Budget & Beyond: Ready for a Roller-coaster?

Its been quite long since I published the last blog article. Markets moved above 5650 as predicted here and Bharti Airtel touched 340 (as predicted here) on 3rd Dec 2012 and then moved further high to touch almost 370 before cooling off. A lot has happened over the past 3 months in markets and in personal life as well…markets have made new highs and good things happened in life too.

So, recently the union budget for the current fiscal year was presented by the finance minister Mr. P. Chidambaram and as expected, the budget had an austere note to it. Somehow, the FM managed the 5.2 fiscal deficit number it promised in the last budget. Which was nothing short of a miracle. A detailed analysis of the budget by IIM Indore's Economics Professor Ganesh Kumar N showed how Chidambaram cut the planned expenditures drastically to get to this number.
Government's mention of Tax Residency Certificate (TRC) being necessary but not sufficient to claim benefit and penalty for failure to file returns proposed in the Finance Bill created a mini-furore. This is a clear negative for Mauritius investor who enjoys the benefits of DTAA (Double Tax Avoidance Treaty) with India. Mauritius is one of the major destinations through which FIIs channel their funds to India. This spooked the market and despite a more or less balanced budget, the markets fell 298 points on the budget day. Later the FM clarified on the issue and tried to pacify the big pockets on which we are increasingly getting dependent upon to bridge our fiscal deficits.

Gold companies were spared from another import duty hike even though there were a lot of chatter for the same before the budget. Gold imports remain one of the sore points for managing the CAD (Current Account Deficit) of the country, obviously after the oil imports. Gold MCX prices have corrected substantially over the past couple of months to close to 29200. However, the imports remain strong and have reported a rise of 15% in January. Titan Industries, which has been in a consistent downturn before the budget due the fear of another import duty hike, bounced back from the lows of Rs 248 on 26th Feb to touch a high of Rs 277 on 29th Feb. With an expectations of a strong march, the stock is all set to rise higher. Technically, above 277, the stock can very well move towards 288 in the short term and 310 in the next 2 months. However, falling gold prices may impact its inventory cost which may affect the numbers in the first quarter results.

Budget also promised to hike the farm loans to 7 trillion rupees from the current 5.75 trillion rupees. This should sound a warning bell for mass lenders like SBI as most of it goes to become NPAs and finally is written off as government's gesture to the ever traumatized farm sector. Overall impact is a widening fiscal deficit but they can't care more as that is where they get their votes from. Food subsidy got a lesser than expected outlay although it seems unlikely that the government in an election year will not step behind the promised lines.

Chidambaram feels the private sector is sitting on a lot of idle cash, which to some extent is true as they would rather hold it in a downturn than splurge it into unproductive projects. Thus, the budget taxed the super rich (those having taxable income above Rs 1 Cr) a surcharge of 10%. He gave a number of 42800 as the number of people who would be qualifying for this. The actual number, probably, is higher than this. However, the marginal crorepatis would now under report (thodi aur tax chori) their incomes to avoid the extra surcharge.

To encourage the retail investors the STT has been lowered but it may not really enthuse the retail investors if the overall economic condition is not improved. Well, this can be, at best, seen positive for day traders and thus the broking companies may make some money. However, increasing CTT (Commodities Transaction Tax) will have a nullifying effect.

Other than these, education sector has seen a decent increase in the spending and so something like Educomp Soutions, Everonn Education  which has been involved with the government's 'Sarva Siksha Abhiyaan', may gain. Most of the education stocks have been doing pretty bad and something like a Core Education has been whacked out of shape, for different reasons. The stock saw a carnage of more than an 80% fall from the levels of 300+ to the lows of Rs 60 in a matter of 3-4 sessions. The company, on balancesheet, looks decent and a little risky trader may pick some of it for a handsome return (more than 30%) in the next 6-9 months. Opportunities exist in Educomp and Everonn as well.

Now with all major domestic events behind, the market will again turn towards the global events to get a direction. And the direction seems towards south! Atleast for the short term. US is getting close to its deadline of extending the debt ceiling which has to come through to allow the US government to borrow more. The domestic and military budgets are going to see a cut of around $110 billion from this month onwards, which shows US's urgency to get its balancesheet in shape. Not just that, the Fed has already indicated of putting lid on quantitive easing which means withdrawing of money from emerging economies like India. Thus, the next two months may see an increased volatility in the market and investors have to be very particular about picking stocks.

However, heightened volatility is something that an option trader loves! Or should love. It gives them the reason to play a hedged game in order to make the most of the volatility.

Some recommendations for the coming month using the Long Strangle Strategy is to buy Tata Motors 320CE for 2.35 and a 260PE for 2.35. Another long strangle can be on DLF which has turned bearish after a superb rally. The stock has a support at 242 and till it trades above that, the rally is not over. DLF 280CE can be bought at 3.3 simultaneously buying a 230PE at 4.1.

Another interesting stock for this series can be SBI which fell around 7% on budget day. With the recent GDP figures coming below expectation, the buzz around another rate cut on 19th March is gaining ground and the rate sensitives like  Auto, Bankex, Real Estate, Infrastructure stocks may give some decent returns.

So, trade cautiously and hedge yourself well.