research.religare.com Union Budget FY14 Preview How to get 5.3%/4.8% fisc for FY13/14 We believe and illustrate how the Govt. could meet its fisc targets of 5.3% for this fiscal, and then a lower, 4.8% for FY14, using a mix of a tight belt on plan expenditure, and some help from accounting this fiscal, with some subsidy rationalization in FY14. Our assessment would be 5.8%/5.2% for FY13/14. Lower subsidies are desirable, could be inflationary, and negative for growth and consumption in the near-term, but on the whole are preferable to a higher-growth-high-fisc scenario. On these lines, policy-based intervention would be the feasible choice over fiscal pump-priming for the Govt., given its strained finances. Union budgets in India have progressively lost significance for the markets in the past few years. Despite being the next macro trigger for the markets, we think this year may not be very different, other than the sustained equity supply. The budget recipe is likely to be a sweet-and-sour mix of reform and populism in a pre-election year, with a potential dose of regressive policies thrown in. Expect to see a 5.3%/4.8% fisc for FY13/14: Meeting the fiscal target is primal for the Govt. this year, and we believe it’s possible for these seemingly optimistic estimates to be met, with subsidy deferrals, thanks to cash accounting, and a tighter plan expenditure being the likely tools of choice. Our estimates are more sedate at 5.8%/5.2% over this period as we factor in lower tax revenues and lower deferrals. Potential consequences of a lower fisc: Apart from the obvious benefits, we believe a lower subsidy-led fisc would be negative for growth and consumption in the near-term, with 5.3%/4.8% over FY13/14 leading to a potential -25bps on growth, implying a lower FY14 growth estimate to ~5.5% (from 5.8%). For the market: While it remains the next macro trigger, the sustained PSU equity supply is likely to remain an overhang for the markets over the next few months, short of a substantial positive surprise. A 4.8% fisc for FY14 is structurally positive, save the higher fuel/fertilizer inflation, potentially back to FY12 levels, delaying the rate-cut cycle. On the bright side could be steps to channelize long- term capital into investments (details in the note). Markets would look at a lower fisc print positively as it improves Govt. finances in the long- term. Sector-wise impact: Positive – Infrastructure, Energy, Industrials, Banks; Negative – Consumer, Autos, Real Estate; Neutral – IT, Telecom, Healthcare, Metals. This report has been prepared by Religare Capital Markets Limited or one of its affiliates. If the analyst who authored the report is based in the United Kingdom, then the report has been prepared by Religare Capital Markets (Europe) Limited. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of this report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Strategy & Economics INDIA 13 February 2013 REPORT AUTHORS Tirthankar Patnaik (91-22) 6766 3446 [email protected]Prerna Singhvi (91-22) 6766 3413 [email protected]Saloni Agarwal (91-22) 6766 3438 [email protected]Subsidy burden in FY13 Actual subsidy burden in FY13 FY13BE FY13E Food 818 750 1,000 Fertilizers 988 610 610 Oil 1,002 436 700 Others 105 105 105 Total 2,912 1,900 2,414 % of receipts 31.7% 19.4% 26.5% % of GDP 2.9% 1.9% 2.4% Source: RCML Research Fiscal deficit trend Source: RCML Research Govt. borrowings vs. incremental deposits – reflects crowding out of private sector Source: Bloomberg, RCML Research 3.3 2.6 6.0 6.3 4.6 5.9 5.1 5.8 5.2 0.0 2.0 4.0 6.0 8.0 (%) 0% 20% 40% 60% 80% 100% 0.0 1.0 2.0 3.0 4.0 5.0 6.0 FY03 FY05 FY07 FY09 FY11 FY13 (%) (Rstrn) Budgeted Actual Actual borrowings/incremental deposits
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research.religare.com
Union Budget FY14 Preview How to get 5.3%/4.8% fisc for FY13/14
We believe and illustrate how the Govt. could meet its fisc targets
of 5.3% for this fiscal, and then a lower, 4.8% for FY14, using a
mix of a tight belt on plan expenditure, and some help from
accounting this fiscal, with some subsidy rationalization in FY14.
Our assessment would be 5.8%/5.2% for FY13/14.
Lower subsidies are desirable, could be inflationary, and
negative for growth and consumption in the near-term, but on the
whole are preferable to a higher-growth-high-fisc scenario. On
these lines, policy-based intervention would be the feasible
choice over fiscal pump-priming for the Govt., given its strained
finances.
