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Budget FY2016
02 March 2015 1
Price Performance
28 Feb15 1M 3M 1Y
(%) (%) (%)
Nifty 8,902 -0.1 3.7 41.8
Sensex 29,362 -0.7 2.3 39.0
BSE Midcap 10,811 0.0 5.3 66.3
Indices Performance
Strong positives over the medium term
The contraction in the Fiscal Deficit to 4.1% of GDP and, the
likely further
decline to 3% in three years can be a strong enabler of positive
changes e.g.
holding inflation down over the medium term. A few other
proposals too have
potentially strong medium term positive effects. The
plug-and-play model
could catalyse projects in power and other infrastructure
sectors. The move
towards lower and simpler tax regulations, coupled with the
above, could add to
Indias attraction as a destination for manufacturing FDI. These
positives are
likely to prevail over the negative effects of proposals that
raise the effective tax
rate in the near term and of expectations unmet.
Tax revenue grew at half the 20% budgeted pace: All segments of
tax
revenue are seen to grow below budget in FY2015, particularly
Service tax and
Excise. The exception is Income tax that grew by 15% y-o-y.
And yet, the deficit target was reached: The Fiscal Deficit for
FY2015 is
now estimated at INR5.1 trillion. This would be 2% higher than
that for FY2014
but, 3% lower than the budgeted amount of INR5.3 trillion. Total
Expenditure
for FY2015 was restricted to 6% below budget. Plan Expenditure
cut by 20%,
Non-Plan Capital Expenditure by 13% and Interest Expenditure by
4%.
Deficit compression is likely to be sustained: The elasticity in
several items
of expenditure is likely to persist. The budget for FY2016
projects a further fall
in Plan Expenditure and 9% y-o-y fall in Subsidies. After
budgeting for 25%
growth in Excise and Service tax and only 10% growth in
Corporation Tax the
Fiscal Deficit for FY2016 is projected to rise 8% y-o-y, well
below the projected
growth in nominal GDP.
Several medium-term positives outweigh a few near-term
negatives:
FY2016 corporate earnings would be impacted by the rise in
surcharge on taxes.
The uptick in Service tax and Excise duty too could dampen
sentiment on
equities. These negatives forces are likely to be offset by the
positive effect of
the anticipated acceleration in economic activity in FY2016.
Other proposals in
this budget, such as the decline in the fiscal deficit ratio,
the move towards a
lower and simpler tax regime and the stimulus to infrastructure
that would be
provided by plug-and-play projects could create conditions that
extend the
high-growth phase beyond FY2016. The combination of USD2trillion
economy
growing at c8%, with improving public finances, falling
inflation and simpler tax
rules can draw in larger FDI into manufacturing.
Risk factors: Conditions that may follow the planned withdrawal
of stimulus in
the advanced economies may impact global interest rates and
capital flows. A
significant rise in global energy prices may have a large impact
on the
expenditure projected in the budget.
Budget FY2016
Research
02 March 2015
Anand Shanbhag
Email: [email protected]
Tel: +91 22 6606 9402
28
Feb15 + /-
1M + /- YTD
(%) (%)
Bank Nifty 19,691 -3.9 5.1
CNX Auto 8,935 -1.2 7.9
CNX Energy 8,696 -1.8 0.6
CNX Pharma 11,799 1.9 7.8
CNX Finance 8,033 -2.9 7.6
CNX FMCG 21,102 0.4 4.9
CNX IT 12,660 7.2 12.9
CNX Media 2,231 -6.8 -6.5
CNX PSU Bank 3,858 -12.7 -9.6
CNX Realty 239 6.3 17.9
CNX Infra 3,307 0.8 8.8
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Budget FY2016
02 March 2015 2
Summary of the budget
Year ending Mar11 Mar12 Mar13 Mar14 Mar15 Mar16
INRbn Actual Actual Actual Actual RE BE
Receipt 8,237 7,884 9,202 10,566 11,685 12,218
Tax revenue 5,699 6,298 7,419 8,159 9,085 9,198
Corporation Tax 2,987 3,228 3,563 3,947 4,261 4,706
Taxes on Income 1,466 1,703 2,015 2,429 2,786 3,274
Wealth Tax 7 8 8 10 10 0
Customs 1,358 1,493 1,653 1,721 1,887 2,083
Union Excise Duties 1,383 1,456 1,765 1,702 1,855 2,298
Service Tax 710 975 1,326 1,548 1,681 2,098
Others 20 28 31 31 34 36
Less - NCCD transfer -39 -40 -44 -47 -51 -57
Less - State's share -2,193 -2,554 -2,915 -3,182 -3,378
-5,240
Non-tax revenue 2,186 1,217 1,374 1,989 2,178 2,217
Expenditure 11,973 13,044 14,104 15,594 16,812 17,775
Non-Plan Revenue 4,925 5,389 6,011 6,448 7,105 7,499
Defence Services 921 1,030 1,113 1,244 1,404 1,521
Subsidies 1,734 2,179 2,571 2,546 2,667 2,438
Grants to State and U.T. Gov. 498 515 480 606 803 1,086
Pensions 574 612 695 749 817 885
Police 273 331 373 421 481 518
Other General Services (Organs of State, tax collection,
external affairs etc.)
