February 24 2015 - microsec.in Budget Expectations 2015-16.pdf · UNION BUDGET 2015-16 PREVIEW...

UNION BUDGET 2015-16 PREVIEW

February 24 2015


February 24 2015

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The Union Budget 2015-16 will be announced on February 28th, 2015. Being the full Budget of the Government after unveiling an interim Budget in July2014, the Government will have to balance judicial allocation of expenditure across core sectors to change the dynamics of the economy towardssustained growth, at the same time manage its fiscal conditions that is to be contained within targeted levels. The Government’s core priorities werealready laid down in the interim budget in July 2014 which was a reflection of their manifestos and part of it was also extension of steps taken by theirpredecessor. However, the Government is better placed to frame its fiscal road map as the steep decline in crude oil and other commodity prices, declinein inflation, increase in forex reserves and uptick in the economy and a narrowed down current account deficit, would help Finance Minister take boldmeasures now than what prevailed in July 2014.

There is an urgent need to resurrect production, employment, consumption and growth. The recent headlines on Prime Minister’s ‘Make in India’initiative gives sense that core sector revival will be key in Budget making this year, with greater emphasis on Power sector growth, particularly onrenewable clean energy, Infrastructure, particularly road, ports and logistics, development which can catalyze manufacturing and lure investments, fromabroad and within India.

The realities of demographic dividend enjoyed by India of a young aspiring population will center on the mind of the Finance Ministry when they willdraft the Union Budget 2015-16 and measures on education, skill development; healthcare and sanitation and cleanliness drive may be touched upon.Broader priorities are as follows:

Priorities before the Government

Bring out a final roadmap for GST implementation.Boost the small scale industry and start ups through incentives which would help generate employment and growthUplift Power and Infrastructure Sector including ports reforms – which can catalyze the ‘Make in India’ initiative besides labor reformsUtilizing the large pool of bank accounts created through Jan DhanYojana for broadening the base of Direct Benefit TransferIncrease storage capacity of crude oil reserves, especially at a time when crude oil prices have fallen significantlyIncrease public spending in utilities and encourage private participation through incentivizing sanitation, healthcare and educationMaintain fiscal consolidation and contain fiscal deficits at the targeted levelsFocus on agriculture growth through farm sector mechanization

Top Pre-Budget Picks are:

Tata Power, NTPC, Power Grid, IL&FS Transport, IDFC, Engineers India, Dredging Corp, M&M, LICHF, Rallis India, Coromondel International.


February 24 2015

Source: Bloomberg, FICCI, Microsec Research

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The Government of India is scheduled to present the Union Budget for FY15-16 on February 28, 2015. In this forthcoming Budgetmajor challenge for the Modi Government will be economic revival via controlling fiscal deficit and boosting growth with theenvision of a successful “Make in India” program. While we expect some progress in long term reforms, announcement ofencouraging manufacturing policy, revival in infrastructure investment, FDI allowance across sectors focus on defence et al. Growth,being the top priority for the government we reckon majority of the policies are likely to have inclination towards the manufacturingsegment.

Maintaining fiscal deficit target - challenge for the government

GDP Growth & Fiscal Deficit Trend India’s real GDP growth is expected to bearound 5.4-5.9 percent in FY14-15 while, fiscaldeficit is likely to come in at 4.1 percent of GDPinterim budget as mentioned. According to thevarious sources the estimated GDP for FY15-16ranges from 6.1% to 6.5% (All GDP data basedon old method). As per the FICCI report, thefiscal deficit estimated at 3.60% of GDP forFY15-16. We expect the new government to bemore inclined towards the speedy clearances ofissues hindering the growth path. Thegovernment has a targeted divestment plan ofINR~70000 crores. The spectrum auctionscheduled in FY2015-16 would likely to addressthe fiscal deficit issue to some extent While weexpect non-plan expenditure to come downlargely due to a lower oil subsidy burden led byfalling crude oil prices.


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Key Expectation on the Revenue Front

In order to boost the growth plan and individual savings, the Government may hike the deduction limit under Section 80C of theIncome Tax Act from INR150000 currently to INR200000. The tenure of tax savings fixed deposits may be reduced from 5 years to 3years in order to boost savings.

To boost the housing and real estate sector, the Government may bring attractive tax incentives for the first home loan buyers andalso, increase deduction limit of INR200000 on interest for the loan taken for the self occupied one house property. Hence, positivefor the economic growth.

Among the most awaited tax reforms in India is implementation of GST. It has been delayed comprehensively due to lack ofconsensus between the Centre and State Governments. We expect the Government may come out with a clear roadmap withtimeline for successful implementation in this budget.

