Union Budget 2017-18 February 1 st, 2017 1
Markets wanted a magic trick to solve the puzzle Cut taxes to increase spending Honor path of fiscal prudence Spend on Infrastructure Don t tinker with LTCG for capital markets 2
FM pulled a trick out of his hat & solved the puzzle 1: Taxes halved to 5% for Rs 2.5-5 lac income bracket 2: Increases Capital Expenditure by 11% yoy focused on Infrastructure 3: Fiscal Deficit @3.2% for FY- 18 & 3% by FY-19 No change to LTCG for capital markets
Economic Growth to Continue Indian Economy Low Inflation Low Fiscal Deficit Adequate liquidity Government Capex Low Interest Rates 4
Major Reforms due to Change in Budget Presentation Railways Merged with Union Budget Provides for Integrated Planning and development of Infrastructure Undoes the Colonial Legacy & political interference in Railway plans Budget Announcement Date Preponed to 1 st Feb Plan & Non Plan Categorization Done away with This allows for timely approval and allocation of resources for the Fiscal Government Expenditures and Plans can kick start from the beginning of the financial year Expense categorization to be under Capital & Revenue Heads Reduces Policy complexity in implementation and monitoring 5
Key Budget Proposals Fiscal Deficit for FY18 at 3.2% of GDP MGNREGA allocation at Rs 48,000 crores in 2017-18. 100% village Electrification by 1 st May 2018. Transportation sector as a whole, including rail, roads, shipping, receive provisioning of Rs 2,41,387 crores Increase in Capital expenditure by 11% Rs 10,000 Crs for Recapitalisation of Banks Income tax for companies with annual turnover upto Rs 50 crore is reduced to 25% The shares of Railway PSEs like IRCTC, IRFC and IRCON will be listed For individual Tax payers within Rs 2.5-5 lakh tax bracket, the rate of taxation is brought down to 5%. 6
Agrarian Push Road to Growth 133 km/day of rural roads under PMGSY in FY17 Allocation increased to Rs 27,000 cr in FY-18 Good road connectivity to cities could help reduce part of post harvest loss to farmers which is currently ~Rs 95,000 cr.* Total Allocation for Rural, Agriculture and allied sectors is Rs. 1,87,223 cr *As per a study published in Economic Times
Impetus on Affordable Housing to Spur Growth Real Estate Prices under check Provide Employment on a mass basis to unskilled labor Banks deploy credit in safe retail housing loans Create demand for local materials from cement to tiles
Focus on Productivity From Just Job Creation to Asset Creation MNREGA has travelled Far Against target of 5 lakh farm ponds under MGNREGA, 10 lakh farm ponds would be completed by March 2017. During 2017-18, another 5 lakh farm ponds will be taken up 9
Law Against Ponzi Scheme to Bring Gullible Savings Mainstream "There is an urgent need to protect the poor and gullible investors from another set of dubious schemes, operated by unscrupulous entities who exploit the regulatory gaps in the Multi-State Cooperative Societies Act (MSCS Act), 2002," Finance Minister Arun Jaitley during the Budget Speech 10
Changes to Tax Savings avenues Changes to NPS & RGESS Partial withdrawal upto 25% of contribution tax-free for NPS No change in 40% withdrawal tax-free at maturity for NPS Deduction allowed for self-employed increased to 20% of income from 10% of income earlier Within overall limit of 80C RGESS withdrawn
