angelbrokingresearch unionbudget2016-17review final...

Union Budget 2016-17 Review

Index

Union Budget 2016-17 Review 2-7

Sectoral Impact 8

Automobile 9

Banking 10

Capital Goods 12

Cement 14

FMCG 15

Infrastructure 16

Information Technology 18

Media 18

Metals & Mining 19

Oil & Gas 19

Pharmaceutical 20

Power 20

Real Estate 21

Telecom 22

Miscellaneous

Agriculture 23

Aviation 23

Chemicals 23

Education 24

Footwear 24

Jewellery 24

Logistics 25

Networking/Hardware 25

Paper 25

Retail 26

Sanitaryware 26

Shipping 26

Textile 26

2

Union Budget 2016-17 Review February 29, 2016

All eyes now on the RBI

The Finance Minister’s (FM) decision to stay firm on the path of fiscal consolidation will have multifold impact on our economy and markets. With the FY2017 fiscal deficit expected to be restrained within the FRBM target of 3.5% of GDP, we expect inflation to remain under check. This should allow the RBI governor to reduce interest rates in the upcoming Monetary Policy, which is vital to boost the economy facing global headwinds.

Fiscal math looks reliable

The FM has budgeted for an 11.7% increase in FY2017 tax revenues, largely in line with the 11% increase in the nominal GDP. Direct and indirect tax revenues are estimated to increase 12.6% and 10.8%, respectively, which we believe are reasonable considering the additional 0.5% cess, taking the effective service tax to 15%.

Disinvestment receipts have also been rationalized to `56,500cr in line with our expectations of `50,000cr. The 25% increase in non-tax revenue led by `99,000cr from telecom services (FY2016 revised estimate - `57,384cr) looks a bit stretched. However, there is enough scope within the budget to enable the achievement of these targets.

Running a tight ship

The FM stayed shy of doling out cash or implementing any populist measures in the budget, which is commendable. The spending continues to remain focused on the rural and infrastructure sector. To boost the rural economy, the budget has taken significant measures to expand the irrigated acreage, conserve soil fertility and improve yields, while ensuring optimal utilisation of water resources by sustainable management of ground water resources. These measures are vital for the economy already reeling under the stress of consecutive droughts.

Allocation towards roads and highways continues to increase (with ~23% yoy increase in allocation to ~`57,980cr). Higher allocation towards the roads sector would further accentuate the execution target set by the government to attain 30km/day of road construction by FY2017. Overall, we believe it is a positive budget with the FM having been able to balance the twin objectives of high spending and sticking to the path of fiscal consolidation.

Budget picks

The higher focus on rural spending coupled with higher fund allocation towards the Seventh Pay Commission will provide a strong boost to rural consumption, thereby benefiting tractor and two-wheeler players such as Mahindra & Mahindra (M&M) and Hero MotoCorp. Also, with higher allocation towards roads and infrastructure projects, we expect road EPC companies such as Sadbhav Engineering and PNC Infratech to gain. Additional deduction on housing loan interest for first home buyers coupled with an anticipated interest rate cut would help housing finance companies such as LIC Housing Finance and Dewan Housing. Further, removal of dividend distribution tax (DDT) for REITs is expected to be positive for real estate players in the commercial space such as DLF, Phoenix Mills, etc.

Tax revenues to increase in line withnominal GDP growth

Strong measures to boost rural andinfra sector

Budget Picks – M&M, Hero MotoCorp,Sadbhav Engineering, PNC Infratech,LIC Housing, Dewan Housing

3


Exhibit 1: Budget 2016-17 at a glance

Budget (` crore)

YOY (%)

FY14 FY15 FY16BE FY16RE FY17BE

FY16BE FY16RE FY17BE

(A) Revenue Receipts (1+2) 10,14,724 11,01,472 11,41,575 12,06,084 13,77,022

3.6 9.5 14.2

Gross Tax Revenue (a+b) 11,38,734 12,44,885 14,49,490 14,59,611 16,30,888

16.4 17.2 11.7

Devolution to States 3,22,880 3,41,270 5,29,648 5,12,103 5,76,787

55.2 50.1 12.6

1) Tax Revenue (Net to Centre) 8,15,854 9,03,615 9,19,842 9,47,508 10,54,101

1.8 4.9 11.2

a) Direct Taxes 6,37,535 6,94,658 7,97,995 7,52,021 8,47,097

14.9 8.3 12.6

Income Tax 2,42,857 2,65,733 3,27,367 2,99,051 3,53,174

23.2 12.5 18.1

Corporate Tax 3,94,678 4,28,925 4,70,628 4,52,970 4,93,923

9.7 5.6 9.0

b) Indirect taxes 5,01,199 5,50,227 6,51,495 7,07,590 7,83,791

18.4 28.6 10.8

Custom Duties 1,72,085 1,88,016 2,08,336 2,09,500 2,30,000

10.8 11.4 9.8

Excise Duties 1,70,198 1,89,952 2,29,808 2,84,142 3,18,670

21.0 49.6 12.2

Service Tax 1,54,778 1,67,969 2,09,774 2,10,000 2,31,000

24.9 25.0 10.0

Others 4,138 4,290 3,577 3,948 4,121

(16.6) (8.0) 4.4

2) Non Tax Revenue 1,98,870 1,97,857 2,21,733 2,58,576 3,22,921

12.1 30.7 24.9

Interest receipt 21,868 23,804 23,600 23,142 29,620

(0.9) (2.8) 28.0

Dividend and profits receipts 90,435 89,833 1,00,651 1,18,271 1,23,780

12.0 31.7 4.7

Others 86,567 84,220 97,482 1,17,163 1,69,521

15.7 39.1 44.7

(B) Capital Receipts (3+4+5) 5,44,723 5,62,200 6,35,902 5,79,307 6,01,038

13.1 3.0 3.8

3) Recovery of Loans 12,497 13,738 10,753 18,905 10,634

(21.7) 37.6 (43.8)

