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India Strategy
Budget: Oil prices may be key
to fiscal consolidation
Fiscal deficit: Subsidy still holds the key
We think the budget is unlikely to have a major impact on the markets. The key
remains whether the Government can build political consensus to undertake
reforms. The Finance minister has expectedly targeted a fiscal deficit of 5.1% of
GDP with net borrowing of Rs4.8trn. We expect the fiscal deficit to eventually
climb to 5.6% resulting in higher net borrowing of Rs5.4trn. Macro thoughts:
1. Fiscal deficit more realistic but will likely overshoot: While more realistic
than the FY12, we think the fiscal risk arises from: (a) Subsidy will likely
overshoot, especially in oil. At an oil price of $112/brl, we estimate the
Government would require a 15% increase in diesel, LPG and kerosene
prices to ensure the subsidy remains a budgeted levels (b) Rs400 bn is
assumed from sale of spectrum and (c) Rs300 bn from disinvestment.
2. Inflation likely to increase: The increase in excise duty and service tax will
add to the inflation burden. We hike our average FY13 inflation forecast by
30bp to 7.4%. We still expect a RBI rate cut in April.
3. Retrospective amendment may receive negative press: The Government
has retrospectively clarified rules on income arising outside India on transfer
of assets situated in India. This follows the Supreme Court decision in the
Vodafone case.
4. EPS change marginal: EPS growth will reduce by 1% for FY13 (ONGC led).
Key sector/stock highlights
1. ITC- Negative: The excise proposed implies a higher than expected ~16%
increase. ITC will need a 6-7% price hike to neutralize this.
2. Sun/Cadila- Negative: Imposition of MAT for partnership firms to adversely
impact Sun and Cadila in terms of higher tax (EPS hit of 5-10%).
3. Steel- near term positive: Import duty on flat rolled steel has been increased
to 7.5% from 5% earlier could support prices near term. +ve for JSW, SAIL &
Tata while JSPL to be least impacted.
4. Utility sector- budget +ve but challenges remain: Import duty on thermal
coal removed in FY13/14. Positive for Adani Power but no impact on Tata
Power/NTPC.
5. Oil - Negative: The cess on crude oil has been increased from Rs2,500/t to
Rs4,500/t. This would hit EPS of ONGC, OIL and Cairn India by 10-15%.
Budget highlights
Macro
Fiscal deficit at 5.9 per cent of GDP in RE 2011-12.
Fiscal deficit at 5.1 per cent of GDP in BE 2012-13.
Net market borrowing required to finance the deficit to be Rs4.8tn in 2012-13.
India’s GDP growth in 2012-13 expected to be 7.6% +/- 0.25%.
Endeavour to keep central subsidies under 2 per cent of GDP in 2012-13.
Over next 3 year, to be further brought down to 1.75 per cent of GDP.
For 2012-13, Rs300bn to be raised through disinvestment. At least 51 per
cent ownership and management control to remain with Government.
Rajiv Gandhi Equity Saving Scheme to allow for income tax deduction of 50
per cent to new retail investors, who invest up to Rs50,000 directly in equities
and whose annual income is below Rs1 mn to be introduced. The scheme
will have a lock-in period of 3 years.
Tax free bonds of Rs600bn to be allowed for financing infrastructure projects
in 2012-13.
ECB proposed to be allowed for capital expenditure on the maintenance and
operations of toll systems for roads and highways, if they are part of original
project.
ECB to be permitted for working capital requirement of airline industry for a
period of one year, subject to a total ceiling of US $ 1 billion.
Permitted two-way fungibility in IDRs subject to a ceiling with the objective of
encouraging greater foreign participation in Indian capital market.
Allowed Qualified Foreign Investors (QFIs) to access Indian Corporate Bond
market.
Direct taxes
Exemption limit for the general category of individual taxpayers proposed to
be enhanced from Rs180,000 to Rs200,000. Upper limit of 20 per cent tax
slab proposed to be raised from Rs0.8mn to Rs1mn.
Expected saving for an individual earning Rs1mn is Rs 22,660.
Proposal to allow individual tax payers, a deduction of upto Rs10,000 for
interest from savings bank accounts.
To provide low cost funds to stressed infrastructure sectors, rate of
withholding tax on interest payment on ECBs proposed to be reduced from
20% to 5% for 3 years for certain sectors.
Proposal to extend weighted deduction of 200 per cent for R&D expenditure
in an in-house facility for a further period of 5 years beyond March 31, 2012.
Proposal to extend the sunset date for setting up power sector undertakings
by one year for claiming 100 per cent deduction of profits for 10 years.
Reduction in securities transaction tax by 20 per cent on cash delivery
transactions.
A net revenue loss of Rs45bn estimated as a result of Direct Tax proposals.
Indirect taxes
Proposal to tax all services except those in the negative list comprising of 17
heads.
To maintain a healthy fiscal situation proposal to raise service tax rate from
10% to 12% with corresponding changes in rates for individual services.
Proposals from service tax expected to yield additional revenue of
Rs186.6bn.
Given the imperative for fiscal correction, standard rate of excise duty to be
raised from 10 per cent to 12 per cent, merit rate from 5 per cent to 6 per
cent and the lower merit rate from 1 per cent to 2 per cent with few
exemptions.
Excise duty on large cars also proposed to be enhanced.
Proposal for full exemption from basic customs duty and a concessional CVD
of 1 per cent to steam coal till 31st March, 2014.
Full exemption from basic duty provided to certain fuels for power generation.
Full exemption from basic customs duty to coal mining project imports
Tax concessions proposed for parts of aircraft and testing equipment for third
party maintenance, repair and overhaul of civilian aircraft.
Indirect taxes estimated to result in net revenue gain of Rs459.4bn.
Economy: Manageable fiscal slippage
Budget 2012 came in line with our low expectations. Finance minister Pranab
Mukherjee has expectedly targeted a fiscal deficit of 5.1% of GDP with net
borrowing of Rs4.9trn. Just as predictably, we believe the government has
underestimated oil, fertilizer and food subsidies, even assuming our 10% hike in
diesel, LPG and kerosene prices. We, therefore, expect the Center’s fiscal deficit
to overshoot by 50bps to 5.6% of GDP with a net borrowing of Rs5.5trn. Given
that the economy can likely bear a fiscal deficit of 5.5-6% of GDP, fiscal risks will
still prove overdone like 2011 in our view. The 10y should continue to trade in a
range around 8.5% as the RBI will need to buy gilts via OMO to generate liquidity.
Alongside the 10% hike in administered oil prices, the 2% customs duty hike
supports our view of inflation rebounding in mid-2012. Still, we expect slowing
growth to push the RBI into cutting rates in their April 17 policy.
Balance between growth and fiscal consolidation
Finance minister Pranab Mukherjee expectedly struck a balance between the
need to revive growth and fiscal consolidation. Given rising global and domestic
risks, we had always argued that Budget 2012 would not be as draconian as
some feared. After all, Rs100 of fiscal contraction would reduce growth by about
Rs150. From that perspective, we had expected the Finance Minister to try to limit
fiscal slippage rather than tighten public spend. In our view, the FY13 fiscal
deficit, at 5.6% of GDP, would end up pretty much close to FY12's 5.9%.
5.6% of GDP fiscal deficit: some fiscal slippage certain
We expect the Center’s fiscal deficit to slip by 50bp to 5.6% of GDP in FY13
(Table 3). In our view, the Finance Minister has underestimated subsidies.
Higher inflation, but April rate cut on slowing growth
inflation should rebound in mid-2012 with Budget 2012 pushing up excise duty
(with an WPI inflation impact of about 60bp), services taxes and eventually
requiring administered oil price hikes of 10% (60bp direct and 110bp direct).
Since our inflation forecasts had factored in only 1% excise duty hike, we have
raised our average FY13 inflation forecast by 30bp to 7.4% (Charts 1-2),
In our view, slowing growth should still force the RBI into cutting rates on April 17.
At the same time, we continue to expect the RBI to pause easing in 2H12 when
inflation will cross into 7.5-8% levels. Rate cuts should again resume towards
end-2012 as inflation comes off.
Tax forecasts reasonable: divestment, telecom swing factors
We think tax projections are reasonable with the tax/GDP ratio taken about 7.5%
in consonance with slow growth (Chart 3). Our own tax projections are fairly in
line with the Budget (Table 2). While the 2% hike in customs duty exceeded our
1% expectation, the Finance Minister also raised the tax exemption for income
tax to Rs200000 from Rs180000. At the same time, the proposed divestment of
Rs300bn and projected receipts of Rs400 from telecom auctions will remain
swing factors in a Budget where all the possible good news is already priced in.
Expenditure targets aggressive: upside risk to subsidies
We find the Finance Minister’s expenditure targets too aggressive. In our view,
food, fertilizer and oil subsidies are likely underestimated by Rs500bn at a time
when our oil strategists expect oil prices to persist at US$112/bbl
Note our oil subsidy projections assume a 10% hike in prices of diesel, cooking
gas and kerosene. Table 4 derives our food subsidy numbers.
Rs5.5trn net borrowing, 10y to trade ~8.5% on RBI OMO
In tandem with our higher fiscal deficit projection, we expect the Center to
overshoot its net borrowing by about Rs500bn to Rs5.5bn/US$110bn (Table 5).
