UNION BUDGET FY2014 - First cut

· Revised Estimates (RE) of the expenditure in 2012-13 at 96% of the Budget Estimates (BE) due to slowdown and austerity measures. During 2013-14, BE of total expenditure of `16,65,297 crore and of Plan Expenditure at

` 5,55,322 crore; Plan Expenditure in 2013-14 to grow at 29.4% over Revised Estimates for the current year; Non Plan Expenditure is estimated at ` 11,09,975 crore.

· Fiscal deficit for the current year contained at 5.2% and for the year 2013-14 at 4.8 %.

· Rural development - Allocation of ` 80,194 crore in 2013-14 for Ministry of Rural Development marking an increase of 46% over RE 2012-13;

· ` 14,873 crore for JNNURM in BE 13-14 as against RE of ` 7,383 crore…..(this would benefit players like Ashok Leyland)

· 3000 kms of road projects in Gujarat, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh will be awarded in the first six months of 2013-14.

· Additional deduction of interest upto ` 1 lakh for a person taking first home loan upto ` 25 lakh during period 1.4.2013 to 31.3.2014 ( this would benefit players like LIC Housing finances, Gruh finance & Dewan housing)

· Surcharge of 10% on persons (other than companies) whose taxable income exceed `1 crore to augment revenues.

· No change in rate of excise and service tax

· Increase surcharge from 5 to 10% on domestic companies whose taxable income exceed `10 crore; In case of foreign companies who pay a higher rate of corporate tax, surcharge to increase from 2 to 5%, if the taxabale income exceeds `10 crore.

· Dividend distribution tax or tax on distributed income, current surcharge is increased from 5 to 10%.

· Investment allowance at the rate of 15% to manufacturing companies that invest more than `100 crore in plant and machinery during the period 1.4.2013 to 31.3.2015.

· ‘Eligible date’ for projects in the power sector to avail benefit under Section 80-IA extended from 31.3.2013 to 31.3.2014.

· Small moderation in the rate of STT to `1700 from `1000 / crore in derivative segment; same amount levied in commodities derivative(non agricultural commodities only)

· ~18% hike in excise for cigarette….hike is very steep

· Relief to readymade garment industry - In case of cotton, zero excise duty on yarns and at fibre stage also…..this would benefit players like Arvind and Vardhaman

· Excise duty on SUVs increased from 27 to 30%. Not applicable for SUVs registered as taxies.

Our view : The budget is largely neutral from medium term as there are no populist measures (lower allocation to Food security bill, etc.) However there were expectations from the current FM on measures to boost investments, which did not happen thus disappointed the markets. Now that budget has been presented the markets will move focus on the monetary policy on the 19^th of March.

BUDGET UPDATES~~~!!!!

Budget FY2014 Highlights: JNNURM allocation 14800 cr; will be beneficial for Ashok Leyland

Budget FY2014 Highlights: Lower than expected allocation towards food security bill positive for the market

Budget FY2014 Highlights: 3000 KM of road projects to be awarded in next six months' Key beneficiaries will be ITNL, IRB and Larsen

Budget FY2014 Highlights: Additional deduction of interest of Rs 1 lakh for first time housing loan upto 25 lakh; Beneficiaries are HDFC, Dewan Housing and LIC housing Finance

Budget FY2014 Highlights: New deduction in allowance for housing loan also positive for mid-size real estate companies like Ashiana Housing and Sobha Developers

Budget FY2014 Highlights: Recapitalisation of public sector bank of Rs 14000 cr; Positive for PSU banks like Syndicate Bank and SBI

Budget FY2014 Highlights: FII's Allowed to participate in Currency Derivative Market in India

Budget FY2014 Highlights:  PPP in coal projects; Positive for Coal India

Budget FY2014 Highlights: Fiscal deficit contained at 5.2% for current year and 4.8% for next year; Positive for market

Budget FY2014 Highlights: Corporate surcharge changed from 5% to 10% for corporate; negative for market

Budget FY2014 Highlights: Set-box import duty hiked from 5% to 10%; Negative for Dish TV, Hathway etc.

