Archive for February, 2010

What’s in the IT budget for specific companies or sectors?

Real Estate

• Interest rate subsidy of 1% for home loans less than 10L (on property less than 20L) to continue. But none of the large RE players are benefited – they just don’t have properties that qualify, and even if they did, people won’t put 50% down.
• The tax slab changes puts more money into people’s hands, but that doesn’t change much; with a potential increase in interest rates soon, the differential will be wiped out by interest cost differentials alone. People in the mint meeting I went to expected RBI rates to harden by 1.5% – even if the bank lending rates only pass on 1% out of this, the interest rate difference will wipe out the tax gains. (For a 50 lakh loan, 20 year term, the EMI moves from 42K to 45K per month)
• A provision to impose service tax on past rentals on commercial space – retrospective to 2007 – is bad for developers that rent out space they own.
• Service tax will apply on all payments made to builders if any part of the amount is paid before construction is completed (“Completion certificate” is granted). This service tax even applies to projects that people have currently bought and are under construction. (though only after April 1, 2010)  That is hugely negative – most builders bank on the pre-construction revenue, and now they have to demand 10% extra from existing buyers. Some were already doing so, but a good number of deals have avoided this tax due to lack of clarity. Now, no choice.
• What this means for you: If you have bought an “under-construction” property, be prepared to pay out about 10% more in every subsequent installment on whatever is not the land cost. This includes any “floor-rise” or such premium costs too. And if you think you are buying a “ready” flat – please demand a copy of the Occupancy Certificate and re-verify with the municipality – otherwise the service tax will apply. (Read this article)
• Rural infrastructure boost could substantially help real estate players in smaller cities, if they keep their prices low enough.
• Slum redevelopment – this has been bumped up to 1270 cr. from 150 cr., and HDIL will benefit.

Automobiles

• Excise duty hikes will increase market prices – and nearly all of them have decided to pass on the duty hikes by raising car prices. (Boy am I glad I bought my car last year). Will car demand drop? We aren’t sure.
• Excise duty exemptions for Agricultural trailers is good for manufacturers in this segment – M&M
• R&D weighted deduction is now 200% – this should help local folks that have a research division, which is all the big players.
• Huge positive for electric car manufacturers like Reva – Excise Duty reduced to nil.

Banks and Financials

• The fiscal deficit looks like it has been tamed at 5.5% but the devil is in the details. We seem to have severely underallocated key items – Defence and security hasn’t got much, considering we have a potential war and serious anti-terrorism work to do, for instance. More details in another post.
• A higher fiscal deficit will need financing from the market. A huge chunk of g-secs are maturing this year and everyone expects that people will put the money right back into new debt. That may not necessarily be true. Higher corporate demand with a potentially strong economy may drive down government bond prices, and if RBI removes the mark-to-market easing that it had done as part of the “stimulus” banks are going to be hit.
• New banking licences – to expect the RBI to give licenses to Reliance or Birla is a jumping the gun; corporate houses have not yet been allowed more than 10% voting rights in banks and I doubt that will change this year. Even if it does, the added competition will only hurt the banks in the short run.
• Overall growth is good but the banking system has great spreads today between lending rates and borrowing rates; that is likely to change as RBI gets tougher. Combined with lower leverage allowances, banks don’t look positive in general.
• The government will put in more than 16,000 cr. in Tier 1 capital in banks. That is usually BAD for shareholders – it will dilute everyone and bring EPS down in the short term.

Other

• Aviation: Service tax now applicable to all classes including domestic. Volumes will surely be impacted
• Cement: Duty increases will make bags cost about more. The infrastructure impetus is nearly 1.75 lakh crore which will keep cement demand up a little bit at least.
• Cigarettes: Obviously negative with higher excise, but that is always expected. Chewing tobacco also impacted.
• IT Services: MAT Is a pain for smaller companies, but the MAT credit available keeps earnings inflated for a while. It’s a cash flow issue but IT is pretty good on cash flow to balance.
• Oil and Excise duty hikes are going to hurt everybody.
• Power: Huge allocation in budget and this is a government controlled sector. Overall positive but darn, look at some of the players – they are all in horrendously unprofitable zones and will have to wait a long time. Better to buy electrical equipment players that are cheap.
• Retail is tough: just the service tax on leases with retrospective effect could hit margins hard. Hopefully, slightly higher disposable urban income from tax slab rejigs will help cushion it.
• Telecom: The MAT increases have an impact on bottomlines. Cellphone battery charger duty cut might help but it does nothing for people like me who have at least two chargers of every make.
• Gold and Precious metals have higher duty (still nothing at 2% or so) – I doubt this makes a very big difference to the industry.
• ULIPs – service tax to only apply on fund management charges; this is positive but the industry is evil and I don’t want to bet on its future.
• 3G Auctions will raise 36,000 cr., they say, and auctions will start on 9th April. It’s going to be interesting to see how they get funded and at what price the licenses go. One thing is for sure though: with this cost structure, the content developers for 3G will likely get very small payments for their work as the mobile operators will try and recover most of the money to pay for the licenses. (If you make a game that can be played with data on 3G and hope to fund it through a small charge in the user’s bill, the operator will take most of the money – 60% to 80%. Comparatively in the west, software developers get higher parts; that promotes the market.

