Some populism but keen eye on long-term growth

INSTITUTIONAL EQUITY RESEARCH

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

Union Budget 2018-19

Some populism but keen eye on long-term growth

INDIA STRATEGY | Post Budget Review

1 February 2018

As expected, the budget was coloured with populist measures such as increasing MSP for kharif crops by c.18% and higher allocations to the rural economy. Long Term Capital Gains Tax is an ephemeral negative for the markets, but was expected to some extent. FY18 fiscal deficit target was revised to 3.5% from 3.2% and there are some doubts about the government’s ability to achieve targeted fiscal deficit because GST collection target for FY19 is higher. However, the budget has not sprung any major negative surprises. It is focussed on growth and creation of jobs with measures such as lower corporate tax for firms with <Rs 2.5bn turnover, and continued focus on infrastructure creation. The government has tried to meet several key objectives to improve growth, but the efficacy will depend on a broader economic revival. We are optimistic about nominal and real growth prospects for FY19. Short-term market corrections will provide good entry points to accumulate stocks. We are positive on infrastructure, rural consumption plays, cement, and NBFCs. Our key themes from the budget of fiscal 2018 are as follows: Major thrust on the rural economy: Increase in MSP prices for kharif crops (to the tune of 18%) may not stoke high inflationary pressures as rabi MSPs are already at >1.5 cost of produce and wholesale prices for key kharif crops are already higher than the revised MSP. Nonetheless, MSP is a supporting mechanism (stabilises incomes) and other measures like introduction of price-deficiency mechanism will help in lower price volatility for agri commodities, which should help improve rural incomes. Apart from MSP, other measures include higher allocation for food processing, food parks, irrigation schemes, and animal husbandry (including fisheries). All these initiatives are well thought out schemes – a part of the government’s key policy ‘Doubling Farm Income’. Infrastructure push continues: Roads allocation has increased by 16% yoy, which, on a reasonably high base, is a significant positive. Some of the key categories in which allocations are higher are railways (+32%, but unlikely to see that much increase), Smart Cities (+54%), and shipping and aviation. However, contrary to our expectations, the budgetary allocation for rural and urban housing schemes was much lower. Nonetheless, the continued push towards infrastructure projects will create rural and urban employment. LTCG on equity will create market volatility in the short term: 10% LTCG on equity investments will create market volatility because there is only a 5% tax gap (15% short term, 10% long term). Also, without indexation benefits, the intrinsic value of LTCG is higher. Real estate and debt funds have LTCG of 20%, but enjoy indexation benefits. While intuitively, LTCG should increase the cost of equity and reduce the attractiveness of equity assets, taxation occurs only on realisation of investments; hence, its impact over the longer term could be much lower. Focus on real long-term growth and major thrust on health care: The budget made very limited changes to taxation of basic goods and introduced corrections to address market anomalies (like in short-term vehicles such as arbitrage funds) to facilitate funds movement into the real economy. The other major initiative taken by the government in the budget is to provide health insurance coverage of Rs 500 thousand per family. This policy is intended to cover 100mn poor households. Further details will emerge in the next 6 months. Key themes and stock picks from the budget:

Key budgetary beneficiaries: Infra companies, cement, NBFCs, logistics, small caps (due to the revised tax rate), and sectors/companies catering to the rural segment

Our key ideas: NCC, Ahluwalia Contract, Ashoka Buildcon, Ultra Tech, Dalmia Bharat, ITC, Escorts, M&M, Shriram Transport Finance, and M&M Financial Services.

Sectoral Impact

POSITIVE Automobiles Agri & Inputs Banks and HFCs Cement FMCG Healthcare Infrastructure Midcap NBFC NEUTRAL Capital Goods

India Research Team


UNION BUDGET 2018-19 POST BUDGET REVIEW

FY19 Macro Budget Review Poor in quality despite fiscal slippage in FY18-19 While headline fiscal deficit numbers are as expected, details are not encouraging. Fiscal deficit slipped by 30bps in FY18, and despite that, capital expenditure took a beating. This was unlike previous years when capital expenditure used to be slashed to maintain fiscal prudence. Similar story in FY19 – fiscal to slip, capex muted, revenue expenditure to soar. There is populism/intention to further stimulate rural India, and the taxpayers will be paying for this by way of higher cess and surcharges. Higher rural incomes (if monsoon is normal and does not disappoint) could push demand/consumption. While public capex is muted, we expect private capex to rise. Spending by the ministries should be front-loaded to show maximum impact in the election year, however, since tax collections are generally back-ended, monthly fiscal deficit will keep causing discomfort to the bond markets and availability of funds for ministries. There is a lot of concern about kharif MSP hike to 1.5x of cost – we do not see this as inflationary, as current payout is already at 1.33x; higher for key crops such as rice and pulses (see table below). Where will money be spent in FY19? Additional government spending in FY19 is at Rs 2,245bn. Its break-up: Interest (20%), food subsidy (12.9%), tax administration (12.4%), transport (12.2%), transfer to states (10%), pension (9.4%), defence (7%), agri/rural/social (3.2%/1.1%/2.5%). Minimal change in urban development (metros) and contraction in the energy sector. Where is money coming from in FY19? Additional tax revenue in FY19 is estimated at Rs 3,251bn. Its break-up – GST (92%), Road and Infrastructure Cess (33%), core income tax (15%), core corporate tax (11%), income surcharge (LTCG) (8%), education cess (7%), import duties (5%), corporate surcharge (3%), social welfare surcharge (2%), STT (1%), basic & special excise duty (ex-cess on MS/HSD) (-10%). Will this budget revive the economy in FY19? Based on the quality of spend, there does not seem to be much to boost the economy from the current prevailing and anticipated pace. Our FY19 GDP estimate is at 7.0-7.5%. Are the estimates realistic? We see risks on GST revenue, fuel subsidy, telecom auction, and LTCG surcharge. Disinvestment can be called realistic, going by FY18 performance. Where was money spent in FY18 vs. FY18 BE: Rs 710bn was spent over and above the budgeted estimates. Its distribution: Higher spend: Tax administration (+92%), pension (+23%), interest (+11%), rural dev (+10%), energy (+7%), health (+6%), police (6%). Lower spend: Transport (-24%), transfer to states (-24%), food/fertilizer subsidy (-12%), and IT and telecom (-4%). Major government schemes