Our estimates suggest that this will still limit gilt supply to about 65% of deposit
mobilization like last year. Besides, the RBI will likely still need to OMO about
Rs2000bn to generate liquidity as a large-scale current account deficit will limit fx
purchases. The 10-year should thus continue to trade about 8.5% levels.
Slowing loan growth to pull down lending rates
We grow more confident of our call of lending rates coming off 100-150bp in
FY13 with loan demand slowing (Table 6). We expect loan demand to bottom out
at 14% levels in September and rebound to 17% by March 2013 on rate cuts and
base effects. Our estimates suggest that banks will face an excess loan supply in
FY13 if they invest Rs2400bn in gilts as we have assumed.
This, in turn, supports our call of growth bottoming out in mid-2012 on the back of
base effects and rate cuts Experience suggests that cycles usually turn down (up)
when the real lending rate, now 8.25%, pierces (slips below) the ‘neutral’ 7.5-8%
potential growth rate
Autos
Overall Expected Budget Impact: Neutral
Key Stocks Affected: Ashok Leyland
Key Measures
Excise duty hike: Excise duty has been hiked from 10% to 12% for all
segments, with the exception of large cars where it has been now shifted to
ad valorem rate of 27% instead of 22% plus specific duty of Rs 15,000. Large
cars are defined as having length exceeding 4m and engine capacity of over
1,200cc for petrol and 1,500cc for diesel
Diesel tax not imposed: Contrary to general expectation, there was no
specific tax on diesel vehicles, except relatively higher excise rate on large
cars.
Duty on commercial vehicle chassis: Compared to specific rate of
Rs10,000 is being charged on chassis of Commercial vehicle over and above
the excise duty, an ad valorem rate of 3% will now be charged.
CBU imports: Import duty raised from 60% to 75% on cars with engine
capacity exceeding 3L and whose value exceed US$40,000 (~Rs2mn).
Extension of weighted deduction on R&D spend: Benefit of 200%
weighted deduction for in-house R&D spend has been extended for another
five years.
Impact of Measures
Pass through likely for excise duty: Overall, we believe most auto
companies will be able to raise vehicle prices to compensate for higher
excise duty. However, this could result in slight impact on demand for price
elastic segments such as petrol cars and two wheelers. Our forecasts factor
muted 5% growth in petrol cars (mostly back ended) and 10% growth in two
wheelers. Key companies likely to be vulnerable will be Maruti Suzuki (70%
petrol FY13E) and Hero Motocorp.
Absence of diesel tax imputed positive: Companies such as M&M and
Maruti would have been impacted by this measure. Absence would therefore
be viewed as imputed positive.
Chassis duty to impact Ashok Leyland: Although most players have
started to shift body buiding in-house, dependence on external sources is
reasonably high. We believe a 5% increase in duty (including 2% for excise)
will have to be partially absorbed by the industry. Ashok Leyland will face
brunt of the impact being a pure play in CVs. Tata Motors derives ~10% of
profit from this business.
Extension of R&D benefits: This has been in line with our expectations.
Auto companies are increasing in house R & D spend which should helps in
maintain low tax rates.
Airlines
Overall Expected Budget Impact: Negative
Key Stocks Affected: All
Key Measures
Allowed direct import of ATF.
Considering 49% FDI in civil aviation.
Allowed to raise ECB for working capital needs up to a sectoral limit of $1bn.
The rate of withholding tax on interest payments on external commercial
borrowings is proposed to be reduced from 20 per cent to 5 per cent for three
years.
Removed the basic customs duty for parts of aircraft and testing equipment
imported for MRO operations.
Impact of Measures
While the budget talked about few points in support of the sector, nothing
new was talked about. Direct import of ATF had already been allowed.
However, market had expected the announcement of 49% FDI in civil
aviation which did not materialized.
Similarly, while ECB for working capital is a positive but it would be difficult
for the airlines to get foreign loans when domestic banks are not willing to
lend. On the same lines, while the budget has aimed to support the MRO
operations, currently domestic MRO operations are limited in India.
Banks / Financials
Overall Expected Budget Impact: Neutral
Key Stocks Affected: All Banks
Key Measures
High growth target for farm credit (+21% yoy); likely to be met owing to
maintaining high subvention (3%); All banks, but more so for SBI, PNB
Recapitalization of govt. banks; Consideration of forming a financial holding
company which will raise resources to meet the capital requirement of Public
sector banks. Beneficiaries: All Govt. Banks
Making external commercial borrowings more attractive for Indian
corporates: Larger banks like SBI, ICICI Bk, with big international
operations
Doubling of Infrastructure bonds to Rs600bn vs. Rs300bn; Positive for
players like REC, PFC
Deduction up to Rs10,000 for savings bank interest for taxpayers with
income up to Rs50mn; Positive for all banks savings deposit franchise
Impact of Measures
Farm loan growth sustaining at +20% in FY13
The budget envisaged a +21% target for farm lending, which will be supported by
continued interest rate subvention of 3% to farmers who are ‘on-time’ for payment
on short-term crop loan, which keeps the effective costs of servicing the loan
unchanged at 4%. This also incentivizes a farmer from lower possible defaults
owing to low interest burden. Additionally it has extended the same interest
subvention on post harvest loans up to six months against negotiable warehouse
receipts to encourage farmers to keep their produce in warehouse. SBI and
PNB (large rural franchise) are likely to be amongst the bigger beneficiaries
of any enhanced farm credit off take.
Recapitalization of govt. banks (will help smaller banks) continues
Govt. has allocated ~Rs159bn (US$3.2bn) for recapitalization of govt. banks in
FY13. This is on top of ~Rs180bn (US$3.6bn) provided for in FY12. This will allow
banks to maintain total capital of +12% (Tier 1 at +8%) to fund adequate loan
growth. Beneficiaries: Will help govt. banks meet Tier I levels at ~ 9%. This
excludes the ~Rs78bn capital infusion that the govt. is planning into SBI by
FY12 year end (March 31, 20102).
External commercial borrowings more attractive for Indian corporates
The budget has made external commercial borrowings much more attractive by
cutting the withholding tax to 5% (vs. 20% earlier); allowing companies to use
ECBs to part finance rupee debt of existing power projects and also for aviation
sector (uto US$1bn) . In our view, ECB’s all inclusive costs today is ~9-10% (fully
hedged, 20% withholding tax), which will become even more attractive
henceforth. This will allow larger banks like SBI and ICICI Bk etc. to sustain a
stronger volume growth and fee growth.
Doubling of Infrastructure bonds to Rs600bn vs. Rs300bn
The budget has allowed infrastructure bonds of Rs600 to be issued by various
agencies including the power sector. This will enable players like REC, PFC to
raise funds by issuing these bonds at reasonable costs.
Deduction up to Rs10,000 for savings bank interest
The budget allows a deduction up to Rs10,000 for savings bank interest for
taxpayers with income up to Rs50mn. While this is unlikely to materially alter the
savings deposit mix or deposit growth, we reckon this will be an added incentive
for savings deposit franchise for banks vs. term deposits. While prima facie very
attractive, we do think this is not applicable for term deposits. Hence, impact for
banks not meaningful.
Prefer Private banks- HDFC Bk, ICICI Bk, Yes Bk
Per our Economist, budget for 2012-13 estimates fiscal deficit at only 5.1% of
GDP, while he believes that this can easily be at least 5.6% of GDP due to higher
owing to Oil subsidies. This will keep bond yields sticky at current 8.5% levels.
We reiterate our view that growth may slow v/s market expectations. We are
expecting loan growth to moderate to 13%. Private banks should relatively grow
faster owing to their ability to gain market share. Hence, we prefer banks with
strong liability franchise (high CASA), expanding distribution, high share of retail
loans (fixed rate).
Our preferred private banks are HDFC Bank (earnings visibility, strong liability
franchise); ICICI Bank (valuation comfort, high share of retail loans limiting NPL
spikes) and Yes Bank (expanding distribution to help CASA, Fees, Margins;
earnings visibility).
Cement
Overall Expected Budget Impact: Neutral
Key Measures
Excise duty up 200bps to 12%: This implies ~Rs4-5/bag rise in costs for
cement majors.
Impact of Measures
No earnings impact as full-passthrough likely: Our impression is that
cement companies expected the change in excise duty & have raised prices
accordingly. Our dealer feedback points to ~Rs15/bag MoM hike in the pan-
India cement prices which is ~2x the cost push from excise & rail freight put
together.
Worst case scenario of 8-14% EBITDA hit unlikely to materialise: If we
assume no pass-through, the 200bps hike in excise duty implies ~8-14% hit
to FY13-EBITDA for cement majors. However, as explained above, we do
not foresee a worst case situation.
Companies with North-exposure are likely winners: We expect a better
pricing power in north India versus other regions. Hence, Ambuja and Shree
Cement seem to be relative winners.
Consumers
Overall Expected Budget Impact: Negative
Key Stocks Affected: ITC, HUL, Dabur, Godrej Consumer, Colgate, Nestle
Key Measures
Excise duty on cigarettes increased: A 10% ‘ad valorem’ duty will be
imposed in addition to the existing specific excise duty on all cigarettes over
the length of 65mm. Ad valorem duty would be chargeable on 50 per cent of
the Retail Sale Price declared on the cigarette pack.
