Budget recedes in importance

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This may not have been a `big bang' or a `dream' budget that sent the markets into yet another bout of bullish action. This is perhaps the first in a series of budgets over the next few years that will highlight the declining importance of this event in determining market action. It may at best have a short-term impact because of the sentiment factor.

We are well on our way to ensuring that the budget has a status akin to the credit policy of the past two years. It sets the broad direction, but the scope for specific fiscal measures that propel stock prices one way or the other is increasingly getting limited. Even in this budget they were few and far in between. This trend is good for investors and the markets. The increase in Securities Transaction Tax may be a minor blip, while there may be disappointment in the short term for traders.

It's Maruti's day

The reduction in excise on small cars by eight percentage points and a liberal definition of small cars is likely to benefit Maruti and, to a lesser extent, Tata Motors. In anticipation of the excise duty reduction, the Maruti stock has been on an upward march in recent weeks. This buoyant trend is likely to continue, as there could be a boost to earnings from robust volume growth. Auto-component players linked to Maruti and Tata Motors such as MICO, Subros, Jay Bharat Maruti, Sona Koyo and Asahi India may benefit over the longer term.

Consumer products pack a punch

The thrust on irrigation, rural infrastructure and targeted farm credit could have a cascading impact on FMCG sales, where accelerated rural growth has been visible over the past two quarters. The reduction in customs duty on a range of soap, detergent and personal product inputs will provide relief from rising material costs for FMCG companies such as Hindustan Lever, Godrej Consumer and Colgate Palmolive.

Lower duty incidence on packaging materials will provide a thrust to categories that use low unit packs and sachets to drive volumes such as shampoos, detergents and toothpaste. Reduction in excise duty on food products such as pasta, ready-to-eat foods and mixes could expand profitability or, alternatively, allow lower selling prices for food products. Players such as ITC could benefit from market expansion.

Infrastructure gets a push

That there would be a push for rural development, power and infrastructure was widely expected. This has been the trend over the past couple of years and this budget is no different. These are three sectors where government-spending patterns still matter. Stocks of companies in the engineering and construction space, which will be the prime beneficiaries, have been on an upward for several months now.

What the budget has done is confirm the likelihood of high revenue visibility for stocks from these two sectors. Not surprisingly, the likes of Siemens, ABB and Larsen & Toubro have been firm. Likely revenue and earnings visibility have been largely priced in and we can expect such price trends in these stocks to shed the budget-day effect and move on fundamentals sooner than later.

There is value addition for petrochem

As the government rationalises the import structure by reducing peak tariff rates, there is greater scope for value addition in the petrochemicals sector. The likes of Reliance and IPCL are likely to benefit.

S. Vaidya Nathan

(This article was published in the Business Line print edition dated March 1, 2006)
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