Up: Urban rejuvenation mission: AMRUT (Rs 32bn), national education mission (Rs 31bn), developmental services (Rs 31bn), Green Revolution (Rs 27bn), Bharatnet (Rs 25bn), crop insurance scheme (Rs 23bn), jobs & skill development (Rs 22bn), Pradhan Mantra Gram Sadak Yojna (Rs 21bn), Pradhan Mantri Krishi Sinchai Yojna (Rs 20bn), construction of new lines (Rs 20bn), National Livelihood Mission-Ajeevika (Rs 14bn), National Social Assistance Program (Rs 12bn), LPG connection to poor households (Rs 9bn),modernisation of police forces (Rs 6bn), PMEGP (Rs 6bn), Integrated Power Development Scheme (Rs 6bn), national program of mid-day meal (Rs 5bn).

Down: MRTS and metro projects (Rs 30bn), credit support program (Rs 21bn), Gram Jyoti Yojna (Rs 16bn), Pradhan Mantra Awas Yojna (Rs 15bn), Swachh



Bharat Mission (Rs 14bn), National Health Mission (Rs 7bn), recapitalisation of PSBs (Rs 0bn)

Unchanged: MNREGA, Namani Gange - National Ganga Plan Fiscal deficit widens and consolidates: The government has projected a fiscal deficit of 3.2% of GDP for FY19 vs. 3.5% in FY18. FY18 fiscal deficit expectedly slipped to 3.5% led by lower non-tax collections and higher revenue spend (up Rs 1,073bn). Capital expenditure for FY18/18BE is lower by Rs 364bn. Revenue receipts were up by Rs 227bn (FY18/FY18BE). For FY19, revenue receipts are estimated to rise by a robust 12% and expenditure by 10%. While pace of revenue expenditure may seem lower than FY18RE, it should be noted that FY18RE itself was 3.6% higher than FY18BE. Capital expenditure rise of 10% is unimpressive due to favourable base of FY18RE. FY19BE capex spend is actually lower than FY18BE.

Tax-GDP ratio to rise to 12.1% vs. 11.6% in FY18 – optimistic due to GST estimates.

Gross market borrowing at Rs 6,055bn vs. Rs 5,990bn in FY18; we see upside risk.

Net market borrowing at Rs 4,621bn vs. Rs 4,594bn in FY18; we see upside risk as switching of securities target (Rs 719bn) is optimistic considering FY18RE performance was Rs 570bn vs. Rs 750bn FY18BE.

States’ share in taxes is assumed at 34.7%, similar to last year.

Total IEBR (including railways) for FY19 is at Rs 4782bn (up 24% yoy).

Central government fiscal account

___________Rs Bn_____________ ___________% of GDP___________ ________yoy growth (%)_______

FY17 FY18BE FY18RE FY19BE FY17 FY18BE FY18RE FY19BE FY17 FY18BE FY18RE FY19BE

Nominal GDP 151837 168475 167847 187223

11.0 11.0 10.5 11.5

Revenue receipts 13742 15158 15054 17257 9.1 9.0 9.0 9.2 15.0 10.3 9.5 14.6

Tax (net) 11014 12270 12695 14806 7.3 7.3 7.6 7.9 16.7 11.4 15.3 16.6

Non - tax 2728 2888 2360 2451 1.8 1.7 1.4 1.3 8.6 5.8 -13.5 3.9

Capital receipts 6010 6310 7123 7165 4.0 3.7 4.2 3.8 0.9 5.0 18.5 0.6

Recovery of loans 176 119 175 122 0.1 0.1 0.1 0.1 -15.4 -32.3 -0.9 -30.2

Other reciepts (mainly PSU disinvestment) 477 725 1000 800 0.3 0.4 0.6 0.4 13.3 51.9 109.5 -20.0

Borrowings and other liabilities 5356 5465 5948 6243 3.5 3.2 3.5 3.3 0.5 2.0 11.1 4.9

Total receipts 19752 21467 22178 24422 13.0 12.7 13.2 13.0 10.3 8.7 12.3 10.1

Total revenue expenditure 16906 18369 19443 21418 11.1 10.9 11.6 11.4 9.9 8.7 15.0 10.2

Total capital expenditure 2846 3098 2734 3004 1.87 1.84 1.6 1.6 12.5 8.9 -3.9 9.9

Total expenditure 19752 21467 22178 24422 13.0 12.7 13.2 13.0 10.3 8.7 12.3 10.1

Fiscal deficit 5356 5465 5948 6243 3.5 3.2 3.5 3.3 0.5 2.0 11.1 4.9

Revenue deficit 3164 3212 4389 4160 2.1 1.9 2.6 2.2 -7.7 1.5 38.7 -5.2

Effective Revenue deficit 1506 1258 2496 2207 1.0 0.7 1.5 1.2 -28.6 -16.5 65.7 -11.6

Primary deficit 549 235 640 485 0.4 0.1 0.4 0.3 -39.8 -57.3 16.6 -24.3

Gross Market Borrowing 5830 5800 5990 6055 3.8 3.4 3.6 3.2 -0.3 -0.5 2.7 1.1

Net Market Borrowing 4082 4232 4594 4621 2.7 2.5 2.7 2.5 -7.4 3.7 12.5 0.6

Source: Budget Document, PhillipCapital India Research

Gross tax components

______ ________Rs Bn_______________ ____________YoY Growth____________ _____________% of GDP_____________

FY17 FY18BE FY18RE FY19BE FY17 FY18BE FY18RE FY19BE FY17 FY18BE FY18RE FY19BE

Gross Tax Revenue 17158 19116 19461 22712 17.9% 11.4% 13.4% 16.7% 11.3% 11.3% 11.6% 12.1%

