Budget and MFs :: Business Line

The Budget has an important set of measures in making mutual fund investments attractive. A significant reduction in securities transaction tax (STT) on equity mutual funds, expanding scope of investments in the case of provident funds and pension schemes are key announcements that would make investments more enticing for retail investors.

But the sore point is the increase in dividend distribution tax on all debt and liquid funds, which would hurt cash flows for investors looking for periodic payouts.

MAKING MFS ATTRACTIVE

The STT has been reduced to nil (from 0.1 per cent) while purchasing equity mutual funds. In the case of sale of units, the proposed rate is 0.001 per cent (from 0.1 per cent). With entry loads also done away with, the cost of transaction at the time of investment gets reduced substantially for all genres of investors. To peg a number to such cost savings, for an investor who makes a purchase and sale of equity mutual fund units totalling Rs 1 lakh, there is a potential saving of Rs 250.

The other very important announcement is the widening of the mandate in investments for pension funds and PF trusts to include debt mutual funds, exchange traded funds (ETFs) and asset-backed securities.

Currently, pension funds such as the NPS are allowed to invest only in the Sensex and Nifty index funds and largely Government securities. They would now be able to benefit from newer investment avenues by investing in the broader market through ETFs tracking indices such as the CNX 500 or BSE 500. ETFs also tend to have very low tracking errors and lower costs compared with pure index funds.

Investment in debt mutual funds and asset-backed securities may help these pension funds and PF trusts to generate returns that are marginally higher than or at least equal to inflation rates even on a post-tax basis. For example, in 2012, the best performing debt mutual funds could generate 12-14 per cent returns. So those in the higher tax brackets too could find investments attractive.

MAKING DIVIDENDS COSTLIER

But the Budget was not without irritants. The disappointing announcement for mutual fund investors is a steep increase in the tax rates on dividends distributed by fund houses. The rate has been doubled from 12.5 per cent to 25 per cent for all (non-equity) schemes that declare a dividend.

Currently dividends from only liquid funds are charged 25 per cent. Now, all debt funds such as gilt, dynamic bond funds and monthly income plans have to pay 25 per cent. This tax is, of course, charged in the hands of the fund house which deducts the amount and pays the rest as dividends.

Investors who are in lower tax bracket and who do not require steady cash flows in the form of dividends, especially from MIPs, can opt for the growth option instead of the dividend choice.

Guarding against GAAR :: Business Line

Ever since the first avatar of GAAR found its way into the proposed Direct Taxes Code – version 2010, it has held the attention and imagination of taxpayers and investors. Coming on the heels of the retrospective amendment in the law to overrule the Supreme Court ruling in the case of Vodafone, it was only natural that when GAAR finally found its way into the law in Budget 2012, stakeholders made a high pitched plea to iron out many of the provisions and also to defer the implementation itself. The noise worked and the implementation was pushed to 2013 when Parliament finally approved the 2012 Budget proposals.

As part of wave of reforms that the Government embarked upon in 2012, a committee headed by Dr Parthasarathi Shome was set up to make recommendations on GAAR. The Committee presented its final report in September 2012 and the Finance Minster had in January 2013 indicated that most of the recommendations of the Committee would be accepted, including deferring its implementation to financial year 2015-16.

Yet, with the experience that when it comes to tax laws nothing should be taken for granted unless the fine-print has it loud and clear, all eyes were on Budget 2013 to see to what extent the recommendations of the Committee would be accepted and what further surprises lay in store.

Among the changes that have been made, the most important one is that now GAAR would apply only to those arrangements whose main purpose is to obtain a tax benefit. The provisions also state that factors such as the period for which an arrangement exists and the fact that taxes have been paid under the arrangement may be considered relevant but not sufficient, while determining the applicability of GAAR to an arrangement:

This is a big leap from the existing GAAR provisions, which explicitly and completely disregarded the above mentioned factors while applying GAAR to an arrangement. Interestingly, the Supreme Court had also considered these factors while pronouncing its ruling in favour of Vodafone.

The constitution of the Approving Panel to be formed for the purpose of overseeing GAAR related matters would now be headed by a sitting or retired judge of a High Court. The directions of the panel would be binding on both, the Revenue authorities and the taxpayer. No appeal can be filed against the directions issued by the panel, although an order issued pursuant to such directions can be appealed before the Income-tax Appellate Tribunal.

While no doubt these changes have created much needed comfort, some of the important recommendations of the Shome Committee, which the Finance Minister had announced as having been accepted, do not find place in the proposals.

Among these the grandfathering provisions for investments already in place before August, 2010 and respite for Foreign Institutional Investors or their investors irrespective of whether or not they claim the benefits of the relevant DTAA stand out. It is hoped that at least some of the missing recommendations will be introduced by way of guidelines and rules.

Interestingly, the GAAR amendments are also silent on the applicability or otherwise of GAAR where a Tax Treaty already provides for a specific anti-avoidance provision.

This just lends credence to the view that every possible unilateral measure is being taken to neutralise the benefits under Tax Treaties, with the proposed new 20 per cent tax on share buy-backs being a striking example.

Is GAAR an idea whose time has come? This will remain a topic of debate for the next few years. I would wish in anticipation that the Government actually makes a positive example of the implementation of GAAR

(The author is Partner, BMR Advisors. The views are personal.)

