Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Market Strategy
Budget: Tug of war Inflation vs. Growth
�� Reforms, Fiscal Deficit, NREGA allocation remain key focus
While we believe it is a challenge to forecast what the Indian FY12 budget has in
store, we have made an attempt to look at some of the key issues in this note. (1)
Given the state elections, we expect NREGA allocations to pick up in addition to
the recent increase in NREGA wage rates (2) Fiscal deficit number is likely to be
closely watched given the rising oil prices, absence of one-time revenues such as
3G, WiMax license fees. (3) Investors perceive that reforms have slowed in the
past 12 months and the budget may address this issue.
�� Investor wish list: Execution of projects, progress on reforms
1) Execution of promises made in roads, power, infra 2) Roadmap for
Implementation of GST & direct tax code 3) Fiscal discipline by taking some
difficult decisions such as cut in Oil & Fertilizer subsidies and curb in govt
expenditure 4) Relaxation of FDI norms further – Retail, Insurance and FDI
procedures.
�� UBS View: Budget likely to be mixed
We believe that the govt has understood the importance of budget as a signalling
mechanism. However given the state elections impending in Tamil Nadu, Kerala &
West Bengal, the govt may find it difficult to take very tough decisions around
issues such as decontrolling diesel prices, curbing other subsidies until inflation
cools off. Income tax relief for middle class is likely in the budget. Barring a
significant increase in crude oil prices, the fiscal situation does not worry us yet.
We advise investors to buy into select stocks given current weakness. Our top
picks are ICICI bank, Bharti, Idea, Maruti, Hero Honda, ONGC, BHEL, L&T.
**CLICK on Picture to Enlarge**
Is it just about the budget?
Fiscal worries abound. Our sanguine view assumes a conservative
approach to asset sales by the government. Otherwise the budget deficit
itself displays rather pedestrian improvement. What could surprise this
time round are any non-budget announcements rather than the actual
fiscal position.
India presents fantastic opportunities for investors not in its fiscal arena,
but in industrial sectors which may be given a new lease of life if the
government helps: reduce cost structures, enables cheaper expansion or
frees up pricing.
So far speculation for big change remains in the banking sector, such as
on banking license expansion, corporate bond market development with
bank guarantees. But it remains to be seen which other sectors could
benefit from new announcements made at this budget. With state
elections round the corner the risk is higher social spending takes
priority over substantive reform.
No radical change in fiscal profile
On the fiscal position itself, the main direction was set at the last budget by the
Thirteenth Finance Commission (chart 1). We doubt the actual numbers
presented on Feb 28th would deviate much from this profile just a year
afterwards. The first half of the year saw fiscal improvement.
We expect this improvement to continue along the lines shown in table 3. A
fiscal deficit of 4.8-5% of GDP in 2011-12 could equate to a rise in central
government net market borrowing to Rs3,700bn (up from Rs3,450bn in 2010-11)
- a benign rise. What would make us begin to worry about crowding-out of bank
lending is if the net borrow amount rose significantly above Rs4,000bn.
Cyclical improvement
What are the positives so far? Firstly, spending has slowed in H1 up only 11.1%
from H1 in the previous year (compared with the 26% boost in 2009-10 H1).
Stable oil prices have played a tacit role here.
Secondly, H1 revenues have been strong. Apart from the substantial non-tax
revenues from 3G and broadband wireless spectrum auctions, gross tax revenue
increased 27% from a year earlier (compared with 7.8% in 2009-10H1). This is
reflected by higher tax-take in customs duty, union excise duty, corporate tax
collections (of 64%, 37% and 20% respectively) though personal income tax
collections rose only 11.8% (below nominal GDP growth).
In general, taxes to GDP have risen, though total tax to GDP remains closer to
cyclical lows at 2-3% (of GDP) - lower than the peak of 2007-08 (chart 2). In
other words it is early days for tax improvement. And implementation delays to
an improved good and services tax (GST) suggest that most of the rise is reliant
on economic recovery rather than to the introduction of a more efficient and
broader tax net with fewer exemptions.
