Feb 26th to Mar 2nd 2001 Volume 1: Issue 40

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Markets this week  Corporate News   Sector Watch  Market Forecast  Stock Ideas             

Budget Announcement - A Macro Economic View

Finance Minister Yashwant Sinha in his Budget 2001-02 announced various sops to the Indian industry via reduction in tax and interest rates. Fiscal consolidation has been attempted by reducing the government's interest burden and downsizing. The budget offered a clear roadmap for divestment of 27 PSUs including that of VSNL, MUL, AI. With the announcement of 10 year tax holiday in first 20 years for core industries and 10 year tax holiday in first 15 years for airports/ports, the budget has made an attempt to stimulate investment. The budget also gave top priority for the debt market. Besides the steps to raise the FIIs investment ceiling to 49 percent from the current level of 40 percent and the decision to allow two-way fungibility on ADR/GDRs are an attempt to increase foreign investors participation.

In an other measure, several steps in the reform front including that of amendments to the Essential Commodities Act and Industrial Disputes Act were announced. The budget also dereserved 14 items reserved for the small scale industry and abolished banking service recruitment board giving greater autonomy for the sector. Overall its been a budget in the direction to help accelerate the economic growth.

• Three international hotel chains, Ritz Carlton, Oriental Mandarin and Raffles owned by the Singapore government, are in race to pick up a minority stake in Hotel Leela Venture Ltd., which owns four five-star hotels in the country.

• Essar group has got a clean financial chit from the government to take equity in $ 300 million oil field along with Oil and Natural Gas Corporation.

• As a prelude to its privatisation, India Petrochemicals Corporation said it was exiting GE Plastics (India) JV by selling all its 50 per cent stake to joint venture partner.

• The government said it had no proposal now to go for rebidding to sell its stake in Indian Airlines and Air India amidst reports that there was a poor response to the technical bids that closed on Friday.

• Sun Pharmaceuticals has approved the merger of Pradeep Drug Company. The company has announced a swap ratio of 1:500 (one equity share of Sun Pharma for every 500 equity shares of Pradeep Drug company).

• Cochin Stock Brokers Ltd, the wholly-owned subsidiary of the Cochin Stock Exchange on Monday successfully activated its trading activities with the BSE.

• The Confederation of Indian Industry has urged the government to expedite the induction of foreign direct investment in the civil aviation sector, by allowing foreign airlines to pick upto 49 per cent stake in domestic carriers.

• Globsyn Technologies Ltd, the Bikram Dasgupta promoted software services and education company, has dropped its public issue plan as it was hugely undersubscribed.

• Chennai-based Ramco Systems, a leading player in e-business, has announced its strategic tie-up with global IT major Sun Microsystems to participate in the latter's "Iforce" initiative in India

• Financial services company ICICI Ltd is looking at divesting a 15 per cent stake in ICICI Bank before the end of March. The stake sale, was to abide by RBI rules which require promoters or founders of private banks to lower their stakes to 40 per cent.

• Cadbury India Ltd has posted a 42 per cent increase in net profit at Rs 52.03 crore for the year ended December 31, 2000 as compared to Rs 36.70 crore in the corresponding period in 1999.

• Interact Commerce Corporation, a provider of customer relationship management software for mid-market companies and small office/home business, has appointed Sonata Information Technology Ltd, a wholly-owned subsidiary of Sonata Software Ltd, as channel partner in India.

• Thapar group company Ballarpur Industries Ltd (Bilt) is considering a proposal to take over Indonesian paper major Sinar Mas' Indian operations in a bid to consolidate its position as market leader in the paper industry

• i2 Technologies Inc, the Dallas-based e-commerce major and Intel Corporation, the world's largest chip maker on Wednesday, formed a worldwide e-business alliance to accelerate growth in B2B solutions.

• Ford India Ltd has dropped prices of the Ikon following the excise duty cut announced in the budget. The price reduction will be effective Thursday. Maruti Udyog Ltd also has announced a price reduction

• Cigarette major ITC Ltd has made a counter offer to acquire up to 20 per cent stake in VST Industries for a consideration of Rs 36 crore at Rs 115 per share. The counter offer is being made through its subsidiary company Russell Credit Ltd, an investment arm of the ITC.

