Budgets & rallies

Markets usually correct post-Budget, after a pre-Budget rally

The markets have corrected a bit this week, but there's no denying that its in the middle of a pre-Budget rally, which began towards the end of January.

Till date, the Sensex has risen around eight per cent since the rally began in late January. With the markets poised the way they are, it would be interesting to see how they had behaved around Budget announcements in previous years.

Dimensional Securities has done a detailed study on pre-Budget and post-Budget rallies by looking at market performance 31 trading days before the Budget, on the Budget day and 10 trading days after the Budget.

The first thing that comes up in the study is that a pre-Budget rally has happened only 7 times in the last 15 years, if one uses the base date as 31 trading days prior to the Budget day.

If the period is reduced to 16 days, it turns out that there have been 8 pre-Budget rallies in the past 15 years. Therefore, it's not true that the Indian markets witness pre-Budget rallies every year.

Of the seven occasions that the markets have delivered positive returns through pre-Budget rallies, it's only two times that returns have remained positive even after the Budget (defined as three trading sessions post-Budget).

Interestingly, the two times this happened was when Manmohan Singh had presented his first two Budgets.

According to Dimensional, this happened because the reforms process had just begun and is unlikely to be repeated.

On all the other five occasions, the markets fell post the Budget, after having rallied before Budget day.

However, it's important to note that investors who buy at the beginning of a pre-Budget rally makes gains even if he sells after the correction post-Budget, simply because the correction is not as sharp as the rise.

History clearly points out that there could be a correction post-Budget this year as well. Things, however, could be different if the finance minister manages to meet market expectations or if FIIs continue to pour in money regardless of what the Budget has in store.

Patni Computers

Patni Computers hopes to achieve two objectives with its proposed ADR issue for $100-120 million. First, the ADRs are expected to help it get more visibility and secondly, it will provide the company additional cash to fund acquisitions.

The company lacks brand visibility in the US despite the fact that the majority of its business originates from that geography. The ADR issue should give it the necessary mileage to enable it to bag new accounts as also to enhance the comfort level with existing customers.

Patni has openly stated that it intends to grow inorganically by acquiring firms in verticals such as energy, utilities, retail, travel and logistics.

It currently has a fairly strong presence in the insurance and financial services verticals and the recently acquired Cymbal Corporation gives it a presence in the telecom vertical - specifically in the service provider space.

But Patni is already sitting on cash to the tune of Rs 704 crore, and if it doesn't use the Rs 525 crore or so it nets from the ADR, its ROCE of 30.5 per cent would fall further.

Patni's financials are not as impressive as some of its peers: its operating margin of around 23 per cent, for instance, is on the lower side.

Besides, it has a huge (27 per cent of revenues) exposure to GE and a high proportion of fixed price contracts (41 per cent). For this reason, the company gets a relatively low valuation of around 15 times estimated CY05 earnings.

Syngenta India

Syngenta India reported a 46.2 per cent growth in its profit before tax for CY04, thanks mainly to a 38.1 per cent jump in revenues. In the December quarter, the company's profit before tax grew only 7 per cent to Rs 38.75 crore.

But one shouldn't read much into quarterly variations in growth because its business (mainly related to crop protection) is seasonal.

A key highlight of the company's performance in CY04 was its attempt to expand market share in domestic market via new products and augment its dealer network, coupled with a rapid improvement in its overseas sales.

The Syngenta management pointed out that the company grew sales of wheat herbicide and insecticides in northern states due to the marketing initiatives taken.

Also, crop protection exports improved 135 per cent to Rs 139.24 crore due to enhanced participation in its parent's global operation. Segment profit of the crop protection business grew 71 per cent to Rs 71.28 crore in CY04, with margins improving by 255 basis points to 15.08 per cent.

In their seeds business (17 per cent of revenues), Syngenta has recently added seeds for rice, apart from their range of seeds for cauliflowers, cabbage and tomatoes.

And while segment revenues grew 21 per cent in CY04, segment profit has been more or less steady at Rs 26 crore, largely due to higher marketing costs incurred for the new varieties.

However, thanks to the good performance of the core crop protection business (83 per cent of revenues), overall operating profit grew 44.3 per cent to Rs 101.02 crore in CY04.

Going forward, the company is optimistic of further expanding its role in the global operations of the parent company coupled with introducing more products for crop protection. However, much would depend on whether there's a good monsoon this year as well.

With contributions by Mobis Philipose, Shobhana Subramanian and Amriteshwar Mathur.