Budget 2013: Do not invest in a stock merely based on Budget expectations
February, 25th 2013
Many investors look forward to pre-and post-Budget rallies to make some extra moolah from the market. They closely follow pronouncements of market pundits and reports from brokering houses to place their bets on the market. This year was no different, though hopes of a pre-Budget rally were dashed by bleak realities.
Not to be deterred by small setbacks, these investors have now turned their sights on the likely measures in the Budget. For example, some believe that to boost growth in rural areas, the finance minister will increase agriculture credit, which could boost tractor and two-wheeler sales. That means there would be some interest in stocks of Bajaj AutoBSE -0.33 % and M&M.
Some feel there could be tax incentives for maintenance and repairs for airlines, which could benefit Jet AirwaysBSE -2.67 % and SpiceJetBSE -1.08 %.
Some are betting that the finance minister will give infrastructure status to affordable housing and he may also increase the tax exemption limit on interest payments on housing loans. Obviously, this could benefit the housing finance companies. Already there are signs of renewed interest for stocks of HDFCBSE 0.81 % and LIC Housing FinanceBSE 1.92 %.
But the trouble with second guessing, experts point out, is that it is fraught with huge risk. "Do not buy a stock merely on Budget expectations. If the expectation comes true, the stock could rally a bit; but if nothing happens, one could see a sharp correction and you could end up losing a lot," says Alok Churiwala, managing director, Churiwala Securities.
If you still insist, at least don't forget the fundamentals of the stock. "Investors must look at valuations, see if the expectation has a significant impact on the company before taking a 'buy' decision," says Kunj Bansal, chief investment officer at Sanlam India.
IS THE IMPACT SIGNIFICANT?
Buying a stock merely because a company could be a beneficiary of an announcement in the Budget is not very prudent.
Consider the case of the airline industry. If there are tax incentives for maintenance, repair and overhaul of airlines in the Budget, it could indeed benefit airlines. But then, will that have a significant impact on the bottomlines? Take the case of Jet Airways. It spent Rs 1,044 crore on aircraft maintenance, which is 7 per cent of total sales. As against this, fuel costs at Rs 6,631 crore stand at 45 per cent of its total sales.
That means the cost of fuel have a significant impact on the profitability of the airline. "Fuel costs continue to be high. In addition, heavy competition among airlines has lead to discount ticketing, which will impact margins in the coming quarters," says Sharan Lillaney, an analyst with Angel Broking.