PRE-BUDGET EXPECTATIONS - 2018-19 Religare Research Team equityresearch@religare.com +91-22 - 67288000 January 25, 2018
Pre-budget view 2018 The Union Budget 2018 is round the corner and expectations are high. More so this time given the challenging backdrop of anticipation, data, aspirations and perceived potential. The government may resort to certain relatively bolder bets considering that this is the last full Budget to be presented ahead of the general elections in 2019 including several state elections in between. On the other hand, conservatism may be in order if it perceives any budgetary action as being politically sensitive at this time. The BJP's performance in the recently concluded Gujarat state election may have left a lot to be Jayant Manglik desired by the party's own expected metrics, and in President - Retail Distribution this context, other state elections are expected to Religare Broking Limited occupy the government's mind space. The second challenge in the budget backdrop is the impact of the two structural reforms i.e. demonetization and GST, which has seemingly taken a toll on the country's economic progress and affected consumer and business sentiment. Further, with higher crude prices and uncertain revenue collections post GST implementation, the government's challenge on the fiscal front is no secret. Nonetheless, we expect a few themes to take centre-stage in the upcoming Budget and these would chiefly revolve around the big rural push, greater focus on housing, attempts at addressing concerns of the middleincome population and the important fiscal deficit roadmap. On the rural front, the government already has a stated objective of doubling farmer income by 2022. While some progress has been made on this front, Budget 2018 could increase its focus on agriculture and allied sectors considerably because almost 50% of the employed workforce in the country belongs to the agriculture sector. Thus, greater spend on rural infrastructure, push to irrigation schemes, etc. are expected to be in limelight. Also, 'Housing for All' has been a key agenda of the current government and is expected to get a further leg up in the upcoming budget, chiefly through the Pradhan Mantri Awas Yojana. More benefits aimed at promoting low-cost housing could also be on the cards and consumers may also be incentivised with a more attractive tax treatment. As for the middle-income group, the expectations primarily revolve around greater disposable income in hand. With the implementation of GST, the anxiety related to indirect taxes (especially on household items, consumer durables, etc.) is now a thing of the past and thus greater disposable income for a common man can now primarily be achieved by reducing the tax rates or increasing the personal tax exemption limits or a bit of both. Notably, the previous budget did give some relief to small tax payers by reducing the tax rate from 10% to 5% in the lowest bracket. A similar move at the next level tax bracket i.e. 20% cannot be ruled out in this Budget. Moreover, some tinkering of the exemption limits under Sec 80C may be announced. Expectation of re-introduction of standard deduction facility for salaried individuals is also on the wish list.
However, the above expectations and the government's spending ability will be challenged by the pressure on the fiscal deficit. The fiscal deficit for FY18 is being pegged at 3.5%-3.7%, which could be a 30-50bps miss from the government's intended target. While the importance of enhanced public spending at a time when private capex is showing little signs of revival cannot be undermined, what will nonetheless be closed watched is the fiscal deficit target for FY19, because a substantial deviation from the target may not go down well with investors, economists and rating agencies alike. Of course, the sale of the government's HPCL holding to ONGC may allow it to stick to the fiscal deficit target while also meeting its divestment target. Also, from the market point of view, the street seems divided on the possibility of introduction of the Long Term Capital Gains (LTCG) Tax in this budget. On this front, despite the fact that the government is facing some pressure on revenue collection front with the implementation of GST, it looks unlikely that LTCG will come through in this Budget. It must be noted that the government has already undertaken two bold reform measures in the last 15-months i.e. demonetization and GST. These seem to have already caused some kind of uneasiness amongst a section of the society. It seems unlikely that the government would want to create another ripple so soon, especially considering the elections calendar over the next 18-months. Also, the government may not want to disturb the strong inflows into equities, especially considering that it also has considerable disinvestment targets, which in turn will help it to take care of the fiscal deficit to a certain extent. In conclusion, it will be interesting to see if the Finance Minister bites the bullet by sacrificing fiscal prudence in the interim to spur economic growth, or manages to present a please-all Budget 2018 despite the fiscal constraints.
