Indian equity fund managers continued to trim exposure to construction sector stocks in March, following the withdrawal of tax breaks in the Budget, a Reuters poll of 13 fund houses showed.
The allocation by diversified equity funds to this sector dropped to an average 6.58% of assets from 8.12% a month ago, with three-fourths of the respondents planning to maintain or further cut their exposure in the next three months.
This is in line with the findings of the Reuters poll in February, which indicated that more than 38% of the respondents were planning to cut their exposure to the sector, that includes cement, infrastructure and real-estate stocks.
“It is because of the impact of taxation post-Budget,” Mihir Vora, head of equities at HSBC Asset Management (India) Pvt. Ltd, said.
“Construction companies will have to shell out higher tax in the future,” he said, adding, it might impact their profitability in the next couple of quarters.
The outlook for construction stocks turned weak after this year’s Budget proposed the withdrawal of income-tax breaks on infrastructure construction contracts and refrained from extending some tax breaks to developers.
Cement stocks were also hit after finance minister P. Chidambaram raised excise duty on cement sold above Rs190 per 50kg bag and lowered the duty on cheaper cement, in a bid to rein in inflation. Consequently, cement makers met officials and agreed to a moratorium on price rise for a year. “There is a fear on margins getting squeezed in the near term for cement companies because of the dual-excise policy announced by the government,” R. Rajagopal, head of equities at DBS Cholamandalam Asset Management, said.
His holdings, ACC and India Cements, have fallen 16.4% and 8% between 28 February and 21 March.
India’s benchmark index was down over 6% by Wednesday since the start of 2007. Infrastructure and real-estate stocks have fallen even more, due to valuation worries, budget decisions and concern that property prices might have risen too high.
Stocks such as IVRCL Infrastructures & Projects Ltd and Mahindra Gesco Developers Ltd have lost 24.12% and 35.06%, respectively.
The sector has dropped to the seventh place in the equity fund managers’ preference list from third in December. In this period, fund managers have generally become cautious, cutting equity exposure and moving to cash.
While the equity allocation of diversified funds dropped to 88.65% in mid-March from 95.20% three months ago, the proportion of cash has gone up to 10.96% from usual levels of 4-5%. However, the latest poll showed fund managers could cut cash allocation rapidly in the next three months with nearly 62% of the respondents planning to increase equity exposure.
Asset managers believe results from forthcoming Assembly elections in Uttar Pradesh, global cues and quarterly corporate results could contribute to market volatility, resulting in some bargains in select stocks. “They are just being cautious to try and identify better opportunities when they can enter,” Mugunthan Siva, chief investment officer, OptiMix division of ING Investment Management (I) Pvt. Ltd, said.