvt Parternship
projects in critical sectors over the next 15 to 18 months.
IIFCL and banks in position to support Rs 1,00,000 cr in infrastructure.
NATIONAL HIGH WAYS
Allocation to National Highways Authority of India (NHAI) for the National
Highway Development Programme (NHDP) increased by 23% over B.E.
2008-09.
POWER
Duty on Wind power equipment down to 5% from 7.5%.
Allocation under Accelerated Power Development and Reform Programme
increased by 160 %to Rs.2, 080 crore in B.E. 2009-10 over B.E. 2008-09.
DISINVESTMENT
To retain at least 51 % Government equity in PSUs.
PSU enterprises such as banks and insurance companies will remain in the
public sector.
Estimated disinvestments proceeds of Rs.1120 cr in FY10 which includes
disinvestments in RITES, Cochin Ship Yard, Telecommunications
Consultants India, Manganese Core India, Rashtriya Ispat Nigam and Satluj
Jal Vidyut Nigam.
AGRICULTURE
Target for agriculture credit flow set at Rs.3,25,000 crore for the year 2009-10
vs. Rs.2,87,000 crore In 2008-09 .
To provide additional 1000 crore rupees over interim budget for irrigation
Extended agriculture debt waiver by 6 months.
Interest subvention scheme for short term crop loans up to Rs.3 lakh per
farmer at the interest rate of 7% per annum to be continued.
Additional subvention of 1% to be paid from this year, as incentive to those
farmers who repay short term loans on schedule
EXPORT
Adjustment assistance scheme to provide enhanced Export Credit and
Guarantee Corporation (ECGC) cover at 95%to badly hit sectors extended
upto March 2010.
Interest subvention of 2 % on pre-shipment credit for seven employment
oriented export sectors to March 31, 2010.
PETROLEUM AND DIESEL
To set up an expert group to advise on a viable and sustainable system of
pricing petroleum products.
MEDIA
Customs duty of 5% to be imposed on Set Top Box.
TEXTILE
Excise duty on manmade fibre and yarn to be increased from 4% to 8%.
JEWELLERY
Excise duty on branded articles of jewellery to be reduced from 2% to Nil.
Customs duty on serially numbered gold bars (other than tola bars) and gold
coins to be increased from Rs.100 per 10 gram to Rs.200 per 10 gram.
Customs duty on other forms of gold to be increased from Rs.250 per 10
gram to Rs.500 per 10 gram.
Custom duty on silver, excluding jewellery, hiked by Rs 500/ kg to Rs 1,000/
kg.
FERTILISER
Government intends to move towards a nutrient based subsidy regime so as
to cover larger basket of fertilizers with innovative fertilizer products available
in the market at reasonable prices.
It is intended to move to a system of direct transfer of subsidy to the farmers
in due course.
Excise duty on naphtha to be reduced to 14%.
HEALTH CARE
Allocation under National Rural Health Mission (NRHM) increased by
Rs.2,057 crore.
Customs duty on 10 specified life saving drugs/vaccine and their bulk drugs to
be reduced from 10% to 5% with Nil CVD.
Customs duty on specified heart devices, namely artificial heart and
PDA/ASD occlusion device, to be reduced from 7.5% to 5% with Nil CVD (by
way of excise duty exemption).
ALLOCATION UNDER COMMONWEALTH GAMES
Outlay to be stepped up from Rs.2, 112 crore in Interim Budget to Rs.3,472
crore in regular Budget 2009-10.
GAS
Government will develop long distance gas pipelines to develop national grid.
LNG infrastructure in the country to be expanded.
Tax holiday on commercial production of mineral oil and natural gas on NELP
VIII
AUTO
Specific component of excise duty applicable to large cars/utility vehicles of
engine capacity 2000 cc and above to be reduced from Rs. 20,000/- per
vehicle to Rs.15,000 per vehicle.
Excise duty on petrol driven trucks/lorries to be reduced from 20% to 8%.
Excise duty on chassis of such trucks/lorries to be reduced from ‘20% +
Rs.10000’ to ‘8% + Rs.10000’.
SOFTWARE
Sunset clause for Software Technology Parks of India (STPIs) extended by 1
year.