<60mm slab in cigarettes modified: The existing slab of filter and non filter
cigarettes of ‘length below 60mm’ is modified to length ‘less than 65mm’.
Given this the slab of length between 60-70mm was revised to length
between 65-70mm in both filter and non filter segment. Excise duty rates for
<60mm segment will apply for <65mm and there will be no ad valorem
component in this slab.
General excise duty rate increased by 2%: General excise duty rate will be
enhanced from 10% to 12%.
Impact of Measures
Expect price hikes in cigarettes; volumes can be impacted: ITC’s entire
cigarette portfolio is >65mm and will face the incremental ad valorem tax.
Excise incidence due to this is likely to go up by ~16%. ITC will likely have to
take price hikes of ~7% to counter this which can impact volumes. We
believe a partial shift to ‘ad valorem rate’ impacts ITC's long term pricing
power negatively. Also this opens up a possibility of a complete shift to ‘ad
valorem’ excise in future.
Expect new launches in <65mm category: Extension of <60mm slab to
<65mm without an incidence of ad valorem tax can lead to organized
players, including ITC, introducing variants at lower price points in this
<65mm segment.
Expect FMCG companies to raise prices to pass on higher excise:
Increase in excise duty will likely be passed on to the consumers through
price hikes. This combined with stabilizing raw material costs will have
moderate impact on volumes.
E&C
Overall Expected Budget Impact: Neutral
Key stocks benefited: IVRC, NJCC, RELI, IRB
Key Stocks Affected: L&T-MHI, PSU power equipment manufacturer
Key Measures
Custom Duty:
No change in import duty on power equipment.
Extension of exemption from basic customs duty on a) Tunnel boring
machines including parts, currently available for hydel and road projects,
to all projects without end use condition and b) coal mining project
imports.
Extension of full exemption from import duty on specified equipment
imported for road construction to contracts awarded by Metropolitan
Development Authorities (vs NHAI and State Govts).
Reduction of basic custom duty to 2.5% for equipments used in
surveying and prospecting of mines (from existing 7.5-10%)
Import duty on non-alloy flat rolled steel has been increased to 7.5%
from 5%.
Reduced basic customs duty on pipes and tubes for use in manufacture
of boilers to 7.5% from 10%.
A concessional rate of 5% CD was extended to raw materials,
intermediates required for the manufacture of parts of blades for rotors
of wind operated generators.
NHDP target for new awards up 20%: Target of new project awards under
NHDP increased to 8,800kms in FY13E vs 7,300kms in FY12E.
Viability gap funding expanded: Irrigation (including dams, channels &
embankments), terminal markets, common infrastructure in agriculture
markets, soil testing laboratories and capital investment in fertilizer sector
has been made eligible for VGF scheme. Also, Oil & Gas / LNG storage
facilities and oil & gas pipelines, fixed network for telecommunication &
telecommunication towers will be made eligible sectors for VGF.
Accelerated Irrigation Benefit Programme (AIBP): Structural changes in
AIBP being made to maximise benefit from investments in irrigation projects.
Allocation for AIBP increased by 13% to Rs142bn in FY13. Irrigation & Water
Resource Finance Co. (IWRFC) is being operationalised to mobilize large
resources to fund irrigation projects.
Exemption from service tax: Service provided for construction, O&M of
road, erection or construction of original works for airport / port / railways are
exempted from service tax.
Proposed to extend the weighted deduction of 200% for R&D expenditure in
an in-house facility beyond FY12, for a further period of five years.
Weak investments by PSUs: The investments by various PSUs are lowered
in FY13E vs FY12 by 8-30%, barring PGCIL with an increase of 13%. While
the investments in the power / roads ministries is estimated to remain flat,
increase in aviation ministry expenses is primarily due to higher infusion in
Air India.
Lower capex of Rs533bn (-7%YoY) by power sector by PSUs in FY13 was
led by likely fall in NTPC capex by -20% and NHPC capex (-12%). Total
power capex was flat YoY le by 13%YoY growth in PGCIL capex.
Impact of Measures
No change in import duty on power equipment shall be the biggest
disappointment to the markets. However, it can still be imposed post
approval of the duty by GoM.
Inclusion of Irrigation sector for VGF is a big measure to boost capex given
poor state financials and support from central Govt. Key beneficiaries here
are: L&T, IVRC, NJCC
Exemption of custom duty on road construction equipment to benefit Road
developers such as L&T, GMR, GVK, IVRC, IRB, NJCC etc
Lower genco capex in power sector by PSUs to weaken visibility of orders of
power generation equipment manufacturers like L&T and PSU power
equipment manufacturer. Higher PGCIL capex to support T&D equipment
manufacturer but it is set to peak in FY13E and that’s the key worry for the
sector facing mounting competition.
A concessional rate of 5% CD was extended to raw materials, intermediates
required for the manufacture of parts of blades for rotors of wind operated
generators. To benefit Suzlon.
India IT and BPO services industry
Overall Expected Budget Impact: Neutral to marginally negative
Key Stocks Affected: None
Key Measures
No change in income tax provisions: No change in the MAT rate
(Minimum Alternate Tax rate) and no extension of deadline for setting up
Special Economic Zones, as was being hoped by a few vendors. Currently
the proposed Direct Tax Code includes grandfathering of tax holiday for
SEZs not approved by Mar 2012 and set up by Mar 2014.
Tax rate on dividend from foreign subsidiaries maintained at 15% for one
more year (FY13) against a full tax rate. Cascading effect of dividend
distribution tax to be removed.
Service tax rate increased from 10 to 12%
Impact of Measures
Reduction of tax rate on dividend from foreign subsidiaries from full rate to
15%, for FY13, could encourage some dividend repatriation and higher other
income perhaps for companies like TCS or Wipro who have foreign
subsidiaries. However, impact to EPS expected to be minimal.
Removal of the cascading effect of dividend distribution tax is also
incrementally positive for IT companies that have domestic subsidiaries, such
as TCS, although the EPS impact is again unlikely to be meaningful.
For companies who have large domestic revs like Rolta (62%) the increase
in service tax will have some impact, which would be passed on. Also in most
cases customers are able to pass it on or set it off. However most of other
companies have less than 10% domestic revs and often are net service tax
refund companies.
Metals
Overall Expected Budget Impact: near term positive for steels.
Stocks Affected: Positive for JSW, SAIL, Tata ; Negative for Sesa (post
proposed merger)
Key Measures
Import duty on non alloy flat rolled steel has been raised from 5% to 7.5%.
Customs duty on steam coal has been reduced to 0% from 5%.
Cess on crude oil increased from Rs2,500/t to Rs4,500/t.
Impact of Measures
Higher import duty on flat non alloy steel: ve+ for Indian steel cos near
term; medium term impact to be limited
Near term positive for domestic steel cos; medium impact limited:
Higher import duty could support domestic prices near term given India is still
an importer of steel and prices are still influenced by import parity. Medium
term impact should be limited in our view as we expect India to become a net
exporter of steel over next 6-8 months as new supply comes on stream and
domestic prices are likely to move to a discount to import parity.
Positive for JSW Steel, SAIL, Tata; limited impact on JSPL: Assuming
that domestic prices increases in line with the increase in import parity prices
we estimate the theoretical impact on FY13e EPS will be highest for JSW
(+20%) followed by SAIL (9.9%) and Tata (6.5%). JSPL will be least
impacted due mainly exposure to long products which is not affected by the
duty hike. We expect the actual impact on FY13e EPS to be lower as
domestic prices should move to a discount to import parity as India shifts to
net exporter over next 6-8 months.
Limited economic rationale for higher import duty on steels: The hike in
import duty was lower than 10% customs duty demanded by steel industry.
However, we see limited economic rationale for imposing import duty given
steel imports have been declining (down 6.4%YTD; net imports down
40%YTD) and are likely to decline further as India becomes a net exporter of
steel over next 6-8 months.
Import duty hike not applicable to boron doped steel imports: We
highlight that import duty hike is not applicable to boron doped (0.0008%
boron content) steel, which is classified as alloy steel. Boron doped steel
accounts for a large mix of steel imports from China. While boron doped
Chinese steel imports may not be affected by the duty hike technically (due
to reason mentioned above), administrative hurdles related to customs is
likely to be a deterrent for imports in our view.
Customs duty reduction on steam coal: Neutral for Coal India; positive
for users of imported coal
Neutral for Coal India: Domestic coal prices are not driven by import parity
and should not be impacted by removal of customs duty. Also we do not
expect e-auction prices to be impacted as e-auction prices will remain at a
discount (~25% discount on calorific value adjusted basis) to imported coal
prices despite the duty cut.
Marginal positive for HZL, Sesa’s potential zinc assets (post proposed
merger): HZL sources ~60% of its coal requirements (~2mtpa) thru imports.
We estimate lower import duty will add marginal 0.1% to Sesa proforma
EPS.
Higher cess on crude oil: ve- for Sesa led by hit to Cairn profits
Cairn EPS hit by higher cess on crude: Cess on crude oil has been
increased sharply from Rs2,500/t to Rs4,500/t. Our Cairn Analyst estimates
the potential hit to Cairn FY13e EPS to be 9%.
