pre-budget expectations -...
TRANSCRIPT
January 24, 2018
Religare Research Team
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PRE-BUDGET EXPECTATIONS - 2018-19
Pre-budget view 2018
Jayant Manglik
President - Retail Distribution
Religare Broking Limited
The Union Budget 2018 is round the corner and expectations are high. More so this time given the challenging backdrop of anticipation, data, aspirat ions and perceived potent ia l . The government may resort to certain relatively bolder bets considering that this is the last full Budget to be presented ahead of the general elections in 2019 including several state elections in between. On the other hand, conservatism may be in order if it perceives any budgetary action as being politically sensitive at this time.
The BJP's performance in the recently concluded Gujarat state election may have left a lot to be desired by the party's own expected metrics, and in this context, other state elections are expected to occupy the government's mind space. The second
challenge in the budget backdrop is the impact of the two structural reforms i.e. demonetization and GST, which has seemingly taken a toll on the country's economic progress and affected consumer and business sentiment. Further, with higher crude prices and uncertain revenue collections post GST implementation, the government's challenge on the fiscal front is no secret.
Nonetheless, we expect a few themes to take centre-stage in the upcoming Budget and these would chiefly revolve around the big rural push, greater focus on housing, attempts at addressing concerns of the middle-income population and the important fiscal deficit roadmap.
On the rural front, the government already has a stated objective of doubling farmer income by 2022. While some progress has been made on this front, Budget 2018 could increase its focus on agriculture and allied sectors considerably because almost 50% of the employed workforce in the country belongs to the agriculture sector. Thus, greater spend on rural infrastructure, push to irrigation schemes, etc. are expected to be in limelight. Also, 'Housing for All' has been a key agenda of the current government and is expected to get a further leg up in the upcoming budget, chiefly through the Pradhan Mantri Awas Yojana. More benefits aimed at promoting low-cost housing could also be on the cards and consumers may also be incentivised with a more attractive tax treatment.
As for the middle-income group, the expectations primarily revolve around greater disposable income in hand. With the implementation of GST, the anxiety related to indirect taxes (especially on household items, consumer durables, etc.) is now a thing of the past and thus greater disposable income for a common man can now primarily be achieved by reducing the tax rates or increasing the personal tax exemption limits or a bit of both. Notably, the previous budget did give some relief to small tax payers by reducing the tax rate from 10% to 5% in the lowest bracket. A similar move at the next level tax bracket i.e. 20% cannot be ruled out in this Budget. Moreover, some tinkering of the exemption limits under Sec 80C may be announced. Expectation of re-introduction of standard deduction facility for salaried individuals is also on the wish list.
However, the above expectations and the government's spending ability will be challenged by the pressure on the fiscal deficit. The fiscal deficit for FY18 is being pegged at 3.5%-3.7%, which could be a 30-50bps miss from the government's intended target. While the importance of enhanced public spending at a time when private capex is showing little signs of revival cannot be undermined, what will nonetheless be closed watched is the fiscal deficit target for FY19, because a substantial deviation from the target may not go down well with investors, economists and rating agencies alike. Of course, the sale of the government's HPCL holding to ONGC may allow it to stick to the fiscal deficit target while also meeting its divestment target.
Also, from the market point of view, the street seems divided on the possibility of introduction of the Long Term Capital Gains (LTCG) Tax in this budget. On this front, despite the fact that the government is facing some pressure on revenue collection front with the implementation of GST, it looks unlikely that LTCG will come through in this Budget. It must be noted that the government has already undertaken two bold reform measures in the last 15-months i.e. demonetization and GST. These seem to have already caused some kind of uneasiness amongst a section of the society. It seems unlikely that the government would want to create another ripple so soon, especially considering the elections calendar over the next 18-months. Also, the government may not want to disturb the strong inflows into equities, especially considering that it also has considerable disinvestment targets, which in turn will help it to take care of the fiscal deficit to a certain extent.
In conclusion, it will be interesting to see if the Finance Minister bites the bullet by sacrificing fiscal prudence in the interim to spur economic growth, or manages to present a please-all Budget 2018 despite the fiscal constraints.