Understanding frequently used Budget terms ::: Business Line

Are you a little confused when you read about the Budget in newspapers? Do terms such as current account deficit, fiscal deficit, Government expenditure, excise duties, import duties boggle you? Here’s de-jargonising some of these terms.

ON EXPENDITURE

The Government classifies its expenditure in terms of planned expenditure and non-planned expenditure.

Planned expenditure is what is spent through centrally-sponsored programmes and flagship schemes such as Bharat Nirman, the Mahatma Gandhi National Rural Employment Guarantee Act and the National Rural Health Mission. Besides this, it includes the Centre’s assistance to States and Union Territories. For 2013-14 fiscal, Rs 5.55 lakh crore is earmarked for planned expenditure. For the last fiscal, it was Rs 5.21 lakh crore.

Non-planned expenditure refers to all other expenditures such as that on defence , subsidies, interest payments, wage and salary payments to Government employees, grants to foreign governments and so on. For the 2013-14 fiscal, Rs 11.1 lakh crore has been earmarked for this.

ON DEFICITS

Now, the Government has to finance such expenditure through its revenues. These revenues may not match up to the level of expenditure.

This is where fiscal deficit comes in. It is the difference between the Government’s total expenditure and total receipts or revenues, excluding borrowings.

Where does the Government get revenues from? Tax revenues (net of transfer payments - payments to households for social objectives such as maintaining minimum living standards, providing health care), one-time sources such as disinvestment, spectrum auction and so on. These may, as has been the case, fall short of estimates.

Deficit is financed by borrowings from the Reserve Bank of India or through market borrowings, mostly from banks or large institutional investors. India’s current fiscal deficit is expected to be around 5.1 per cent. The aim is to bring this down to 4.8 per cent of the GDP by the next fiscal. Current account deficit (CAD) is the difference between a country’s total exports of goods, services and transfers (such as foreign aid) and total imports of goods, services and transfers. The difference is financed by foreign portfolio flows such as FII, FDI, external commercial borrowings, foreign deposits (such as NRI deposits), and so on.

It isn’t necessary that a CAD is harmful for a country. Say a country is importing heavy machinery which will improve the production capacity or make the current production capacity more efficient.

That’s a good thing. But if the CAD is because of importing goods which are mainly for consumption purposes such as luxury cars, which does not add to production capacities or fuel exports, then it is harmful for the country.

CAD can be sustained up to certain threshold. If a country suffers a high CAD for a sustained period of time, it could be difficult to keep attracting required inflows or finance imports. It could further increase a country’s vulnerability to international financial volatility.

A high fiscal and current account deficit could lead to a danger of being down-graded by ratings agencies, making it harder and more expensive to raise finance. Investors could lose faith in the country’s ability to sustain growth. India’s CAD stood at 4.6 per cent of the GDP for the first half of the current fiscal.

Budget- And the winners are….. ::: Business Line

The Budget speech has been read and re-read. The accompanying documents have been analysed threadbare. So, why not get down to the brass tacks and look at the stocks in your portfolio that are likely to gain or lose from proposals in the Budget?

Here are three sets of definite winners that should help you rethink your portfolio.

There has been much moaning and groaning about the new surcharge on corporate tax, which will entail a Rs 6,000-7,000 crore additional outgo for India Inc. But one little item tucked away in section 32AC of the Income-Tax Act may help a few companies earn tax breaks that will more than offset this surcharge.

This is the 15 per cent tax deduction for manufacturing companies which invest Rs 100 crore or more in new plant and machinery over the next two financial years. Last year’s numbers show that listed manufacturing companies made aggregate investments of over Rs 3.1 lakh crore in new fixed assets. A 15 per cent deduction on this would mean a Rs 11,000-crore tax saving at an effective tax rate of 24 per cent (the average for India Inc).

However, the specific beneficiaries of this investment allowance would be companies which have lined up concrete expansion plans for 2013-14 and 2014-15. Sifting through data from CMIE shows that sectors such as petroleum and polymers (Rs 62,000 crore), steel (Rs 53,000 crore) and aluminium (Rs 26,000 crore) are likely to bag the biggest benefits.

Going by their capex plans, companies that may get to pay substantially lower taxes over the next two years are SAIL (Rs 42,000 crore capex plan), Hindalco (Rs 20,000 crore), Reliance Industries (Rs 16,000 crore), NMDC (Rs 15,000 crore), Ultratech Cement (Rs 5,000 crore), BGR Energy (Rs 2,300 crore) and others.

POWER GENERATORS

The power sector has a litany of woes, ranging from poor coal availability to delayed payments from State electricity boards. But the Budget has a lifeline in the form of a one-year extension in the time limit for availing the tax holiday under Section 80IA.

Adani Power’s Kawai and Tiroda projects, Tata Power’s Maithon and Mundra Ultra Mega Power Project and KSK Energy Ventures’ Mahanadi Plant are projects expected to be commissioned in 2013-14. If these projects come up on time, their profits will be completely tax-free for the first 10 years. This may lower their overall tax incidence too.

The proposal for a PPP (private-public partnership) model for Coal India’s mines, if it materialises, may help step up supplies of cheaper domestic coal.

That will particularly help Adani Power, Lanco Infratech and Sterlite Energy which rely on local coal for some of their projects.

