Impact of Budget 2011: Gain after the Pain

The big event has finally unfolded: Status-quo has been maintained. Equity markets gyrated in a wide range as the finance minister unfolded the budget proposals and finally settled with minor gains in the end. The budget proposals in totality are good for the long term health of the markets as there are no negative surprises. However, the markets will continue to be guided by national/ international news flow, in the short term, which continues to be negative. Let us analyse the few positives for the markets:

• Surcharge on Corporate tax reduced from 7.5% to 5%. However the tax holiday on IT companies has ended with imposition of MAT on SEZs.
• Disinvestment target set at Rs.40,000 cr., giving investors an opportunity to invest in Public sector companies.
• Foreign retail investors allowed to enter Indian equity market through mutual funds, which is a big positive for the markets.
• Distribution of subsidies in cash by March 2012 to poor users of kerosene, cooking gas and fertilisers. This will help to plug the leakages in Govt. subsidy bill.
• Spending on infrastructure has been hiked substantially by 23% to Rs.2,14,000 cr.

The downside risk to the broader market has been reduced substantially, although there will be adjustment in individual stock prices post the budget impact on their bottom lines. The markets on the downside may find good support in the 5100-5200 range on the Nifty.  Let us analyse the impact of budget 2011 on some important sectors:

• Automobiles: Budget impact is neutral, but higher disposable incomes shall continue to guide growth, but higher crude prices can spoil the party.
• Banking & Finance: The budget impact is positive, interest subvention on home loans and crop loans has been increased. Steady growth in credit will be witnessed with infrastructure funding getting a boost. But margins will be under pressure in rising interest rate scenario.
• Consumer Durables: The duty structure has remained unchanged, but higher disposable income will continue to spur growth. The sector is expected to grow at 15% during the year.
• Infrastructure: The hike in infra spending, 85% of which goes to road development, will be positive for companies engaged in highway development projects.
• Information Technology: IT companies are on the 'Mat' after the announcement of hiking the MAT and bringing SEZs under the ambit of MAT.
• Pharmaceuticals: The imposition of MAT is negative for many companies catering to export sector. Imposition of tax on Hospitals and Diagnostics is negative for health care sector.
• Real Estate: Input costs will escalate with increase in cement, steel prices. The demand-supply mismatch does not auger well for the sector. Only those companies focused on affordable housing in Tier II/III cities could benefit.

Overall, the budget is positive for markets in long run, and any dip in markets will be a good opportunity to accumulate good stocks for the long run.