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• Muted expectations. Indian equities are going into the FY2012E Union
Budget, scheduled for February 28th, with limited expectations.
• No major changes in taxation expected. Fiscal compulsions should
rule out any substantial tax concessions. There is also a need to tighten
fiscal policy to tame surging inflation. But the issue would have to be
handled tactfully, given political compulsions - elections in 5 states are
scheduled for 2Q CY2011. Also a more comprehensive review of tax
rates is scheduled for next year. The Direct Tax Code (DTC) and Goods
and Services Tax (GST) are scheduled to be implemented in FY2013E.
On balance, we could see a reduction of income tax rates for lower
income groups and an increase of 200 bps in excise duties.
• Focus on fiscal consolidation. As per the Fiscal Responsibility Act
roadmap, over FY2012E the deficit is to be cut to 4.8% of GDP. A
challenging target, as the one off revenues from the telecom auction will
not be available for the next fiscal year and subsidies on energy, fertilizer
and food are mounting. In this backdrop, the assumptions behind the
deficit targeted, particularly on growth and any exceptional revenue
streams will be under substantial scrutiny.
• Policy initiatives to the fore? There is limited flexibility on the Budget
math. And business confidence needs to be revived. In this backdrop, we
believe the Government could use the forum to articulate policy
initiatives related to 1) Financial sector reforms (pension sector reforms,
insurance sector reforms, corporate and infrastructure bond market, etc)
2) Initiatives to kick start the investment cycle 3) Enhancing private
sector participation in education, health and food storage and
distribution. 4) Tightening the tax net and getting back ‘black money’ for
productive economic use.
• Substantive agenda in Budget session of Parliament. Besides the
FY2012E Budget, the Government proposes to introduce 32 Bills in the
current session of Parliament. Significant among these, from an equity
market’s perspective, are the Land Acquisition (Amendment) Bill, Mines
and Minerals (Development and Regulation) Bill, Companies
(Amendment) Bill. Passage of these will clarify Government policy on a
number of grey areas and boost business confidence.
Union Budget – Sectoral expectations and potential impact
Sector Measures JPM Comment Impact
Automobile Excise duty increase by 2% The Finance minister will likely normalize excise duties to 12% on small cars. While the
minister had cut duties to 8% during the downturn - as economic growth revived, duties
were raised to 10% last year.
Negative
Tax / cess on diesel based vehicles The government may consider raising duties / cess on diesel vehicles given that diesel
fuel prices have not been market linked
Negative
Cement Increase in excise rates We expect any increase in excise rates to be passed on in final prices Negative
Spending on infrastructure programs Announcements on increased infrastructure spending, particularly roads or affordable
housing, would be positive for cement
Positive
Consumer
Staples
Increase in excise duties on
cigarettes.
Post a significant increase in excise duty (15-17%) for cigarettes during last budget, we
expect this year quantum of excise duty hike to be relatively lower. However excise hike
of more than 10% could impact our volume growth estimates for ITC's cigarette business
negatively.
Negative
Excise duty revisions There is a risk of excise duty rates to increase which bodes negatively for FMCG
companies particularly for Hindustan Unilever, Nestle India and Colgate India which have
relatively higher share of production from non-excise free zones
Negative
Increase in MAT rate Last year MAT rate was raised from 15% to 18%. Any incremental hike this year would
be relatively more negative for companies like Dabur and Godrej Consumer.
Negative
Increased government spending
across rural initiatives like NREGS
etc.
Government measures to boost rural spending would be positive for companies such as
Hindustan Unilever, Colgate, Godrej Consumer and Dabur, which receive significant
share of revenues (30-50%) from rural regions.
Positive
Energy Cutting excise duty on auto fuels A rollback of the Re1/lt hike in excise on auto fuels last year would lead to a ~Rs90bn
reduction in diesel subsidies, with breakeven on petrol rising to ~$92/93/bbl from $90/91
currently, assuming this is not passed on to consumers
Positive
Cutting customs duty on crude
imports
Customs duty of 5% was re-introduced last year - given high levels of crude, this could be
rolled back again, and would be a positive for refining margins
Positive
Cutting of customs duty on products This would be negative for refiners as effective duty protection on refining would come
down
Negative
Flexibility in 7-year tax holiday, clarity
on tax benefit for gas production
Flexibility in claiming the 7 year tax holiday post commencement of commercial
production would allow E&P firms to claim this at a time when production has ramped up
to peak levels. Clarity on taxation of gas production from NELP blocks will be positive, but
is unlikely to be part of the budget agenda
Positive
Service tax exemption for E&P This measure would act as a further boost to investments in E&P - a stated aim of the
govt.