4) Disinvestment 29,368 37,737 69,500 25,312 56,500

84.2 (32.9) 123.2

5) Borrowings and Other Liabilities 5,02,858 5,10,725 5,55,649 5,35,090 5,33,904

8.8 4.8 (0.2)

Total Receipt(A+B) 15,59,447 16,63,672 17,77,477 17,85,391 19,78,060

6.8 7.3 10.8

(C) Non Plan Expenditure (6+7) 11,06,120 12,01,029 13,12,200 13,08,194 14,28,050

9.3 8.9 9.2

6) Revenue Expenditure (a+b+c) 10,19,040 11,09,394 12,06,027 12,12,669 13,27,408

8.7 9.3 9.5

a) Interest Payments 3,74,254 4,02,444 4,56,145 4,42,620 4,92,670

13.3 10.0 11.3

b) Subsidies 2,54,632 2,58,258 2,43,811 2,57,801 2,50,433

(5.6) (0.2) (2.9)

c) Others 3,90,154 4,48,692 5,06,071 5,12,248 5,84,305

12.8 14.2 14.1

7) Capital Expenditure 87,080 91,635 1,06,173 95,525 1,00,642

15.9 4.2 5.4

(D) Plan Expenditure (8+9) 4,53,327 4,62,644 4,65,277 4,77,197 5,50,010

0.6 3.1 15.3

8) Revenue Expenditure 3,52,732 3,57,597 3,30,020 3,35,004 4,03,628

(7.7) (6.3) 20.5

9) Capital Expenditure 1,00,595 1,05,047 1,35,257 1,42,193 1,46,382

28.8 35.4 2.9

Total Expenditure (C+D) 15,59,447 16,63,673 17,77,477 17,85,391 19,78,060

6.8 7.3 10.8

(E) Fiscal Deficit (C+D-A-3-4) 5,02,858 5,10,725 5,55,649 5,35,090 5,33,904

8.8 4.8 (0.2)

(F) Revenue Deficit (6+8-A) 3,57,048 3,65,519 3,94,472 3,41,589 3,54,015

7.9 (6.5) 3.6

(G) Primary Deficit (E -6a) 1,28,604 1,08,281 99,504 92,469 41,234

(8.1) (14.6) (55.4)

Source: Budget Documents, Angel Research (Note RE: Revised Estimate, BE: Budget Estimate)

4


Exhibit 2: Key Fiscal Indicators (% of GDP)

FY13 FY14 FY15 FY16BE FY16RE FY17BE

Gross Tax Revenue 10.4 10.0 10.0 10.3 10.8 10.8

Devolution to State 2.9 2.8 2.7 3.8 3.8 3.8

Net Tax to Centre 7.4 7.2 7.3 6.5 7.0 7.0

Direct Tax 5.6 5.6 5.6 5.7 5.5 5.6

Indirect Tax 4.8 4.4 4.4 4.6 5.2 5.2

Capital Receipt (ex borrowing) 0.4 0.4 0.4 0.6 0.3 0.4

Plan Expenditure 4.1 4.0 3.7 3.3 3.5 3.7

Non-Plan Expenditure 10.0 9.7 9.6 9.3 9.6 9.5

Subsidies 2.6 2.2 2.1 1.7 1.9 1.7

Total Capital Expenditure 1.7 1.7 1.6 1.7 1.8 1.6

Total Expenditure 14.1 13.7 13.4 12.6 13.2 13.1

Of which grants and central assistance to states 1.9 3.1 2.8 2.2 2.4 2.4

Revenue Deficit 3.6 3.1 2.9 2.8 2.5 2.3

Fiscal Deficit 4.8 4.4 4.1 3.9 3.9 3.5

Primary Deficit 1.8 1.1 0.8 0.7 0.7 0.3

Source: Budget Documents, Angel Research

FY2017 tax revenue lower than estimates

Tax revenues are expected to increase 11.7% in FY2017 with healthy growth in both direct as well as indirect taxes. Direct taxes are set to increase 12.6% led by growth in nominal GDP and tax buoyancy. Overall, FY2017 budget estimate of direct tax revenues is 1.1% below our estimate. Indirect tax revenues jumped sharply in FY2016 led by increase in petroleum taxes and higher service tax rate. The FY2017 budget estimate of indirect tax revenues are estimated to be much lower than our expectations, despite the addition of 0.5% cess on all taxable services, taking the effective service tax to 15%.

Exhibit 3: Tax Revenue

Budget Est. Angel Est. Budget Est. Angel Est.

FY16RE FY16E (%) FY17BE FY17E (%)

Direct Taxes 7,52,021 7,64,576 (1.6) 8,47,097 8,56,325 (1.1)

Indirect taxes 7,07,590 7,10,727 (0.4) 7,83,791 8,67,087 (9.6)

Gross Tax Revenue 14,59,611 14,75,303 (1.1) 16,30,888 17,23,412 (5.4)

Devolution to States 5,12,103 5,19,306 (1.4) 5,76,787 5,85,960 (1.6)

Tax Revenue (Net to Centre) 9,47,508 9,55,996 (0.9) 10,54,101 11,37,452 (7.3)

Non-Tax Revenue 2,58,576 2,38,393 8.5 3,22,921 2,65,822 21.5

Revenue Receipts 12,06,084 11,94,389 1.0 13,77,022 14,03,274 (1.9)

Source: Budget Estimates, Angel Research

Non-tax revenue targets appear slightly stretched

Non-tax revenue is expected much ahead of estimates led by higher than expected telecom revenues. Telecom revenues are estimated at ~`99,000cr for FY2017 as against the FY2016 revised budget estimate of `57,384cr.