MID-PRICED HOMES

Two proposals — additional interest deduction of Rs 1 lakh (available to first-time home buyers of sub-Rs 40 lakh homes, with a maximum loan of Rs 25 lakh) and allocations to housing funds (new allocation of Rs 2,000 crore to urban focus and increasing rural-housing fund allocation to Rs 6,000 crore) can deliver a boost to demand for low-cost homes.

The listed companies that would benefit from this would be those with presence in tier-2 and tier-3 cities in the residential segment. Mahindra Life Space, India Bulls Real Estate, Godrej Properties and Omaxe have projects under construction or under consideration in tier-2/-3 cities such as Pune, Ahmedabad, Hyderabad, Nagpur, Ludhiana and Bhubaneswar.

Puravankara, a Bengaluru-based builder, routes its mid-priced housing foray through subsidiary Providence Housing. It contributes one-fourth of the revenues.

AND NOW THE LOSERS

Why go on about the losers? The list is long, but here briefly, are the key ones…

CAPITAL INADEQUACY

With bad loans inching up and Basel III looming ahead, capital will be the key fuel for public sector (PSU) banks in the year ahead.

An RBI estimate puts their capital requirement over the next five years at Rs 90,000 crore. Against this backdrop, the Budget proposal to infuse Rs 14,000 crore in 2013-14 into PSU banks looks quite stingy.

Then, there is the diktat that banks must increase their agricultural lending from Rs 5.75 lakh crore to Rs 7 lakh crore. The share of PSU banks in agriculture lending is already over 80 per cent. This has led to mounting bad loans. While non-performing assets (NPAs) for PSU banks in priority sector grew 36 per cent, agriculture NPAs surged by 56 per cent.

This is why the increase in agriculture lending will be negative for all PSU banks already weighed down by loan-quality problems.

Banks such as Punjab National Bank, Bank of India, Bank of Baroda and State Bank of India already have an exposure of more than 12 per cent to the agriculture sector.

UTILITY VEHICLE MAKERS

If commercial vehicle makers have got Budget handouts in the form of new bus orders, there is a speed-breaker ahead for sports utility vehicle (UV) makers.

For one, the Budget has hiked excise duty from 27 per cent to 30 per cent for vehicles exceeding engine capacity of 1,500 cc. This further widens the gap between the normal rate for motor vehicles (12 per cent), vehicles with engine capacity of less than 1,500 cc (24 per cent) and these UVs. With the industry usually passing on cost increases to customers, UVs might turn costlier sooner than later. This could force a slowdown in the UV segment’s scorching pace of growth (57 per cent) this fiscal. Two, lower Budget allocations for oil subsidies, taken with the recent freeing up of diesel prices, suggest that diesel prices are likely to trend up.

With this, the edge that UVs have over petrol cars on running costs will likely begin to narrow. That means lower demand for listed UV makers such as Tata Motors and Mahindra & Mahindra. The latter is already facing challenges from a slowdown in tractor sales.

HIGH TAX PAYERS

The hike in the surcharge on corporate taxes from 5-10 per cent will impact all companies that currently turn in a profit and shell out taxes. Overall, a back-of-the-envelope calculation shows that companies may be forced to part with 1 per cent more of their pre-tax profits to the taxman. As the surcharge is calculated on a company’s existing tax bill, this measure will extract a stiffer price from companies that already suffer high tax incidence.

Multinational companies top this list. Apart from this, companies that figure in this bracket are bank and finance companies such as IDBI Bank, Axis Bank, Yes Bank and HDFC Bank, public sector majors such as Engineers India, BEML, Oil India and MOIL, and pharma companies such as Pfizer, Abbott and Dr Reddy’s Labs.

Good start to solving economy problems ::: Business Line

Now, it all depends on whether the Finance Minister is able to walk the talk on fiscal consolidation.

Sometimes the first step to solving a complicated problem is to recognise the problem. By acknowledging that the Indian economy is currently challenged, the Finance Minister set the context for finding solutions to resolve our imbalances of slowdown, high twin deficits and elevated inflation levels.

Despite the compulsions of a pre-election year, the Minister has laid out a credible path of fiscal consolidation by budgeting to reduce fiscal deficit to 4.8 per cent of GDP in fiscal 2014. This is an important step, given the continued scrutiny of our fiscal situation by external rating agencies. As we lay out a path for growth recovery by resolving our stalled projects and kick-starting the investment cycle, renewed concerns regarding our sovereign rating would be significantly counter-productive.

STALLED PROJECTS

In this regard, the proposal of an investment allowance for companies investing more than Rs 100 crore in plant and equipment is an important step forward. Similarly, the proposal to constitute a regulatory authority for the road sector should be helpful in resolving stalled projects. There is no doubt that if we can start a virtuous cycle (high investment leading to high growth leading to low inflation) like the one we enjoyed in 2005-2007, then a number of our economic challenges will resolve themselves.

Regarding growth, a significant impetus will also be provided by the 29 per cent increase in Plan spending in fiscal 2014 over fiscal 2013. The Plan outlay has been increased across a number of social development sectors such as agriculture, rural development and health and education. That said, from a longer-term perspective kick-starting our domestic investment cycle should remain the key focus of our policymakers. In this regard, we hope that the Cabinet Committee on Investment resolves at least some of the almost Rs 8-trillion worth of stalled infrastructure projects.