169 192 218 238 258 309
Social Services (Education, Health, Broadcasting) 350 194 212
256 256 291
Economic Services (Agriculture,Industry, Power, Science &
Tech.) 281 218 222 250 271 290
Other 125 117 129 139 149 160
Non-Plan Interest 2,340 2,732 3,132 3,743 4,114 4,561
Non-Plan Capital 918 799 824 871 913 1,062
Defence Services 621 679 705 791 820 946
Others 298 120 119 80 94 116
Plan Revenue 3,142 3,337 3,292 3,527 3,669 3,300
Plan Capital 648 786 844 1,006 1,011 1,353
Revenue Deficit 2,523 3,943 3,643 3,570 3,625 3,945
Fiscal Deficit 3,736 5,160 4,902 5,029 5,126 5,556
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Budget FY2016
02 March 2015 3
Service tax and Excise have
grown far slower than budgeted. Corporation tax
and Customs too grow slower than budgeted.
Plan Expenditure cut by
20%, Non-Plan Capital Expenditure by 13%.
Interest Expenditure 4% below budget.
Deficit compression likely to be sustained
Fiscal deficit for the year ending March 2015 is now estimated
at INR5.1 trillion, 3% below budget
and only 2% growth over FY2014. Tax revenue for FY2015 is now
estimated to grow 10% y-o-y,
half the budgeted growth. The deficit was held in check by
severe cuts in the Plan Expenditure
and in Non-Plan Capital Expenditure. Interest expenditure too
grew less than budget. Non-Plan
Revenue expenditure grew more than the budgeted amount due to
Defence and Subsidies. The
budget for FY2016 projects 25% growth in Excise and Service tax
and only 10% growth in
Corporation Tax. It projects a further fall in Plan Expenditure
and 9% y-o-y fall in Subsidies. The
Fiscal deficit for FY2016 is projected to rise 8% y-o-y. This
would be well below the growth in
nominal GDP.
Tax revenue growth in FY2015 was half the budgeted 20%
Six segments of tax that provide revenue to the Central
Government, viz.
Corporation Tax, Income Tax, Wealth Tax, Customs, Excise and
Service Tax are
now estimated to have grown 10% y-o-y to contribute an aggregate
INR12.5
trillion for the year ending March 2015. The budgeted revenue
was INR13.6
trillion, representing a targeted growth of 20% y-o-y.
The largest variance from the budgeted revenue was in Service
Tax, that is now
estimated at INR1,681bn (+9% y-o-y) compared with the budget of
INR2,160bn
(+40% y-o-y). Excise is now estimated at INR1,855bn (+9% y-o-y)
compared
with the budget of INR2,071bn (+22% y-o-y). Revenue from
Corporation Tax
and from Customs is estimated to grow 8% and 10% y-o-y; about 6%
lower
than budgeted growth. Income Tax is estimated to grow 15% y-o-y
for FY2015,
only 2% lower than budgeted growth.
And yet, the Fiscal Deficit target was reached
The Fiscal Deficit for FY2015 is now estimated at INR5.1
trillion. This would be
2% higher than that for FY2014 but, 3% lower than the budgeted
amount of
INR5.3 trillion.
