The week gone by consisted of two different events where the first was the normal week from Monday to Friday and the second, the Union Budget 2020-2021 which was presented on Saturday the 1st of February. The week saw the markets lose on four of the five trading sessions. Budget saw a sell-off primarily on the back of no announcement on LTCG (long term capital gains tax) front.

The normal week saw the BSESENSEX lose about 870 points while NIFTY lost about 285 points. Budget day was a big sell-off with markets cracking big time. BSESENSEX lost 987.96 points while NIFTY lost 300.25 points.

For the week (including budget) the BSESENSEX lost 1,877.66 points or 4.51% to close at 39,735.53 points while NIFTY was down 586.40 points or 4.79% to close at 11,661.85 points. The broader markets saw BSE100, BSE200 and BSE500 lose 4.96%, 4.88% and 4.78% respectively. BSEMIDCAP was down 4.44% while BSESMALLCAP was down 3.38%.

The Indian Rupee was down 2 paisa or 0.03% to close at Rs 71.34 to the US Dollar. Dow Jones had a very poor showing on Friday when it lost 600 points to end the week with losses of 733.70 points or 2.53% at 28,256.03 points.

January futures expired at 12,035.80 points losing 90.75 points or 0.75%.

The coronavirus is assuming gigantic proportions with virtual shutdown in many cities in China. The stock market in China would open today after the Chinese New Year holidays and an advisory of banning short sales has already been issued. Further huge amount of money is being pumped into the market and it is expected that it could open gap down between 8-10%.

The global supply chain is being disrupted as a result of the coronavirus with serious time implications. It is becoming a matter of concern as globally people are worried about importing from China. Further travel is being affected between countries and no one knows for sure who could the next carrier of the virus be. This has also caused crude prices to soften significantly as world demand is expected to slow down. The nagging doubt is how long could this affect the world before it could be presumed that coronavirus is behind us and whether there is an antidote for the same.

Coming to the budget, the key takeaway was the thrust on infrastructure and focus on rural India whether it is agriculture, health or education. The focus is on increasing consumption and doubling of farmers income in four years by 2024.

With the budget laying great emphasis on infrastructure the personal rapport of the Prime Minister would come in play where he gets the sovereign funds of various countries to invest in building our infrastructure. One must also remember that infrastructure spending kickstarts the economy, provides jobs and has a multiplier effect of anything between 5 and 8 times. It is for this reason that the budget has extended 100% tax exemption to the interest, dividend and capital gains income on investment made in infrastructure and priority sectors before 31st March, 2024 with a minimum lock-in period of 3 years. The budget also proposes to monetise 12 lots of 6000 kms of national highways by 2024. The government plans accelerated development of highways which would include access control highways, economic corridors, costal roads and strategic highways.

Further the Finance Minister through the period September to November 2019 made a number of announcements including the cut to corporate income tax rates and as a coincidence many of these announcements and press conferences happened on a Friday. One needs to add these announcements and benefits to the budget announced yesterday and then look at the same in totality.

The budget has proposed the sale of the governments entire stake in IDBI Bank through the secondary market and this would be a test case for PSU banks divestment in future. It is also proposed to list Life Insurance Corporation of India Limited through an IPO during the course of the year. It is widely believed that this IPO as an when it happens would have a similar effect on the market as the Aramco issue in Saudi Arabia. Rough estimates talk of a valuation of 10 lakh crs for the IPO or thereabouts with a 10% offering.

On the personal income tax rate, the budget proposes a cut in rates with a caveat that deductions would be abolished. It offers both options of the old scheme with deductions and new scheme with lower tax rate and no deductions. The biggest casualty of this were the life insurance companies like SBI Life, HDFC life and ICICI Prudential which lost considerable ground. The fall was on account of the fact that in India, insurance is primarily done as a tax saving exercise and not for investment or protection. Further the announcement of LIC IPO too would act as a dampener in the longer term. Very clearly the focus is to increase consumption with the younger generation using the higher disposable income to spend rather than save.

Dividend Distribution tax has been shifted from the company which declares dividends to the shareholder who would now pay the same depending on his/her individual income. This would be helpful to FPI’s as the pay-out from dividends would increase and they would get a credit for the tax paid on dividend. This again would be helpful to mutual funds and FPI’s.

Seeing the success of the resolution scheme in service tax, the budget has proposed the same in direct taxes as well. This would free up a lot many cases and also money for the government. For the taxpayers and litigant’s life would be that much easier and penalties and prosecution would end.

The budget has recognised the importance of ESOP’s for start-ups and given them benefit in terms of tax treatment on ESOP’s.

Through Deposit Insurance and Credit Guarantee Corporation (DICGC) Insurance Coverage on fixed deposits is to be increased to Rs. 5 lakhs from Rs.1 lakh per depositor. This is to instil confidence in the public after what happened in some of the coop banks in recent times.

Customs duty on products such as AC, refrigerators, footwear and other goods which are made in India has been raised. The idea is to promote make in India and discourage imports. The finance ministers favourite item for umpteen number of years, cigarettes has not been spared this year either and taxes raised.

The antidumping duty on PTA of 160$ per ton has been removed benefitting a large number of consumers. This would affect the fortunes of Reliance Industries who is the largest producer of the same.