Structural Reform in Financing Budgets Source: FY18 Union Budget. As % of GDP 12 Government by disciplining its Fiscal Deficit is looking to: Improve India s International Credit Rating, Creates Headroom for RBI to reduce key policy rates and Makes investment/ borrowings for private sector cheap
The Funds Flow due to Budget Source: FY18 Union Budget. In Lakh Crore 13
Tax growth in line with nominal GDP growth Composition of key components of receipts (INRBn) Receipts (INR Bn) FY17RE FY18BE % growth Comments Excise duty 3874 4069 5% Customs duty 2170 2450 13% Service tax 2475 2750 11% In line with GDP growth; no change s in service tax rate Corporate tax 4939 5387 9% No change in corporate tax rate Income tax 3532 4412 25% Total gross tax revenue 17032 19116 12% Dividend receipts 1532 1424-7% Disinvestment 4550 7250 Telecom related 781 443 25% growth rate on the back of amnesty scheme and surcharge Overall tax revenue growth appears achievable Includes strategic disinvestment INR 150bn & others (listing of insurance companies at INR 110Bn Of which INR 220bn is from recurring payments ; balance is deferred payment from earlier auctions Gross tax revenue growth budgeted at 12% in FY18; net tax revenue growth at 12.7%. Disinvestment receipts to be the key monitorable; shortfall could be made up by higher income from demonetization related gains Source: budget documents, Kotak estimates
Tax to GDP Big improvement required No. of Persons employed in organised sector in 'cr No. of Persons employed in Unorganised sector in 'cr 1.74 2.46 People not filing tax People filing tax 1.81 3.79 People not filing tax People filing tax No. of companies registered in India in 'lacs 5.97 7.97 Companies who filed tax Source: Budget Speech
Tax compliance to improve going forward Reduction in taxes: 5% tax for < Rs. 5 lacs; reduced corporate tax of 25% for companies with turnover < Rs. 50 cr Proposal to cut corporate taxes gradually from 30% to 25% Demonetisation Impact GST Implementation
What the Budgetary Expenditures Translates into? Source: FY18 Union Budget. In Rs Crore 17
Personal Income Tax Existing rate of taxation for individual assesses between income of Rs 2.5 lakhs to 5 lakhs reduced to 5% from the present rate of 10% Surcharge of 10% of tax payable on categories of individuals whose annual taxable income is between Rs 50 lakhs and Rs 1 crore Impact Illustration: Annual Taxable Income Existing Tax New Tax Gain Rs 2.5 Lakhs - - - Rs 3.5 Lakhs 5,150 2,575 2,575 Rs 5 Lakhs 20,600 12,875 7,725 Rs. 10 Lakhs 128,750 115,875 12,875 Rs. 50 Lakhs 1,364,750 1,351,875 12,875 Rs. 75 Lakhs 1,673,750 1,826,963 (153,213) Rs. 100 Lakhs 2,909,750 3,186,563 (276,813) This is just an illustrative example. You are requested to consult your tax advisor for any matters related to taxation
The Borrowing Math FY17 Budgeted FY17 Revised FY18 Budget A. Gross Borrowing 6,00,000 5,82,000 5,80,000 B. Redemptions in Financial Year -1,75,000-1,75,000-1,57,000 C. Net Borrowing [A-B] 4,25,000 4,07,000 4,23,000 D. Buybacks in Financial Year - -59,000-75,000 E. Borrowing Net of Buybacks [C-E] 4,25,000 3,47,000 3,48,000 F. Net T-Bill Issuance 17,000 18,000 2,000 G. Total Net Borrowing via G-Sec + T-Bill [E+F] 4,42,000 3,65,000 3,50,000 Receipts under Small Savings 22,000 90,000 1,00,000 Figures in Rs. Cr. Source: FY18 Union Budget. Gross Borrowing has remained flat YoY while net borrowing has marginally increased Fiscal deficit was at the lower end of market expectations band of 3.2-2.5% We expect rate cut of 25 bps in Feb policy and 50 bps in CY17 19
