A fiscally prudent budget with the right intent & focus · Aries Agro Irrigation is the focus area - A dedicated Long Term Irrigation Fund with a initial corpus of about ~20,000 crore

29th February 2016

A fiscally prudent budget with the right intent & focus

2

Budget Highlights

• The much awaited Union Budget 2016-17 is behind us. It has turned out to be a pragmatic budget which above all looks at keeping the credibility

of budgetary estimates intact. The budget focuses on 3 main themes, rural spending (agriculture, roads, etc), phasing out of

exemptions/deductions to align effective corporate tax rates to the stated rate of 25%, over the next few years, and bringing some socio-economic

balance in the society through transfer of wealth.

• Specifically, the government has expanded its budgetary size by ~11%. Total revenues (both tax and non-tax, and both revenue and capital) are

expected to go up by 15.46% to `14.47tn, while total expenditure is expected to go up by 10.8% to `19.78tn. Fiscal Deficit is targeted to be 3.5%,

and hence the govt. has chosen to stick to fiscal prudence.

• As the Fiscal Deficit is targeted at 3.5% for FY17, it will keep the borrowing program at a lower level, thereby improving probability of a rate cut in

future. Contrary to the market expectation, Budget has left the Service Tax unchanged and LTCG was not maneuvered. However there was

disappointment on the corporate tax front, as the convergence to the 25% rate was only proposed for “new mfg units” and NOT for existing

companies.

• On the infrastructure side, the budget has set out an aggressive spending target. Roads and Railways alone are likely to see a capex of `2.2tn.

• In terms of financial sector reforms, strengthening of ARCs and setting up of Bank Bureau have been proposed. The PSU banking sector too has

been allocated `25k crore of capital, though we were expecting it to be about 35k-40k crore.

• On the spending side, subsidy bill is expected to go down marginally from `257,000 crores to `250,000 crores, thereby indicating

government’s intent to spend on productive causes and not use up excessive revenue for subsidies.

• The redistribution of wealth through increased allocation to farm sector and “robin-hood” type taxes (higher dividend tax, higher surcharge, which

impacts the rich) were also some of the key measures announced in the budget. Budget targets to double income of famers over next five years

and has allocated `870bn towards that end including higher outlay to MNREGA.

• For the common man, though, direct measures to boost the consumption growth were missing in the budget. It however, does allow `50,000

interest exemption for first time home buyers if the value of the house is less than `50 lakhs. Exemption for rent paid under Section 80GG for

employees who don’t get HRA from their companies was hiked 150% to `60,000. For NPS, 40% of the corpus would be tax-exempt at the time of

withdrawal for retirement, compared to the entire proceeds being taxable under the EET regime hitherto.

• To conclude, it is a pragmatic budget, with focus on fiscal prudence, rural spending, infrastructure spending, rationalizing tax

exemptions/deductions, reducing social divide and above all, reducing credibility gap for the budgetary estimates.

Top Picks : Aegis Logistics, Wabco, SML Isuzu, HDFC Bank, Indusind Bank

3

Hits and Misses from the Budget

Hits from the Budget

GAAR remains deferred by 1 year; to apply to investments made on or after 1st April 2017. It will not be implemented RETROSPECTIVELY – Will

remove uncertainty for FIIs and will give boost to dwindling FII flows

Fiscal deficit for FY17 maintained at 3.5% (as previously stated)

Service tax rates remain unchanged

No tinkering with the Long Term Capital gains Tax (LTCG) rates or tenures

Amnesty scheme for black money. The government has allowed for a window for past tax transgressors. By paying tax at 30%,and surcharge at

7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed income, there will be no scrutiny or enquiry regarding income declared in these

declarations

No rise in subsidy bill, government to focus on productive spending

Focus on plugging subsidy leakages, by bringing more and more subsidies under the Aadhar platform

Incentivize new gas exploration by allowing for a calibrated move towards market based pricing (using landed cost of alternative fuels)

Misses from the Budget

No reduction in corporate tax rate as promised in the previous budget

Additional tax on dividend (for dividend higher than 10 lakh per annum)

Increase in cess on certain sectors (Krishi Kalyan Cess, @ 0.5% on all taxable services, infrastructure cess, of 1% on small petrol, LPG, CNG cars,

2.5% on diesel cars of certain capacity and 4% on other higher engine capacity vehicles and SUVs.