Budget FY2014 Highlights: Excise duty on cigarettes hiked by 18%; Negative for ITC

Budget FY2014 Highlights:  Excise duty on SUV hiked; Negative for M&M

FII's allowed to participate in Currency Derivative Market in India. Positive for currency derivative markets  volumes.

Commodity Transaction Tax to be levied on non agri commodities futures at 0.01%

Budget FY2014 Highlights: No change in excise, service and custom duty; Positive for market

Budget FY2014 Highlights: Zero excise duty on cotton yarn; Positive for Arvind and Vardhaman

First cut - Railway Budget 2013-14

Gross Budgetary support: 26000cr (higher by 8%); Planned investment of Rs 63,363 crore for 2013-14

Passenger Fares: No immediate hike in tariffs

Freight : Implementation of FUEL ADJUSTED COMPONENT(FAC) within the tariff structure to lead to an average ~5% hike; Freight target fixed at 1,047 MT for 2013-14, 40 MT higher over the current year.

Gross traffic Receipts: projected at Rs.1,43,742cr ( ~14%higher) with freight expected at Rs.93,554cr (higher by 9%) and passenger fares at Rs.42,200cr(higher by ~5.2%)

Coal Infrastructure: 4000cr allocation towards building of coal mine connectivity

Iron-Ore & Port Infrastructure: 9000cr allocation towards building of port, iron-ore mine connectivity

Operating ratio expected to improve to 87.8% in 2013-14 from 88.8% in the current fiscal.

Outlook: Overall neutral to positive budget as passenger fare and freight targets look reasonable and commensurate with the current growth rate. Reasonable allocations towards building of iron-ore and coal infrastructure. Market was expecting a marginal hike in passenger fare which did not come through.

Budget expectations - Real Estate Sector

EXPECTATIONS

1. Extension of 1% interest subvention on home loans by 1 yr.

2. Increase scope imit of ECB for  Real estate companies

3. Increase in tax benefit for home loan Interest (current Rs.0.15mn) and Principal repayment (Current Rs.0.1mn).

4.  Industry lobbying for infra status for affordable housing .

5. Tax incentives to developers for mid income housing and Slum rehabilitation schemes

6. Increase in service tax.

IMPACT

1.Positive for the sector as a whole.

2.ECB issuance is currently allowed for only low-cost and rural housing projects. Any extension of the limits with certain caveats will be positive for Real estate companies.

3.Positive for the residential developers.

4.Positive for the sector as a whole.

5.Positive for developers in mid income housing segment .

6. Slightly negative for the sector as it would increase the cost of purchasing homes and result in higher cost of construction.

Budget expectations - Power Sector

EXPECTATIONS

1. Extension of tax holiday u/s 80IA.

2. Freight hike for coal in Railway budget.

3. Elimination of import duty on thermal coal.

4. Exempting power projects from service tax net.

5. More clarity over SEB Restructuring & Coal Price Pooling.

IMPACT

1.Provision of a 10‐year tax holiday to be extended to 15 years and it should be continued beyond 2013. Positive for overall  Generators.

2. Negative for the sector.

3. Likely positive for players dependent on imported coal such as ADANI and JSW.

4. Positive for the sector as a whole.

5. Positive for the sector as a whole.

Budget expectations - Power Sector

EXPECTATIONS

1. Extension of tax holiday u/s 80IA.

2. Freight hike for coal in Railway budget.

3. Elimination of import duty on thermal coal.

4. Exempting power projects from service tax net.

5. More clarity over SEB Restructuring & Coal Price Pooling.

IMPACT

1.Provision of a 10‐year tax holiday to be extended to 15 years and it should be continued beyond 2013. Positive for overall  Generators.