Direct Tax 8495 9800 10050 11500 14.5% 15.4% 18.3% 14.4% 5.6% 5.8% 6.0% 6.1%

Personal Income Tax 3646 4413 4413 5290 26.8% 21.0% 21.0% 19.9% 2.4% 2.6% 2.6% 2.8%

Corporation Tax 4849 5387 5637 6210 7.0% 11.1% 16.3% 10.2% 3.2% 3.2% 3.4% 3.3%

Indirect tax 8620 9269 9364 11160 21.4% 7.5% 1.0% 19.2% 5.7% 5.5% 5.6% 6.0%

GST 4446 7439 0.0% 0.0% 0.0% 67.3% 0.0% 0.0% 2.6% 4.0%

Excise Duty 3821 4069 2770 2596 32.6% 6.5% -31.9% -6.3% 2.5% 2.4% 1.7% 1.4%

Customs Duty 2254 2450 1352 1125 7.1% 8.7% -44.8% -16.8% 1.5% 1.5% 0.8% 0.6%

Service Tax 2545 2750 795 0 20.4% 8.1% -71.1% -100.0% 1.7% 1.6% 0.5% 0.0%




Non-tax and capital receipts break-up Rs Bn FY16 FY17 FY18BE FY18RE FY19BE

Disinvestment 421 400 465 1000 800

Strategic 0 55 260 - -

Telecom 565 787 443 307 487

Dividends 1121 1230 1424 1064 1073

Public Enterprises 306 519 675 548 525

RBI 815 712 749 516 548


Central government’s capital expenditure (Rs bn)

FY17 FY18BE FY18RE FY19BE

Gross Budgetary Support 2846 3098 2734 3004

Ministry of Railways (IEBR) 647 760 800 934

IEBR (excluding Ministry of Railways) 2734 3090 3969 3848

Total 6227 6948 7503 7787


Central government fiscal deficit Revenue and capital expenditure (% of GDP)

Gross and Net market borrowing (Rs bn) Direct and indirect tax (% of GDP)

3.0

3.2

3.4

3.6

3.8

4.0

4800

5000

5200

5400

5600

5800

6000

6200

6400

FY16 FY17 FY18BE FY18RE FY19BE

Fiscal deficit (Rs Bn) Fiscal deficit (% of GDP) (RHS)

1.4

1.5

1.6

1.7

1.8

1.9

10.4

10.6

10.8

11.0

11.2

11.4

11.6

11.8


Revenue Exp (% of GDP) Capital Exp (% of GDP) (RHS)

0

1000

2000

3000

4000

5000

6000

7000

FY9

7

FY9

8

FY9

9

FY0

0

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8B

E FY

18

RE

FY1

9B

E

Gross borrowing Net borrowing

3%

4%

4%

5%

5%

6%

6%

7%

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8B

E

FY1

8R

E

FY1

9B

E

Direct Tax Indirect tax



Gross tax revenue


Outlay on major schemes


National Social Assistance prog 8616 8854 9500 8745 9975

MNREGA 37341 48215 48000 55000 55000

Green Revolution 9777 10105 13741 11185 13909

Pradhan Mantri Krishi Sinchai Yojana 7781 5134 7377 7392 9429

Pradhan Mantri Gram Sadak Yojna 18290 17923 19000 16900 19000

Pradhan Mantri Awas Yojna 11603 20952 29043 29043 27505

PMAY: Rural 10116 16000 23000 23000 21000

PMAY: Urban 1487 4880 6043 6043 6505

National Rural Drinking Water Mission 4370 5980 6050 7050 7000

Swachh Bharat Mission (SBM) 7469 12619 16248 19248 17843

SBM: Rural 6703 10484 13948 16948 15343

SBM: Urban 766 2135 2300 2300 2500

National Health Mission (NHM) 20213 22870 27131 31292 30634

National Rural Health Mission 18254 19826 21189 25459 24280

National Urban Health Mission 717 491 752 652 875

National Education Mission 27066 27616 29556 29556 32613

National Programme of Mid day meal 9145 9475 10000 10000 10500

Development Services 16835 15893 20755 19963 23088

National Livelihood Mission-Ajeevika 2783 3486 4849 4699 6060

National Rural Livelihood Mission 2514 3158 4500 4350 5750

National Urban Livelihood Mission 269 329 349 349 310

Jobs and Skill Development 1177 1817 4089 2905 5071

Urban Rejuvenation Mission : AMRUT 7296 9277 9000 8999 12169

Modernisation of Police Forces 1581 2230 2022 2577 3157

Bharatnet ... 5600 10000 5710 8175

MRTS and Metro Projects 9300 15327 18000 18000 15000

Interest subsidy for credit to farmers 13000 13397 15000 14750 15000

Namami Gange-National Ganga Plan 1000 1675 2300 2300 2300

LPG connection to poor households ... 2500 2500 2252 3200

National SocialAssistance Progamme 8616 8854 9500 8745 9975

Crop Insurance Scheme 2983 11052 9000 10698 13000

Interest Equalisation Scheme 1100 1000 1100 2000 2500

India Post Payments Bank ... 300 500 500 300

Price Stabilisation Fund ... 6900 3500 3500 1500

Recapitalization of PSBs 25000 24997 10000 10000 0

Police Infrastructure 3739 2904 4447 4490 4750

Credit Support Programme 71 716 3002 2802 700

Prime Minister Employment Gen Prog (PMEGP) 1281 1113 1024 1195 1801

Gram Jyoti Yojna 4500 2966 4814 5400 3800

Integrated Power Dev Scheme 1002 4366 5821 4372 4935

Construction of New Lines 15828 14193 11533 7768 9755


-5%

0%

5%

10%

15%

20%

25%

30%

0

5000

10000

15000

20000

25000

FY0

0

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8B

E

FY1

8R

E

FY1

9B

E

Gross Tax Revenue (Rs Bn, LHS) YoY growth (%, RHS)