Sesa (post merger) pro forma FY13 EPS to be hit by 4.5%: Sesa currently
owns 20.1% stake in Cairn and will have 58.9% post proposed merger. Cairn
accounts for 39.6% of Sesa post merger EBIDTA (on a pro forma basis) and
69% of Sesa post merger SOTP valuation (ex Cairn debt). We estimate the
hit to Cairn EBIDTA will lead to 3.8% hit to Sesa proforma EBIDTA.
Other measures
Import duty on plant and machinery for setting up of pellet making unit
reduced to 2.5% (7.5% earlier).
Steel companies including SAIL, JSW Steel are setting up pellet plants and
should benefit.
Oil & Gas
Overall Expected Budget Impact: Negative
Key Stocks Affected: ONGC, OIL and Cairn India
Key Measures
The cess on crude oil was raised from Rs2,500/ton to Rs4,500/ton. Including
the education cess it is up from Rs2,575/ton (US$6.9/bbl) to Rs4,635/ton
(US$12.4/bbl)
Rs400bn has been provided in the FY13 budget towards 4Q FY12 subsidy
compensation to the R&M companies
ONGC & OIL may report 20-30% YoY EPS growth in FY12
FY12 subsidy sharing likely to be same as in 9M for upstream
The subsidy provision made for 4Q FY12 in the FY13 budget suggests that
subsidy sharing formula for upstream companies for FY12 may be the same as in
9M FY12. If subsidy sharing formula is same as in 9M we expect ONGC and
OIL's FY12 earnings growth at 22-31% YoY.
Upstream and government to bear most of FY12 subsidy
The government has provided Rs400bn in the budget towards 4Q FY12 subsidy
in addition to Rs450bn already committed to R&M companies as subsidy
compensation for 9M. Thus government would bear Rs850bn of subsidy in FY12
while upstream share in subsidy would be Rs512bn if it is on the same basis as in
9M. Thus government and upstream would bear Rs1,362bn of FY12 subsidy of
Rs1,369bn estimated by us. Thus based on our estimates R&M companies are
expected to bear just Rs6.9bn of subsidy in FY12
Pharmaceuticals
Overall Expected Budget Impact: Neutral
Key Stocks Affected: Sun Pharma, Cadila
Key Measures
Excise duty hike: Excise duty on domestic formulations have been hiked
from 5% to 6% and for API (bulk drug) sales, it has been increased in line
with standard rates at 12% (vs 10% earlier). Domestic formulations account
for one-third or so of total sales for the industry while less than 10% sales are
attributable to API segment.
Applicability of MAT on partnership profits: Indian pharma companies
like Sun Pharma and Cadila have benefited so far from tax exemption of
partnership profits. However, this would be subject to MAT now leading to
sharp increase in effective tax rates for these two companies.
Extension of weighted deduction on R&D spend: The benefit of
weighted deduction of 200% on in-house R&D spend has been extended for
another five years (after March 31,2012).
Impact of Measures
Pass-through for excise duty hike: Overall, we believe pharma
companies will be able to pass through the cost push duty to higher excise
duty via price hikes due to reasonable pricing power (in line with benefit
being passed on earlier). Hence we do not see any impact on profits due to
this move.
Taxation of Partnership profits to hurt Sun & Cadila: Sun and Cadila
both enjoy effective tax rates of ~9% and ~15%, thanks to high share of
partnership profits exempt from tax. However, taxing partnership profits at
MAT rates (19.5%) would lead to surge in effective tax rate for Sun to ~17%
and to ~22% for Cadila. As a result both Sun and Cadila are likely to see an
adverse impact on their FY13E EPS to the tune of 8-9%.
Extension of R&D benefits: This has been in line with our expectations.
Pharma companies spend 4-8% of their revenues on R&D (in house), which
helps them lowering their tax outgo.
Real Estate
Overall Expected Budget Impact: Neutral
Key Stocks Affected: Minor positive for HDIL and Puravankara
Key Measures
Interest rate subvention on affordable housing: The government has
extended the interest rate subvention of 1% for affordable houses for FY13.
The home buyer who takes housing loan of up to Rs1.5mn (unchanged) for
purchase of house not costing more than Rs2.5m (unchanged) will now be
allowed interest rate subvention of 1% for the first 12months.
External commercial borrowing allowed for affordable housing: The
government has allowed developers to borrow foreign capital for affordable
housing defined under the JNNURM scheme under Ministry of Housing &
Urban Poverty Alleviation.
Service tax for purchases of apartments under construction
increased from 2.6% to 3.1%
Tax deducted at source (TDS) of 1%: TDS of 1% shall be deducted for
immovable property transactions above Rs5mn in metro cities and above
Rs2.5mn in other cities.
Impact of Measures
Interest Subvention for affordable housing push - It is a minor positive
as most of the listed developers do not operate in this space. Unitech, HDIL,
Puravankara do have some products priced under Rs2.5mn. However, the
saving is not significant (maximum of Rs15,000 for the home buyer) given
the subvention in only for the first 12 months and had no impact on volume
last year.
External commercial borrowing allowed for affordable housing: This
should allow developers to raise capital at a lower cost. However, we believe
the impact is likely to remain limited as not many developers have ventured
into developing affordable housing except for Puravankara and HDIL. Also
the guidelines for the affordable housing laid out in the income tax is quite
stringent and the developers may not be keen on undertaking such projects.
Service tax for purchases of apartments under construction
increased from 2.575% to 3.09%: This increases in the cost of acquiring
housing units by 0.5%. For an apartment worth Rs1mn, your cost increases
by Rs5,000
Tax deducted at source (TDS) of 1%: We believe the purpose for the
same is to curb circulation of unaccounted monies in the sector, thus
reducing speculative activities.
Telecom
Overall Expected Budget Impact: Negative
Key Measures
Retrospective change (from FY1963) in Indian income tax rules (Sec 2, 9, &
195).
Rs580bn of budgetary receipts from telecom penciled-in for FY13.
Rs250bn of spectrum-receipts anticipated in FY14 and FY15
Increase in service tax from 10% to 12%
Impact of Measures
The retrospective change in income tax rules could make Vodafone to be
liable to pay tax (~US$2.2bn) for its deal with regard to Hutch-India
transaction. This could be seen as a negative for FDI in the sector
The budgetary receipt expectations from telecom sector indicate that policy
making will drive cash outgo from the industry. This is negative for both
incumbent and relatively new operators. One-time charge for excess
spectrum with incumbents, auction of 2G/BWA spectrum and licence
renewals are potential revenue drivers for the government.
Increase in service tax from 10% to 12%; this is a pass-through cost for
operators but increases cost of mobile ownership for the incremental
(poor/rural) subscriber
Utility and Developers
Overall Expected Budget Impact: Positive
Key stock benefited: Adani Power, GMR, JP, JP Power, Lanco
Key stock affected: NA
Key Measures
Customs duty: Exemption from basic customs duty for (a) Steam Coal, till
Mar’14 (b) Natural gas, LNG imported for power generation (c) Tunnel boring
machines including parts, currently for hydel and road projects, is extended
to all projects and (d) coal mining projects. Duty reduced to 2.5% for
equipments used in surveying and prospecting of mines (from existing 7.5%
to 10%).
Export duty on power export from SEZ to Domestic Tariff Area (DTA)
continued @10paise / kWh despite zero duty on imported coal over FY13-14.
This duty was imposed earlier in lieu of custom duty on imported coal used
by power projects inside a SEZ.
Income Tax holiday extended: Sunset date for tax holiday under section
80IA for the power sector has been extended by another year to March 31,
2013.
Tax incentive for funding infrastructure: Power / road / port developers
borrowing in foreign currency from sources outside India, then interest paid
to non-residents would be taxed at 5% v/s 20%.
ECB: Developers would be allowed to raise ECB to part finance rupee debt
of existing power projects and for capex on the O&M for road assets is
allowed.
Coal India advised to sign Fuel Supply Agreements (FSA) with power plants,
having long-term PPAs with DISCOMs and getting commissioned on or
before March 31, 2015.
Tax free bonds doubled: Proposed to issue Rs600bn tax free bonds during
FY13. These includes:
Rs100bn by each NHAI, Indian Railway Finance Corp (IRFC) and IIFCL
Rs50bn each by HUDCO, NHB, SIDBI and
Rs50bn for ports and Rs100bn for power sector.
Removal of cascading effect of Dividend Distribution Tax (DDT) : In the
multi-tier corporate structure, if company receives dividend from subsidiary
(which has paid DDT), then dividend distributed by holding company is same
year to that extent would not be subject to DDT. This benefit was already
available for two-tier corporate structure.
20% additional depreciation allowed: Power companies (generation +
distribution) allowed to have initial depreciation of 20% (over and above
normal depreciation) of actual cost of new machinery or plant acquired and
installed in previous year
NHDP target for new awards up 20%: Target of new project awards under
NHDP increased to 8,800kms in FY13E vs 7,300kms in FY12E.
Proposed to reduce rate of withholding tax on interest payment on ECBs
from 20% to 5% for 3 years.
