Union Budget 2015-16: Vision, Execution or

Transcription

Institutional Equity Research
Union Budget 2015-16 | India
Union Budget 2015-16: Vision, Execution or Hallucination?
Finance Minister, Mr. Arun Jaitley, presented the second Budget for the new
government in power. Notably, the market had reasonably high expectations
from Union Budget 2015-16, this being the first full-year Budget by the new
government post its historic win last year. Apart from this, the Budget this
year was in the backdrop of favorable external and domestic factors including softened crude oil and other commodity prices, twin deficits under
control, inflation well within comfort zone, initiation of interest rate reversal
cycle by the RBI, domestic GDP showing signs of pick-up, which have put
the government in a relatively sweet spot.
However, in our view, there were no big-bang announcements in the budget.
Nonetheless, the budget was always going to be a challenging exercise
considering the balance that needed to be maintained between sticking to
the fiscal consolidation path while at the same time providing catalysts for
the Indian economy to not only concretize its recent recovery, but also build
on it further. Thus, the government seems to have achieved both the
objectives to a reasonable extent.
On the fiscal front, while the government has retained the fiscal deficit target
at 4.1% for FY15, it is aiming to contain the fiscal deficit at 3.9% in FY16.
However, it has extended achieving the 3% fiscal deficit target by a year to
FY18 as it eyes for growth. As far as growth is concerned, GDP is expected
to improve by 8% to 8.5% in FY16 compared to the expected 7.4% in FY15
as per the new series.
On the tax reforms front, the government has reiterated the timeline for the
implementation of GST as April 1, 2016. GST, when implemented, will see
transition from the current system of various types/rates indirect taxes to a
much leaner structure. As part of the movement towards GST, the Education
February 28, 2015
Cess and the Secondary and Higher Education Cess have been included in
the Central Excise duty and rounded off to 12.5% from the current effective
12.36%. Budget has also increased the present rate of service tax plus
education cess from 12.36% to a consolidated rate of 14%.
On the direct tax front, while the government has not tinkered with the
personal income tax slabs, it has hiked the mediclaim and pension deduction
limits. However, 2% additional surcharge has been imposed on the superrich (taxable income over Rs10mn), while abolishing the Wealth Tax.
Further, a 2% Swachh Bharat Cess is being contemplated to be imposed on
the common man (date to be notified later). However, on the corporate front,
the tax rate would be reduced from the current 30% to 25% over the next 4
years, along with rationalization/removal of the various exemptions. Also,
postponement of GAAR implementation by 2 years to FY18, that too not
retrospectively, is a breather for market participants and foreign investors in
particular.
As stated earlier, while the budget lacked any major structural reforms
announcement, the government has made various welcome announcements
on dealing with the black money stashed abroad, which includes mandatory
filing of return if a person owns foreign assets or is a beneficiary from it.
Penalty for income concealment/tax evasion includes rigorous imprisonment
and hefty fine.
The government has also moved ahead on greater inclusion of the public at
large. In wake of the success of the Pradhan Mantri Jan Dhan Yojana and
leveraging on the same, it has proposed to introduce more social security
schemes pertaining to Insurance for the poor and the under-privileged.
1
Further, the government has enhanced focus on the Power and Transport
sectors - the backbone of Indian economy growth, which is evident from the
8% (against -15.1% in FY15) and 82% (against +2.2% in FY15) increase
respectively in budget allocation towards these sectors. The government has
also encouraged the states to spend towards rural development, which if
implemented, could lead to significant growth in consumption.
Other than the above, the budget continued its broad focus on infrastructure,
heath, education, hygiene, etc.
From the market point of view, we believe, this Budget was largely a
balanced event with no major advantage/disadvantage for any particular
section of the society or industry. Thus, the market focus is now expected to
shift to the execution of the announcements in the budget and to the various
global and domestic factors, which affect short-term sentiments. Further, the
market will be keenly waiting for the RBIs next move with respect to
reduction in interest rates depending upon its assessment of the fiscal
roadmap laid down by the government.
Thus, India Inc.’s earnings growth recovering to 15-20% over the next 2-3
years remains very much possible. This will help sustain investor conviction
and interest in Indian equities.
We reiterate our Sensex target of 33,500 by December 2015, which implies
a good 14% index return from the current levels. Sectorally, we prefer
Financials and Automobiles to play the initial leg of the economic recovery
with continued positive bias towards the IT and Pharma sectors. We would
remain selective in the Capital Goods, FMCG, Real Estate and Infrastructure
(Cement, Roads, etc.) space in wake of the lagged recovery (Capital
Goods), the relatively rich valuations of the sector (FMCG) and/or absence
of an all-round pick-up in activity in the sectors (Real Estate & Infrastructure)
in the medium-term.
The Indian stockmarket is up 7.5% year-to-date (last two months) after
having surged over 31% in 2014. The 3QFY15 result season was a
disappointment leading to further cut in estimates for FY15. However, we
remain optimistic of growth picking up from FY16 onwards on the back of the
economic recovery underway, which will be further aided by government
actions (note, a lot of government action now takes place outside the
budget), low inflation and lower interest rates among others.
Head – Research : Hitesh Agrawal
hitesh.agrawal@relianceada.com
Contact : (022 ) 33201418
February 28, 2015
Research Team
rsec.research@rcap.co.in
Contact : (022 ) 33201318
2
Budget at a Glance
Descriptions (Rs bn)
FY15 R.E.
(YoY %)
FY16 B.E.
(YoY %)
FY15 R.E.
(% of GDP)
FY16 B.E.
(% of GDP)
FY14
FY15 R.E.
FY16 B.E.