Questions & vulnerabilities
If GST were to be introduced this would be a significant step forward for a
stronger fiscal position, but hitherto a lack of agreement between Centre and
States has been a main cause of delay.
Regarding asset sales (ie divestment and telco spectrum (3G/BWA)), this year
these were much higher (c. Rs1.3tn) than budget estimates of Rs750bn. Can we
expect such a windfall in 2011-12? Ideally, such proceeds should be used to
paydown the additional debt issued in 2008-10, which boosted economic
recovery. In reality, the government intends to use the receipts to boost spending
on priority sectors - a case of short-term demand stimulation?
Numerically the fiscal deficit in 2010-11 could fall (from 5.5% to 4.8% of GDP)
simply due to the recent upgraded GDP denominator. That’s history. More
important is to ask: how large is the rise in the rupee net amount that bond
markets would be asked to fund in FY11-12 – a year where we expect a cooling
off in real GDP from 9% to 8%? This requires a conservative expectation for
asset sales – which are included in the fiscal balance. If the government follows
last year’s conservative approach, then the risk of slippage and an unexpected
rise in the deficit should be low.
A final issue is subsidies – the fiscal Achilles’ heel. There is a risk of higher
subsidies in oil and fertilizers if oil prices were to rise quickly. Our rough
calculations suggest a $10 bbl rise could add 0.4% of GDP to fiscal spending.
Last July the government moved to free up petroleum prices, but diesel prices
remain subject to arbitrary control. Ordinarily a slowdown in the WPI is
considered a precursor to fuel price de-control, but recent rises in global fuel
prices suggest delay. Off budget oil/fertilizer bonds remain the Achilles’ heel of
the whole Indian fiscal set-up because there is no explicit allowance for any
compensating cut in spending in order to accommodate higher subsidies.
Spending is not subject to fiscal responsibility targets. Can the tiger change its
stripes on this one, or will higher oil prices 'smoke him out'?
Sector Expectations
Autos (Sonal Gupta)
We expect FY12 budget to have neutral/positive impact on auto sector. We
believe government’s increasing impetus on rural development will help boost
rural demand for 2Ws/PVs/tractors. We expect the excise rates for PVs, 2Ws
and CVs to be maintained at current levels. From budget standpoint, we prefer
Hero Honda, Maruti and M&M.
Last Budget
In the FY11 budget, government increased excise duty by 2% for PV/2W/CV,
increased weighted deduction for R&D from 150% to 200% and reduction in
income tax rates.
Industry expectations from this budget
�� Excise duty should remain un-changed from current levels.
�� Increased stimulus packages for rural development, including and not limited
to, provision of Rs. 640bn for the NREGA programme, an increase of 60%
from last budget.
�� Increased targets towards agriculture credit growth.
UBS view
�� We share industry belief that government will maintain the excise rates for
the auto industry in FY12 budget.
�� We believe that the government will announce substantial budget allocation
towards rural housing, infrastructure, agri-credit that will further boost rural
incomes. We expect 2Ws, small cars and tractors to be major beneficiaries.
Stock Implications
Stocks having maximum exposure to rural India will benefit in our view. We
prefer Hero Honda, Maruti and M&M, in that order.
Banks and NBFC (Vishal Goyal and Ajitesh Nair)
The sector has transitioned into the second leg of interest rate tightening marked
by elevated level of inflation, tight liquidity scenario, lagging deposit growth
rate and rate hikes by the central bank. We expect the near-term macro
environment for banks to be difficult which will likely lead to margin pressure.
Last Budget
�� Government extended the period of farm loan waived (under OTS schemes)
repayment to June 2010 from December 2009
�� Infrastructure bonds investment made by individuals up to Rs20,000 was
eligible for tax benefit
�� RBI to consider rolling out additional banking licenses to NBFCs and private
players
�� Allocation of Rs165bn towards infusion of capital in select PSU Banks
Industry expectations from this budget
�� Allowing banks to raise money through infrastructure bonds
�� Restore the short-term crop loan subvention to 2 %
�� Allocation of capital for equity infusion in select PSU banks
�� Fiscal consolidation is expected from current high levels of borrowings
UBS view
�� We expect industry will be keenly tracking the government fiscal deficit and
its borrowing programme for FY12 which will be a key driver of
liquidity/rates in FY12.