% of GDP



GoI expenditure break-up

______________Rs Bn_______________ __________YoY Growth__________ _____% of total expenditure________

FY17 FY18BE FY18RE FY19BE FY18BE/17 FY18RE/17 FY19BE/18RE FY17 FY18BE FY18RE FY19BE

Pension 1314 1312 1474 1685 -0.2 12.2 14.3 6.7 6.1 6.6 6.9

Defence 2518 2624 2671 2827 4.2 6.1 5.8 12.7 12.2 12.0 11.6

Subsidy 2348 2729 2641 2928 16.2 12.5 10.9 11.9 12.7 11.9 12.0

Fertiliser 663 700 650 701 5.6 -2.0 7.9 3.4 3.3 2.9 2.9

Food 1102 1453 1403 1693 31.9 27.3 20.7 5.6 6.8 6.3 6.9

Petroleum 275 250 245 249 -9.2 -11.2 1.9 1.4 1.2 1.1 1.0

Agriculture and Allied Activities 502 570 566 638 13.6 12.8 12.8 2.5 2.7 2.6 2.6

Commerce and Industry 214 247 263 280 15.4 23.2 6.3 1.1 1.1 1.2 1.1

Development of North East 25 27 27 30 7.5 7.5 11.9 0.1 0.1 0.1 0.1

Education 720 797 819 850 10.7 13.7 3.8 3.6 3.7 3.7 3.5

Energy 310 367 417 411 18.6 34.6 -1.4 1.6 1.7 1.9 1.7

External Affairs 128 148 137 150 16.0 7.3 9.7 0.6 0.7 0.6 0.6

Finance 415 295 294 203 -28.9 -29.1 -30.9 2.1 1.4 1.3 0.8

Health 390 489 532 547 25.3 36.4 2.8 2.0 2.3 2.4 2.2

Home Affairs 784 838 881 935 7.0 12.5 6.0 4.0 3.9 4.0 3.8

Interest 4807 5231 5308 5758 8.8 10.4 8.5 24.3 24.4 23.9 23.6

IT and Telecom 180 208 178 224 15.6 -1.0 25.7 0.9 1.0 0.8 0.9

Others 637 677 695 728 6.4 9.2 4.8 3.2 3.2 3.1 3.0

Planning and Statistics 45 50 51 52 12.3 12.7 2.7 0.2 0.2 0.2 0.2

Rural Development 1139 1286 1356 1381 12.9 19.1 1.8 5.8 6.0 6.1 5.7

Scientific Departments 195 223 224 249 14.4 14.8 11.3 1.0 1.0 1.0 1.0

Social Welfare 318 394 386 442 23.8 21.4 14.5 1.6 1.8 1.7 1.8

Tax Administration 221 127 777 1055 -42.7 251.1 35.7 1.1 0.6 3.5 4.3

Transfer to States 1327 1371 1203 1429 3.3 -9.4 18.8 6.7 6.4 5.4 5.8

Transport 1022 1244 1071 1346 21.7 4.8 25.7 5.2 5.8 4.8 5.5

Union Territories 133 134 142 141 0.7 7.5 -0.9 0.7 0.6 0.6 0.6

Urban Development 369 406 408 418 9.9 10.3 2.5 1.9 1.9 1.8 1.7

Grand Total 19752 21467 22178 24422 8.7 12.3 10.1 100.0 100.0 100.0 100.0


GoI expenditure break-up



Agri & Inputs – Positive

WINNERS: Input players in seeds, feeds, crop protection, and enhancements. UPL, PI Industries, Kaveri Seeds, Avanti Feeds, Dhanuka Agritech LOSERS: None Budget 2018-19 had a higher focus on rural income and credit flow to agriculture – with significant increase in agri credit, crop insurance, promotion of food processing infrastructure, agro exports, irrigation and credit facilities to related sectors such as animal husbandry, fisheries and aquaculture. Higher credit allocation and outflow would lead to de-risking/de-burdening of farmers, enabling them to invest more on crop yield improvements and food security through modernised products (crop protection and enhancement products, and hybrid/modified seeds). Review of FM announcement on kharif-crop MSP increment to 1.5x In the Budget 2018-19, the highlight for the agri sector was the hike in the Minimum Support Price (MSP) of kharif crops up to 1.5x of the cost of produce. From the clarification from the Ministry of Agriculture, MSP estimate for 2018-19 of 1.5x cost is based on the A2+FL formula (Actual paid-out cost + imputed value of family labour). In FY17-18, the MSP of kharif crops already stand at 1.3x of A2+FL. This indicates that the average incremental income for a kharif farmer will be 15-18% from current levels.

Budget Proposals PhillipCapital Perspective

No change announced in total fertiliser subsidy (Rs 700bn).

Minimum Support Prices (MSP) for Kharif crops to be hiked to 50% more than A2+FL costs, which is currently at ~33% more, which benefits the farmers by ~15-18% improvement in average incremental income.

Agri-credit target hiked to Rs 11tn from Rs 10tn last year

Budgetary allocation for higher MSP on kharif crops (similar to rabi crops, provided earlier) will trickle down profits to medium and small-scale farmers. This would promote higher spends on hybrid/modified seeds, fertilisers, crop protection products (for pre- and post-harvest use), and equipment. Strong positive for Crop protection and enhancement products and farm-equipment companies

Pradhan Mantri Fasal Bima Yojana: Allocation of Rs 130bn, up 44% from budgeted Rs 90bn in FY18. The coverage of scheme will be increased to 50%/60% of cropped area in FY19/20 from 40% in FY18

Should increase the risk-taking appetite of farmers and lead to more spending on crop protection, soil nutrition, and targeted bio agri-input products and farm equipments

Allocation of Rs 14bn to food processing to promote establishment of specialized agro-processing financial institutions in the sector

Help promote investments in infrastructure and expansion of the current food processing facilities in the country

Government to add advanced food-processing facilities in 42 mega food parks in the country. To develop 22,000 gramin agri markets. Agri market infra fund with a corpus of Rs 20bn

Will support better price realisation of food produce for farmers and FPOs and enable exports of more categories of products

Irrigation: Allocation to the Pradhan Mantri Krishi Sinchai Yojana (PMKSY) aggregated across three ministries increased by ~28% to Rs 94.3bn

More sustainable income with reduced dependence on rains

The coverage of National Agricultural Market (e-NAM) will be expanded to 585 APMCs from the current 470. E-NAMs will be de-linked from APMC regulations.