Sectoral Budget Wishlist
Pre-budget expectations FY18-19
Expectations Impact Stocks
Allocate more funds for conserving water, suitable
fertilizer, irrigation, crop schemes, storage, farm
education and research
Creation of Farmer policy for Disbursing debt/ loans
at low interest cost
Increase in budget allocation for Pradhan Mantri
Fasal Bima Yojana (PMFBY) to INR 13,000 Crs from
INR 10,701 Crs (Current fiscal)
PMFBY is benefitting farmers to get full claim
against crop damage, by just paying nominal
premium
All Agriculture Companies
Increase in allocation for investment policy in ureaTo Benefit Urea manufacturers, as the
domestic urea capacity is falling shortAll fertilizer companies
Expectations Impact Stocks
Restore incentives given on R&D in the form of
weighted tax deduction to previous levels
This could result in lower tax expenses to
certain extentPositive for all auto companies
Passenger vehicles should be kept under two tax
rates under GST compared to multiple rates now
This would rationalize the overall tax structure
and may lead to lower prices
Positive for Maruti Suzuki, Tata Motors,
M&M
Policy to replace vehicles older than 10-15 years It would increase demand for new vehiclesPositive for M&M, Tata Motors, Ashok
Leyland, Eicher Motors
Expectations Impact Stocks
Increase in capital infusion for PSU banksWill help improve capital ratios and build their
provision coverage ratios Positive for all PSU Banks
Focus on rehabilitating stressed assets in banksThis will help in resolving asset quality issues
faced by banksPositive for all Banks
Increase limits on affordable housingHigher income would also receive benefit of
interest subsidy
Positive for Banks & Housing Finance
Companies
Expectations Impact Stocks
Increased budget allocations to government
initiatives like AMRUT and Smart Cities
Positive impact on the order-book of capital
goods manufacturers
Positive for Va Tech Wabag, Voltas,
Kalpataru Power Transmission, KEC
International, Siemens India
Increase investment in infrastructurePositive impact on the order-book of capital
goods manufacturers
Positive for Larsen & Toubro (L&T),
Bharat Earth Movers
Increase in custom duty on power equipmentsEncourage domestic capital goods
manufacturing companiesPositive for BHEL & Thermax
Increase capex allocation for DefencePositive impact on the order book of Defence
companies
Positive for Bharat Electronics and
Bharat Earth Movers
Expectations Impact Stocks
Excise duty rationalization and simplification-
Reduce excise duty from current rate of 12.5% plus
specific duty to 6-8% without any specific duty
This will create a uniform rate structure for the
cement industryPositive for all cement companies
Increase spending on infra project including housing
and roadsHigher demand for cement Positive for all cement companies
Imposition of clean energy cess on pet coke It would increase the cost of operations for
cement manufacturersNegative for all cement companies
Agriculture
BFSI
Auto and Auto ancillary
Cement
Capital Goods
It will benefit to generate more income to
farmers and achieve the goal of doubling
farmer income by 2022
Positive for Companies like Jain
Irrigation, UPL, Kaveri Seeds,
Coromandel, GNFC, GSFC, Monsanto, etc
Pre-budget expectations FY18-19
Expectations Impact Stocks
Increase tax exemption limit / Increase income tax
slabs
Positive for the entire sector in general since it
would lead to increase in disposable income &
consumer spending
All FMCG companies
Emphasis on rural development, infrastructure and
skill development through a range of measures and
higher allocations
Steps taken could improve the rural income and
spending power and result in demand uptick for
FMCG goods
All FMCG companies, especially those
expanding their presence in rural India
Increased allocation towards Housing For All
initiative and development of Smart Cities
Increased allocation would be long term
beneficial for companies engaged in electrical
equipment / appliances, white goods and
building materials segments (paints, tiles,
plywood, adhesives)
Positive for Asian Paints, Berger Paints,
Greenply Ind, Century Plyboard, Kajaria
Ceramics, Pidilite Industries, Whirlpool,
Voltas, Symphony, Havells, Bajaj
Electricals, V-Guard
Emphasis on driving the agriculture growth
Higher agricultural income would improve
spending power and drive the demand for
FMCG goods
All FMCG companies
Hike in cess component on cigarettes and other