INDIRECT TAXES
Goods & services tax to come into effect from April 2010
Customs duty on LCD Panels for manufacture of LCD televisions to be
reduced from 10% to 5%.
Customs duty on bio-diesel to be reduced from 7.5% to 2.5%.
DIRECT TAXES
Income tax slabs changed.
Standard deduction increased
For women – Rs. 190,000 Vs. Rs. 180,000
For senior citizen – Rs. 240,000 Vs. 225,000
For other assesses– to Rs. 160,000 from Rs. 150,000
Income Tax rate
160001 - 300000 10%
300001 - 500000 20%
Above 500000 30%
No change in corporate income tax rate.
Surcharge on personal Income Tax removed
Fringe Benefit Tax on the value of certain fringe benefits provided by
employers to their employees to be abolished.
Minimum Alternate Tax (MAT) to be increased to 15 per cent of book
profits from 10 per cent.
Commodity Transaction Tax (CTT) to be abolished.
CONCLUSION: Overall the FY 10 budget seems to be a populist budget favouring
the rural population and the individual taxpayers. However, the capital market
did not welcome the budget as widely expected measures such as removal of
security transaction tax (STT), deregulation of oil sector, FDI in insurance,
reduction in surcharge on corporate tax were not touched upon. Further hike in
Minimum Alternative Tax (MAT) rate from 15% to10% also disappointed the
markets. Though measures like introduction of GST and abolition of fringe
benefit tax were positive steps, but was not enough to cheer the markets.
Saturday, July 4, 2009
Don't expect too much, you won't be disappointed
A test match, not T20
For me, a Test match is still the real thing. T20 is fine for the occasional thrill and I have no quarrel with the place it has carved out in the hearts of cricket lovers. Yet I suspect that any serious cricketer will still measure his career against his Test track record. So it is, or should be, with policy making. The stock market may want instant gratification but it's prudent to shed that T20 frame of mind going into this budget. A dream budget will be like a flamboyant Yuvraj Singh century within a test match, supremely welcome but the bigger goal has to be to win the Test match. Never miss the woods for the trees.
Reams have been written about the significance of this electoral verdict for the Indian economy. This may have raised the bar of expectations for the first Union Budget of this government though interestingly the Sensex hasn't added any weight at all from where it was one day after the election result. That could well mean that investors hope that strong reform signals come through but have not positioned themselves for such an outcome. It's like admiring the shape of a horse and fancying it's chances of winning but not exactly betting on it. You see the difference? The market is going in fairly light, into the event. If it is a complete damp squib, and let’s discuss what would qualify as one, the Nifty could certainly retreat to 3800 kind of levels but that would hardly be a dire scenario. If it has some positive tones but not a lot, the Nifty may not even break 4000. That is, on the budget impact alone. And if it is a complete dream budget, it will certainly rush back to 4600-4700 levels, it's recent peak, and then wait to see what is going on in the global equity environment. That is my best guess of the budget impact; depending on how good or bad it is perceived to be, the nifty will probably go to 4000 or 4700. Only a terribly insipid budget will break it below 4000 or an outstanding one take it beyond 4700. After that the environment takes over. If global markets rally on, the S&P goes to 1100, the Nifty will head to 5000 plus. If global markets correct, something which can certainly not be ruled out and the S&P falls to below 800, then the Nifty too perhaps heads to 3600-3700. The budget is just one event, even something as unexpected as the election result got discounted by the market in one day flat. I doubt very much though that the budget is a 20% binary event. Seems more like 7-8% to me, either way.