Launched first Infrastructure Debt Fund with an initial size of Rs80bn in
Mar’2012
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India Strategy
Budget: Oil prices may be key
to fiscal consolidation
Fiscal deficit: Subsidy still holds the key
We think the budget is unlikely to have a major impact on the markets. The key
remains whether the Government can build political consensus to undertake
reforms. The Finance minister has expectedly targeted a fiscal deficit of 5.1% of
GDP with net borrowing of Rs4.8trn. We expect the fiscal deficit to eventually
climb to 5.6% resulting in higher net borrowing of Rs5.4trn. Macro thoughts:
1. Fiscal deficit more realistic but will likely overshoot: While more realistic
than the FY12, we think the fiscal risk arises from: (a) Subsidy will likely
overshoot, especially in oil. At an oil price of $112/brl, we estimate the
Government would require a 15% increase in diesel, LPG and kerosene
prices to ensure the subsidy remains a budgeted levels (b) Rs400 bn is
assumed from sale of spectrum and (c) Rs300 bn from disinvestment.
2. Inflation likely to increase: The increase in excise duty and service tax will
add to the inflation burden. We hike our average FY13 inflation forecast by
30bp to 7.4%. We still expect a RBI rate cut in April.
3. Retrospective amendment may receive negative press: The Government
has retrospectively clarified rules on income arising outside India on transfer
of assets situated in India. This follows the Supreme Court decision in the
Vodafone case.
4. EPS change marginal: EPS growth will reduce by 1% for FY13 (ONGC led).
Key sector/stock highlights
1. ITC- Negative: The excise proposed implies a higher than expected ~16%
increase. ITC will need a 6-7% price hike to neutralize this.
2. Sun/Cadila- Negative: Imposition of MAT for partnership firms to adversely
impact Sun and Cadila in terms of higher tax (EPS hit of 5-10%).
3. Steel- near term positive: Import duty on flat rolled steel has been increased
to 7.5% from 5% earlier could support prices near term. +ve for JSW, SAIL &
Tata while JSPL to be least impacted.
4. Utility sector- budget +ve but challenges remain: Import duty on thermal
coal removed in FY13/14. Positive for Adani Power but no impact on Tata
Power/NTPC.
5. Oil - Negative: The cess on crude oil has been increased from Rs2,500/t to
Rs4,500/t. This would hit EPS of ONGC, OIL and Cairn India by 10-15%.
Budget highlights
Macro
Fiscal deficit at 5.9 per cent of GDP in RE 2011-12.
Fiscal deficit at 5.1 per cent of GDP in BE 2012-13.
Net market borrowing required to finance the deficit to be Rs4.8tn in 2012-13.
India’s GDP growth in 2012-13 expected to be 7.6% +/- 0.25%.
Endeavour to keep central subsidies under 2 per cent of GDP in 2012-13.
Over next 3 year, to be further brought down to 1.75 per cent of GDP.
For 2012-13, Rs300bn to be raised through disinvestment. At least 51 per
cent ownership and management control to remain with Government.
Rajiv Gandhi Equity Saving Scheme to allow for income tax deduction of 50
per cent to new retail investors, who invest up to Rs50,000 directly in equities
and whose annual income is below Rs1 mn to be introduced. The scheme
will have a lock-in period of 3 years.
Tax free bonds of Rs600bn to be allowed for financing infrastructure projects
in 2012-13.
ECB proposed to be allowed for capital expenditure on the maintenance and
operations of toll systems for roads and highways, if they are part of original
project.
ECB to be permitted for working capital requirement of airline industry for a
period of one year, subject to a total ceiling of US $ 1 billion.
Permitted two-way fungibility in IDRs subject to a ceiling with the objective of
encouraging greater foreign participation in Indian capital market.
Allowed Qualified Foreign Investors (QFIs) to access Indian Corporate Bond
market.
Direct taxes
Exemption limit for the general category of individual taxpayers proposed to
be enhanced from Rs180,000 to Rs200,000. Upper limit of 20 per cent tax
slab proposed to be raised from Rs0.8mn to Rs1mn.
Expected saving for an individual earning Rs1mn is Rs 22,660.
Proposal to allow individual tax payers, a deduction of upto Rs10,000 for
interest from savings bank accounts.
To provide low cost funds to stressed infrastructure sectors, rate of
withholding tax on interest payment on ECBs proposed to be reduced from
20% to 5% for 3 years for certain sectors.
Proposal to extend weighted deduction of 200 per cent for R&D expenditure
in an in-house facility for a further period of 5 years beyond March 31, 2012.
Proposal to extend the sunset date for setting up power sector undertakings
by one year for claiming 100 per cent deduction of profits for 10 years.
Reduction in securities transaction tax by 20 per cent on cash delivery
transactions.
A net revenue loss of Rs45bn estimated as a result of Direct Tax proposals.
Indirect taxes
Proposal to tax all services except those in the negative list comprising of 17
heads.
To maintain a healthy fiscal situation proposal to raise service tax rate from
10% to 12% with corresponding changes in rates for individual services.
Proposals from service tax expected to yield additional revenue of
Rs186.6bn.
Given the imperative for fiscal correction, standard rate of excise duty to be
raised from 10 per cent to 12 per cent, merit rate from 5 per cent to 6 per
cent and the lower merit rate from 1 per cent to 2 per cent with few
exemptions.
Excise duty on large cars also proposed to be enhanced.
Proposal for full exemption from basic customs duty and a concessional CVD
of 1 per cent to steam coal till 31st March, 2014.
Full exemption from basic duty provided to certain fuels for power generation.
Full exemption from basic customs duty to coal mining project imports
Tax concessions proposed for parts of aircraft and testing equipment for third
party maintenance, repair and overhaul of civilian aircraft.
Indirect taxes estimated to result in net revenue gain of Rs459.4bn.
Economy: Manageable fiscal slippage
Budget 2012 came in line with our low expectations. Finance minister Pranab
Mukherjee has expectedly targeted a fiscal deficit of 5.1% of GDP with net
borrowing of Rs4.9trn. Just as predictably, we believe the government has
underestimated oil, fertilizer and food subsidies, even assuming our 10% hike in
diesel, LPG and kerosene prices. We, therefore, expect the Center’s fiscal deficit
to overshoot by 50bps to 5.6% of GDP with a net borrowing of Rs5.5trn. Given
that the economy can likely bear a fiscal deficit of 5.5-6% of GDP, fiscal risks will
still prove overdone like 2011 in our view. The 10y should continue to trade in a
range around 8.5% as the RBI will need to buy gilts via OMO to generate liquidity.
Alongside the 10% hike in administered oil prices, the 2% customs duty hike
supports our view of inflation rebounding in mid-2012. Still, we expect slowing
growth to push the RBI into cutting rates in their April 17 policy.
Balance between growth and fiscal consolidation
Finance minister Pranab Mukherjee expectedly struck a balance between the
need to revive growth and fiscal consolidation. Given rising global and domestic
risks, we had always argued that Budget 2012 would not be as draconian as
some feared. After all, Rs100 of fiscal contraction would reduce growth by about
Rs150. From that perspective, we had expected the Finance Minister to try to limit
fiscal slippage rather than tighten public spend. In our view, the FY13 fiscal
deficit, at 5.6% of GDP, would end up pretty much close to FY12's 5.9%.
5.6% of GDP fiscal deficit: some fiscal slippage certain
We expect the Center’s fiscal deficit to slip by 50bp to 5.6% of GDP in FY13
(Table 3). In our view, the Finance Minister has underestimated subsidies.
Higher inflation, but April rate cut on slowing growth
inflation should rebound in mid-2012 with Budget 2012 pushing up excise duty
(with an WPI inflation impact of about 60bp), services taxes and eventually
requiring administered oil price hikes of 10% (60bp direct and 110bp direct).
Since our inflation forecasts had factored in only 1% excise duty hike, we have
raised our average FY13 inflation forecast by 30bp to 7.4% (Charts 1-2),
In our view, slowing growth should still force the RBI into cutting rates on April 17.
At the same time, we continue to expect the RBI to pause easing in 2H12 when
inflation will cross into 7.5-8% levels. Rate cuts should again resume towards
end-2012 as inflation comes off.
Tax forecasts reasonable: divestment, telecom swing factors
We think tax projections are reasonable with the tax/GDP ratio taken about 7.5%
in consonance with slow growth (Chart 3). Our own tax projections are fairly in
line with the Budget (Table 2). While the 2% hike in customs duty exceeded our
1% expectation, the Finance Minister also raised the tax exemption for income
tax to Rs200000 from Rs180000. At the same time, the proposed divestment of
Rs300bn and projected receipts of Rs400 from telecom auctions will remain
swing factors in a Budget where all the possible good news is already priced in.
Expenditure targets aggressive: upside risk to subsidies
We find the Finance Minister’s expenditure targets too aggressive. In our view,
food, fertilizer and oil subsidies are likely underestimated by Rs500bn at a time
when our oil strategists expect oil prices to persist at US$112/bbl
Note our oil subsidy projections assume a 10% hike in prices of diesel, cooking
gas and kerosene. Table 4 derives our food subsidy numbers.
Rs5.5trn net borrowing, 10y to trade ~8.5% on RBI OMO
In tandem with our higher fiscal deficit projection, we expect the Center to
overshoot its net borrowing by about Rs500bn to Rs5.5bn/US$110bn (Table 5).
