Budget 2013 Special Report Preview

Budget- 13 Special Preview Report - Profit this Budget with wonderful Insights & Key Pre-Budget expectations

Content Index

• Broad Stock Market Outlook – Budget 13 to Budget 14. • Budget’s Core Macro Projections. (HBJ Views on Broad Economy) • P. Chidambaram’s Expectation Meter + Possible Aces. • Best Sectors and Themes in Stocks for FY-2014 post Budget. • TOP 2 Medium Term Stock Picks with Huge Upside Potential.

(Research Reports from our Exclusive Institutional - Bulls Eye Stock Package) • Impact of Budget on Various Stocks/ Sectors.

(Structural Changes + One-Off positive/ negative Impacts) • High Impact Stocks to watch out for in this Budget.

“ Specialists in discovering Multibagger stocks “

Broad Stock Market Outlook – Budget 13 to Budget 14 Stock Markets – Stock Markets after a strong 2012, has started the new year on a weak note. While the Headline Indices are slightly negative, the underlying trend amongst Mid-Cap and Small-Cap stocks have been very weak with several stocks crashing between 20-30%. We believe that Markets are giving us clear signs of Consolidation and Base building for a strong Multi-Year rally. While we have been writing about this hypothesis of “Initial days of a Bull Market” for the last 15 months, we believe that our conviction continues to strengthen with various developments.

We believe with the right noises from the Budget, Markets should get a fillip and resume its uptrend. With very low participation, we continue to believe in Sir John Templeton’s wisdom of – “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria”. Last Year’s rally didn’t make Investors confident instead there is huge Skepticism which can be seen from the strong Redemption pressure across Mutual Funds and Insurance. We believe with the Markets generating good returns going forward, this Skepticism will slowly turn towards Optimism.

Company level Factors – The sharp slow down in GDP growth from 9.5% to 5% within a few Quarters is affecting several companies. Especially companies with weaker Pricing power and High Operational leverage are getting hit hard. Impact on Topline is inline with Growth slowdown but the bigger hit has been on the Margins. With a slow Economic recovery, we believe it would take some time for companies to get back to their Ideal Margins. This provides good Investment opportunities in stocks where there is Operational Leverage with decent Pricing power which will result in gradual Margin improvement leading to Higher Return ratios and eventually higher Valuations. The time line for this would vary depending on Growth improvements and Sectoral dynamics.

Secular Bull Market – We believe while the Multi-Year rally is definitely on the cards, a secular Bull Market requires a few other factors to fall in place. This involves converting the Cyclical Economic recovery into a Structural one with reforms to deal with High Imports, Large Subsidies and Policy decisions to create a favorable Business environment. In addition Capital Market boosting reforms to increase the Equity Allocation of Indians would result in probably a – “Mother of all Bull Markets” over the next decade.


Broad Core Macro Projections


Data categories and components Units 2008-09

2009-

10(PE)

2010-

11(QE)

2011-

12(AE)

2012-

13(BE) 2013-14(BE) GDP and Related Indicators

GDP (current market prices) Rs. crore 5630063 6457352 7674148 8912178 10222268 11704497

Growth Rate % 12.9 14.7 18.8 16.1 14.7 14.5

GDP (factor cost 2004-05 prices) Rs. crore 4158676 4507637 4885954 5222027 5535349 5895146

Growth Rate % 6.7 8.4 8.4 6.9 5.6 6.5

Savings Rate % of GDP 32 33.8 32.3 na 31 32

Capital Formation (rate) % of GDP 34.3 36.6 35.1 na 35.96 36.01

Per Capita Net National Income Rs.

40775 46117 53331 60972 69508.08 79934.292 (factor cost at current prices)