The success in reaching the targeted deficit was the result of
restricting Plan
Expenditure (c30% of total expenditure) to 20% below budget and
Non-Plan
Capital Expenditure (c6% of total) to 13% below budget. Non-Plan
Interest
Expenditure (c24% of total) is reported to be 4% below
budget.
Non-Plan Revenue Expenditure is the largest segment comprising
over 40% of
total expenditure of the Central Government. It is now estimated
to have grown
10% y-o-y for FY2015, higher than the budgeted 7% growth.
Subsidies, the
largest item accounting for more than a third of the Non-Plan
Revenue
Expenditure grew 5% y-o-y, compared with budgeted growth of 2%
y-o-y.
FY2016 revenue to be led by a recovery in GDP growth
Gross tax revenue from the six segments is budgeted to grow 16%
y-o-y over
FY2015. This is not a particularly aggressive growth compared
with the 10% y-o-
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Budget FY2016
02 March 2015 4
FY2016 growth in Service
tax and Excise could accelerate as the GDP
recovers. Lower target for Corporation Tax may
reflect slower rise in profitability.
y growth for FY2015 and is modest compared with the 20% growth
that had
been budgeted for FY2015.
The budgeted growth in Excise (24% y-o-y) and in Service Tax
(25% y-o-y)
could be realized if the real growth of Indias GDP does recover
to c8%, as
projected by a few global institutions and by credit rating
agencies. Revenue
from Corporation Tax (10% y-o-y) and from Customs (10% y-o-y) is
modest and
virtually unchanged from the actual growth for FY2015. The
targeted growth in
Corporation Tax may also suggest that corporate profitability is
not expected to
materially improve in FY2016. Income Tax (on individuals and
non-corporates) is
budgeted to grow 18% y-o-y, a small rise from the 15% growth for
FY2015.
Net tax revenue is projected to grow by only 1% y-o-y for FY2016
because the
budgeted transfer to States would grow 55% y-o-y. The States
share of gross
tax revenue is projected to rise to 36% in FY2016 from an
average of 28% in the
preceding five years.
The budget projects c5% y-o-y fall in Plan Expenditure for
FY2016. Non-Plan
Capital Expenditure is budgeted to grow 16% y-o-y while Plan
Interest
Expenditure is projected to grow 11% y-o-y. Non-Plan Revenue
Expenditure is
budgeted to grow 6% y-o-y despite a 9% fall in Subsidies. Grants
to States and
Union Territories are budgeted to grow 35% y-o-y.
The budgeted Fiscal Deficit for FY2016 would rise by 8% y-o-y to
INR5.6 trillion.
However, the budget projects only a 2% rise y-o-y in market
borrowings for
funding the deficit.
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Budget FY2016
02 March 2015 5
Steady decline in the deficit
ratio would support the recovery in GDP growth
during FY2016.
Faster implementation of
projects possible if well-
known hurdles are cleared in advance.
Effective tax rate would creep up in FY2016 for
corporates and high-income
individuals.
Significant medium-term positives outweigh a few near-term
negatives
Earnings of the corporate sector would be impacted by the rise
in surcharge on taxes. The uptick
in Service tax and Excise duty too could dampen sentiment on
equities. These negative forces are
likely to be offset by the positive effect of the anticipated
acceleration in economic activity in
FY2016. Other proposals in this budget, such as the decline in
the fiscal deficit ratio, the move
towards a lower and simpler tax regime and the stimulus to
infrastructure that would be provided
by plug-and-play projects could create conditions that extend
the high-growth phase beyond
FY2016. The combination of USD2trillion economy growing at c8%,
with improving public
finances, falling inflation and simpler tax rules can draw in
larger FDI into manufacturing.
Calibrated fall in deficit likely to encourage growth
The ability to meet the deficit target despite low growth in tax
revenues suggests
that the government is regaining control over expenses. So, it
could have
targeted an even lower growth in Fiscal Deficit for FY2016 i.e.
the deficit could
possibly be pushed below 3.9% of GDP and the milestone of 3% be
realized
quicker. However, a rapid compression of the deficit could
create an obstacle to
the recovery of economic growth. So, the gradual decrease in the
deficit is likely
to be a supporting factor for a quicker return to the high
growth path.