INFLATION DICHOTOMY

On the issue of inflation, India is facing a bit of a dichotomy with significant moderation in the wholesale price index (WPI) to 6.6 per cent in January from 8 per cent in August-September, while the consumer price index (CPI) continues to be in double digits.

A key reason is that food inflation, which constitutes a much larger proportion of the CPI than the WPI, remains elevated in our country. To address this high level of food inflation and growing demand for food items, the Minister has talked about taking supply-side reforms forward.

Moreover, the Minister needs to be congratulated on the steps taken to augment financial savings.

First, the Rajiv Gandhi Equity Savings Scheme has been liberalised to give incentives to higher retail participation in the equity market. Moreover, the introduction of inflation-linked bonds will be a significant alternative to gold as a savings instrument. No doubt, the best long-term solution to our addiction to gold is to bring inflation down to a much lower 4-5 per cent range.

Maybe the markets were a bit disappointed because of the additional surcharge on corporate profits or because some may have thought the 19 per cent expected increase in gross tax receipts is unrealistic.

But these are smaller considerations, given the larger economic backdrop of the country. If the Minister continues on the fiscal consolidation path as promised, and lower fiscal deficits result in lower current account deficit and lower inflation, then this Budget can be categorised as a success in putting India back on the right path.

(The author is CEO, Aditya Birla Financial Services.)

Reason to cheer for first-time home buyers ::: Business Line

Budget will hit equities; fiscal deficit to be at 5%: Goldman Sachs in BL

While the fiscal consolidation plan unveiled in the Budget is in line with expectations, the composition of fiscal deficit (FD) reduction based on optimistic revenue rise than on spending cuts is a disappointment, Goldman Sachs said on Friday.

The investment bank, therefore, is not optimistic about the Government’s ability to meet fiscal deficit target set at 4.8 per cent of GDP for FY14, and sees it’s touching 5 per cent on a possible fall in the revenue mop—up side.

“Given the Budget proposals, the fiscal deficit may be 5 per cent against the projected 4.8 per cent next fiscal.

Thus, the net borrowing requirement (Rs 4.88 trillion according to the Budget target) may be higher than budgeted,” Goldman Sachs said in a report.

The brokerage said the Budget could have a short—term negative impact on equities, bonds and the rupee as no new reform measures have been announced by the Finance Minister.

The report, however, noted that fiscal trajectory has changed for the better over the past months due to front— loading of consolidation and the Government’s debt ratio remains on a declining path.

On expenditure front, it said the Government has budgeted for a significant increase in expenditure to the tune of 16 per cent with a rise in non—subsidy current spending.

“While subsidies have been reduced significantly, there can be some upside to them, especially to food subsidy bill if the Food Security Bill is passed and implemented.”

In terms of spending priorities, Goldman Sachs said there is a significant increase in rural, agricultural, infrastructure, and social spending, apart from Rs 14,000 crore for recapitalisation of the public sector banks.

It said the Budget may be negative for bond yields due to higher—than—expected net market borrowing requirement. “RBI may need to do a significant amount of open market operations to finance the deficit and inject liquidity into the system.”

The report said the Budget would have negative impact on equity markets due to hike in the corporate tax surcharge. .

“We think the Budget may be negative for investor sentiment and for the rupee, at least in the short term, as it has not taken up any major proposals to bring down current account deficit (which touched 5.4% in Q2, FY13).”

India Strategy Budget: Oil prices may be key to fiscal consolidation 􀂄 :: BofA Merrill Lynch

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


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%.

A tough balancing act Stretch assumptions, stiff measures and stuck markets :Motilal Oswal

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


 At first glance, Budget 2012 has delivered on the low expectations: 7.6% real GDP growth
with less than 6% inflation, fiscal deficit of 5.1% of GDP, inclusive growth, etc
 These headline numbers, however, build in stretch assumptions which imply taking stiff
policy measures such as lower fuel and fertilizer subsidy.
 There are some major negative earnings implication for Oil & Gas and select companies in
Healthcare.
 Foreign investors will likely be jolted by a proposed retrospective change in tax laws.
 There are also a few positives as well such as marginal relief in personal taxes and incentives
for investment in some key sectors like fertilizers, power and roads.
 Overall, the Budget does not strengthen market's conviction of a meaningful rate cut
cycle on the back of easing inflation. With valuations at LPA of 14x one-year forward
P/E, expect markets to remain range-bound for the next few months.
Backdrop: Delivering on low expectations
The Union Budget 2012 has been presented in a backdrop of slowing GDP growth
(6.1% in 3QFY12), high oil prices (under-recoveries of INR2t at current prices), fickle
political allies (e.g. Trinamool Congress), and the government's poor track record of
reforms in its current term to-date. Even now, most key bills have been kept out of
the Budget session (GST, DTC, Lokpal, etc). As a result, expectations from the budget
were running low. In this sense, the budget has lived up to expectation with at least
positive headline numbers, including lowering of fiscal deficit to GDP to 5.1% for FY13
from 5.9% for FY12.
Stretch assumptions and stiff measures
The budget build in some stretch assumptions which imply corresponding stiff policy
measures as tabled below. Slippage on either or both fronts will have negative
implications for achieving the headline macroeconomic targets - 7.6% real GDP growth
with less than 6% inflation, fiscal deficit of 5.1% of GDP, inclusive growth, etc.
The tightrope act between stretch assumptions and stiff measures
Stretch assumptions Stiff measures taken / required to be taken
Controlling total subsidy bill  Meaningful increase in fuel and fertilizer prices
at 2% of GDP  Acceleration in UIDAI roll-out to enable targeted
subsidy via direct cash transfers to beneficiaries
20% increase in FY13  2% across-the-board hike in excise duty and service tax
tax revenue  Widening of service tax net
Jump in non-tax revenue and  Completion of telecom spectrum auction to raise
non-debt capital receipts INR400b (zero in FY12)
 Successful PSU disinvestment to raise INR300b
(INR155b in FY12)
FY13 average inflation of <6%  Preventing higher user charges and higher indirect
taxes from stoking inflation
FY13 real GDP growth of 7.6%  Ensuring fiscal discipline to ensure no major
dis-saving by government, which would hurt
investment rate, and hence growth
Some unexpected big blows
The budget has major negative implications for a few large cap stocks, mainly in Oil &
Gas and Healthcare sectors.

