General Budget: Story moves from De Coupling to Re Coupling.

Last week was event heavy week for Indian economy with RBI credit policy and Budget. In RBI credit policy interest rate was kept unchanged. It’s disturbing to see RBI Governor frequently changing its policy stand on reducing interest rate. Earlier RBI was saying fall in core inflation to be the key for reducing rates- now in this policy they said a credible deficit numbers and now post budget – RBI deputy governor has hinted of that they will wait for international oil prices to come down. This is disturbing. RBI needs to understand that falling rate itself will address its concern. Falling rate will help growth which in turn will lift tax collection and so will reduce deficit. At the same time higher growth will mean appreciating rupee thus will help reduce the impact of rising international crude prices.

Our hypothesis for commencement of a new bull market in 2012 hinges highly on falling interest rate this year and we hope RBI will start cutting rates from its April credit policy review onward.

In the meantime general budget was presented on last Friday. Though the budget had realism of an old person it lacked energy, dream and bold direction of a youth that India is. Investors were particularly focused on a credible fiscal deficit. And FM has presented a credible fiscal deficit. Worry remains on the expenditure side particularly oil subsidy but we think Finance Minister had been conservative in Income calculation which ultimately will take care for the deficit.

We believe that our macroeconomic strength is our demography, a low per capita income of $1,500, high savings rate at 8% of GDP, debt/GDP ratio of 63% and interest/budgetary receipt of 31%. Among these solid fundamental variables, if policymakers add low interest rate and stable currency, India will start shining again for sure.

In this budget though no big bang tax reform like GST or DTC has happened , but there are some tax reforms in the sense clarity has been brought on transfer pricing, dividend distribution tax in multi tier corporate structure and on transfer of capital assets located in India. Though amending income tax rule on transfer of capital assets in India with retrospective effect since 1962 has been taken very negatively by the market and rightly so. Implementing of a tax rule with retrospective effect sounds very poor on India as an investment decision.

 We make no changes to our Sensex EPS (Earning per share) estimate on account of the budget. Negative impact of budget on Oil sector company ONGC due to extra cess imposed and on Sunpharma due to MAT will be nullified by positive impact on financials and power utility companies.

 As far as financial market is concerned, devoid of any immediate domestic trigger, we will just track the direction of global financial market for some time now. Though any fall if it comes, will be a good buying opportunity.

Stock specific we recommend buying stocks of India consumption opportunity companies. We particularly like Hindustan Unilver, GSK Consumer and Godrej Consumer Product.

Hindustan Unilever is currently trading at P/E of 20 on its FY14 earning. HUL is expected to clock PAT growth upward of 18% for next two years and its ROE will be strong 60%. We assume upward surprise in its earnings estimate due to fall in advertisement expenses going forward. Our fair value target for HUL for next 12 month is Rs 480.

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