Production

Food grains Mn tonnes 234.5 218.1 244.8 250.4 255.4 260.5

Index of Industrial Production(Growth) Per cent 2.5 5.3 8.2 3.6 4.5 5.5

Electricity Generation(Growth) Per cent 2.7 6.1 5.5 9.4 6 7

Prices

Inflation (WPI) (52-week average) % Change 8.1 3.8 9.6 9.1 8.8 8

Inflation CPI (IW) (average) % Change 9.1 12.4 10.4 8.4 9 9

External Sector

Export Growth ( US$) % Change 13.6 -3.5 40.5 23.5 25 27

Import Growth (US$) % Change 20.7 -5 28.2 29.4 27 28

Current Account Balance (CAB)/GDP Per cent -2.3 -2.8 -2.7 -3.6 -4.2 -4.7

Foreign Exchange Reserves US$ Bn. 252 279.1 304.8 292.8 286.9 281.2

Average Exchange Rate US$ Bn. 45.99 47.44 45.56 47.7 50 51

Money and Credit

Broad Money (M3) (annual) % Change 19.3 16.8 16 14.4 15 16

Scheduled Commercial Bank Credit(Growth) % Change 17.5 16.9 21.5 16.4 17 17.5

Fiscal Indicators (Centre)

Gross Fiscal Deficit % of GDP 6 6.5 4.8 4.6 4 4

Revenue Deficit % of GDP 4.5 5.2 3.2 3.4 3.6 3.9

Primary Deficit % of GDP 2.6 3.2 1.8 1.6 1.4 1.2

Population Million 1154 1170 1210 na na na

Broad Economic Outlook Macro Economy :- The country’s Macros continues to be weak with a Large Current Account deficit, Sticky Inflation, High cost of borrowings, deteriorating Savings Rate and a stalled Investment cycle. Our analysis show that these Variables are much more inter-linked and a few triggers can create a big positive impact in a short time period. We believe that the trend of deteriorating variables is over with several parameters bottoming out and slowly the Vicious cycle will turn into a Virtuous cycle along with Positive sentiments.

Interest Rates :- RBI has started reducing Interest Rates with the latest being a 25 Bps cut in January. We believe with Inflation moderating, RBI has scope for a few more Rate Cuts which will be a positive for Markets. Currently Interest Payments as % of Revenues is high leading to lower profitability and this can be reversed with Rate cuts. Also, Interest Rate cuts in itself can reduce the Fiscal deficit considering the fact that a substantial amount of Government Revenues goes towards Interest Payments and any reduction in Borrowing costs will benefit the Government.

Fiscal Deficit :- The main focus of this Budget is expected to be revolving around containing Fiscal Deficit. The Government has shown resolve to take some Hard decisions, but still we need to look for the Quality of Fiscal Deficit reduction. A lower Fiscal Deficit re-balances the Economy with more Capital being available for Private Enterprises leading to higher Supply of goods. This is a major reason for Sticky inflation and with proper Fiscal consolidation, we believe that Inflation will trend lower structurally.

Inflation :- Indian consumer Inflation still remains high and with some of the Suppressed inflation showing up with Fuel Price de-regulation and Power costs increase, we believe that Inflation will moderate but not dramatically. But with Fiscal consolidation and demand slowdown, medium term view looks bright. Food Inflation which is a major contributor will ease only with strong Supply related Policies which can be a positive surprise in this Budget.

Currency :- High Gold and Crude imports are leading to a large Current account deficit and considering their in-elastic nature, even a Rupee depreciation will not affect their demand and in fact they would only affect the Fiscal consolidation in the form of Higher Fuel subsidies. But a Rupee depreciation is required to mitigate the negative effects of High Land price inflation and boost Exports along with Import substitution.


Chidambaram’s Expectation Meter + Possible Aces With the last Budget before elections, we believe Mr. Chidambaram has the tough act of balancing “Good Politics with Good Economics”. With very little space for maneuvering along with several pre-Budget decisions taken already, we expect a stable Budget which will be well received by the Market.

- Kick starting the economy by reviving the Investment cycle and curbing on spending requires some political will. The gains of these would be reaped only after next year’s elections, forcing the Government to compromise on the Quality of Fiscal Consolidation by cutting out politically less-sensitive subsidies. Any positive surprise here will really take the Markets higher.

- Finance Ministry has already indicated cuts in Defense and NREGA schemes. These are good starting points for Fiscal Consolidation and increase in Investments from PSU’s will certainly help in reviving the Investment cycle.

- We must expect a fairly stable Taxation policy with little tinkering and an aggressive push for getting in GST and DTC reforms as soon as possible.


Problem/ Issue Possible Aces from the Finance Minister

Low Financial savings, Negative Equity allocations. Boost Capital Markets through STT cut, simpler Rajiv

Gandhi Equity scheme.