How Budget makes the aam aadmi pay more ::Business Line

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Sitting for GMAT? Taking a package tour? Good. Be prepared to pay more as service tax.

Reams have been written about what the Budget means for businessmen. But it also affects many other groups.

STUDENTS

Students who are planning to write the GMAT or GRE should be prepared to shell out more from April. Fees on coaching classes are set to rise with the increase in service tax rate.

The peak rate of service tax has been increased to 12 per cent from 10 per cent. On a fee of Rs 50,000 service tax is currently Rs 5,000 (education cess additional), from April this will increase to Rs 6,000.

Students who train in a dance or sports academy may also have to pay a higher fee. Accommodation and canteen service charges at PG hostels may also go up.

But it is not all bad.

Consolidating your portfolio post Budget ::Business Line

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

As you focus on equity, target a certain portion of your assets to fixed income instruments.

The Union Budget for FY-13 didn't announce any path-breaking reforms, but there are a host of small steps that will influence your personal finances.

For the common man, while on one hand the Finance Minister has put some extra money in their wallets through income tax exemptions/ raising the tax limits, the increase in service taxes and excise duty will result in rising expenses. Also, with rising crude prices, oil marketing companies will be forced to raise petrol and diesel prices, thereby impacting consumer spends as well as hiking inflation. This may lead to interest rates continuing to remain stubborn.

From an investment perspective, your portfolio would need to undergo some fine-tuning, so that post-inflation returns are good. Let's take a closer look at how the Budget has impacted different asset classes, and what you need to do with your portfolio post the Budget.

IMPACT ON ASSET CLASSES

Gold: Increase in customs duty from 2 per cent to 4 per cent will make the precious metal costlier. To this extent, buying a unit of a gold fund will also become costlier from next fiscal.

Real Estate: The Budget has imposed tax deduction at source (TDS) on transfer of immovable property. This will result in lower profits for investors.

Life Insurance: Service tax increase from 10 per cent to 12 per cent will result in life insurance covers becoming costlier. In addition, one can claim tax deduction under Section 80C only if the premium payable is at least 10 per cent of the sum assured. Besides, the final sum you receive from a policy will be taxable unless your premium is less than 10 per cent for the sum assured. You will, therefore, have to budget for lesser receipts from a policy that doesn't satisfy this.

STOCKS

Rajiv Gandhi Equity Scheme: The Rajiv Gandhi Equity scheme that allows for tax deduction up to Rs 50,000 for investments in direct equities by retail investors with a lock-in period of 3 years, with income less than Rs 10 lakh per annum, will help increase retail participation in equity markets.

Securities Transaction Tax (STT): A reduction from 0.125 per cent to 0.1 per cent in STT will mean lower transaction costs. This will also benefit mutual funds when asset management companies purchase or sell stocks from their fund portfolio.

REVISITING YOUR PORTFOLIO

You may want to allocate a reasonable quantum of your assets into equity stocks, preferably through mutual funds depending upon your risk profile. What you need to keep in mind is that your returns from stocks/ mutual funds can vary a lot, depending on the specific stock/ mutual fund purchased. Make sure that the fund has reasonable number of stocks, and isn't too concentrated. Also, given the uncertainty in the global economic scenario, as well as the difficulties at the domestic level, it is important that you keep a long-term view when investing in your preferred mutual fund scheme.

Even as you focus on equity, you may want to target a certain portion of your assets to fixed income instruments This is because Government borrowing target looks within range, and hence, achievable. As such, you may want to focus on long-term government securities and Monthly Income Plan (MIP).

Budget- More in the hands of salaried class ::Business Line

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Budget: Close to reality, but no game-changer: CEO, CapitalVia Global Research::Business Line

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

I had limited expectations from the Budget, which helped avoid any major disappointment. From a macro perspective, the biggest challenge for the government had been to strike a balance between fiscal consolidation and revitalising growth by improving the current sluggish investment sentiment. This was particularly difficult, given the government's poor fiscal health. These conflicting objectives did not leave much room for any major change in the tax structure in either direction.

TARGETS CREDIBLE

Against this backdrop, the government's move to raise excise and service tax rates indicates prioritising fiscal consolidation to an extent. The strategy to emphasise more on the areas of indirect taxes will likely be more revenue-efficient for the government as these taxes are relatively more difficult to evade. In the case of direct taxes, on the other hand, with the more taxpayer-friendly income tax slabs, the government would hope for better compliance.