Cess on service tax should help garnerhigher indirect taxes

5


Higher than expected telecom revenues have resulted in FY2017 non-tax revenues estimates, being 21.5% ahead of our expectations. Overall revenue receipts for FY2016 are expected to be 1% higher than our estimate, while the FY2017 revenue receipts are expected 2% below our estimate.

Disinvestment target rationalized in line with expectations

We had estimated disinvestment revenues at ~`25,000cr for FY2016 and ~`50,000cr for FY2017. The FY2016 revised estimate came in line with our expectations at `25,312cr, while the FY2017 budget estimate is 13% ahead of expectations at `56,500cr.

Exhibit 4: Capital Receipts



Recovery of Loans 18,905 10,705 76.6 10,634 12,043 (11.7)

Disinvestment 25,312 25,000 1.2 56,500 50,000 13.0


Exhibit 5: Disinvestment Proceeds

Source: Company, Angel Research

Revenue expenditure in line; Capex lower than estimates

Overall capital expenditure is expected to be lower than our estimates as the FM stuck to the path of fiscal consolidation. We believe the fiscal discipline will provide multifold benefits to our economy, which is positive. Also, the FM has carefully aligned capital expenditure towards rural and infra spending, which should clearly add to the benefits.

Revenue expenditure meanwhile is in line with expectations in both FY2016 and FY2017, respectively.

24

,58

1

22

,84

6

15

,49

3

25

,89

0

29

,36

8

37

,73

7

69

,50

0

25

,31

2

56

,50

0

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

FY10 FY11 FY12 FY13 FY14 FY15 FY16BE FY16RE FY17BE

(`cr

)

FY2017 Disinvestment target set at`56,500cr

Strong re-alignment in capitalexpenditure towards rural and infraspending

6


Exhibit 6: Budget Expenditure



Revenue Expenditure 15,47,673 15,18,455 1.9 17,31,036 17,63,010 (1.8)

Capital Expenditure 2,37,718 2,59,845 (8.5) 2,47,024 3,03,387 (18.6)

Total Budget Expenditure 17,85,391 17,78,300 0.4 19,78,060 20,66,396 (4.3)


Focus of Budget spending on Rural and Infrastructure

The areas of spending continue to remain focused on the rural and infrastructure sector. The FM noted that there is an urgent need to focus on areas of drought and rural distress. In line with this objective the budget has taken significant measures to expand the irrigated acreage, conserve soil fertility and improve yields, while ensuring optimal utilisation of water resources by sustainable management of ground water resources. Allocations have also been increased towards electrification of villages through Deendayal Upadhayaya Gram Jyoti Yojna and Integrated Power Development Schemes.

Apart from these, various schemes targeted towards the rural economy have been proposed in the budget. We believe these measures will help boost the rural economy and drive consumption demand.

Allocation towards roads and highways continues to increase with ~23% yoy increase in allocation to ~`57,980cr. Higher allocation towards roads sector would further accentuate the execution target set by the government to attain 30km/day of construction by FY2017. Agriculture and rural development saw a 32% increase in allocation to `137,661cr, including the `19,000cr allocated to the Pradhan Mantri Gram Sadak Yojana. Overall, the budget has realigned capital spending to focus on rural and infrastructure creation, which is positive.

Subsidy burden ahead of estimates

Total FY2017 subsidy burden is expected 4.0% ahead of estimates at `240,871cr, led by higher than expected fertilizer and crude subsidies. Despite a fall in urea prices, fertilizer subsidy continued to remain high at `72,438cr in FY2016 as against our estimate of `65,672cr. Petroleum subsidy has also been retained at `30,000cr for FY2016 as against our expectations of `25,486cr. FY2017 food subsidy is in line with our estimates, while fertilizer and petroleum subsidies are ahead of expectations resulting in major subsidies (food, fertilizer and petroleum) for FY2017 standing 3.1% ahead of estimates.

Fertilizer and Petroleum subsidiesahead of estimates

7


Exhibit 7: Subsidy Burden

FY13 FY14 FY15 FY16BE FY16RE FY17BE

Major Subsidies 2,47,493 2,44,717 2,49,016 2,27,388 2,41,857 2,31,782

Fetiliser Subsidy 65,613 67,339 71,076 72,969 72,438 70,000

Food Subsidy 85,000 92,000 1,17,671 1,24,419 1,39,419 1,34,835

Petroleum Subsidy 96,880 85,378 60,269 30,000 30,000 26,947

Interest Subsidy 7,270 8,137 7,632 14,903 13,808 15,523

Other Subsidy 2,316 1,778 1,610 1,520 2,136 3,128

Total Subsidy 2,57,079 2,54,632 2,58,258 2,43,811 2,57,801 2,50,433


Exhibit 8: Subsidy Burden vs. Angel Estimates



Major Subsidies 2,41,857 2,15,576 12.2 2,31,782 2,24,776 3.1

Fetiliser Subsidy 72,438 65,672 10.3 70,000 64,358 8.8

Food Subsidy 1,39,419 1,24,419 12.1 1,34,835 1,36,861 (1.5)

Petroleum Subsidy 30,000 25,486 17.7 26,947 23,557 14.4

Interest Subsidy 13,808 14,903 (7.3) 15,523 14,605 6.3

Other Subsidy 2,136 1,520 40.5 3,128 1,490 110.0

Total Subsidy 2,57,801 2,32,000 11.1 2,50,433 2,40,871 4.0


8


Sectoral Impact

9


Automobile Positive

Announcement

Levy of 1% infrastructure cess on petrol, CNG, LPG cars not exceeding 1200 cc, 2.5% on diesel cars not exceeding 1500 cc and 4% on bigger SUV's and sedans

Central Government to work in coordination with States towards abolition of permit regime thereby resulting into liberalization of passenger road transport segment

Provison of `35,984 cr for Agriculture and Farmers Welfare and `5,500 cr under crop insurance scheme coupled with higher allocation of `38,500 cr under MGNREGA (previous year MGNREGA allocation was `34,699 cr)

Higher agricultural credit of `9 lakh cr (as against `8.5 lakh cr) and provison of `15,000 cr towards interest subvention on farm loans

Impact

Neutral for OEM's as the increase would be passed on to the consumer. The extent of levy is unlikely to have impact on the demand.

