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Union Budget: 2011-12
Status quo, thrust on consumption stays
Walking a difficult tightrope, thrust on domestic consumption continues
The FY12 union budget has tried to walk the difficult tightrope of achieving fiscal
consolidation without unduly undermining the country’s inherent growth dynamic,
particularly through keeping consumption growth drivers intact. While the finance
minister kept both excise duties and service tax rates unchanged (contrary to all
expectations), the fiscal deficit for FY12 is pegged at 4.6% (a 50bps decline over
the budgeted deficit estimate of 5.1% for FY11) – relying heavily on tax buoyancy
and lower subsidies bill. The net borrowing target for FY12 has also been pegged
at Rs3430bn – if achieved will help assuage concerns on government crowding
out. We believe both bond as well as equity markets will be monitoring these
numbers keenly as they appear optimistic, particularly in the current environment
of elevated commodity prices and slowing industrial growth momentum.
Focused on the common man, domestic consumption and agriculture
We believe that the finance minister has addressed three focus areas through the
budget – the common man (basic income tax exemption limit raised by
Rs20,000/annum), Indian agriculture (raising banking credit targets for farmers,
linking MGNREGS wages to inflation, enhancing interest subvention to crop loans
and incentivizing investments in food supply chain to address structural supply
side constraints) and domestic consumption (through continuing with stimulus
announced during global financial crisis, despite the urgent need for fiscal
consolidation). While we are enthused with the announcement to allow foreign
retail investors to invest in Indian mutual funds, the budget had little to offer to
equity markets. Among key measures for infrastructure were (a) higher allocation
to Bharat Nirman (+21% yoy), (b) raising the FII limit for corporate bonds of
infrastructure companies to US$25bn (vs. US$5bn) and (c) permission for issuance
of tax-free bonds worth INR300bn for investment in infrastructure.
Key winners Autos, FMCG; key losers: Pharma; iron ore
Auto and consumer stocks are likely to be the biggest beneficiaries on account of
status quo being maintained on excise duties (a big surprise with market expecting
a 200bps hike in excise duty rates) with M&M, Bajaj, Hero, Honda, TVS Motors,
Maruti and ITC likely to emerge as key winners. Pharma companies seem to be
the most negatively impacted as a combination of MAT on SEZ and tax on profits
of Limited Liability Partnerships is expected to affect Lupin, Cipla, Biocon, DRL
and Sun Pharma. The overall net impact on IT Services, Financials, Oil & Gas and
Real Estate is expected to be neutral.
Long term story intact, headwinds to continue in near term
While we remain convinced about the long term India investment thesis, we
remain concerned over three key factors in immediate term – persistent and
elevated inflation, oil price volatility fuelled by the insurrections in the MENA
countries and policy inertia. In case the government of India is able to move ahead
on long pending second generation reforms, beginning with reforms in the
financial sector as stated by the finance minister in the budget speech, it would
remove overhang of governance/policy deficit and will assuage investor concerns.
Automobiles (Budget impact: Positive)
Key proposals
„ Excise duty for all automobiles maintained at 10% and at 22% for large cars and utility
vehicles.
„ Target for agricultural credit flow to farmers has been increased by 27% to Rs 4.75 tn.
„ Interest subvention for crop loans has been enhanced by 100bps to 3% for farmers who
repay their crop loan on time.
„ The capital base of National Bank for Agricultural and Rurual Development (NABARD) is
proposed to be increased by Rs 30bn. Additionally, Rs 100bn will be contributed to
NABARD’s short-term rural credit fund in FY12E
„ The wage rates notified under the Mahatma Gandhi National Rural Employment
Guarantee scheme (MGNREGS) would be indexed to the Consumer Price Index for
Agricultural Labour to ensure real wages of Rs 100/day.
„ Disbursements by India Infrastructure Finance Company (IIFCL) are expected to increase
by 25% to Rs 250bn in FY12E which would provide a fillip to infrastructure projects.
„ Weighted deduction on R&D has been enhanced from 175% to 200%.
Impact
„ Flat excise duty on automobiles (vs market expectation of a 200bps hike) is positive for
the sector. An increase in excise duty in the current environment of high input costs
would have impacted ability of auto companies to take price hikes to offset pressure on
margins.
