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Brave new world

Aravamuthan Sasikant

The Y2K Budget has only reinforced the stark polarisation that has taken place in the last six months in the stock market. At one end are ICE (infotech, communication and entertainment) stocks which continue to hit the roof and at the other the rest of the market which receive a drubbing every day.

One operator divides the market as ICE and non-ICE. He adds, "Non-ICE stocks are out unless and until there is an e-commerce story."

Walk into the Bombay Stock Exchange at Jeejeebhoy Towers and the only tips changing ears involve ICE stocks. Fund managers and investors continue to exit the old economy stocks. Yesterday's darlings, pharmaceuticals and fast moving consumer goods, have been replaced by communication and entertainment in the golden triangle while infotech still rules.

The main reason for this polarisation is the impetus given in the Budget for 'Intellectual Capital-based industries,' while other sectors were ignored. Of course, analysts say the hype is also responsible to some extent.

Four important announcements in Budget 2000-01 favour ICE stocks over old economy scrips.

• Dividend tax has been increased to 20 per cent from 10 per cent. This is a big negative for the cyclicals, pharma and FMCG companies which have been paying liberal dividends in the past. New economy companies do not have major dividend payouts; their profits being small.
• Excise duty restructuring has affected pharma, FMCG and cyclicals. The proposed move to a single rate value added tax or central value added tax -- CENVAT -- of 16 per cent will affect some products which had an incidence of 8 per cent. Also, a special excise duty has been introduced over and above the single rate at three levels -- 8, 16 and 24 per cent. Modified value added tax -- MODVAT -- credit is available only on the single rate and not on the special excise duty. This will increase the excise outgo for companies. This is a big negative for the manufacturing industry.
• The Budget has increased the foreign institutional investment limit from 30 per cent to 40 per cent. FIIs have been moving as a herd, catching the same stocks in ICE sectors.
• The phased withdrawal of export sops over five years was the next knife. The export earnings of companies like Ranbaxy and Dr Reddy's will no longer be tax-free and with the excise restructuring, it is a double whammy. The finance minister has said that software companies set up before March 31, 2000 as software technology parks or export promotion zones will continue to get tax-free status.

Against this backdrop why should one go for cyclical and FMCG stocks that grow at less than 15 per cent? Compare this to the software sector that promises a minimum 50 per cent growth for the next two to three years. A large domestic broker says, "Investors are not only putting fresh funds in ICE but also shifting funds from cyclicals."

Most FII investment in the recent past has gone into these three sectors. FIIs have brought in $ 846 million so far this year and a dealer at a foreign stockbroker estimates 80 per cent of it is in ICE stocks. With raised limits, they can buy more ICE scrips. Even in the recent past, they have divested from FMCGs first and now pharma in favour of ICE stock.

Just three months into this year and the FII investment so far is more than half of last year's total investment. Seeing this trend and the Budget's treatment to manufacturing, the polarisation is likely to continue for the next three to six months -- a long time for the ICE to melt.

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