tobacco products (cess is over and above the 28%
GST rate)
Moderate or no hike in cess would result in
volume growth revival in cigarettes. Through
selective price hikes, manufacturers will be able
to smoothly pass on the marginal hike
Positive for ITC, VST Ind and Godfrey
Philips
Steps to revamp the direct tax system (like
reduction in corporate tax rates)
A meaningful cut in the corporate tax rates
would benefit the full tax payers, as lower
taxes would positively impact their bottomline
Positive for FMCG / consumer companies
like Colgate, GSK Consumer, Nestle, ITC,
Asian Paints, Berger Paints, Symphony,
etc
Expectations Impact Stocks
Increase in funds allocation for development of
Rural infra
Will help in development of rural infrastructure
like roads, and railways, also improvement of
other facilities which is necessary for growth of
rural economy like electricity, irrigation,
warehouse, etc
All infrastructure companies
Expectations Impact Stocks
Removal of import duty on ferro nickel and stainless
steel scrap from 2.5% currently
This move would reduce the raw material cost
for the steel industry
Positive for steel players- JSW Steel,
Tata Steel, Sail, etc
Increase spending on infra project including housing
for all and roadsHigher demand for metal products Positive for all metal companies
Export duty on iron ore to be reduced to zero for
grades between 58-62%It would increase iron ore exports Positive for Vedanta
Import duty on Aluminium to be increased to 10%
from 7.5%
Domestic companies would benefit as import
price will increasePositive for Vedanta, Hindalco
FMCG / Consumer Discretionary
Infrastructure
Metal
Expectations Impact Stocks
Implementing GST for power sectorWill help in reduction of power cost and boost
demand for power companiesAll Power Manufacturing Companies
Increase allocation towards power for all schemes
like Integrated Power Development Scheme (IPDS),
Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY)
Will give boost to power sector; help all discom
players to get government support,
furthermore this scheme will aid towards debt
restructuring for players in the sector
NTPC, Power Grid, Adani Power, JSW
Energy, etc
Focus on Renewables EnergyTo Boost Make in India initiative as well as
projects dealing in renewable energySuzlon, Inox Winds, Tata Power
Power
Pre-budget expectations FY18-19
Expectations Impact Stocks
Infrastructure status for the sectorFunds for construction will be available to the
developer at much lower interest ratesPositive for all real estate companies
Tax sops to homebuyers and tax incentives for first-
time home buyers increase from Rs 50,000 to Rs 2
lakh
It will push demand for real estate and housing
finance
Positive for all real estate and housing
finance companies
Rationalisation of the GST rates from the current
12% to 6% and bringing stamp duty under the ambit
of GST
Lower taxes would push demand in the sector Positive for all real estate companies
Expectations Impact Stocks
Reduction in custom duty on Gold imports from 10%
to 4%
The moderation in duty would boost customer
demand, uplift business sentiment and help
industry become more compliant and
organized
Positive for Titan, TBZ, PC Jewellers, etc
Continued push towards labour reforms (like
announcement of a comprehensive National
Employment Policy)
This policy would provide fiscal incentives for
employers across labour-intensive sectors like
Leather / Footware to create more jobs
Positive for all leather / footwear
companies
Expectations Impact Stocks
Higher allocation towards Technology Upgrade
Fund Scheme (TUFS) subsidy
The move would result in investment uptick in
downstream segments, facilitating higher value
addition and sector's contribution to GDP and
exports
Positive for all textile companies
Continued push towards labour reforms (like
announcement of a comprehensive National
Employment Policy)
This policy would provide fiscal incentives for
employers across labour-intensive sectors like
Textiles to create more jobs
Positive for all textile companies
Retainment of duty reimbursement to Garment
exporters at the pre-GST stage of 7.5% drawback
(from current 2%)
The move would boost the apparel exports,
which has remained stagnant over the last few
quarters due to heightened competition
Positive for all garment exporters
Retail
Textiles
Real Estate
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Pre-budget expectations FY18-19