Budget Preview

Transcription

1 Budget Preview Reform seems the Norm Strategy Note Indian equities have taken a breather since mid January 2013 as market participants ponder over the outcome of the Union Budget. We take it as a foregone conclusion that the Finance Minister will deliver a reformcentric Budget addressing the fiscal and current account deficits in the wake of the sustained country downgrade scare. In our opinion, the FM cannot even afford a Budget which is termed as a non event, leave alone a bad one. Attempts to revive the industry cycle, infrastructure and deepening the corporate bond market are other market friendly measures likely to be taken up. The Finance Minister would obviously want to serve customary populist carrots to appease the critical vote bank ahead of the forthcoming elections but, his Budget, by and large, is likely to be balanced, certainly devoid of any ambiguous provisions to help maintain investor confidence as also to attract foreign capital. We believe the Budget will deliver a good vibe and provide fresh legs to the market to scale new highs. First and foremost, the FM will try and achieve the fiscal deficit target of 5.3% that he had promised for He is likely to succeed in getting close primarily through tighter expenditure control and higher PSU dividends that may offset to an extent, slippage in tax collections, lukewarm spectrum response and spillage in unrealistic subsidy targets set by his predecessor. Already, we have heard of tight spend controls imposed across ministries in the last few months. Next, the FM would want to keep his promise of fixing fiscal deficit at 4.8% next year. If one looks at the India Inc statement of account, all revenue earned by the government goes towards fulfilling non plan expenditure and consequently we run a fiscal deficit that equals the size of our plan expenditure. This is the result of wasteful and unchecked spending over the years and the noose has been tightening. It s obvious the FM can t reduce fiscal deficit significantly solely through revenue boost. We expect a massive expenditure control in this Budget. The FM is likely to provide for no growth or only a marginal rise in expenditure. This will be a major move, which should excite the market and make the deficit target look achievable. Apart from the flagship schemes like the NREGA, many centrally sponsored schemes are likely to be given lower allocations or abandoned altogether. Subsidy of course, cannot be reduced in the current scheme of things, but reducing wastage will be attempted through direct transfers, and over time, by deregulating fuel prices. To make up for the fuel subsidy, we expect additional duty on diesel vehicles. Interest subsidy to farmers and raising purchase limit for housing to Rs30 lacs from Rs25 lacs may be popular moves from the election perspective; so also Food Security Bill, access to medicines through higher allocations and substantial rise in agriculture allocations. Sops are also likely to help boost exports and aid the current account deficit cause. On the direct taxation front, we expect no change in personal income tax and corporate tax rates, given the prevailing mood. The FM too, hinted at stable rates at a recent investor seminar. Perhaps, he would impose a surcharge, for the higher tax brackets in particular, in line with the philosophy to tax the rich. Contrary to popular opinion, we doubt the FM would increase exemption slabs beyond Rs2 lacs. For one, the DTC recommends a limit of Rs2 lacs and more importantly, enhanced tax collection is critical given the reigning deficit. In this pressure scenario, an exemption of say Rs2.5 3 lacs will help many people escape the tax net. The FM simply cannot afford this potential loss. February 20, 2013 Amar Ambani research@indiainfoline.com