A few targeted programs can help to revive projects
The plug-and-play model for Ultra Mega Power Projects could be
capable of
rapidly reviving investment demand in a critical segment of the
economy. The
intentions behind the plug-and-play projects are to resolve the
well known
obstacles to such projects at the inception stage itself and
could enable rapid
progress and commissioning of these projects.
Lower, simpler tax rules can enhance image to investors
A 25% tax on corporate earnings would be a highly visible change
from the
current 30% base rate. While the removal of tax exemptions and
shelters could
mean that the effective tax rate may change little, it does
point a simpler tax
regime. Even if the implementation of this change would wait for
four years, it
sends a strong signal to global investors that India is becoming
more business-
friendly.
This message is likely to be reinforced by the decision to defer
the
implementation of GAAR by two years.
Rise in tax surcharge may impact near-term sentiment
Earnings of corporates and of non-corporates with taxable income
exceeding
INR10mn would be subject to a higher marginal tax during FY2016.
This would
tend to erode the net profits of the corporate sector and would
thus be
marginally negative for sentiment on equities. The rise in the
rates of Service tax
and Excise duty too tend to act against the sentiment on
equities.
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Budget FY2016
02 March 2015 6
Annexure
Direct Taxes
1 Surcharge proposed to be levied on individuals, HUFs,bAOPs,
BOIs, artificial juridical persons, firms,
cooperative societies and local authorities having income >
Rs. 1 cr = 12%
2 Surcharge proposed to be levied in the case of domestic
companies
a) Having income > Rs.1 cr and upto Rs.10 cr = 7%
b) having income > Rs.10 cr = 12%
3 Surcharge proposed to be levied in the case of foreign
companies
a) Having income > Rs.1 cr and upto Rs.10 cr = 2%
b) Having income > Rs.10 cr = 5%
4
Proposed to levy a surcharge @12% as against current rate of 10%
on additional income-tax payable by
companies on distribution of dividends and buyback of shares, or
by mutual funds and securitisation
trusts on distribution of income.
5
Education cess on income-tax @ 2% for fulfilment of the
commitment of the Government to provide quality
based education and
1% of additional surcharge called Secondary and Higher Education
Cess on tax and surcharge is proposed to be continued for the FY16
for all taxpayers.
6
Proposed to amend the provisions of section 269SS and 269T of
the Income-tax Act so as to prohibit acceptance or re-payment of
advance in cash of Rs. 20,000 or more for any transaction in
immovable
property. It is also proposed to provide a penalty of an equal
amount in case of contravention of such
provisions.
7 Reduce rate of Corporate Tax over next 4 years from 30% to 25%
along with rationalisation and removal of
various kinds of tax exemptions and incentives for corporate
taxpayers
8
It is proposed to defer applicability of General Anti Avoidance
Rule (GAAR) by 2 years. It is proposed to be
applicable for income of the FY 2017-18 (A.Y. 2018-19) and
subsequent years. It is also proposed that the investments made
upto 31.03.2017 shall not be subjected to GAAR.
9 Proposed to provide pass through status to all the
subcategories of category-I and also to category-II
Alternative Investment Funds (AIFs) governed by the regulations
of SEBI.
10 To facilitate technology inflow to small business at low
cost, Income tax rate on royalty and fees for technical service
proposed to be reduced from 25% to 10%.
11 It is proposed to amend the provisions of section 194LD of
the I-T Act so as to extend the period of applicability of reduced
rate of tax at 5% in respect of income of foreign investors (FIIs
and QFIs) from
corporate bonds and government securities, from 31.5.2015 to
30.06.2017.
12 It is proposed to abolish the levy of Wealth-tax with effect
from 2016-17(AY). The revenue loss on account of such abolition is
proposed to be compensated by increase in the existing
surcharge by 2% in case of domestic companies and all non
corporate taxpayers ( for income > Rs.1 cr)
13 Increase the deduction unit u/s 80 D for health insurance
premium from Rs.15000 to Rs.20000 for individuals and from Rs.20000
to Rs.30000 for senior citizens
14 Increase the deduction limit u/s 80CCD for contribution to
National Pension Scheme from Rs.1 lakh to
Rs.1.5 lakh.