Revenue Receipts
10147.24
11,262.94
11,415.75
11.0
1.4
8.9
8.1
Net Tax Revenue
8,158.5
9,084.6
9,198.4
11.4
1.3
7.2
6.5
Non Tax Revenue
1,988.7
2,178.3
2,217.3
9.5
1.8
1.7
1.6
Capital Receipts
5,638.9
5,705.4
6,238.6
1.2
9.3
4.5
4.4
Disinvestments
293.7
313.5
695.0
6.7
121.7
0.2
0.5
4,535.5
4,469.2
4,564.1
(1.5)
2.1
3.5
3.2
15,904.3
16,811.6
17,774.8
5.7
5.7
13.3
12.6
11,061.2
12,132.2
13,122.0
9.7
8.2
9.6
9.3
Plan Expenditure
4,533.3
4,679.3
4,652.8
3.2
(0.6)
3.7
3.3
Capital Expenditure
2,190.8
3,072.0
2,424.2
40.2
(21.1)
2.4
1.7
13,713.6
14,876.9
15,350.5
8.5
3.2
11.8
10.9
Revenue Deficit
3,570.5
3,624.9
3,944.7
1.5
8.8
2.9
2.8
Fiscal Deficit
5,028.6
5,126.3
5,556.5
1.9
8.4
4.1
3.9
Primary Deficit
1,286.0
1,012.7
995.0
(21.3)
(1.7)
0.8
0.7
Net Market Borrowing
Total Expenditure
Non Plan Expenditure
Revenue Expenditure
February 28, 2015
Despite increase in Gross tax
collections by 15.8% YoY,
net
tax
collections
is
estimated
to
expand
marginally as states share to
tax collections have been
increased to 42.0% from
existing 32.0%
Disinvestment target has
again been optimistically
estimated at Rs695.0bn
Capital expenditure has been
dropped down to 1.7% of
GDP from the revised figure
of 2.4% last year. Major
thrust in capital expenditure
is expected to be undertaken
by the state governments
3
Sharp reduction in Plan Expenditure in FY15
FY15 B.E.
FY15 R.E.
% change
Absolute Change
Net Tax Reveune
9,772.6
9,084.6
(7.04)
(688)
Corporate Tax
4,510.1
4,260.8
(5.53)
(249)
Excise Duty
2,071.1
1,854.8
(10.44)
(216)
Service Tax
2,159.7
1,681.3
(22.15)
(478)
Assignment to states
3,822.2
3,378.1
(11.62)
(444)
Non Debt Capital Receipts
739.5
422.4
(42.89)
(317)
Disinvestment of PSU's
634.3
313.5
(50.57)
(321)
Capital Receipts
5,140.1
5,283.0
2.78
143
Market Borrowings(Net)
4,612.1
4,469.2
(3.10)
(143)
82.3
332.8
304.37
251
17,948.9
16,811.6
(6.34)
(1,137)
B. Plan Expenditure
5,750.0
4,679.3
(18.62)
(1,071)
On Revenue Account
4,535.0
3,668.8
(19.10)
(866)
On Capital Account
1,215. 0
1,010.5
(16.83)
(205)
Fiscal deficit
5,311.8
5,126.3
(3.49)
(186)
Primary deficit
1,041.7
1,012.7
(2.78)
(29)
Revenue Deficit
3,783.5
3,624.9
(4.19)
(159)
(Rs bn)
Small Savings(Net)
TOTAL EXPENDITURE
February 28, 2015
Sharp shortfall in Revenue
was witnessed from Indirect
tax collections. Due to
sluggishness manufacturing
and services sector, shortfall
was significant in excise and
services tax collection. New
excise duty on diesel and
petrol has generated the
revenue yield of Rs200.0bn
Disinvestment target has
been revised downwards by
Rs320.8bn i.e. 50.6% from
the budget estimate
Plan expenditure has been
scaled down by Rs1.1tn in
FY15
as
against
our
expectations of Rs890.0bn in
order to meet the fiscal deficit
target despite the revenue
crunch
4
Treading softly on path of Fiscal Consolidation
7
80
6
75
5
70
60
3
(%)
65
4
55
50
2
45
1
40
Fiscal deficit
Revenue Deficit
FY18E
FY17E
FY16 B.E.
FY15 R.E.
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
35
FY05
0
Revenue Deficit % of Fiscal Deficit
Large Tax revenue transferred to states
FY14
FY15 R.E.
Assistance for Central
and Centrally
Sponsored Schemes
Central Assistance for
State & UT (with
Legislature) Plans
Non-Plan Grants &
Loans
6,000
5,000
4,000
3,000
2,000
1,000
0
States' share of taxes
and Duties
(Rs bn)
Devolution of Centre’s revenue to states
As the first year of 14th Finance Commission (FFC), Budget FY16E is
presented with lower tax resources to the centre. Centre’s share of tax
revenue collection has been sharply brought down to 6.5% of GDP in
FY16E as compared to 7.2% in the FY15. By providing substantial share to
the states in tax revenue, FM has passed the onus from centre to the states.
85
FY04
FM has continued the approach of progressive fiscal consolidation by
targeting fiscal deficit at 3.9% in FY16E, against our expectation of 3.8%,
from 4.1% in FY15 R.E. The fiscal deficit targets for FY17E and FY18E are
estimated at 3.5% and 3.0% respectively. Fiscal consolidation is estimated
to be mainly achieved through high disinvestment proceeds and cut down in
planned expenditure. Planned expenditure has been sharply cut down this
year to maintain the path of fiscal consolidation despite resource crunch.
Though budget represents a deviation from 3.6% adopted in the fiscal
roadmap; the recalibration was necessitated to maintain fine balance
between the need to continue with policy of fiscal rectitude to provide
sufficient space for monetary policy easing on one hand and the need to
adequately provide for social and welfare programmes and increase public
spending in core sectors to give fillip to growth, on the other hand.
Path to Fiscal consolidation
(%)
Fiscal Deficit target of 3.9% in FY16E
FY16 B.E.
Source: Budget Documents, RSec Research
February 28, 2015
5
Squeezing the Expenditure
Expenditure in FY16 to expand by 5.7%
10
5
FY16 B.E.
FY15 R.E.
FY14
FY13
FY11
FY10
FY09
FY08
FY07
FY12
Total Expenditure Growth
Capital Expenditure to be focused in this budget
Other Subsidies
Subsidies % of GDP
Petroleum Subsidy
1.5
1.0
0.5
Capex Ex Defence % of GDP
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
0.0
FY16 B.E.
Food Subsidy
2.0
FY15 R.E.
Fertilizer Subsidy
(%)
0.0
FY16 B.E.
0
FY15 R.E.
0.5
FY14
500
FY13
1.0
FY12
1,000
FY11
1.5
FY10
2.5
1,500
FY09
2.0
FY08
3.0
2,000
FY07
Capital Expenditure
3.5
FY06
FY06
Revenue Expenditure
2.5
FY05
0
FY05
0
3.0
FY04
15
5,000
2,500
February 28, 2015
(%)
20
10,000
3,000
FY03
(Rs bn)
Subsidy bill to drop below 2.0%
25
FY04
Crude oil dropping by US$10 per barrel is likely to provide a relief in the
petroleum subsidy bill, which is estimated to drop by nearly half as
compared to FY15 R.E. to Rs300.0bn. Subsidy bill is likely to drop to 1.7%
of GDP in FY16 B.E. and this is likely to be achieved this year with crude
oil remaining in the current range.
