Some sectors like banking and textiles may steal the show this year, while cement and FMCG may lag behind
It's no secret that the finance minister has attempted to appease all sections of society this year. Apart from doling out sops to tax payers, he seems to have adopted a rather cautious approach towards industry also.
In spite of touching upon almost all sectors in his Budget speech, the finance minister has avoided tinkering with the existing duty structure in most, except for textiles where several incentives are offered to organised players. And if other sectors were affected, it was because of the rationalisation of excise duty and/or reduction of peak customs duty.
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Banking is another sector where the finance minister has proposed to take steps to meet industry demands. Apart from this, attention was largely focused on proposals to improve infrastructure like roads, airports and sea ports, which will indirectly have an influence on the performance of core manufacturing companies in cement, steel and construction.
So with no obvious or direct negative impact on any specific sector, the general mood seems to be upbeat on the street. "It's a very bold Budget with steps to fuel consumer demand. Thus, by and large, most of the sectors should do well," feels Nikhil Khatau, chief executive officer, Sun F&C Mutual Fund.
Market experts also believe that the improved performance of India Inc. will lead to a broad-based rally on the bourses. "We expect retail investors to drive a liquidity-based rally across various sectors," asserts S Naren, director and chief operating officer, HDFC Securities.
Although market participants feel that most key sectors will do well, some sectors like banking, information technology and textiles, among others, are expected to lead the anticipated rally in the markets. This apart, the outlook on sectors like FMCG and telecommunications services continues to remain weak. Analysts also seem to be apprehensive about the cement industry despite the prospects of growth in demand from the proposed huge investments in infrastructure projects.
In this issue, we take a look at some of the key sectors that could lead the rally and some which might not find favour with investors.
GAINERS
Banking: Banking stocks have already witnessed a smart rally on the bourses, thanks to falling interest rates and the passage of the 'Securitisation Bill' which is expected to significantly bring down the level of non-performing assets (NPA).
The positive announcements in this Budget, like the hike in the foreign direct investment (FDI) limit in private sector banks, seems to have improved sentiments towards banking stocks. "The hike in the limit should see foreign capital flowing into the country. The reason being that the finance minister intends to relax the restrictions placed on the voting rights for foreign shareholders," says Sejal Doshi, research analyst, Tower Capital.
Public sector banks also stand to benefit from the proposal to buyback high yielding but illiquid government securities (G-secs) at a premium by the government. "The buy-back of high-yield G-secs will enable PSU banks to report improved performance," says U R Bhat, director, J P Morgan India.
The recent resurgence in gilts due to the repo rate cut will further have added to the unrealised gains on their gilt portfolios. However, some analysts feel that the rally in banking stocks could be limited to private sector banks as the foreign institutional investor (FII) limit in public sector banks has not been hiked.
Information Technology: Software services companies dominated the list of gainers on Friday. And rightly so, as the uncertainty related to Section 10A/10B was playing heavily on the minds of investors. Thus, the proposal to revert to 100 per cent exemption on corporate tax as originally envisaged simply delighted the markets.
"The restoration of original benefits under section 10A/10B is a pleasant surprise for the tech sector," says Sun F&C's Khatau. Even optimists among analysts were not expecting such a positive proposal in the Budget.
In addition to this, the Budget also proposes to pave the way for enhanced mergers and acquisition (M&A) activity by allowing continuation of section 10A/10B benefits in case of change of management control of an software technology park(STP)-based software services unit. So all eyes are focused on the top-rung and some cash-rich mid-sized software companies which are expected to aggressively look for inorganic growth options now.
Textiles: The textile industry has been one of the biggest beneficiaries of this Budget. Thus, it is not surprising that market experts anticipate textile stocks to outperform markets. The Budget proposes an across-the-board reduction in excise duties for various classes of textiles ranging from synthetic man-made fibres to knitted yarn and woven fabrics and garments.
This is expected to strengthen the organised sector in terms of its competitiveness against unorganised players. "The significant changes in duty structure will enable the organised sector to fight competition from the unorganised sector, which will eventually reflect in the financial performance of textile companies," points out HDFC Securities' Naren.
Moreover, there are incentives for the modernisation of manufacturing units in the form of lower customs duty on textile machinery. This seems to be prompted by the expected removal of import quota system by developed countries in 2005. Thus, investors could be attracted towards scrips of leading textile companies which could emerge as large exporters in future.
Steel: Focus on the infrastructure sector in terms of the huge proposed investment on development of roads, rail and ports is good news for steel manufacturers. The existing firm global demand as well as potential demand from domestic industry in the next few years is likely to keep the prices firm.
However, there is a downside too. This is in the rationalisation of import duty on metallurgical coke, a basic ingredient in the steel manufacturing process. But not all steel producers will be hit. Fully-integrated players will suffer marginally as compared to the considerable impact on non-integrated companies producing sponge iron and pig iron. Thus, large players such as Tata Steel and Jindal Iron & Steel could lead the rally in the steel sector this fiscal.
Automobiles: Lowering the excise duty on passenger cars and utility vehicles (UV) is expected to boost investor sentiments towards auto stocks. Moreover, the narrowing of cost differentials between organised and unorganised sector in building bodies for commercial vehicles (CV) is an upside for CV manufacturers.
Thus, most proposals seem to be beneficial for Tata Engineering which is expected to lead the rally in auto stocks. "Passenger cars should witness a pick-up in demand but there are few listed companies in this sector," points out Kejriwal.
LAGGARDS
Cement: Cement is a sector where many analysts have adopted a cautious approach. This is despite the fact that the Budget has proposed 48 new infrastructure projects at an estimated expense of Rs 40,000 crore over the next few years. However, the additional excise levy of Rs 50 per tonne, or Rs 2.5 per bag, on cement seems to have hurt investor sentiments.
"Given the highly competitive scenario, the cement manufacturer might not be able to pass on the extra cost to consumers. Thus, it could adversely impact the profitability of cement companies," feels Naren. This apart, market participants could prefer to fully understand the impact of implementation of value added tax (VAT) on the cement industry. Analysts point out that there is still uncertainty about the exact cost structure that will evolve in the cement industry.
FMCG: The Budget has some goodies for the fast moving consumer goods (FMCG) sector. The reduction of duties on biscuits and alcohol-based toiletry like after-shaves and deodorants is good news for companies like Britannia and Gillette. But market experts seems to be worried about the growth in rural demand which has a strong influence on the fortunes of FMCG.
"The cess levied on diesel and the reduction of subsidy in urea could considerably impact the level of disposable income in the hands of farmers," points out Raamdeo Agrawal, joint managing director, Motilal Oswal Securities. However, many analysts tend to agree that the markets might ignore the long-term impact of a possible slowdown in rural demand. Thus, some of the leading FMCG stocks should attract some buying interest in the near future. But it would be wise to be careful when making your pick in this sectors.