• Taking cue from the rate cut announced in the budget, the Reserve Bank of India announced a 50 basis point cut in bank rate to 7 per cent. The new bank rate becomes effective from Friday.

• The Tata group is planning to bid for the VSNL stake following government's decision to divest 25 percent stake in the company. A consortium of Tata companies will submit the bid jointly in the first week of April.

• HDFC the market leader in the housing finance has lowered its lending rate by 50 basis points to 12.5 percent. The institution has also introduced new slabs with lower rates.

• Birla Sun Life Insurance Company has announced a tie-up with Citibank NA, wherein the bank will distribute the former's products through its branches in the country.

VIEWS ON NEWS

Corpoarte dividend tax cut to 10.2 p.c: The Union Budget 2001-2002 has reduced   the corporate dividend tax for  domestic companies to 10.2 per cent from the 22 per cent tax levied earlier. This announcement was in line with the industry wish list. The tax on dividend distributed is an additional burden on corporates since it is over and above the tax paid on the normal profits. The post-tax profits of companies declaring, distributing or paying dividends are subject to double taxation by way of dividend distribution tax. Hence this reduction in dividend distribution tax compounded with the reduction in surcharge will directly benefit companies, specially companies with a high dividend outgo (for example the multinational companies operating in India). Some of the companies which shall benefit from this reduction in dividend tax include Bharti Telecom, Knoll Pharmaceuticals Ltd, Essel Packaging Ltd, Reckitt & Colman Of India Ltd, Colgate-Palmolive (India) Ltd, Nestle India Ltd ,as these companies have a high dividend payout.

Reliance Industries after budget: Reduction in customs duty on PTA, Polyester and Nylon chips will bring down realisations. But considering the overall growth being posted, it would be neutralised. Further regulatory hurdle for the company to sell part of its 64 percent stake in Reliance Petroleum has been removed and this would   ease the sell off process. Besides, lower cost of telecom equipment will bring lower capital cost for Reliance Infocom. Hence the budget has been mildly negative from the earnings perspective while policy changes towards sale of Reliance Petroleum equity will release inherent value driving the share price up.

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• Software - Domestic sales from EOUs which will now be taxed will have a marginal impact. Removal of conditions of ownership of companies in Sec 10 A and 10 B will help increase M&A activity in domestic and global arena. Reduction in customs duty on IT products will have a marginal impact as most items are already at 15 percent customs duty or lower. Key announcement for the sector was the two way fungibility of ADR/GDR and the option to offer sponsored ADRs against block holdings. Though the budget has given lot of positives for the sector, the rally in tech stocks are unlikely as the slow down in economy still holds as a major concern.

• Banking - Budget has promised some structural reforms in the form of more autonomy for public sector banks, scrapping of SICA and introduction of foreclosure laws which will improve their efficiency. Abolition of surcharge will see marginal impact in shoring up profits. However, the reduction of tax on income distributed by debt funds will find fund flowing away from banking sector to mutual funds. Another negative is the reduction in tax exemption from income on deposits to Rs 2500. Overall the budget has given a positive signal to the sector.

• Automobile - Customs duty on second hand cars has been raised to 105 percent. With this the total duty on them is more than 180 percent which would deal with the fear of used cars flooding the domestic market. The reduction in excise duty by 8 percent points on motor vehicles would help boost the demand following the reduction in motor vehicle prices. Accelerated depreciation on new commercial vehicles to be charged at the rate of 50% for one year would benefit the commercial vehicle sector.

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Budget Implications on Capital Market

With some good announcements, this budget has been an investor friendly one for the capital market. First and foremost was the cut in the small savings interest rate by 1.50 per cent which would be followed by banks cutting the lending and deposit rates. This would see the appetite for equities improve relative to fixed income investments. Besides, with falling rates, equity valuations by discounted cash flow method will increase especially for high-growth stocks such as software, where cash flows are more back-ended. In addition the move would improve corporate sector earnings due to lower interest burden. The mutual funds industry would be another major beneficiary with the rate cut as this would redirect the flow of funds from the banking sector to mutual funds.