Sectoral Budget Wishlist
Pre-budget expectations FY18-19 Allocate more funds for conserving water, suitable fertilizer, irrigation, crop schemes, storage, farm education and research Creation of Farmer policy for Disbursing debt/ loans at low interest cost Increase in budget allocation for Pradhan Mantri Fasal Bima Yojana (PMFBY) to INR 13,000 Crs from INR 10,701 Crs (Current fiscal) Increase in allocation for investment policy in urea Agriculture It will benefit to generate more income to farmers and achieve the goal of doubling farmer income by 2022 PMFBY is benefitting farmers to get full claim against crop damage, by just paying nominal All Agriculture Companies premium To Benefit Urea manufacturers, as the domestic urea capacity is falling short Positive for Companies like Jain Irrigation, UPL, Kaveri Seeds, Coromandel, GNFC, GSFC, Monsanto, etc All fertilizer companies Restore incentives given on R&D in the form of weighted tax deduction to previous levels Passenger vehicles should be kept under two tax rates under GST compared to multiple rates now Policy to replace vehicles older than 10-15 years Auto and Auto ancillary This could result in lower tax expenses to certain extent This would rationalize the overall tax structure and may lead to lower prices It would increase demand for new vehicles Positive for all auto companies Positive for Maruti Suzuki, Tata Motors, M&M Positive for M&M, Tata Motors, Ashok Leyland, Eicher Motors Increase in capital infusion for PSU banks Focus on rehabilitating stressed assets in banks Increase limits on affordable housing BFSI Will help improve capital ratios and build their Positive for all PSU Banks provision coverage ratios This will help in resolving asset quality issues faced by banks Positive for all Banks Higher income would also receive benefit of Positive for Banks & Housing Finance interest subsidy Companies Increased budget allocations to government initiatives like AMRUT and Smart Cities Increase investment in infrastructure Increase in custom duty on power equipments Increase capex allocation for Defence Capital Goods Positive impact on the order-book goods manufacturers Positive impact on the order-book of capital goods manufacturers of capital Encourage domestic capital goods manufacturing companies Positive impact on the order book of Defence companies Positive for Va Tech Wabag, Voltas, Kalpataru Power Transmission, KEC International, Siemens India Positive for Larsen & Toubro (L&T), Bharat Earth Movers Positive for BHEL & Thermax Positive for Bharat Electronics and Bharat Earth Movers Excise duty rationalization and simplification- This will create a uniform rate structure for the Reduce excise duty from current rate of 12.5% plus Positive for all cement companies cement industry specific duty to 6-8% without any specific duty Increase spending on infra project including housing and roads Imposition of clean energy cess on pet coke Cement Higher demand for cement It would increase the cost of operations for cement manufacturers Positive for all cement companies Negative for all cement companies
Pre-budget expectations FY18-19 Increase tax exemption limit / Increase income tax slabs Emphasis on rural development, infrastructure and skill development through a range of measures and higher allocations Increased allocation towards Housing For All initiative and development of Smart Cities Positive for the entire sector in general since it would lead to increase in disposable income & All FMCG companies consumer spending Steps taken could improve the rural income and spending power and result in demand uptick for FMCG goods Increased allocation would be long term beneficial for companies engaged in electrical equipment / appliances, white goods and building materials segments (paints, tiles, plywood, adhesives) All FMCG companies, especially those expanding their presence in rural India Positive for Asian Paints, Berger Paints, Greenply Ind, Century Plyboard, Kajaria Ceramics, Pidilite Industries, Whirlpool, Voltas, Symphony, Havells, Bajaj Electricals, V-Guard Higher agricultural income would improve Emphasis on driving the agriculture growth spending power and drive the demand for All FMCG companies FMCG goods Moderate or no hike in cess would result in Hike in cess component on cigarettes and other volume growth revival in cigarettes. Through Positive for ITC, VST Ind and Godfrey tobacco products (cess is over and above the 28% selective price hikes, manufacturers will be able Philips GST rate) to smoothly pass on the marginal hike Steps to revamp the direct tax system (like reduction in corporate tax rates) FMCG / Consumer Discretionary A meaningful cut in the corporate tax rates would benefit the full tax payers, as lower taxes would positively impact their bottomline Positive for FMCG / consumer companies like Colgate, GSK Consumer, Nestle, ITC, Asian Paints, Berger Paints, Symphony, etc Increase in funds allocation for development of Rural infra Infrastructure Will help in development of rural infrastructure like roads, and railways, also improvement of other facilities which is necessary for growth of All infrastructure companies rural economy like electricity, irrigation, warehouse, etc Removal of import duty on ferro nickel and stainless steel scrap from 2.5% currently This move would reduce the raw material cost for the steel industry Positive for steel players- JSW Steel, Tata Steel, Sail, etc Increase spending on infra project including housing Higher demand for metal products for all and roads Positive for all metal companies Export