For the post-harvest phase, the government has taken steps to enable farmers to get better prices for their produce in the markets through a transparent agri-trading online platform.



With e-NAM, small farmers, who could not afford to trade in large markets like APMCs, would have more benefits.

Proposed new scheme 'Operation Green', which shall promote Farmer Producers Orgs (FPO), agri logistics, processing facilities, and professional management. Allocated a corpus of Rs 50bn

Kisan Credit Cards scheme to support short-term credit support for animal husbandry, fisheries, and aquaculture sectors. Allocated Rs 100bn on two new funds – Dairy Processing Infrastructure Development Fund (DPIDF) and Fisheries & Aquaculture Infrastructure Development Fund (FAIDF)

Positive for feeds, dairy/dairy products, fish/seafood exports, processing centers and aquaculture industries



Automobiles – Marginal positive

WINNERS: Apollo Tyres, Ceat, MRF (NR), JK Tyres (NR), Escorts, Hero Motocorp, M&M LOSERS: None


Basic custom duty on tyre imports hiked to 15% from 10% earlier

Positive for tyre companies. More so for JKTY and

Apollo, who have higher exposure to the MHCV segment.

Our checks revealed that the lowest-quality Chinese tyre prices have already surged to Rs 30,000/pair – with this move, these will inch up to Rs 31,500/pair (vs. Rs 23,000/pair six months ago).

As we have been saying – we see a structural drop in imports of Chinese tyres, thereby increasing pricing power of domestic players.

Boost to the rural sector Positive for Escorts, MSIL, Hero Motocorp and M&M.

Escorts has ~80% revenue exposure to rural markets, M&M and Hero Moto both have c.50%.

Maruti generates ~35% of its revenues from the rural segment.



BFSI Banks and HFCs: Mildly positive; NBFCs: Positive

WINNERS: ICICI Bank, Axis Bank, CIFC, MMFS, SCUF, SHTF LOSERS: None This budget is mildly positive for the BFSI sector


BANK and HFC

Deeping of the bond market – large corporates to meet about a fourth of their financing needs from this market

Necessary action to be taken to allow companies rated below AA to raise funding from the bond market

Disintermediation is negative for the banking sector. Though banks will be eventual participants in the bond market, it is negative from the margin perspective

Negative for banks with a low CASA base

Carry forward and set-off of losses in certain companies U/S 79 of IT Act

For companies under IBC, the aggregate amount of unabsorbed depreciation and brought-forward loss to be reduced from the book profit for MAT calculation

Restriction on shareholding for the purpose of carry forward loss shall not apply in case of change of shareholding pursuant to an approved resolution plan under IBC, 2016.

Clears the ambiguity about the applicability of the rule for both listed and unlisted companies.

Positive for banks as the carry forward benefit for the acquiring company will help in better price discovery for the stressed asset.

Positive for banks (SBI, ICICI, Axis, PNB)

Increased allocation under MUDRA loans to Rs 3tn Positive for micro credit and micro finance due to increased allocation. +BHARATFIN, UJJIVAN, EQUITAS

Corporate income tax for MSMEs up to Rs 2.5mn turnover has been reduced to 25% from 30%

Positive for MSMEs as the segment has been under pressure after demonetisation. This will improve cash flow and help the segment to overcome GST implementation challenges. +DCBB, Federal Bank, CUB, KVB

Housing sector

Establish affordable housing fund (AHF) in NHB, funded from priority sector shortfall of banks

Allocation under PMAY is Rs 275bn in FY19 (Rs 290bn in FY18). Credit-linked subsidy scheme (CLSS) Rs 19bn (Rs 14bn in FY18)

Increased refinancing corpus will be available for affordable housing. As per NHB data, ~50% of refinance in FY16 was for houses with ticket sizes of +Rs 2.5mn.

Though the allocation under CLSS has increased yoy, we believe it is still much lower than what is actually required to fulfill the Housing 2022 scheme.

Mildly positive for HFCs (Repco, Gruh, CanFin Homes)

Thrust towards agri-business

MSP for kharif crop will also be 1.5x of production cost – in line with rabi crop.

Will help increase agriculture credit for the system, but it also increases the credit risk if adequate underwriting measures are not taken,



Formalise mechanism to ensure that the agri produce will not be procured at less than MSP

Extend facility of Kisan Credit Card to fisheries and animal husbandry

Agriculture credit target for FY19 is Rs 11tn

Evolve a suitable mechanism to enable access of crop loans to lessee cultivators.

given the inherent nature of risk involved

Exemption of interest income for senior citizens on deposits with banks and post offices to be increased to Rs 50,000 from Rs 10,000.

Positive for banks as it would attract retail deposits from senior citizens

It is proposed that trading in agricultural commodity derivatives on a recognized stock exchange shall not be treated as a speculative transaction even if no Commodities Transaction Tax (CTT) has been paid for those derivative transactions.

Rationalization of CTT for options on commodity derivatives.