30
15,000
FY04

Interest payments, which form a major part of the expenditure, is budgeted
to grow by 10.9% YoY in FY16E. However, with lower market borrowing
and lower interest rate scenario, interest payments this year are likely to
remain subdued.
20,000
(Rs bn)

Revenue portion in plan expenditure is likely to project a decline of 10.0%
YoY while capital portion in the total expenditure has been outlined to
increase to 13.6% of the total expenditure vs. 11.5% in FY15 R.E.
(%)

Larger allocation to Capital spending
6
Sharp crunch in Centre’s Revenue collection
13
12
11
10
9
5,699
6,298
7,403
2,134
2,447
2,987
3,228
3,563
3,947
4,261
4,706
10.5
Income Tax
Customs
Excise Duty
Service Tax
Non Tax
Revenue
Interest
Receipts
Dividends and
Profits
Receipts of
Union
Territories
Other Non
Tax Revenue
1,060
999
1,086
609
969
1,224
833
1,030
584
1,163
1,466
1,358
1,383
710
2,186
1,703
1,493
1,456
975
1,217
2,015
1,653
1,765
1,326
1,374
2,429
1,721
1,702
1,548
1,989
2,786
1,887
1,855
1,681
2,178
3,274
2,083
2,298
2,098
2,217
17.5
10.4
23.9
24.8
1.8
207
218
197
203
208
219
222
236
6.5
386
502
480
506
538
904
888
1,007
13.4
8
12
11
10
11
15
12
13
4.3
431
1,498
498
617
851
1,056
962
FY16 B.E.
FY15 R.E.
FY14
FY13
FY12
FY11
FY10
FY09
6,000
5,000
4,000
3,000
2,000
1,000
0
(1,000)
368
FY08
Drop in market borrowing – signals lowers interest rate
(9.0)
Short Term Borrowing
FY16 B.E.
4,565
FY15 R.E.
4,433
FY14
Net Tax
Revenue
Corporate Tax
FY13
%
Growth
1.3
FY12
FY16
B.E.
9,198
FY11
8,159
FY15
R.E.
9,085
FY10
FY14
FY09
FY13
FY08
FY12
FY07
FY11
FY06
FY10
FY05
FY09
Gross Tax Revenue as % of GDP
FY04
Government’s Receipts trend
FY07
Together, telecom spectrum sale, disinvestments and strategic
disinvestments (SUUTI) are estimated to be at Rs1.1tn i.e. 9.6% of the
total revenue receipts.
FY06
8
FY03

Despite expected increase in indirect taxes, net tax generation to the
centre is likely to grow at 1.3% YoY due to significant increase in pass
through to the states. In the event of the non-realisation of one off
receipts such as spectrum and disinvestments due to non conducive
markets, flexibility of generating additional revenue by increasing taxes
would be difficult.
(Rs bn)

Gross tax revenue at 10.3% of FY16 B.E.
FY05
Tax Revenue to grow marginally - deficit to be funded by other
revenue
Market Borrowing
February 28, 2015
7
Central Plan Outlay
States allocation towards rural development increased
Increasing allocation towards Energy and transport
Central Outlay to
States
(Rs bn)
Ministry of Agriculture
Central outlay
(Rs bn)
FY15 R.E. FY16 B.E. FY15 R.E. FY16 B.E.
150.9
Department of Atomic Energy
111.5
-
-
Ministry of Communications and Information Technology
87.4
106.7
104.5
151.1
249.9
268.2
Ministry of Drinking Water and Sanitation
119.4
60
1.6
2.3
Ministry of Finance
680.2
160
180
382.7
Ministry of Health and Family Welfare
251
194.8
65.9
78.2
Ministry of Housing and Urban Poverty Alleviation
25.3
45
122.9
157.9
Ministry of Human Resource Development
410.4
368.4
152.5
176.7
Ministry of Petroleum and Natural Gas
749.9
766.2
Ministry of Power
554.9
614
FY14
28.7
281.1
827
Ministry of Rural Development
644
656.7
61.9
74.9
Ministry of Urban Development
24.3
60
114.4
132
Ministry of Water Resources, River Development and
Ganga Rejuvenation
32.8
20
21.2
16.1
Ministry of Women and Child Development
177.6
90
5
9.9
1.4
1.2
8.6
12.5
643
983.7
4,268.1
5,783.8
Ministry of Youth Affairs and Sports
Ministry of Railways
Union Territories
Total Outlay
February 28, 2015
64.5
80.4
2,781.7
2,047.8
FY15
R.E.
FY16
B.E.
FY15
R.E.
FY16
B.E.
177.88
101.99
116.57
(42.7)
14.3
2.39
2.73
Rural Development*
517.57
18.77
31.31
(96.4)
66.8
0.44
0.73
4.41
8.96
7.72
103.2
(13.8)
0.21
0.18
1,823.88
1,548.78
1,673.42
(15.1)
8.0
36.29
39.21
334.33
393.97
431.13
17.8
9.4
9.23
10.1
1,039.59
1,062.42
1,934.17
2.2
82.1
24.89
45.32
Communications
162.09
130.27
120.32
(19.6)
(7.6)
3.05
2.82
Science Technology &
Environment
135.35
148.21
190.23
9.5
28.4
3.47
4.46
General Economic Services
260.64
173.03
203.33
(33.6)
17.5
4.05
4.76
Social Services***
1,507.36
642.84
810.03
(57.4)
26
15.06
18.98
General Services
72.63
38.87
265.59
(46.5)
583.3
0.91
6.22
GRAND TOTAL
6,035.73
4,268.11
5,783.82
(29.3)
35.5
100
135.51
Irrigation and Flood Control
Industry and Minerals
Transport**
26.1
FY15 R.E. FY16 B.E.