Capital Market Related Proposals FPI (Foreign Portfolio Investors) FIPB to be phased out and a new liberalised FDI policy to be released in due course Clarification issued with respect to indirect transfer exempting category I and II FPIs Withholding tax of 5% on ECBs and masala bonds extended till Jun 30, 2020 Corporate Tax: MAT credit carry forward allowed for 15 years against current limit of 10 years Tax rate for companies with annual turnover of less than INR500Mn reduced to 25% Divestment: More CPSEs (Central Public Sector Enterprise) like state owned General Insurance Cos, IRCTC, etc. to be listed More divestment through the CPSE (Central Public Sector Enterprise) ETF route
Capital Market Related Proposals Capital Gains: Base year for indexation changed to Apr 1, 2001 from Apr 1, 1981. Should help to reduce tax incidence Capital gains arising from transfer of a rupee denominated bond by a non resident to a non resident is exempt No tax at the time of conversion of preference shares into equity shares Additional eligible issuers to be announced for benefit u/s 54EC Curbing black economy: Benefit of LTCG (Long Term Capital Gains) tax available only if STT (Securities Transaction Tax) paid at the time of acquisition too. Exception: IPO, FPO, bonus, rights, investments under FDI
Outlook Budget ensures control over the fiscal situation while focusing on rural and agricultural growth. India s real GDP growth trajectory likely to be in the 6.5-6.8% range in FY17 before a recovery to ~7% in FY18 Earnings growth trajectory for Indian corporates likely to improve in FY18; Focus to remain on stocks which are able to outpace market earnings growth Markets are in fair value zone; NIFTY trading at 19.8xFY17E and 16.4xFY18E EPS (free float basis) Market performance to be driven by revival in corporate earnings and pace of reforms As global volatility stabilizes, expect FII flows to resume in India; focus to return on» Domestic growth fundamentals; we expect earnings growth for FY18E to be in the range of 12-15%» Progress on reforms: implementation of GST to be the key» Structural shift from physical assets to financial assets; to lead to continuation of inflows into 22 domestic institutions
Budget at a Glance Figures in Rs. Cr. Source: FY18 Union Budget. Figures in brackets: As % of GDP 23 2015-2016 2016-2017 2016-2017 2017-2018 (Actual) (BE) (RE) (BE) Revenue Receipts (1) 1195025 1377022 1423562 1515771 Tax Revenue (Net to Centre) (1A) 943765 1054101 1088792 1227014 Non-Tax Revenue 251260 322921 334770 288757 Capital Receipts (2) 595748 601038 590845 630964 Total Receipts 3=(1+2) 1790783 1978060 2014407 2146735 Total Expenditure (4) 1790783 1978060 2014407 2146735 On Revenue Account (4A) 1537761 1731037 1734560 1836934 of which, Interest Payments(4B) 441659 492670 483069 523078 On Capital Account 253022 247023 279847 309801 Revenue Deficit 5=(4A-1A) 342736 354015 310998 321163 (2.5) (2.3) (2.1) (1.9) Fiscal Deficit (6) 532791 533904 534274 546532 (3.9) (3.5) (3.2) (3.2) Primary Deficit (6-4B) 91132 41234 51205 23454 (0.7) (0.3) (0.3) (0.1) The government has not deviated significantly from FRBM target of 3% in spite of growth concerns and lack of private investment. Revenue Deficit has fallen sharply in the last few years. Government has aimed to help accelerate economic growth through higher spending on infrastructure and support for the agricultural sector, while also keeping deficit in check.