Real Estate price rise, Housing Shortage, Cyclical

boost to the Economy.

Boost housing by increasing Tax Exemption limits and lower

Tax for Affordable Housing projects.

Food Inflation, Inclusive Politics, Small Farmer

empowerment, Rural Economy boost

Increased Equity Allocation to Farmer groups, Higher

subsidies to boost productivity.

Sectors/ Themes post Budget

Sector PROPOSED IMPACT Stocks/ Companies.

Benefitted

Probability

Oil & Gas

To do away with 5% excise duty on

LNG

Marginally

Positive GAIL, Petronet LNG Yes

To do away with VAT on LNG &

Natural Gas

Marginally

Positive All Oil & Gas companies

No - States has

to agree

Benefits U/S 80IA of the Income

Tax Act

Marginally

Positive

ONGC, OIL India, Cairn,

IOC,HPCL,BPCL,RIL No

To do away with National calamity

duty of Rs.50/tonne

Marginally

Positive IOC,HPCL,BPCL Yes

While Budget as such may not have a structural impact on many sectors, but the holistic Government policies will certainly affect several sectors. We believe that Taxation reforms will have a huge positive impact on several sectors including Logistics, Manufacturing etc. Sectoral Shift :- (Impact on Consumption and Investment Related Stocks) We believe with the Macro policy turning towards improving Investment cycle and reducing Consumer related subsidies, we believe that there will be a temporary slowdown in the Consumption stocks while they will still continue to be leaders of the next Bull Market. Increased Customer taxation along with pruning down of subsidies (Fuel, Power, Fertilizer) should temporarily halt the growth in discretionary spending. Oil & Gas Sector :- (Biggest beneficiary of Government policies) HBJ’s Research team is of the strong view that the biggest beneficiary of Government’s action will be the Oil & Gas sector which has been subdued over the past several years. While all companies have a benefit, the biggest beneficiaries will be the Upstream Oil companies on which we will put out a separate report.

Our Special Sample Call from our Highly Successful HNI Package

J****D***, H**M** (BUY) – Bulls Eye Call Maximum Allocation :- 5-7 %

Entry : Buying Strategy

1st Phase (Now) of Accumulation :- 70% of Allocation.

These Calls needs to be accumulated slowly and if we are seeing small dips, Investors can add more. The Second phase of buying will be suggested later.

Exit : Selling Strategy

We would intend to exit around Q3-FY 14 (or) at around 35% profits from current Buy Levels. We believe that the Returns can be even Higher with a slightly longer Time frame considering Election Schedules. Anyways, exit strategy will be communicated to our Clients.

Classification Type : Tactical Positioning Call

One Liner on Call :- With a number of Elections coming up in the next year combined with a cyclical Economic recovery, these Stocks will be the biggest beneficiaries over the next 2-3 Quarters.

Sub – Allocations : J***D*** :- 3-4 % H**M** :- 2-3 % Accumulation Range :

J***D*** = 90-105 H**M** = 85-100

Significant Event – Elections (State and General) Strategy – Build positions before other Market Participants jump in. Target Price/ Stop Loss – J***D*** = 135 / 80 H**M** = 140 / 80 Time Frame – 8 to 10 Months (See : Exit)

Core Investment Thesis Tactical Triggers :-

Macro Event :- Elections, RBI Interest rate cuts.

Cyclical Factors :- Economic Recovery, Ad Spend growth, Newsprint Price decline.

Entry Triggers :- Current Mid-Cap correction. Average Prices at >30% discount.

Two Stocks has been selected to get Diversity and also to have one Low Beta & another High Beta play:

English Media – HT Media

Hindi Media – Jagran Prakashan

Long Term Business Quality of these Stocks

J***D*** – Good (High Dividend Yield )

H***M** – Not Good (Play with stricter Stop Losses )

Conclusion : With Markets going through a temporary Correction phase, we would like to take

advantage of it and build positions at lower prices. Markets are still not factoring in the improved Earnings

estimates based on the expected News flow and these stocks will start garnering limelight once the

Election based News flow starts getting heavy. We would like to position ourselves before the Market and

earn superior returns on these stocks. We are also constructive on the Overall Market conditions with the

SENSEX expected to provide decent returns over the next 6-9 Months. We believe that these stocks driven

by higher Interest and better Earnings, will outperform the Markets significantly.