Overall, I’m not convinced this budget is a game changer. The cues on the global front are more important – what happens to Greece and the Euro? American housing is going down again, and there is serious stress beginning to show. China is showing signs of overheating, and Dubai’s problems are far from over. This will impact us, in a bigger way than the budget will.

But there are small and medium size companies that will do phenomenally well, and it’s up to you and me to find them. I’m actively looking and building up positions; I will post once I’m done with the buying. Do chip in with suggestions.

Disclosure: I have positions in some of the above sectors.

Markets went berserk today. They obviously loved the budget, and tripped on Pranab-da’s speech so much they nearly touched the 5,000 mark before rolling back. The Nifty closed at 4922, up 1.3%, which isn’t a lot; but it was up nearly 3% during the day.

Turnover was amazingly high today, with 116,000 cr. traded in the F&O segment, and 18,000 cr. in cash – both very high values for what is the first day of the next expiry cycle.

Surprise: Foreign Institutional investors bought more than 800 cr. worth of stocks. And Domestic Institutions SOLD more than 800 cr. worth – this is interesting. Who’s going to print the trend?

Given that this is an inflationary budget, it’s surprising that banks went up – but they did. The Bank Nifty was up 2.2% at 8722, and some NBFCs like Reliance Capital and IDFC were up more than 5% on the news they might get banking licences. Fat chance for Reliance – RBI will never let a corporate house own a bank, but don’t let logic stop you. Canara Bank was up 3.25% at 394, whic

Auto stocks went up dramatically largely towards the end, as the FM announced that he’s hiking excise duty for cars back up 2% and taking away the stimulus. It might just have been panic buying, or short covering; only Tuesday will tell us. TataMotors, M&M and Hero Honda  were up more than 5% each, with Maruti close by at 4.73%.

What went down? ITC was down 5.7% and I’m kicking myself for not shorting it right at that cigarette duty increase announcement. Tatapower was off 4.36% too, for reasons I can’t quite fathom. Real estate stocks were flat – they didn’t have much to cheer about. The Tech pack ended weak but not substantially – less than 1% down – due perhaps to the Minimum Alternate Tax announcements.

Disclosure: Am actively trading the market and have positions currently open. I’m not at liberty to disclose directions and stocks at this point.

I spoke too early. I assumed in my first post that Fuel Price hikes due to the reintroduction of duty on Crude and Refined products will not immediately translate to higher retail prices because there still was an administered price mechanism (APM) meaning the government controls the prices.

The talk of the Kirit Parekh committee report implementation – to deregulate and free oil prices – is only talk; the government will still regulate prices.

I assumed that the higher price incurred by the oil companies due to this duty would be paid back by subsidies; this is of course a stupid way to do things, to first increase a tax on something and then pay the excess back through another route. Earlier it was a way to make the fiscal deficit look better – since the duty was “revenue” and the subsidy was “off balance sheet” by issuing it in bonds of a specific sort. Unfortunately people have not been falling for it, so the FM decided this year to take the subsidy in by paying in cash, not bonds. So everything is on the balance sheet.

So Moneycontrol says the government “is set to” increase fuel prices by midnight tonight. In the larger scheme of things, it’s good; hiding these fuel price subsidies was going to hurt us anyhow. But the difference – Rs. 2.71 on petrol and Rs. 2.55 on diesel – will surely impact food inflation, which was just set to have gone violently down because of a reasonably good harvest this year. Sometimes I think the government wants the inflation – that promotes GDP growth to a large extent, and hey, there are not many elections this year.

