In this edition, we talk about the budget for the next fiscal year and its impact. We also talk about the hammering that Adani Group stocks received and another set of layoffs by the edtech giant Byju’s.
Welcome to Kuvera’s weekly digest on the most critical developments related to business, finance, and the markets.
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In the run up to the Union Budget for the fiscal year 2023-24, many economists had expressed concern about the government possibly caving in to populism ahead of the general elections next year.
Finance Minister Nirmala Sitharaman did just that on February 1, and still the economists can’t complain.
The government announced enough tax sops to keep the middle class happy, and at the same time stuck to the fiscal consolidation path by lowering the target for fiscal deficit to 5.9% of GDP.
Now, why was this balance important?
The fiscal deficit is mostly made up by issuance of government bonds or gilts, an instrument many mutual funds invest in heavily. But the government also has to pay interest on these gilts.
India has a high debt-to-GDP ratio and unless the government embarks upon the path of fiscal consolidation it will end up spending most of its revenue on servicing debt. For example, in 2023-24, of every Rs 100 the government earns, it will spend Rs 20 on servicing debt, up from Rs 18 in 2020-21.
At the same time, it is important for the government to provide enough incentives to lure people towards the new income tax regime that it has been promoting. So, the government made income up to Rs 7 lakh tax-free under the new regime.
Back-of-the-envelope calculations suggest that unless a person is claiming a deduction of Rs 3.75 lakh (Rs 1.50 lakh under Section 80C of the Income Tax Act, plus Rs 25,000 for medical insurance and Rs 2 lakh on house loan interest), there are few reasons to stick to the old tax regime. While proponents of the new regime say it will reduce people’s tax outgo and boost consumption, critics say it may discourage long-term savings.
So, it is time to sit with your calculators and spreadsheets to make a choice, but do keep in mind your savings ability for the future, too.
Take cover
The new tax regime had an unintended consequence on shares of insurance companies on the budget day. Most insurance stocks tumbled as the new regime doesn’t incentivise insurance as a tax-saving measure under various sections of the Income Tax Act such as 80C.
Also, the budget proposes to make income from insurance schemes that have premium higher than Rs 5 lakh taxable at the hand of the recipients.
The only exception that the government provides for this is ULIP, or unit-linked insurance plans. But the tax benefits from ULIPs had already been capped at Rs 2.5 lakh in the last budget.
Vibha Padalkar, chief executive of HDFC Life Insurance, told a news agency that there could be a 10-12% hit on the company’s top-line because of the budget measures.
Does this mean you stop taking insurance policies?
Of course not. Insurance schemes as a cover for difficult times remain as important as ever. But do choose wisely what type of insurance you really need. And, if you are sticking to the old income tax regime, most of the benefits under Section 80 C still stand.
Adani fiasco
If last week was bad for billionaire Gautam Adani’s eponymous Adani Group, this week was even worse as investors continued to lose faith in the conglomerate following a damaging report by US short-seller Hindenburg Research. In its 100-page report on January 25, Hindenburg alleged stock manipulation and accounting fraud by Adani Group. Not surprisingly, the group vehemently denied the allegations. But its 413-page denial seems to have had little effect.
Hindenburg’s report came just as Adani Enterprises, the group flagship, launched a follow-on public offering to raise almost Rs 20,000 crore. The FPO—the largest ever in India—received tepid response from domestic mutual funds, foreign institutions and retail investors. But it was still fully covered thanks to support from the UAE-based International Holding Company and top Indian businessmen, which reportedly include JSW’s Sajjan Jindal, Airtel’s Sunil Mittal and HDFC’s Deepak Parekh. However, Adani Enterprises cancelled the FPO as its shares slumped.
In fact, shares of Adani Enterprises lost more than 40% of their value this week. Adani Total Gas plunged 44%, Adani Green lost 37%, Adani Transmission plunged over 30% and Adani Ports cracked 16% this week. Overall, the combined market value of the group fell by more than $100 billion this week, before pulling back on Friday. This pushed Gautam Adani from the world’s third-richest person a couple of weeks ago to No.17 rank, as per Forbes.