�� Allowing infrastructure bonds for banks will be positive for infra focused
banks like SBI, Axis, Canara, IDBI and negative for IFCs like PFC,REC &
IDFC
�� While we do not expect any radical change in fiscal profile, we believe any
higher then expected fiscal target would lead to crowding out and hardening
of yields which will impact the sector negatively.
Stock Implications
Banks in general and particularly PSU banks could be impacted
negatively/positively depending on high/low fiscal borrowings in FY12.
Consumer staples/Retail (Sunita Sachdev)
FY12 Budget should be good for Indian consumer staples/retail space as the
government is expected to increase allocations to many development and social
programs. The retail sector is expecting some indication on the opening of FDI
in retail that will help accelerate the pace of growth. From the budget
perspective we prefer HUL, Godrej and Dabur in that order.
Last Budget
In FY11 budget, the government provided impetus to consumption through
NREGA, social sector spending and reduction in personal tax rates. The excise
duty on cigarettes was also raised by ~15-17%. The government provided tax
incentive to hotel industry for capex in FY11.
Industry expectations from this budget
�� Increased stimulus for rural India. 1) linking NREGA wages to CPI and 2)
marginal increase in the number of working days guaranteed under the
programme.
�� The TII (Tobacco Institute of India) believes we could have no increase in
excise duty this year given there was a ~17% weighted increase in excise last
budget.
�� Opening up FDI in retail sector is one of the key expectations. The industry
expects the Government to provide a roadmap in Budget 2011-12.
UBS view
�� We expect the government to make several budgetary provisions to aiding
consumption across the low income sections –in urban and rural India. This
is expected to be a big positive for most staples companies that have a higher
proportion of revenues coming from rural parts i.e. Dabur and HUL.
�� We believe there could be an increase in excise duty on cigarettes by another
7-10%, we have built in ~8% average increase in excise duty in our estimates
for ITC Ltd.
�� We share industry expectation regarding opening of FDI in retail. This will
be positioned to be a step towards reducing inflation across food and
commodities.
Stock Implications
�� We believe rural focussed companies should do well – given the focus of the
government is to improve the quality of life for the marginalized rural
population.
�� We expect ITC to remain relatively weak till there is clarity on the quantum
of the excise duty increase.
�� If there is an indication on retail FDI, Pantaloon would react positively to
this.
Infrastructure/Power (Sandip Bansal and Pankaj
Sharma)
Given the heavy investment requirement in this sector, we believe that the thrust
on spending will be maintained. In-line with this, we expect the incentives to
continue and in a best case scenario, there could be some more positive surprises
as well.
Last Budget
�� Government had increased spending on infrastructure through increased
allocations across sectors. However, in the very recent past we have seen that
the progress on ordering activity, project award, execution and as a
result infrastructure spending has remained slow.
�� During the last budget, the government provided the option for additional
income tax savings to individuals via investments of Rs20,000 in
infrastructure bonds, resulting in increased availability of finance for
infrastructure projects.
Industry expectations from this budget
�� The domestic BTG (boiler turbine and generator) equipment manufacturers
expect that the government may provide more details on decision regarding
import duty on power equipments
�� Spending via various infrastructure schemes or overall spending on
infrastructure related sectors could be increased.
�� The companies expect that starting 2H CY11, the activity level should pick
up in core areas for infrastructure development.
UBS view
�� We believe that infrastructure development in the country provides a
significant opportunity given the significant under-investment in the sector.
We expect increased spending on infrastructure is likely to continue in FY12
budget as well.
�� In last budget, the government has increased the MAT rate from 15% to
18% which has impacted the companies putting up their projects under SPVs,
we don’t feel that there would be any further change in this.
�� We believe that the budget could be positive for the domestic main power
plant equipment manufacturers if there is a positive news flow on import
duty for power equipments.
�� Given the current higher interest rate and inflationary environment, we also
believe that government spending rise is very much needed for the sector. In
our view, the growth opportunity is most significant in the power, railways
and road sectors.
