Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Market Strategy
All is well, ex Oil
Fiscal discipline maintained on paper; Crude oil price is the wild card
The Indian finance minister Pranab Mukherjee delivered a budget which does a
good job on paper with respect to fiscal discipline. However if crude oil prices go
higher, the finance minister will have to either de-regulate diesel prices or live with
a much higher fiscal deficit. Our sensitivity analysis indicates that every US$10
upward move in crude prices is likely to widen fiscal deficit by 0.5% of GDP
(assuming only petrol prices are market linked). If diesel prices are de-regulated,
we are likely to live with high levels of inflation.
+ves: Higher disposable income; -ves: Lack of progress on reforms
The budget is likely to ensure strong demand from middle class and rural India as
(1) Income tax exemption for people earning Rs180,000 per annum (from
Rs160,000 previously) (2) Excise duty unchanged at 10% (vs. expectations of a
roll back to 12%). The other positives include higher outlay for infrastructure
investment, allowing foreign investors to invest in Indian mutual funds, measures
to improve infrastructure financing. The budget failed to provide a detailed
roadmap on GST. Also while the finance minister emphasized the importance of
FDI, the budget speech was silent on the details.
Maintain positive view on Indian stocks; Buy select large cap stocks
Auto stocks, Infra companies and ITC emerge as direct beneficiaries of the budget.
While Indian stocks may go lower in the short term on the back of rising crude
prices & FII outflows, we remain positive on a 12m horizon. We recommend
investors to buy into large cap names such as L&T, BHEL, Bharti, Idea, ICICI. In
our model portfolio, we remove MhasiS & Asian Paints and allocate weight to
ITC.
The budget presented for 2011-12 (FY12) displayed an impressive drop in fiscal
deficit (from 5.1% of GDP in 2010-11 to 4.6% in 2011-12). But it is a budget of
spending cutbacks - some of which may not stick. The harder work of
meaningfully improving tax/GDP and freeing the budget from the oil price
subsidies still lies ahead. From a funding angle, the net domestic borrow amount
of INR3.4bn appears very manageable. But there are several risks:
— recent trends in higher global oil prices can boost the subsidy bill,
— today's environment is challenging for divestment proceeds,
— the 9% government growth forecast and therefore tax buoyancy can
struggle if it turns out inflation, again becomes a problem requiring a
longer period of tighter policy.
Budget profile improves
The budget profile (table 1) has improved, though partly due to the recently
upgraded GDP denominator. But even apart from this 3 things emerge in the
numbers for 2011-12. First, tax to GDP dropped in the year just passed (gross
tax of 10% instead of the 10.8% envisaged). The increase pencilled in for 2011-
12 appears conservative, but it relies on strong economic growth more than tax
reform.
In the budget some direct tax rates were cut while indirect taxation was
tightened up by reducing some of the exemptions. But a sustained rise in tax to
GDP requires restarting the tax reforms which have been delayed. There is the
implementation of the Direct tax Code (DTC) which simplifies and removes
many exemptions and there is the Goods and Services Tax (GST) which will be
levied at both Centre and State levels. The intention is to introduce them next
year (April 2012). Until then tax boost would have to be cyclically driven.
Spending risks
The second notable thing about the budget is the subsidy bill. Even as a percent
of GDP it is set to drop from 2.1% to 1.6% (table 3). In money terms the
government intends to reduce subsidies from INR1.64tn to INR1.43tn. Within
this all components: fuel, food and petroleum products are expected to drop
(table 2). While there certainly is need to rein in subsidies, we question how
realistic these projections are given the recent rises in global oil prices and given
the (failed) intent to do the same last year. What this tells us is that either the
government does not expect oil prices to keep climbing/stay elevated or it
intends (at some point in the year) to simply allow more pass-through of
domestic fuel diesel) prices.
A third feature in the 2011-12 accounts is the cutback in non-plan operating
spending (or Revenue Spending as it's called) - tables 2, 3. Much of this is social
spending and grants to States. Could this be subject to slippage in a year with
multiple State elections? The over spend in non-plan spending in 2010-11
(revised versus budgeted) was possible in part because of the windfall surplus
proceeds from asset sales allowed the government to spend more. This year it
may not have that luxury.
Funding vulnerable
Finally on funding the fiscal deficit the net amount the government intends to
borrow domestically, of INR3.4bn appears very manageable. The ability of the
government to execute its divestment plan is a question in the current
environment, but we do not think this is the main risk. A bigger headache could
be the implications from either a swelling of the subsidy bill or the interest rate
implications from a step-up in inflation due to the need to permit more oil passthrough.