But lets leave the market aside for a moment. The budget is, after all, much bigger than just the stock market. The only thing that one expects will shine through the budget speech is positive intent. The budget is not the best forum to push through sensitive policy reform. One cannot forget that it is, after all, a very political document. However, given that Prakash Karat will not be sniping at his heels this time, one certainly hopes that Pranab Mukherjee can unveil a roadmap that he will execute over his five year term. Heavens will not fall if FDI in insurance is not taken to 49% in this budget or if a Rs 40,000 crore divestment target is not set out for the current fiscal. The budget should not be judged on some of these litmus tests alone. Yes, the policy inaction of the last five years has fostered a lot of impatience. Some observers are waiting to stand up say "if you couldn't even do it this time, shorn of the Left, then when will you ever do it?" and there would be a grain of truth in that criticism too. Yet, my only submission is that having waited so long, another year or so will not kill us. The first message that the Congress government wants to send out would be to the people who voted it to power. Not to big business or investors. Sure, the two need not be mutually exclusive but the government will probably prioritise and in doing that, will lean closer to those large sections of our population who do not invest in the stock market. I say, that's fine. What's good for India, is eventually good for the stock market. So if the FM lays stress on issues like education or rural employment generation, collective groans of 'socialist/populist' should not come up from investors. The Finance Minister's job is not to spark a 300 point Nifty rally on budget day. If that happens, it will be a bonus.
So what are the issues on which will hinge the stock market's response. The most immediate items are STT/Capital gains, disinvestment, FDI and GST. Let’s take them one at a time. Long term capital gains tax regime has worked like a dream for investors. Yes, lower STT may benefit traders and arbitrageurs but any move to phase out STT and reintroduce capital gains tax will go down as a big negative. If no change happens, the markets will be fine. Any disappointment from traders will be very short-lived. Unless LTCG comes back, this is not such a make or break item.
Disinvestment. Let’s call it that without confusing it with privatisation. Given that this has been on the backburner for the last five years, the FM may want to start small and then scale up. So the first step may well be to sell small 5-10% stakes in large listed PSU companies and raise some money. This will help raising some money for the fisc but it is a drop in the ocean of our deficit, so macro watchers should not get too excited. It's not as if divestment will bring down our combined fiscal deficit from 12% to 8%. No way. And frankly, these partial stake sales have little positive implication for the stock market. It is simply fresh supply of paper into a market which is already facing too much supply from QIPs, in fact it may even crowd out private listed companies from the capital raising arena. Money is better raised by companies for productive use than by the government for putting in the fiscal deficit blackhole. The other thing that may happen is IPOs for unlis ted government companies. In fact, NHPC and OIL are already in queue. This is positive. New PSUs getting listed at attractive prices will revive the primary market and some of these unlisted PSUs like BSNL and Coal India are so huge that they will end up raising serious money for the government. So the more the FM stresses about new listings, the happier the market will be. If he goes on to lay a firm divestment target for the next five years and that number is substantial, say 4 lakh crore or 80 billion dollars, investors will be very happy. Privatisation is too bold a first step, that’s just being too wishful. That is the stuff of the Economic survey, not the Union Budget. On the subject of capital raising, a firm mention of the 3G auction would be welcome.
On FDI, some caution is warranted. Yes, there is no issue with doing 49% in Insurance and I hope he does that at least but don't expect much more than that. Retail is too sensitive for a first budget. Aviation too may not happen and but that will only make Vijay Mallya unhappy. Eventually, all of this will happen, it has to.
The goods and service tax (GST) is truly important. I hope it does not get postponed by a year, though it is increasingly looking like that. Also, whether it is a dual structure or not is important. This is frankly, the only substantial and material tax reform sought in this budget. Other irritants like FBT or the education cess on corporate tax etc are marginal and any cut in corporate tax rates should not be expected. Nor for personal income taxes. Now of course there will be sector specific stuff like sops for exporters and more taxes for tobacco companies but that’s minutiae. That never makes a budget a dream or a dud. Its much better to focus on the big picture. In that, I truly hope that there is some out of the box thinking. A VDIS (voluntary disclosure of income scheme) like amnesty scheme has been spoken about to channelise resources into infrastructure, something that sounds like a good idea to me. A front on approach to tackle subsidies would be great but given t he recent fuel price hike one suspects that the budget will give the thorny issue of administered price dismantling a pass. Global investors will want to see a firm timeline for bringing our high fiscal deficit under control. The FM cannot be silent on this, but I hope he speaks of a phased reduction aided by higher capital receipts and lower subsidies rather than making it sound as the immediate and top priority. The intent and resolve is important, not immediate steps to rein it in at the cost of growth. Growth is the priority, managing the deficit a compulsion that cannot be ignored, if that note is struck even fiscal hawks may grudgingly agree and rating agencies baying for blood, kept at bay.