Is India s Country Rating Under-rated? India with Better Debt Ratio and Growth Profile is evidently under-rated Moody rating agencies have shown some poor standards in ratings 24
Key Recommendations for Fixed Income Investors Segment Scheme Rationale Accrual Play Kotak Income Opportunities Fund / Kotak Medium Term Fund Investment for higher accrual Asset Allocation Kotak Monthly Income Plan Investment for asset allocation Short Term Parking of Funds Kotak Treasury Advantage Fund / Kotak Low Duration Fund / Kotak PSU Debt Fund Kotak Equity Arbitrage Fund Higher post tax return Duration Play Kotak Mahindra Bond Scheme Investment for longer maturities 25
Strategy For Investment in Equities Post Budget Assuming an agnostic perspective on risk, the following recommendations can be prescribed:- Around half the money in SIP with 5 year horizon The rest of the corpus can be placed aside for event related volatility, such as: US fed raising interest rates India Quarterly Earnings UP Election Outcome European Banking Crisis China Slow down GST Roll Out In the absence of significant event risk, one can look at fresh issuance opportunities with attractive valuations in IPO, OFS and FPO Any IPO in which NBFC are providing leveraged financing for applications might be a good bet for retail application 26
Key Recommendations Key theme Remarks Large Cap play on buying sectoral leaders that benefit from improving investment climate Kotak 50 Diversified/Multicap focus on sectors that are likely to benefit the most across market cap Infrastructure revival True-to-label fund recent thrust of government to revive the infrastructure theme Through SIP in Midcap oriented scheme ELSS Equity allocation with ability to reduce tax outgo Balanced benefit from debt and equity allocation Kotak Select Focus Kotak Infrastructure & Economic Reforms Fund Kotak Emerging Equities Fund Kotak Tax Saver Fund Kotak Balanced Fund We recommend investors to invest through SIP with a 5 years horizon. 27
Summary of Impact of Budget on Key Sectors Sectors Outlook Telecom Cap Goods Defense Infrastructure Metals & Mining FMCG Agriculture Cement & Building Material Oil & Gas 28
Impact of Budget on Key Sectors Sector Budget Proposal Nature of Impact Comments Telecom Proceeds from License fee and spectrum charges from telecom service providers at INR 443 bn against INR 787 bn in FY17 RE Neutral As per expectation government is not planning for spectrum auction in FY18. INR 443 bn comprises only recurring charges and deffered payments from earlier spectrum auctions Budgeting of INR 6.9 bn as extra budgetary resourse for Hemisphere properties Positive Progress in Tata comm excess land monetisation Sector Budget Proposal Nature of Impact Comments Capital goods Defence capital acquisition outlay of INR 865 bn against INR 717 bn for FY17 RE Positive Growth of about 20% over FY17RE Budgetary support towards Railways capital expenditure at INR 550 bn against INR 463 bn in FY17 RE Neutral Inline with expectation Overall outlay for infrastructure development at INR 3961 bn against INR 3586 bn in FY17 RE Positive Outlay for IPDS and DDUGJY for improvement in urban and rural, transmission and distribution improvement increased to INR 106 bn from INR 79 bn in FY17 RE Positive Increase of 10.5% over last year provides scope for EPC and equipment companies to grow Increases the pie for EPC contractors and equipment manufacturers Section 80-IA sunset clause is not extended Negative 29
Impact of Budget on Key Sectors Sector Budget Proposal Nature of Impact Comments Under Power Sector Development Fund, government was already Power Lower BCD on LNG from 5% to 2.5% No impact supplying LNG without any duties, taxes. Sec 80-IA exemption not extended beyond FY17E Negative Largely in continuation with earlier stance, construction companies claiming the benefit will have full tax in FY18E. Infrastructure Roads sector outlay up 11% to INR1.24t Positive Positive for both developer and construction companies. Railways Capex up 9% YoY to INR1.3t Positive Positive for contractors like L&T, KEC and Kalpataru Infrastructure status to Affordable housing Positive RE sector focus contractors like Alhuwalia contractors, BL Kashyap, etc could be beneficiary. Real Estate S Holding period reduced to 2 years, vs 3 years for eligibility of LTCG exemption Setoff lossses under Housing property restricted to INR2lac Infrastructure status to Affordable housing Units area at 30sq.mtr (municipal limit of 4 metro)/60sq.mtr on carpet basis, vs build up area; 100% PAT dedn for developer, time increased to 5 years vs 3 years. Developer can have 1 year stock in trade for completed building Positive Negative Positive Positive Negative Inventory churn would help better price discovery. Partly negative for primary developer / new launches. Lower setoff vs unlimited setoff earlier will lower investor demand, positive in long term though. LT funding will help improve RE sector /developer outlook with focus on low/mid income housing. Developers with focus on low/mid income housing project would benefit immensely. These could also entice developers to reinvent business model to cater to this large market pie. While positive given earlier stance of zero holding allowance, the developer holding high inventory in completed project will be negatively impacted (higher tax burden, on no/deemed cash flows). This could lead to higher inventory sell-off. 30