Stay tuned; an official announcement is likely to be out soon.Note that I don’t yet know if this is happening – I’m just relaying news.

Pranab Mukherjee presented the budget for 2010-11 today. Some notes, to be expanded upon later:

Taxes, which will interest most of you:

• Tax slabs changed:
• Upto 1.6 lakhs, no tax.
• 1.6L to 5L: 10% tax
• 5L to 8L: 20% tax
• 8L onwards: 30% tax.
• No reintroduction of surcharge above 10L that was taken out last year, which is a good thing.
• Additional Rs. 20,000 deduction, above the 80C deductions, if you invest in infrastructure bonds.
• Companies get to pay lower taxes if they’re not tax free entities. Surcharge for companies lowered to 7.5% (from 10%), but Minimum Alternate Tax increased to 18% (from 15%)
• The company tax changes hurt IT companies, SEZ exporters like Reliance, tax free players like Bharti
• Taxes on petroleum products – removed for fiscal stimulus – brought back. Crude gets 5% duty, Diesel 7.5% and the rest 10%. With the administered pricing in place I don’t know if this will mean price rises (if crude falls). Update: It seems it might mean a price rise.
• Cigarettes and chewing tobacco likely to cost more. Details when I get ‘em.
• Customs duty on Automobiles brought back up to 22% (reduced for stimulus)
• Central excise duty up to 10% from 8% across the board (reversing stimulus)
• No change in service tax – stays at 10%

Other interesting notes:

• Disinvestment to bring in 25,000 crores.
• The Direct Tax Code is on for 2011, and so is GST.
• Kirit Parekh committee report to be implemented sometime – oil prices will be freed. But right now, nothing.
• Public Sector Banks to get 16,500 cr. in additional Tier 1 capital. This can’t be good for the private banks.
• Interest subvention of 2% in certain sectors like handicrafts, carpets and SMEs will be continued till March 2011.
• Agri Credit targets hiked to 375,000 cr. (from 325,000 cr.)
• Additional 1% interest subvention (total 2%) for farmers that repay crop loans on time. The “on time” bit moved to end Jun 2010.
• Roads get 19,800 cr. (versus 17,500 cr.)
• Fertilizer subsidies will be given direct to farmers rather than paying fertilizer companies. That’s a good thing.
• UID project gets 1900 cr. next year. First UID numbers will be released next year as well.
• NREGA allocation upped from 40,000 cr. to 48,000 cr. Wow. Where are they going to fund this from? Update: Alert reader AbheekB tells me I got that part wrong – NREGA Is only at 40,100 cr. (it’s “Bharat Nirman” that’s up to 48,000 crores)
• Housing loans upto 10L for houses costing upto 20L were given 1% interest subsidy, that continues into the next year. Will cost the govt. 700 cr.
• Some level of social security for workers like rickshaw pullers etc. I don’t yet know the details. The scheme will start with 1000 cr. put in.
• New Pension Scheme: All new accounts opened in 2010-11, where people put in less than 12,000 Rs. per year, get an additional Rs. 1,000 from the government.
• Direct taxes will cost the govt. 26,000 cr. in lost revenue; they expect gross tax receipts at 746,000 cr. That’s not a great amount, considering how much more we are spending this year.
• Oil companies to be paid for shortage in cash, not bonds. That brings it back on the balance sheet and deficits are better known/managed.
• Excise slashed for electric cars.
• Host of green initiatives get duty cuts. Will detail more as I get ‘em.

Overall, this is a ridiculously expensive budget. We will probably up revenue only by 1 or 2% – 20,000 cr.  if there is no double dip abroad. And the expenses? just the increase in NREGA is 8,000 cr. – and it gets much worse if you consider most of the other stuff. Turns out the NREGA bit was wrong – the increase there is just 1,000 cr. But the expenses seem very large – the deficit should widen, not contract this year.

Inflation will go up. Fiscal deficit is sure to be higher than expected. This can’t be positive for interest rates; expecting bonds to underperform and banks to be hit along with other rate sensitives.

Much more to come as I analyze the speech. Stay tuned.

• See the Twitter Feed for the Budget
• Full Budget Speech
• The Finance Bill 2010-11
• Fuel Prices to go up?
• Markets Love the Budget

Live searching Budget 2010: (I am @deepakshenoy)