2. Negative for the sector.

3. Likely positive for players dependent on imported coal such as ADANI and JSW.

4. Positive for the sector as a whole.

5. Positive for the sector as a whole.

Budget expectations - Pharmaceuticals Sector

Measure expected - 

1. Enhancement of in-house R&D exemption limit to 250% as well as exemption extended to third-party suppliers

2. Hike in excise duty on drugs to 8%

3. Providing tax sops for setting up hospitals in urban areas

Likely impact 

1. Will increase tax exemption and lower tax rates for more prolific R&D spenders  

2.  Negative impact on margins for all domestic formulation players 

3. Positive for corporate hospital chains, which are aggressively stepping up bed additions in urban areas

Key stocks affected 

1. Beneficial for larger generic companies like DRL, Sun, Lupin etc

2. Almost all pharma stocks, especially those with large contribution from the domestic market

3. Apollo and Fortis

Budget expectations - Oil & Gas Sector

EXPECTATIONS - 

1. Implementation of the new gas pricing formulated by C.Rangarajan Commiitee recommendations.

2. Exemption of import duty on LNG, currently it is at 5%( exempted only for Power).

3. Re-introduction of custom duty @ 5% on crude oil.

4. LNG & Natural Gas may grant the Declared Good status .

5. Granting of Tax holiday to natural gas sector (7 year tax holiday are applicable to crude oil E&P activities).

6. Extension of tax holiday to refinery projects till the end of 12th five year plan (i.e. 2012-2017).

 IMPACT - 

1. Positive for the upstream companies like RIL,ONGC,Oil India.

2. Positive impact as the lower domestic output of natural gas along with increasing demand raises the importance of LNG. Key beneficiaries: PetronetLNG,.GAIL & IGL.

3. This move will facilitate the GoI to address the CAD and fiscal deficit. Negative for oil & gas companies due to higher under-recoveries.

4. Encourage the domestic natural gas sector to carry out more production raising activities. Positive for ONGC,RIL.

Budget expectations - Metals & Mining Sector

Expectations -

1. Reduction of export Duty on Iron Ore from the current 30% to 15-20%

2. Import Duty on sponge Iron from 0% to 5-10%

3. Removal of steel products from the ambit of Free Trade Agreement (FTA)

4. Increase in Import duty on manganese ore from the current 2% to 5%

5.Import Duty exemption on Thermal Coal

6. Rise in basic Customs duty on stainless steel flat products from 5% to 15%.

7.Increase in custom duty on copper or reduction in customs duty on copper concentrates

8. Increase in customs duty on aluminium products

IMPACT

1. Positive for Iron Ore exporters like Sesa Goa and NMDC.

2. Positive for all sponge iron manufacturing companies like Monnet Ispat, JSPL, Tata Sponge, etc.

3.Positive for all steel manufacturing companies.

4. Positive for manganese ore producers such as MOIL and Adhunik Metaliks.

5. Positive for all coal importing steel companies like Tata Steel, JSW Steel, JSPL, SAIL, Bhushan Steel.

6. Positive for stainless steel producers like Jindal Stainless.

7. Positive for all domestic copper smelters like Hindalco and Sterlite Industries.

8. Positive for all domestic aluminium manufacturing companies like NALCO.

Budget expectations - Infrastructure Sector

EXPECTATIONS

1.The government may restore tax exemption under Section 80  CCF of the Income Tax Act on infrastructure bonds worth INR20,000 per individual, thereby boosting the investment in infrastructure

2. Increase in allocation of funds to various infrastructure flagship programmes like JNNURM Bharat Nirman APDRP AIBP and NHDP.

3.Permitting 100% refinancing of INR debt through ECBs.

4.Increase in taxes as differential between MAT and IT comes down.

5.The government to exempt a holding company from paying dividend distribution tax if the dividend received from its subsidiaries is invested in infrastructure projects.

6.Reduction in customs duty on import of equipments for ports.

7.Major policy measures in respect of public-private partnership  (PPP) projects to increase the private sector’s participation.

IMPACT

1.Increase in the ( company) borrowing limit for infra-bonds in order to give a push to infrastructure development is positive for the sector.

2.It will provide impetus to award of projects and enhance the inflow of orders to the construction industry Positive for NCC L&T, ITNL etc.

3.This will help the industry to reduce the cost of debt. Positive for all the companies in the infra space.

4.Any increase in MAT in the context of a tight fiscal situation would be negative for the sector.

5.Positive for all private infra developers .

6.Given the need for up gradation of port infrastructure, this exemption would help port developers to procure new technology at lower cost. Positive for all port developers.

7.Positive for all private infra developers .