For traders in the commodity derivative segment, any losses arising from such transactions can be set off against income from any other source. May lead to some increase in volume in agri- commodity derivates

Rationalizations of CTT on the commodity option will not necessarily improve its volume

Neutral for MCX

NBFC

In FY19, for creation of livelihood and infrastructure in rural areas, total amount to be spent by the ministries will be Rs 14.34tn

Increased spend in rural regions to improve cash flow in rural geographies. Positive for MMFS, as 80% of its branches are concentrated in rural areas

Target of Rs 3tn for lending under MUDRA for 2018-19

Refinancing policy and eligibility criteria set by MUDRA will be reviewed for better refinancing of NBFCs

Positive for NBFCs as Mudra provides refinance at much cheaper rates

Increased investments in the road sector Increased connectivity drives demand for more vehicles such as cars and trucks. Hence, positive for vehicle financiers – SHTF, CIFC, MMFS



Capital Goods & Power – Neutral

WINNERS: L&T, KEC International, Engineers India LOSERS: NA


Estimated spending by central PSUs projected to grow by 5% to Rs 5.1tn

Capex growth in railways (+22% yoy), roads (+10%), telecom (+39%), and oil & gas (+2% yoy) will offset a decline in power capex (-16%)

Railway capex to grow 22% yoy to Rs 1.47tn

Funding the capex will not be a challenge

Capex to be driven by network expansion (new lines and gauge conversion), track renewals, rolling stocks, and electrification. Investments in network decongestion projects and signalling and telecom will be muted

Budgetary support is expected to increase by 33% yoy to Rs 531bn while other financing should grow 17% yoy

Capital outlay for defence (ex-construction and land) to grow modestly by 9% to Rs 830bn on a low base

Defence outlay still out of sync with project approvals accorded by the government (Rs 4.2tn).

Beneficiaries: BEL, L&T, Tata Power, Astra Microwave

Allocation to irrigation-led schemes raised by 28% yoy to Rs 94bn

Higher capex under PMKSY and drip irrigation is positive for pump companies.

Beneficiaries: Kirloskar Brothers, Crompton Greaves, Shakti Pumps, V-Guard, KSB

Allocation to rural and urban electrification schemes – DDUGJY, IPDS and Saubhagya (rural) - flat yoy

Beneficiaries: KEC International, L&T, Voltas, ABB, Schneider Electric

Allocation to Namami Ganga at Rs 23bn (flat yoy) The government has started awarding projects under the Hybrid Annuity Model in FY18.

Beneficiaries: Va Tech Wabag, L&T, ION Exchange, SPML, Ramky Infra

AMRUT allocation increased by 20% yoy to Rs 60bn (8% of the project costs approved)

Expect strong momentum to continue where Rs 319bn of (Rs 776bn approved) water supply and sewerage projects have been awarded.

Beneficiaries: L&T, Va Tech Wabag, ION Exchange, SPML, Ramky Infra

Smart Cities allocation raised by 54% yoy to Rs 62bn Positive for L&T, Siemens, ABB, VA Tech Wabag



Cement – Positive

WINNERS: All: Especially – pan-India majors UltraTech, ACC, and Ambuja and regional leaders such as Dalmia Bharat, JK Cement, India Cements, and JK Lakshmi Cement. LOSERS: None The budget continued its focus on development such as housing for all and better infrastructure across all formats. Additional demand momentum should come from improved focus on providing hygiene facilities, setting up more educational institutions, and Smart Cities. This budget has specifically focused on improving earnings of rural India through a host of measures. In India, a major chunk of cement demand is from housing and that too from Individual House Builders (IHB) in rural India. This budget will help revive IHB demand, which is a key trigger to improve cement companies’ earnings profile.

Budget proposals PhillipCapital Perspective

Improving the income profile of rural India IHB remains a major chunk of cement demand. In a populous budget, the FM announced a series of measures that would improve rural incomes, which would ultimately lead to a revival of cement demand from the IHB segment (key for demand revival)

Infrastructure demand, though helpful, is more useful for better scale efficiencies. The key earnings trigger will come from a revival of IHB demand – this is where cement manufacturers display their pricing power and earn better margins

20mn toilets by the end of FY19 Implies cement demand of ~4-5mn tonnes in FY19, assuming minimum size of 10 sq. ft. per toilet

Reiteration of focus on housing for all by 2022 – 5.1 mn houses in rural areas in FY19 and assistance sanctioned to construct 3.7mn houses in urban areas over FY17-19

Implies cement demand of 20-25mn tonnes for rural India in FY19 and 15-18mn tonnes over FY17-19 for urban India, assuming minimum house size of 200 sq. ft.

Setting up of a dedicated Affordable Housing Fund in the National Housing Bank

This will facilitate smoother construction of affordable houses

Reemphasized focus on development of infrastructure facilities across all formats – roads, rails, metros, ports, airport, inland water ways, defense infrastructure, tourism infrastructure, smart cities etc.

Better cement demand from infrastructure projects, meaning better scale efficiencies and volume ramp up for cement manufacturers

Incentive for real estate transaction The FM has proposed that no adjustments shall be made in computing gains from real estate transaction where the circle rate value does not exceed 5% of the consideration. Though this will not create any immediate direct momentum for cement demand, in the long run, it will facilitate transactions in the real estate space, and help developers / investors to get rid of the existing inventories faster and bring in more transparency



FMCG – Positive

WINNERS: ITC, Colgate, HUL, Emami, and Dabur


No increase in GST compensation cess on cigarettes Positive for ITC; however, the government always has the option to increase cess outside the ambit of the budget

We believe there is less likelihood of any increase in compensation cess in FY19 as the government shall be in comfortable position to collect budgeted Rs 900bn (because the monthly run-rate from July to November 2017 was >Rs 75bn

Higher MSP price for kharif crops, creation of fund for aquaculture and fisheries, and setting up more toilets under the Swacch Bharat mission

Positive for rural-oriented companies such as HUL, Colgate, Dabur, and Emami



Healthcare– Positive (non-event for pharmaceuticals)

WINNERS: Apollo Hospital, Healthcare Global, Thyrocare, Dr Lal PathLabs LOSERS: None


Budget allocation raised by 13% to Rs 306bn towards the National Health Mission scheme (covering government insurance and medi-claims).

Indirect positive for the Indian healthcare sector (more for corporate hospitals than pharmaceuticals).

