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http://www.kotaksecurities.com/pdf/dmb/MorningInsight29022012.pdf
PRE BUDGET NOTE - FEBRUARY 2012
The Finance Minister will present the FY2012-13 budget in the backdrop of a
sharp rise in the fiscal deficit for 2011-12. Interest rates have risen sharply in
FY12 and budget provisions are expected to largely determine future
monetary actions, we opine. Thus, the FM's priority in the 2012-13 budget
will be fiscal rectitude, we believe. Revised FRBM targets may also be set for
the next few years. While the nominal GDP for FY12 will likely grow at the
budgeted pace, the composition between real growth and inflation is quite
different as compared to expectations. Improving the real GDP growth rates
will also invite the FM's attention.
Overall, we believe that, the budget will aim to provide an investment - led
supply push to growth as against a consumption - led demand pull (higher
subsidies, etc). Lower deficit and borrowings (and interest rates) post tax
increases will also encourage investments. The resultant easing of supply
constraints will also reduce the pressure on inflation.
With fiscal deficit expected to be at about 5.9% in FY12 (our estimate), we
expect the FM to target greater fiscal discipline. The target for fiscal deficit
for FY12-13 is expected to be set at 5.02% on a nominal GDP growth of 13%.
We expect increase in indirect tax rates (excise, service tax). We believe that,
service tax revenues will also receive a boost through increase in scope of
coverage (negative list expected to be announced). We expect the
divestment target to be set at around the FY2011-12 levels of Rs.400bn.
Growth rate in expenditure will likely be relatively lower. However,
containing subsidy burden beyond a point may prove difficult especially
keeping in mind the rising crude prices.
Real GDP growth is expected at around 7% in FY12 v/s budget estimate of
9%. Advance estimates indicate that gross fixed capital formation as a
proportion of GDP has dropped to 29.2% in FY2012E from the peak of 32.9%
in FY2008. We expect higher allocations in the budget towards
infrastructure, social initiatives and agriculture. We believe the FM will
invite more private participation by giving incentives for investments in
targeted areas. These should help in sustaining and improving the rate of
GDP growth and that too, equitable (inclusive) growth. However, speedier
implementation of allocated budgets will make these spends more effective.
We believe that, significant stress will be laid on more effective
implementation of the outlays rather than increasing any outlays
significantly.
WPI inflation for FY12 is expected to average around 9%; much higher v/s
the target levels. We expect measures towards easing supply constraints,
both on food articles and manufactured items. Measures / investments to
increase agricultural output, reduce wastage of perishables and improve
supply chain may be announced. However, we understand that, most supply
side constraints can be addressed only in the long term. We are already
seeing initiatives to ease supply bottlenecks on the manufacturing side
(Mining, Power, etc) and the budget may provide further direction to these.
While higher duties / taxes are inflationary in nature, lower Government
borrowings can help in cushioning the impact, we opine.
On reforms, the FM may signal the Government's intention to move ahead
with the reforms process on several fronts. DTC and GST are expected to be
implemented WEF FY14 now. However, some enabling measures may be
announced. We expect a negative list of services to be announced (service
tax). Changes in taxation of transactions in a globalized environment are
also expected. There are several reform initiatives which the Government
has initiated outside the budget. The budget may take some of them ahead
- FDI in multi-brand retail, Companies Bill, Competition Bill, Mining Bill,
Banking Regulation Act, Power sector reforms, etc.
We believe that, with crude at high levels, the FM may not be able to tinker
much with the subsidy targets. However, we expect to see a roadmap and
targets for reducing the overall subsidy burden. Possible disclosure of all
financial guarantees provided by the Government will increase transparency.
Critical issues like labour reforms, pension reforms, etc may need broader
political consensus.
As far as tax measures are concerned, we expect the FM to roll back the
stimulus provided earlier. Thus, we expect excise and service tax rates to
increase by 200bps to 12%; a step towards GST. Increasing the coverage of
service tax will also result in higher collections. We expect a negative list of
services to be announced. On direct taxes, the exemption limit for
individuals is expected to increase by Rs.20000. We also expect the FM to
introduce provisions for foreign companies relating to Advanced Pricing
Agreement and Controlled Foreign Companies. Tax exemptions on targeted
investments may also be announced.
We do not expect any major initiatives for the stock markets. Any reduction
in STT will be cheered by the markets. Thus, we believe that, the focus of
the markets will be on fiscal prudence, on effective implementation of
investments, and on sectors which are impacted by the budget proposals.
We believe that, the budget may have:
Positive implications for Banking, NBFCs, Capital Goods, Cement,
Construction, FMCG, Logistics, Media, Oil & Gas, Power, Shipping sectors;
Negative implications for Automobile sector and Neutral for sectors like
Aviation, Hotels, Information Technology, Metals & Mining, Real Estate,
Telecom.
Stock markets
We do not expect any significant measures for the stock markets. Markets will be
pleasantly surprised if there are downward revisions in STT. We opine that, if the
budget focuses strongly on fiscal consolidation and lays down a roadmap for reforms, markets may not be disappointed.
Sectoral implications
We believe that, the focus of the markets will be more on :
n Reverting back to fiscal prudence,
n Initiatives to sustain and improve the GDP growth,
n Announcement and speedier implementation of reform initiatives,
n Steps to control inflation - LT as well as ST measures and
n Sectors which will be positively impacted by the budget proposals
We expect the following sectors to be positively impacted by the budget:
Expected sectoral impact
Budget impact Sector
Positive Banking, NBFCs, Capital Goods, Cement, Construction, FMCG,
Logistics, Media, Oil & Gas, Power, Shipping
Negative Automobile
Neutral Aviation, Hotels, InformationTechnology, Metals & Mining,
Real Estate, Telecom
Source: Kotak Securities - Private Client Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/dmb/MorningInsight29022012.pdf
PRE BUDGET NOTE - FEBRUARY 2012
The Finance Minister will present the FY2012-13 budget in the backdrop of a
sharp rise in the fiscal deficit for 2011-12. Interest rates have risen sharply in
FY12 and budget provisions are expected to largely determine future
monetary actions, we opine. Thus, the FM's priority in the 2012-13 budget
will be fiscal rectitude, we believe. Revised FRBM targets may also be set for
the next few years. While the nominal GDP for FY12 will likely grow at the
budgeted pace, the composition between real growth and inflation is quite
different as compared to expectations. Improving the real GDP growth rates
will also invite the FM's attention.