Positive
Natural gas/Naphtha to be declared
goods under CST
This move would bring the VAT charged on natural gas down, particularly as some states
have higher rates. Also, since currently no input credit can be claimed on gas purchases,
costs of power generation also rise.
Positive
Financials Clarity on PSU Bank Capitalization Specific details on capital infusion for PSU banks. There was news on large capital
infusion by the government in Dec-10 but we expect formal announcement on the same.
Infusion would be positive for most small PSU banks but would be EPS/ROE dilutive for
some PSUs who are comfortable with capital currently.
Positive
Deficit at 4.8% and net government
borrowings of Rs3.8 trn
Our economics team expects fiscal deficit at 4.8% and net government borrowing of
Rs3.8trn. With this deficit we expect only a moderate increase in G-Sec yield and limited
impact on banks’ bond portfolios though PSU banks are more vulnerable. Lower
proceeds from divestments and a populist budget before a packed 1HCY11 state
calendar could be risks to our view.
Neutral
Insurance bill -FDI increase to 49%
from 26%
This has been long awaited but we believe increase in FDI in insurance is unlikely in this
session. If passed would be positive for private insurers as it will trigger stake transfers
between sponsors, set valuation benchmarks for the sector before public issue.
Positive
Industrials Government is expected to
reemphasize its commitment to
increasing investments in
infrastructure.
The following areas could be targeted for specific measures:
• More ultra mega power projects, accelerated power capacity addition, power for all
• Faster road building activity
• Continue with partial divestments of PSUs in the infra space, so that they can tap capital
markets to fund growth
• Issue of tax-free Infrastructure bonds, steps to develop the corporate debt market for
project funding
However we note the element of surprise is limited- PGCIL, NHAI, UMPP capex plans
are already in the public domain
Positive
Duty protection for domestic power
equipment manufacturing industry
The Indian manufacturing sector has been seeking duty protection on project imports
(e.g.: imported power plant equipment) to provide them a level playing field with Chinese
equipment manufacturers and also to stimulate domestic manufacturing. Implementation
may be questionable though given that private IPPs tend to import equipment, and such a
move would increase their capital cost. The government would also avoid a move which
could slowdown execution of power projects in the last year of the 11th five year plan
Positive
Any increase in indirect taxes Any potential hike in excise and import duties would be negative. BHEL and L&T enjoy
pass-through clauses for 60-70% of their order book, but they would need to take the hit
on the balance.
Negative
IT Services Industry is lobbying for an extension
in tax holiday of Software Technology
Parks (STPI).
We believe there is less of a good chance of the proposal being implemented. Also, the
industry will seek more clarification about the SEZ policy and see how it stands relative to
the proposed Direct Tax Code (presently, participants in the industry we have spoken to
believe that the Direct Tax Code will not override the SEZ policy).
Positive
Hospitality Extend 80IA benefits to the hotel
industry
All new hotel projects will be able to avail the benefit of deductions of 100 per cent with
respect to profits and gains for a period of 10 years.
Positive
Metals &
Mining
Increase in excise rates We expect any increase in excise rates to be passed on in final prices Negative
Increase in royalties/export tax on
iron ore
Given the sharp increase in spot iron ore prices, we would not be surprised to see export
taxes on iron ore increased from the current 5%
Negative
Increase in import duties and/or
imposition of safeguard duties
Given the sharp decline in steel imports, increase in import duty is unlikely in our view NA
Real estate Extension of tax benefits under STPI Current deadline likely to expire a Mar-11. The industry is lobbying for an extension in tax
holiday of Software Technology Park, we believe there is less of a good chance of the
proposal being implemented.
Positive
Introduction of a real estate regulator Regulator will bring in greater transparency in property dealings and also rate the
construction quality of projects. Positive for the sector.
Positive
Increase interest deduction under sec
24 (B)
Increase deduction available u/s 24(B) from Rs1, 50,000 on interest paid on home loans.
Currently first home buyers can avail of tax deduction on interest paid on home loans
upto Rs1.5L. The exemption limit could likely to be revised up to Rs2.5L to encourage
buyer demand.
Positive
Telecom 3G investments included under
section 80I-A tax benefits
This would be positive for 3G spectrum winners including Bharti, Idea and Reliance
Communications
Positive
Telecom classified as infrastructure Potential tax savings would be positive for the sector Positive
Potential increase in import duties for
mobile handsets
While we believe this would be positive for domestic handset vendors, we would view this
as slightly negative for the telecom service providers especially as 3G gets ready to ramp
up. Both handset prices and tariff rates are key to determine take-up of 3G services in our
view
NA
Source: J.P. Morgan estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• Muted expectations. Indian equities are going into the FY2012E Union
Budget, scheduled for February 28th, with limited expectations.