Overall, revenue collection targets for 2012-13 look broadly credible. I find the government's 2012-13 growth assumption of 7.6 per cent to be somewhat more optimistic than our expectation of around 7 per cent. But a slippage of 50-60 basis points in GDP growth will not hurt the revenue collections drastically.

In fact, overall fiscal projections seem credible, especially when compared with last year's experience. It is true that subsidies projections, fuel subsidy, in particular, involve major under-estimation. But, most of the other estimates appear largely realistic.

The Budget was void of any overdose of populism. Allocations to social sector schemes, such as the NREGA, have been broadly modest. Given the government's sticky expenditure patterns, some slippage in the fiscal projections cannot be ruled out. I don't expect fiscal deficit to exceed 5.4-5.5 per cent of GDP in 2012-13 under normal circumstances.

Nevertheless, the Centre projects a gross market borrowing of Rs 5,70,000 crore in 2012-13 (assuming fiscal deficit of 5.1 per cent of GDP). Such a large borrowing would continue to put considerable pressure on bond yields — we expect the 10-year benchmark government bond yields to gradually head towards 8.70 per cent in the next three-four months, with significant risks of further upside.

PETRO-PRICE HIKE

The Budget proposals, however, would lead to more cost pressures for manufacturers through higher excise and service tax burdens. Also, to contain petroleum subsidies at even close to the projected Rs 44,000 crore, the Government will have to increase fuel prices substantially. The oil marketing companies are currently incurring under-recoveries of nearly Rs 500 crore a day.

The first petro-price hike, thus, can be just days away (possibly immediately after getting the budget passed in the parliament). This would have adverse implication for both inflation and growth in coming months.

The equity market didn't get much cheer from the Budget (despite the rationalisation of the STT, tax benefits for first-time equity investor) as there was nothing much on offer to revive the investment and growth sentiment in the near-term. However, given the realities of the ongoing coalition politics, no major reforms, such as the opening up of investments to foreign investors or concrete implementation plans of tax reforms such as DTC or GST, were really expected in the Budget. And there was no pleasant surprise on these counts.

The fiscal arithmetic, thus, comes distinctly closer to reality this time, but the Budget is no game-changer for the near-term muddling through of the economy.

Union Budget-FY13 Realistic on Fisc; what about growth! - Sunidhi

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

The Union Budget FY13 makes an earnest attempt to depict a true picture of the economic scenario given the dichotomy of slowing growth v/s fiscal challenges. Although, the aim to bring down the fiscal deficit to 5.1% in FY13 from a revised estimate of 5.9% in FY12 looks credible, but the gross market borrowing program of 5.7 trillion in FY13 has been a major dampener for the markets. Despite a deviation from the thirteen finance commission roadmap in terms of fiscal deficit (5.1% for FY13 against a target of 4.2%), the debt to GDP ratio at 45.5% for FY13 remains well below the target of 50.5%. As some undesirable subsidies have been putting pressure on the government financials, the budget assures to keep central subsidies under 2% of GDP in FY13. In addition to that finance minister targets to bring it down to 1.75% in next 3 years. The absence of any mention of proceeds from the 4G and 2G auctions of the cancelled licenses could provide a positive surprise to overall fiscal deficit number.

Indian Railways hike rail haulage yet again by 20% - :: Kotak Securities PDF link

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

http://www.kotaksecurities.com/pdf/dmb/MorningInsight21032012.pdf


LOGISTICS
Indian Railways hike rail haulage yet again by 20% - to impact
volumes for container rail companies
1. Indian Railways (IR) has yet again increased the haulage rates by 20% for four
commodity categories. This four categories include Cement, Iron and Steel , Alumina and Petroleum (POL) products effective 1st April 2012

Budget Impact Sectors :: Kotak Securities PDF link

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

http://www.kotaksecurities.com/pdf/dmb/MorningInsight19032012.pdf


Sectoral impact
Budget Impact Sectors
Positive Banking, NBFCs, Cement, Construction, Logistics, Pharmaceuticals, Power, Retail, Telecom
Neutral Aviation, Capital Goods, Information Technology, Media, Real Estate,
Negative Automobile, FMCG, Hotels, Oil & Gas, Shipping
Source: Kotak Securities - Private Client Research

Post Budget Impact Analysis: 2012-13 :HDFC Sec,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