Our estimates suggest that this will still limit gilt supply to about 65% of deposit
mobilization like last year. Besides, the RBI will likely still need to OMO about
Rs2000bn to generate liquidity as a large-scale current account deficit will limit fx
purchases. The 10-year should thus continue to trade about 8.5% levels.
Slowing loan growth to pull down lending rates
We grow more confident of our call of lending rates coming off 100-150bp in
FY13 with loan demand slowing (Table 6). We expect loan demand to bottom out
at 14% levels in September and rebound to 17% by March 2013 on rate cuts and
base effects. Our estimates suggest that banks will face an excess loan supply in
FY13 if they invest Rs2400bn in gilts as we have assumed.
This, in turn, supports our call of growth bottoming out in mid-2012 on the back of
base effects and rate cuts Experience suggests that cycles usually turn down (up)
when the real lending rate, now 8.25%, pierces (slips below) the ‘neutral’ 7.5-8%
potential growth rate
Autos
Overall Expected Budget Impact: Neutral
Key Stocks Affected: Ashok Leyland
Key Measures
Excise duty hike: Excise duty has been hiked from 10% to 12% for all
segments, with the exception of large cars where it has been now shifted to
ad valorem rate of 27% instead of 22% plus specific duty of Rs 15,000. Large
cars are defined as having length exceeding 4m and engine capacity of over
1,200cc for petrol and 1,500cc for diesel
Diesel tax not imposed: Contrary to general expectation, there was no
specific tax on diesel vehicles, except relatively higher excise rate on large
cars.
Duty on commercial vehicle chassis: Compared to specific rate of
Rs10,000 is being charged on chassis of Commercial vehicle over and above
the excise duty, an ad valorem rate of 3% will now be charged.
CBU imports: Import duty raised from 60% to 75% on cars with engine
capacity exceeding 3L and whose value exceed US$40,000 (~Rs2mn).
Extension of weighted deduction on R&D spend: Benefit of 200%
weighted deduction for in-house R&D spend has been extended for another
five years.
Impact of Measures
Pass through likely for excise duty: Overall, we believe most auto
companies will be able to raise vehicle prices to compensate for higher
excise duty. However, this could result in slight impact on demand for price
elastic segments such as petrol cars and two wheelers. Our forecasts factor
muted 5% growth in petrol cars (mostly back ended) and 10% growth in two
wheelers. Key companies likely to be vulnerable will be Maruti Suzuki (70%
petrol FY13E) and Hero Motocorp.
Absence of diesel tax imputed positive: Companies such as M&M and
Maruti would have been impacted by this measure. Absence would therefore
be viewed as imputed positive.
Chassis duty to impact Ashok Leyland: Although most players have
started to shift body buiding in-house, dependence on external sources is
reasonably high. We believe a 5% increase in duty (including 2% for excise)
will have to be partially absorbed by the industry. Ashok Leyland will face
brunt of the impact being a pure play in CVs. Tata Motors derives ~10% of
profit from this business.
Extension of R&D benefits: This has been in line with our expectations.
Auto companies are increasing in house R & D spend which should helps in
maintain low tax rates.
Airlines
Overall Expected Budget Impact: Negative
Key Stocks Affected: All
Key Measures
Allowed direct import of ATF.
Considering 49% FDI in civil aviation.
Allowed to raise ECB for working capital needs up to a sectoral limit of $1bn.
The rate of withholding tax on interest payments on external commercial
borrowings is proposed to be reduced from 20 per cent to 5 per cent for three
years.
Removed the basic customs duty for parts of aircraft and testing equipment
imported for MRO operations.
Impact of Measures
While the budget talked about few points in support of the sector, nothing
new was talked about. Direct import of ATF had already been allowed.
However, market had expected the announcement of 49% FDI in civil
aviation which did not materialized.
Similarly, while ECB for working capital is a positive but it would be difficult
for the airlines to get foreign loans when domestic banks are not willing to
lend. On the same lines, while the budget has aimed to support the MRO
operations, currently domestic MRO operations are limited in India.
Banks / Financials
Overall Expected Budget Impact: Neutral
Key Stocks Affected: All Banks
Key Measures
High growth target for farm credit (+21% yoy); likely to be met owing to
maintaining high subvention (3%); All banks, but more so for SBI, PNB
Recapitalization of govt. banks; Consideration of forming a financial holding
company which will raise resources to meet the capital requirement of Public
sector banks. Beneficiaries: All Govt. Banks
Making external commercial borrowings more attractive for Indian
corporates: Larger banks like SBI, ICICI Bk, with big international
operations
Doubling of Infrastructure bonds to Rs600bn vs. Rs300bn; Positive for
players like REC, PFC
Deduction up to Rs10,000 for savings bank interest for taxpayers with
income up to Rs50mn; Positive for all banks savings deposit franchise
Impact of Measures
Farm loan growth sustaining at +20% in FY13
The budget envisaged a +21% target for farm lending, which will be supported by
continued interest rate subvention of 3% to farmers who are ‘on-time’ for payment
on short-term crop loan, which keeps the effective costs of servicing the loan
unchanged at 4%. This also incentivizes a farmer from lower possible defaults
owing to low interest burden. Additionally it has extended the same interest
subvention on post harvest loans up to six months against negotiable warehouse
receipts to encourage farmers to keep their produce in warehouse. SBI and
PNB (large rural franchise) are likely to be amongst the bigger beneficiaries
of any enhanced farm credit off take.
Recapitalization of govt. banks (will help smaller banks) continues
Govt. has allocated ~Rs159bn (US$3.2bn) for recapitalization of govt. banks in
FY13. This is on top of ~Rs180bn (US$3.6bn) provided for in FY12. This will allow
banks to maintain total capital of +12% (Tier 1 at +8%) to fund adequate loan
growth. Beneficiaries: Will help govt. banks meet Tier I levels at ~ 9%. This
excludes the ~Rs78bn capital infusion that the govt. is planning into SBI by
FY12 year end (March 31, 20102).
External commercial borrowings more attractive for Indian corporates
The budget has made external commercial borrowings much more attractive by
cutting the withholding tax to 5% (vs. 20% earlier); allowing companies to use
ECBs to part finance rupee debt of existing power projects and also for aviation
sector (uto US$1bn) . In our view, ECB’s all inclusive costs today is ~9-10% (fully
hedged, 20% withholding tax), which will become even more attractive
henceforth. This will allow larger banks like SBI and ICICI Bk etc. to sustain a
stronger volume growth and fee growth.
Doubling of Infrastructure bonds to Rs600bn vs. Rs300bn
The budget has allowed infrastructure bonds of Rs600 to be issued by various
agencies including the power sector. This will enable players like REC, PFC to
raise funds by issuing these bonds at reasonable costs.
Deduction up to Rs10,000 for savings bank interest
The budget allows a deduction up to Rs10,000 for savings bank interest for
taxpayers with income up to Rs50mn. While this is unlikely to materially alter the
savings deposit mix or deposit growth, we reckon this will be an added incentive
for savings deposit franchise for banks vs. term deposits. While prima facie very
attractive, we do think this is not applicable for term deposits. Hence, impact for
banks not meaningful.
Prefer Private banks- HDFC Bk, ICICI Bk, Yes Bk
Per our Economist, budget for 2012-13 estimates fiscal deficit at only 5.1% of
GDP, while he believes that this can easily be at least 5.6% of GDP due to higher
owing to Oil subsidies. This will keep bond yields sticky at current 8.5% levels.
We reiterate our view that growth may slow v/s market expectations. We are
expecting loan growth to moderate to 13%. Private banks should relatively grow
faster owing to their ability to gain market share. Hence, we prefer banks with
strong liability franchise (high CASA), expanding distribution, high share of retail
loans (fixed rate).
Our preferred private banks are HDFC Bank (earnings visibility, strong liability
franchise); ICICI Bank (valuation comfort, high share of retail loans limiting NPL
spikes) and Yes Bank (expanding distribution to help CASA, Fees, Margins;
earnings visibility).
Cement
Overall Expected Budget Impact: Neutral
Key Measures
Excise duty up 200bps to 12%: This implies ~Rs4-5/bag rise in costs for
cement majors.
Impact of Measures
No earnings impact as full-passthrough likely: Our impression is that
cement companies expected the change in excise duty & have raised prices
accordingly. Our dealer feedback points to ~Rs15/bag MoM hike in the pan-
India cement prices which is ~2x the cost push from excise & rail freight put
together.
Worst case scenario of 8-14% EBITDA hit unlikely to materialise: If we
assume no pass-through, the 200bps hike in excise duty implies ~8-14% hit
to FY13-EBITDA for cement majors. However, as explained above, we do
not foresee a worst case situation.
Companies with North-exposure are likely winners: We expect a better
pricing power in north India versus other regions. Hence, Ambuja and Shree
Cement seem to be relative winners.
Consumers
Overall Expected Budget Impact: Negative
Key Stocks Affected: ITC, HUL, Dabur, Godrej Consumer, Colgate, Nestle
Key Measures
Excise duty on cigarettes increased: A 10% ‘ad valorem’ duty will be
imposed in addition to the existing specific excise duty on all cigarettes over
the length of 65mm. Ad valorem duty would be chargeable on 50 per cent of
the Retail Sale Price declared on the cigarette pack.