Investment Analysis & Rationale

Elections Calendar State Elections in 2013

Karnataka

Madhya Pradesh *

Delhi *

Rajasthan *

Chhattisgarh *

Nagaland

Tripura

Mizoram

Meghalaya

Jammu and Kashmir

• Election Calendar is highly back-ended with most Major Elections (Delhi, Rajasthan & Madhya Pradesh) scheduled towards the end of the Year with few small states during March and Karnataka in July. In addition to these Elections, we have in May -2014 : General Elections combined with state Elections to Key states like Maharashtra, Andhra Pradesh etc.

• Indian Elections in itself is a Huge Quantitative boost with Huge Spending from all candidates. We expect this year to be no different and in fact higher spending compared with previous elections.

• With Political heat increasing through the year, we believe that the Print Media stocks will be a big beneficiary. There are several benefits of Election Calendar – Increased focus on XXXXX.

• In last Election year of 2009, Indian Government is said to have increased its Spending by over 20% and informal spending shot up by over 40%. We have also witnessed this impact on other Media companies like Radios too.

* - High Impact Elections

• In last year’s Gujarat Election, ENIL (Radio Mirchi) is set to have raked in Advertising revenue almost equal to the General elections of 2009 which shows the increasing Ad spending during Elections.

• XXXXX are said to have almost 70% Revenues from Ads and almost 15% Ads are said to be contributed through Government agencies and any increase will lead to a decent enough growth on its EPS.

Sectoral Triggers

• Print Media accounts for almost 50% of the Total Ad spends in this country. In spite of emergence of other Media, there is nothing which will match the sheer reach of Print. Hence we believe that the best way to play revival in Ad spend growth is through Print Media Stocks.

• Advertising which contribute majorly to Revenues has been slightly dull overall the last two years inline with the overall Economic slowdown. With Interest Rates falling, Government being reformist combined with lower Inflation will lead to a Economic recovery which will improve Ad spends.

• Major reason for the Margin compression in Print Media stocks over the past 2 years has been the increasing Newsprint costs. There too, the bigger component of the increase had come from Rupee depreciation. We believe that with the Rupee stabilizing the Cost pressures would ease resulting in healthy margins and visibility for these companies.

• There is enough Operational Leverage in the business as improvement in Revenues will lead to significant improvement in Margins. There is a strong Re-Rating possibility in these stocks.

Sample Copy – Only for our Privileged Clients

J**D*** – Snapshot (India’s largest M**D)

• Jagran Prakashan is India’s leading daily with Huge readership of its Flagship – “Dainik Jagran” across the country. It’s Huge readership base is a delight for any Advertiser.

• Company has been growing both Organically and through acquisitions like its latest – Nai Duniya. With increasing Rural prosperity and literacy, Jagran has a strong Long Term positioning.

• Jagran has strong Financials with a robust Balance sheet. Since it’s a Capital Light business model, Jagran continues to have very strong Dividend Payout ratio upwards of 70% and hence a Dividend Yield of > 3.4 %.

• Even in an Economic down cycle, Jagran has been able to post strong Return ratios. Its ROE has been over 20% and we believe in a stronger Economy, its Return on Equity can in fact start inching towards 30%. Company continues to throws cash and hence even other than this Medium Term Call, the stock is a good Investment for one’s Portfolio


H***M** – Snapshot (Delhi’s largest M**D)

• HT Media is one of the oldest and most Respected Media houses in this country. It is being run by Mrs. Shobana Bhartia, one of the scions of Birla family. • HT Media has been aggressive in the recent times with launch of several Media properties and aggressive rollout of new Editions along with entering newer Markets. • While this has certainly resulted in higher Top line, company has been consistently lagging behind its peers in Margins and Bottom-line performance considering many of the initiatives are still loss making.

• HT Media has a strong Cash Surplus balance sheet, but its Returns ratios are poor. It’s ROE is around 10% which makes sure that the stock trades at a significant discount to its Peers and deservedly so. • We believe that considering the long term gestation period of several of its initiatives, Investors should continue to look at this Stock from the Event Trigger based scenario and not as a long term Investment opportunity.