Centre would provide ecosystem that enables State governments to adopt the permit relaxations. These measures would lead to increased operators in the road transport category thereby boosting the demand for buses, LCV and three wheelers. Positive for CV players such as Ashok Leyland, Eicher Motors, Bajaj Auto and Tata Motors

Rural development initiatives are likely to boost income levels and the same would be positive for OEMs having strong rural presence such as Mahindra & Mahindra, Hero Motocorp, TVS Motors and Escorts.

Higher rural incomes would be positive for rural centric

OEMs such as Mahindra & Mahindra, Hero Motocorp and Escorts.

The Union Budget for 2016-2017 is Positive for the automotive sector. Focus on enhancing farm income and rural development initiatives are likely to indirectly spur demand for companies with rural exposure such as Mahindra & Mahindra, Hero Motocorp, Escorts and TVS Motors. Further, the likely reforms in the passenger road transport sector would boost demand for passenger commercial vehicles thus benefiting Ashok Leyland, Tata Motors and Eicher Motors. Also, the unexpected imposition of infrastructure cess on cars is unlikely to have significant impact on the demand.

The Budget is Positive for the Automobile sector.

10


Banks & Financial Services (BFSI) Neutral

Announcement

The government has proposed an allocation of `25,000cr towards recapitalisation of public sector banks. It has also reiterated that it would find the means of providing additional capital to fund these banks, if need be

The fiscal deficit in RE 2015-16 and BE 2016-17 have been retained at 3.9% and 3.5% of GDP respectively

Debt Recovery Tribunals will be strengthened by improving the existing infrastructure, including computerised processing of court cases to support reduction in the number of hearings and faster disposal of cases

A comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in the Parliament during 2016-17. This Code will provide a specialised resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities. This Code, together with the Insolvency and Bankruptcy Code 2015, when enacted, will provide a comprehensive resolution mechanism for our economy

The Bank Board Bureau (BBB) will be operationalized during 2016-17 and a roadmap for consolidation of public sector banks will be spelt out

Necessary amendments in the SARFAESI Act 2002 to enable the sponsor of an ARC to hold up to 100% stake in the ARC and permit non-institutional investors to invest in Securitization Receipts

100% FDI in ARCs will be permitted through the automatic route. Foreign Portfolio Investors will be allowed up to 100% of each tranche in securities receipts issued by ARCs subject to sectoral caps

Impact

The proposed allocation of `25,000cr came in below our expectation of `35,000cr. Looking at the aggressive call by the RBI to clean up banks’ balance sheets by FY2017, we feel banks would need incrementally higher funds to meet the challenges emanating from NPAs and at the same time attaining growth. The budget is Neutral for PSU banks

This is Positive for the bond market and the restrained budget also means that interest rates could come down further in the coming weeks

This will help in speeding up the process of recovery of bad debts. This is positive for all banks, particularly PSU banks

The existing process involves multiple agencies and steps thus delaying the process of recovery. The passage of Insolvency and Bankruptcy law will prove to be beneficial for the entire banking industry as it gives more teeth for recovering dues from the defaulters

The government has recently appointed Mr Vinod Rai (former CAG of India) as the First Chairman of the BBB. This will bring in more transparency and accountability in the PSU banking space and the bureau will consult with the respective banks for their future growth strategies

With increasing quantum of NPAs the existing ARCs need higher capital to buy out stressed assets and this move will enable access to incremental funds. This will enable banks to sell higher NPAs to ARCs and reduce the stress on their books

11


Announcement

The government intends to transform IDBI Bank and also consider the option of reducing its stake to below 50% in it. The government also has said it is open for reducing its stake in other PSU banks to up to 52%

General insurance companies owned by the government will be listed in the stock exchanges

Foreign investments will be allowed in the insurance and

pension sectors in automatic route up to 49%

First home buyers to get deduction for additional interest

of `50,000 p.a. for loans up to `35 lakh sanctioned during the next financial year, provided the value of the house does not exceed `50 lakh

Non-banking financial companies (NBFCs) shall be eligible for deduction to the extent of 5% of their income in respect of provision for bad and doubtful debts

Investment limit for foreign entities in Indian stock exchanges will be enhanced from 5% to 15% at par with domestic institutions. This will enhance global competitiveness of Indian stock exchanges and accelerate adoption of best-in-class technology and global market practices

Rate of Securities Transaction Tax (STT) in case of ‘Options’ is proposed to be increased from the existing 0.017% to 0.05%

Impact

This can give a boost to IDBI Bank since the current government holding is ~80% and it implies government’s intention to bring in private participation in the bank.