„ Continued thrust on rural agriculture and liquidity would provide support to tractor
volumes and is a positive for M&M (tractors is 50% of EBIT).
„ The absence of any specific excise duty on passenger vehicles running on diesel (mainly
utility vehicles) is a positive for M&M as 50% of its EBIT is derived from UVs.
„ Continued focus on infrastructure spending would have a positive impact on commercial
vehicles. The higher deduction now available on R&D expenses would reduce the tax
burden for companies engaged in product development. Both these measures are
positive for Tata Motors, Ashok Leyland and M&M.
Capital Goods / Utilities (Budget impact: Marginally Positive)
Key positive proposals for the sector include (1) Reduction of with holding tax for debt funds
and (2) allowing FII investments in debt paper of infra funds. Also for the near term,
Government has (1) initiated proposals to extend the tax holiday under 80IA and (2) also
brought parity in tax applicability for SEZ areas. In addition for UMPP and mega power
projects, it seems that the government has favored the domestic equipment suppliers by
giving them concessions in making excise zero though countervailing duty is applicable.
Key proposals
„ Excise duty on capital goods for existing mega or Ultra Mega Power Projects (UMPPs)
has been brought to zero, on par with imports.
„ A nominal Central Excise duty of 1 per cent without CENVAT credit facility is being
imposed on the 130 items that are entering the tax net. This seemingly includes Coal.
„ Tax holiday under Section 80 IA has been extended till March 31, 2012.
„ FII limit on Infra bonds with maturity greater than 5 years has been increased from US$ 5
bn to US$ 25 bn. FIIs would also be permitted to invest in unlisted bonds with a
minimum lock-in period of three years. However, the FIIs will be allowed to trade
amongst themselves during the lock-in period.
„ Issue of Infra tax-free bonds totaling up to INR 300 bn (INR 100 bn towards railways, INR
100 bn for NHAI, INR 50 bn for ports and INR 50 bn towards HUDCO).
„ Withholding tax has been now made at 5% (vs. 15% earlier) on infrastructure debt
funds.
„ Infrastructure status for capital investments in fertilizer sector. MAT has been imposed
on the SEZ developers and units.
„ Surcharge reduced from 7.5% to 5%. However MAT increased from 18% to 18.5%.
Impact
„ Lowering of excise duty is likely to benefit domestic equipment manufacturers and
developers who are building units based on domestic equipments.
„ Excise duty on 1% on Coal is likely to impact power, cement and steel sectors.
„ MAT for SEZ developers is likely to impact both developers and the units.
„ The 50bps increase in MAT rate is neutral to all infrastructure developers as it is offset by
the reduction in corporate tax surcharge, restricting the increase in total tax rate to 7bps.
„ Infrastructure status for capital investments in fertilizer sector may improve order inflow
from this segment for Larsen & Toubro.
Cement (Budget impact: Marginally Negative)
The budget is marginally negative for the sector as excise duty changes are likely to result in
overall costs rising marginally by 1%. This, if not passed on, is likely to result in the EBITDA/t
for FY12E being impacted by c3%.
Key proposals
„ Excise duty on cement changed from 10% of retail price to 10% ad valorem + INR 160/t
(for cement selling at retail price exceeding INR 3800/t) and from INR 290/t to 10% ad
valorem + INR 80/t. On clinker, increased from INR 375/t to 10% ad valorem + INR 200/t.
„ A tariff rate of 5% excise duty on Coal, Pet coke, Lignite, RMC, Fly ash and Wood pulp.
However, these would attract a 1% duty without CENVAT credit facility.
„ Basic customs duty reduced from 5% to 2.5% on mineral gypsum and petroleum coke.
Impact
„ The change in excise duty structure on cement is likely to result in excise duty increasing
by a marginal INR 20/t while the imposition of 1% excise duty without CENVAT credit on
coal, pet coke, lignite, RMC, fly ash is likely to impact overall costs by another INR 10/t.
„ Basic customs duty reduction on pet coke by 2.5% is likely to benefit players like Shree
Cement and UltraTech (and consequently Grasim) among the companies under
coverage.
„ This, if not passed on, is likely to result in the EBITDA/t for FY12E being impacted by
c3%.