As expected, the latest Union Budget is neither bold/reformist nor populist. It is a please-all Budget trying to be provide reliefs to all constituencies and be as less controversial
among political parties as possible. The finance minister has chosen the line of least resistance. He has also mentioned at several places about trying for a broad based consensus.
Key issues like subsidy have not been tackled. No attempt has been made to dissuade diesel consumption by way of levying additional excise duty on diesel cars or raising the price
of diesel. This however will have a positive impact on Diesel car manufacturers.
Total subsidy provision has been cut by about 12% while fuel subsidy has been cut by 36%, despite the fact that crude prices continue to rule high and the Government has not
shown any inclination to free fuel pricing or even move towards it. Contrary to expectations, provision for food subsidy has not risen sharply.
As expected, outlay for rural areas has not been raised sharply while that on education, health and sanitation/drinking water and transport been raised decently.
Telecom receipts projected for FY13 include an estimated Rs.40,000 cr + by way of auction of telecom licences and spectrum fees. One hopes that there are no hindrances to
raising this amount and the optimism of the Finance minister is well placed.
Real GDP has been assumed to grow 7.6% while inflation is expected to rise 6.2%. These numbers will be closely watched as recent history shows that on both counts we have
failed to meet targets.
Corporate and income taxes are assumed to grow 13.9% while customs and excise duty collections are assumed to rise 22 and 29% respectively. If growth momentum in India does
not pick up in the next few months, there will be a serious threat to achieving these numbers.
Fiscal deficit has been assumed to be 5.1% for FY13 vs 5.9% in FY12. This target is again a bit aggressive. Government debt is expected to rise to 50.25 lac cr in FY13 from 44.68
lac cr in FY12.
Service tax proposals to raise an extra Rs.19,000 cr – throws up scope of uncertainties, procedural hassles, litigation. Custom and Excise duty hike to raise an extra Rs.27000 cr.
Both will have a regressive impact on inflation and the RBI may have to postpone rate cut by a few more months. Borrowings by the Government will be Rs.4.79 lac crore vs Rs.4.36
lac cr in FY12. This will keep crowding out private sector borrowers and halt fall in interest rates.
The Budget gives a lot of flexibility/approvals to local companies in different sectors to access ECB. Indirectly it recognises the limitation of these sectors to raise money from local
sources.
The Budget has proposed retrospective amendments to overcome effect of adverse judgements. It has also introduced amendments by way of GAAR (General Anti Avoidance
Rule), arms length pricing, transfer pricing for domestic entities. These could create fresh issues for the corporate sector. Foreign companies may not take these amendments kindly
although they cannot afford to ignore Indian market.
While mentioning his targets on divestment, the Finance minister stated about wanting to retain 51% stake. Thereby he gave a socialist touch to the divestment process. Pension
provision has shot up by 12.5% to Rs.63183 cr after remaining flat over two years. This could over years be a problem area.
The Budget has introduced Rajiv Gandhi Equity savings scheme to promote equity culture. If investors are convinced of making money, then it will be of help. However there could
be procedural issues that need to be addressed before the policy is notified. STT has been cut by 20% for delivery transactions but no change has been proposed on non-delivery
transactions. Hence the disadvantage faced the equity stock exchanges vis-à-vis the commodity exchanges has not been removed.
Sectorally,
• Infrastructure - some incremental reliefs have been announced including TDS reduction on ECB.
• Very few reliefs for power equipment manufacturers
• Relief granted to bring down the capital cost for mining projects

• For power industry some measures have been announced including – extension of sunset clause and additional depreciation, coal imports have been allowed at zero
customs duty. However no announcement has come on the much-awaited SEB reforms.
If the RBI starts cutting rates after a couple of months, the impact of the global liquidity by way of QE and LTRO will technically support and push up the Indian markets. The
progress of India is less driven by policies enunciated in the Budget and more by the ground level reforms at the state level, corporate prudence and public aspirations.
The markets have understandably reacted negatively to the Union Budget. They could further drift downwards for the next couple of session’s post, which they would be driven by
the other local and global triggers.

India Pharma :Budget impact:CLSA

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Budget impact
Apart from imposition of minimum alternate tax, the budget 2012 was
quite neutral for the pharmaceutical and healthcare sectors. The budget
brought partnership firms under gamut of MAT thereby negatively
impacting Sun Pharma and Cadila in the pharma sector. We estimate
FY13 EPS downgrade of Sun Pharma by c. 12% and Cadila by c. 9%.
Among other provisions, marginal increase in excise duty would most
likely be passed on to consumers and in any case a number of India firms,
being based out of excise exempt zones, do not get impacted. Weighted
deduction on R&D at 200% has been extended for another five year
period. This is a positive though was on expected lines.
MAT applicable on partnership firms
q Budget has included under minimum alternate tax (MAT) all persons other than
companies claiming profit linked deductions.
q Sun Pharma has been using partnership structure for more than a decade thereby
not coming under MAT.
q Cadila started using this structure with commissioning of Sikkim facility two years
back.
q Both companies would be negatively impacted with MAT being applied on
partnership structures.
q With this Sun Pharma’s tax rate goes up from 7-9% to c. 17% and Cadila tax rate
goes up from 14-15% to c. 20%.
q In case MAT is implemented on partnership structures, we see c. 12% EPS
downgrade in Sun Pharma earnings and c. 9% downgrade in case of Cadila’s
earnings.
q Our EPS estimates for Sun Pharma are at Rs26.9/share for FY13 and Cadila at
40.3x FY13. We expect these to come down to c. Rs23.7/ share for Sun Pharma
and c. Rs36.6/ share for Cadila.
Marginal increase in excise duty (5% to 6%)
q Most companies have a large proportion of domestic sales coming from excise
exempt locations and hence the impact is marginal for the sector with slightly
higher impact on MNCs.
q Excise duty on bulk also increases with CENVAT rate moving up from 10% to 12%.
q Most companies are likely to pass on hike in excise duties.
Other measures in the budget
q Weighted deduction on R&D at 200% has been extended for another five year
period. This is a positive though was on expected lines.
q Healthcare services continue to be exempt from service tax.
q No change in MAT rate remains positive as most Indian pharma companies (except
MNCs) are below corporate tax rate.