Overall, we believe that, the budget will aim to provide an investment - led
supply push to growth as against a consumption - led demand pull (higher
subsidies, etc). Lower deficit and borrowings (and interest rates) post tax
increases will also encourage investments. The resultant easing of supply
constraints will also reduce the pressure on inflation.
With fiscal deficit expected to be at about 5.9% in FY12 (our estimate), we
expect the FM to target greater fiscal discipline. The target for fiscal deficit
for FY12-13 is expected to be set at 5.02% on a nominal GDP growth of 13%.
We expect increase in indirect tax rates (excise, service tax). We believe that,
service tax revenues will also receive a boost through increase in scope of
coverage (negative list expected to be announced). We expect the
divestment target to be set at around the FY2011-12 levels of Rs.400bn.
Growth rate in expenditure will likely be relatively lower. However,
containing subsidy burden beyond a point may prove difficult especially
keeping in mind the rising crude prices.
Real GDP growth is expected at around 7% in FY12 v/s budget estimate of
9%. Advance estimates indicate that gross fixed capital formation as a
proportion of GDP has dropped to 29.2% in FY2012E from the peak of 32.9%
in FY2008. We expect higher allocations in the budget towards
infrastructure, social initiatives and agriculture. We believe the FM will
invite more private participation by giving incentives for investments in
targeted areas. These should help in sustaining and improving the rate of
GDP growth and that too, equitable (inclusive) growth. However, speedier
implementation of allocated budgets will make these spends more effective.
We believe that, significant stress will be laid on more effective
implementation of the outlays rather than increasing any outlays
significantly.
WPI inflation for FY12 is expected to average around 9%; much higher v/s
the target levels. We expect measures towards easing supply constraints,
both on food articles and manufactured items. Measures / investments to
increase agricultural output, reduce wastage of perishables and improve
supply chain may be announced. However, we understand that, most supply
side constraints can be addressed only in the long term. We are already
seeing initiatives to ease supply bottlenecks on the manufacturing side
(Mining, Power, etc) and the budget may provide further direction to these.
While higher duties / taxes are inflationary in nature, lower Government
borrowings can help in cushioning the impact, we opine.
On reforms, the FM may signal the Government's intention to move ahead
with the reforms process on several fronts. DTC and GST are expected to be
implemented WEF FY14 now. However, some enabling measures may be
announced. We expect a negative list of services to be announced (service
tax). Changes in taxation of transactions in a globalized environment are
also expected. There are several reform initiatives which the Government
has initiated outside the budget. The budget may take some of them ahead
- FDI in multi-brand retail, Companies Bill, Competition Bill, Mining Bill,
Banking Regulation Act, Power sector reforms, etc.
We believe that, with crude at high levels, the FM may not be able to tinker
much with the subsidy targets. However, we expect to see a roadmap and
targets for reducing the overall subsidy burden. Possible disclosure of all
financial guarantees provided by the Government will increase transparency.
Critical issues like labour reforms, pension reforms, etc may need broader
political consensus.
As far as tax measures are concerned, we expect the FM to roll back the
stimulus provided earlier. Thus, we expect excise and service tax rates to
increase by 200bps to 12%; a step towards GST. Increasing the coverage of
service tax will also result in higher collections. We expect a negative list of
services to be announced. On direct taxes, the exemption limit for
individuals is expected to increase by Rs.20000. We also expect the FM to
introduce provisions for foreign companies relating to Advanced Pricing
Agreement and Controlled Foreign Companies. Tax exemptions on targeted
investments may also be announced.
We do not expect any major initiatives for the stock markets. Any reduction
in STT will be cheered by the markets. Thus, we believe that, the focus of
the markets will be on fiscal prudence, on effective implementation of
investments, and on sectors which are impacted by the budget proposals.
We believe that, the budget may have:
Positive implications for Banking, NBFCs, Capital Goods, Cement,
Construction, FMCG, Logistics, Media, Oil & Gas, Power, Shipping sectors;
Negative implications for Automobile sector and Neutral for sectors like
Aviation, Hotels, Information Technology, Metals & Mining, Real Estate,
Telecom.
Stock markets
We do not expect any significant measures for the stock markets. Markets will be
pleasantly surprised if there are downward revisions in STT. We opine that, if the
budget focuses strongly on fiscal consolidation and lays down a roadmap for reforms, markets may not be disappointed.
Sectoral implications
We believe that, the focus of the markets will be more on :
n Reverting back to fiscal prudence,
n Initiatives to sustain and improve the GDP growth,
n Announcement and speedier implementation of reform initiatives,
n Steps to control inflation - LT as well as ST measures and
n Sectors which will be positively impacted by the budget proposals
We expect the following sectors to be positively impacted by the budget:
Expected sectoral impact
Budget impact Sector
Positive Banking, NBFCs, Capital Goods, Cement, Construction, FMCG,
Logistics, Media, Oil & Gas, Power, Shipping
Negative Automobile
Neutral Aviation, Hotels, InformationTechnology, Metals & Mining,
Real Estate, Telecom
Source: Kotak Securities - Private Client Research
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