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Ritual’s over; Let’s move on
ƒ Support to consumption and infrastructure
ƒ Fiscal deficit target looks challenging due to subsidy slippage
ƒ Gainers: autos, consumer, banks, infrastructure
ƒ Losers: cement, oil & gas, metals, telecom
The accounting exercise is over
The budget for FY12 was an exercise in rebalancing – marked by no major changes in tax
proposals and a move towards fiscal consolidation – though also marked by doubts about
achievability.
Support to consumption, support to infrastructure
Through increases in allocation to social sector projects and marginal reduction in income
taxes the government has attempted to support consumption. Allocation to infrastructure
projects increased approximately 25% – though not all of it from budgetary allocations.
Corporate and personal income tax changes
Reduction in the corporate tax surcharge would lead to a 0.75% average tax rate reduction
for non-Minimum-Alternate-Tax (MAT)-paying companies, and an increase of 0.1% for MATpaying companies. Increase in exemption limit for personal income tax could increase
disposable income marginally – INR6,000 per annum at the highest tax bracket.
Things that didn’t happen
The increase in the CENVAT rate from 10% to 12% that was anticipated by many industries
was not implemented in the budget. Neither was the excise duty increase for tobacco – a
usually “increase prone sector”.
Concern on fiscal slippage
Even though the finance minister announced a fiscal deficit of 4.6% of GDP (lower than the
target 4.8%) and a borrowing programme of INR3.43t (lower than the INR3.6t-3.7t that we
expected), concerns remain about achievability.
Beneficiary sectors
Autos, consumer staples benefit from lack excise duty hikes. Banks benefit from the lower
government borrowing programme, easing worries from a bond yield spike. Increase in FII
investment limits should lower infra companies’ borrowing costs.
Sectors losing out
Increase in ad valorem export duty on iron ore hurts iron ore exporters (Sesa Goa & NMDC).
PSU oil & gas companies will have to deal with uncertainty in under-recovery burden
sharing. Replacement of 10% excise duty with an ad valorem duty is negative for the
cement sector.
The market shall move on
The market has come to accept the budget for what it is – an accounting exercise of the
government. We believe after digesting the positives in the budget (no significant increase in
indirect taxes, higher allocation to infrastructure) and the concerns (fiscal slippage in FY12
from higher subsidies), the market shall move on to the fundamental positives (robust
growth and reasonable valuations) and the fundamental headwinds (potential corporate
earnings estimate reduction, sticky inflation and higher commodity prices). In the near term
the headwinds appear stronger – leading to our caution on short-term market movement.
Over the longer term, we reiterate that several fundamentally sound stocks are appearing
attractive in terms of valuation as well (see “What to BUY after this correction”, 2 February)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ritual’s over; Let’s move on
ƒ Support to consumption and infrastructure
ƒ Fiscal deficit target looks challenging due to subsidy slippage
ƒ Gainers: autos, consumer, banks, infrastructure
ƒ Losers: cement, oil & gas, metals, telecom
The accounting exercise is over
The budget for FY12 was an exercise in rebalancing – marked by no major changes in tax
proposals and a move towards fiscal consolidation – though also marked by doubts about
achievability.
Support to consumption, support to infrastructure
Through increases in allocation to social sector projects and marginal reduction in income
taxes the government has attempted to support consumption. Allocation to infrastructure
projects increased approximately 25% – though not all of it from budgetary allocations.
Corporate and personal income tax changes
Reduction in the corporate tax surcharge would lead to a 0.75% average tax rate reduction
for non-Minimum-Alternate-Tax (MAT)-paying companies, and an increase of 0.1% for MATpaying companies. Increase in exemption limit for personal income tax could increase
disposable income marginally – INR6,000 per annum at the highest tax bracket.
Things that didn’t happen
The increase in the CENVAT rate from 10% to 12% that was anticipated by many industries
was not implemented in the budget. Neither was the excise duty increase for tobacco – a
usually “increase prone sector”.
Concern on fiscal slippage
Even though the finance minister announced a fiscal deficit of 4.6% of GDP (lower than the
target 4.8%) and a borrowing programme of INR3.43t (lower than the INR3.6t-3.7t that we
expected), concerns remain about achievability.
Beneficiary sectors
Autos, consumer staples benefit from lack excise duty hikes. Banks benefit from the lower
government borrowing programme, easing worries from a bond yield spike. Increase in FII
investment limits should lower infra companies’ borrowing costs.
Sectors losing out
Increase in ad valorem export duty on iron ore hurts iron ore exporters (Sesa Goa & NMDC).
PSU oil & gas companies will have to deal with uncertainty in under-recovery burden
sharing. Replacement of 10% excise duty with an ad valorem duty is negative for the
cement sector.
The market shall move on
The market has come to accept the budget for what it is – an accounting exercise of the
government. We believe after digesting the positives in the budget (no significant increase in
indirect taxes, higher allocation to infrastructure) and the concerns (fiscal slippage in FY12
from higher subsidies), the market shall move on to the fundamental positives (robust
growth and reasonable valuations) and the fundamental headwinds (potential corporate
earnings estimate reduction, sticky inflation and higher commodity prices). In the near term
the headwinds appear stronger – leading to our caution on short-term market movement.
Over the longer term, we reiterate that several fundamentally sound stocks are appearing
attractive in terms of valuation as well (see “What to BUY after this correction”, 2 February)
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