<60mm slab in cigarettes modified: The existing slab of filter and non filter
cigarettes of ‘length below 60mm’ is modified to length ‘less than 65mm’.
Given this the slab of length between 60-70mm was revised to length
between 65-70mm in both filter and non filter segment. Excise duty rates for
<60mm segment will apply for <65mm and there will be no ad valorem
component in this slab.
General excise duty rate increased by 2%: General excise duty rate will be
enhanced from 10% to 12%.
Impact of Measures
Expect price hikes in cigarettes; volumes can be impacted: ITC’s entire
cigarette portfolio is >65mm and will face the incremental ad valorem tax.
Excise incidence due to this is likely to go up by ~16%. ITC will likely have to
take price hikes of ~7% to counter this which can impact volumes. We
believe a partial shift to ‘ad valorem rate’ impacts ITC's long term pricing
power negatively. Also this opens up a possibility of a complete shift to ‘ad
valorem’ excise in future.
Expect new launches in <65mm category: Extension of <60mm slab to
<65mm without an incidence of ad valorem tax can lead to organized
players, including ITC, introducing variants at lower price points in this
<65mm segment.
Expect FMCG companies to raise prices to pass on higher excise:
Increase in excise duty will likely be passed on to the consumers through
price hikes. This combined with stabilizing raw material costs will have
moderate impact on volumes.
E&C
Overall Expected Budget Impact: Neutral
Key stocks benefited: IVRC, NJCC, RELI, IRB
Key Stocks Affected: L&T-MHI, PSU power equipment manufacturer
Key Measures
Custom Duty:
No change in import duty on power equipment.
Extension of exemption from basic customs duty on a) Tunnel boring
machines including parts, currently available for hydel and road projects,
to all projects without end use condition and b) coal mining project
imports.
Extension of full exemption from import duty on specified equipment
imported for road construction to contracts awarded by Metropolitan
Development Authorities (vs NHAI and State Govts).
Reduction of basic custom duty to 2.5% for equipments used in
surveying and prospecting of mines (from existing 7.5-10%)
Import duty on non-alloy flat rolled steel has been increased to 7.5%
from 5%.
Reduced basic customs duty on pipes and tubes for use in manufacture
of boilers to 7.5% from 10%.
A concessional rate of 5% CD was extended to raw materials,
intermediates required for the manufacture of parts of blades for rotors
of wind operated generators.
NHDP target for new awards up 20%: Target of new project awards under
NHDP increased to 8,800kms in FY13E vs 7,300kms in FY12E.
Viability gap funding expanded: Irrigation (including dams, channels &
embankments), terminal markets, common infrastructure in agriculture
markets, soil testing laboratories and capital investment in fertilizer sector
has been made eligible for VGF scheme. Also, Oil & Gas / LNG storage
facilities and oil & gas pipelines, fixed network for telecommunication &
telecommunication towers will be made eligible sectors for VGF.
Accelerated Irrigation Benefit Programme (AIBP): Structural changes in
AIBP being made to maximise benefit from investments in irrigation projects.
Allocation for AIBP increased by 13% to Rs142bn in FY13. Irrigation & Water
Resource Finance Co. (IWRFC) is being operationalised to mobilize large
resources to fund irrigation projects.
Exemption from service tax: Service provided for construction, O&M of
road, erection or construction of original works for airport / port / railways are
exempted from service tax.
Proposed to extend the weighted deduction of 200% for R&D expenditure in
an in-house facility beyond FY12, for a further period of five years.
Weak investments by PSUs: The investments by various PSUs are lowered
in FY13E vs FY12 by 8-30%, barring PGCIL with an increase of 13%. While
the investments in the power / roads ministries is estimated to remain flat,
increase in aviation ministry expenses is primarily due to higher infusion in
Air India.
Lower capex of Rs533bn (-7%YoY) by power sector by PSUs in FY13 was
led by likely fall in NTPC capex by -20% and NHPC capex (-12%). Total
power capex was flat YoY le by 13%YoY growth in PGCIL capex.
Impact of Measures
No change in import duty on power equipment shall be the biggest
disappointment to the markets. However, it can still be imposed post
approval of the duty by GoM.
Inclusion of Irrigation sector for VGF is a big measure to boost capex given
poor state financials and support from central Govt. Key beneficiaries here
are: L&T, IVRC, NJCC
Exemption of custom duty on road construction equipment to benefit Road
developers such as L&T, GMR, GVK, IVRC, IRB, NJCC etc
Lower genco capex in power sector by PSUs to weaken visibility of orders of
power generation equipment manufacturers like L&T and PSU power
equipment manufacturer. Higher PGCIL capex to support T&D equipment
manufacturer but it is set to peak in FY13E and that’s the key worry for the
sector facing mounting competition.
A concessional rate of 5% CD was extended to raw materials, intermediates
required for the manufacture of parts of blades for rotors of wind operated
generators. To benefit Suzlon.
India IT and BPO services industry
Overall Expected Budget Impact: Neutral to marginally negative
Key Stocks Affected: None
Key Measures
No change in income tax provisions: No change in the MAT rate
(Minimum Alternate Tax rate) and no extension of deadline for setting up
Special Economic Zones, as was being hoped by a few vendors. Currently
the proposed Direct Tax Code includes grandfathering of tax holiday for
SEZs not approved by Mar 2012 and set up by Mar 2014.
Tax rate on dividend from foreign subsidiaries maintained at 15% for one
more year (FY13) against a full tax rate. Cascading effect of dividend
distribution tax to be removed.
Service tax rate increased from 10 to 12%
Impact of Measures
Reduction of tax rate on dividend from foreign subsidiaries from full rate to
15%, for FY13, could encourage some dividend repatriation and higher other
income perhaps for companies like TCS or Wipro who have foreign
subsidiaries. However, impact to EPS expected to be minimal.
Removal of the cascading effect of dividend distribution tax is also
incrementally positive for IT companies that have domestic subsidiaries, such
as TCS, although the EPS impact is again unlikely to be meaningful.
For companies who have large domestic revs like Rolta (62%) the increase
in service tax will have some impact, which would be passed on. Also in most
cases customers are able to pass it on or set it off. However most of other
companies have less than 10% domestic revs and often are net service tax
refund companies.
Metals
Overall Expected Budget Impact: near term positive for steels.
Stocks Affected: Positive for JSW, SAIL, Tata ; Negative for Sesa (post
proposed merger)
Key Measures
Import duty on non alloy flat rolled steel has been raised from 5% to 7.5%.
Customs duty on steam coal has been reduced to 0% from 5%.
Cess on crude oil increased from Rs2,500/t to Rs4,500/t.
Impact of Measures
Higher import duty on flat non alloy steel: ve+ for Indian steel cos near
term; medium term impact to be limited
Near term positive for domestic steel cos; medium impact limited:
Higher import duty could support domestic prices near term given India is still
an importer of steel and prices are still influenced by import parity. Medium
term impact should be limited in our view as we expect India to become a net
exporter of steel over next 6-8 months as new supply comes on stream and
domestic prices are likely to move to a discount to import parity.
Positive for JSW Steel, SAIL, Tata; limited impact on JSPL: Assuming
that domestic prices increases in line with the increase in import parity prices
we estimate the theoretical impact on FY13e EPS will be highest for JSW
(+20%) followed by SAIL (9.9%) and Tata (6.5%). JSPL will be least
impacted due mainly exposure to long products which is not affected by the
duty hike. We expect the actual impact on FY13e EPS to be lower as
domestic prices should move to a discount to import parity as India shifts to
net exporter over next 6-8 months.
Limited economic rationale for higher import duty on steels: The hike in
import duty was lower than 10% customs duty demanded by steel industry.
However, we see limited economic rationale for imposing import duty given
steel imports have been declining (down 6.4%YTD; net imports down
40%YTD) and are likely to decline further as India becomes a net exporter of
steel over next 6-8 months.
Import duty hike not applicable to boron doped steel imports: We
highlight that import duty hike is not applicable to boron doped (0.0008%
boron content) steel, which is classified as alloy steel. Boron doped steel
accounts for a large mix of steel imports from China. While boron doped
Chinese steel imports may not be affected by the duty hike technically (due
to reason mentioned above), administrative hurdles related to customs is
likely to be a deterrent for imports in our view.
Customs duty reduction on steam coal: Neutral for Coal India; positive
for users of imported coal
Neutral for Coal India: Domestic coal prices are not driven by import parity
and should not be impacted by removal of customs duty. Also we do not
expect e-auction prices to be impacted as e-auction prices will remain at a
discount (~25% discount on calorific value adjusted basis) to imported coal
prices despite the duty cut.
Marginal positive for HZL, Sesa’s potential zinc assets (post proposed
merger): HZL sources ~60% of its coal requirements (~2mtpa) thru imports.
We estimate lower import duty will add marginal 0.1% to Sesa proforma
EPS.
Higher cess on crude oil: ve- for Sesa led by hit to Cairn profits
Cairn EPS hit by higher cess on crude: Cess on crude oil has been
increased sharply from Rs2,500/t to Rs4,500/t. Our Cairn Analyst estimates
the potential hit to Cairn FY13e EPS to be 9%.
