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FURTHER improvements are expected in the productivity of Corporate India and relative competitiveness over global peers, which will help sustain the current trend and valuations over the long term.

However, one should not expect corporate India to turn in the same level of performance in FY-06 due to the higher base of FY-05.

Over the long term, the changing demographic profile of India and the expected improvement in income levels will also lead to an explosion in demand for a range of goods and services. This is expected to benefit a wide swathe of companies in all sectors of the economy.

Pharmaceuticals: Pharmaceutical stocks bounced back from last month's lows as investors indulged in bottom fishing. The Government has extended the accelerated tax deduction for R&D spend for a period up to March 2007 instead of the current March 2005, which is a positive for all companies in the sector, given their recent thrust on R&D.

The reduction in import tariffs for the pharmaceutical machinery is a mild positive and will help bring down project costs.

Overall, we continue to be positive on the outlook for the sector, given the potential of generics, outsourcing opportunities and growing domestic market. Over the short term, the implementation of value-added tax (VAT) could lead to destocking of inventory due to lack of clarity on VAT credit.

FMCG: The announcement of price hikes in leading categories such as detergents, by Hindustan Lever and Procter and Gamble, seems to indicate that the intense price competition that the sector had witnessed in previous months could be easing off.

Tata Tea attracted buying interest after the company announced plans to restructure its loss making South Indian plantations business. Second-rung FMCG stocks were in the limelight on the back of FII interest. The sector has been witnessing growth in recent times as reflected in the AC Nielsen's study on retail off-take trend for January 2005.

The growth in January 2005 remained strong at 8.2 per cent, while growth in December 04 has been revised upwards to 10.3 per cent. The Budget has a mixed impact on consumer companies. Cigarette companies have been negatively affected by the Budget with a 10 per cent increase in excise duty, while tea companies are likely to benefit from sops to the tea industry.

Overall, the reduction in income tax rate is likely to benefit all companies. However, the increase in dividend tax and the introduction of tax on fringe benefits partially offsets the benefit of the reduction in effective income tax rate.

Reduction of peak import duties from 20 per cent to 15 per cent is also likely to alleviate input and packaging cost pressures to an extent. From a macro perspective, the changes to personal tax structure and the renewed focus on the rural economy augurs well for the sector from a medium-to-long-term perspective.

IT: We continue to be positive about the prospects of the sector as we expect larger companies in the sector to take advantage of the strengthening offshoring trend, the world over. The technology sector which is growing at a relatively higher rate compared to other sectors has the potential to outperform the broad markets, but a lot will depend on the macro-economic environment, both on the domestic and international fronts and developments in other sectors which are difficult to predict, and the strengthening rupee will be a concern going ahead.

(Source: Edited extracts from the latest monthly performance report and latest weekly report of Franklin Templeton.)

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