However, the process might take much longer than expected and given the current performance of the bank, it will take time for new investors to come on board and the stock is likely to remain volatile going ahead

This will help in increasing the valuation of private owned subsidiaries and help the banks in monetising their assets at a premium

This will enable foreign players to increase their stake in their insurance JVs in India without approaching the Foreign Investment Promotion Board

Positive for Dewan Housing & LIC Housing Finance. Also positive for private sector banks with a retail focus as home buyers will have more incentive to purchase their first home

Positive for all NBFCs

Positive for SBI as it will allow monetising assets at higher valuations

Negative for listed broking entities

The budget is neutral for banks and NBFCs. On the negative side, the recapitalisation amount has fallen short of expectations and no concrete plans have been announced to control the stress in the system. However on the positive side, additional deductions for first time home buyers will be positive for retail oriented banks and housing finance companies. Higher allocations to infrastructure and rural spending will also enable to some extent in credit growth picking up. Overall, we remain neutral on the banking sector and will keenly watch further developments in the infrastructure and power segment which has the largest share to the stressed assets. The government has retained its fiscal deficit target at 3.9% for FY2016 and 3.5% for FY2017 of GDP respectively. Adherence to deficit target is a positive for the bond market and the restrained budget also means that interest rates are likely to come down further in the coming weeks.

12


Capital Goods Positive

Announcement

Higher capital outlay towards the defense sector (up 6.9% yoy to `69,705cr)

Duties on direct import of specified goods for defense purposes by the Government of India, State governments or sub-contractors of such PSUs are being withdrawn (BCD– 5/10%, CVD– 12.5%, SAD – 4%)

12.5% CVD levied on Road Construction Equipments

Excise duty on parts of Railway/Tramway locomotives/rolling stock, Railway/Tramway track fixtures and fittings, Railway safety or traffic control equipment, etc reduced from 12.5% to 6%

Levy of 5.6% tax on construction, erection, commission or installation of original works pertaining to monorail or metro in respect of contracts entered into on or after March 1, 2016

Higher allocation towards Ministry of Urban Development (focus on Metro, Smart Cities, AMRUT; up 34% yoy to `24,523cr)

Increase basic customs duty on industrial solar water

heaters from 7.5% to 10%

Basic excise duty on 5 specified parts (electric motor, shafts, sleeve, chamber, impeller, washer) required for the manufacture of centrifugal pumps reduced from 12.5% to 6%

Levy of 6% excise duty on 5 specified items for manufacture of rotor blades, intermediates, parts, sub-parts of rotor blades for wind operated electricity generators is withdrawn.

Basic excise duty on carbon pultrusions for manufacture of rotor blades and intermediates, parts and sub-parts of rotor blades for wind operated electricity generators is reduced from 12.5% to 6%

Higher allocation of `8,500cr towards the Rural Electrification program

Impact

Positive for defense equipment manufacturers like BEL, L&T and Bharat Forge

Neutral for defense equipment manufacturers like BEL, L&T and Bharat Forge as they would pass on the cost increases.

Negative for companies like Voltas, Greaves Cotton, TIL

Positive for Railway focused capital goods companies like BEML, Titagarh Wagons, Texmaco

Marginally Negative for Metro/Monorail focused capital goods companies like BEML, Titagarh Wagons, Texmaco

Positive for capital goods companies catering to the urban metro space like Siemens, Alstom India, BEML. For the Smart City project, companies like NBCC, Havells India and Bajaj Electricals would benefit.

Marginally Negative for companies like Thermax

Positive for pump manufacturers like Shakti Pumps, KSB

Pumps, Kirloskar Brothers

Neutral for companies like Inox Wind

Positive for players like KEC International, Jyoti Structures

13


Announcement

Basic customs duty exempted on specified capital goods for use in manufacture of micro fuses, sub-miniature fuses, resettable fuses, and thermal fuses

Higher allocation towards Ministry of New & Renewable Energy (to `5,036cr).

Allocation of `3,000cr p.a. towards Nuclear Power Generation

Lower allocation towards Ministry of Water Resources, River Development & Ganga Rejuvenation (down 11.8% yoy to `6,201cr)

Impact

Positive for T&D players as import costs would decline

Positive for alternate energy players like Inox Wind

Positive for companies like, L&T, ABB

Negative for water treatment companies like VA Tech Wabag.

On the positive side, the budget has made a higher allocation towards rural electrification, urban development (includes spending towards Metro, Smart City & AMRUT schemes), alternate energy and defense sectors. On the flip side, we are disappointed to see low budgetary allocation towards water resources, river development & Ganga rejuvenation. Also, some relief has been given in the form of tax incentives to stimulate demand for capital goods. On the whole, we expect this budget to be Positive for the Capital Goods sector.

14


Cement Positive

Announcement

Clean Energy Cess on coal increased to `400/ton from `200 /ton

Basic custom duty on silica sand reduced to 2.5% from 5%

Allocation to Ministry of Roads Transport & Highways increased by 23% to `57,976cr.

NHAI bonds worth `19,000cr and `19,000cr allocated for Pradhan Mantri Gyan Sadan Yojna. Combinedly ~`96,000cr allocated for roads constructions.

Ready Mix Concrete (RMC) manufactured at the site of

construction for use in construction work at such site is to being fully exempted from excise duty.

Impact

Marginally negative for cement companies

Marginally positive for cement companies, as it is one of

the inputs for cement manufacturing

Incrementally higher concrete roads to be constructed leading to higher cement volume growth.

Cement volume growth has a 1.5x co-relation with GDP growth and going by the expected GDP growth of ~7.5%, cement volume should grow by ~10%.

Companies with national presence will be key beneficiaries. Positive for Ultratech, JK Cement

Positive for RMC players like UltraTech, Prism Cement

The budget is positive for the cement sector. Though there is no direct announcement for the cement companies, we believe the highest ever allocation for the infrastructure sector itself is a big positive. Incrementally the government intends to build more of concrete roads as it involves lower maintenance cost vis a vis tar roads and this is expected to be positive for the cement sector with accelerated volume growth and improvement in realisations. Further strengthening its focus on housing for all, the government has announced ~35% incremental allocation for rural housing and also announced tax exceptions on profits on houses of up to 30 sq mtrs developed in metro cities and 60 sq mtrs in other cities. These all measures will ensure steady volume growth for cement companies.