To enhance the consumption rate and investments of low income group, the Government may raise the limit of minimum taxexempted income by INR50000 to INR300000.

Given the buoyancy in capital markets, The Government’s disinvestment target for FY15-16 may be around INR65000- INR70000crore.

In order to meet the increased cost of medical services, medical exemption limit may be raised from INR15000 per annum.Expectations range between INR 20000-INR50000 per annum.

The Government is likely to review gold import duty, which was hiked to 10 percent from 2 percent in 2012. According toindustry body, import duty may to be slashed by 2 percent to 8 percent as concerns on the external front mainly in Current AccountDeficit have abated.

The Government may reintroduce tax exemption on long term infrastructure bonds to address the growing need of infrastructuredevelopment.


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Emphasis on controlling subsidies & other social schemes ……

We believe that like the decontrolling of diesel, the government may come up with such more efficient subsidy mechanism thatenables to rationalization of subsidies. The government may also ensure effective functioning of the DBT and inclusion of anyother benefits under its purview cannot be ruled out. Considering the current scenario the GoI may give an indication in termsof de-regulation in a phased manner of other regulated products.

We reckon that the government would continue to focus on the infrastructure space by incentivizing the sector in one way orother viz. Tax benefits, faster approvals of project, better lending options, simplifying structure, and other flagship programs toboost the ailing sector and the revival of the same is the need of the hour

For the intent of making “Make in India “successful the government may incentivize the manufacturing sector .

To propel the smart cities concept as proposed in the erstwhile Union Budget the government may relax some norms, or maygive tax incentives.

We reckon that the government may continue to allocate in regards to the development of the education sector to make it moreavailable among the masses across all regions of the country. In the interim budget GoI allocated INR28635crore for SarvShiksha Abhiyan.

We believe that the government to ensure women security and women empowerment at highest levels across the country islikely to allocate funds towards the implementation of adequate facilities.

Allocated Funds (in the interim budget INR100crores allocated) may get raised for the awareness programs viz. “Beti BachaoBeti Padhao Yojana”,or other youth based programs, or to improve the prevailing sports infrastructure.


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Fiscal Deficit Budget Estimation for FY14-15

Government Accounts FY13-14 RE FY14-15 BE

1. Revenue Receipts 10292 11898

1.1 Tax Revenue (net) 8360 9773

1.2 Non - Tax Revenue 1932 2125

2.Other Receipts 338 739

A. Total Receipts (1+2) 10630 12637

3.Non-Plan Expenditure of which 11149 12199

3.1 Capital Expenditure 872 1053

3.2 Revenue Expenditure 10277 11146

Subsidy 2555 2607

Food 920 1150

Fertilizer 680 730

Oil 855 634

Others 101 93

4. Plan Expenditure 4755 5750

B. Total Expenditure (3+4) 15904 17949

Fiscal Deficit (B-A) 5274 5312

as a % of GDP -4.6 -4.1

GDP at market price 113550 128767

Source: Union Budget FY2014-15, Microsec ResearchNote: Fiscal Deficit target for FY15-16 is 3.6%.


February 24 2015

SECTOR- WISE EXPECTATIONS & IMPACT


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AGRICULTURE

EXPECTATIONS/PROPOSALS IMPACTAll service provider for agricultural products be

exempt from the service tax.

Positive for all agri inputs companies. Seems

partially likely.

Higher subsidy may be approved of INR4000 or

more per tonne export of raw sugar.

Positive for sugar companies. It will help the cash-

starved industries pay farmer arrears. Seems very

likely.

Loans given for construction of godowns both

under Private Entrepreneurs Guarantee (PEG) and

Grameen Bhandaran Yojna as against indirect

lending under priority sector at present may get

direct lending tag under priority sector

benchmark from bank.

Positive for private companies, as well as various

agencies in Public Sector for guaranteed hiring by

FCI. Seems very likely.

Excise duty on pesticides may be brought (8%) on

par with the duty on fertilizers. Excise duty on

technical grade pesticide and formulations is

12.36%.

Positive for pesticides and other agrochemicals

companies. Seems likely.

Reduction or full exemption (10.3% & 12% on

raw materials & parts respectively) of excise duty

on tractor's parts and other agriculture equipment.

