3 reasons why the Sensex has rallied over 700 points

The Sensex has come back from a volatile performance on the Budget day. Here are a few reasons why

Markets gained ground on Tuesday with the benchmark indices – the S&P BSE Sensex and the Nifty 50 – rallying over 2% each in intra-day deals. While the S&P BSE Sensex soared zoomed over 700 points, the Nifty 50 index rallied nearly 217 points to reclaim 7,200 levels.

Here are a few reasons for the 600-point post Budget rally on Tuesday:

Budget rekindles rate cut hope: Despite the increased allocation towards rural expenditure, Union Budget 2016-17 stuck to the fiscal deficit target at 3.5% of GDP for the next year, which has rekindled hope that the Reserve Bank of India (RBI) may soon slash key rates. Experts also suggest that the central bank could cut rates ahead of its scheduled review meeting on April 05.

“With the government signalling commitment to fiscal consolidation, we expect the Reserve Bank of India to respond with a rate cut at its April rate meeting but note the increased chances of an inter-meeting move this month,” says Radhika Rao, chief India economist at DBS Bank in a note.

Adds Devendra Joshi, Equity Strategist, Asia Pacific at HSBC: "In our view, today's budget strikes a good balance between these two objectives. That in itself we believe is positive for equities and our rates strategists look for a compression in term yields for a similar reason. Our economist expects that this move is likely to have a far reaching impact on the macro economy by preserving stability a 25bp post-budget repo rate cut."

Rally in index heavyweight, ITC: The rally on Tuesday was led by index heavyweights – Maruti Suzuki, ICICI Bank, Hero MotoCorp, TCS, Wipro and Infosys that rallied 3% - 7%. However, it was ITC that stole the show. The stock rallied nearly 10% in intra-day deals to Rs 325 levels on the National Stock Exchange (NSE), after several brokerages revised upwards their rating on the stock despite an excise hike on cigarettes. The stock has 8.99% weightage in the Nifty 50 index.

"The government has announced a 10% hike in excise duty (our expectation 15%) on cigarettes across segments in the Union Budget 2016-17. After a 15%+ hike taken for four straight years, the 10% hike comes as a respite for cigarette players," said Premal Kamdar, an analyst tracking the company at Religare Institutional Research.

"We expect ITC to easily pass this on to consumers with a minimal impact on volume growth. We accordingly raise estimates and our Mar’17 target price to Rs 350 (from Rs 330). We, however, expect a marginal decline in FY17 cigarette volumes and muted demand to hurt ITC’s other businesses. HOLD," Kamdar adds.

ITC has underperformed the Sensex by 20% in last twenty four months on the back of punitive cigarette taxation measures.

"We note that magnitude of excise duty increase has come off progressively over FY13-17 (from 22% to 18% to 16% to now 10%)," point out Gautam Duggad and Vishal Punmiya of Motilal Oswal Research in a report.

"With budget overhang behind, we believe combination of attractive valuations and provide a reasonable risk-reward, in our view. Upgrade to BUY with a target of Rs 365 (23x FY18 EPS, unchanged 15% discount to three year average/E)," they add.

Muted impact of STT: The government has not tinkered with the capital gains tax on listed equity investments and the basic service tax rate, which analysts say is a positive move. The move to hike securities transaction tax (STT) will have a muted impact, they add.

"However, there will also be grunt on more steps that could have been taken to revive the financial sector apart from increasing the dividend distribution tax for dividends receipts of over Rs10 lakh, the securities transaction tax (STT; 0.017% to 0.05% on options) and lowering the corporate tax rates (no change in tax slabs for large corporates)," points out a Sharekhan report.

"Going ahead, the market will pay heed to the progress on the key legislations like the Goods and Services Tax (GST) and the bankruptcy law along with the RBI’s monetary measures which if goes through could repair the weak sentiment," it adds.