As things stand, we estimate spending could rise INR200-300bn,
without a meaningful impact on banks holdings of excess government securities
- i.e. before 'crowding out' of private lending becomes a concern
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Market Strategy
All is well, ex Oil
Fiscal discipline maintained on paper; Crude oil price is the wild card
The Indian finance minister Pranab Mukherjee delivered a budget which does a
good job on paper with respect to fiscal discipline. However if crude oil prices go
higher, the finance minister will have to either de-regulate diesel prices or live with
a much higher fiscal deficit. Our sensitivity analysis indicates that every US$10
upward move in crude prices is likely to widen fiscal deficit by 0.5% of GDP
(assuming only petrol prices are market linked). If diesel prices are de-regulated,
we are likely to live with high levels of inflation.
+ves: Higher disposable income; -ves: Lack of progress on reforms
The budget is likely to ensure strong demand from middle class and rural India as
(1) Income tax exemption for people earning Rs180,000 per annum (from
Rs160,000 previously) (2) Excise duty unchanged at 10% (vs. expectations of a
roll back to 12%). The other positives include higher outlay for infrastructure
investment, allowing foreign investors to invest in Indian mutual funds, measures
to improve infrastructure financing. The budget failed to provide a detailed
roadmap on GST. Also while the finance minister emphasized the importance of
FDI, the budget speech was silent on the details.
Maintain positive view on Indian stocks; Buy select large cap stocks
Auto stocks, Infra companies and ITC emerge as direct beneficiaries of the budget.
While Indian stocks may go lower in the short term on the back of rising crude
prices & FII outflows, we remain positive on a 12m horizon. We recommend
investors to buy into large cap names such as L&T, BHEL, Bharti, Idea, ICICI. In
our model portfolio, we remove MhasiS & Asian Paints and allocate weight to
ITC.
The budget presented for 2011-12 (FY12) displayed an impressive drop in fiscal
deficit (from 5.1% of GDP in 2010-11 to 4.6% in 2011-12). But it is a budget of
spending cutbacks - some of which may not stick. The harder work of
meaningfully improving tax/GDP and freeing the budget from the oil price
subsidies still lies ahead. From a funding angle, the net domestic borrow amount
of INR3.4bn appears very manageable. But there are several risks:
— recent trends in higher global oil prices can boost the subsidy bill,
— today's environment is challenging for divestment proceeds,
— the 9% government growth forecast and therefore tax buoyancy can
struggle if it turns out inflation, again becomes a problem requiring a
longer period of tighter policy.
Budget profile improves
The budget profile (table 1) has improved, though partly due to the recently
upgraded GDP denominator. But even apart from this 3 things emerge in the
numbers for 2011-12. First, tax to GDP dropped in the year just passed (gross
tax of 10% instead of the 10.8% envisaged). The increase pencilled in for 2011-
12 appears conservative, but it relies on strong economic growth more than tax
reform.
In the budget some direct tax rates were cut while indirect taxation was
tightened up by reducing some of the exemptions. But a sustained rise in tax to
GDP requires restarting the tax reforms which have been delayed. There is the
implementation of the Direct tax Code (DTC) which simplifies and removes
many exemptions and there is the Goods and Services Tax (GST) which will be
levied at both Centre and State levels. The intention is to introduce them next
year (April 2012). Until then tax boost would have to be cyclically driven.
Spending risks
The second notable thing about the budget is the subsidy bill. Even as a percent
of GDP it is set to drop from 2.1% to 1.6% (table 3). In money terms the
government intends to reduce subsidies from INR1.64tn to INR1.43tn. Within
this all components: fuel, food and petroleum products are expected to drop
(table 2). While there certainly is need to rein in subsidies, we question how
realistic these projections are given the recent rises in global oil prices and given
the (failed) intent to do the same last year. What this tells us is that either the
government does not expect oil prices to keep climbing/stay elevated or it
intends (at some point in the year) to simply allow more pass-through of
domestic fuel diesel) prices.
A third feature in the 2011-12 accounts is the cutback in non-plan operating
spending (or Revenue Spending as it's called) - tables 2, 3. Much of this is social
spending and grants to States. Could this be subject to slippage in a year with
multiple State elections? The over spend in non-plan spending in 2010-11
(revised versus budgeted) was possible in part because of the windfall surplus
proceeds from asset sales allowed the government to spend more. This year it
may not have that luxury.
Funding vulnerable
Finally on funding the fiscal deficit the net amount the government intends to
borrow domestically, of INR3.4bn appears very manageable. The ability of the
government to execute its divestment plan is a question in the current
environment, but we do not think this is the main risk. A bigger headache could
be the implications from either a swelling of the subsidy bill or the interest rate
implications from a step-up in inflation due to the need to permit more oil passthrough.
As things stand, we estimate spending could rise INR200-300bn,
without a meaningful impact on banks holdings of excess government securities
- i.e. before 'crowding out' of private lending becomes a concern
No comments:
Post a Comment