Stock Implications
�� Budget is a positive event for infra sector in general. We expect that BHEL,
L&T and Lanco are amongst the key beneficiaries of infrastructure sector
growth.
�� We believe that corporates which can leverage a broad range of opportunities
and have strong project management, financial engineering, and execution
skills will be the key beneficiaries.
Oil and Gas (Prakash Joshi)
Diesel pricing is a key issue for the government, given mounting underrecoveries
of the OMCs on account of lower retail prices.
Last Budget
�� Custom duty on crude oil was increased from nil to 5% and the duty on
gasoline and diesel was raised to 7.5% from the earlier 5%.
�� Excise duty on gasoline and diesel was increased by Re 1/ltr each. With oil
prices having run up sharply we expect these to be reversed
Industry expectations from this budget and UBS view
�� Since diesel accounts for almost 60% of the under-recoveries, diesel pricing
will be the key takeaway from the forthcoming budget. Kirit Parekh
Committee recommendation of complete auto fuel deregulation is highly
unlikely under current macro situation (high food inflation).
�� We anticipate a marginal cut in import duty on crude and diesel along with a
reduction in excise duty on diesel. In our view, a modest 10% hike in diesel
is likely, followed by further increases during the year as and when inflation
eases.
Stock Implications
�� We view that lower under-recoveries (assuming our most acceptable
scenario) will be positive for ONGC and GAIL as upstream companies are
required to make good one-third of the total losses incurred by the PSU
OMCs.
�� Even after a hike in diesel price, OMCs will continue to make heavy losses
on selling LPG and kerosene below cost. In our view, diesel deregulation
only provides short term upside to marketing companies on the back of
stiffer competition from private players. Essar Oil is a better play on
deregulation in the longer term as it stands to benefit from increased market
share.
Real Estate (Ashish Jagnani)
In India, housing is a state subject while the central government provides the
framework for development through the Ministry of urban development, the
Ministry of housing and urban poverty alleviation and various policy initiatives.
Nonetheless, the budget is very important to the sector and its players as housing
decisions by individuals and leasing decisions by companies are highly
influenced by tax implications. Further, states derive directional policy from the
central budget.
Last Budget
�� During the last budget the activity of construction of a property that has
already been sold by the builder to the buyer before its completion was
deemed a taxable service thereby increasing effective cost of buying an
under construction residential property.
�� Other than the above the budget allowed Interest subvention of 1 per cent on
loans of up to Rs1mn on property up to Rs2mn by another year. Also, one
year extension for completion (from four to five) was accorded to pending
housing projects to avail tax deductions. Besides this the partial rollback of
cement excise duty also affected the real estate sector.
Industry expectations from this budget and UBS view
�� There is a slight chance that the tax holidays for developing affordable
housing (section 80IB) could be reinstated. This would benefit developers
across the board and may lead to a greater focus on mid-income housing.
�� We expect that the interest subvention of 1% on loans of up to Rs1m on
property of Rs2m will be extended by another year during this budget.
�� The government has traditionally used tax incentives for promotion of the
housing sector. The deduction on the principal amount allowed is Rs100,000
which can also be availed through other routes like provident fund schemes
and life insurance. We expect the government to increase the same to
Rs200,000. This would bring down the cost of debt on housing loans and
hence somewhat offset the high interest rate environment.
�� Individuals are also allowed to deduct a sum of up to Rs150,000 pa paid as
interest on home loans for tax purposes under section 24 of the Income Tax
Act. We expect this deductible also to be increased to Rs300,000 pa.
�� The STPI (Software Technology Parks of India) scheme is currently
scheduled to expire in March 2011. An extension to the scheme is being
watched out for since the last budget. We don’t believe an extension to the
scheme is likely but if the scheme is extended SEZs would see a negative
impact as they are the natural alternative to STPIs.
