Union Budget FY16 & Strategy: Finally, Growth Gets a Chance :: Edelweiss

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We are pleasantly surprised by the Union Budget FY16 - focus on quality growth at the expense of near term miss in FRBM targets is the step in the right direction. We highlight that the revenue assumptions are credible and see little risk to a 3.9% fiscal deficit target for FY16. Near term growth concerns have been addressed by upsized investments in roads/railways. Importantly, we believe that the Budget has laid a roadmap for critical reforms anchored around: (a) fiscal consolidation; (b) ease of doing business; and (c) encouraging higher savings. Fiscal reforms are being addressed through committing to implementation of GST and Direct Benefit Transfers and simplifying the tax structure. Ease of doing business is being facilitated through multiple levers of revamping bankruptcy laws, remodeling PPP contracts, plug & play contracts, among others.  Finally, innovative attempts have been made not only to encourage financial savings but also unlock massive gold holdings in the country. Some notable misses are lack of measures to jump-start affordable housing and any plan to deal with existing stressed assets. Bank recapitalisation figures disappoint and credit capacity could be challenged. We wager policy actions outside the Budget will address these issues.  Equity strategy remains mostly unchanged with a focus on early cyclicals. We remain convinced about infra cycle picking up and EPC/BOT players being direct beneficiaries.

Fiscal math: We got what we asked for

• The economy has got the fiscal policy it needed. Fiscal targets have been relaxed for FY16 from 3.6% (under FRBM) to 3.9%, and the medium term fiscal target of 3% has been pushed out by one year.
• Thus, fiscal impetus to the economy will turn mildly favourable after being adverse for past 5 years. Infrastructure (roads, railways) is the key thrust area. Crucially, all this is done without compromising on the credibility of fiscal math.

Policy reforms: The common thread is fiscal consolidation, innovatively

• The government`s commitment to the path of fiscal consolidation is well showcased by its seriousness with regards to: 1) GST- sizeable allocation of GST compensation to the states last year and handsome provisions for FY16; 2) swift progress on direct benefit transfers through JAM trinity (Jan Dhan-Aadhar-Mobile) to make social transfers leakage proof; and 3) a more simplified tax structure (lower corporate tax rate while eliminating exemptions) to allow for better compliance.

Ease of doing business: Connecting the dots

• The finance minister (FM) mentioned several initiatives - revamping the bankruptcy law to match global standards, introducing the Public Contracts (Resolution of Disputes) Bill to make conflict resolution less cumbersome; revisiting the PPP model to reduce private sector risks, and considering plug and play model for power, roads, etc. All this taken together means a big push to the ease of doing business.

Encouraging financial savings

• The Budget made a clear attempt to encourage financial savings by giving tax incentives on health insurance and pension, and offering schemes on gold - sovereign gold bond (a financial asset as an alternative to gold) and the gold monetisation scheme, which will help reduce the allure of physical gold as a means of saving.

What we did not get?

• Lack of specific announcement with regards to affordable housing, inadequate provisions for public sector banks` recapitalisation and absence of policy measures to address the issue of existing stressed assets were some of the disappointments in the Budget. We hope some of  these issues will get addressed outside the Budget.

Equity Strategy: We stick with what we have   

• At the cost of being immodest, we have got what we were looking for - growth rebound with government push - private consumption will pick up as consumers reassess higher real incomes.
• We have little idea what markets will do in the near term, especially given the recent market moves, but still remain convinced that markets are a Buy with a 12-18 months time frame. We have long argued that apart from earnings growth, valuations will be positively influenced by falling interest rate expectations and consequently lower risk free rates - this fundamentally impacts valuations.
• Early cyclicals remain best bets. We are getting more biased towards PSU banks and are evaluating higher weightages. EPC companies are the biggest beneficiaries of the Budget.