India Power : FY13 budget impact:CLSA

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


FY13 budget impact
Most measures announced for the power sector in the FY13 Budget were
expected. The reduction of import duty on coal (from 5% to 0%) is an
important move and leads to 5-13% EPS upgrade for JSW Energy and
Adani Power for FY13-14. The tax holiday under the Section 80IA got
extended by one more year and there was no change in MAT this year.
Overseas borrowings (ECBs) would have a lower interest burden due to
the reduction in the withholding tax. While no duty was imposed on
import of generation equipment, the possibility of this happening post
budget cannot be ruled out. No change in our recommendations.
Cut in import duty on thermal coal and LNG
q Customs duty on coal has been reduced to 0% from 5.2% earlier for a period of
two years.
q The companies which have untied power would benefit from this. Key beneficiaries
would be JSW Energy, Adani Power.
q There would not be any benefit for the companies which are importing coal but
have tied up all power in PPAs like Tata Power or NTPC. Under PPAs this would
qualify as “change in law” and the benefits of no customs duty on coal would need
to be passed on to the procurers.
q The basic duty on LNG for power generation has also been exempted to bring down
the cost of power.
q SEBs (State owned distribution companies) would be biggest beneficiaries of the
above as their cost of power procurement would go down.
No change in MAT; Section 32 benefit extended to power sector
q There was no change in Minimum Alternate Tax (MAT) rate in the budget after
many years. The effective MAT rate remains at ~20%.
q Benefit of Section 32 of the Income Tax Act has been extended to power sector
which will allow assesse engaged in the business of generation or generation and
distribution of power an initial depreciation at the rate of 20% of actual cost of new
machinery or plant – this will help in reducing the tax burden.
ECBs allowed for re-financing; withholding tax cut from 20% to 5%
q External Commercial Borrowings (ECBs) would be allowed to part finance the INR
debt of existing power projects.
q Given the state of Indian Power sector as of now we are sceptical if many projects
would be able to attract foreign lenders for re-financing.
q The rate of withholding tax on ECBs has been cut to 5% from 20% which will help
reduce the interest burden for the power companies.
5-13% EPS upgrade for ADANI.IN and JSW.IN; Maintain SELL on both
q We are upgrading FY13-14 earnings for Adani Power by 5-7% and for JSW Energy
by 11-13% to factor in the cut in import duty on thermal coal.
q The magnitude of upgrade is higher for JSW as it sells more power in the short
term market. Our TP for JSW is now Rs42/sh.
q We maintain SELL on both the stocks.
No import duty on generation equipment in the budget
q It was expected that the government will impose an import duty of 19% (against
which domestic suppliers would pay 10%+ excise duty and central cess) on import
of power generation equipment. This is a near term negative for BHEL and L&T.
q Our discussion with industry participants suggests that there was opposition to this
from both utilities and equipment makers. Equipment makers believe current level
of duties being proposed are not sufficient and want higher duties.
q Though import duty on power equipment did not come through in the budget, it is
quite likely to be imposed on a later date.

ITC: Pricing power is the key :: CLSA

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Pricing power is the key
The union budget added ad-valorem component to the current specific excise
duties on cigarettes, translating into a weighted average hike of ~15% (quantum,
broadly in-line with market expectations). The imposition of ad-valorem may raise
long term concerns but we highlight that since the imposition of state VAT in 2007,
ITC’s cigarette Ebit has grown at 16% Cagr, clearly highlighting its pricing power.
There could also be a volume tailwind from the revised excise duty slab for sub-
65mm, which would allow the organised industry to grab shares from illicit market.
Excise duty structure becomes hybrid with effective hike at ~15%...
q The budget, while retained existing specific excise rates which are based on the
length of cigarette (slight change in classification for sub 70-mm, though)…
q … added 5% ad-valorem duty on consumer price (MRP) to current slabs.
q We estimate weighted average excise duty hike at ~15% for ITC (~17.5%
including VAT impact) which meets the upper-end of the market expectations.
… and a new size comes to life at sub-65mm
q The budget also created a new slab of sub-65mm attracting an excise duty of
Re0.67/stick, with no ad-valorem component.
q In the earlier regime, the excise slabs were sub-60mm and 60-70mm where the
duties were at Re0.67/stick and Re0.97/stick respectively.
q Currently, legitimate industry derives insignificant proportion from sub-60mm.
The hybrid system raises the proportion of variable taxes…
q The move to ad-valorem is not a sea change as ITC, even today, pays 30% of total
taxes in variable form due to VAT levied by different states (provinces) in India.
q The proportion of variable taxes would rise to 40% under the new regime.
q While risk persists on increasing proportion of variable excise in future, requiring
higher price hikes, we do not see it as a big threat given ITC’s leadership.
q This is also evident from the fact that after the levy of state VAT in 2007, ITC has
been able to grow its cigarette Ebit at a 16% Cagr in the last five years.
… while new slab could drive volumes, particularly from illicit market
q We expect ITC (and industry) to launch brands at sub-64mm given the economics.
q Interactions with an industry contact indicate that ~8% of the market is currently
occupied by illicit cigarettes which organised players could now target.
Remain confident of ITC’s pricing power; no downside to estimates
q Industry checks indicate that the players may take time in rolling out revised
prices due to the change in methodology and complexity in SKU structure.
q Our calculations indicate that ITC needs to take up prices by ~8% to neutralise the
impact of excise duty hikes.
q We would however expect ITC to take up prices by around ~15% and grow Ebit by
14-15%; we do not see any downside risk to our current estimates, therefore.