Consumer (Budget impact: Positive)
„ Tobacco - No excise hike for FY12 (vs 10% expected) is a big positive for ITC. ITC is likely
to allow volumes to stabilise and is under no pressure now to hike cigarette prices in the
near term. ITC remains our top pick within the sector. Target price 196 (16% upside)
„ FDI in retail - As against expectations no announcement on FDI in retail is a negative for
capital strapped Indian retailers.
„ 1% additional Excise duty hike has been announced on 130 products including Branded
Jewellery, Packaged foods, ketchups, sauces, instant food mixes like noodles. We
believe that the relevant companies will pass on the hike comfortably.
Financials (Budget impact: Neutral)
Key proposals
„ Moving of various legislations pertaining to the financial sector – banking laws, SBI Act,
life insurance, etc
„ Amendments (as suggested by Reserve Bank of India) proposed to the Banking
Regulation Act in the context of additional banking licences to private sector players.
„ INR60bn to be provided during 2011-12 to enable public sector banks (PSBs) to maintain
a minimum of Tier I capital adequacy (CRAR) of 8 per cent. INR5bn to be provided to
enable Regional Rural Banks to maintain a CRAR of at least 9 per cent as on March 31,
2012.
„ Existing housing loan limit enhanced to INR2.5mn from INR2mn for dwelling units under
priority sector lending
„ Fiscal deficit kept at 4.6 per cent of GDP for 2011-12. Net market borrowing of the
government through dated securities in 2011-12 would be INR3.43 trn
Impact
„ If the legislations pertaining to financial sector are passed by the Parliament it will be a
key positive for the sector; especially, the passage of bills related to the life insurance
sector. These however need to be separately legislated and have been pending for a
long time – some of them for years.
„ Notification of final guidelines for new private sector bank licenses could be positive for a
few non-banks. Once again, this is largely driven by the Reserve Bank of India as far as
the procedure and suitability for new licences are concerned and there is no timeline for
the realization of these new licences. Our belief is that Shriram Transport Finance
(through the group) stands a good chance of getting a licence as their core business
broadly fits the criterion of financial inclusion (they have indicated that they are willing to
look at a banking licence). Generally speaking, however, it must be noted that a banking
licence is not a bonanza as it comes with significant obligations and encumbrances.
„ The amount for recapitalization for public sector banks (PSBs) in FY12 is lower than that
in FY11, but this could be due to the fact that government would have already infused
INR200bn during FY12. While the capital infusion is positive for small PSBs, it is unclear
how the proposed rights issue of SBI would be funded, since the implied government
funding for SBI’ issue alone exceeds the total recapitalization amount set aside for FY12.
„ Lower targeted fiscal deficit and lower than estimated net government borrowings in
FY12 means there is lower probability of crowding out of private sector credit demand.
However, achieving the proposed fiscal deficit target could be a challenge due to rising
subsidies, and the incremental amount is not capable of making a material difference to
aggregate loan growth.
IT Services (Budget impact: Neutral)
Increase in scope of MAT (minimum alternate tax) to impact cash flows:
The reduction in surcharge to 5% (vs 7.5% earlier) largely offsets the impact of an increased
MAT rate of 18.5% (vs 18% earlier). Thus the effective MAT rate (including surcharge and
education) is only 7bps higher yoy to 20%. However, the applicability of MAT to profits from
units under SEZ’s (Special Economic Zone) will result in an additional cash outgo for the
Indian IT services companies. Since the amount of tax paid under MAT is allowed to be
carried forward for a period of ten successive years, it will only accelerate the creation of this
asset and will have no impact on the effective tax rate for the company. In summary, the
increase in scope of tax will only increase the tax credit available to the company but will
have no incremental impact on profits.
Non extension of tax holiday for units under STPI in line with expectations:
The tax holiday under the STPI scheme promulgated under the income Tax Act 1961 has not
been extended and is set to expire by the 31st of March 2011. This would mean that for the
top tier companies under coverage the tax rate for FY12E would increase. We note that this
increase has been duly factored in our estimates.