Having said all of this, I must confess that I am as ready to be surprised as anyone else, by this budget. I doubt very much though that the impact of the budget will last the week out. Unless there are huge surprises, which I am not betting on, it will be priced in within 48 hours or two trading sessions. It may not be a total non-event like the previous 3 budgets, particularly because of elevated expectations, but it may not be a trend decider for the market. That I continue to believe will be the global market environment, where worryingly some disturbing signs are cropping up.
This weekend I recommend Wimbledon and Yoga. Try not to work yourself into a frenzy with budget expectations, in fact try to temper them. Remember the oldest rule in the book of life: don't expect too much, you won't be disappointed.
For me, a Test match is still the real thing. T20 is fine for the occasional thrill and I have no quarrel with the place it has carved out in the hearts of cricket lovers. Yet I suspect that any serious cricketer will still measure his career against his Test track record. So it is, or should be, with policy making. The stock market may want instant gratification but it's prudent to shed that T20 frame of mind going into this budget. A dream budget will be like a flamboyant Yuvraj Singh century within a test match, supremely welcome but the bigger goal has to be to win the Test match. Never miss the woods for the trees.
Reams have been written about the significance of this electoral verdict for the Indian economy. This may have raised the bar of expectations for the first Union Budget of this government though interestingly the Sensex hasn't added any weight at all from where it was one day after the election result. That could well mean that investors hope that strong reform signals come through but have not positioned themselves for such an outcome. It's like admiring the shape of a horse and fancying it's chances of winning but not exactly betting on it. You see the difference? The market is going in fairly light, into the event. If it is a complete damp squib, and let’s discuss what would qualify as one, the Nifty could certainly retreat to 3800 kind of levels but that would hardly be a dire scenario. If it has some positive tones but not a lot, the Nifty may not even break 4000. That is, on the budget impact alone. And if it is a complete dream budget, it will certainly rush back to 4600-4700 levels, it's recent peak, and then wait to see what is going on in the global equity environment. That is my best guess of the budget impact; depending on how good or bad it is perceived to be, the nifty will probably go to 4000 or 4700. Only a terribly insipid budget will break it below 4000 or an outstanding one take it beyond 4700. After that the environment takes over. If global markets rally on, the S&P goes to 1100, the Nifty will head to 5000 plus. If global markets correct, something which can certainly not be ruled out and the S&P falls to below 800, then the Nifty too perhaps heads to 3600-3700. The budget is just one event, even something as unexpected as the election result got discounted by the market in one day flat. I doubt very much though that the budget is a 20% binary event. Seems more like 7-8% to me, either way.
But lets leave the market aside for a moment. The budget is, after all, much bigger than just the stock market. The only thing that one expects will shine through the budget speech is positive intent. The budget is not the best forum to push through sensitive policy reform. One cannot forget that it is, after all, a very political document. However, given that Prakash Karat will not be sniping at his heels this time, one certainly hopes that Pranab Mukherjee can unveil a roadmap that he will execute over his five year term. Heavens will not fall if FDI in insurance is not taken to 49% in this budget or if a Rs 40,000 crore divestment target is not set out for the current fiscal. The budget should not be judged on some of these litmus tests alone. Yes, the policy inaction of the last five years has fostered a lot of impatience. Some observers are waiting to stand up say "if you couldn't even do it this time, shorn of the Left, then when will you ever do it?" and there would be a grain of truth in that criticism too. Yet, my only submission is that having waited so long, another year or so will not kill us. The first message that the Congress government wants to send out would be to the people who voted it to power. Not to big business or investors. Sure, the two need not be mutually exclusive but the government will probably prioritise and in doing that, will lean closer to those large sections of our population who do not invest in the stock market. I say, that's fine. What's good for India, is eventually good for the stock market. So if the FM lays stress on issues like education or rural employment generation, collective groans of 'socialist/populist' should not come up from investors. The Finance Minister's job is not to spark a 300 point Nifty rally on budget day. If that happens, it will be a bonus.