15


FMCG Neutral

Announcement

Excise duties on various tobacco products, other than beedis, have been raised by 10%-15%

Cumulative allocation of `87,765cr for rural development activities and MGNREGA

Basic custom duty on pulp of wood reduced from 5% to 2.5% and on super absorbent polymer (used in the manufacture of sanitary pads, napkins and tampons) it has been reduced from 7.5% to 5%

Excise duty on waters including mineral waters, and aerated waters (containing added sugar or other sweetening matter or flavours) has been increased from 18% to 21%.

Impact

The hike in excise duty on tobacco products has been less aggressive than in the previous two years. We had anticipated some hike in excise duty on cigarettes. In our view, cigarette manufacturers would pass on the hike in the duty to consumers. Thus, we expect the impact to be Neutral on companies like ITC, VST Industries, and Godfrey Phillips.

This will be positive for the FMCG sector as it will increase the disposable incomes in the hands of rural households. FMCG companies like HUL, Dabur, Marico, etc should stand to benefit.

This will be positive for female personal care products manufacturers like Procter & Gamble Hygiene (brand –Whisper).

This will be negative for companies like Tata Global Beverages (brand – Himalayan)

16


Infrastructure Positive

Announcement

Higher allocation towards the Roads & Highways sector (up 23.1% yoy to `57,976cr and vs our expectation of `42,964cr). Total investment in the Roads sector (including PMGSY) is envisaged at `97,000cr. The budget announced the approval of ~10,000km of National Highways in FY2017 by the government

Fast tracking of ~89 irrigation projects under the AIBP scheme with FY2017 investment of `17,000cr and `86,500cr in the next 5 years. A dedicated long-term Irrigation Fund will be created in NABARD with an initial corpus of `20,000cr. Allocation of `12,517cr through budgetary support and market borrowings for FY2017 has been announced.

`800cr allocated towards the Sagarmala & National Waterways Project

Allocation of `3,000cr per year towards nuclear power

generation

Mobilization of additional finance of `31,300cr by

NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority through issue of bonds

Introduction of Public Utility Bill aimed at speedier

resolution of disputes in infrastructure projects

Introduction of new credit rating system for infrastructure projects; dedicated fund to be set-up by LIC

Any distribution of SPV income to REITs will not be subject to Dividend Distribution Tax (DDT)

Removal of section 80IA deduction for development,

operation and maintenance of any infrastructure facility on or after April 1, 2017

Excise duty exemption on Ready Mix Concrete (RMC) manufactured at the site of construction for use in construction work at such site

Impact

Positive for Road EPC players like KNR Constructions, Sadbhav Engineering, PNC Infratech

Positive for irrigation focused EPC players like NCC,

Sadbhav Engineering, Gayatri Projects, IVRCL

Positive for EPC players like MBL Infrastructure and others focused on inland waterways projects

Positive for nuclear power generation players like L&T

Positive for roads and electrification sectors

Positive for all companies with higher exposure to dispute prone segments; HCC should benefit

Positive for infrastructure developers like ITNL, IRB, GMR

Makes InvITs attractive and opens up one more avenue

of fund raising; Positive for MEP Infra, IRB

Negative for EPC players like KNR Constructions.

Positive for EPC players with in-house RMC plants like MBL Infra, Supreme Infra, J Kumar Infra

17


Announcement

Service tax exemption for government works on canal, dam, airport, port and other irrigation works

Higher allocation towards agri, rural and urban housing development (up 32.1% yoy to `137,661cr)

Impact

Positive for EPC players like, Gayatri Proj, NCC, IVRCL, Sadbhav

Positive for unlisted EPC players

Higher allocation towards Roads & Highways has been the biggest positive announcement in the budget towards the infrastructure sector. Allocation has been increased by 23.1% to `57,976cr. Also, higher allocation towards housing, irrigation, and power indicate towards the government’s impetus to revive the already ailing construction sector. Opening up of new funding avenues and support to address the ongoing disputes gives a positive message to the industry about the government’s intent to revive the sector. Further, service tax exemption on abovementioned areas should give the much required thrust to increase spending towards these sub-sectors. DDT removal for InvITs is another positive. As a result, we can expect companies like, MEP Infra and IRB to list their infra assets, going forward.

On the whole, we expect this budget to be Positive for the infrastructure sector.

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Information Technology Negative

Announcement

An additional tax at the rate of 10% of gross amount of dividend will be payable by the recipients receiving dividend in excess of `10 lakh per annum.

The budget has proposed to amend section 10AA of the Income-tax Act. For availing a deduction under the said section by a unit located in a SEZ, pertaining to commencement of manufacturing or services, a sunset date of 31.03.2020 has been proposed.

Impact

Most IT companies are cash rich and are hence prospective candidates for high dividend payouts. Investors in these companies subject to receipt of dividend in excess of the said amount will be impacted.

It will be negative for IT companies as many of these enjoy SEZ tax benefits, although the proposed amendment will apply from FY2021.

Overall, the Budget is Negative for the sector.