duty on iron ore to be reduced to zero for It would increase iron ore exports grades between 58-62% Positive for Vedanta Import duty on Aluminium to be increased to 10% Domestic companies would benefit as import Positive for Vedanta, Hindalco from 7.5% price will increase Metal Power Will help in reduction of power cost and boost Implementing GST for power sector All Power Manufacturing Companies demand for power companies Will give boost to power sector; help all discom Increase allocation towards power for all schemes players to get government support, NTPC, Power Grid, Adani Power, JSW like Integrated Power Development Scheme (IPDS), furthermore this scheme will aid towards debt Energy, etc Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) restructuring for players in the sector To Boost Make in India initiative as well as Focus on Renewables Energy Suzlon, Inox Winds, Tata Power projects dealing in renewable energy
Pre-budget expectations FY18-19 Real Estate Funds for construction will be available to the Infrastructure status for the sector Positive for all real estate companies developer at much lower interest rates Tax sops to homebuyers and tax incentives for firsttime home buyers increase from Rs 50,000 to Rs 2 It will push demand for real estate and housing Positive for all real estate and housing finance finance companies lakh Rationalisation of the GST rates from the current 12% to 6% and bringing stamp duty under the ambit Lower taxes would push demand in the sector Positive for all real estate companies of GST Reduction in custom duty on Gold imports from 10% to 4% Retail The moderation in duty would boost customer demand, uplift business sentiment and help industry become more compliant and organized Positive for Titan, TBZ, PC Jewellers, etc Continued push towards labour reforms (like This policy would provide fiscal incentives for Positive for all leather / footwear announcement of a comprehensive National employers across labour-intensive sectors like companies Employment Policy) Leather / Footware to create more jobs Higher allocation towards Technology Upgrade Fund Scheme (TUFS) subsidy The move would result in investment uptick in downstream segments, facilitating higher value Positive for all textile companies addition and sector's contribution to GDP and exports Continued push towards labour reforms (like This policy would provide fiscal incentives for announcement of a comprehensive National employers across labour-intensive sectors like Positive for all textile companies Employment Policy) Textiles to create more jobs Retainment of duty reimbursement to Garment exporters at the pre-gst stage of 7.5% drawback (from current 2%) The move would Textiles boost the apparel exports, Positive for all garment exporters which has remained stagnant over the last few quarters due to heightened competition
Pre-budget expectations FY18-19 Before you use this research report, please ensure to go through thedisclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 and Research Disclaimer at the following link : http://old.religareonline.com/research/disclaimer/disclaimer_rsl.html Specific analyst(s) specific disclosure(s) inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 is/are as under: Statements on ownership and material conflicts of interest, compensation Research Analyst (RA) [Please note that only in case of multiple RAs, if in the event answers differ inter-se between the RAs, then RA specific answer with respect to questions under F (a) to F(j) below, are given separately] S. No. Statement Answer Tick appropriate YES I/we or any of my/our relative has any financial interest in the subject company? [If answer is yes, nature of Interestis given below this table] I/we or any of my/our relatives, have actual/beneficial ownership of one per cent. or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of the public appearance? I / we or any of my/our relative, has any other material conflict of interest at the time of publication of the research report or at the time of public appearance? I/we have received any compensation from the subject company in the past twelve months? I/we have managed or co-managed public offering of securities for the subject company in the past twelve months? I/we have received any compensation for brokerage services from the subject company in the past twelve months? I/we have received any compensation for products or services other than brokerage services from the subject company in the past twelve months? I/we have received any compensation or other benefits from the subject company or third party in connection with the research report? I/we have served as an officer, director or employee of the subject company? I/we have been engaged in market making activity for the subject company? Nature of Interest ( if answer to F (a) aboveis Yes :... Name(s)with Signature(s)of RA(s). [Please note that only in case of multiple RAs andif the answers differ inter-se between the RAs, then RA specific answer with respect to questions under F (a) to F(j) above, are given below] SS.No Name(s) of RA Signatures of RA Serial Question of question which the signing RA needs to make separate declaration / answer YES Copyright in this document vests exclusively with RSL. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose, without prior written permission from RSL. We do not guarantee the integrity of any emails or attached files and are not responsible for any changes made to them by any other person. Disclaimer: www.religareonline.com/research/disclaimer/disclaimer_rsl.html