Stock Implications
Since real estate is a state subject most developers are similarly affected by the
union budget as it mainly relates to tax issues which would affect the industry
macro. The extension of STPI can be watched out for as developers with a
higher exposure to SEZs stand to benefit if the scheme is not extended.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Market Strategy
Budget: Tug of war Inflation vs. Growth
�� Reforms, Fiscal Deficit, NREGA allocation remain key focus
While we believe it is a challenge to forecast what the Indian FY12 budget has in
store, we have made an attempt to look at some of the key issues in this note. (1)
Given the state elections, we expect NREGA allocations to pick up in addition to
the recent increase in NREGA wage rates (2) Fiscal deficit number is likely to be
closely watched given the rising oil prices, absence of one-time revenues such as
3G, WiMax license fees. (3) Investors perceive that reforms have slowed in the
past 12 months and the budget may address this issue.
�� Investor wish list: Execution of projects, progress on reforms
1) Execution of promises made in roads, power, infra 2) Roadmap for
Implementation of GST & direct tax code 3) Fiscal discipline by taking some
difficult decisions such as cut in Oil & Fertilizer subsidies and curb in govt
expenditure 4) Relaxation of FDI norms further – Retail, Insurance and FDI
procedures.
�� UBS View: Budget likely to be mixed
We believe that the govt has understood the importance of budget as a signalling
mechanism. However given the state elections impending in Tamil Nadu, Kerala &
West Bengal, the govt may find it difficult to take very tough decisions around
issues such as decontrolling diesel prices, curbing other subsidies until inflation
cools off. Income tax relief for middle class is likely in the budget. Barring a
significant increase in crude oil prices, the fiscal situation does not worry us yet.
We advise investors to buy into select stocks given current weakness. Our top
picks are ICICI bank, Bharti, Idea, Maruti, Hero Honda, ONGC, BHEL, L&T.
**CLICK on Picture to Enlarge**
Is it just about the budget?
Fiscal worries abound. Our sanguine view assumes a conservative
approach to asset sales by the government. Otherwise the budget deficit
itself displays rather pedestrian improvement. What could surprise this
time round are any non-budget announcements rather than the actual
fiscal position.
India presents fantastic opportunities for investors not in its fiscal arena,
but in industrial sectors which may be given a new lease of life if the
government helps: reduce cost structures, enables cheaper expansion or
frees up pricing.
So far speculation for big change remains in the banking sector, such as
on banking license expansion, corporate bond market development with
bank guarantees. But it remains to be seen which other sectors could
benefit from new announcements made at this budget. With state
elections round the corner the risk is higher social spending takes
priority over substantive reform.
No radical change in fiscal profile
On the fiscal position itself, the main direction was set at the last budget by the
Thirteenth Finance Commission (chart 1). We doubt the actual numbers
presented on Feb 28th would deviate much from this profile just a year
afterwards. The first half of the year saw fiscal improvement.
We expect this improvement to continue along the lines shown in table 3. A
fiscal deficit of 4.8-5% of GDP in 2011-12 could equate to a rise in central
government net market borrowing to Rs3,700bn (up from Rs3,450bn in 2010-11)
- a benign rise. What would make us begin to worry about crowding-out of bank
lending is if the net borrow amount rose significantly above Rs4,000bn.
Cyclical improvement
What are the positives so far? Firstly, spending has slowed in H1 up only 11.1%
from H1 in the previous year (compared with the 26% boost in 2009-10 H1).
Stable oil prices have played a tacit role here.
Secondly, H1 revenues have been strong. Apart from the substantial non-tax
revenues from 3G and broadband wireless spectrum auctions, gross tax revenue
increased 27% from a year earlier (compared with 7.8% in 2009-10H1). This is
reflected by higher tax-take in customs duty, union excise duty, corporate tax
collections (of 64%, 37% and 20% respectively) though personal income tax
collections rose only 11.8% (below nominal GDP growth).
In general, taxes to GDP have risen, though total tax to GDP remains closer to
cyclical lows at 2-3% (of GDP) - lower than the peak of 2007-08 (chart 2). In
other words it is early days for tax improvement. And implementation delays to
an improved good and services tax (GST) suggest that most of the rise is reliant
on economic recovery rather than to the introduction of a more efficient and
broader tax net with fewer exemptions.