Overall View on Bets

• We are providing these Medium Term Investment calls and considering the fact that there are Multiple Triggers, we believe Investors can confidently build Strong positions. • Amongst the two bets given, we have lower Weightage for HT Media as it is more Risky considering the below average Fundamentals of the Stock. We are including it for the reason that it has a Higher Returns potential in an Improved environment. • Anyways, we believe that these stocks are Safe bets in a falling Market as they have clean Corporate governance practices combined with Strong Balanced Sheet and no Promoter Pledging.

• The Risk comes from the subdued Market conditions and a slow economic growth continuing for over the next 6 Months, for which we believe the probability is quite low. • One of the key reasons for taking this bet so early in spite of Elections being far off is to be ahead of the market buzz and to use the current Market correction.


Technical View

Jagran Prakashan - “Charts are indicating a very clear Technical Buy, if it breaks 110 Resistance on upside with Target of around 140”.

HT Media – “HT Media charts shows some weakness but we believe it’s a good trade on the Long with clear Stop Loss at around 80 Rs levels”.

Only for our Clients

Fundamental Earnings View J****D***

H***M**

Our Next Bulls Eye Call is in a stock in the Oil & Gas Sector where there is a Tactical Call based on few Events and a Stock which can deliver over 30% returns over the next 4-6 Months.

Budget Expectations & Impact


Sector

ISSUES

PROPOSED

IMPACT

Proba

bility

Telecom

Service Tax on Broadband

To do away with current service

tax @ 12% Big Positive. No

Service Tax on VST To bring VST on service Tax Negative Yes

Infrastructure Status

Benefits under 80IA of the Income

Tax Act Positive. No

Promote use of Tablets,

Smart phones

Treatment as a perquisite to be

done away with Positive. Yes

Infrastructure Benefits U/S 80IA Withdrawal of benefits U/S 80IA Big Negative Yes

Type of Incentive Investment linked benefits Marginally Positive Yes

Power

Debt restructuring of state

discoms

A financial support of Rs.1200

crore sought Marginally Positive Yes

Sunset clause

Extension for Sunset Clause till

31st March,2014

Marginally Positive Yes


Sector

ISSUES

PROPOSED

IMPACT

Proba

bility

Banking

Enhancement of TDS limit Increase TDS limit for interest from

current Rs.10000 to Rs.25000 Marginally Positive Yes

Incentive for Bond

Investments Exemption of Rs.20000 U/S 80CCF

for Infra Bond Investments Marginally Positive No

Raise funds through tax

free bonds Permission sought for banks to

raise funds by issuing tax free bonds Marginally Positive Yes

Reduced lock in for tax

savings deposits

Lock in period of tax savings

deposits be reduced to 3 years from

current 5 years Marginally Positive Yes

Pharmaceuticals

Import duty on Life saving

drugs Eliminate import duty on life saving

drugs Marginally Positive High

R&D Expenditure

Increase in weighted tax deduction

on R&D upto 250-300% from current

200% Marginally Positive Low

Metals & Mining Reduction in Import Duty

Reduction in import duty of 2.5%

imposed on iron ore & steel grade

limestone & dolomite Marginally Positive High

Dividend Payout

Change in guidelines for increasing

PSU Dividends from the current 20%

of PAT/Equity Marginally Positive High



Sector

ISSUES

PROPOSED

IMPACT

Proba

bility

Textiles

Duty on Man Made Fibres

Reduction in Excise duty from

current 12% to 8% Marginally Positive No

Enhanced service tax

exemption limit

Enhance exemption limit from

current Rs.10 Lakh to Rs.15 Lakh Marginally Positive No

Reduction in service tax

rate

Reduce service tax rate from

current 12% to 10% Marginally Positive Yes

Lending on par with

Priority sector

Lending of export credit to be on

par with priority sector Marginally Positive No

IT Reduction in MAT Rate Reduce MAT from 18.5% to 10% Positive Low

Media

Import duty on set top box Lowering of duty on set top box Marginally Positive Low

Capital Goods

Import duty on

transmission equipment Extension of levy Marginally Positive High


High Impact Stocks to watch out for in this Budget


Sample Copy – Only for our Clients

HBJ’s Flagship Multibagger Package

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Budget 2013 Special Report Preview

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