Media Positive

Announcement

Service tax increased from 14.5% to 15.0% owing to levy of 0.5% towards Krishi Kalyan cess

Basic Customs Duty on wood chips and particles used in manufacture of paper and news prints reduced from 5% to nil

Impact

This will marginally impact the subscription revenue of DTH and MSO operators, although we had expected a higher service tax of 16.0%. We expect a Neutral impact on companies like Dish TV, Den Networks, etc

This will reduce the cost of key raw materials (news print) of print media companies like Jagran Prakashan, HT Media, Hindustan Media Ventures, Sandesh, etc

I

19


Metals & Mining Neutral

Announcement

Basic custom duty increased on primary aluminium from 5% to 7.5%

Custom duty on zinc alloys increased from 5% to 7.5%

Export duty on iron ore lumps (below 58% Fe content)

reduced to nil from 30%

Increased allocation to infrastructure

Clean Energy cess on coal increased from `200/ton to

`400/ton

Impact

Positive for aluminium players like Hindalco, Nalco, Vedanta, etc

Positive for zinc producers like Hindustan Zinc and Vedanta

Marginally Positive for Vedanta as its Goa mines can start exporting meaningfully.

Marginally positive for steel producers as it would lead to incrementally better demand for steel

Negative for companies consuming domestic coal such as Hindalco, Nalco, JSPL

Based on the measures already taken by the government such as the safeguard duty and minimum import price to protect the domestic steel industry from the pressure of cheap imports, we were expecting the budget to be broadly neutral for the sector. In line with our expectations, there weren’t any significant measures announced for the steel sector. The aluminium sector saw a marginal increase in protection, also in line with our expectations.

Overall the metal sector should benefit from the government’s thrust on the infrastructure sector.

Oil & Gas Negative

Announcement

The levy of Oil Industries Development cess on domestically produced crude oil has been altered from `4,500/MT to 20% ad-valorem basis

No deductions for entities engaged in the production of mineral oil & natural gas if the production commences on or after April 1, 2017

Impact

The ad valorem cess at twice that of our expectations of ~10% which is negative for upstream companies like ONGC, Cairn India

Negative for oil & gas producing companies like ONGC, Cairn India, Reliance Industries

20


Pharmaceutical Negative

Announcement New health protection scheme will provide health cover

up to `1 lakh per family.

For senior citizens, an additional top-up package up to `30,000 will be provided

3,000 stores under Prime Minister’s Jan Aushadhi Yojana will be opened during 2016-17.

A 10% tax rebate on income from worldwide exploitation of patents developed and registered in India has been announced.

The budget has proposed to amend section 35 of the Income-tax Act so as to reduce the weighted deduction under section 35(1)(ii), 35 (2AA) and 35 (2AB) to 150% from FY2018 to FY2020. From FY2021 onwards the deduction shall be restricted to 100%.

It has also been proposed that deduction under section 35(1) (iia) and (iii) of the Income-tax Act shall be reduced from 125% to 100% with effect from 01.04.2017.

The budget has proposed to amend section 10AA of the Income-tax Act to provide for a sunset date of 31.03.2020 for commencement of activity of manufacture or production of any article or thing or providing services by a unit located in a SEZ for availing the deduction under said section.

Additional tax at the rate of 10% of gross amount of dividend will be payable by the recipients receiving dividend in excess of `10 lakh per annum.

Impact Positive for the sector

Positive for the sector

Positive for the sector

This will be positive for all pharma companies as the rebate can be claimed not just on new chemical entities, but also on platform technologies.

The proposal to reduce the tax benefit related to R&D expenditure from FY2018 and then freezing it at 100% from FY2021 will impact all pharma companies as their tax liabilities will go up.

We believe the impact will not be significant as the

quantum of outsourcing of R&D work for most companies is low, although some companies in particular might be impacted marginally.

This will be negative for pharma companies as many of them enjoy SEZ tax benefits, although the proposed amendment will apply from FY2021. Companies like Sun Pharma, Dishman Pharma, Lupin, and Cadila Healthcare amongst others are to be particularly impacted.

Investors in these companies subject to receipt of dividend in excess of the said amount will be impacted.

While the Budget is overall positive for the sector, the proposal of reduction of tax benefit on R&D expenditure from FY2018 will impact the earnings of pharma companies in FY2018.

From this perspective, the budget could be viewed as negative for the sector.

Power Negative

Announcement

‘Clean Energy Cess’ now renamed ‘Clean Environment Cess’ has been increased from `200/ton to `400/ton

Impact

Negative for power producers such as NTPC, JSW Energy etc.

21


Real Estate Positive

Announcement

100% deduction for profits to an undertaking from a housing project for flats up to 30 sq mtrs in 4 metro cities and 60 sq mtrs in other cities. These should be approved between the June 2016 to March 2019 period and completed within 3 years of approval. MAT would be applicable on these projects. Also, service tax would be exempt on construction of affordable houses up to 60 sq mtrs under any Central/ State Government scheme (including PPP scheme).

For first-time home-buyers, there would be an additional deduction of `50,000 interest p.a. towards housing loans of up to `35 lakh sanctioned during FY2017, provided the value of the house does not exceed `50 lakh.

Any distribution of SPV income to REITs will not be subject to dividend distribution tax (DDT).

Benefits of section 10AA to new SEZ units will only be available to ones commencing activity before March 31, 2020. Also, no deduction under section 80IAB shall be available towards development of SEZs on or after April 1, 2017.

Higher allocation of `20,075cr towards Pradhan Mantri Awas Yojana (PMAY).

Impact

This will be positive for real estate developers having affordable housing projects as the potential for higher return on investments at the project level would increase. Accordingly, we expect companies like Ashiana Housing and Puravankara to benefit

This will be positive for companies like Ashiana Housing

and Puravankara which are in the affordable housing space

This makes REITs attractive and opens up an additional avenue of fund raising for them. The announcement is positive for developers like DLF, Prestige Estates and Phoenix Mills amongst others

This is negative for SEZ players as attractiveness of SEZs would further decline; Negative for developers like Mahindra Lifespace

This will be positive for unlisted real estate players

The budget has given a massive push to the affordable housing segment. In addition to higher allocation towards Pradhan Mantri Awas Yojana, a slew of positive announcements towards affordable housing have been made, which include (1) exemption on profits for affordable housing projects, (2) tax incentives for first time home buyers, and (3) excise duty exemption on concrete mix manufactured at construction sites. These announcements in our view would help developers maximize the profitability potential and also attract foreign, domestic financing for their housing projects. Also, interest rate cuts from here on should attract first time home buyers, which in-turn should lead to revival in affordable housing demand.