% Share
Agriculture and Allied
Activities
Energy
Ministry of Road Transport and Highways
% YoY growth
8
Automobile
Budget Proposal
 Focus on Infra
Impact
Our View
Positive
 Increased focus on revival of Infrastructure activity would
Stocks affected
 Tata Motors, Ashok Leyland
increase utilization of commercial vehicles leading to faster
replacement and new fleet additions of MHCVs
 Excise duty concession on
Neutral
 FM has extended excise duty concession of 6% on electric
vehicles until 31st March 2016. However the segment has
electric vehicles to continue
 M&M (only player in the electric vehicle
segment)
not gained acceptance due to higher cost
 Custom
on
Marginal
 Custom duty on import of fully built commercial vehicles has
Vehicles
Positive
been increased from 10% to 40%, however in case of
duty
Commercial
increased to 40%
 Royalty
withholding
 Tata Motors, Ashok Leyland
completely knocked down (CKD) units, duty remains at 10%
tax
Neutral
reduced from 25% to10%
 Withholding tax on royalty paid by companies for technical
 Maruti, Bosch (however we gauge the
knowhow has been reduced from 25% to 10%, which would
impact
to
be
neutral
for
now
as
aid future transfer of knowhow
withholding tax is borne by the parent
company)
 Implementation of Goods
Positive
 FM has assured that GST will be implemented from FY16
and Service Tax (GST) by
onwards, which would lead to uniform tax rates across the
FY16E
country and would eliminate the inter-state discrepancies in
 M&M, Maruti
tax charged on automobiles. We expect vehicle prices to be
lowered post GST coming into effect; more so in UVs
segment due to lower effective tax rates
 Investments and reforms in
agriculture
Positive
 Investments and reforms in agriculture will boost rural farm
 M&M, Hero, Maruti
incomes and consequently the demand for automobile
products, specially 2Ws and tractors.
9
February 28, 2015
9
Automobile
Sector outlook
 While the budget was largely a Neutral event for the automotive sector from the near-term standpoint, we believe that overall the stage is set and the sector would
benefit going forward as: 1) direction of growth and inflation favors demand uptick, 2) fuel prices have corrected significantly, 3) more rate-cuts in the offing (we
estimate 75-100bps cut in FY16E, 4) pickup in job growth 5) massive pent-up demand post the sluggishness in last 3 years and 6) lower penetration to addressable
households. Moreover focus on infra revival will boost MHCV volumes .Overall we remain positive on the sector from a longer term perspective and expect all
categories i.e. PVs, 2Ws and CVs to post double-digit growth rates.
 Top picks: Maruti Suzuki, Tata Motors, Mahindra & Mahindra, Hero Motocorp, Motherson Sumi
10
February 28, 2015
10
Banking
Budget Proposal
Impact
 Distinction between different types of
foreign investments to be done away
with
Positive
 Positive for many private banks, which have not  Axis Bank , IndusInd Bank, DCB Bank,
reached FII investment limit. These banks can
Kotak Mahindra Bank and Yes Bank
increase FII limit without targeting ADR window.
Overall this will lead to higher MSCI weight for
private banks
 Allocated Rs95.6bn for recapitalization
of public sector banks
Negative
 Decline in budget provision (Rs95.6bn in FY16  Union Bank of India, Bank of India and
v/s Rs134.5bn in FY15) for recapitalization of
other small public sector banks
public sector bank will negatively impact poor
performing banks
 Gradual reduction in Corporate income
tax rate from 30% to 25% in next 4 year
Positive
 Almost all leading banks are paying tax at  All
private banks and leading public
higher rate of 29-33%. Reduction in corporate
sector banks like SBI
income tax will gradually help them to post
higher income
 NBFCs registered with RBI and having
asset size of Rs5bn will be notified as
‘Financial Institution’ as per SARFAESI
Act, 2002
Positive
 Long pending demand of NBFC sector has  All listed asset-financing NBFC’s like
been met as it has got now a level playing field
Shriram Transport Finance
with banks. This will help them to recover the
money quickly
 Comprehensive Bankruptcy Code of
global standards to be brought in
Positive
 New comprehensive law will help banks to  All Banks. However, in near-term it will aid
recover the money fast and take remedial
public sector banks to improve recovery of
measures in advance
NPAs
 An autonomous Bank Board Bureau to
be set up to improve the governance of
public sector bank
Positive
 Setting up of autonomous body to manage the  All public sector banks
PSBs is a step in the right direction. This will
help to optimize capital allocation to these
banks as well as push other structural reforms
11
February 28, 2015
Our View
Stocks affected
11
Banking
Budget Proposal
Impact
Our View
Stocks affected
 India Financial Code to be introduced
soon
Positive
 This will help the banking and financial sectors  All banks and NBFCs
to address the regulator hindrance and adopt
best international practices
 Setting up of MUDRA Bank (Micro Units
Development Refinance Agency)
Positive
 Setting up of MUDRA Bank will help the  SKS Microfinance and Shriram Citi Union
microfinance industry to get refinance at
Finance
attractive terms and conditions
 Target of Rs8.5Tn of agricultural credit
during the year 2015-16.
Neutral
 Encouraging shift from cash based
transaction to card / online transactions
Positive
 Agriculture credit target is in-line with current  Marginally negative for PSBs
growth in segment. However marginally negative
for PSB as they are facing higher delinquency in
the agriculture segment
 Positive for all banks as this will bring more  All banks and NBFCs
business into banking system fold and will help
them to expand their earnings capability
 New Monetary policy Frame work by
amending RBI Act
Positive
 Government is moving towards international  All banks and NBFCs
best practice on monetary policy management
by working jointly with RBI to manage inflation
~6% level. This will give better visibility on
interest rates in banking system
12
February 28, 2015
12
Banking
Sector outlook
 Given the improving macroeconomic scenario, we remain positive on the banking sector. Based on the banks’ competitive positioning, management quality, and
earnings visibility, we once again re-iterate our positive stance on private banks and believe earnings upgrades will be led by decline in credit costs along with
improvement in core operating performance. Superior return ratios, cleaner balance sheet coupled with easy access to capital market provides private banks
greater ability to accelerate growth as economic activity picks up.
On the other hand, Government is rapidly introducing the much needed structural reforms in public sector banks, which will help them in long run to become much
more efficient. However in the medium-term, performance of these banks will remain volatile due to their poor assets quality profile along with low capital base.
Upside trigger in PSB stocks will largely come from: a) improving assets quality, b) clarity on the pension liability post the wage settlement, c) ground level
implementation of longer term structural reforms and d) clarity on additional capital infusion for BASEL III norms.
