Budget day always means a shaky start for the stockmarkets. This year, anticipation of what it would bring added more anxiety to a market already bogged down by weak global cues.
The Sensex was down over 600 points and the Finance Minister hadn't even started. When he did, the benchmark index stood at 13,200, against the year's highest closing, 14,652 on 8 February 2007. The markets gained ground during the first part of the Budget (expenditure).
But, when Chidambaram proposed extending minimum alternate tax (MAT) to cover all corporate incomes, including IT companies, markets began to tumble again. From then on, there were no positive triggers -- dividend distribution tax was raised, excise on cement selling at over Rs 190 per bag was hiked and one per cent added to the education cess.
A weary market ended trade with the Sensex shedding 541 points and closing below the 13,000 level at a Oh-My-God! level of 12,938.
Outlook Money recommended six stocks between August and December in the section 'Stock Pick.' We take intellectual responsibility for our recommendations and review them in the light of the Budget and the third quarter results.
The stocks recommended will be part of the Outlook Money portfolio till we put a sell recommendation. We will review our portfolio at the end of every quarter. On 28 February, this portfolio is up 12 per cent on an average.
1. Airtel
Recommended on: 8 December 2006, Price: Rs 638.20, Gain/loss: 12.6%
We recommended Airtel at Rs 638.20. It is currently trading at Rs 718.75. Airtel's market has changed with Vodafone's entry. Vodafone has aggressive plans for India and we expect cellular tariff to fall further, which may lower Airtel's margins. Also, Trai has begun baring its teeth.
Airtel's consolidated total revenues of Rs 4,913 crore (Rs 49.13 billion) for the quarter ended 31 December 2006 grew by 62 per cent and earning before interest, tax, dividend and amortisation (EBITDA) of Rs 2,005 crore (Rs 20.05 billion) grew by 79 per cent year-on-year (y-o-y). Its profit from operations of Rs 2,137 crore (Rs 21.37 billion) grew by 108 per cent y-o-y. Net profit for the third quarter was Rs 1,215 crore (Rs 12.15 billion), a growth of 123 per cent y-o-y. We recommend you book some profit in this counter.
2. NIIT
Recommended on: 9 November 2006, Price: Rs 358, Gain/loss: 87%
We recommended the stock at Rs 358. It is now trading at Rs 669. This Budget has been highly pro-education. The allocation for education sector has been enhanced by 34 per cent to Rs 32,352 crore (Rs 323.52 billion). This will help companies in the sector.
NIIT was also powered by its performance in the third quarter, when it posted consolidated net revenues of Rs 225.1 crore (Rs 2.251 billion) and recorded a growth of 114 per cent y-o-y. Its global revenues stood at Rs 297 crore (Rs 2.97 billion), a 111 per cent growth. Its consolidated net profit grew 97 per cent y-o-y to touch Rs 10.7 crore (Rs 107 million).
The company witnessed record revenue growth in its 'individual learning business'. NIIT added 10 new significant corporate customers in the quarter, including the Income Tax department. We believe the company will continue to gain as there is shortage of infrastructure in government education and outsourcing is here to stay. We would recommend you make an entry into this stock, or hold if you have it.
3. HCL Tech
Recommended on: 9 December 2006, Price: Rs 630, Gain/loss: -5%
The Budget's announcement of extended MAT cover of 10 per cent will affect HCL. Its tax liability will increase and this would drag its profits down. HCL's tax provision is only 2.36 per cent, and this would now have to go up substantially.
The company's revenues for the quarter grew 39 per cent y-o-y, while its net profit grew 58.1 per cent. The net profit growth due to forex gain of Rs 34.7 crore (Rs 347 million). The EBITDA of HCL's BPO arm increased to 12 per cent sequentially. The company added seven new clients this quarter.
We recommended this stock at the level of Rs 630 and it currently trades at Rs 596. We are positive both in the near and long term. We maintain our buy call.
4. Mahindra & Mahindra (M&M)
Recommended on: 22 September 2006, Price: 652.10, Gain/loss: 24%
This Budget was all about agriculture. With farm credit expected to touch Rs 2,25,000 crore (Rs 2,250 billion) and 50 lakh (5 million) new farmers being brought under the banking system, Mahindra's tractor business is set to benefit. Its gross revenue this year was Rs 2,942.8 crore (Rs 29.428 billion), a growth of 16 per cent compared to the same quarter last year. The operational Q3 profit was at Rs 242 crore (Rs 2.42 billion), up by of 35 per cent. The company registered a net profit of Rs 241.7 crore (Rs 2.417 billion) compared to Rs 233.5 crore (Rs 2.335 billion) y-o-y.
The utility vehicle and farm equipment segment witnessed a growth of 15 per cent each. In the LCV segment, sales went up by 40.6 per cent. Its EPS registered a decline and was Rs 10.21 against Rs 10.43 y-o-y. We recommended M&M at the level of Rs 652.10 and it currently trades at Rs 806. But, the stock can face pressure in the short term. We recommend you book some profits.
5. Tata Tea
Recommended on: 18 August, Price: Rs 844, Gain/loss: -27%
No Budget sops were announced for this sector. The company's consolidated income for the third quarter was Rs 1,113 crore (Rs 11.13 billion), up by 37 per cent y-o-y. This growth was driven by sales of higher-end brands and income through the acquisition of Jemca, a tea company in Czechoslovakia, and Eight O Clock Coffee of the US.
Profit before tax from operations, at Rs 149.86 crore (Rs 1.498 billion), has increased by 56 per cent; its consolidated profit after tax was Rs 117.19 crore (Rs 1.171 billion), up by 95 per cent y-o-y. This rise is partly due to the exceptional income of Rs 42.36 crore (Rs 423.6 million) -- it sold investment in holding companies. The interest cost went up to Rs 66.51 crore (Rs 665.1 million) compared to Rs 1.44 crore (Rs 14.4 million) y-o-y on account of these acquisitions.
The stock currently trades at Rs 617 and we recommended at Rs 844. The EPS for nine months of the current fiscal is Rs 69.08, which means the stock currently trades at 8.23 times (annualised) FY07 earnings. Even after removing extraordinary income, the company trades at only 12 times annualised profits. We reiterate our buy call on this counter.
6. FDC
Recommended on: 8 September 2006, Price: Rs 42, Gain/loss: -22%
The quarter did not see much movement on this counter. The stock currently trades at Rs 32.70 against our recommendation of Rs 42. We don't see much action in the short term.
The company's third quarter profit stood at Rs 13.24 crore (Rs 132.4 million), down from Rs 16.4 crore (Rs 164 million) in the previous corresponding quarter. Income was up 29 per cent this quarter but staff costs went up by 37 per cent and raw material cost was up 81 per cent. The EPS for the quarter was also down by 19 per cent compared to the same quarter last year.
With pressure on profits, we don't see too much of market interest in this counter. We recommend you sell the stock.
