Strategy. Disinvestment is the key next trigger; The $10bn Question
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- Millicent Evans
- 5 years ago
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1 Disinvestment is the key next trigger; The $10bn Question Continued fall in crude oil prices below $80/bbl could be a hindrance rather than help achieving India s fiscal deficit target of 4.1% for FY15 unless the Govt. garners Rs. 600bn from disinvestment proceeds. The other option is a cut in expenditure, which has more of a negative impact on growth and tax revenues than positive. We think the importance of disinvestment proceeds have increased and our view is that investors/markets could get disappointed if the first round of share sale starting next month turns out to be a damp squib. Tax revenues have grown merely 5.1% yoy during 1HFY15 against the budget target of 16.9% for FY15. The falling crude oil prices are actually resulting in higher fiscal deficit in FY15 due to the loss of tax revenue and no material benefit on oil subsidy this year as the government has to pay ~Rs. 400bn as oil subsidy for FY14 irrespective of crude oil prices. We think the benefits of lower crude oil prices are largely in the bag; incremental benefits are negligible. Tax collections are lagging the budget estimates by a huge margin: i. Revenues from corporate taxes, which account for ~35% of the total tax revenue, rose just 5.6% during 1HFY15, far lower than annual target of 14.6%. ii. Collections on excise duty contracted by 2.2% yoy during 1HFY15 versus the budget target of 15.4% for the full year FY15. While the recent excise duty hike on petrol and diesel should lead to higher excise collections, it is unlikely to meet the budget target of 15.4% increase over FY14 due to ~24% fall in crude oil prices. iii. Collections under other heads custom duties (5.3% vs. 15.3% BE), service tax (14.2% vs. 31% BE) and personal income tax (11.9% vs. 17.8% BE) are also considerably behind budget target. If the tax revenues do not catch up and government misses its divestment target of Rs. 600bn, it would lead to 5-10% cut in plan expenditure to meet the fiscal deficit target. We present three scenario analysis of the fiscal situation in FY15: Case 1: Rs. 600bn If the government (i) meets its divestment target of Rs 600bn (ii) saves Rs.150bn on food subsidy due to delay in pan India rollout of Food Security Act and saves Rs 80bn on fuel subsidy, the FY15 fiscal target if 4.1% would be achieved. This, however, is the best case scenario. Case 2: Rs. 400bn If the government (i) divests Rs 400bn (ii) saves Rs.150bn on food subsidy and saves Rs.40bn on fuel subsidy, it will have to cut either plan expenditure by 5% or non-plan expenditure by 2.5% to meet the 4.1% target or fiscal deficit would be 4.4% of the GDP. Case 3: Rs. 200bn If the government (i) garners only Rs 200bn in disinvestment (ii) saves Rs.150bn on food subsidy and pays the fuel subsidy as budgeted, it will have to cut either plan expenditure by 10% or non-plan expenditure by 5% to meet the fiscal target or fiscal deficit would be 4.6% of the GDP. Date November 19, 2014 Market data BSE Sensex NSE Nifty 8426 Growth, %, yoy Expenditure Non-tax revenue Apr-Sep FY15 FY15BE Performance (%) 1m 3m 12m Sensex 8% 7% 36% BSE % 9% 42% Ganeshram Jayaraman ganeshram@sparkcapital.in Gautam Singh gautam@sparkcapital.in Vishnu Kumar A S vishnu@sparkcapital.in
2 -2.2 (Growth, %, yoy) (% of full year target) Fiscal deficit: Need some actions to meet the target Lower crude prices actually pushing the fiscal deficit up in FY15; benefit to be seen in FY16 Fiscal deficit reaches 83% of FY15 budget target in Apr-Sep 14 s remain considerably behind the budget target Net tax revenue Non-tax revenue Apr-Sep FY14 Expenditure Fiscal deficit Revenue deficit Apr-Sep FY15 Expenditure Non-tax revenue Growth, %, yoy Apr-Sep FY15 FY15BE Source: Comptroller and Auditor General (CAG), Spark Capital Research Excise duties, corporate tax and custom duties behind budget target Income tax Corporate tax Custom duties Excise duties Service tax Source: CAG, Spark Capital Research Fiscal deficit reaches 83% of FY15 budget target in Apr-Sep 14 as net tax revenues remain considerably behind the budget target Lower crude oil prices are actually resulting in increasing the fiscal deficit in FY15 because of the loss on tax revenue front and no material benefit on oil subsidy front. This is because government has to pay ~Rs. 400bn as oil subsidy for FY14 alone irrespective of the crude levels. FY15BE Source: CAG, Spark Capital Research Apr-Sep FY15 Indirect taxes excise duties, corporate tax and custom duties are considerably behind budget target 2
