Budget and Presidential race wobble investors

THE market retained a downward trend this week with both indices falling during most part of the week. However the indices picked up on Friday amid 2.5 million of new HDFC shares making its debut after a successful Initial Public Offering (IPO).

Both indices were down considerably compared to last weeks closing levels. The ASPI closed week down by 1.85% or 46.5 points at 2472 points, while the MPI took a similar trend closing down 2% or 66.6 points, at 3265.9 points. Hayleys MGT saw 8% or approximately 6 million of its shares being sold this week.

The trade went through at a steep discount to the market price at Rs.50 per share, with the majority of the above stake being bought by the EPF.

Halyeys MGT shares closed the week at Rs.59 per share down considerably by 28% Week on Week. The counter contributed a sizable Rs.316.7 million towards weekly turnover.

Apart from this, Sampath Bank and NDB also saw considerable stakes changing hands this week. Approximately 3 million of Sampath Bank shares exchanged on Wednesday at a price of Rs.110 per share.

It was reported in newspapers that Elgin fund had sold its stake in Sampath Bank to a Malaysian party.

The Sampath counter closed the week at Rs.109 per share with 4.1 million shares trading, representing Rs.447 million of the weekly turnover.

NDB saw a considerable stake of its shares being sold on Friday, by Gold Quest, which was reportedly bought by a Malaysian party.

The counter closed the week at Rs. 230.75 per share, with 2.18 million shares trading. The counter was the second largest contributor towards weekly turnover contributing Rs.523.3 million.

A substantial 29.2 million of Asia Capital shares traded this week with the majority (23.7 million) of shares trading on Tuesday. It was rumoured that a Malaysian party has bought the majority of the quantities sold this week.

The counter closed the week at Rs.16.25 per share, with Rs.503.5 million being contributed towards the weekly turnover.

JKH retained investor interest with 3.3 million of its shares trading this week. The counter closed at Rs.169.50 per share down slightly from last week 's closing price of Rs.172 per share. The counter became the highest contributor towards weekly turnover contributing Rs.563.7 million.

Dialog share price remained unchanged compared to last week closing at Rs.19.50 per share. Approximately 8 million shares traded this week, contributing Rs.157.6 million towards weekly turnover.

Overseas Realty saw its share price stabilise this week with the counter closing just moderately up from last week at Rs.20.50 per share with nearly 2.8 million shares trading for the week.

The total turnover for the week was high at Rs.4.1 billion this week. The daily turnover more than doubled compared to last week, as it stood at a staggering Rs.818 million compared to Rs.382.2 million posted during last week.

Both foreign purchases and foreign sales saw sizable improvements this week amid the above stated large scale transactions going through.

Foreign purchases for the week stood at Rs.2.12 billion, while foreign sales for the week amounted to Rs.1.55 billion. Foreign participation for the week was at a record high of 45% compared to 15.6% of total activity recorded last week.

Among the highest traded stocks volume wise were, Asia Capital, Dialog, Hayleys MGT, Tokyo Cement (Non Voting), and Sampath.

HDFC IPO makes a successful debut

HDFC Bank shares opened trading on Friday after a successful IPO, which was well received by the investor community. The Bank offered 2.5 million shares to public at Rs.220 per share (at a Rs.120 premium) in order to raise Rs.550 million for its business expansion.

The offer was oversubscribed by around 11.4 times and received more than 29,000 applications and the interest for the issue largely came from local institutional investors.

Approximately 414,000 HDFC shares traded in the market on Friday, at a high of Rs.401 and a low of Rs.353 per share, and closed the day at Rs.357 per share.

Based on a fully diluted annualised EPS of Rs.26.77, the PER stands at 13.3x, higher than the banking sector PER of 11.9x.

Furthermore the Bank is planning to split the par value from Rs.100 to Rs.10 per share, and in our opinion this would result in an improvement in the liquidity of the counter.

Decisive times ahead

This week's trading was primarily influenced by the budget proposals and the events in the lead up to the presidential race. The enthusiasm towards the budget proposals remained relatively low, as the investors were more concerned on the outcome of the next week's election.

An inconsistent tax policy

After a downward revision in corporate tax rate in the Budget 2002, previous Government indicated their policy was to increase tax collections by way of improvements to taxable income.

This we believe is a better strategy as it motivates the companies to further improve the taxable income, where the lower tax rates would benefit both the Government as well as the corporates.

The increase in tax rate come as a contradiction to the Budget 2002, and it reflects inconsistency in policy. We believe that the higher tax rates would lead to tax evasion and avoidance, thus increasing the tax revenue by way of boosting the taxable income, can be seen as a better option.

Opportunities for growth

On a positive note, many development projects have been identified in the budget proposals that would boost the infrastructure development.

Given timely implementation and adequate opportunities for private sector participation, we believe that this would create likelihood to improve the profitability of the listed companies.

Furthermore relief was offered to sectors such as apparel, agriculture and hotels, while other sectors such as banking, imports, motor and food & beverages were affected negatively.

Therefore we are of the opinion that selected sectors would benefit from the budget, but the overall pressure on their bottom line will be on the rise due higher tax liability. The Government plans to raise Rs.2 billion through these changes in the corporate taxes.

Considering these factors, we believe that the overall impact from the budget proposals towards capital markets is moderately negative.

As expected market reacted negatively in the aftermath of the budget reading with both indices slumping during the three days including the date of reading. The market capitalisation eroded by Rs.21 billion and the ASPI lost 69.3 points or 2.7 %.

However we do not fully attribute this dip on the negative impact of the budget proposals, as other factors in the lead up to the presidential race also had a bearing on the investor reaction.

A crucial week ahead

With a crucial Presidential election ahead, the broader investor community seeks the key candidates to offer a practical, reliable and a consistent policy framework, especially on the vital areas such as peace process, economic reforms and fostering economic growth.

Given the two main candidates both pledging strong commitment to uphold the peace process, and maintain market friendly economic policies, we are of the view that the longer-term fundamentals still hold, despite possible misgivings in the short run.

With trading limited to four days due to Tuesday being a public holiday, the market activity is likely to remain modest with investors preferring to avoid strategic transactions.

However the some may prefer to take trading positions expecting a positive outcome from the election, thus a positive trend in indices can be anticipated, until Thursday's trading.

"This information has been compiled from sources that we believe to be reliable but we do not hold ourselves responsible for its completeness or accuracy. No matter published herein create any liability of any kind of HNB Stockbrokers (Private) Limited or its associates.