4

Agenda

Sector specific measures and impact

Budget at a glance

5

Budget at a glance

6

Budget at a glance

FY15 FY16 FY16 FY17

Particulars (In ` crore) Actuals Budget Estimates Revised Estimates Budget Estimates

1. Revenue Receipts (2+3) 1,101,473 1,141,575 1,206,084 1,377,022

2. Tax Revenue (net to Centre) 903,615 919,842 947,508 1,054,101

3. Non-tax Revenue 197,857 221,733 258,576 322,921

4. Capital Receipts (5+6+7) 562,200 635,902 579,307 601,038

5. Recoveries of Loans 13,738 10,753 18,905 10,634

6. Other Receipts 37,737 69,500 25,313 56,500

7. Borrowings and other Liabilities* 510,725 555,649 535,090 533,904

8. Total Receipts (1+4) 1,663,673 1,777,477 1,785,391 1,978,060

9. Non-plan Expenditure 1,201,029 1,312,200 1,308,194 1,428,050

10. On Revenue Account of which, 1,109,395 1,206,027 1,212,669 1,327,409

11. Interest Payments 402,444 456,145 442,620 492,670

12. On Capital Account 91,635 106,173 95,526 100,642

13. Plan Expenditure 462,644 465,277 477,197 550,010

14. On Revenue Account 357,597 330,020 335,004 403,628

15. On Capital Account 105,047 135,257 142,192 146,382

16. Total Expenditure (9+13) 1,663,673 1,777,477 1,785,391 1,978,060

17. Revenue Expenditure (10+14) 1,466,992 1,536,047 1,547,673 1,731,037

18. Of which, grants for creation of capital assets 130,760 132,462 132,004 166,840

19. Capital Expenditure (12+15) 196,681 241,430 237,718 247,024

20. Revenue Deficit (17-1) 365,519 394,472 341,589 354,015

% of GDP (2.9) (2.8) (2.5) (2.3)

21. Effective Revenue deficit (20-18) 234,759 268,000 209,585 187,175

% of GDP (1.9) (2.0) (1.5) (1.2)

22. Fiscal Deficit {16-(1+5+6)} 510,725 555,649 535,090 533,904

% of GDP (4.1) (3.9) (3.9) (3.5)

23. Primary Deficit (20-11) 108,281 99,504 92,470 41,234

% of GDP (0.9) (0.7) (0.7) (0.3)

Source: Indiabudget.nic.in, ABML Research

7

Budget at a glance (Cont’d)


Revenue Receipts

67.6%

Capital Receipts

32.4%

Receipts Break-up FY16 RE

Rs 5793 bnRs 12061 bn

Revenue Receipts

69.6%

Capital Receipts

30.4%

Receipts Break-up FY17 BE

Rs 13770 bn

Rs 6010 bn

Non-Plan Expenditure

73.3%

Plan Expenditure

26.7%

Expenditure Break-up FY16 RE

Rs 13082 bn

Rs 4772 bn

Non-Plan Expenditure

72.2%

Plan Expenditure

27.8%

Expenditure Break-up FY17 BE

Rs 14281 bn

Rs 5500 bn

8

Budget at a glance (Cont’d)


Corporation Tax31.0%

Taxes on Income

20.5%Union

Excise Duties

19.5%

Customs14.4%

Service Tax14.4%

Taxes on U.T.0.3%

Wealth Tax0.0%

Tax Revenue Break-up FY16 RE

Corporation Tax30.3%

Taxes on Income

21.7%

Union Excise Duties

19.5%

Customs14.1%

Service Tax14.2%

Taxes on U.T.0.3%

Wealth Tax0.0%

Tax Revenue Break-up FY17 BE

Interest Payments etc.

34.2%

Subsidies19.9%

Defence Services (RE+CE)

17.4%

Grants to State & UT

8.4%

Pensions7.4%

Police4.1%

Others8.7%

Non-Planned Expenditure FY16 RE

Interest Payments etc.