So what are the issues on which will hinge the stock market's response. The most immediate items are STT/Capital gains, disinvestment, FDI and GST. Let’s take them one at a time. Long term capital gains tax regime has worked like a dream for investors. Yes, lower STT may benefit traders and arbitrageurs but any move to phase out STT and reintroduce capital gains tax will go down as a big negative. If no change happens, the markets will be fine. Any disappointment from traders will be very short-lived. Unless LTCG comes back, this is not such a make or break item.
Disinvestment. Let’s call it that without confusing it with privatisation. Given that this has been on the backburner for the last five years, the FM may want to start small and then scale up. So the first step may well be to sell small 5-10% stakes in large listed PSU companies and raise some money. This will help raising some money for the fisc but it is a drop in the ocean of our deficit, so macro watchers should not get too excited. It's not as if divestment will bring down our combined fiscal deficit from 12% to 8%. No way. And frankly, these partial stake sales have little positive implication for the stock market. It is simply fresh supply of paper into a market which is already facing too much supply from QIPs, in fact it may even crowd out private listed companies from the capital raising arena. Money is better raised by companies for productive use than by the government for putting in the fiscal deficit blackhole. The other thing that may happen is IPOs for unlis ted government companies. In fact, NHPC and OIL are already in queue. This is positive. New PSUs getting listed at attractive prices will revive the primary market and some of these unlisted PSUs like BSNL and Coal India are so huge that they will end up raising serious money for the government. So the more the FM stresses about new listings, the happier the market will be. If he goes on to lay a firm divestment target for the next five years and that number is substantial, say 4 lakh crore or 80 billion dollars, investors will be very happy. Privatisation is too bold a first step, that’s just being too wishful. That is the stuff of the Economic survey, not the Union Budget. On the subject of capital raising, a firm mention of the 3G auction would be welcome.
On FDI, some caution is warranted. Yes, there is no issue with doing 49% in Insurance and I hope he does that at least but don't expect much more than that. Retail is too sensitive for a first budget. Aviation too may not happen and but that will only make Vijay Mallya unhappy. Eventually, all of this will happen, it has to.
The goods and service tax (GST) is truly important. I hope it does not get postponed by a year, though it is increasingly looking like that. Also, whether it is a dual structure or not is important. This is frankly, the only substantial and material tax reform sought in this budget. Other irritants like FBT or the education cess on corporate tax etc are marginal and any cut in corporate tax rates should not be expected. Nor for personal income taxes. Now of course there will be sector specific stuff like sops for exporters and more taxes for tobacco companies but that’s minutiae. That never makes a budget a dream or a dud. Its much better to focus on the big picture. In that, I truly hope that there is some out of the box thinking. A VDIS (voluntary disclosure of income scheme) like amnesty scheme has been spoken about to channelise resources into infrastructure, something that sounds like a good idea to me. A front on approach to tackle subsidies would be great but given t he recent fuel price hike one suspects that the budget will give the thorny issue of administered price dismantling a pass. Global investors will want to see a firm timeline for bringing our high fiscal deficit under control. The FM cannot be silent on this, but I hope he speaks of a phased reduction aided by higher capital receipts and lower subsidies rather than making it sound as the immediate and top priority. The intent and resolve is important, not immediate steps to rein it in at the cost of growth. Growth is the priority, managing the deficit a compulsion that cannot be ignored, if that note is struck even fiscal hawks may grudgingly agree and rating agencies baying for blood, kept at bay.
Having said all of this, I must confess that I am as ready to be surprised as anyone else, by this budget. I doubt very much though that the impact of the budget will last the week out. Unless there are huge surprises, which I am not betting on, it will be priced in within 48 hours or two trading sessions. It may not be a total non-event like the previous 3 budgets, particularly because of elevated expectations, but it may not be a trend decider for the market. That I continue to believe will be the global market environment, where worryingly some disturbing signs are cropping up.
This weekend I recommend Wimbledon and Yoga. Try not to work yourself into a frenzy with budget expectations, in fact try to temper them. Remember the oldest rule in the book of life: don't expect too much, you won't be disappointed.
Subscribe to:
Posts (Atom)
