BUDGET WATCH: A Shot In The Arm

There are certain companies which generate specific investor interest as they stand to benefit more from some of the Budget provisions

The countdown for the Union Budget has started. In the run up to this event, there is often a pre-Budget rally and major movements after the Budget depending on the measures announced. There are certain companies which generate specific investor interest since they stand to benefit more from some of the Budget provisions.
The Union Budget outlines the government’s priorities in several areas including, social sectors, infrastructure, education, health and allied sectors besides the farm sector.
For instance the government’s Budget for implementing its Accelerated Irrigation Benefit Programme (AIBP) has gone up from 4,500 crore in FY07 to 11,500 crore in FY11, which includes 1,000 crore specifically for microirrigation projects. It is no wonder then that the scrip of Jain Irrigation, which manufactures irrigation systems and is India’s largest micro-irrigation company, benefits from a strong upswing in the weeks ahead of the Budget every year.
The government’s focus on improving basic education has resulted in the allocation for this segment going up three-and-a-half times in the past four years to 35,000 crore for FY11. Companies such as Educomp Solutions, which reaches out to over 1.2 crore students through its various programmes, typically see a run-up thanks to this.
The government’s increased spending in these areas has played a key role in growth of these companies. In the past four years, Jain Irrigation’s growth rate has remained above 33% every year, which it expects to continue for a few more years. The revenues of Educomp Solutions have almost doubled year after year for the past four consecutive years.
From the stock market’s point of view, the Railway Budget, which is presented a couple of days before the Union Budget, is also important. The railway ministry’s attempts at modernising, electrifying and expanding its network through a private public partnership (PPP) have helped bring in more business for a few listed companies.
Ahead of the railway budget, there is heightened investor interest in Kalindee Rail Nirman, for instance, which is in the business of railway signalling, electrification and track laying and related civil work. Not only do the average volumes rise substantially in February from January, the price also witnesses an uptrend till the last week of February.
This trend is not restricted to Kalindee Rail alone. Other companies that have related businesses also witness a similar trend year after year include private sector wagon manufacturers, such as Texmaco and Titagarh Wagons or component suppliers for railways such as Stone India and Hind Rectifiers.
The railway budget presented in February 2010 for FY11 had the highest ever planned outlay of 41,426 crore, nearly double of 23,475 crore of FY07. This included several major projects such as metros, dedicated freight corridors, 1,000 km of additional rail lines and incremental loading capacity by 54 million tonne apart from acquiring some 18,000 wagons.
A short-term investor can take benefit of these swings in the market, which have become fairly predictable over the past few years. However, it is not necessarily that some of these companies really benefit from the Budget announcements.
Very often government contracts and tenders get delayed. For instance, in FY10 there was a major delay on the part of the railways ministry in bringing out orders for wagons which frustrated a leading manufacturer, Texmaco. In its annual report for the year published in May 2010, the company vented its frustration. “It is regrettable that even after the elapse of nearly 14 months, Indian Railways are yet to release the wagon orders for the year 2009-10. Ironically, there is an all round clamour by the industry on account of shortage of wagons. Yet, the continuing delay in releasing the overdue wagon orders is rather inexplicable,” it mentioned.
Even when the orders do materialise, foreign or local competitors could impact the listed company’s ability to win those contracts or put pressure on margins. Again, not all related to these sectors benefit equally. Despite the success of Educomp, leading publisher of textbooks Navneet Publication has seen its revenues growing at only 17% annually over the past four years.
Similarly, the trend in price rise is highly dependent on overall market conditions. In February 2010, the scrip of Kalindee Rail rose from 190 levels at the end of January to a peak of 218 by February 15. However, the scrip ended the month at 165 as the markets crashed. Educomp, which typically rises 15-20% within the first three weeks of February, also witnessed a continuous downward journey in February 2010.
In 2011, so far weak market sentiment has weighed on most of these scrips, which have lost value in February despite higher volumes. There are no signs of a‘pre-Budget rally’ as yet. It may have something to do with the fact that Parliament has not been functioning with doubts being cast over the budget session. Much will hinge now on what the finance minister delivers on February 28 in the back drop of a series of scams, high inflation and policy paralysis.