3 Fiscal deficit in FY15: Expenditure cut looming if govt. misses divestment target Possibility of 5-10% cut in plan expenditure to meet the fiscal target Absolute, Rs bn Growth, % yoy FY15E FY15 BE FY15E FY15BE Case 1 Assump. Case 2 Assump. Case 3 Assump. Case 1 Case 2 Case 3 Revenue receipts (i) 11,898 11,698 11,614 11, ,773 9,572 9,489 9, grows at 14.5% grows at 13.5% grows at 12.5% Non-tax revenue 2,125 2,125 vs. 16.9% BE 2,125 2, Non debt capital receipts (ii) Disinvestment of PSUs Miss divestment Miss divestment Largely meet Recovery of loans target by Rs. 105 target by Rs divestment target 230bn 430bn Non plan expenditure 12,199 11,969 12,009 12, Expenditure on subsidies (a +b+c) = A 2,514 2,284 2,324 2, Food (a) 1,150 1,000 Saves Rs.150bn 1,000 Saves Rs.150bn 1,000 Saves Rs.150bn Fertilizer (b) on food subsidy 730 on food subsidy 730 on food subsidy Oil Saves Rs.80bn 594 Saves Rs.40bn Pays as budgeted Other non plan expenditure 9,685 9,685 on fuel subsidy 9,685 on fuel subsidy 9, Plan expenditure (B) 5,750 5,750 5,750 5, Total expenditure (iii) = A + B 17,949 17,719 17,759 17, Cut either plan Fiscal deficit (iii-ii-i) 5,312 5,316 Cut either plan Meets fiscal 5,639 5,963 exp. (~10%) or exp. (~5%) or nonplan exp. (~2.5%) 4.6 deficit target non-plan exp. Fiscal deficit (% of GDP) (~5%) Net market borrowings 4,612 4,600 4,896 5, Source: India Budget, Spark Capital Research Case 1: Meets fiscal deficit target Meets its divestment target of Rs 634bn Saves Rs. 150bn on food subsidy Saves Rs.80bn on fuel subsidy Case 2: Need to cut expenditure Rs 400bn, saves Rs.150bn on food subsidy and saves Rs.40bn on fuel subsidy Cut either plan exp. (~5%) or non-plan exp. (~2.5%) to meet the 4.1% target Case 3: Need to cut expenditure Rs 200bn, saves Rs.150bn on food subsidy Cut either plan exp. (~10%) or non-plan exp. (~5%) to meet the 4.1% target 3
4 Disinvestment candidates in FY15 Govt. could raise Rs. 438bn through disinvestment and Rs. 50bn through SUUTI sale in FY15 Revenue from selling shares in state-owned companies is critical to the government s plans to keep the fiscal deficit at 4.1% of GDP in FY15. Companies for which divestment has already been approved Likely amount to be raised (Rs. bn) Stake dilution ONGC 180 5% Coal India % The Cabinet Committee on Economic Affairs has approved selling 10% of government's stake in Coal India, 5% in ONGC and 11.38% in NHPC, which can garner Rs. 438bn in FY15 NHPC % SAIL 160 5% Specified Undertaking of The Unit Trust of India (SUUTI) Govt. stake Axis Bank 11.72% ITC 11.27% L&T 8.18% Government holds11.72% in Axis Bank; 11.27% in ITC and 8.18% in Larsen & Toubro. Government plans to raise ~Rs 50bn in FY15 by selling stakes in Axis Bank, ITC and L&T though ETF. Source: GoI, Spark Capital Research 4
5 Fiscal arithmetic: Scenario analysis in FY16 Fiscal deficit to narrow to 3.8% of GDP on lower subsidies and higher tax revenues Absolute, Rs bn FY16E Growth, % yoy FY16E FY15BE Case 1 Case 2 Case 3 Case 1 Case 2 Case 3 Revenue receipts (i) 11,898 13,886 13,984 14, ,773 11,336 11,434 11, Non-tax revenue 2,125 2,550 2,550 2, Non debt capital receipts (ii) Assumed higher tax revenue at higher crude level Disinvestment of PSUs Recovery of loans Non plan expenditure 12,199 13,709 13,747 13, Expenditure on subsidies (a +b+c) = A 2,514 2,281 2,319 2, Food (a) 1,150 1,265 1,265 1, Fertilizer (b) Oil Other non plan expenditure 9,685 11,428 11,428 11, Plan expenditure (B) 5,750 6,621 6,621 6, Higher crude prices would lead to Higher oil subsidy Total expenditure (iii) = A + B 17,949 20,330 20,368 20, Fiscal deficit (iii-ii-i) 5,312 6,118 5,858 5, Fiscal deficit (% of GDP) Net market borrowings 4,612 5,312 5,069 4, Source: India Budget, Spark Capital Research Base Case 4.0% Bear case 4.2% Bull case 3.8% 5
6 Absolute Rating Interpretation Buy Stock expected to provide positive returns of >15% over a 1-year horizon Add Stock expected to provide positive returns of >5% <15% over a 1-year horizon Reduce Stock expected to provide returns of <5% -10% over a 1-year horizon Sell Stock expected to fall >10% over a 1-year horizon Spark Disclaimer Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. 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 law, regulation or which would subject Spark Capital and/or its 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 a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital, its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this report. Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report: 6
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