The hike in the dividend distribution tax for money market funds is a positive for banks.
The BSE Bankex hit a three-month low at 6408.01 points on Budget day and though it has rebounded from those levels, it's still at a three-month low of 6584.56 points.
Besides, the index has underperformed the broader market: while the Sensex lost just under 5 per cent between December and February, the Bankex lost around 10 per cent.
That's not surprising because the recent hike in the Cash Reserve Ratio (CRR) by 50 basis points to 6 per cent meant less funds at banks' disposal at a time when liquidity is already tight.
Moreover, deposit rates have been moving up-five-year money now fetches depositors over 9 per cent compared with 6.5 per cent less than a year back.
While banks have increased lending rates, it's not always easy to pass on the increased borrowing costs, especially to retail borrowers.
Thus, the hike in dividend distribution tax for money market mutual funds from an effective 14.025 per cent to 28.325 per cent, comes as a positive for the sector.
Investors have been parking surpluses with liquid funds instead of bank deposits because interest from bank deposits is taxable whereas dividend from a debt mutual fund is not.
As such, the return post-tax was higher from these schemes. With investors likely to receive less as dividend from money market mutual funds, because of higher dividend distribution tax, they may prefer to save through fixed deposits. Besides, the lower fiscal deficit of 3.3 per cent should ease liquidity and bring further relief to banks.
The fringe benefit tax to be levied on employee stock option plans (ESOPs), however, is a negative for the sector especially for private sector banks such as ICICI Bank, UTI Bank and HDFC Bank, which have given their employees stock options.
While the rate at which the tax will be levied has not been specified, the benefits are expected to be taxed at 33.99 per cent.
Long-term financial institutions HDFC, IDFC and LIC Housing Finance (not in the Bankex), will have to pay more tax because the government proposes to reduce the tax benefit available against long-term funding business (loans with a maturity over five years).
At present, these lenders claim an exemption on 40 per cent of their profit from long-term loans; this now stands reduced to 20 per cent. As a result, the effective tax rate will rise to 27 per cent from 20.4 per cent impacting their earnings.
Gujarat Gas: Cost boost
Gas transmission companies such as Gujarat Gas are likely to see a reduction in their operating costs by nearly 10 per cent with the government awarding infrastructure status to gas pipeline and allied infrastructure in the budget. The company is expected to pass on lower operational costs to consumers, going forward.
Meanwhile, Gujarat Gas' consolidated operating profit grew 23.2 per cent y-o-y to Rs 33.5 crore in the December 2006 quarter compared with 36.6 per cent growth in its income from operations to Rs 273.59 crore. Operating profit margin also declined 140 basis points y-o-y to 12.2 per cent in the last quarter.
This pressure on margins was owing to raw material costs as a percentage of income from operations jumping 410 basis points to 78 per cent in the last quarter.
Analysts point out that higher prices of gas were not fully passed on to consumers in the last quarter. However, it has effected price hikes in Q4 FY07. These hikes are expected to improve operating margins, going forward.
Last quarter, the volume of gas transported surged 40.1 per cent y-o-y, thanks to strong demand from residential and CNG segments. For CY06 also, operating profit margin declined 430 basis points y-o-y to 15.4 per cent.
However, the results for CY06 are not strictly comparable with a year earlier, given its acquisition of the co-generation business of BG India Energy Services with effect from June 2006. The Gujarat Gas stock trades at 14.7 times estimated CY07 earnings and leaves little room for further upside.
With contributions from Shobhana Subramanian and Amriteshwar Mathur
As regards banks,one can say that the deposits will increase,in view of the unattractiveness of the Stock Market,due to the Budget,2007.That is, its a vicious cycle,like demand and supply etc.
Content Guide
The BSE Bankex hit a three-month low at 6408.01 points on Budget day and though it has rebounded from those levels, it's still at a three-month low of 6584.56 points. 
Gas transmission companies such as Gujarat Gas are likely to see a reduction in their operating costs by nearly 10 per cent with the government awarding infrastructure status to gas pipeline and allied infrastructure in the budget. The company is expected to pass on lower operational costs to consumers, going forward. 