This was not all. The Reserve Bank of India asked banks for their exposure to Adani Group companies and global lenders began keeping their distance from the group’s securities. The group companies’ overseas bonds came under pressure especially after Citigroup’s wealth investment arm and Credit Suisse’s lending arm stopped accepting Adani Group securities as collateral for giving out margin loans. Meanwhile, the National Stock Exchange put Adani Enterprises, Adani Ports and Ambuja Cements in its list of stocks that require additional surveillance measures. Adani Enterprises has also been removed from the Dow Jones Sustainability Indices effective February 7.
Is the worse over for Adani Group? Unlikely. While shares of the group companies may begin recovering in the weeks and months ahead, they will face even more scrutiny—especially from foreign investors and institutions.What does this mean for common folk like us? Well, if you are a stock investor, make your bets wisely. And if you are a mutual fund investor, do check the portfolios of the schemes in which you have invested.
While most actively mutual fund schemes have either shunned Adani Group stocks or only have a small exposure, index funds have to mandatorily invest in the stocks that make up the index. While the BSE Sensex doesn’t include any Adani stock, the Nifty 50 includes Adani Enterprises and Adani Ports while the Nifty Next 50 includes Adani Total Gas, Adani Transmission, Ambuja Cement, ACC and Adani Green. So, hang tight for now and watch this space.
Byju’s layoffs
When the Covid-19 pandemic first began spreading almost three years ago, one of the biggest beneficiaries of the stay-at-home restrictions was the ed-tech sector. Now, as school, colleges and other educational institutions are fully open, ed-tech companies are feeling the heat.
Byju’s, the biggest online teaching startup in India, is conducting its second layoff exercise within four months. Byju’s is said to be firing about 1,000-1,500 employees in this round, including freshers and senior executives, multiple news report said this week. A large number of the laid-off executives were part of the tech and engineering teams.
These layoffs come after the company in October sacked about 2,500 employees, out of its workforce of 50,000 at the time.
Okay, but why is Byju’s, which has amassed millions of dollars from venture capital and private equity investors, laying people off?
Well, the company has said that the layoffs are critical for the company to become profitable. The edtech startup had reported a loss of Rs 4,588 crore for the year ended March 2021. While it has earlier said that it expects losses for 2021-22 to fall and revenue to jump, it hasn’t yet released its financials. But the layoffs indicate that all is still not well with the edtech company.
Market Wrap
Despite the rout in Adani stocks, the broader market held up rather well during the week with the benchmark indices closing in the green thanks to Friday’s gains.
The 30-share Sensex gained about 2.5% during the week while the 50-script Nifty ended 1.4% higher, weighed down by Adani group shares.
Among the Nifty stocks that gained the most during the week were ITC, which jumped almost 10%, and Ultratech Cement, which climbed 7%. Titan, Britannia Industries, ICICI Bank and Mahindra & Mahindra all rose over 5% each. Other gainers included Eicher, Bajaj Finance, Kotak Mahindra Bank, HDFC Bank, HCL and Wipro.
Apart from the Adani pack, the others that lost value this week included HDFC Life Insurance, which fell nearly 17%, and SBI Life Insurance, which lost almost 9%. Drugmaker Divi’s Labs slumped close to 15% after missing estimates for third-quarter results. UPL, Hindalco, Hero MotoCorp, BPCL and ONGC were among the other laggards.
Other headlines
- NCLT disallows second round of auction for Reliance Capital; lenders likely to challenge order
- Centre to pare stake in Hindustan Zinc this fiscal year; to scrap Pawan Hans sale
- HDFC Q3 net profit rises 13% to Rs 3,691 crore; loan growth slows down
- Dabur Q3 net profit falls 5.4% to Rs 476 crore, revenue crosses Rs 3,000 crore
- Tata Consumer Products Q3 net profit rises nearly 26% to Rs 364 crore, revenue rises 8.3%
- Tata Chemicals Q3 consolidated net profit rises 21% to Rs 425 crore
- Kalpataru Power Transmission bags orders worth Rs 2,456 crore
- Cognizant Q4 net profit falls 9.6% year on year, meets FY22 guidance
- January service sector expansion slows as PMI eases to 57.2
- Google to launch ChatGPT rival soon, says CEO Sundar Pichai
- Bank of England lifts interest rates by 50 basis points to 4% to fight inflation
Until next week, happy investing!
Interested in how we think about the markets? Read more: Zen And The Art Of Investing
Watch here: ELSS: Saving tax through mutual funds
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