Oil & Gas (Budget impact: Neutral)
Key proposals
„ Surcharge on corporate tax reduced from 7.5% to 5%
„ MAT rate increased from 18% to 18.5% of book profits
„ Basic Customs Duty on petcoke reduced from 5% to 2.5 per cent
„ Cash compensation for government share of subsidies to continue
„ Government to move towards direct transfer of cash subsidy to people living below
poverty line in a phased manner for better targeting of kerosene, LPG subsidy and
reduce leakage from the system
Impact
1. The expectation of reduction in customs duty on auto-fuels was not met and no roadmap
was given for alleviation of oil subsidy losses. With Brent oil price hovering above
US$110/bbl, this raises concerns on the funding of subsidy losses for oil marketing
companies (HPCL, BPCL, IOC). This is therefore a negative for oil marketing companies.
2. Direct subsidies for Kerosene and LPG to Below Poverty Line (BPL) families, as
announced in the budget, will only be implemented in a phased manner depending on
the rollout of the Unique Identity (UID) project. We expect long term benefit for the oil
marketing companies, ONGC, OIL and GAIL but minimal near term impact.
3. Reduction of surcharge from 7.5% to 5% will benefit high tax paying companies like
state-owned oil companies.
4. There is no impact of increase in minimum alternate tax (MAT) rate on RIL and Cairn India
as this is offset by reduction in surcharge.
5. Reduction of customs duty on petcoke will have a marginal adverse impact on RIL and
IOC.
Pharmaceuticals (Budget impact: Negative)
Key proposals
„ Under the existing provisions, profits from an SEZ unit are exempt from payment of
Minimum Alternate Tax (MAT) on book profits. Hence, most pharmaceutical companies
were setting up SEZ facilities to nullify the impact of higher taxes in future with older
units losing tax shelter in a phased manner. However, levying of MAT (18.5% of Book
Profits) on SEZ units is a negative surprise.
„ While a similar provision has been introduced to tax profits of Limited Liability
Partnerships (LLPs), partnership firms continue to remain exempt from MAT.
„ Under the existing provisions, dividends received from foreign subsidiary are taxed at
marginal tax rate (30% for corporates). The budget proposes to cut this tax to 15%.
Impact
„ Levying of MAT (18.5% of Book Profits) on SEZ units is a negative surprise negative
specially for companies whose effective tax rates in FY12e was lower than MAT (~20%
including surcharge and cess) – Lupin (14%), Cipla (17%), DRL (18%), Biocon (19%),
and Glenmark (19%).
„ Sun Pharma has an effective tax rate of 8% in FY12e largely due to profit sharing from
partnership firms that are exempt from taxes as they are in Backward Areas. This would
continue in the future as these partnership firms are neither LLPs nor in SEZs.
„ While lower tax rate on dividend income from foreign subsidiaries is positive as most
companies have quite a few foreign subsidiaries, the impact is nominal as most of the
profits are captured at parent level in India to enjoy the comparatively liberal taxation
here.
„ We have an underweight rating on the sector and prefer only Aurobindo. We have a Sell
rating on Ranbaxy, Dr. Reddy’s and Biocon.
Real Estate (Budget impact: Neutral)
Key highlights
„ The existing scheme of interest subvention of 1% on housing loans is being extended
for housing loans upto INR 1.5m (earlier INR 1m) where the cost of the house does not
exceed INR 2.5m (earlier INR 2m). This marginally improves affordability
„ Housing loan limit under priority sector lending by banks has been increased to INR 2.5m
(earlier INR 2m). With banks striving to meet their priority sector lending norms, this
proposal may increase lending for such affordable housing.
„ However, levying of MAT (18.5% of Book Profits) on SEZ developers is a surprise
negative. Furthermore, applicability of MAT for end-users of SEZs may reduce the
attractiveness of shifting to SEZs for end-users and hence, constrain demand of SEZs.
Impact
„ Higher flow of funds to affordable homes segment (INR 2-5m) and interest subvention
will boost demand for such homes. This will be positive for developers targeting this
segment – HDIL, Sobha Developers and Puravankara Projects.
„ However, levying of MAT on SEZ developers and end-users is negative for developers
focusing on SEZs – DLF, Unitech and Indiabulls Real Estate.
