BackMarket sees budget as neutral to positive; targets left unchanged
Market participants express concerns on valuations though, as earnings have not picked up, but ruled out a correction
Premium(Mint)
Mumbai: Indian stock indices rose on Monday, as investors digested the contents of finance minister Arun Jaitley’s budget and concluded that its impact on the market would range from neutral to positive.
While Jaitley’s budget for 2015-16 didn’t do much to immediately boost sagging corporate earnings, it pushed forward with the government’s quest of higher economic growth, market participants said.
They expressed concerns on valuations though, as earnings have not picked up, but ruled out a correction, as fund flows continue at a steady pace.
BSE’s 30-share Sensex closed 0.33% higher at 29,459.14 points while the National Stock Exchange’s 50-share Nifty gained 0.62% to 8,956.75 points, a record closing high.
These key indices had closed 0.48% and 0.65% higher on Saturday in a volatile session.
Jaitley pushed back the target of limiting the fiscal deficit to 3% of gross domestic product (GDP) by a year to 2017-18. The pace of cutting the deficit would be slower as the government seeks to boost investment. Jaitley revised the target for the next fiscal year to 3.9% from 3.6%.
“Overall, the budget does little to stimulate corporate earnings in the immediate terms and hence, following the announcement the benchmark market multiples can still look stretched," Dhananjay Sinha, head of institutional research, economist and strategist at Emkay Global Financial Services Ltd said in a note on Saturday.
According to Bloomberg estimates, Sensex is trading at 19.3 times one-year estimated earnings, a premium of nearly 23% to its five-year average of 15.7 times.
The government expects gross domestic product (GDP) growth for 2014-15 at 7.4% and sees it at 8.1-8.5% for 2015-16.
Among key positives, Jaitley deferred the implementation of general anti-avoidance rules (GAAR) by two years, removing the looming uncertainty over it. He also announced that corporate tax rates would be cut to 25% from 30% over four years starting in fiscal 2017, but took away the exemptions allowed.
Jaitley also expects to implement the goods and services tax (GST) by April 2016.
He also proposed to do away with the distinction between foreign portfolio investment (FPI) and foreign direct investment (FDI), and said they will be treated as one category.
Sinha of Emkay said he continues to focus on select investment themes, specially the road sector and larger entities in the construction space.
Private banks will continue to be the winning theme in the banking sector while state-owned banks will lag, given the modest recapitalization support from the budget.
Private-sector lenders Axis Bank Ltd and IndusInd Bank Ltd added 14.18% and 9.25% gains in the two sessions on Saturday and Monday, after Jaitley proposed a potential merger of separate limits on FPI and FDI.
ITC Ltd tumbled 12.81% over the two sessions as the budget raised excise duty on tobacco and cigarettes of up to 65mm in length by 25%.
Standard & Poor’s (S&P) said the budget highlighted the government’s commitment to keeping the fiscal deficit low despite lower-than-expected revenue growth, and this commitment moderated the drag on sovereign credit support posed by the relatively heavy general government debt burden in India.
“Nevertheless, the debt burden and large budgetary subsidies could constrain the speed of improvements in India’s credit metrics," S&P said in a statement on Monday.
Moody’s Investors Service said the budget was credit-neutral for the sovereign, positive for corporate entities and infrastructure, and a mixed bag for banks. According to Fitch Ratings, the budget contained both positive and negative elements from a sovereign perspective.
“While the budget shows this government’s continued orientation on implementation of structural reforms, it could have been more ambitious on the fiscal front, especially given India’s high public debt burden," said Thomas Rookmaaker, director at Fitch’s Asia-Pacific sovereigns group.
Market participants ruled out a sharp correction in share prices. “I would say it is neutral for the market," said Amisha Vora, joint managing director of Prabhudas Lilladher Pvt. Ltd.
“Since the event is out, and despite a hike in service tax and surcharge on income tax, it is not that harsh as it is accompanied by a vision of gradual reduction in corporate taxes, infra, bonds, gold bonds and GAAR being postponed," she added
“All this means that the budget is not negative. The worry of a correction is now behind us. All eyes are now on (Reserve Bank of India governor Raghuram) Rajan’s action, and what happens in Parliament in terms of passing certain ordinances."
Foreign institutional investors have pumped in a net of $3.9 billion in Indian shares, and flows are expected to remain strong, and analysts have been upbeat on the prospects of the rise in key indices for the year.
“Overall, from the market’s perspective, we consider today’s budget was positive as it continues the government’s agenda of higher growth with a clear emphasis on easing longer-term supply side constraints," Prabhat Awasthi , Nipun Prem, and Sanjay Kadam, analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd, wrote in a 1 March note.
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