Budget allocation for biotechnology research raised by 8% to Rs 13.5bn.

Positive for companies having presence in biotechnology space like Biocon.

Under ‘‘Ayushman Bharat’’ program – to set up 150,000 ‘Health and Wellness Centers’. These centers will also provide free essential drugs and diagnostic services. Budget allocation of Rs 12bn.

This could be a very small negative for Indian pharma (as it could lead to price challenges), but positive for diagnostic players.

Launching flagship National Health Protection Scheme to cover over 100mn poor and vulnerable families (with about five family members) providing coverage up to Rs 500,000 per-family per-year for secondary and tertiary care hospitalization.

Inclusion of tertiary care hospitalisation will be positive for private hospital and diagnosis companies, as government hospital lacks facilities for treating critical/complex disease.

Our rough calculation suggests that this initiative could result in an incremental business opportunity of ~US$ 1.5bn (i.e., about 2% of Indian healthcare market).

The tariff rate of customs duty for specified medical devices increased to 10% from 7.5%. The effective rate of import duty on such medical devices, will, however, remain unchanged.

Almost neutral for medical device manufacturing companies.



Infrastructure – Positive

WINNERS: NCC, Ashoka Buildcon, Ahluwalia Contracts, Sadbhav Engineering, PNC Infratech, KNR Construction, HCC, Adani Ports LOSERS: JKumar Infraprojects (Minor)


Increased allocation for roads and railways

16% increase in budgetary allocation for roads

32% increase for railways

The increase in allocation was along expected lines

Positive for road companies – Ashoka Buildcon, Sadbhav Engineering, and EPC companies – NCC, PNC, KNR, HCC

Positive for companies in MRTS segment – J Kumar, ITD Cementation, HCC

Increased allocation for shipping and aviation

20% increase in budgetary allocation for ports segment

25% increase in allocation for Sagar Mala

Positive for Adani Ports & SEZ

Positive for ITD Cementation

Lower allocation for metro projects

17% decrease in budgetary allocation for metro projects Negative for JKumar Infraprojects

Huge jump in allocation for Smart Cities and AMRUT

54% decrease in budgetary allocation for Smart Cities

20% increase in allocation for AMRUT

Positive for NCC, Ahluwalia Contracts

Total Budgetary allocation Rs bn FY16 FY17 FY18 FY18RE FY19 Increment % Increase

Budget Support

Roads 469.1 522.3 649.0 610.0 710.0 100.0 16%

NHAI 230.2 149.8 238.9 238.9 296.6 57.7 24%

Urban development* 184.2 320.7 345.8 347.1 352.6 5.5 2%

Smart cities etc 14.8 44.1 40.0 40.0 61.7 21.7 54%

AMRUT 27.0 48.8 50.0 50.0 60.0 10.0 20%

Metro projects 93.0 157.0 180.0 180.0 150.0 -30.0 -17%

Railways 350.1 452.3 550.0 418.1 550.9 132.7 32%

Shipping 13.2 13.3 17.7 15.7 18.8 3.1 20%

Sagar mala, ports 1.4 4.1 6.0 4.8 6.0 1.2 25%

Inland transport 3.4 3.7 3.5 4.8 5.1 0.3 6%

Power 77.3 104.8 138.8 149.2 150.5 1.3 1%

Aviation 41.7 34.1 27.0 27.1 66.0 38.9 144%

PMGSY 182.9 179.2 190.0 169.0 190.0 21.0 12%

PMAY 101.2 209.5 290.4 290.4 275.1 -15.4 -5%

Urban

48.8 60.4 60.4 65.1 4.6 8%

Rural

160.7 230.0 230.0 210.0 -20.0 -9%

Swachh Bharat

126.2 162.5 192.5 178.4 -14.1 -7%

Urban

21.4 23.0 23.0 25.0 2.0 9%

Rural

104.8 139.5 169.5 153.4 -16.1 -9%



Midcap – Positive

WINNERS: Sintex Plastics, Pennar Engineered Building Systems (PEBS), Sical, Praj, Bajaj Electricals, KEI Industries, Finolex Cables, Havells, V-Guard Industries, Sterlite Technologies, Somany ceramics, Kajaria, AGL, Orient Bell. LOSERS: KDDL


Allocation of Ministry of Food Processing doubled to Rs 14bn from Rs 7.15bn.

Rashtriya Krishi Vikas Yojana (RKVY) for 1.05mn cold-storage, godowns, and glass houses – with an allocation of Rs 31bn. Scheme for cold-chain with 101 projects; 12 mega food parks.

Solar rooftops in Smart Cities.

150,000 health and wellness centers to be set up with an allocation of Rs 12bn.

Airport development under UDAN.

Investment in cold-chain and warehouses is positive for prefab and sandwich-panel companies such as PEBS and Sintex, and reefer-transport companies like Sical and Snowman.

Sagar Mala budgetary allocation at Rs 2.5bn from Rs 1.25bn; major ports allocation Rs 40.4bn from Rs 31.6bn. Total financial outlay on Sagar Mala at Rs 6bn for modernisation and connectivity.

Dredging at VOC Port / KOPT at Rs 677mn / Rs 1.5bn. Farakka barge Rs 1.95bn.

Investment in Sagarmala will promote rail and coastal cargo movement in the long term.

The investment in inland waterways and dredging is positive for DCI and Mercator.

A comprehensive textile sector package of Rs 71.5bn to boost the apparel and made-up segments.

Remission of state levies of Rs 16.6bn.

Amended technology upgradation fund of Rs 23bn.

Technology upgradation leading to higher productivity.

To create export incentives. Positive for textile exporters- KPR, SP Apparel, Kitex.

Railways’ capex for the year 2018-19 pegged at Rs 1.48tn; large part devoted to capacity creation.

Work on Eastern and Western Dedicated Freight Corridors is in full swing. Adequate number of rolling stock (12,000 wagons, 5,160 coaches, 700 locomotives) to be procured in 2018-19.

Redevelopment of 600 major railway stations is being taken up by Indian Railway.