„ At current levels, we prefer Sobha, India Bulls Real Estate and HDIL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Budget: 2011-12
Status quo, thrust on consumption stays
Walking a difficult tightrope, thrust on domestic consumption continues
The FY12 union budget has tried to walk the difficult tightrope of achieving fiscal
consolidation without unduly undermining the country’s inherent growth dynamic,
particularly through keeping consumption growth drivers intact. While the finance
minister kept both excise duties and service tax rates unchanged (contrary to all
expectations), the fiscal deficit for FY12 is pegged at 4.6% (a 50bps decline over
the budgeted deficit estimate of 5.1% for FY11) – relying heavily on tax buoyancy
and lower subsidies bill. The net borrowing target for FY12 has also been pegged
at Rs3430bn – if achieved will help assuage concerns on government crowding
out. We believe both bond as well as equity markets will be monitoring these
numbers keenly as they appear optimistic, particularly in the current environment
of elevated commodity prices and slowing industrial growth momentum.
Focused on the common man, domestic consumption and agriculture
We believe that the finance minister has addressed three focus areas through the
budget – the common man (basic income tax exemption limit raised by
Rs20,000/annum), Indian agriculture (raising banking credit targets for farmers,
linking MGNREGS wages to inflation, enhancing interest subvention to crop loans
and incentivizing investments in food supply chain to address structural supply
side constraints) and domestic consumption (through continuing with stimulus
announced during global financial crisis, despite the urgent need for fiscal
consolidation). While we are enthused with the announcement to allow foreign
retail investors to invest in Indian mutual funds, the budget had little to offer to
equity markets. Among key measures for infrastructure were (a) higher allocation
to Bharat Nirman (+21% yoy), (b) raising the FII limit for corporate bonds of
infrastructure companies to US$25bn (vs. US$5bn) and (c) permission for issuance
of tax-free bonds worth INR300bn for investment in infrastructure.
Key winners Autos, FMCG; key losers: Pharma; iron ore
Auto and consumer stocks are likely to be the biggest beneficiaries on account of
status quo being maintained on excise duties (a big surprise with market expecting
a 200bps hike in excise duty rates) with M&M, Bajaj, Hero, Honda, TVS Motors,
Maruti and ITC likely to emerge as key winners. Pharma companies seem to be
the most negatively impacted as a combination of MAT on SEZ and tax on profits
of Limited Liability Partnerships is expected to affect Lupin, Cipla, Biocon, DRL
and Sun Pharma. The overall net impact on IT Services, Financials, Oil & Gas and
Real Estate is expected to be neutral.
Long term story intact, headwinds to continue in near term
While we remain convinced about the long term India investment thesis, we
remain concerned over three key factors in immediate term – persistent and
elevated inflation, oil price volatility fuelled by the insurrections in the MENA
countries and policy inertia. In case the government of India is able to move ahead
on long pending second generation reforms, beginning with reforms in the
financial sector as stated by the finance minister in the budget speech, it would
remove overhang of governance/policy deficit and will assuage investor concerns.
Automobiles (Budget impact: Positive)
Key proposals
„ Excise duty for all automobiles maintained at 10% and at 22% for large cars and utility
vehicles.
„ Target for agricultural credit flow to farmers has been increased by 27% to Rs 4.75 tn.
„ Interest subvention for crop loans has been enhanced by 100bps to 3% for farmers who
repay their crop loan on time.
„ The capital base of National Bank for Agricultural and Rurual Development (NABARD) is
proposed to be increased by Rs 30bn. Additionally, Rs 100bn will be contributed to
NABARD’s short-term rural credit fund in FY12E
„ The wage rates notified under the Mahatma Gandhi National Rural Employment
Guarantee scheme (MGNREGS) would be indexed to the Consumer Price Index for
Agricultural Labour to ensure real wages of Rs 100/day.
„ Disbursements by India Infrastructure Finance Company (IIFCL) are expected to increase
by 25% to Rs 250bn in FY12E which would provide a fillip to infrastructure projects.
„ Weighted deduction on R&D has been enhanced from 175% to 200%.
Impact
„ Flat excise duty on automobiles (vs market expectation of a 200bps hike) is positive for
the sector. An increase in excise duty in the current environment of high input costs
would have impacted ability of auto companies to take price hikes to offset pressure on
margins.