2 With Mumbai and Delhi contributing 50% of the country s income tax collections, our tax base needs to be seriously widened both to boost nation wide collections and those from hitherto untapped sources. An amnesty scheme could be one good way to boost tax collection. We expect section 80C to be extended beyond Rs1 lac to Rs1.5 lacs or may be even Rs2 lacs, if the Rajiv Gandhi Equity Savings Scheme is included under this section (FM acknowledged the fact that the scheme is complicated and promised to address it in Budget). Likely inclusions to the 80C could be Pension schemes of mutual funds. The section 80C extension helps in many ways: it leaves more money for the lower income groups to tackle inflation, hopefully discourages gold investment to an extent and encourages mass savings and investments to help fund infra and other national development projects. There is a strong case to enhance exemption limit for medical allowance, which hasn t been revised since As for wealth tax, we expect rates to be raised but don t see a downward revision in STT rates in the light of the 10% drop in collections from last year s level. Instead, we see the possibility of a commodity transaction tax to boost collections under the garb of better regulation. It s prudent to note that the current Finance Minister was the first to propose it way back in the Budget. When it comes to indirect taxation, given that peak Service Tax and Excise rates were increased last year, they are unlikely to be raised in times of falling GDP growth. Customs duty may be raised to discourage imports and help improve current account deficit. The variable rates in Customs duty could be raised by 1% and a Countervailing duty could be imposed. GST looks a difficult prospect for implementation without state support. The government may explore a way out on the lines of FDI (ie. implementation by wilful states). The FM is likely to share his thoughts in this context. On the non tax revenue front, the FM will set a big target for disinvestment, higher than Rs300bn. We believe that the budget would be positive for sectors like FMCG, Infrastructure, Oil & Gas & Pharmaceutical and negative for sectors like Automobile & Cement. Sectoral expectations Automobiles Increase in excise duty on large diesel passenger vehicles It would be a negative for players having substantial exposure in diesel portfolio like M&M. However the probability is low as steps for linking the diesel prices with market prices have already been taken. Continuation of interest rate subvention scheme Extension of JNNURM scheme Favourable policies for manufacturing defence equipments in India Increasing the agri credit The scheme of providing interest rate subventions to farmers will help the disposable incomes of population in rural India. It would be positive for M&M, Hero Moto It will help the OE's like Tata motors, Ashok Leyland as the state transport units will have continued access to funds for buying buses Would be a positive for Bharat Forge It would increase allocation in rural programs and help the tractor and two wheeler sales 2

3 Banking and Financial services Commitment to fiscal consolidation; announcement of Positive for banks in general as lower borrowings could a lower market borrowing program for FY14 ease pressure on banking system liquidity Positive for PSU Banks with lower Tier 1 capital such as er capital infusion target for PSU Banks CBOI, UBI, BOI, SBI etc; would also aid in complying with Basel III norms Shifting capital infusion of PSU Banks to start of the year (first quarter) from end of the year Implementation of Bailout package for SEBs Promotion of longer term bank FDs eligible under section 80C either by raising tax deduction limit or by lowering tenure from current 5 yrs to 3 yrs Increase in FDI limit within insurance sector from current 24% to 49% Positive for PSU Banks with lower Tier 1 capital such as CBOI, UBI, BOI, SBI, etc; early capitalization would enable banks to plan their growth more efficiently To partially assuage asset quality concerns pertaining to restructured SEBs Positive for banks in general; would stimulate mobilization of longer tenure deposits and also beneficial from ALM perspective Positive for banks/nbfcs having insurance ventures; in particular for HDFC, Reliance Cap, etc Banks to be allowed to raise long term funds through issue of tax free/infrastructure bonds Affordable housing to be assigned infra status Announcement of capital market friendly measures especially towards promoting equity investments Positive in general for the sector; would address the ALM issues in long term funding like infrastructure, etc Positive for banks/nbfcs to avail long term funds at relatively lower cost for the development of the entire Housing industry Positive for Broking companies and NBFCs linked to capital market such as Reliance Cap, etc Cement Hike in excise duty, Re imposition of excise duty on advalorem basis to high yield market to be impacted most Negative in general for the sector; companies catering Cut in custom duty for thermal coal from 5% to 0% Positive for all cement companies Re imposition of custom duty on cement imports Positive for north bound cement companies like JK Lakshmi, JK Cement, Shree Cement and Ambuja Cement Education Increase in expenditure towards ICT in government Positive for companies likes Educomp, Everonn having schools presence in ICT for schools Grant of infrastructure status for higher education Positive for companies having presence in higher segment education segment FMCG Expect increase in allocation of resources towards Would increase the disposable income in the hands of NREGA and Bharat Nirman consumers, which would be a positive for the sector Increase in limit under Section 80C Positive for the industry Zero/marginal excise duty hike on cigarettes Positive for cigarette manufacturers like ITC, Godfrey Phillips, VST Industries Exempt custom duty on filter paper (used for tea bags) Positive for players like Tata Global Beverages, HUL, Goodricke Group Implementation of GST Positive for the industry 3