Positive for tractor and agriculture equipment

manufacturer. Reduction seems likely


February 24 2015

AUTO AND AUTO ANCILLARIES

EXPECTATIONS/ PROPOSALS IMPACT

Increase import duty on tyres from 10% to 20%

If implemented, Positive for the MRF ltd, Apollo

tyres, Ceat Ltd and JK tyre & industries -Seems

likely

May cut excise duty on SUVs, large segment Cars

and Mid segment Cars

If implemented, Positive for M&M Ltd, Tata

Motors and Marut Suzuki Ltd-Seems unlikely

May cut Excise duty on small cars, Motorcycle

,Scooters and Commercial Vehicles

If implemented, Positive for Mahindra &

Mahindra, Ashok Leyland Tata Motors , Eicher

Motors, Maruti Suzuki, TVS Motor, Bajaj auto and

Hero Motocorp ltd-Seems likely on Commercial

Vehicles

Increase depreciation on cars, MUVs and vans to

25% from 15%

If implemented, Positive for M&M Ltd, Tata

Motors and Marut Suzuki Ltd-Seems unlikely

Reduce CST rate from 2% to 1% If implemented, Positive for the sector-Seems

unlikely

Incentives for replacing 15-year-old commercial

vehicles to encourage replacement

If implemented, Positive for the commercial

vehicles-Seems unlikely

Jawaharlal Nehru National Urban Renewal

Mission (JnNURM) may be replaced by a new

scheme by Government of India (JnNURM ended

on 31st March 2014)

If implemented, Positive for the sector-Seems

likely

May cut Excise duty on auto components form

12% to 10%.

If implemented, Positive for the auto ancillary -

Seems unlikely


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BFSI

Key Expectations/Proposal Impact

Roadmap for dilution of Public Sector Banks' (PSBs) stake up to

52%.

Positive for the PSBs, as dilution of stake will help PSBs to raise

capital and enable them to meet the stringent Basel III norms as

well as enhance their risk absorption capacity and support growth

trajectory.

New initiatives like higher Autonomy to PSBs and forming of

industry wise agency to resolution of mounting Non Performing

Assets.

Positive for the PSBs, as higher autonomy in decision making will

make PSBs' management more accountable for the performance of

the Bank and forming of agency - industry wise will improve the

PSBs' ability to recovery of the loan and strong vigilance before

sanctioning of the loan may reduce the risk of further NPA,

resulting improvement in profitabality.

Agriculture lending target may be increased by ~INR1 trillion to

INR9 trillion.

Negative for the PSBs, as Agriculture sector contributes large

numbers of NPAs and also, more agriculture credit with lower

yield may affect the PSBs' NIM.

New Postal Bank may be announced. Competition may increase.

Reduction of five years lock in period of fixed deposits for tax

benefits to three years.

Positive for the Banks, as Banks may mobilize more fund through

this channel.


February 24 2015

Cement

EXPECTATIONS/ PROPOSALS IMPACTReduce uniform rate of excise duty on cement to 6-

8% from 12% advalorem + Rs.120 / MT

If implemented, Positive for the sector -Seems

unlikely

Impose basic custom duty on cement


unlikely

Announcement on development of infrastructure,

affordable housing, smart cities, industrial

corridors, and port developments


likely


February 24 2015

CONSUMER DURABLES

EXPECTATIONS IMPACT

The government could lay-out clear road map for GSTimplementation.

Positive- GST would bring in uniform tax structure across theproduct category within India ,thereby reducing overall taxburden.

The government could allocate higher budgetary funds to socialschemes like NREGS, Indira Gandhi Vikas Yojana to reviverural spending.

Positive for the sector as demand will revive.


February 24 2015

ENGINEERING & CAPITAL GOODS

EXPECTATIONS IMPACT

The government could sharpen its focus on defenceindigenization and augment defence industrial base with activeparticipation from the private sector.

Positive for Bharat Electronics, Astra Microwave Products,Bharat Forge, Larsen & Toubro.

Government could increase custom duty on electronicconstruction equipment.

Negative for construction sector but Positive for equipmentmakers-The current duty structure is 7.5% and the industryexpects government could increase the duty structure by 150-200 Bps and it would lead to higher capital expenditure cost.

The government is likely to reduce the excise duty on copperwinding wire to 10% from the current rate of 12%.

Positive- The current duty structure is 12% and the industryexpects government could cut the duty structure by 150-200Bps and this policy decision could lead to cost competitivenessof domestic capital goods players.

Government could remove state entry tax for goods already subjected to value added tax or central sales tax.

Positive- This policy decision could largely depend on theimplementation of GST on a timely manner.

Government could incentivize power transmission &distribution sector in the upcoming budget.

Positive- This policy decision could drive T&D capex by SEBsand central utilities.

The government could reduce the inverted duty structure andbring it in line with that of finished products.

Positive- This policy decision could lead to cost competitivenessof domestic capital goods players.