Impact of Budget on Key Sectors Sector FY18 Budget Proposals Nature of Impact Comments Oil & Gas Customs duty on LNG cut from 5% to 2.5% Positive Minor savings of US$ 0.2/mmbtu (Rs 0.4/scm) at current spot price. Beneficial for cos. across the value chain viz. Petronet LNG (savings in internal consumption & higher R- LNG vols.), GAIL (lower input cost for petchem segment), IGL, MGL, Gujarat Gas (spread improvement to the extent benefit is retained or pass on to customers to make CNG/PNG/natural gas slightly more competitive against alternate fuel) Petroleum subsidy allocation of INR 275 bn for FY17E and INR 250 bn for FY18E Neutral Subsidy allocation for FY17 is adequate. For FY18, allocation is adequate assuming current oil price at USD 55/bbl. If oil price is higher, then monthly price hike on kerosene and LPG has to continue or allocation to be increased by INR 70-80 bn to keep oil cos. out of subsidy net at USD 60/bbl oil price No reduction in cess on crude oil Negative Expectation was it will reduce to 10% which would have increased ONGC's and Oil India's EPS by INR 2.5/sh and INR 5.5/sh respectively. Proposal to create mega oil company through merging some cos. Neutral Too early to determine impact and will be determined by how merger is structured. However, it is a difficult to proposition to implement due to opposition from employees union. Metals & Mining FY18 Budget Proposals Nature of Impact Positive Customs duty on HRC for welded tubes and pipes reduced from 12.5% to 10% Mildly positive for pipe cos. such as Welspun Gujarat, Jindal Saw and Maharashtra Seamless (ERW) Customs duty on nickel reduced from 2.5% Positive Beneficial for stainless steel producers to Nil Aluminium ore export duty at 15% Neutral Bauxite already had export duty and now extended to other ores including laterite. 31
Impact of Budget on Key Sectors Sector Budget Proposal Nature of Impact Comments Consumer Reduction in personal income tax Positive Will boost low ticket consumption Increased spending on MNREGA Positive Will boost FMCG consumption 6% excise hike on cigarette Positive This is a moderate hike in tax against a steep hike expected. Sector Budget Proposal Nature of Impact Comments Agriculture Fertilizer subsidy - Total fertilizer subsidy allocated is INR700bn (INR498bn for urea + INR202bn for complex fertilizers). Requirement for FY18 is estimated currently to be INR550bn. Hence incremental subsidy allocated (INR150bn)will benefit fertilizer companies as portion of their prior period receivables get paid. Agricultural Credit - target for FY18 has been fixed at a record level of INR1,000bn. To support flow of credit to farmers, government to support NABARD for computerisation and integration over 3 years at a cost of INR19bn Crop Insurance - Pradhan Mantri Fasal Bima Yojna (PMFBY) coverage to be increased from 30% of cropped area in FY17 to 40% in FY18 and 50% in FY19. Budget provision of INR90bn in FY18 vs budget provision of INR55bn in FY17 Positive Positive Positive Positive for fertilizer companies. This will decrease their working capital requirements and improve the RoCE for the business. Can help improve demand for agricultural inputs Can help improve demand for agricultural inputs Irrigation - Pradhan Mantri Krishi Sinchai Yojana (PMKSY)- Per Drop More Crop, allocation has been increased to INR74bn from earlier budget of INR58bn. In addition, a Long Term Irrigation Fund has already been set up in NABARD. Prime Minister has announced an addition of INR200bn to its corpus. This will take the total corpus of this Fund to INR400bn. A dedicated Micro Irrigation Fund will be set up in NABARD to achieve the goal, per drop more crop. The Fund will have an initial corpus of INR50bn. Positive Can help improve demand for agricultural inputs 32