Investment in wagon and coaches is positive for Pennar Industries.

Levy of Road and Infrastructure Cess on petrol and high-speed diesel oil of Rs 8 per ltr in place of abolition of additional excise duty of Rs 6 per ltr and reduction of basic excise duty by Rs 2 per ltr.

No infrastructure cess on ethanol blending up to 10% and bio diesel up to 20%

Duty benefit on ethanol and bio-diesel will incentivise oil marketing companies for ethanol blending.

Positive for sugar companies and Praj.

Custom duty on smart watches / wrist watches wearable devices increased to 20% from 10%.

Levy of social welfare surcharge on imported goods at 10% (from nil earlier) of the aggregate duties of customs.

Negative for watch retailers who are focused on imported brands.

Negative for KDDL.

Tempo of rural electrification maintained

Allocation for Saubhagya (rural electrification) increased by 77% to Rs 27bn (total allocation of Rs 160bn – electrification of 40 mn houses).

This allocation is in line with the government’s capex and timetable. Ripple effect of electrification is already visible in the steady consumption of wires, cables, switches, lighting, fans, and appliances.



Allocation to Deendayal Upadhyay Gram Jyoti Yojana (DDUGJY) stood at Rs 38bn.

Under DDUGJY electrification of 100,000 villages; under Saubhagya 17.5mn households.

Electrical companies with comprehensive portfolios that include wires and cables and lighting stand to benefit the most – KEI Industries, Finolex Cables, Havells, V-Guard, Orient Electric, and Surya Roshni.

Telecom Infrastructure

Setup 500,000 wi-fi hotspots will provide broadband access to 50mn rural citizens.

Allocation to Bharatnet has increased by 43% to Rs 100bn.

Allocation of optical-fibre-cable-based network for Defence Services increased by 20% to Rs 45bn.

Will create demand for optical fiber cables. Sterlite technologies, Finolex Cables will be biggest beneficiaries.

Focus on Swachh Bharat Abhiyan, affordable housing, Smart Cities, and other rural development schemes

Increased allocation in Swachh Bharat Mission (SBM) by 10% to Rs 178bn and in the Urban Rejuvenation Mission (Smart Cities + AMRUT) by 35% to Rs 122bn. To build 20mn toilets by 2019 under SBM. To build 4.9mn houses under Pradhan Mantri Awaas Yojana – Gramin.

It will create demand for toilets, modern sewage systems (bath fitting), tiles, and other building-material products. Positive for the Indian ceramic industry; positive for Kajaria, Somany, AGL, Orient Bell, Nictco, Cera, and HSIL.

Focus on Make in India: Custom duty increased on:

Cellular Mobile Phone To 20% from 15%

Parts and accessories of mobile phones To 15% from 7.5%/10%

Charger/adapter To 10% from zero

LCD panels and other parts of LED TVs To 15% from 7.5%/10%

Parts for manufacture of LCD/LED TV panels To 10% from zero

Silica used for manufacture of optical fiber

cables

To 5% from zero

Furniture: Seats, mattresses supports, and

lamps and lighting fittings

To 20% from 10%

Positive for Dixon, PG Electroplast, Sterlite Technology, Finolex Cables, Uniply.



Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year.

Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

Management Vineet Bhatnagar (Managing Director) (91 22) 2483 1919

Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6246 4101

Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735

Research

Automobiles

Engineering, Capital Goods

Pharma & Specialty Chem

Dhawal Doshi (9122) 6246 4128

Jonas Bhutta (9122) 6246 4119

Surya Patra (9122) 6246 4121

Nitesh Sharma, CFA (9122) 6246 4126

Vikram Rawat (9122) 6246 4120

Mehul Sheth (9122) 6246 4123

Agro Chemicals

IT Services & Infrastructure

Raag Haria (9122) 6667 9943

Varun Vijayan (9122) 6246 4117

Vibhor Singhal (9122) 6246 4109

Strategy

Banking, NBFCs

Shyamal Dhruve (9122) 6246 4110

Naveen Kulkarni, CFA, FRM (9122) 6246 4122

Manish Agarwalla (9122) 6246 4125

Logistics, Transportation & Midcap

Neeraj Chadawar (9122) 6246 4116

Pradeep Agrawal (9122) 6246 4113

Vikram Suryavanshi (9122) 6246 4111

Telecom

Paresh Jain (9122) 6246 4114

Media


Consumer & Retail


Technicals


Vishal Gutka (9122) 6246 4118

Subodh Gupta, CMT (9122) 6246 4136

Preeyam Tolia (9122) 6246 4129

Metals

Production Manager

Vishal Gutka (9122) 6246 4118

Dhawal Doshi (9122) 6246 4128

Ganesh Deorukhkar (9122) 6667 9966

Akshay Mokashe (9122) 6246 4130

Vipul Agrawal (9122) 6246 4127

Editor

Cement

Mid-Caps

Roshan Sony 98199 72726

Vaibhav Agarwal (9122) 6246 4124

Deepak Agarwal (9122) 6246 4112

Sr. Manager – Equities Support

Economics

Rosie Ferns (9122) 6667 9971

Anjali Verma (9122) 6246 4115

Sales & Distribution

Corporate Communications

Ashvin Patil (9122) 6246 4105

Asia Sales

Zarine Damania (9122) 6667 9976

Kishor Binwal (9122) 6246 4106

Dhawal Shah 8522 277 6747

Bhavin Shah (9122) 6246 4102

Sales Trader

Ashka Mehta Gulati (9122) 6246 4108

Dilesh Doshi (9122) 6667 9747

Execution

Archan Vyas (9122) 6246 4107

Suniil Pandit (9122) 6667 9745

Mayur Shah (9122) 6667 9945

Contact Information (Regional Member Companies)

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Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

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INDIA

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http://www.phillip.co.id/

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http://www.phillip.co.th/

http://www.kingandshaxson.com/

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No

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No

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No

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Some populism but keen eye on long-term growth

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