FY13 budget – No surprises ::CLSA

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FY13 budget – No surprises
India’s FY13 Union budget partially delivered on the market expectations
of a move towards fiscal consolidation and incentives to revive
investment cycle, even while working within obvious political constraints.
While possible fiscal slippages are likely, we are encouraged by the
Government budgeting for a 38% in non-defence capex and a slew of
measures to help infrastructure sector. Our positive view on Indian
equities hinges on sustained affirmative policy action and global liquidity.
Government assumptions more realistic, but slippages still likely
 Government has embarked on the right path of fiscal consolidation with the target
to reduce fiscal deficit from 5.9% of GDP in FY12 to 5.1% in FY13.
 Increase in excise duties, service tax rates and widening the base should drive tax
buoyancy, although collections will likely be impacted as excise duties on petroleum
products (40% of excise duties) were left unchanged. Impact on fiscal deficit will be
smoothened as some costs (30%+ of tax revenues) are also directly linked to tax
collections.
 The usual underfunding of subsidies as well, which will mean that the actual fiscal
deficit would be about 5.3-5.5% unless crude corrects materially.
 Higher fiscal deficit and tax increases should put an upward pressure on inflation.
Several initiatives revive investment cycle
 Several initiatives to revive infrastructure investment visible with lowering imports
duty on coal to 0% from 5%, and doubling of tax free infra bonds to Rs600bn
should help roads, power and the housing sector.
 The government itself is budgeting to increase its non-defence capex by 38% to
Rs1.2trn should be a positive for the investment cycle
 Opening up of the ECBs for low cost housing, airlines, power and reduction in
withholding tax from 20% to 5% for infra borrowers should be a positive.
Some progress on financial sector reforms
 Rajiv Gandhi Equity Scheme (RGES) to broad-base equity participation from retail
households can be a kicker for the flagging equity participation by retail.
 The above scheme entitles a new equity investor an income tax deduction of
Rs25,000 from income for an investment of Rs50,000 into equities market.
 Three key reform bills – pension, insurance and banking – expected to be
introduced in the budget session
Retain positive market view, replacing M&M with BPCL in top 5 picks
 The budget announcements positive for M&M (no excise on diesel vehicles), IRB
(thrust on roads) and Jet Air (reduction in withholding tax) and for sectors like
power (coal import duty reduction) and steel (increase in imports duty.
 The announcement were negative for upstream oil companies (increase on crude
cess), BHEL (no increase in imports duty on equipment), telcos (high expectation of
the Government on auction proceeds) and property (imposition of TDS)
 With the rising oil prices, risks to economic growth are rising but our optimistic view
on the markets (Sensex target cut to 20,000; implies 14x, 1x PEG) hinges on
global liquidity and sustained affirmative policy action, which should improve the
investment outlook. We expect auto fuel price hike after the current parliamentary
session in early April.
 We tweak our model portfolio and replace Mahindra & Mahindra (recently
downgraded by Abhijeet Naik on tractor growth concerns) with BPCL. The recent
M&A benchmarks for BPCL’s upstream assets suggest an optimistic SoP of
Rs1100/sh (with 60% of the value coming from E&P business) or a 50%+ upside.
Potential auto fuel price hike could be a near-term trigger.
 Other top ideas continue to be ICICI Bank, Yes bank, Tata Motors and Infosys.