• No major changes in taxation expected. Fiscal compulsions should
rule out any substantial tax concessions. There is also a need to tighten
fiscal policy to tame surging inflation. But the issue would have to be
handled tactfully, given political compulsions - elections in 5 states are
scheduled for 2Q CY2011. Also a more comprehensive review of tax
rates is scheduled for next year. The Direct Tax Code (DTC) and Goods
and Services Tax (GST) are scheduled to be implemented in FY2013E.
On balance, we could see a reduction of income tax rates for lower
income groups and an increase of 200 bps in excise duties.
• Focus on fiscal consolidation. As per the Fiscal Responsibility Act
roadmap, over FY2012E the deficit is to be cut to 4.8% of GDP. A
challenging target, as the one off revenues from the telecom auction will
not be available for the next fiscal year and subsidies on energy, fertilizer
and food are mounting. In this backdrop, the assumptions behind the
deficit targeted, particularly on growth and any exceptional revenue
streams will be under substantial scrutiny.
• Policy initiatives to the fore? There is limited flexibility on the Budget
math. And business confidence needs to be revived. In this backdrop, we
believe the Government could use the forum to articulate policy
initiatives related to 1) Financial sector reforms (pension sector reforms,
insurance sector reforms, corporate and infrastructure bond market, etc)
2) Initiatives to kick start the investment cycle 3) Enhancing private
sector participation in education, health and food storage and
distribution. 4) Tightening the tax net and getting back ‘black money’ for
productive economic use.
• Substantive agenda in Budget session of Parliament. Besides the
FY2012E Budget, the Government proposes to introduce 32 Bills in the
current session of Parliament. Significant among these, from an equity
market’s perspective, are the Land Acquisition (Amendment) Bill, Mines
and Minerals (Development and Regulation) Bill, Companies
(Amendment) Bill. Passage of these will clarify Government policy on a
number of grey areas and boost business confidence.
Union Budget – Sectoral expectations and potential impact
Sector Measures JPM Comment Impact
Automobile Excise duty increase by 2% The Finance minister will likely normalize excise duties to 12% on small cars. While the
minister had cut duties to 8% during the downturn - as economic growth revived, duties
were raised to 10% last year.
Negative
Tax / cess on diesel based vehicles The government may consider raising duties / cess on diesel vehicles given that diesel
fuel prices have not been market linked
Negative
Cement Increase in excise rates We expect any increase in excise rates to be passed on in final prices Negative
Spending on infrastructure programs Announcements on increased infrastructure spending, particularly roads or affordable
housing, would be positive for cement
Positive
Consumer
Staples
Increase in excise duties on
cigarettes.
Post a significant increase in excise duty (15-17%) for cigarettes during last budget, we
expect this year quantum of excise duty hike to be relatively lower. However excise hike
of more than 10% could impact our volume growth estimates for ITC's cigarette business
negatively.
Negative
Excise duty revisions There is a risk of excise duty rates to increase which bodes negatively for FMCG
companies particularly for Hindustan Unilever, Nestle India and Colgate India which have
relatively higher share of production from non-excise free zones
Negative
Increase in MAT rate Last year MAT rate was raised from 15% to 18%. Any incremental hike this year would
be relatively more negative for companies like Dabur and Godrej Consumer.
Negative
Increased government spending
across rural initiatives like NREGS
etc.
Government measures to boost rural spending would be positive for companies such as
Hindustan Unilever, Colgate, Godrej Consumer and Dabur, which receive significant
share of revenues (30-50%) from rural regions.
Positive
Energy Cutting excise duty on auto fuels A rollback of the Re1/lt hike in excise on auto fuels last year would lead to a ~Rs90bn
reduction in diesel subsidies, with breakeven on petrol rising to ~$92/93/bbl from $90/91
currently, assuming this is not passed on to consumers
Positive
Cutting customs duty on crude
imports
Customs duty of 5% was re-introduced last year - given high levels of crude, this could be
rolled back again, and would be a positive for refining margins
Positive
Cutting of customs duty on products This would be negative for refiners as effective duty protection on refining would come
down
Negative
Flexibility in 7-year tax holiday, clarity
on tax benefit for gas production
Flexibility in claiming the 7 year tax holiday post commencement of commercial
production would allow E&P firms to claim this at a time when production has ramped up
to peak levels. Clarity on taxation of gas production from NELP blocks will be positive, but
is unlikely to be part of the budget agenda
Positive
Service tax exemption for E&P This measure would act as a further boost to investments in E&P - a stated aim of the
govt.