Sesa (post merger) pro forma FY13 EPS to be hit by 4.5%: Sesa currently
owns 20.1% stake in Cairn and will have 58.9% post proposed merger. Cairn
accounts for 39.6% of Sesa post merger EBIDTA (on a pro forma basis) and
69% of Sesa post merger SOTP valuation (ex Cairn debt). We estimate the
hit to Cairn EBIDTA will lead to 3.8% hit to Sesa proforma EBIDTA.
Other measures
Import duty on plant and machinery for setting up of pellet making unit
reduced to 2.5% (7.5% earlier).
Steel companies including SAIL, JSW Steel are setting up pellet plants and
should benefit.
Oil & Gas
Overall Expected Budget Impact: Negative
Key Stocks Affected: ONGC, OIL and Cairn India
Key Measures
The cess on crude oil was raised from Rs2,500/ton to Rs4,500/ton. Including
the education cess it is up from Rs2,575/ton (US$6.9/bbl) to Rs4,635/ton
(US$12.4/bbl)
Rs400bn has been provided in the FY13 budget towards 4Q FY12 subsidy
compensation to the R&M companies
ONGC & OIL may report 20-30% YoY EPS growth in FY12
FY12 subsidy sharing likely to be same as in 9M for upstream
The subsidy provision made for 4Q FY12 in the FY13 budget suggests that
subsidy sharing formula for upstream companies for FY12 may be the same as in
9M FY12. If subsidy sharing formula is same as in 9M we expect ONGC and
OIL's FY12 earnings growth at 22-31% YoY.
Upstream and government to bear most of FY12 subsidy
The government has provided Rs400bn in the budget towards 4Q FY12 subsidy
in addition to Rs450bn already committed to R&M companies as subsidy
compensation for 9M. Thus government would bear Rs850bn of subsidy in FY12
while upstream share in subsidy would be Rs512bn if it is on the same basis as in
9M. Thus government and upstream would bear Rs1,362bn of FY12 subsidy of
Rs1,369bn estimated by us. Thus based on our estimates R&M companies are
expected to bear just Rs6.9bn of subsidy in FY12
Pharmaceuticals
Overall Expected Budget Impact: Neutral
Key Stocks Affected: Sun Pharma, Cadila
Key Measures
Excise duty hike: Excise duty on domestic formulations have been hiked
from 5% to 6% and for API (bulk drug) sales, it has been increased in line
with standard rates at 12% (vs 10% earlier). Domestic formulations account
for one-third or so of total sales for the industry while less than 10% sales are
attributable to API segment.
Applicability of MAT on partnership profits: Indian pharma companies
like Sun Pharma and Cadila have benefited so far from tax exemption of
partnership profits. However, this would be subject to MAT now leading to
sharp increase in effective tax rates for these two companies.
Extension of weighted deduction on R&D spend: The benefit of
weighted deduction of 200% on in-house R&D spend has been extended for
another five years (after March 31,2012).
Impact of Measures
Pass-through for excise duty hike: Overall, we believe pharma
companies will be able to pass through the cost push duty to higher excise
duty via price hikes due to reasonable pricing power (in line with benefit
being passed on earlier). Hence we do not see any impact on profits due to
this move.
Taxation of Partnership profits to hurt Sun & Cadila: Sun and Cadila
both enjoy effective tax rates of ~9% and ~15%, thanks to high share of
partnership profits exempt from tax. However, taxing partnership profits at
MAT rates (19.5%) would lead to surge in effective tax rate for Sun to ~17%
and to ~22% for Cadila. As a result both Sun and Cadila are likely to see an
adverse impact on their FY13E EPS to the tune of 8-9%.
Extension of R&D benefits: This has been in line with our expectations.
Pharma companies spend 4-8% of their revenues on R&D (in house), which
helps them lowering their tax outgo.
Real Estate
Overall Expected Budget Impact: Neutral
Key Stocks Affected: Minor positive for HDIL and Puravankara
Key Measures
Interest rate subvention on affordable housing: The government has
extended the interest rate subvention of 1% for affordable houses for FY13.
The home buyer who takes housing loan of up to Rs1.5mn (unchanged) for
purchase of house not costing more than Rs2.5m (unchanged) will now be
allowed interest rate subvention of 1% for the first 12months.
External commercial borrowing allowed for affordable housing: The
government has allowed developers to borrow foreign capital for affordable
housing defined under the JNNURM scheme under Ministry of Housing &
Urban Poverty Alleviation.
Service tax for purchases of apartments under construction
increased from 2.6% to 3.1%
Tax deducted at source (TDS) of 1%: TDS of 1% shall be deducted for
immovable property transactions above Rs5mn in metro cities and above
Rs2.5mn in other cities.
Impact of Measures
Interest Subvention for affordable housing push - It is a minor positive
as most of the listed developers do not operate in this space. Unitech, HDIL,
Puravankara do have some products priced under Rs2.5mn. However, the
saving is not significant (maximum of Rs15,000 for the home buyer) given
the subvention in only for the first 12 months and had no impact on volume
last year.
External commercial borrowing allowed for affordable housing: This
should allow developers to raise capital at a lower cost. However, we believe
the impact is likely to remain limited as not many developers have ventured
into developing affordable housing except for Puravankara and HDIL. Also
the guidelines for the affordable housing laid out in the income tax is quite
stringent and the developers may not be keen on undertaking such projects.
Service tax for purchases of apartments under construction
increased from 2.575% to 3.09%: This increases in the cost of acquiring
housing units by 0.5%. For an apartment worth Rs1mn, your cost increases
by Rs5,000
Tax deducted at source (TDS) of 1%: We believe the purpose for the
same is to curb circulation of unaccounted monies in the sector, thus
reducing speculative activities.
Telecom
Overall Expected Budget Impact: Negative
Key Measures
Retrospective change (from FY1963) in Indian income tax rules (Sec 2, 9, &
195).
Rs580bn of budgetary receipts from telecom penciled-in for FY13.
Rs250bn of spectrum-receipts anticipated in FY14 and FY15
Increase in service tax from 10% to 12%
Impact of Measures
The retrospective change in income tax rules could make Vodafone to be
liable to pay tax (~US$2.2bn) for its deal with regard to Hutch-India
transaction. This could be seen as a negative for FDI in the sector
The budgetary receipt expectations from telecom sector indicate that policy
making will drive cash outgo from the industry. This is negative for both
incumbent and relatively new operators. One-time charge for excess
spectrum with incumbents, auction of 2G/BWA spectrum and licence
renewals are potential revenue drivers for the government.
Increase in service tax from 10% to 12%; this is a pass-through cost for
operators but increases cost of mobile ownership for the incremental
(poor/rural) subscriber
Utility and Developers
Overall Expected Budget Impact: Positive
Key stock benefited: Adani Power, GMR, JP, JP Power, Lanco
Key stock affected: NA
Key Measures
Customs duty: Exemption from basic customs duty for (a) Steam Coal, till
Mar’14 (b) Natural gas, LNG imported for power generation (c) Tunnel boring
machines including parts, currently for hydel and road projects, is extended
to all projects and (d) coal mining projects. Duty reduced to 2.5% for
equipments used in surveying and prospecting of mines (from existing 7.5%
to 10%).
Export duty on power export from SEZ to Domestic Tariff Area (DTA)
continued @10paise / kWh despite zero duty on imported coal over FY13-14.
This duty was imposed earlier in lieu of custom duty on imported coal used
by power projects inside a SEZ.
Income Tax holiday extended: Sunset date for tax holiday under section
80IA for the power sector has been extended by another year to March 31,
2013.
Tax incentive for funding infrastructure: Power / road / port developers
borrowing in foreign currency from sources outside India, then interest paid
to non-residents would be taxed at 5% v/s 20%.
ECB: Developers would be allowed to raise ECB to part finance rupee debt
of existing power projects and for capex on the O&M for road assets is
allowed.
Coal India advised to sign Fuel Supply Agreements (FSA) with power plants,
having long-term PPAs with DISCOMs and getting commissioned on or
before March 31, 2015.
Tax free bonds doubled: Proposed to issue Rs600bn tax free bonds during
FY13. These includes:
Rs100bn by each NHAI, Indian Railway Finance Corp (IRFC) and IIFCL
Rs50bn each by HUDCO, NHB, SIDBI and
Rs50bn for ports and Rs100bn for power sector.
Removal of cascading effect of Dividend Distribution Tax (DDT) : In the
multi-tier corporate structure, if company receives dividend from subsidiary
(which has paid DDT), then dividend distributed by holding company is same
year to that extent would not be subject to DDT. This benefit was already
available for two-tier corporate structure.
20% additional depreciation allowed: Power companies (generation +
distribution) allowed to have initial depreciation of 20% (over and above
normal depreciation) of actual cost of new machinery or plant acquired and
installed in previous year
NHDP target for new awards up 20%: Target of new project awards under
NHDP increased to 8,800kms in FY13E vs 7,300kms in FY12E.
Proposed to reduce rate of withholding tax on interest payment on ECBs
from 20% to 5% for 3 years.
Launched first Infrastructure Debt Fund with an initial size of Rs80bn in
Mar’2012
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