Budget expectations - FMCG Sector

EXPECTATIONS -

1. Hike in Service Tax from 12 to 14%

2. Hike in Excise duty from 12 to 14%.

3. Excise duty  on Cigarettes  remain same or increase marginally

4. Increase in personal income tax exemption limits – higher disposable incomes resulting in impetus to overall demand.

IMPACT -

1. Neutral : Higher prices may impact consumption for very short time but eventually neutralize.

2.Negative: It will increase the cost of manufactured goods. Negative for companies like HUL, Asian Paints, Godrej Consumer Products, Colgate etc.

3. Neutral for companies like ITC, Godfrey Phillips.

4. Positive: For all FMCG companies as it will boost volumes.

Budget expectations - It Sector

Industry wish-list -   

* Tax reimbursement and employment linked benefits.

* TDS for technical services provided in domestic market be reduced from 10% to 2%

Our expectation - May not happen

Rationale for our  expectation -  Revenue considerations may not allow this to happen

Impact of our expectation -  Neutral

Industry wish-list -   More clarity on this issue for shrinkwrapped software and standard offthe- shelf software

Our expectation -  May be provided

Rationale for our  expectation - Uncertainty / litigation relating to witholding tax is an irritant for the industry

Impact of our expectation - Positive

Industry wish-list -  Simplification of refunds process in case of inadequate set-offs

Our expectation -  May happen

Rationale for our  expectation - Expected to lead to faster refunds and better compliance

Impact of our expectation - Marginally positive

 

Industry wish-list -

* Treat software as service (and not goods) so as to avoid double taxation from centre and states

 * Currently there is no clarity

Our expectation -  May not happen

Rationale for our  expectation -  Treating software as 'service' will deprive states of revenues

Impact of our expectation -  Neutral

Industry wish-list -  Clarity on taxation of on-site income

Our expectation -  May happen

Rationale for our  expectation - Uncertainty relating to tax liability is an irritant for the industry

Impact of our expectation -  Positive

Industry wish-list -  Three-pronged approach to clear backlog and provide certainty for future 'Transfer pricing' issues

Our expectation - May happen

Rationale for our  expectation -  Uncertainty / litigation relating to transfer pricing is an irritant for the industry

Impact of our expectation - Positive

Budget expectations - Capital Goods Sector

Expectations
 
 1.Import duty hike of 5-10% on power equipment.

 2.Removel of cusroms duty exemptions on imported capital goods required for certain industries
   (Currently duty being 0-5%).

Impact
 
 1.L&T,BHEL,Thermax

 2.Capital Goods Sector

Budget expectations - Banking & NBFC Sector

Expectations

1. Norms for fixed deposits eligible for tax benefit u/s 80C could be relaxed from 5 years to 3 years to bring on par with equity linked saving schemes.

2. NPA provisions may be allowed for full tax deductibility.

3. Further clarity on issuing new Banking licenses.

4. Increase in foreign limit (from 26% to 49%) in Insurance sector.

5. Affordable housing may be assigned as Infrastructure status.

6. Large investment in infrastructure space may be announced.

7. Government borrowing programme may be lowered.

Impact -

1. Positive for the banks to raise long term fund and will also help in their ALM profile.

2. Positive for the entire BFSI.

3. Positive for new entities, competition may increase among the banks as a result, consumer may be benefited.

4. Positive for the insurance companies. Increase in foreign limit will bring them closer to listing.

5. Positive for low cost housing finance companies like LICHF, Dewan housing Ltd, Gruh finance Ltd and also for those banks which have large exposure in housing segment like SBI, ICICI Bank as clearances and sanctions to finance projects will be easier and cheaper.

6. Positive for the Infrastructure finance Companies like IDFC, HDFC etc.

7. Positive for the banks as lower borrowing will ease the pressure of liquidity in the banking system.

Budget expectations - Automobiles Sector

EXPECTATIONS - 

1. Subsume Road Tax, R&D Cess & Octroi in the proposed GST & also to provide clarity on applicability of GST on used-vehicles  market.

2.Duty drawback rates on exported vehicles should be restored to 5.5% from the current 2-2.5% especially for two wheelers.

3. Reduce Excise Duty rate on chassis from 14% to 10%; Increase depreciation rate to 60% from 40%; Start fresh round of JNNURM scheme for buses & extending the same for Inter City Buses also; Bring scheme for fleet modernization; Government purchase of CVs; Purchase of Ambulances through National Rural Health Mission; Extend credit scheme to larger NBFCs/Co-Op Banks.

