Almost a Slam Dunk

Ashish Advani (March 5, 2010)

Why I am so excited!!

Issue #21

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Dear Dalal Street Insider Subscriber,

I am awash in optimism and excitement.

Last week I wrote to you on the eve of the announcement of the 2010-11 Annual budgets in India. And the news is almost perfect. This budget is full of great things for all involved. The businessmen are happy, the average citizen is happy, the investors are happy and the foreign investors are happy.

Hats off to the master magician, AKA Prime Minister Manmohan Singh as well as the Finance Minister Pranab Mukherjee. The crafty duo has managed to walk the tightrope and has ended up pleasing most people. Not an easy feat in a country of 1.1 Billion and in a thriving and vibrant democracy where dissent is easily found.

And what had me leaping off my seat was the fact that this budget had something for all. Let’s see what goodies it had to offer:

I cheer the Union budget for FY11 for aiming to reduce the government’s massive fiscal deficit to 5.5% of GDP in FY11 from 6.7% of GDP in FY10, and also chalking out a medium-term fiscal consolidation plan.

I also cheer for juggling the revenue-expenditure mix judiciously. In my view, spending is increased for the right areas—infrastructure and agriculture, and subsidies are reduced. Taxes are raised in areas where demand is rather fixed – petroleum products. Finally, there was reasonable reduction for middle-class taxpayers, thereby not hurting overall demand.

Looking at some of the specific items within the budget:

There were significant reductions in Personal Income Tax rates. This will help increase disposable income and boost consumption and will therefore benefit a number of sectors.

On the Corporate Tax side, surcharge has been reduced from 10% to 7.5%. Some other areas of indirect taxes have increased such as MAT (minimum alternative tax – Indian version of VAT) which was hiked from 15% to 18%. While this will affect some areas, overall this will be net positive for corporate spending.

And overall, this will be positive for the Stock Markets.

Moving on to PSU’s (Public Sector Units – government-owned companies), the government has clearly decided to continue to sell their stakes in such companies and increase private holding and competition. This was an eagerly awaited decision that has also rolled out in favor of market forces. It has announced 400 Billion INR (rupee) disinvestment target for FY11, maintaining the previous momentum.

On the Pharmaceutical side, there was an increase in allowable deduction for R&D to 200% of actual expense. This will help develop the whole pharma sector and our specific pick, Dr. Reddy’s.

The government has also decided to recapitalize some of the weaker banks and give the bigger banks more competition. While we should worry about our ICICI Bank, I strongly believe that this move will increase efficiencies in banks and we will see a much more robust sector emerge.

Another major aspect that had me a bit worried was the introduction of GST (Goods and Services Tax). While additional taxes will be a drag on consumption power, the introduction of GST has been deferred for another year. That will keep spending power in the hands of the consumers.

Allocation of new licenses and capital spending on Infrastructure (Roads, Power, Renewable Energy, etc.) did not disappoint the expectations. The government increased overall capital spending by 30% in the budget, and spending on infrastructure received continued priority, with allocations for the power sector doubling. To increase infrastructure financing, the government announced a major scheme—Rs20,000 (US$444) invested in infrastructure bonds to be tax deductible for individuals.

This will greatly increase the issuance of infrastructure-based bonds. I continue to believe that financing of infrastructure is critical, and these public offerings will go a long way in channeling savings into infrastructure companies.

Oh! And before I forget… This is not related to the budget, but it was just announced today that the average increase in salaries in India (as measured by Hewitt Survey) is expected to rise by 10.6% compared to 6.6% last year. What this means is that the consumer will have more and more money to spend on consumer-based products.

I could continue for another few pages, but I hope that you can see that we are now in for a good year of robust growth. The election of last year and now this budget will start seeing the rise of the stock markets that we have assembled here to take advantage of.

I am beginning to form ideas on my next pick and will come in with a recommendation next week.

Let’s see what the past three trading days (about 5% gain) have done to our portfolio:

Position Update

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I am getting concerned about the only weak link in our portfolio, Tata Communications Limited. I am digging into this for you, as this stock price does not make any sense. I will report back on this soon.

It was indeed a great pleasure meeting some of you in Scottsdale, Arizona last week. I was very flattered by your high regards and will redouble my efforts to make this an even better newsletter than we have had so far.

Until next week,

Ashish Advani