20th february 2013 - aditya birla capital · major economic reforms like goods and services tax,...

20th February 2013

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Our View

Economic policy reforms have for some years now mostly been taking place outside of the Union

Budget.

This year is not likely to be any different. The budget this year assumes critical importance in the

context of

(i) Fiscal consolidation to facilitate lower inflation and interest rate cuts, and

(ii) Policy measures and incentives to direct savings towards infrastructure and industrial investment

to boost non-inflationary economic growth.

Steps towards fiscal consolidation and boosting investments would also be important to attract foreign

capital inflows to finance the high current account deficit. Investors would also seek some roadmap for

major economic reforms like Goods and Services Tax, Direct Tax Code, Land Acquisition Bill, FDI in

insurance and pension.

To achieve the objective of fiscal consolidation, the Budget is likely to concentrate more on boosting

revenue growth and containing less productive expenditure without hurting economic growth. While the

government could go in for populist measures like a food security bill ahead of the elections, this is

likely to be balanced with rationalization of unproductive expenditure.

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Our View

To induce efficient allocation of household savings away from non-productive assets like gold into

financial assets for funding infrastructure and industrial investment and ease CAD issues, the budget

could introduce

(i) Inflation-indexed bonds

(ii) Tax-saving incentives in insurance beyond the current Rs. 1 L limit under section 80C and

(iii) Extend tax exemption limits for medical insurance ,

(iv) Tax saving infrastructure bonds

These measures would not only boost investment but also promote consumption through lower

incidence of tax and consequently, higher disposable income for the middle class.

For healthy growth of the economy, the health of the capital market is important. Expect the budget to

spell out measures to improve the depth of the markets. This could lead to some rationalization of

Securities Transaction Tax and steps to deepen the corporate bond market and improve the regime for

foreign capital flows.

Scope for RGESS is expected to be widened and made more attractive for the common man.

The budget could be a good trigger for the markets if it lays out a credible outline for fiscal

consolidation and boosting investment. In the following slides we present a list of expectations from the

Union Budget 2013-14 and also the likely implications it would have for various sectors and stocks. We

have selected 6 stocks which we believe could be beneficiaries of the budget’s attempts to enhance

economic growth through fiscal consolidation and boosting investment.

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Banking

Likely Budgetary Measures Impact Stocks to Watch

Allocation of equity capital for infusion in

PSU banks

Positive for PSU banks as it will enable them to

be compliant with stricter capital adequacy

Basel III norms. Besides this, the infusion will

cater to the credit needs of productive sectors of

the economy & help banks expand their

business

PSU Banks (+ve)

Reduction in lock-in period for tax saving

fixed deposits that are eligible for tax

benefits under section 80C from the current

5 years to 3 years

Positive for banks as it would lead to increased

flow of deposits. This move would also give

level playing field to these deposits against

Equity Linked Savings Schemes (ELSS), as far

as locking period is concerned.

Entire Banking sector (+ve)

Infrastructure status to affordable housing With Infrastructure status, affordable housing

segment may become more attractive to

developers as getting clearances and sanctions

to finance projects will be easier and faster.

HFCs like Dewan Housing, LICHF, Gruh &

banks like SBI, ICICI bank (+ve)

Providing capex based tax breaks to

corporates

Would fuel demand for incremental credit which

has remained muted in the current fiscal

Entire Banking sector (+ve)

Measures to direct household savings into

productive financial assets for funding

infrastructure and industrial investment

Increased flow of funds to infrastructure

financing companies

IFCs like IDFC

5

Construction/Infrastructure/Engineering


MAT to be lowered/ abolished for

infrastructure players.

The move is likely to bring in more participation

and investments for long gestation infrastructure

projects.

L&T, ITNL, Sadbhav, HCC (+ve)

Creation of long term dedicated debt funds

for infrastructure.

The move is likely to bring in more liquidity and

investments in the infrastructure sector/

All Infrastructure companies. (+ve)

Priority sector lending status for

infrastructure sector funding

The move will ease the cost of funding for the

infrastructure sectorAll Infrastructure companies. (+ve)

Concessional rate /Removal of service tax

for construction services.

The move is likely to ease margin pressures of

the construction companies.

All Construction Companies (+ve)

Impetus to manufacturing of defence

equipments in India

Broad guidelines likely given the magnitude of

dollars spent on defence equipmentL&T, Bharat Forge, M&M (+ve)

Removal of Customs duty exemptions to

imported capital goods required for certain

industries (currently zero/5%)

The move will encourage investments and

demand from domestic capital goods industry.L&T, Bhel (+ve)

6

FMCG/Media/Cement


Customs duty on set-top box (STB) likely to

be reduced from existing 5%

Service tax and entertainment likely to be

imposed on the cable/DTH industry

Low cost of STB will reduce cost of customer

acquisition for cable/DTH players. Any hike in

taxes will be passed on the consumer.

All MSO’s like Hathway, Den, WWIL, Hinduja

Ventures (+ve)

Rural focus of the budget and direct tax relief

for the middle class

This will increase money in the hands of the

consumer

Godrej Consumer, HUL, Dabur, Marico, Asian

Paints (-ve)

Excise duty on cement may be raised by

changing the existing slab

In low growth scenario, cement players will

pass-on the increased cost to the end consumer

with lag effect, thereby impacting margins of

cement players in short to medium term

Cement players like ACC, Ambuja (-ve)

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Metals / Automobiles


Likely increase in import duty on steel This will help to protect the steel industry reeling

from high debt and lower profitability.

SAIL, JSW Steel, Tata Steel (+ve)

Reduction in export duty on iron ore fines

from the current 30%

Positive for iron ore miners as these would

reduce duty outflows on exports. This is likely to

increase the costs of iron ore procurement for

JSW Steel.