„ Continued thrust on rural agriculture and liquidity would provide support to tractor
volumes and is a positive for M&M (tractors is 50% of EBIT).
„ The absence of any specific excise duty on passenger vehicles running on diesel (mainly
utility vehicles) is a positive for M&M as 50% of its EBIT is derived from UVs.
„ Continued focus on infrastructure spending would have a positive impact on commercial
vehicles. The higher deduction now available on R&D expenses would reduce the tax
burden for companies engaged in product development. Both these measures are
positive for Tata Motors, Ashok Leyland and M&M.
Capital Goods / Utilities (Budget impact: Marginally Positive)
Key positive proposals for the sector include (1) Reduction of with holding tax for debt funds
and (2) allowing FII investments in debt paper of infra funds. Also for the near term,
Government has (1) initiated proposals to extend the tax holiday under 80IA and (2) also
brought parity in tax applicability for SEZ areas. In addition for UMPP and mega power
projects, it seems that the government has favored the domestic equipment suppliers by
giving them concessions in making excise zero though countervailing duty is applicable.
Key proposals
„ Excise duty on capital goods for existing mega or Ultra Mega Power Projects (UMPPs)
has been brought to zero, on par with imports.
„ A nominal Central Excise duty of 1 per cent without CENVAT credit facility is being
imposed on the 130 items that are entering the tax net. This seemingly includes Coal.
„ Tax holiday under Section 80 IA has been extended till March 31, 2012.
„ FII limit on Infra bonds with maturity greater than 5 years has been increased from US$ 5
bn to US$ 25 bn. FIIs would also be permitted to invest in unlisted bonds with a
minimum lock-in period of three years. However, the FIIs will be allowed to trade
amongst themselves during the lock-in period.
„ Issue of Infra tax-free bonds totaling up to INR 300 bn (INR 100 bn towards railways, INR
100 bn for NHAI, INR 50 bn for ports and INR 50 bn towards HUDCO).
„ Withholding tax has been now made at 5% (vs. 15% earlier) on infrastructure debt
funds.
„ Infrastructure status for capital investments in fertilizer sector. MAT has been imposed
on the SEZ developers and units.
„ Surcharge reduced from 7.5% to 5%. However MAT increased from 18% to 18.5%.
Impact
„ Lowering of excise duty is likely to benefit domestic equipment manufacturers and
developers who are building units based on domestic equipments.
„ Excise duty on 1% on Coal is likely to impact power, cement and steel sectors.
„ MAT for SEZ developers is likely to impact both developers and the units.
„ The 50bps increase in MAT rate is neutral to all infrastructure developers as it is offset by
the reduction in corporate tax surcharge, restricting the increase in total tax rate to 7bps.
„ Infrastructure status for capital investments in fertilizer sector may improve order inflow
from this segment for Larsen & Toubro.
Cement (Budget impact: Marginally Negative)
The budget is marginally negative for the sector as excise duty changes are likely to result in
overall costs rising marginally by 1%. This, if not passed on, is likely to result in the EBITDA/t
for FY12E being impacted by c3%.
Key proposals
„ Excise duty on cement changed from 10% of retail price to 10% ad valorem + INR 160/t
(for cement selling at retail price exceeding INR 3800/t) and from INR 290/t to 10% ad
valorem + INR 80/t. On clinker, increased from INR 375/t to 10% ad valorem + INR 200/t.
„ A tariff rate of 5% excise duty on Coal, Pet coke, Lignite, RMC, Fly ash and Wood pulp.
However, these would attract a 1% duty without CENVAT credit facility.
„ Basic customs duty reduced from 5% to 2.5% on mineral gypsum and petroleum coke.
Impact
„ The change in excise duty structure on cement is likely to result in excise duty increasing
by a marginal INR 20/t while the imposition of 1% excise duty without CENVAT credit on
coal, pet coke, lignite, RMC, fly ash is likely to impact overall costs by another INR 10/t.
„ Basic customs duty reduction on pet coke by 2.5% is likely to benefit players like Shree
Cement and UltraTech (and consequently Grasim) among the companies under
coverage.
„ This, if not passed on, is likely to result in the EBITDA/t for FY12E being impacted by
c3%.