 Top picks: HDFC Bank, ICICI Bank, IndusInd Bank, Yes Bank, DCB Bank, Canara Bank
13
February 28, 2015
13
Capital Goods
Budget Proposal
Impact
Our View
 Corporate tax reduction from 30% to 25%
Positive
 All companies in sector
 Focus to boost infra spend through
flagship projects
Positive
 Most of the capital goods are paying full tax
rates
 It will improve order inflows for capital goods
companies
 Focus on completing Rural electrification
by 2020.
Positive
 It will help to bolstering the rural power
distribution network. Positive for both power
generation and T&D equipment companies
 Crompton Greaves, ABB, Siemens
 Higher allocation of Rs 42.3bn to Deen
Dayal Upadhyaya Gram Jyoti Yojana for
Rural power network
Positive
 It will help to reduce AT&C losses, helping to
improve discoms financials. Positive for both
power generation and T&D equipment
companies
 KEC International, Crompton Greaves,
Kalpataru Power
 Excise duty on pig iron SG grade and
Ferro-silicon-magnesium for manufacture
of Cast components of wind operated
electricity generators is being fully
exempted, subject to certification by
MNRE in this regard
Positive
 It will encourage private investments in wind
energy.
 Suzlon Energy
 Central Excise Duty increased on goods
Negative
 Marginally Negative
companies. It would
marginally
 All companies in sector
 Basic Customs Duty on Active Energy
Controller (AEC) for use in the
manufacture of Renewable Power
System (RPS) Inverters reduced to 5%,
subject to certification by MNRE
Positive
 Positive for Solar equipments manufacturers
Stocks affected
for Capital goods
increase capital cost
 BHEL, BEML
 ABB
14
February 28, 2015
14
Capital Goods
Sector outlook
 The Indian capital goods sector has been going through continuous slowdown in order-inflows amid declining margins, delay in project execution and declining
return ratios resulting in PE de-rating of the sector in last 2-3 years. On domestic front, glut in BTG industry would witness sustained pricing pressure. We believe
that the sector would see some recovery from FY16E onwards with the beginning of capex of 13th Five Year Plan. While order flows to power generation continue
to suffer, T&D remains an exception.
 Top picks: KEC International, Crompton Greaves
15
February 28, 2015
15
Cement
Budget Proposal
 Excise duty hiked to 12.5% from 12%
Impact
Our View
Marginally
 New rate 12.5% subsumes Education and S.H.E.
Negative
Stocks affected
 All cement companies
Cess, which effectively leads to an additional duty of
0.14%. Additional duty translates into higher payout
of Rs6/tonne, which should not be read much into
 Impetus to infrastructure development
Positive
 Emphasis
on
infrastructure
development
via
establishing National Investment and Infrastructure
Fund, Tax free infrastructure bonds for road, rail and
irrigation
projects,
e-Biz
portal
(integrates
14
regulatory approvals at single window), Plug-andPlay mode for power, rail, road sector, etc. will aid
cement demand growth
 Clean energy cess increased from
Marginally
Rs100/tonne to Rs200/tonne on coal
Negative
 Increase in additional cess will have an impact of
Rs14/tonne on operating costs, which is insignificant
Sector outlook
 We understand that there has not been any direct benefits for the cement industry in the budget. However, considering the fact that cement is a natural beneficiary
of infrastructure pickup in the country, impetus offered to infrastructure segment in the budget will certainly help demand scenario to improve going ahead. Hence,
we continue to believe that cement industry in India is on the cusp of cyclical upturn from FY16E in the backdrop of pickup in infrastructure and real estate activities
across the country. Slowing capacity addition in the industry from FY16E will further aid industry utilisation. We reckon an incremental supply of 49mnT over FY15EFY20E as against incremental demand of 135mnT during the same period, which clearly favors the industry and, hence, cement prices/profitability.
 Top picks: Ultratech Cement, J.K. Cement, JK Lakshmi Cement, Mangalam Cement and Ramco Cements
16
February 28, 2015
16
FMCG
Budget Proposal
Impact
Our View
 GST to be in place from April 1, 2016
Positive
 Entire Sector
 Allocation
of
Rs53bn
towards
Pradhanmantri Gram Sinchai Yojana to
develop micro-irrigation and water shed
programs
 Initiation
of
Rural
Infrastructure
Development Fund with allocated
corpus of Rs250bn to be used to
develop rural infrastructure in 2015-16
 Restoration and re-development of
World Heritage sites across 9 tourist
attractions across India and extending
Visa on arrival to include 150 countries
 Excise duty on cigarettes has been
increased by 25% for cigarettes upto
65mm and 15% for others
Positive
 Long due GST will streamline tax regime in India and help to get rid of
numerous indirect taxes including state VAT, Octroi, etc.
 Development of irrigation would reduce dependence on monsoon and
ensure rural economy to remain buoyant
Positive
 Development rural of road network would enable better distribution
and increased reach for the sector
 Entire Sector
Positive
 Tourism thrust will aid the hospitality industry
 ITC
Negative
 Blended excise duty hike for cigarette for ITC is ~15% which
essentially means that ITC needs to undertake a price hike between
11-13% to ward off the increase and maintain cigarette EBIT margins
at 31-33%. This will further pressurize the volume sales for ITC
 Prima Facie, this is a positive for the sector as it will aid earnings
growth of our universe; however, certain companies having
manufacturing facilities in tax exempt zones (like Baddi) may not get
complete benefit from the same. Further clarity is required
 This will encourage small scale manufacturing of Agarbattis (usually
undertaken by women in India) aiding disposable income. In the
organised space, ITC has presence through Cycle and Mangaldeep
brands and enjoys market share of 8-9% in the Rs35bn market
Agarbatti market
 ITC
 Gradual reduction of Corporate Tax rate
from 30% to 25% over the next 4 years,
while simultaneously also reducing
exemptions given
 Nil
Excise
duty
on
Agarbattis
manufacturing
Positive
Positive
Stocks affected
 Entire Sector
 Entire Sector
 ITC
17
February 28, 2015
17
FMCG
Sector outlook
 We remain positive on the FMCG sector considering that the economy is on the cusp of a revival. Rural India accounts for 40-45% of the consumption of FMCG
products and was also one of the focus areas in the Union Budget. Enhanced allocation towards infrastructure development will increase reach for the FMCG
companies in the hinterlands, while, development of irrigation facilities will ensure lesser dependence of crop cultivation on monsoons, thereby ensuring inflation to
remain stable and aiding disposable income in the hands of the farmers. Thrust on tourism will aid hospitality industry, while measures towards “ease of doing
business” by the government will spur investments, which eventually will aid growth in the urban markets. We believe economic revival will support growth in the
FMCG sector and expect our universe to record 13-14% yoy growth in its top-line from hereon.