The government has received subscription of over Rs 22,500 against the base offer of Rs 10,000 crs and green shoe of Rs 8,000 crs for the CPSE ETF. In the process of this issue, the price of the ETF has been hammered to Rs 20.28, a loss of Rs 1.67 or 7.61% for the week. At this price many of the shares in future are trading at a discount to the cash market. A bounce when markets resume is on the cards and one needs to take note of the fact that all of these companied are Navratna’s and dividend paying companies.

The FPO from ITI Limited was extended on account of poor response and the price band changed from Rs 72-77 to Rs 71-77. It has been again extended with the same price band to now close on 5th February. The issue as of 31st January is subscribed 0.58 times with QIB portion subscribed 0.59 times, HNI portion 0.17 times, Retail 1.05 times and Employee 0.87 times.

Markets saw a sell-off particularly in the last hour on budget day. A part of this was triggered by the cascading effect of margin calls as well. I strongly believe that markets would rebound today as clarity on the budget emerges.

Markets need time after the mauling of last week. Allow them to stabilise before forming medium term opinion.

Markets fell for the first three days of the week and then recovered ground. The recovery though was not enough to end markets in positive territory, but the salient feature was that the midcap and Smallcap indices had a very strong showing and closed the week with gains.

BSESENSEX lost 332.18 points or 0.79% to close at 41,613.19 points. NIFTY lost 104.10 points or 0.84% to close at 12,248.25 points. The broader indices saw the BSE100, BSE200 and BSE500 lose 0.59%, 0.84% and 0.31% respectively. BSEMIDCAP gained 0.72% while BSESMALLCAP was up 0.93%. The breadth in the market is certainly improving and this will hold the market in good stead going forward.

The Indian Rupee lost 24 paisa or 0.34% to close at Rs 71.32 to the US Dollar. Dow Jones was down 358.37 points or 1.22% to close at 28,989.73 points.

Results are a mixed bag from the heavyweight stocks. HDFC Bank saw its loan book under pressure with provisions increasing while ICICI Bank produced its best ever results with a strong uptick in core operations. The performance improved further with the resolution of Essar Steel and it saw a sharp drop in provisions and also an increase in recoveries. The bank reported a consolidated net profit of Rs 4,670 crs in the 3rd quarter versus 1.874 crs in the corresponding quarter last year.

SEBI has filed a SLP (special leave petition) in the Supreme Court asking that IHH, the company that had acquired Fortis Healthcare be allowed to complete the open offer as the same was done before the Supreme Court gave instructions to freeze the shares. This would be positive as the matter has been hanging fire now for over 13 months.

Sterling and Wilson continues to be in the news for the wrong reasons. A respected portfolio manager has now written to SEBI complaining and highlighting the change in objects of the issue where the promoters have not repaid the money. The role of the boars in granting extension of time is also being questioned. This issue is now gaining momentum and its time SEBI took a stand. Knowing Indian promoters and their ingenuity, if nothing is done quickly, one can be sure that we will find them changing the objects at will. This could be really bad news for capital markets and investors as the sanctity of the RHP would be lost.

The week ahead sees ITI Limited (Indian Telephone Industries) a PSU coming out with its follow-on offer for 18.18 cr shares in a price band of Rs 72-77. This was India’s first PSU set up way back in 1948. After being a great performer for about 45 years it fell on bad times and had become a sick company. The government revived the company and it is now not only back in the black but has also reported a positive net worth. The new management is aggressive in their strategy and is now competing with its private sector peers in terms of competition.

The issue price earnings multiple is a steep 74.23-79.38 times based on financial year ended March 2019. The performance for the current year has changed significantly and the future looks better considering the order book and marked improvement in performance.

The order book is about Rs 11,000 crs and does not include the ‘ASCON Phase IV’ order from the defence which the company would be getting shortly. This order is to the tune of another Rs 7,000 crs. The above order includes roughly 70% of execution of creating an optical fibre network and the remaining as AMC over a period of eight years.

Margins for the company have improved significantly and there has been cost cutting and efficiencies all round. To derive benefit from the huge land bank the company has, it is looking at creating manufacturing hubs which would be leased out under the make in India initiative. With the company having turned the corner, its interest outgo would reduce and it would be possible for the company to earn decent margins on all its business verticals.

For the record the closing price of ITI on Friday was Rs 91.05, a loss of Rs 12.10 or 11.73%. Considering the size of the issue and the present floating stock, it would be fair to assume that the market price would fall further and adjust closer to the issue price band. It would still be higher than the top end of the price band offering listing gains to successful applicants.

The week ahead sees January futures expire on Thursday the 30th. The current level of NIFTY at 12,248.25 points is higher by 121.70 points or 1.00% over the previous expiry. With the budget around the corner and no major build up in positions so far, one should expect the bulls to take the series.

The union budget would be announced on Saturday the 1st of February and markets would trade normally. This is after a very long time that with the budget a mere five trading sessions away, there is no expectation or build up or a pre-budget rally which has happened. This means that if the budget has positives for the market there can be an upside and if there are no positives, things would remain as they are. With the economy under severe stress, it would be expected that there would be measures to kick start announced in the budget. Further as the stock market is a barometer for the state of the economy, something to brighten the spirits would certainly happen.

Trade with a positive bias as budget is likely to help revive market sentiments and economy.