Fillip from status quo

Unchanged freight rates will benefit the cement sector

The railway budget came as a positive surprise, and this is reflected in the 1.7 per cent increase in the Bombay Stock Exchange Sensex. The markets were expecting an increase in freight rates.

Since inputs like coal (prices of which were increased recently) have to be necessarily transported by rail, an increase in freight rates would have hit some industries hard.

Among others, the cement industry would benefit because freight rates were untouched. Most cement stocks rose by over 2 per cent in Tuesday's trade.

But analysts point out that it's nothing to get too excited about, especially since the demand-supply mismatch continues to be significant in every region barring north India.

Further, the railway minister has offered a 10 per cent rebate on the transport of heavy machinery, which led to a spike in stocks such as BHEL and L&T. But freight rates have minimal significance for engineering companies, which means the jump in price wasn't warranted.

The minister also proposed to introduce aluminium body wagons and conduct field trails, which led to a 5 per cent jump in the prices of Hindalco and Nalco. But analysts point out that it's too early to comment whether this can be implemented.

All this only goes to confirm that the markets often jump the gun when it comes to discounting policy announcements, ignoring other important factors that too affect these companies.

Turnover tax

There is much talk of a turnover tax being levied on stock market transactions instead of the capital gains tax, as applicable at present.

This means that for every transaction, regardless of whether it results in a profit or a loss, an investor or a trader has to cough up a tax, unlike in the case of the capital gains tax where traders and investors can offset their losses against gains, thereby getting a tax hedge. Moreover, losses on deliveries can be carried forward for eight years.

If the rate is between 0.1 and 0.3 per cent, as is reportedly being contemplated, it could be a big disincentive to intra-day trading. As is known, delivery trades account for barely 20 per cent of the volumes and it is the day traders who provide nearly 80 per cent of the volumes in the market giving it liquidity and depth.

In a market which is already nervous and where volumes are already down to a trickle, the last thing one needs a move that will keep players away.

Scalpers, or traders who punt for wafer-thin profits, will be particularly dissuaded. That could result in lower volumes and larger impact costs, particularly for institutions which make large purchases. Therefore, the assumption that the exchequer may garner Rs 3,000 crore or so (based on the cash market turnover of the two main exchanges in FY04) may not hold, since volumes would drop.

Nice numbers from Ipca Laboratories

Ipca Laboratories Ltd has declared impressive results for the quarter ended March 2004. Riding on the back of a 44 per cent growth in net sales to Rs 174.76 crore, net profit of the company (after tax but before exceptional items) jumped 62.4 per cent to Rs 18.5 crore.

In the domestic market, revenues were driven by an upsurge in the sales of its medication for diverse segments such as cardio-vascular, anti-diabetics and anti-malarials.

However, overseas markets are the key for Ipca, which derives approximately 56 per cent of its turnover from foreign markets. Its medications for the antihypertensive segment, diuretic and anthelmintic segments grew due to efforts to enter new markets, especially in Africa and South America.

But while sales have grown, the cost base has also been rising at a fast pace. For instance, staff costs rose 48 per cent to Rs 16.75 crore in the March quarter.

With the company paying greater attention to research and development as well as entering new markets, analysts point out that one could expect a further increase in staffing costs.

However, rising sales helped the company grow its margins-operating profit grew 71 per cent to Rs 18.57 crore in the March quarter and operating profit margin rose 166 basis points to 10.62 per cent. It appears that the company's strategy of moving up the value chain by increasing its emphasis on branded formulations has paid off.

On the bourses, the Ipca stock has outperformed the BSE's healthcare index in the recent past. Since its lows about two weeks ago, the scrip has gained over 11 per cent, much higher than the 5 per cent gain in BSE's Healthcare index.

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