Consumer (Budget impact: Positive)
„ Tobacco - No excise hike for FY12 (vs 10% expected) is a big positive for ITC. ITC is likely
to allow volumes to stabilise and is under no pressure now to hike cigarette prices in the
near term. ITC remains our top pick within the sector. Target price 196 (16% upside)
„ FDI in retail - As against expectations no announcement on FDI in retail is a negative for
capital strapped Indian retailers.
„ 1% additional Excise duty hike has been announced on 130 products including Branded
Jewellery, Packaged foods, ketchups, sauces, instant food mixes like noodles. We
believe that the relevant companies will pass on the hike comfortably.
Financials (Budget impact: Neutral)
Key proposals
„ Moving of various legislations pertaining to the financial sector – banking laws, SBI Act,
life insurance, etc
„ Amendments (as suggested by Reserve Bank of India) proposed to the Banking
Regulation Act in the context of additional banking licences to private sector players.
„ INR60bn to be provided during 2011-12 to enable public sector banks (PSBs) to maintain
a minimum of Tier I capital adequacy (CRAR) of 8 per cent. INR5bn to be provided to
enable Regional Rural Banks to maintain a CRAR of at least 9 per cent as on March 31,
2012.
„ Existing housing loan limit enhanced to INR2.5mn from INR2mn for dwelling units under
priority sector lending
„ Fiscal deficit kept at 4.6 per cent of GDP for 2011-12. Net market borrowing of the
government through dated securities in 2011-12 would be INR3.43 trn
Impact
„ If the legislations pertaining to financial sector are passed by the Parliament it will be a
key positive for the sector; especially, the passage of bills related to the life insurance
sector. These however need to be separately legislated and have been pending for a
long time – some of them for years.
„ Notification of final guidelines for new private sector bank licenses could be positive for a
few non-banks. Once again, this is largely driven by the Reserve Bank of India as far as
the procedure and suitability for new licences are concerned and there is no timeline for
the realization of these new licences. Our belief is that Shriram Transport Finance
(through the group) stands a good chance of getting a licence as their core business
broadly fits the criterion of financial inclusion (they have indicated that they are willing to
look at a banking licence). Generally speaking, however, it must be noted that a banking
licence is not a bonanza as it comes with significant obligations and encumbrances.
„ The amount for recapitalization for public sector banks (PSBs) in FY12 is lower than that
in FY11, but this could be due to the fact that government would have already infused
INR200bn during FY12. While the capital infusion is positive for small PSBs, it is unclear
how the proposed rights issue of SBI would be funded, since the implied government
funding for SBI’ issue alone exceeds the total recapitalization amount set aside for FY12.
„ Lower targeted fiscal deficit and lower than estimated net government borrowings in
FY12 means there is lower probability of crowding out of private sector credit demand.
However, achieving the proposed fiscal deficit target could be a challenge due to rising
subsidies, and the incremental amount is not capable of making a material difference to
aggregate loan growth.
IT Services (Budget impact: Neutral)
Increase in scope of MAT (minimum alternate tax) to impact cash flows:
The reduction in surcharge to 5% (vs 7.5% earlier) largely offsets the impact of an increased
MAT rate of 18.5% (vs 18% earlier). Thus the effective MAT rate (including surcharge and
education) is only 7bps higher yoy to 20%. However, the applicability of MAT to profits from
units under SEZ’s (Special Economic Zone) will result in an additional cash outgo for the
Indian IT services companies. Since the amount of tax paid under MAT is allowed to be
carried forward for a period of ten successive years, it will only accelerate the creation of this
asset and will have no impact on the effective tax rate for the company. In summary, the
increase in scope of tax will only increase the tax credit available to the company but will
have no incremental impact on profits.
Non extension of tax holiday for units under STPI in line with expectations:
The tax holiday under the STPI scheme promulgated under the income Tax Act 1961 has not
been extended and is set to expire by the 31st of March 2011. This would mean that for the
top tier companies under coverage the tax rate for FY12E would increase. We note that this
increase has been duly factored in our estimates.