15 Increase the deduction limit u/s 80CCC for contribution to
pension fund of LIC or IRDA approved insurer
from Rs.1 lakh to Rs.1.5 lakh.
16 Transport allowance exemption increased from Rs.800 to
Rs.1600 per month.
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Budget FY2016
02 March 2015 7
Indirect Taxes A) Excise Duty
1 Central Excise Duty increased from 12.36% to 12.5% to subsume
education cess.
2 Hike in excise duty on cigarettes to 25% for length upto 65mm
and 15% for other cigarette lengths.
3 Reduction in excise duty on leather footwear with retail
price> Rs.1000 from 12% to 6%
4 Clean Energy Cess increased from Rs.100 to Rs.200 per metric
tonne of coal
5 Inputs for use in the manufacture of LED drivers and MCPCB for
LED lights, fixtures and LED lamps from
12% to 6%.
6 Excise duty on chassis for ambulances is being reduced from
24% to 12.5%
7 Excise duty on sacks and bags of polymers of ethylene other
than for industrial use is being increased from 12% to 15%.
B) Service Tax
1 Increase in service tax rate plus education cess from 12.36%
to 14%
2 Service tax exemption to be provided on Varishta Bima Yojana
for Senior Citizen
3 Service provided by a Common Effluent Treatment Plant operator
for treatment of effluent is being exempted
from service tax.
4 Service tax to be levied on the service provided by way of
access to amusement facility such as rides,
bowling alleys, amusement arcades, water parks, theme parks,
etc.
5 Service tax exemption extended for pre cold storage services
to incentivize value addition in fruits and
vegetables sector.
6
A uniform abatement is being prescribed for transport by rail,
road and vessel to bring parity in these sectors. Service Tax shall
be payable on 30% of the value of such service subject to a uniform
condition of
non-availment of Cenvat Credit on inputs, capital goods and
input services. Presently, tax is payable on 30% of the value in
case of rail transport, 25% in case of road transport and 40% in
case of transport
by vessels.
C) Customs Duty
1
Proposal to reduce the rates of basic customs duty on certain
inputs, raw materials, intermediates and
components (in all 22 items) so as to minimise the impact of
duty inversion and reduce the manufacturing cost in several
sectors.
2 Basic customs duty on sulphuric acid for the manufacture of
fertilizers is being reduced from 7.5% to5%.
3 The tariff rate of basic customs duty on bituminous coal is
being reduced from 55% to 10%.
4 Increase in basic customs duty on Metallurgical Coke from 2.5%
to 5%.
5
Increase in effective rate on Commercial Vehicles from 10% to
20%. Customs duty on commercial vehicles in
Completely Knocked Down (CKD) kits and electrically operated
vehicles including those in CKD
condition will continue to be at 10%.
6
Tariff rate on iron & steel and articles of iron or steel,
falling under Chapters 72 and 73 of the Customs Tariff,
from 10% to 15%. However, there is no change in the existing
effective rates of basic customs duty on these
goods.
7 The effective rates of Additional Duty of Customs levied on
imported Petrol and High Speed Diesel Oil (commonly known as road
cess) are being increased from Rs.2/litre to Rs.6/litre only.
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Budget FY2016
02 March 2015 8
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Budget FY2016
02 March 2015 9
Market Outlook:
In line with our expectations, Nifty has moved sideways
for almost 15 days within in the tight band of
8913-8669 levels. Despite showing sharp weakness
during the last week, Nifty made a smart recovery but
was not able to move above the resistance of around
8913 levels. The bullish sequence of higher tops and
bottoms is still intact in Nifty as per longer timeframe.
If Nifty manages to close above 8997 levels by this
week, then that is going to be an upside breakout of the
consolidation and we may see potential upside till
9073/9250 levels. Trend reversal is seen below 8650
levels. So, we suggest exercising caution below 8650
levels on Nifty.