Union budgets in India have progressively lost significance for
the markets in the past few years. Despite being the next macro
trigger for the markets, we think this year may not be very
different, other than the sustained equity supply. The budget
recipe is likely to be a sweet-and-sour mix of reform and
populism in a pre-election year, with a potential dose of
regressive policies thrown in.
Expect to see a 5.3%/4.8% fisc for FY13/14: Meeting the fiscal target
is primal for the Govt. this year, and we believe it’s possible for these
seemingly optimistic estimates to be met, with subsidy deferrals,
thanks to cash accounting, and a tighter plan expenditure being the
likely tools of choice. Our estimates are more sedate at 5.8%/5.2%
over this period as we factor in lower tax revenues and lower
deferrals.
Potential consequences of a lower fisc: Apart from the obvious
benefits, we believe a lower subsidy-led fisc would be negative for
growth and consumption in the near-term, with 5.3%/4.8% over
FY13/14 leading to a potential -25bps on growth, implying a lower
FY14 growth estimate to ~5.5% (from 5.8%).
For the market: While it remains the next macro trigger, the
sustained PSU equity supply is likely to remain an overhang for the
markets over the next few months, short of a substantial positive
surprise. A 4.8% fisc for FY14 is structurally positive, save the higher
fuel/fertilizer inflation, potentially back to FY12 levels, delaying the
rate-cut cycle. On the bright side could be steps to channelize long-
term capital into investments (details in the note). Markets would look
at a lower fisc print positively as it improves Govt. finances in the long-
Banks; Negative – Consumer, Autos, Real Estate; Neutral – IT,
Telecom, Healthcare, Metals.
This report has been prepared by Religare Capital Markets Limited or one of its affiliates. If the analyst who authored the report is based in the United Kingdom, then the report has been prepared by Religare Capital Markets (Europe) Limited. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of this report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
(%)(Rstrn) Actual market borrowings Avg. 10Y yield
21.1%19.1% 18.3%
26.4%
32.5% 32.6%
39.1%
28.5%29.9% 29.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
(%)
With falling Govt. investment to counter burgeoning subsidy burden and subdued demand in the private sector, pro-growth policy incentives along with easing monetary policy remain key to spur growth
Private share of the gross capital formation has fallen from a high of ~39% in FY08 to ~29% in FY12
Union Budget FY14 Preview
How to get 5.3%/4.8% fisc for FY13/14
Strategy & Economics
INDIA
research.religare.com 13 February 2013 Page 15 of 23
Fig 20 - Annual trend of new project announcements Fig 21 - Public & Pvt. share of outstanding investments
Source: CMIE, RCML Research Source: CMIE, RCML Research
2.3 3.04.1
8.8
18.1
21.0
23.1
16.5 16.1
10.2
7.6
3.4
0.0
5.0
10.0
15.0
20.0
25.0
(Rstrn)
67 6556
44 42 39 33 39 39 43 40 41
33 3544
56 58 61 67 61 61 57 60 59
0
10
20
30
40
50
60
70
80
90
100
(%) Govt. Private
Union Budget FY14 Preview
How to get 5.3%/4.8% fisc for FY13/14
Strategy & Economics
INDIA
research.religare.com 13 February 2013 Page 16 of 23
Influence of the Budget on the markets
The Union Budget has had progressively lower importance in the past as the last few
budgets have avoided big-ticket policy reform announcements (unlike in the early 90s
when game changing reforms were announced), which in any case tended to come
throughout the year instead of end-Feb. As such, we don’t expect this time to be any
different, especially given the recent reform rhetoric, as our table 24 on the following
page comprehensively illustrates.
The figures below suggest that budget influence on the market performance has been
declining. In 6/12 years, markets have seen negative returns. Also, in 8/12 times we have
different pre-post movement. In other words, a positive return in the month prior to the
budget is generally followed by a negative return in the month post the budget. What
could be different this time is the sustained PSU equity supply overhang that’s likely to
STT, first introduced in 2004, is the tax levied on purchase or sale of equity shares and
derivatives. Currently, 0.1% of the transaction value (revised downwards from 0.125% in
July’12) is levied on the sale and purchase of equity shares.