Sesa Goa , NMDC (+ve)

JSW Steel (-ve)

Increase in iron ore royalty Negative for iron ore miners and integrated steel

producers

NMDC. Sesa Goa, SAIL, Tata Steel, JSW Steel

(-ve)

Imposing Diesel Tax on large diesel

passenger vehicles

This will be negative for large diesel passenger

vehicle producers

M&M (-ve)

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Oil & Gas


Increase in the administered price of Natural

Gas

It is expected that Government would accept the

recommendations of the Rangarajan committee

Reliance, Oil India (+ve)

Ending the uncertainty over the under-

recovery sharing mechanism - A clear

formula for sharing between the government,

up-stream, mid-stream and the down

stream.

Very high probability given the move from the

government on raising diesel prices and putting

a cap on LPG

HPCL, IOC, Oil India (+ve)

Reintroduction of customs duty on crude oil

to boost revenues.

This is likely given the rising imports of crude oil

and the need to boost government revenues

Negative for oil refining companies

Cairn (+ve)

Additional Excise duty on diesel cars The move will bring down the under-recoveries

of oil PSU’s.

BPCL,HPCL (+ve)

Maruti,M&M (-ve)

Exemption of the 5 % import duty on

liquefied natural gas (LNG).

The move is likely to reduce the usage of diesel

and that will bring relief for the PSUs.

BPCL,HPCL (+ve)

Policies to promote domestic oil & gas

production and lower CAD

Domestic oil& gas producers to benefit RIL, Cairn (+ve)

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Pharmaceuticals


Increase in MAT rate from 18% to 20% Probability is high considering the fact that

government wants to let go off differentiated tax

structure

Overall sector (-ve)

Weighted deduction on In-house Research

to increase from 200% to 225%

There is a high probability since government

wants Indian companies to focus on innovation

All major companies who are high spenders

including Sun Pharma, Lupin, Cipla, Glenmark

(+ve)

Increase in allocation to NRHM (National

Rural Health Mission)

High probability since government has

consistently increased spending on the scheme

and will continue to maintain the trend.

Overall sector (+ve)

10

Power


Extension of sunset clause for power

generating co’s beyond 2013. (Currently an

undertaking is eligible for tax benefits only if it

begins to generate power by 31/03/2013)

Will ensure long term investments in the power

sector

Tata Power, CESC, JSW Energy (+ve)

UMPP timeline for coal tie up to be modified

to 3 years from signing of FSA (currently 3

years from the date of issuance of Provisional

Certificate.)

Will ensure greater participation and more

funds in the sector.

Tata Power, Reliance Power (+ve)

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Real Estate


Industry status be accorded to real estate

sector

The move is likely to bring in additional liquidity

and lower the cost of funds for the sector.

All real estate players (+ve)

Exemption Limit for interest paid on

borrowed capital to be revised upwards.

The move will bring in additional investments

and make housing more affordable

Sobha Developers, Prestige Estates ,HDIL (+ve)

Creation of structures like REIT’s, Real

Estate Funds etc

The move will bring in additional funds and bring

more participation

All real estate players (+ve)

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Our Top Picks for the ensuing risk-on rallyOur Top Picks

IDFCCMP 158.1

Budget’s strong focus to boost infrastructure & industrial investments augurs well for the company. Besides this,

recent reform initiatives by the government in the infrastructure sector will bring down the perceived risk of higher bad

assets in the infrastructure portfolio.

Infrastructure would be one of the key focus areas in the upcoming budget: a) robust investments are likely to be

announced b) clarity on various taxation issues are likely to be put up and c) various incentives and removal of

bottlenecks for speedy implementation of the projects are likely to be announced. All the above are likely to augur well

for L&T.

L&TCMP 1444.0

ICICI Bank

CMP 1121.9

Budget’s focus to promote investment & consumption growth to fuel demand for credit. It would also benefit from likely

incentives to direct household savings to insurance and a likely roadmap for higher foreign investment in insurance.

Godrej

Consumer CMP 725.2

Rural focus of the government & likely direct tax reliefs for the middle class will put more money in hands of the

consumer, thereby benefiting FMCG players.

M&MCMP 898.0

M&M is the largest manufacturer of tractor. Increase in credit flow to farmers and no extra tax on large vehicles would

act as a positive trigger.

Would benefit from (1) Government’s policies to promote domestic oil&gas production and reduce CAD and (2)

possible increase in customs duty on crude oil

CairnCMP 304.3

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Research Team

Vivek Mahajan Hemant Thukral

Head of Research Head – Derivatives Desk

022-42333522 022-42333483

[email protected] [email protected]

Fundamental Team

Avinash Nahata Head of Fundamental Desk 022-42333459 [email protected]

Akhil Jain Metals & Mining/Mid Caps 022-42333540 [email protected]

Sunny Agrawal FMCG/Cement/Mid Caps 022-42333458 [email protected]

Sumit Jatia Banking & Finance 022-42333460 [email protected]

Shreyans Mehta Construction/Real Estate 022-42333544 [email protected]

Dinesh Kumar Information Technology/Auto 022-42333531 [email protected]

Pradeep Parkar Database Analyst 022-42333597 [email protected]

Quantitative Team

Jyoti Nangrani Sr. Technical Analyst 022-42333454 [email protected]

Raghuram Technical Analyst 022-42333537 [email protected]

Advisory Support

Indranil Dutta Advisory Desk – HNI 022-42333494 [email protected]

Suresh Gardas Advisory Desk 022-42333535 [email protected]

Sandeep Pandey Advisory Desk 022-30004011 [email protected]

ABML research is also accessible on Bloomberg at ABMR

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20th february 2013 - aditya birla capital · major economic reforms like goods and services tax,...

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