4. Support to be given to National Electric Mobility Mission Plan (NEMMP) to promote the range of Electric Vehicles; Concessions to be provided & extended to at least 5years on identified parts of these vehicles; Hybrid & all electric CBUs (imported) should be taxed at 6%.

5 .75% Custom Duty on passenger cars/MUVs should stay; Increase duty on imported CVs to 40% from current 10%.

IMPACT - 

1. Positive – This could make the sector more organized & also earn revenue for the government.

2. Positive for the automobile manufacturers across all the segments.

3. Positive for the entire sector. It will help companies like TATA Motors Ashok Leyland among others. Moreover with  JNNURM schemes the State Transport Units will have continued access to funds to buy buses.

4. Positive for this new variants in automobiles. Besides promoting the usage of Hybrid & Electric Vehicles will also result in the savings of 2.2 – 2.5 million tones (estimated) of liquefied fuel by 2020.

5.Positive for the Commercial Vehicle manufacturers.

What will Indian stock market offer us!~~~!!!

India has been attracting record FII inflows…….Last year saw ~$24.5 billion inflows in Equities and this year since January ’13, we’ve already seen $ 8 billion flowing into India. This is on the back of attractive valuations, government led reforms and expectation of a fall in interest rates. While, FII’s are pouring money into India , we’ve seen some amount of selling by domestic institutions due to redemptions from retail Indian investors, who are taking a very short term view on the markets. These investors have been holding Mutual Funds for the last 4-5 years and now wanting to sell above their cost at the first opportunity. They have already sold substantial amount over the last six months and now have very little left with them in their portfolios……...which means that they are grossly under invested in the Equities

With correction, more and more large FII’s are getting bullish on India as it is amongst the most attractive markets(size wise) given the interest rate cycle and the new thrust provided by the Government to improve business and investor sentiments. Good amount of money is waiting on the sidelines to enter markets on corrections, which gives us confidence that every fall is an opportunity and should be bought into.

Budget is round the corner and we have already seen positive statements from the FM. He will not disappoint given the urgency to perform and also he understands the importance of capital markets and FII money for the growth of the country. Also, any change in the current monetary policy in US (which the market is fearing) will imply speculative money out of commodities leading to a fall in Gold, oil, copper, etc…and this would eventually benefit India in the medium term.

We believe the next week’s announcement in Union Budget will be positive for India in the medium to long term. FM is likely to:

1. Incorprorate further tightening of unplanned expenditure to control the fiscal deficit…an imperative to pacify the rating agencies. FM has clearly spelt out his intent of achieving a 5.3% FD in the current year and proposes to improve it by 50 bps in FY14. Notwithstanding the fact that this union budget is the last before the next general election, there is little doubt that about Chidambaram’s willingness and ability to achieve the targets.

2. In order to kick start the growth it is important that FM focus on pick up in the investment cycle which he will through a host of measures.

3. He is expected to broadly refrain from tax increase, balancing the deficit by spending restraint.

4. Govt effort of credible tightening measures will encourage RBI to cut interest rates further. During the remaining part of the year a 75 bp cut is a possibility

5. Thus we believe that the GDP may have bottomed around 5.3-5.5% growth that we are likely to see in FY13. The reforms initiated, cut in the interest rates will help in pickup in the growth to ~ 6.5% next year.

The markets therefore would get stronger with time. We continue to maintain that quality companies should be bought on decline. We have recently recommended the following stocks in our budget recommendation:-

 CAIRN INDIA

 M&M

ICICI BANK

IDFC

GODREJ CONSUMER

LT

We maintain +ve stance for all the above stocks which are +ve from medium term perspective. Other than these, we are also +ve on the following stocks which have corrected over last few days

ITC ~Rs.290, NTPC ~ Rs. 251, ING Vysya ~ Rs.545 and Tata Global ~ Rs.138

Market is throwing up big opportunity to make money for Investors from 1 – 6 months perspective.

Share this with every client n investor of yours. Invite him/her to participate in the Indian growth story and create wealth by investing in high quality stocks!

Happy investing !