 Top picks: ITC, GSK Consumer, Bajaj Corp, Britannia
18
February 28, 2015
18
Information Technology
Budget Proposal
Impact
Our View
 Set-up of SETU (Self-Employment and
Marginally
 While the quantum is not materially significant,
Talent Utilisation), a techno-financial
Positive
Stocks affected
it will be an enabler for start-ups seeking
incubation and facilitation program to
incubation funding. The funding avenue will
support
all
aspects
of
 NA
start-up
support product innovation in domestic start-
businesses, particularly in technology-
ups and make it more relevant to Indian IT’s
driven areas with allocation of Rs10bn
growth
Sector outlook
 We remain positive on the IT sector (US$ revenue CAGR of 13.7% over FY15E-17E estimated as compared to 11.8% in FY15E) based on a) robust contract trends
indicative of growth, b) strong hiring numbers composite to higher automation and M&A, c) positive growth outlook from major source geographies, d) continued
onsite investments (delivery centers, local hiring), e) stable margins with availability of multiple levers despite ominous headwinds such as cross-currency.
 Top picks: HCL Tech , TCS, KPIT, eClerx
19
February 28, 2015
19
Infrastructure
Budget Proposal
 The budget has exempted long term
Impact
Our View
Stocks affected
Positive
 Will be a big positive for the success of InvIT
 L&T, IRB Infra, IL&FS Transportation,
of
platform as earlier the capital gains were
Sadbhav Engineering, Ashoka Buildcon
Infrastructure Investments Trusts (InvIT)
deferred and deemed to be taxed at long term
etc.
units by sponsor in an event of stake
capital gains rate while being disposed. This
sale/IPO, though Securities transaction
brings the industry at level playing field with the
tax will still be applicable. Short term
IPO market
capital
gain
tax
on
disposal
capital gain shall continue to be taxed at
15%
 Pass through is provided in respect of
 This has been one of the key demand of
income distribution by SPV to InvIT,
infrastructure players and will avoid double
implies no taxation of such income in
taxation and tax leakage
etc.
Positive
hands of InvIT and no withholding tax at
the level of SPV. However, once the
income is distributed by InvIT, 10% TDS
shall be effected on resident holder
 Dividend received by trust is subject to
Neutral
 Industry wanted this to be waived off, but
DDT at SPV level and InvIT & unit
budget has also provided income to be
holders are exempted from DDT
distributed as interest, wherein TDS will be
 All Infrastructure companies
deducted at lower rate of 10% vs 17.2%
currently for DDT on dividend distribution
 Additional cess on Petrol & Diesel
 Tight fiscal deficit target has resulted in
(Rs4/litre) amounting to Rs400bn has
Government increasing this cess, taking benefit
been carved out for funding Roads and
of cooling crude oil prices. This shall help to
etc.
other infrastructure projects. This has
finance large road and infrastructure projects.
been done pre-budget but re-iterated in
The amount can be leveraged to increase total
budget speech
investment outlay
February 28, 2015
Positive
20
20
Infrastructure
Budget Proposal
Impact
Our View
 Outlay on Roads has been increased by
Positive
 Increased outlay to speed up ordering activity
Rs140bn and railways by Rs100bn.
on
Cumulatively, infrastructure outlay in the
construction companies order book to grow
budget has been increased by Rs700bn
after a dormant downcycle
 Setting up of National Investment &
Infrastructure
fund
(NIIF)
and
Positive
the
EPC
mode.
This
Stocks affected
will
result
 All infrastructure companies
in
 The Government intends to bring long term
find
monies through this route as it will be co-invest
monies to ensure annual inflow of
in the fund. This will inspire confidence in
Rs200bn as equity. This trust can then
investors’ mind and help bridge the funding
invest as equity in infrastructure finance
shortfall. The domestic companies are currently
companies such as IRFC and NHB.
constrained to take up PPP projects for lack of
These companies will further leverage
equity; this move bridges it to an extent
this equity manifold to fund projects
 Permitting tax free bonds in the Rail,
Positive
Road and Irrigation segment
 Its incentivizing domestic savers to park surplus
funds and help ease infrastructure funding
pressure
 Revitalizing
the
PPP
model
of
Positive
 Delay in land acquisition, Environmental &
infrastructure development to rebalance
Forest clearance has resulted in cost overruns
the risk wherein Sovereign will bear
in infrastructure projects. This has resulted in
major part of risk
unfavorable risk reward and projects becoming
 L&T, IRB, IL&FS Transportation, Ashoka,
Sadbhav, KNR Construction, HCC. etc.
unviable. PPP has seen limited interest from
infrastructure developers and hence Sovereign
bearing major part of risk will help bring more
projects on anvil
21
February 28, 2015
21
Infrastructure
Budget Proposal
Impact
Our View
 Plan to introduce Plug & Play model for
Positive
 Currently most of the projects in final stages of
get
delayed
Stocks affected
infrastructure projects viz. Roads, Ports,
commissioning
for
want
Railway lines, Airport etc. wherein all
linkages, land acquisitions, clearances, etc.
the approvals and linkages will be in
This single window clearance mechanism will
place before the project gets awarded
cut down construction time and minimize cost
through a transparent auction route
overruns
of
Sector outlook
 The Union Budget has addressed five major stake holder concerns viz (i) Increase in outlay – Rs700bn incremental contribution vs FY15BE is very positive for the
already depleting order book of construction companies and impact will be higher once this amount gets leveraged (ii) Alternative means of financing – currently
most of the infrastructure developers are going through deep balance sheet stress (attributable to variety of reasons viz. pending claims, non-core diversification
etc), setting up of National Investment Infrastructure Fund, Issuances of tax free bonds, etc. are steps in the right direction to mobilize funding for big infrastructure
projects (iii) Sharing of risks – until now the risk of the projects has been in entirety borne by developers, the revitalizing of PPP projects with Sovereign bearing the
major part of risk will help attract foreign capital and partnership (iv) Plug & Play model – single window clearance will be the most important reform as delays in
approvals have resulted in huge cost overruns and financial upset for developers; this is the prime reason for balance sheet stress and claims are yet to be settled
& finally (v) addressing taxation of InvIT – Union budget addresses stakeholders concern on double taxation and tax pass through shall help in unlocking value in
matured/operation annuity/BOT toll assets. We believe these positive measures will lead to overall re-rating of Infrastructure sector over medium to long term.