Impact of Budget on Key Sectors Sector Cement and Building Materials 33 Budget Proposal Infrastructure status to affordable Housing For affordable housing instead of built up area, 30 sqm and 60 sqm of carpet area will be considered. 30 sqm in municipal limits and 60 sqm for rest of country will be considered Allocated Rs 290 bn under Pradhan Mantri Awas Yojana in rural and urban v/s allocation of Rs 209 bn in previous year. Net increase of Rs 81 bn. Proposes to complete 10 mn houses by 2019 for the houseless and those living in kutcha houses In a negative move for landlords (those who buy and rent), the set-off loss against income from house property has been limited to Rs200k/annum against no prior limit Increase in budget allocation for highways from around Rs 580 bn to Rs 650 bn. Addition of 200 bn to dedicated long term irrigation fund in Nabard Person whose land has got pooled under land pooling scheme of AP government for creation of new capital will be exempt from capital gains tax provided they were holding it as on 2/6/2014 Nature of Impact (Positive/Negative/Neutral) Positive Positive Positive Negative Mildly Positive Positive Comments Housing accounts for 60-65% of overall cement consumption in India and this will increase the overall cement demand. Housing demand will have spillover effect on building materials demand. It will be partially offset by slowdown in investment led housing demand. Roads have a lesser contribution to overall cement demand and irrigation is more driven by state budgets. Exemption of capital gains tax will incentivise people to sell land and improve land acquisition for the upcoming capital finally driving cement demand from the capital Cut in import duty on LNG from 5% to 2.5% Positive Tile players have around 20% of costs as power and fuel and they will benefit to the extent of the price cuts which will be passed on by LNG players
DISCLAIMERS & RISK FACTORS The information contained in this (document) is extracted from different public sources. All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication. This is for the information of the person to whom it is provided without any liability whatsoever on the part of Kotak Mahindra Asset Management Co Ltd or any associated companies or any employee thereof.we are not soliciting any action based on this material and is for general information only. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. 34
PRODUCT LABELING Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Mahindra 50 Unit Scheme Kotak Select Focus Fund Kotak Emerging Equity Scheme Kotak Balance Fund Kotak Opportunities Kotak Gilt Investment Kotak Bond Kotak Medium Term Fund Kotak Low Duration Fund (Formerly known as PineBridge India Short Term Fund) long term capital growth Investment in portfolio of predominantly equity & equity related securities long term capital growth Investment in portfolio of predominantly equity & equity related securities generally focused on a few selected sectors long term capital growth Investment in equity & equity related securities predominantly in mid & small cap companies. Long term capital growth Investment in equity & equity related securities balanced with income generation by investing in debt & money market instruments long term capital growth Investment in portfolio of predominantly equity & equity related securities income over a long investment horizon Investments in sovereign securities issued by the Central and/or State Government(s) and / or reverse repos in such securities. income over a long investment horizon investment in debt & money market securities Income over a medium term investment horizon Investment in debt, government securities & money market instruments with a portfolio weighted average maturity between 3-7 years Regular Income over short term Income by focusing on low duration securities 35 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them
PRODUCT LABELING Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Equity Arbitrage Scheme Kotak Income Opportunities Fund income from arbitrage opportunities in the equity market investment in arbitrage opportunities in the cash & derivatives segment of the equity market. Income over a medium term investment horizon Investment in debt & money market securities Kotak Treasury Advantage Scheme Income over a short term investment horizon investment in debt & money market securities Kotak Infrastructure & Economic Reform Fund (formerly known as PineBridge Infrastructure & Economic Reform Fund ) long term capital growth long term capital appreciation by investing in equity and equity related instruments of companies contributing to infrastructure and economic development of India Kotak Tax saver Fund Long term capital growth with a 3 year lock in Investment in portfolio of predominantly equity & equity related securities 36 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them
PRODUCT LABELING Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Monthly Income Plan income & capital growth over a long term horizon investment in a portfolio of debt instruments with a moderate exposure in equity & equity related instruments Kotak Banking and PSU Debt Fund income over a short to medium term investment horizon Investment in debt & money market securities of PSUs, Banks & government securities 37