Questions & vulnerabilities
If GST were to be introduced this would be a significant step forward for a
stronger fiscal position, but hitherto a lack of agreement between Centre and
States has been a main cause of delay.
Regarding asset sales (ie divestment and telco spectrum (3G/BWA)), this year
these were much higher (c. Rs1.3tn) than budget estimates of Rs750bn. Can we
expect such a windfall in 2011-12? Ideally, such proceeds should be used to
paydown the additional debt issued in 2008-10, which boosted economic
recovery. In reality, the government intends to use the receipts to boost spending
on priority sectors - a case of short-term demand stimulation?
Numerically the fiscal deficit in 2010-11 could fall (from 5.5% to 4.8% of GDP)
simply due to the recent upgraded GDP denominator. That’s history. More
important is to ask: how large is the rise in the rupee net amount that bond
markets would be asked to fund in FY11-12 – a year where we expect a cooling
off in real GDP from 9% to 8%? This requires a conservative expectation for
asset sales – which are included in the fiscal balance. If the government follows
last year’s conservative approach, then the risk of slippage and an unexpected
rise in the deficit should be low.
A final issue is subsidies – the fiscal Achilles’ heel. There is a risk of higher
subsidies in oil and fertilizers if oil prices were to rise quickly. Our rough
calculations suggest a $10 bbl rise could add 0.4% of GDP to fiscal spending.
Last July the government moved to free up petroleum prices, but diesel prices
remain subject to arbitrary control. Ordinarily a slowdown in the WPI is
considered a precursor to fuel price de-control, but recent rises in global fuel
prices suggest delay. Off budget oil/fertilizer bonds remain the Achilles’ heel of
the whole Indian fiscal set-up because there is no explicit allowance for any
compensating cut in spending in order to accommodate higher subsidies.
Spending is not subject to fiscal responsibility targets. Can the tiger change its
stripes on this one, or will higher oil prices 'smoke him out'?
Sector Expectations
Autos (Sonal Gupta)
We expect FY12 budget to have neutral/positive impact on auto sector. We
believe government’s increasing impetus on rural development will help boost
rural demand for 2Ws/PVs/tractors. We expect the excise rates for PVs, 2Ws
and CVs to be maintained at current levels. From budget standpoint, we prefer
Hero Honda, Maruti and M&M.
Last Budget
In the FY11 budget, government increased excise duty by 2% for PV/2W/CV,
increased weighted deduction for R&D from 150% to 200% and reduction in
income tax rates.
Industry expectations from this budget
�� Excise duty should remain un-changed from current levels.
�� Increased stimulus packages for rural development, including and not limited
to, provision of Rs. 640bn for the NREGA programme, an increase of 60%
from last budget.
�� Increased targets towards agriculture credit growth.
UBS view
�� We share industry belief that government will maintain the excise rates for
the auto industry in FY12 budget.
�� We believe that the government will announce substantial budget allocation
towards rural housing, infrastructure, agri-credit that will further boost rural
incomes. We expect 2Ws, small cars and tractors to be major beneficiaries.
Stock Implications
Stocks having maximum exposure to rural India will benefit in our view. We
prefer Hero Honda, Maruti and M&M, in that order.
Banks and NBFC (Vishal Goyal and Ajitesh Nair)
The sector has transitioned into the second leg of interest rate tightening marked
by elevated level of inflation, tight liquidity scenario, lagging deposit growth
rate and rate hikes by the central bank. We expect the near-term macro
environment for banks to be difficult which will likely lead to margin pressure.
Last Budget
�� Government extended the period of farm loan waived (under OTS schemes)
repayment to June 2010 from December 2009
�� Infrastructure bonds investment made by individuals up to Rs20,000 was
eligible for tax benefit
�� RBI to consider rolling out additional banking licenses to NBFCs and private
players
�� Allocation of Rs165bn towards infusion of capital in select PSU Banks
Industry expectations from this budget
�� Allowing banks to raise money through infrastructure bonds
�� Restore the short-term crop loan subvention to 2 %
�� Allocation of capital for equity infusion in select PSU banks
�� Fiscal consolidation is expected from current high levels of borrowings
UBS view
�� We expect industry will be keenly tracking the government fiscal deficit and
its borrowing programme for FY12 which will be a key driver of
liquidity/rates in FY12.