34.8%

Subsidies17.7%

Defence Services (RE+CE)

17.6%

Grants to State & UT

8.4%

Pensions8.7%

Police4.2%

Others8.5%

Non-Planned Expenditure FY17 BE

9

Changes in FY17BE over FY16RE

Particulars (` Cr.) FY16 RE FY17 BE

∆ FY17BE /

FY16RE

REVENUE RECEIPTS

1. Tax Revenue 1,459,611 1,630,888 11.7%

Corporation Tax 452,970 493,924 9.0%

Taxes on Income 299,051 353,174 18.1%

Customs 209,500 230,000 9.8%

Union Excise Duties 284,142 318,670 12.2%

Service Tax 210,000 231,000 10.0%

2. Non-Tax Revenue 258,576 322,921 24.9%

Interest receipts 23,142 29,620 28.0%

Dividend and Profits 118,271 123,780 4.7%

Other Non Tax Revenue 117,163 169,521 44.7%

3. Capital Receipts

Miscellaneous Capital Receipts (on a/c of Disinvestment) 25,313 56,500 122%


10

Agenda


Budget at a glance

11


12

Agriculture

Budgetary Measures Impact Stocks to Watch

Allocation for the entire rural sector

@~`88000cr. This includes Allocation

under Pradhan Mantri Gram Sadak Yojana

@19,000crore; 38,500 crore allocated for

MGNREGS.

This will boost rural demand and infrastructure. All major Agri focus companies (+ve)

15000cr for interest subvention towards

Farm Loans.

Target of amount sanctioned under

Pradhan Mantri Mudra Yojana increased to

` 1,80,000 crore

Credit cost will fall for lending Institutions and

overall credit environment will get good

impetus

SKS Microfinance, Rural Portfolio of Banks

(+ve)

Excise duty on Micronutrients reduced

from 12.5% to 6% This will reduce the overall cost of Micro

Nutrient Aries Agro

Irrigation is the focus area - A dedicated

Long Term Irrigation Fund with a initial

corpus of about ~20,000 crore.

12.5k crore outlay for FY16-17 and

86500cr over the next 5 year period for the

89 stalled projects

This will lead to ease pressure for the Farmer

after back to back two monsoon failures.

Jain Irrigation, Finolex Industries, EPC

Industries (+ve)

Modernisation of land records to enable

dispute free transfers The revamped Programme will

build an integrated land information

management system. This would be a long

term enabler for Rural India

All major Agri focus companies (+ve)

Top Picks: PI Industries, SKS Microfinance, EPC Industries


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Auto & Auto Ancillary


Infrastructure Cess being levied on motor

vehicles, of heading 8703, as under:

a) Petrol/LPG/CNG driven motor vehicles of

length not exceeding 4m and engine

capacity not exceeding 1200cc; 1%

b) Diesel driven motor vehicles of length not

exceeding 4m and engine capacity not

exceeding 1500cc; 2.5%

c) Other higher engine capacity and SUVs

and bigger sedans. 4%

Looking at the cut throat competition,

Manufacturers will be forced to absorb part

hike impacting margins

M&M, Maruti (-ve)

BCD on Aluminium Oxide for manufacture

of Wash Coats, which are used in the

manufacture of catalytic converters, being

reduced subject to actual user condition:

reduced from 7.5% to 5%

Aluminium Oxide is RM for Bosch Ltd Bosch India Ltd (+ve)

Amendments to be made in Motor Vehicles

Act to open up the road News Bus routes to get opened. Will

encourage investment in Road Transport

Sector

ALL, Force Motor, SML, Wabco,

ZFSteering(+ve)

Top Picks: SML Isuzu, Wabco


14

Banking & Financials


Budget was not expansionary as market

borrowing of the Government is pegged at

`5339 bn for FY17E (3.5% of GDP) which

is in line with the budgeted estimate. This

provided comfort to markets and has led to

sharp fall of ~15 bps in 10 year G-sec yield

Positive for banks as yields have corrected by

~15 bps. This shall keep trading loss under

check.

Kotak Mahindra Bank, Indusind Bank, Yes

Bank (+ve)

Government allocated `250 bn for PSU

bank re-capitalisation which is in line with

budgeted estimate but much lower than the

capital required by PSU banks

PSU banks will be requiring `2000 bn+ capital

by FY19E (~3years) for making NPA provision

and modest credit growth. On these lines,

capital of `250 bn by Government is paltry.

All PSU banks – mainly PNB, BOI, OBC, Union

Bank, IOB, OBC, Allahabad Bank (-ve)

Under PM Mudra scheme, Government

has proposed an allocation of `1800 bn.

Also, the budget had clear focus on rural

economy which shall benefit MFIs

Microfinance companies shall be major

beneficiaries as the cost of fund for borrowing

under Mudra is lower than other alternatives

SKS Microfinance, Satin credit (+ve)

NBFCs shall be eligible for deduction to the

extent of 5% of its income in respect of

provision for bad and doubtful debts.