 Top picks: KNR Construction, MBL Infrastructure
22
February 28, 2015
22
Metals & Mining
Budget Proposal
Impact
Our View
 Increase in Tariff rate on Iron & Steel
Marginally
 While import duty on steel has been kept
from 10% to 15%
Positive
Stocks affected
 SAIL, JSW Steel, Tata Steel, JSPL
unchanged, increase in tariff will make imports
only slightly more expensive, giving some
respite to domestic steel manufacturers
 Increase in Import duty on Metallurgical
Marginally
coke from 2.5% to 5%
Negative
 While most large domestic steel players have
 Non-integrated ferrous players
their own coke oven batteries, only nonintegrated steel mills import met coke
 Increase in excise duty from 12% plus
Marginally
education cess and higher education
Negative
cess to 12.5% all inclusive
 Effective excise duty will increase by only
~0.14%, and on a per tonne basis it will be
~Rs50
assuming
a
steel
price
 Hindalco, NALCO, HZL, SAIL, JSW
Steel, Tata Steel, JSPL
of
Rs35,000/tonne
 Increase in clean energy cess on coal
Negative
from Rs100/tonne to Rs200/tonne
 This will increase the operational cost for all
players with captive coal mines along with other
 Hindalco, NALCO, HZL, SAIL, JSW
Steel, Tata Steel, JSPL
metal players who get linkage coal as well as
who buy from e-auction
 Incremental spend of ~Rs700bn on
infrastructure
Positive
 With the government’s continued focus on
 SAIL, JSW Steel, Tata Steel, JSPL
infrastructure, domestic steel consumption is
set to increase
Sector outlook
 While domestic steel off-take in the near-term is expected to remain weak, with the government’s thrust on infrastructure, we expect domestic steel growth to be
~6% for FY16E. However, realizations are under pressure due to cheap imports and hence Net Sales Realization (NSR) is expected to dip over the next two
quarters, resulting in steel spreads coming under pressure. On the non-ferrous front, while LME prices have been weak on a YTD basis, we expect deficits in
Aluminium and Zinc to translate into higher prices going forward thus boosting profitability for domestic non-ferrous companies.
 Top picks: Hindustan Zinc, NALCO, JSW Steel
23
February 28, 2015
23
Media
Budget Proposal
Impact
Our View
Stocks affected
 Service provided by way of exhibition of
Neutral
 No service tax was being paid for Cinema
movie by the exhibitor/theatre owner to
exhibition to the distributors as the exhibitor and
the distributor or association of persons
distributor had a revenue share agreement with
consisting of exhibitor as one of it’s
respect to net ticket sales (net of tax)
 PVR
member is being exempted
 The service tax rate is being increased
Negative
from 12% plus Education cess to 14%
 For a broadcaster, the increase in service tax
will
be
largely
advertisement
netted
rates
off
against
commanded
by
 Sun TV, PVR
the
the
broadcasters which may have only near term
impact on their advertisement revenue
 For an exhibitor, service tax increase on lease
and rental, housekeeping, etc. will have an
impact on the EBITDA by Rs200-300mn
 Set up of a Centre for Film Production,
Neutral
Animation and Gaming in Arunachal
 This will encourage film production and study in
India
 All
films
companies
including
Eros
International (indirectly) and PVR
Pradesh, for the North-Eastern States
Sector outlook
 Media sector (except Films related sector) is directly dependant on the economy for its advertisement revenue growth. We believe the Union Budget gave a lot of
thrust towards economic health improvement, which will have long term benefits. While the service tax increase is a negative for the sector, it is viewed as a
stepping stone towards implementation of GST, which will simplify tax regimes across the states. This is especially beneficial for film exhibitors like PVR, which
have to pay a separate state-wise entertainment tax and will also have a pass through benefit for production house like Eros, which benefits from revenue share
accruing from ticket sales. Overall, we remain positive on the Media sector.
 Top picks: DB Corp (print) and PVR (film exhibition)
24
February 28, 2015
24
Pharmaceutical
Budget Proposal
Impact
 Tax on royalty and fess paid for technical
Positive
services to be reduced to 10% from 25%
Our View
Stocks affected
 This will reduce fixed costs in R&D expenditure to  SPARC,
certain extent and encourage more investment in
Biocon,
Dr
Reddy’s
and
Glenmark
technical research
 Allocation of Rs331.5bn for healthcare
sector vis-à-vis Rs351.6bn last year; to
open AIIMS in 5 new states; creation of
pharma institutes in 3 states; increase
in health insurance premium deduction
to Rs25,000 from Rs15,000; Exempt
artificial heart from basic customs duty
of 5% and CVD
Neutral to
 Correcting inverted duty structure
Neutral to
Positive
 Extension of health cover and other initiatives to  NA
boost
health
insurance
spending.
However,
reduced spending on public health is disappointing
in our view
Positive
 Impacts
domestic
industry
adversely
as
the  Domestic API manufacturers – All
manufacturer has to pay a higher price for raw
pharma companies
material in terms of import duty than finished goods
 Increase in service tax by 2% to 14%
Negative
 Hospitalization will get dearer
 Apollo Hospitals, Fortis
from 12% earlier
Sector Outlook
 Budget continues to remain a non-event for the healthcare sector apart from overall announcement of “Health for All” and creation of institutes in 3 states. Industry
demands continue to remain unmet on (1) boost of R&D activity by increasing weighted deduction on indigenous product development. (2) reduction in excise duty
and (3) tax benefits for the industry. Although pharma sector has not found much space in Budget 2015-16, we continue to maintain our positive stance on the
sector for the long run. We like government’s braodly increasing focus towards the healthcare segment. With major pharma companies foraying into R&D (Lupin,
Sun Pharma, Dr Reddy’s, Glenmark - all have increased their R&D spend to an average of 10% of sales from 6-7% in the past 2 years), we expect niche products
in complex therapies like oncology, biosimilars, respiratory, etc. to drive growth. The Pharma sector has one of the best combinations of attractive fundamentals
(RoE, balance sheet, EPS and sales growth) and valuation.