22


Telecom Negative

Announcement

The budget stated that the government expects revenue receipts of `98,995cr in FY2017 from the telecom sector by way of licensing charges, fees and spectrum receipts

Excise duty on mobile batteries reduced from 12.5% to 2%

Impact

The revenue target of ~`99,000cr for FY2017 is 73% higher than `57,384cr estimated to be collected in FY2016. The government is factoring in an income of `55,000cr from sale of fresh spectrum primarily in the 700Mhz band which is on the higher side considering the TRAI recommended reserve price. Telecom companies could be compelled to bid aggressively which could lead to further deterioration in their financial positions

This would marginally lower the price of mobile handsets

The budget indicates that the government has substantially increased the target to be raised from the telecom segment. The government aims to realize 73% more revenues in FY2017 as compared to previous year. A major chunk of the revenues would be realized through spectrum auctions in the 700Mhz band. Given the huge targets, the government is likely to set higher reserve prices for the auction which is likely to lead to aggressive bidding leading to o further deterioration in the financial positions of telecom companies like Bharti Airtel and Idea Cellular.

The Budget is Negative for the Telecom sector.

23


Miscellaneous

Agriculture Positive

Announcement

Allocation for agriculture and farmers’ welfare of `35,984cr (mainly towards irrigation related schemes)

Impact

Irrigation plays like Shakti Pumps, Jain Irrigation and EPC Industries will stand to benefit

Aviation Negative

Announcement

Tools and tool kits for maintenance, repair, and overhauling of aircraft have been exempted from excise duty

Service tax on services provided by assessing bodies

empanelled centrally reduced from 14.0% to nil

Impact

This will indirectly benefit aviation companies like Interglobe Aviation, SpiceJet and Jet Airways as maintenance, repair and overhaul form the second largest component of total cost

This will be negative for all airline stocks like Jet Airways, SpiceJet and Interglobe Aviation that are presently serving on Non-Regional Connectivity Scheme airports

Chemicals Positive

Announcement Basic custom duty on electrolysers, membranes and their

parts required by caustic soda/potash units (using membrane cell technology) reduced from 2.5% to nil

Impact

This will be positive for Tata Chemicals as it manufactures caustic soda using membrane cell technology.

24


Education Positive

Announcement Allocation of `1,804cr for skill development

Service tax on services provided by assessing bodies empanelled centrally reduced from 14.0% to nil

Impact

This will be positive for companies providing skill and development training. These include MT Educare and NIIT amongst others

This will be positive for MT Educare which is in the process of being empanelled by the Ministry of Skill Development & Entrepreneurship

Footwear Positive

Announcement

Abatement rate from retail sale price for assessment of excise duty on all categories of footwear revised from 25% to 30%.

Impact

This will be positive for footwear companies like Bata and Relaxo Footwear

Jewellery Negative

Announcement

Excise duty exemption withdrawn on articles of jewellery

Impact

This will have a negative impact on organized jewellers like Titan and PC Jewellers

25


Logistics Positive

Announcement Basic custom duty on refrigerated containers reduced

from 10% to 5% and excise duty on the same reduced from 12.5% to 6%.

Impact

This will be positive for companies having presence in the cold storage business like Snowman Logistics, Gati and Navkar Corp

Networking/Hardware Positive

Announcement Parts and components for manufacture of Routers,

Broadband modems exempted from basic custom duty, CVD and SAD

Impact

This will be positive for companies dealing in the network hardware solutions space like D Link India, etc

Paper Positive

Announcement Basic custom duty on wood chips and particles used in

manufacture of paper, paperboard and news print has been reduced from 5% to nil

Impact

The paper industry is an importer of wood chips and as a result companies like Tamil Nadu Newsprint, Ballarpur Industries Ltd, West Coast Paper Mills, etc. will stand to benefit

26


Retail Negative

Announcement

Excise duty on branded readymade garments of retail sale price (RSP) of `1,000 or more changed to 2% without Input Tax Credit (ITC) or 12.5% with ITC. Earlier, it was NIL without ITC or 6%/12.5% with ITC. The tariff value is being revised from 30% of RSP to 60% of RSP.

Impact

Excise duty which was earlier based at 30% of RSP will now be levied at 60% of RSP. Excise duty is being increased to 2% without ITC or 12.5% with ITC. This will be negative for the companies like Aditya Birla Fashion and Retail, Shoppers Stop, Arvind Ltd etc.

Sanitaryware Neutral

Announcement

Announced allocation of `9,000cr for Swachh Bharat Abhiyan

Impact

This will not have any meaningful impact on major players like HSIL and Cera Sanitaryware as organized players do not have much scope of getting orders owing to demand for low end product

Shipping Positive

Announcement

Exemption of excise duty on capital goods and spares (raw materials, parts, and material handling equipment) and on consumables for repairs of ocean-going vessels

Impact

This will be positive for ship maintenance and repair companies like ABG Shipyard, Bharati Defence & Infra, etc

Textile Marginally Negative

Announcement Basic custom duty on specified fibres and yarns reduced

from 5% to 2.5%

Impact

This will be marginally negative for synthetic yarn and poly staple fibre manufacturers like Bombay Dyeing, Vardhman Textiles, etc

27


Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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