4 Financial services (Exchanges) Imposition of Commodity transaction taxes on Negative. Will impact the volumes of commodity trading commodity trading on all commodity exchanges. Passage of FCRA bill in budget session Positive. To broaden participation and increase the breadth of investable products in commodity market IT Reduction/Removal of MAT on SEZ Positive. Will incentivise SEZ investments. Reduction in MAT will improve economic viability of the existing SEZs. Positive for companies having strong SEZ presence Clear codification/transparency of transfer pricing regulation Positive. To reduce uncertainty and litigation costs Clarification service tax refunds, tax treatment on onsite services and dual levy of taxes as well as withholding taxes on software products Positive. To reduce uncertainty in these aspects taxation. To help in proper compliance and hence lower litigation costs. To improve cash flows and create level playing field for software product and services firms Infrastructure and Capital Goods Increased allocation to the infrastructure sector The move is likely to bring in more investments in the infrastructure sector and enhance the order inflows for the sector. Positive for all the infrastructure companies Initiatives towards restructuring of state power distribution companies to improve their financial health The move will aid in improving working capital cycle for the capital goods companies facing payment delays from SEBs Hike of import duty on power equipments Positive for BTG manufacturers Exemption of MAT for the sector This will improve the cash flows for the development projects in the initial years. Positive for all the developers. Permitting 100% refinancing of INR debt through ECBs Positive for all the companies in the infra space Metals and Mining Export duty on Iron ore fines to be reduced from 30% Positive for miners like Sesa Goa, NMDC. Negative for to 20% JSW Steel Increase in import duty on HRC from 7.5% to 10% Will benefit all steel companies Removal of steel products from the ambit of Free Trade Agreement (FTA) Will benefit all steel companies Oil & Gas Reinstate 5% custom duty on crude oil and increasing excise duty on petro products Clarity on domestic natural gas pricing (implementation of Rangarajan Committee recommendations) Exemption of the 5% import duty on LNG in all LNG consumer sectors (presently exemption only in power sector) The move could be made to increase the government revenues, positive for Cairn and negative for refining companies Positive for Gas producers RIL, OINL, ONGC and negative for gas consumers like GAIL, IGL. However as production volumes start increasing transmission companies expected to start benefiting To increase affordability of LNG and thereby beneficial for Petronet LNG, GAIL, GSPL, IGL, GUJGAS Clarity on FY13 subsidy sharing formula Would indicate the sharing pattern for FY14 4

5 Extend the tax holiday to natural gas sector (presently 7 year tax holiday given to crude oil E&P projects) Tax holiday on refining projects to be extended till end of 12th five year plan ( ) Increase on import duty on polymers like PVC, PE from 5 to 7.5% and/or Removal or reduction of import duty of all petchem inputs (current rate 2.5% 10%) Declared goods status for LNG and natural gas It would help improving investment climate in the E&P of domestic gas in the country While the benefit has expired in March end 2012, many grassroot refineries and expansion projects are undergoing. Such tax concession extension would support their viability and would benefit HPCL, BPCL, IOCL, MRPL It will make local petchem production viable by making the spreads more comparable with the imported polymers Current sales tax/vat is % and on back of declared goods status the same rates would be reduced to 5% improving the affordability of LNG. Pharmaceutical Increase in weighted deduction on R&D and include all research related services. Currently a weighted tax deduction of 200 % is available only for R&D Good for overall pharma industry expenditure in an in house facility. Infrastructure status to healthcare Good for Apollo Hospital and Fortis Expected increase in healthcare budgets Good for overall pharma industry Power Provision of a 10 year tax holiday to be extended to 15 years and it should be continued beyond 2013 Positive for overall Generators Exempting power projects from service tax net and removal of import duty on equipment Would help in bringing down cost of the Generators Policies pertaining to imported fuel based projects to be suitably modified Positive for Tata Power, R Power, Adani and Lanco Increase ECB limits or bank lending limits Positive for overall sector Telecom Stream lined and uniform tax structure as current framework involves a plethora of duties, levies etc Positive for all telecom players 5

6 Recommendation parameters for fundamental reports: Buy Absolute return of over +10% Market Performer Absolute return between 10% to +10% Sell Absolute return below 10% Published in India Infoline Ltd 2013 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL India Private Clients research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subject IIFL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, er Parel (W), Mumbai For Research related queries, write to: Amar Ambani, Head of Research at amar@indiainfoline.com or research@indiainfoline.com For Sales and Account related information, write to customer care: info@5pmail.com or call on