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Budget FY2016
02 March 2015 10
SKS MICROFINANCE
SKS MICROFINANCE BUY
Market Price : INR 437 (28th Feb 2015)
Buy Range : INR 437-425 Targets : INR 525-540
Stoploss : INR 395 Holding Period : up to 2 months
Investment Rationale: SKS Microfinance is moving in rising
channel indicating strength in the stock.
Relative Strength Index is improving from oversold zone
indicating bulls are taking control. In advancing
trend, each up move extends to new price highs while
the sell offs in between do not decline as far as the price
levels seen on previous sell offs. SKS will
continue to move in this channel until either trend line is
broken. Based on the chart pattern we have set
price target of 525-540 for short term.
BIOCON BUY
Market Price : INR 427 (28th Feb 2015)
Buy Range : INR 427-420 Target : INR 470/482
Stoploss : INR 402 Holding Period : up to 1 month
Investment Rationale: Biocon has given breakout
from down sloping trend line along with volumes.
Positive divergence is observed on MACD momentum indicator
signifying advancing trend for short term.
Based on Fibonacci price extension we have set price target of
470/482, which is 100% & 123.6% of the
total move i.e. from 402-454, which is added to recent
swing low of 418.
Source: Bloomberg
Source: Bloomberg
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Budget FY2016
02 March 2015 11
SINTEX INDUSTRIES BUY
Market Price : INR 114 (28th Feb 2015) Buy Range : INR
114-110
Target : INR 144 Stoploss : INR 102
Holding Period : up to 2 months
Investment Rationale: Positive trend is observed on
Sintex Industries daily charts. The stock is making higher highs
and higher lows indicating advancing
trend. Moreover, positive DMI is greater than negative DMI
suggesting bulls have the edge. Based on
Fibonacci price extension we have set price target of
144, which is 178.6% of the total move i.e. from 71-105, which
is added to recent swing low of 84 for arriving the estimated
target.
EROS INTERNATIONAL MEDIA BUY
Market Price : INR 394 (28th Feb 2015)
Buy Range : INR 394-385 Target : INR 460
Stoploss : INR 359 Holding Period : up to 3 months
Investment Rationale: Eros International Media is looking
bullish on daily charts. The stock is comfortably
trading well above its 50 & 100 day moving indicating
strength in the stock. Based on Fibonacci price
extension we have set price target of 460, which is
123.6% of the total move i.e. from 319-400, which is added to
recent swing low of 359.
Source: Bloomberg
Source: Bloomberg
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Budget FY2016
02 March 2015 12
YES BANK BUY
HINDUSTAN UNILEVER BUY
Market Price : INR 910 (28th Feb 2015) Buy Range : INR
910-880
Targets : INR 1057 Stoploss : INR 829
Holding Period : up to 3 months
Investment Rationale: Hindustan Unilever is
consolidating in tight range of 880-920 levels for almost 1
month. The stock is moving in strong
uptrend. We can see the stock is making higher highs
and higher lows. Based on Fibonacci price extension we have set
price target of 1057, which is 78.6% of
the total move i.e. from 744-969, which is added to recent swing
low of 880.
Market Price : INR 862 (28th Feb 2015)
Buy Range : INR 862-845
Target : INR 1005 Stoploss : INR 780
Holding Period : up to 2 months
Investment Rationale: Yes Bank has reversed its recent weakness
and entered into a new short term
uptrend. The rise in the last two sessions was accompanied with
above average volumes, which augurs well for the uptrend to
continue. We have set
price target of 1005 based on Fibonacci price extension. Based
on Fibonacci price extension we have
set price target of 1005, which is 100% of the total
move i.e. from 670-895, which is added to recent swing low of
780.
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
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Budget FY2016
02 March 2015 13
BAJAJ AUTO BUY
Market Price : INR 2153 (28th Feb 2015) Buy Range : INR
2153-2125
Target : INR 2304
Stoploss : INR 2042 Holding Period : up to 1 month
Investment Rationale: On daily charts, Bajaj Auto is
moving in downward sloping channel. Currently, the
stock is trading near lower end of the trend line. So we may see
quick bounce from lower end of the trend line
and will attempt to test the resistance line (joining the
peaks). The stock will continue to trade in the channel
till it breaks out of the trading zone.
Source: Bloomberg
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02 March 2015 14
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02 March 2015 15
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