�� Allowing infrastructure bonds for banks will be positive for infra focused
banks like SBI, Axis, Canara, IDBI and negative for IFCs like PFC,REC &
IDFC
�� While we do not expect any radical change in fiscal profile, we believe any
higher then expected fiscal target would lead to crowding out and hardening
of yields which will impact the sector negatively.
Stock Implications
Banks in general and particularly PSU banks could be impacted
negatively/positively depending on high/low fiscal borrowings in FY12.
Consumer staples/Retail (Sunita Sachdev)
FY12 Budget should be good for Indian consumer staples/retail space as the
government is expected to increase allocations to many development and social
programs. The retail sector is expecting some indication on the opening of FDI
in retail that will help accelerate the pace of growth. From the budget
perspective we prefer HUL, Godrej and Dabur in that order.
Last Budget
In FY11 budget, the government provided impetus to consumption through
NREGA, social sector spending and reduction in personal tax rates. The excise
duty on cigarettes was also raised by ~15-17%. The government provided tax
incentive to hotel industry for capex in FY11.
Industry expectations from this budget
�� Increased stimulus for rural India. 1) linking NREGA wages to CPI and 2)
marginal increase in the number of working days guaranteed under the
programme.
�� The TII (Tobacco Institute of India) believes we could have no increase in
excise duty this year given there was a ~17% weighted increase in excise last
budget.
�� Opening up FDI in retail sector is one of the key expectations. The industry
expects the Government to provide a roadmap in Budget 2011-12.
UBS view
�� We expect the government to make several budgetary provisions to aiding
consumption across the low income sections –in urban and rural India. This
is expected to be a big positive for most staples companies that have a higher
proportion of revenues coming from rural parts i.e. Dabur and HUL.
�� We believe there could be an increase in excise duty on cigarettes by another
7-10%, we have built in ~8% average increase in excise duty in our estimates
for ITC Ltd.
�� We share industry expectation regarding opening of FDI in retail. This will
be positioned to be a step towards reducing inflation across food and
commodities.
Stock Implications
�� We believe rural focussed companies should do well – given the focus of the
government is to improve the quality of life for the marginalized rural
population.
�� We expect ITC to remain relatively weak till there is clarity on the quantum
of the excise duty increase.
�� If there is an indication on retail FDI, Pantaloon would react positively to
this.
Infrastructure/Power (Sandip Bansal and Pankaj
Sharma)
Given the heavy investment requirement in this sector, we believe that the thrust
on spending will be maintained. In-line with this, we expect the incentives to
continue and in a best case scenario, there could be some more positive surprises
as well.
Last Budget
�� Government had increased spending on infrastructure through increased
allocations across sectors. However, in the very recent past we have seen that
the progress on ordering activity, project award, execution and as a
result infrastructure spending has remained slow.
�� During the last budget, the government provided the option for additional
income tax savings to individuals via investments of Rs20,000 in
infrastructure bonds, resulting in increased availability of finance for
infrastructure projects.
Industry expectations from this budget
�� The domestic BTG (boiler turbine and generator) equipment manufacturers
expect that the government may provide more details on decision regarding
import duty on power equipments
�� Spending via various infrastructure schemes or overall spending on
infrastructure related sectors could be increased.
�� The companies expect that starting 2H CY11, the activity level should pick
up in core areas for infrastructure development.
UBS view
�� We believe that infrastructure development in the country provides a
significant opportunity given the significant under-investment in the sector.
We expect increased spending on infrastructure is likely to continue in FY12
budget as well.
�� In last budget, the government has increased the MAT rate from 15% to
18% which has impacted the companies putting up their projects under SPVs,
we don’t feel that there would be any further change in this.
�� We believe that the budget could be positive for the domestic main power
plant equipment manufacturers if there is a positive news flow on import
duty for power equipments.
�� Given the current higher interest rate and inflationary environment, we also
believe that government spending rise is very much needed for the sector. In
our view, the growth opportunity is most significant in the power, railways
and road sectors.