There is disparity in accounting as banks are

eligible for deduction to the extent of 7.5% of

total income. With current amendment, even

NBFCs shall be eligible for tax benefit

M&M Finance, Shriram Transport Finance,

L&T Finance (+ve)

Top Picks: HDFC Bank, Indusind Bank, Kotak Mahindra Bank


15

Banking & Financials (Cont’d)


For ‘First – home buyers’, Deduction for

additional interest of `50000 per annum for

loans upto `35 lakh sanctioned during the

next financial year, provided the value of

the house does not exceed `50 lakh.

It shall encourage the first time home buyers

as it makes buying house more attractive. This

shall led to higher sales volume and benefit

housing finance companies from credit growth

perspective.

HDFC, Dewan Housing Finance, Repco Home

Finance (+ve)

100% deduction for profits to an

undertaking from a housing project for flats

upto 30 sq. metres in four metro cities and

60 sq. metres in other cities. Also, service

tax exempted on construction of affordable

houses up to 60 square metres

Encourages real estate companies to build

affordable housing projects. This shall create

lending opportunities to developers and the

retail home buyers. Mainly housing finance

companies shall benefit.

HDFC, Dewan Housing Finance, Repco Home

Finance (+ve)

Investment limit for foreign entities in Indian

stock exchanges will be enhanced from 5

to 15% on par with domestic institutions.

New derivative products will be developed

by SEBI in the Commodity Derivatives

market.

Foreign capital will be attracted with increased

investment limit.

Volumes in the commodity exchanges shall

increase with launch of new derivative

products. This will benefit MCX as it

commands 80%+ market share. It shall

support revenue and profitability in medium to

long term.

MCX (+ve)

Top Picks: HDFC Bank, Indusind Bank, Kotak Mahindra Bank


16

Energy and Mining


Basic Customs duty on aluminum and

aluminum products raised from 5% & 7.5%

to 7.5% and 10% respectively. Marginally Positive Nalco, Vedanta (+ve)

Basic Customs duty increased on zinc

alloys from 5% to 7.5%. Marginally Positive Hindustan Zinc (+ve)

Accelerated Depreciation provided under

IT Act to be limited to maximum 40% from

1.4.2017

Negative for companies taking advantage of

additional depreciation Suzlon Energy, Inox Wind (-ve)

Export duty on Iron ore fines and lumps

reduced form 10% and 30% respectively to

nil. Positive for iron ore miners. NMDC,Vedanta (+ve)

Clean Energy Cess increased from `300

per tonne to `400 per tonne

Negative for aluminum and power producers

as their cost of production will increase

(Effective Rate increased from `200 to

`400/tonne)

Adani power, NTPC,Tata Power (-ve)

Top Picks: None


17

Garments, Jewellery and Footwear


Excise duty on branded readymade

garments and made up of articles of

textiles of retail sales price of `1000 or

more is increased as follows-

From NIL(without input tax credit) or 6%

(with input tax credit) to 2%(without input

tax credit) or 12.5% (with input tax credit).

Also, the Tariff value for excise purpose on

readymade garments and made up articles

of textiles increased from 30% of RSP to

60% of RSP.

Negative for branded garments manufacturer,

For instance if the excise duty on a garment

costing `2000 earlier was `36 (2000*30%*6%

without input tax credit) will now be charged

`150 (2000*60%*12.5% without input tax

credit). Therefore the overall incremental

impact on the garment is ~5.5%

Arvind Ltd., Aditya Birla Fashion & Retail,

Raymomds (-ve)

Excise duty on Articles of Jewellery

increased from Nil to 1%(without input tax

credit) or 12.5% (with input tax credit)

Negative for jewellers as this is over and above

an existing CD of 10%. Titan, PC Jewellers (-ve)

Excise duty on rubber sheets & resin

rubber sheets for soles and heels reduced

from 12.5% to 6%.

Also, abatement rate for Retail Sale Price

based excise duty increased from 25% to

30%.