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FMCG

EXPECTATIONS/PROPOSALS IMPACTExcise duty on Poly coated paper and paperboards

may be reduced from 12% to 6%. It will help to

reduce the uses of plastic and increasing the paper

product which is eco-friendly.

Positive for paper products manufacturing

companies, other food processing companies like

bakery. Seems likely

Excise duty on leather shoes may be reduced from

12% to 6% to give a boost to manufacturing.Positive for shoes manufacturing companies.

Seems very likely.

Restructure excise duty on length based segments

in the Cigarette industries.Depends upon the initiative taken.


February 24 2015

INFRASTRUCTURE & REAL ESTATES

EXPECTATIONS IMPACT

The government could remove MAT under section 801A frominfrastructure projects.

Positive- This policy decision could lead to increase returns oninfrastructure projects by reducing the cash outflows.

Government could increase budgetary allocation towardscritical infrastructure vertical such as roads, urbaninfrastructure and smart cities.

Positive for all EPC companies as it will bring much neededboost.

Easing availability of long term debt paper for infrastructure.Positive for infrastructure sector as a whole, as it will addressfunding requirements on the debt side.

Government could increase in road cess to INR 4 per litre onpetrol and diesel from the current rate of INR 2 per litre.

Positive- This policy decision could increase extra budgetaryallocation towards road sector but may impact Logisticscompanies

Loans qualifying for affordable housing should be revised as percity.

Positive for HDIL,DB Realty,Oberoi Realty,Godrej Properties.

Clarity on taxation issues with respect to Real Estate InvestmentTrust (REIT).

Positive- The government could foist greater clarity on capitalgains tax and MAT taxation issues with respect to Real EstateInvestment Trust (REIT).


February 24 2015

IT, MEDIA & ENTERTAINMENT


February 24 2015

LOGISTICS & SHIPPING

EXPECTATIONS/PROPOSALS IMPACT

Goods and Service Tax (GST) roll out

GST has been in the limbo for long and the roll out of GST will be positive for theLogistics Sector as this will help to get rid of all the complicated taxes and itwould also reduce the documentation which would lead to speedy and simplifiedwork.

Expansion of the 30% subsidy to cover all domestic vessels in shipbuilding The expansion of subsidy towards all the domestic vessels will be positive as this

will attract more domestic orders from the Indian Ship owners.

Quick Roll out of Dedicated Freight Corridor (DFC)Quick roll out of DFC will be positive as it will cut the transit by half and willalso increase the container volumes

Industry Status for Logistics

Industry status will be positive as this will help the Logistics sector to accumulate funds easily. The Logistics industry on the whole is very fragmented and unorganized. This sector works with high expenses and spends around 14% of its GDP where as this percentage is around 8-9% for developed countries. This will be positive for Gati Ltd, Transport Corporation of India Ltd., Container Corp

Development of Special Economic Zones

Development of Special Economic Zone (SEZ) will be positive as it will trigger a large flow of foreign and domestic investment in SEZs, in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities.


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METAL, MINERAL & MINING

EXPECTATIONS IMPACT

Removal of custom duty on coking coal.Positive to most steel producers especially flat steel producerslike JSW Steel, TATA Steel, SAIL.

Reduction in exports duty on iron ore from 30% to 15-18%.Positive for Indian iron ore producers as it will strength theircompetitiveness on the export market .

Removing export duty on iron ore pellets from 5% to nil. Positive for JSW Steel, TATA Steel,SAIL.

HOTEL & TRAVEL

EXPECTATIONS IMPACT

Infrastructure status of hotel development and lower criteria.Positive for the sector. Positive for Indian Hotels, MahindraHolidays & Resorts, Thomas Cook and Cox & Kings.


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OIL & GAS

Expectations/ Proposal Impact

The custom duty on imported crude oil prices may get

restored in the range of 2.5%-5% on the back of soften

crude oil prices

Positive for the government as it would fetch more

revenue as well as it would attract domestic

production. However this would negatively affect the

OMCs.

The current cess on domestic production may get

reduced to INR2500/mt from INR4500/mt

Positive as it would benefit the domestic upstream

companies via better realisations and encourage

production.

Tax holiday period can be extended from the existing 5

years to 10 years for business associated E&P activities

of crude oil, natural gas and other alernative energy

Positive as it would induce interest for the E&P

companies to carry out more exploration activities.

The Ministry of Road Transport and Highways has

proposed an increase in the existing road cess of

INR2/l

Neutral for the Oil Marketing companies (OMCs) as

the incremental cess is a pass on cost for the OMCs.