Stock Implications
�� Budget is a positive event for infra sector in general. We expect that BHEL,
L&T and Lanco are amongst the key beneficiaries of infrastructure sector
growth.
�� We believe that corporates which can leverage a broad range of opportunities
and have strong project management, financial engineering, and execution
skills will be the key beneficiaries.
Oil and Gas (Prakash Joshi)
Diesel pricing is a key issue for the government, given mounting underrecoveries
of the OMCs on account of lower retail prices.
Last Budget
�� Custom duty on crude oil was increased from nil to 5% and the duty on
gasoline and diesel was raised to 7.5% from the earlier 5%.
�� Excise duty on gasoline and diesel was increased by Re 1/ltr each. With oil
prices having run up sharply we expect these to be reversed
Industry expectations from this budget and UBS view
�� Since diesel accounts for almost 60% of the under-recoveries, diesel pricing
will be the key takeaway from the forthcoming budget. Kirit Parekh
Committee recommendation of complete auto fuel deregulation is highly
unlikely under current macro situation (high food inflation).
�� We anticipate a marginal cut in import duty on crude and diesel along with a
reduction in excise duty on diesel. In our view, a modest 10% hike in diesel
is likely, followed by further increases during the year as and when inflation
eases.
Stock Implications
�� We view that lower under-recoveries (assuming our most acceptable
scenario) will be positive for ONGC and GAIL as upstream companies are
required to make good one-third of the total losses incurred by the PSU
OMCs.
�� Even after a hike in diesel price, OMCs will continue to make heavy losses
on selling LPG and kerosene below cost. In our view, diesel deregulation
only provides short term upside to marketing companies on the back of
stiffer competition from private players. Essar Oil is a better play on
deregulation in the longer term as it stands to benefit from increased market
share.
Real Estate (Ashish Jagnani)
In India, housing is a state subject while the central government provides the
framework for development through the Ministry of urban development, the
Ministry of housing and urban poverty alleviation and various policy initiatives.
Nonetheless, the budget is very important to the sector and its players as housing
decisions by individuals and leasing decisions by companies are highly
influenced by tax implications. Further, states derive directional policy from the
central budget.
Last Budget
�� During the last budget the activity of construction of a property that has
already been sold by the builder to the buyer before its completion was
deemed a taxable service thereby increasing effective cost of buying an
under construction residential property.
�� Other than the above the budget allowed Interest subvention of 1 per cent on
loans of up to Rs1mn on property up to Rs2mn by another year. Also, one
year extension for completion (from four to five) was accorded to pending
housing projects to avail tax deductions. Besides this the partial rollback of
cement excise duty also affected the real estate sector.
Industry expectations from this budget and UBS view
�� There is a slight chance that the tax holidays for developing affordable
housing (section 80IB) could be reinstated. This would benefit developers
across the board and may lead to a greater focus on mid-income housing.
�� We expect that the interest subvention of 1% on loans of up to Rs1m on
property of Rs2m will be extended by another year during this budget.
�� The government has traditionally used tax incentives for promotion of the
housing sector. The deduction on the principal amount allowed is Rs100,000
which can also be availed through other routes like provident fund schemes
and life insurance. We expect the government to increase the same to
Rs200,000. This would bring down the cost of debt on housing loans and
hence somewhat offset the high interest rate environment.
�� Individuals are also allowed to deduct a sum of up to Rs150,000 pa paid as
interest on home loans for tax purposes under section 24 of the Income Tax
Act. We expect this deductible also to be increased to Rs300,000 pa.
�� The STPI (Software Technology Parks of India) scheme is currently
scheduled to expire in March 2011. An extension to the scheme is being
watched out for since the last budget. We don’t believe an extension to the
scheme is likely but if the scheme is extended SEZs would see a negative
impact as they are the natural alternative to STPIs.
Stock Implications
Since real estate is a state subject most developers are similarly affected by the
union budget as it mainly relates to tax issues which would affect the industry
macro. The extension of STPI can be watched out for as developers with a
higher exposure to SEZs stand to benefit if the scheme is not extended.
No comments:
Post a Comment