Positive
Natural gas/Naphtha to be declared
goods under CST
This move would bring the VAT charged on natural gas down, particularly as some states
have higher rates. Also, since currently no input credit can be claimed on gas purchases,
costs of power generation also rise.
Positive
Financials Clarity on PSU Bank Capitalization Specific details on capital infusion for PSU banks. There was news on large capital
infusion by the government in Dec-10 but we expect formal announcement on the same.
Infusion would be positive for most small PSU banks but would be EPS/ROE dilutive for
some PSUs who are comfortable with capital currently.
Positive
Deficit at 4.8% and net government
borrowings of Rs3.8 trn
Our economics team expects fiscal deficit at 4.8% and net government borrowing of
Rs3.8trn. With this deficit we expect only a moderate increase in G-Sec yield and limited
impact on banks’ bond portfolios though PSU banks are more vulnerable. Lower
proceeds from divestments and a populist budget before a packed 1HCY11 state
calendar could be risks to our view.
Neutral
Insurance bill -FDI increase to 49%
from 26%
This has been long awaited but we believe increase in FDI in insurance is unlikely in this
session. If passed would be positive for private insurers as it will trigger stake transfers
between sponsors, set valuation benchmarks for the sector before public issue.
Positive
Industrials Government is expected to
reemphasize its commitment to
increasing investments in
infrastructure.
The following areas could be targeted for specific measures:
• More ultra mega power projects, accelerated power capacity addition, power for all
• Faster road building activity
• Continue with partial divestments of PSUs in the infra space, so that they can tap capital
markets to fund growth
• Issue of tax-free Infrastructure bonds, steps to develop the corporate debt market for
project funding
However we note the element of surprise is limited- PGCIL, NHAI, UMPP capex plans
are already in the public domain
Positive
Duty protection for domestic power
equipment manufacturing industry
The Indian manufacturing sector has been seeking duty protection on project imports
(e.g.: imported power plant equipment) to provide them a level playing field with Chinese
equipment manufacturers and also to stimulate domestic manufacturing. Implementation
may be questionable though given that private IPPs tend to import equipment, and such a
move would increase their capital cost. The government would also avoid a move which
could slowdown execution of power projects in the last year of the 11th five year plan
Positive
Any increase in indirect taxes Any potential hike in excise and import duties would be negative. BHEL and L&T enjoy
pass-through clauses for 60-70% of their order book, but they would need to take the hit
on the balance.
Negative
IT Services Industry is lobbying for an extension
in tax holiday of Software Technology
Parks (STPI).
We believe there is less of a good chance of the proposal being implemented. Also, the
industry will seek more clarification about the SEZ policy and see how it stands relative to
the proposed Direct Tax Code (presently, participants in the industry we have spoken to
believe that the Direct Tax Code will not override the SEZ policy).
Positive
Hospitality Extend 80IA benefits to the hotel
industry
All new hotel projects will be able to avail the benefit of deductions of 100 per cent with
respect to profits and gains for a period of 10 years.
Positive
Metals &
Mining
Increase in excise rates We expect any increase in excise rates to be passed on in final prices Negative
Increase in royalties/export tax on
iron ore
Given the sharp increase in spot iron ore prices, we would not be surprised to see export
taxes on iron ore increased from the current 5%
Negative
Increase in import duties and/or
imposition of safeguard duties
Given the sharp decline in steel imports, increase in import duty is unlikely in our view NA
Real estate Extension of tax benefits under STPI Current deadline likely to expire a Mar-11. The industry is lobbying for an extension in tax
holiday of Software Technology Park, we believe there is less of a good chance of the
proposal being implemented.
Positive
Introduction of a real estate regulator Regulator will bring in greater transparency in property dealings and also rate the
construction quality of projects. Positive for the sector.
Positive
Increase interest deduction under sec
24 (B)
Increase deduction available u/s 24(B) from Rs1, 50,000 on interest paid on home loans.
Currently first home buyers can avail of tax deduction on interest paid on home loans
upto Rs1.5L. The exemption limit could likely to be revised up to Rs2.5L to encourage
buyer demand.
Positive
Telecom 3G investments included under
section 80I-A tax benefits
This would be positive for 3G spectrum winners including Bharti, Idea and Reliance
Communications
Positive
Telecom classified as infrastructure Potential tax savings would be positive for the sector Positive
Potential increase in import duties for
mobile handsets
While we believe this would be positive for domestic handset vendors, we would view this
as slightly negative for the telecom service providers especially as 3G gets ready to ramp
up. Both handset prices and tariff rates are key to determine take-up of 3G services in our
view
NA
Source: J.P. Morgan estimates.
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