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STOCK DOCTOR | GS SoodSTOCK DOCTOR | GS Sood
Budget focus on managing growth
THE markets gave a thumbs-up to he Budget due to the very low expectations they had. That was the reason why the markets opened in green even before the Budget was presented. But the fact that they on solidated the gains during the day was entirely due to some welcome surprises and the way the Budget handled the three key issues of growth, fiscal deficit and reforms. The Finance Minister talked of returning to 9 per cent growth in GDP in the very next fiscal year, ie 2010-2011, containing fiscal deficit to 5.5 per cent for 2010-11 (sharply lower from the revised deficit of 6.9 per cent for 2009-10) and to 4.8 per cent and 4 per cent in subsequent financial years. An increased disinvestment target further raised hopes.
The present, therefore, looks to be pleasant, if not rosy, to which the markets responded. What the future holds and how the economy will transform these targets into reality is another question. If the rain gods support the Finance Minister in the coming one to two years, they may well be achieved otherwise we have to keep our fingers crossed. The market cheer was further justified since the Budget left the capital gains tax and STT untouched.
The Budget also had the partial rollback of stimulus, but did not touch the service tax rates. By broadening the tax slabs, it has left substantially higher disposable income with individuals which will fuel growth of the economy. The further reduction in corporate surcharge from 10 to 7.5 per cent is also welcome. Pranab Mukherjee’s thrust to infrastructure – both rural and urban – by giving it a lion’s share of total plan allocation at Rs 1.73 lakh crore is laudable. An allocation of Rs 48,000 crore to the Bharat Nirman Scheme will go a long way in building and upgrading rural infrastructure. Introduction of infrastructure bonds will not only give further relief to the individual tax payer but will also lead to accumulating huge resources for the country’s infrastructure requirements.
FIIs have responded positively to the Budget but the rally may get restricted to a mere relief rally and it will be very difficult to say that the markets will go higher just because of the Budget statements.
But the Budget fails to address the key issue of inflation which is seen as the biggest threat to the economy and likely to derail all the positives mentioned till now. Rather, an increase in petrol and diesel prices will further push inflation. An increase in MAT from 15 to 18 per cent will specifically hit the small and medium enterprises – the key growth drivers with immense potential to generate employment.
However, despite some areas of concern, the Budget can well be called a focused exercise aimed at managing growth after the country has successfully managed the crisis. FIIs have responded positively to the Budget but the rally may get restricted to a mere relief rally and it will be very difficult to say that the markets will go higher just because of the Budget statements. The markets will consolidate their gains only when the promised GDP numbers start materializing and corporate earnings start improving on a sustained basis.
In the short term, markets may see gains of around 5 per cent but the direction in the medium term will be largely dictated by global issues and economic realities at home.
Banswara Syntex (CMP Rs 95)
A Rajasthan-based manufacturer of various types of blended yarns, namely polyester, viscose, woollen and acrylic, Banswara has entered into a 50 per cent joint venture with French textile company Carreman for a weaving plant of 60 looms. The fabric business is currently the larger contributor to the total revenue, with more than 60 per cent of sales coming from the segment. The remaining 40 per cent to the top line is contributed by the yarn business, a major chunk of which comes from the sale of polyester yarn. The company exports its products to nearly 50 countries. Banswara has coal-based and furnace oil thermal power-based power plants with a capacity of 18 MW and 9 MW, respectively, both of which are used for captive consumption of power. The company has plans for an additional 15/18 MW thermal-based power plant, which is expected to commence operation at the end of 2010.
The company’s top line grew at a compounded annual growth rate (CAGR) of 21 per cent and net profit at a CAGR of 40 per cent during the last five financial years. The fact that the current market price discounts the estimated FY11 EPS of 35 by just 2.5 times and the interim dividend of 18 per cent already paid for the year boosts confidence in the stock.
The author has no exposure in the stock recommended in this column. gfiles does not accept responsibility for investment decisions by readers of this column. Investment-related queries may be sent to gfilesindia@gmail.com with Dr Sood’s name in the subject line.
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