Oil & Gas (Budget impact: Neutral)
Key proposals
„ Surcharge on corporate tax reduced from 7.5% to 5%
„ MAT rate increased from 18% to 18.5% of book profits
„ Basic Customs Duty on petcoke reduced from 5% to 2.5 per cent
„ Cash compensation for government share of subsidies to continue
„ Government to move towards direct transfer of cash subsidy to people living below
poverty line in a phased manner for better targeting of kerosene, LPG subsidy and
reduce leakage from the system
Impact
1. The expectation of reduction in customs duty on auto-fuels was not met and no roadmap
was given for alleviation of oil subsidy losses. With Brent oil price hovering above
US$110/bbl, this raises concerns on the funding of subsidy losses for oil marketing
companies (HPCL, BPCL, IOC). This is therefore a negative for oil marketing companies.
2. Direct subsidies for Kerosene and LPG to Below Poverty Line (BPL) families, as
announced in the budget, will only be implemented in a phased manner depending on
the rollout of the Unique Identity (UID) project. We expect long term benefit for the oil
marketing companies, ONGC, OIL and GAIL but minimal near term impact.
3. Reduction of surcharge from 7.5% to 5% will benefit high tax paying companies like
state-owned oil companies.
4. There is no impact of increase in minimum alternate tax (MAT) rate on RIL and Cairn India
as this is offset by reduction in surcharge.
5. Reduction of customs duty on petcoke will have a marginal adverse impact on RIL and
IOC.
Pharmaceuticals (Budget impact: Negative)
Key proposals
„ Under the existing provisions, profits from an SEZ unit are exempt from payment of
Minimum Alternate Tax (MAT) on book profits. Hence, most pharmaceutical companies
were setting up SEZ facilities to nullify the impact of higher taxes in future with older
units losing tax shelter in a phased manner. However, levying of MAT (18.5% of Book
Profits) on SEZ units is a negative surprise.
„ While a similar provision has been introduced to tax profits of Limited Liability
Partnerships (LLPs), partnership firms continue to remain exempt from MAT.
„ Under the existing provisions, dividends received from foreign subsidiary are taxed at
marginal tax rate (30% for corporates). The budget proposes to cut this tax to 15%.
Impact
„ Levying of MAT (18.5% of Book Profits) on SEZ units is a negative surprise negative
specially for companies whose effective tax rates in FY12e was lower than MAT (~20%
including surcharge and cess) – Lupin (14%), Cipla (17%), DRL (18%), Biocon (19%),
and Glenmark (19%).
„ Sun Pharma has an effective tax rate of 8% in FY12e largely due to profit sharing from
partnership firms that are exempt from taxes as they are in Backward Areas. This would
continue in the future as these partnership firms are neither LLPs nor in SEZs.
„ While lower tax rate on dividend income from foreign subsidiaries is positive as most
companies have quite a few foreign subsidiaries, the impact is nominal as most of the
profits are captured at parent level in India to enjoy the comparatively liberal taxation
here.
„ We have an underweight rating on the sector and prefer only Aurobindo. We have a Sell
rating on Ranbaxy, Dr. Reddy’s and Biocon.
Real Estate (Budget impact: Neutral)
Key highlights
„ The existing scheme of interest subvention of 1% on housing loans is being extended
for housing loans upto INR 1.5m (earlier INR 1m) where the cost of the house does not
exceed INR 2.5m (earlier INR 2m). This marginally improves affordability
„ Housing loan limit under priority sector lending by banks has been increased to INR 2.5m
(earlier INR 2m). With banks striving to meet their priority sector lending norms, this
proposal may increase lending for such affordable housing.
„ However, levying of MAT (18.5% of Book Profits) on SEZ developers is a surprise
negative. Furthermore, applicability of MAT for end-users of SEZs may reduce the
attractiveness of shifting to SEZs for end-users and hence, constrain demand of SEZs.
Impact
„ Higher flow of funds to affordable homes segment (INR 2-5m) and interest subvention
will boost demand for such homes. This will be positive for developers targeting this
segment – HDIL, Sobha Developers and Puravankara Projects.
„ However, levying of MAT on SEZ developers and end-users is negative for developers
focusing on SEZs – DLF, Unitech and Indiabulls Real Estate.
„ At current levels, we prefer Sobha, India Bulls Real Estate and HDIL.
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