Boosting infrastructure investment by
o Raising infra bonds’ issuance target for the year,
o Allowing commercial banks to issue tax-free infra bonds. Currently only state-run
infrastructure firms are allowed to issue these bonds.
o Introducing separate limit/carve-outs for tax-free infra bonds. Tax exemption on
tax-saving infra bonds up to a maximum of Rs20,000 was again included in the
Rs1lac limit in the last budget. Increasing this limit to Rs50,000 and separating it
from the Rs1lac investment limit for tax exemption would channelize retail savings
into the infra sector and widen the investor base, thus providing much-needed
long-term financing for the sector.
o Allowing insurance companies to have higher exposure to infra bonds (providing
tax breaks for debt funds).
Easing bond issuance for the private sector thus promoting the bond market in India
which is still very nascent compared to the equity market.
Union Budget FY14 Preview
How to get 5.3%/4.8% fisc for FY13/14
Strategy & Economics
INDIA
research.religare.com 13 February 2013 Page 20 of 23
Govt. spending on rural welfare programs like NREGA, IAY, and SSA etc. had risen
sharply with UPA-II in 2009, but has petered out in recent years on lower income
growth and utilization. We do not foresee a sharp rise this time around.
Fig 26 - Govt. spending on rural employment – NREGA* Fig 27 - Govt. spending on rural housing – IAY*
Source: RCML Research, Budget Documents *Key head is National Rural Employment Guarantee Scheme
Source: RCML Research, Budget Documents *Key head is Indira Awas Yojna
Fig 28 - Govt. spending on rural education – SSA* Fig 29 - Govt. spending on rural infrastructure – PMGSY*
Source: RCML Research, Budget Documents *Key head is Sarva Shiksha Abhiyan (SSA)
Source: RCML Research, Budget Documents *Key head is Pradhan Mantri Gram Sadak Yojana
117 129142
368391
358
310330
0
50
100
150
200
250
300
350
400
450
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13BE
(Rs.bn)
25 26
36
79 79
103
90
100
0
20
40
60
80
100
120
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13BE
(Rs.bn)
72
4337
47
35
102
71
83
0
20
40
60
80
100
120
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13BE
(Rs.bn)
3851
106
152168
224
182
217
0
50
100
150
200
250
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13BE
(Rs.bn)
Union Budget FY14 Preview
How to get 5.3%/4.8% fisc for FY13/14
Strategy & Economics
INDIA
research.religare.com 13 February 2013 Page 21 of 23
Sector-wise expectations Fig 30 - Sector-wise budget expectations and implications
Sector Budget expectations Implication
Auto
Specific excise duty on diesel passenger vehicles
Likely to affect UV/diesel passenger car players, MM, TTMT, MSIL
Any specific duty on large cars especially utility vehicles
Any increase would be negative for MM
Continuation/Increase of allocation to schemes like NREGS
Higher allocation to income transfer schemes would be a positive especially for two-wheelers and tractor segments
Consumer
Excise duty hike on FMCG products Minor negative for all FMCG players but expect to be passed through
Excise duty hike/imposition of any specific ad-valorem duty on cigarettes
Impact on ITC with more than 10% increase in excise likely to be a key negative for the stock
Further hike in Gold import duty Negative for TTAN
Lower spend on flagship schemes Sentimentally negative for FMCG cos. with high rural share such as HUVR and DABUR
Personal Income Tax brackets Hike in personal income tax slabs will be a positive for the sector in general
Infrastructure
Infra-bonds
Increase in the (company) borrowing limit for infra-bonds in order to give a push to infrastructure development, positive for the sector Any increase in the (personal) tax exemption limit for infra bonds will incrementally address funding constraints for the sector
Continued spending on roads and pick-up in rail spending
Likely positive for LT and midcap contractors
Increase in taxes as differential between MAT and IT comes down
Any increase in MAT in the context of a tight fiscal situation would be negative for the sector
Capital Goods
Impetus on railway spending/modernization & urban transport
For signaling and locomotives - positive for manufacturers like BHEL, SIEM, ABB & CRG Positive for contracting companies like LT & KEC
Increased indigenization of defense equipment
Positive for BHEL, LT
Support for renewable energy - solar/wind
Positive for BHEL, SIEM and SUEL (Suzlon)
Budget allocation for power transmission projects
Positive for equipment manufacturers – CRG, BHEL, Positive for contractors – KEC & L&T
Financials