Positive for footwear manufacturing

companies. (Taxable value will be 70% of RSP

vis-à-vis 75% taxable value earlier)

BATA, Relaxo(+ve)

Top Picks: Arvind Mills


18

Infrastructure/ Real Estate


Infrastructure cess, of 1% on small petrol,

LPG, CNG cars, 2.5% on diesel cars of

certain capacity and 4% on other higher

engine capacity vehicles and SUVs

Positive - Will bring in additional funds for the

infrastructure sector L&T, GPPL etc (+ve)

`700bn allocated for Roads and Highways

Positive- Higher investments and more liquidity

for the road sector. L&T, MBL Infrastructure, Sadhav Infra(+ve)

Steps to revive PPP’s: a) Dispute Bill to be

introduced. B)guidelines for renegotiation

of PPP Concession Agreement and c)New

credit rating system for infra projects

Positive –Likely to revive PPP contracts which

is the key for the success of infra projects All Infrastructure companies (+ve)

Distribution made out of income of SPV to

the REITs and INVITs having specified

shareholding will not be subjected to

Dividend Distribution Tax, in respect of

dividend distributed after the specified date

Positive – One of the key pending issues for

the success of REIT’s. Will revive investments

in REIT’s

Godrej Prop, Sobha Devp etc(+ve)

Reduction in deduction from 150% to

100% u/s 35AD Marginally Negative Snowman Logistics (-ve)

Top Picks: L&T, GPPL


19

Pharmaceuticals


Benefit of deductions for Expenditure on

scientific research under section 35 (2AB) -

Currently at 200% - Weighted deduction

shall be restricted to 150% from

01.04.2017 to 31.03.2020. Deduction shall

be restricted to 100% from 01.04.2020

onwards.

Negative for majority of the pharma companies

as they spend heavily (7-8% of sales) on R&D

but impact on EPS is minimal

All major pharma companies (-ve)

Proposal of a special patent regime with

10% rate of tax on income from worldwide

exploitation of patents developed and

registered in India.

With just 10% tax, government is rewarding

innovation Cipla (+ve)

Opening of 3,000 Stores under Prime

Minister’s Jan Aushadhi Yojana during

2016-17 will lead to greater thrust on

generics

Negative impact on prescription (Rx) volumes

for pharma companies while companies with

separate generic divisions may see some

positive impact

Sun Pharma (-ve), Cipla, Alkem (+ve)

10AA - Special provision in respect of

newly established units in SEZ - Profit

linked deductions available for units in SEZ

for profit derived from export of articles or

things or services - No deduction shall be

available to units commencing

manufacture or production of article or

thing or start providing services on or after

1st day April,2020.

Negative as most of the pharma companies

have manufacturing units located at SEZ All major pharma companies (-ve)

Top Picks: Lupin, Sun Pharma


20

Tobacco and Tobacco Products


Excise duty on Gutkha, Chewing tobacco

and Jarda scented tobacco increased from

70% to 81%. Negative for Tobacco and tobacco products

manufacturer but a commensurate rise is

indirectly positive for cigarette producing

companies.

None

Additional Duty on Cigarettes increased as

follows-

Filter not exceeding 65mm increased from

`70/1000sticks to `215/1000sticks.

Filter exceeding 65mm but not exceeding

70mm increased form `110/1000sticks to

`260/1000sticks.

Filter exceeding 70mm but not exceeding

75mm increased from `110/1000sticks to

`370/1000sticks. And

Others increased from `180/1000sticks to

`560/1000sticks.

Marginally Negative for Cigarette

manufacturing companies from volume growth

perspective. However the rise is not as steep

when compared to the last few years

ITC, Godfrey Phillip(-ve)

Top Picks: None


21

Others (Aviation & Railways)


Excise duty on Aviation Turbine Fuel other

than for supply to Scheduled Commuter

Airlines (SCA) from the Regional

Connectivity Scheme Airports, being

increased from 8% to 14%. However ATF

for supply to aircraft under the Regional

Connectivity Scheme will continue to

attract 8% excise duty.

Negative for cargo carriers, aviation

companies. Blue Dart, Jet, Interglobe Aviation (-ve)

Excise duty on parts of railway or tramway

locomotives or rolling stock and railway or

tramway track fixtures and fittings, railway

safety or traffic control equipment, etc.

reduced from 12.5% to 6%.

Positive for locomotive, rolling stock, track

fixtures and fittings, railway safety or traffic

control equipments manufacturing companies.

Texmaco(+ve)

Top Picks: None


22

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Head of Research Head – Derivatives Desk

022-61802820 022-61802870

[email protected] [email protected]

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Jaymin Trivedi Banking & Finance 022-61802833 [email protected]

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23

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Documents

A fiscally prudent budget with the right intent & focus · Aries Agro Irrigation is the focus area - A dedicated Long Term Irrigation Fund with a initial corpus of about ~20,000 crore