More efficient mechanism of Direct Benefit TransferPositive to ensure minimal leakages and cost

efficiency.


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PHARMA & HEALTHCARE

EXPECTATIONS/PROPOSALS IMPACTExtend tax benefits to units engaged in the

business of R&D or contract manufacturing to

provide thrust to R&D in India.

Positive for the all pharma companies which have

R&D wings. Seems likely

Central board of direct Taxes may provide similar

guidelines for pharma companies like IT and Auto

Component manufacturer prescribing attractive

margins so that it avoid litigation under transfer

pricing regulation that are manufacturing and

exporting the product as contract manufacturer.

Positive for the pharma sector mainly for

companies with contract manufacturing. Seems

Likely.

All medical devices used in critical care,

consumables used with devices in the specific

critical care treatment procedure and their spare

parts may be exempted from Customs Duty.

It will be very positive move for medical

equipment sector.Positive for healthcare sector

indirectly also. Seems very likely.

All Healthcare Education and Training services,

especially life-saving ones, may be exempted from

service tax.

Positive for healthcare sector specialy hospitals.

Seems less likely.


February 24 2015

POWER & RENEWABLES

EXPECTATIONS IMPACT

The government could extend 10-year tax holiday under section Sec 80IA beyond 2017.

Positive-This policy decision is favorable to the companieswhose projects would come up in the 13th Plan.

The government could allocate additional funds forstrengthening transmission and distribution systems.

Positive- In all likelihood the government will spare additionalfunds to this sector as it will incentivize all stakeholders tocurtail AT&C losses.

The government could reduce Basic Customs Duty (BCD) andCountervailing Duty (CVD) on coal imports.

Positive for domestic power producers as currently coal importattracts 2% BCD and CVD.

The government could restore accelerated depreciation for wind energy sector to 80%.

Positive- The government has a target of 3GW per year of windpower installations and this tax sops would provide fillip forwind energy sector.

Government could bring renewable energy including solar project under the ambit of under infrastructure projects.

This policy decision will be a positive for the sector as it willallow tapping of long term, low cost debt from insurance,pension funds.


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RETAIL

EXPECTATIONS/PROPOSALS IMPACTSpecific exemption may be offered of service tax

on reimbursements of electricity charges made by

the member retailers.

Positive for retailers, some relief from

multifarious taxes. Seems less likely.

R&D deduction may be permissible in retail

segment like manufacturing companies as retail

companies also incur substantial R&D

expenditure, which is very much required for

growth of the industries.

Positive for the all retail companies which has

R&D wings. Seems likely


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TEXTILE

EXPECTATIONS/PROPOSALS IMPACTImport Duty on MEG (Mono Ethylene Glycol) &

PTA (Purified Terephthalic Acid) may be raised

from existing lebel to rationalize the tariff

structure for the polyester sector and to make

India self-sufficient in PTA & MEG.

Positive for synthetic textile maker in domestic

market. Seems less likely.

Excise duty reduction may be happen from 12% to

6% on Man Made Fibers (MMF) and

cotton/cotton fabric.

Positive for technical textile. Seem likely on

MMF.


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TELECOM


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Fundamental Research

Name Sectors Email ID

Nitin Prakash Daga IT, Telecom & Enterta inment [email protected]

Sutapa Roy Economy [email protected]

Sanjeev Ja in BFSI s ja [email protected]

Anik Das Capita l Good, Infra , Industria l [email protected]

Soumyadip Raha Oi l & Gas [email protected]

Saroj Singh Auto, cement ss [email protected]

Ajoy Mukherjee Pharma & Agri inputs [email protected]

Ujja la Choudhary Midcaps , Logis tics [email protected]

Vini t Pagaria Technica l Research [email protected]

Ranaji t Kumar Saha Technica l Research [email protected]

Institutional Desk

Abhishek Sharma Insti tutional Desk [email protected]

Bhavesh Patel Insti tutional Desk [email protected]

Siddharth Sedani PMS Research [email protected]

Subhabrata Bora l Research Support sbora [email protected]

VP

Research-Support

Asst. Manager Technology

Senior VP - Investment Strategies

AVP

Dealer

PMS Division

Dealer

Research Analyst

Technical & Derivative Research

Executive Research

Research Executive

Executive Research

Microsec Research: Phone No.: 91 33 66512100 Email: [email protected]

Ajay Jaiswal: President, Investment Strategies, Head of Research: [email protected]

Research Analyst

Designation

VP-Research

Research Analyst

Research Analyst


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February 24 2015

February 24 2015 - microsec.in Budget Expectations 2015-16.pdf · UNION BUDGET 2015-16 PREVIEW...

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