The announcements in ADR/GDR norms will have a positive impact on Indian companies especially technology ones. The two way fungibility in particular would see arbitrage, existing because of the price difference between domestic price and ADR/GDR price, reduce to the extent of exchange rate risk. It would also drive down the premium on ADR/GDRs enjoyed by Indian companies. Foreign investors who until now had to exit completely from their ADRs or GDRs when they decided to sell underlying shares in the event of the price being higher in the Indian market, can now do so with greater degree of comfort as they can always pick them up again. There could also be enhanced investment flows into the country when foreign investors decide to buy more domestic shares in an attempt to reconvert them into ADR/GDRs.

In an other measure, FII investment limit has been raised to 49 per cent from the current level of 40 percent which would ensure more foreign funds flowing into the capital market. However it would have been better if the ceiling itself had been got rid off.

Other important measures include the reduction of tax dividend to 10.2 percent from 22 percent last year and abolition of surcharges on corporates and non corporates except for the 2 percent quake surcharge. This will help revive the capital markets, providing stimulus for the growth of it. Especially for a capital-intensive industry like telecom, steel, power the reduction in dividend tax has come as a savor. This would enable companies in these sectors augment capacity. Inflows into debt funds would also get a boost following cut in dividend tax.

There were measures in the direction of reviving the primary markets as well. One such measure was the tax exemption from long-term capital gains when such gains are reinvested in the primary issues of shares of public companies. Depressed IPO market will be favourably impacted with increased flow of capital into the system.

After a calm beginning, the week saw extreme volatility. If the day of the budget saw markets lure on the back of the market friendly measures from the Finance Minister, Friday saw them crashing as selling pressure continued unabated in the new economy pivotals. Concerns of slowing US economy and domestic economic forecast took its toll. However with various positive measures like rationalisation of excise and customs duty, changes in the labour laws are in the direction to help accelerate the rate of economic growth. Host of other measures like cut in dividend tax, cut in small savings rate, increase in FII ceiling would help revive the capital market in the long run. In the coming week, banking and finance sector stocks are expected to gain further. Same is the case with PSUs on the back of government accelerating the divestment process.

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Stock Ideas

Morepen Laboratories is known in the domestic and global markets as a manufacturer of generic bulk drugs. For the third quarter ending December 2000, the company recorded a topline figure of Rs 111.2 crore, up 31.2 per cent. Considering Morepen's markets, products and international tie-ups, the scrip should receive investor attention over the medium to long-term at the current PE of 12.5.

Polyplex Corporation: Recommended Buy @ Rs 27.00 on 27th Feb.

The company has wrested the opportunity to make a healthy comeback as polyester film has started doing better. And at its present share price of Rs 27, its earnings are discounted at just around 2.3 times. The stock is going cheap at present level, and is worth buying.

HLL: Recommended Buy @ Rs 232.80 on 1st Mar.

Post budget this scrip is a major beneficiary. The thrust given to agro businesses, the cut in surcharge and the lowering of interest rates will all have a very positive impact on the bottomline. A good safe growth oriented bet for the coming year.

Infosys: Recommended Buy @ Rs 5682.70 on 1st Mar.

The prime movers in this scrip will be the reconversion of ADR’s and GDR’s which has been permitted as well as the increase in the limit of FII’s. The scrips growth prospects remain buoyant and these measures will infuse new cash into the scrip as well as increase the volume of trading giving investors the arbitrage opportunity. A must for any portfolio.

Nestle: Recommended Buy @ Rs 551.30 on 2nd Mar.

This 51% subsidiary of Nestle S.A., Switzerland is another major beneficiary of the budget proposals of removal of surcharge, promotion to agro processed industry as well as general lowering of interest rates. The company is taking steps to develop and launch new branded goods, upgrade technology, packing and improve product quality. The time is right to invest in this agro major.

Sterlite: Recommended Buy @ Rs 148.15 on 2nd Mar.

The company’s recent acquisition of the PSU Balco (51%) stake at Rs. 551 crs, is a step in the right direction. This enhances the company’s overall position in the Aluminium industry at No. 2 after Hindalco. It will also be in a position to strengthen its place in terms of metal capacities. We recommend an accumulate at this level for Sterlite Industries.