Fiscal deficit and borrowing target Fiscal consolidation is very crucial from macro perspective. Fiscally prudent policies would mean reduced supply of Govt. bonds which in turn would be positive for yields and inflation
Allocation of equity capital for infusion in PSU banks
Positive for SBI and other large PSU banks (BOI, UNBK)
Increase in exemption limit for borrower on housing loans
Positive for the sector and housing finance companies
Cement Increase in excise duty Negative for the sector as a whole
Push for infrastructure spending Positive for the sector
Real Estate
Increase scope/limit of ECB for Real estate companies
ECB issuance is currently allowed for only low-cost and rural housing projects. Extension of the scope/limits will be positive for Real estate companies
Increase in tax benefit for home loan Interest (current Rs.0.15mn) and Principal repayment (Current Rs.0.1mn)
Positive for the residential developers
Signals of including Real estate under GST
Near-term negative but long-term positive for the sector
Tax incentives to developers for mid-income housing/Slum rehab schemes
Positive for developers in mid-income housing segment (UT, HDIL, PVKP)
Change in limit for home loan eligibility for priority sector lending
Marginally positive if home/loan value increased from current limit of Rs2.5mn/1.5mn respectively
Infrastructure status to the affordable housing sector
Positive as it would facilitate liquidity infusion into the sector (PVKP, HDIL)
Further increase in service tax Slightly negative for the sector as it would increase the cost of purchasing homes and result in higher cost of construction (service tax on construction contracts etc.)
Source: RCML Research
Union Budget FY14 Preview
How to get 5.3%/4.8% fisc for FY13/14
Strategy & Economics
INDIA
research.religare.com 13 February 2013 Page 22 of 23
Sector Budget expectations Implications
Power
Elimination of import duty on thermal coal (reduced from 5% to 1% in FY13 budget)
Likely positive for players dependent on imported coal such as ADANI and JSW
Further extension of 80-IA benefit (MAT exemption based on year of commissioning)
Positive for the sector as a whole
Tax-free bonds for the power sector Positive for the sector as a whole
Increase in taxes as differential between MAT and IT comes down
Negative for the sector
Telecom
Any changes in the duties on telecom equipment such as data cards, phones etc.
Would have minimal impact on the sector
Increase in service tax Could negatively impact the sector and could impact the ARPUs of the operators
Energy
Under-recoveries and fuel taxes Increase in tax and subsidy math for fuel subsidies will likely hint at possible fuel price hikes etc. No change in excise/customs expected for refined products.
Further increase in cess on crude oil production (increased to Rs4500/T from Rs2500/T)
This would mean additional burden on crude oil producers. Negative for ONGC, CAIR, OIL
Reintroduction of Customs duty on Crude
GoI is actively seeking new revenue sources to meet its fiscal deficit target, reintroduction of customs duty of 5% would help them garner close to Rs340bn. However, this is negative for oil refiners/OMCs
Increase in Natural Gas price We expect GoI to consider recommendations of Rangarajan committee on Gas pricing and announce a revision of the same. This is positive for gas producers
Gas to come under GST / Categorised goods
To promote usage and import of gas and ease the substitution of oil products. Positive for the sector as a whole
Media & Distribution
Reduction of customs duty on set-top boxes
Positive for all distribution companies (DITV, HATH, DEN)
Increase in service tax Negative for DITV and HATH
Metals
Increase in custom duty on ferro-alloys from existing 5%
Positive for ferro-alloy companies as threat from import substitutes will be reduced
Increase in export duty on iron ore fines from 5% to 20%
Negative for iron ore companies especially Sesa Goa
Agriculture
Increase in excise duty on pesticides Negative for the sector as a whole
Urea price hikes Positive for urea manufacturers
Road map for bringing Urea under Nutrient-based Subsidy (NBS) ambit
Positive for urea manufacturers
Maintaining/reducing rates in the interest subvention scheme for short-term crop loans (at 7% currently)
Facilitate raising of short-term loans by the farmers which in turn is positive for pesticides/fertilizers/irrigation players
Increased allocation to various agricultural programs (RKVY)
Positive for the sector as a whole
Source: RCML Research
research.religare.com 13 February 2013 Page 23 of 23
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