 Top Picks- Sun Pharma, Glenmark, Aurobindo
February 28, 2015
25
25
Power
Budget Proposal
Impact
Our View
Stocks affected
 Corporate tax reduction from 30% to
25%
Positive/Neutral
 Since most of the private power companies are
paying MAT rates, this move will not save tax
outflow significantly
 +ve for Coal India
 Neutral for NTPC
 The tariff rate of basic customs duty on
bituminous coal is being reduced from
55% to 10%
Positive
 Beneficial for IPPs having dependence on coal
 JSW Energy, Adani Power, Tata Power
 Clean energy cess on Coal increased
from Rs 100 per tonne to Rs 200
Marginally
Negative
 Neutral for Regulated player’s since higher coal
cost is pass-through while for others, impact is
around 6 paise per unit.
 Neutral for Coal India, NTPC. Negative
for IPP’s
 Additional depreciation of 20% of the
cost of new plant or machinery acquired
and installed is allowed under the
existing provisions of section 32(1)(iia)
of the Act over and above the general
depreciation allowance
 5 New Ultra mega power projects of
4,000MW each with Coal linkage
Positive
 It would lower tax outgo from FY17E
 Overall power sector value chain
Positive
 Earlier bidding for UMPP’s had shown good
response with support from central govt.
Estimated opportunity size of Rs1,000bn to
Power sector
 NTPC, Power Grid , BHEL
Sector outlook
 Indian Power stocks have been underperforming due to concerns like unavailability of coal, lower merchant rates and deteriorating financial condition of State
Electricity Boards (SEBs). Recently, the government has made few meaningful structural announcements such as (i) SEB financial restructuring; ii) finalisation of
revised Case II bidding norms iii) FSA obligation from Coal India (CIL); (iv) Tariff relief for imported coal-based projects, which we believe would improve the outlook
for the sector.
 We prefer power utilities with (I) Assured RoEs of regulated business model vs. merchant business model due to lower merchant realization, (II) Fuel linkages, (III)
Strong balance sheet & execution track record, and (IV) Low valuation & low-risk business models.
 Top picks: PGCIL, KSK Energy
26
February 28, 2015
26
Real Estate
Budget Proposal
Impact
Our View
Stocks affected
 The Union budget has exempted long term
Positive
 Will be a big positive for the success of REIT
 DLF, Phoenix mills, Prestige Estates,
capital gains tax on disposal of REIT units
platform, as earlier the capital gains were
by sponsor in an event of stake sale/IPO,
deferred and deemed to be taxed at long term
though Securities transaction tax will still
capital gains rate while being disposed. This
be applicable. Short term capital gain shall
brings the industry at level playing field with the
continue to be taxed at 15%.
Oberoi Realty, Brigade Enterprises
IPO market
 Pass through is provided in respect of
Positive
 This has been one of the key demand of real
income distribution by SPV to REIT,
estate players and will avoid double taxation
implies no taxation of such income in
and tax leakage
 DLF, Phoenix mills, Prestige Estates,
Oberoi Realty, Brigade Enterprises
hands of REIT and no withholding tax at
the level of SPV. However once the
income is distributed by REIT, 10% TDS
shall be effected on resident holder.
 Service
tax
has
been
increased
Negative
from12.36% to 14%
 The service tax on sale of under-construction
real estate projects will increase from 3.1-3.5%
 Marginally negative for all the real estate
players, though it is pass through
to 3.5-4%. This will be an incremental burden
on the buyers. The under construction property
prices will increase by ~0.5%.
 Dividend received by trust is subject to
Neutral
 Industry wanted this to be waived off, but
DDT at SPV level and REIT & unit holder
budget has also provided income to be
are exempted from DDT
distributed as interest wherein TDS will be
 All Real Estate players
deducted at a lower rate of 10% vs 17.2%
currently for DDT on dividend distribution
 Impetus on housing to construct 20mn
Neutral
 We
still
await
policy
on
affordable
houses in urban and 40mn houses in rural
housing/smart cities which is currently under
areas by 2022
evaluation. This is a long term positive
27
February 28, 2015
 Purvankara, Ashiana Housing, Poddar
Developers
27
Real Estate
Sector outlook
 We remain positive on the real estate sector as amendments in the finance bill on taxation makes REIT doable. Most of the real estate companies with income
producing assets viz. DLF, Prestige Estates, Phoenix, Brigade Enterprises have leveraged their balance sheet through lease rental discounting. The current cost of
borrowing on LRDs will be anywhere between 12-13%. Once these assets are transferred to REIT, the cap rate can come down to 8-9% depending on the asset
quality and hence with the lower cost of capital, the asset valuation will get re-rated upwards. For every 100bps reduction in cap rate, the Rental asset value will go
up by ~10-12%.
 Top picks: Oberoi Realty, Sobha Ltd.
28
February 28, 2015
28
Others
Sector
Budget Proposal
Impact
Our View
 Consumer Durable -
 Will introduce Gold monetisation
Marginally
 Introduction of Gold monetisation scheme and
Jewellery
scheme and sovereign gold bonds
Positive
 To launch India made gold coins
Stocks affected
 Titan
and
other
launch of India made gold coins will reduce
players in jewellery
dependence on import of gold in the long run
sector
which will eliminate the risk of regulatory curbs
related to import of gold
 Additionally, interest on gold deposits in metal
account will encourage buying of gold, however
at the same time launch of sovereign gold
bonds will have discouraging impact upto
certain extent. More clarity will come once the
schemes
are
launched
and
details
are
available. But for the time being we do not
foresee any negative impact
 Sanitaryware
 Emphasis
on
Swaach
Bharat
Positive
 This
will
generate
high
demand
for
 HSIL,
Cera
Abhiyaan by committing to build
sanitaryware products and will lead to high
Sanitaryware
and
60mn toilets
replacement demand in the long run
other sanitaryware
players
 Housing for all by 2022 which would
require to build 20mn houses in
urban areas and 40mn houses in
rural areas
 Donations made to Swachh Bharat
Kosh shall be eligible for 100%
deduction u/s 80G of Income Tax
29
February 28, 2015
29
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30
February 28, 2015
30

Union Budget 2015-16: Vision, Execution or

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