Union Budget 2014-15 Preview

UNION BUDGET2014-2015 PREVIEWJULY 04,2014


The incumbent Government is scheduled to present the Union Budget for FY14-15 on 10th JULY, 2014. Indian Government having attained a fullmajority after 30 years, this Budget is likely to be different than what we have seen in the past few years, in the sense that the Government islikely to take harsh measures to put in place the fiscal situation of the country, with growth oriented measures and at the same time containinginflation The Budget is likely to be a replica in part of the BJP manifesto which has put greater emphasis on Infrastructure development job

Priorities before the Government

inflation. The Budget is likely to be a replica in part of the BJP manifesto, which has put greater emphasis on Infrastructure development, joboriented manufacturing, curb food inflation through increase in supply by mechanizing farming, Energy reforms particularly electricity for all andboosting domestic Oil & Gas sector to minimize dependency of imported fuel, Education, Ganga Cleaning Programme, increase sanitation.However, among the major policy initiatives, a roadmap to GST implementation will be keenly watched.

The Priorities before the Government in the FY14-15 is more challenging as the country is caught between low growth, high inflation particularlyf d i fl i d i i l di i di i i hi i l d i f i i i i l bili ffood inflation, deteriorating employment conditions, diminishing energy security, slowdown in manufacturing activities, vulnerability of currencyfluctuations and not to mention the fiscal and current account imbalances. Social issues like women safety and lack of sanitation and corruptioncalls for immediate attention. The broader priorities of the government are:

Fiscal consolidation and GDP Growth: Fiscal consolidation is the need of the hour as the government inherits large imbalances due to roll backof subsidies, infrastructure spending into FY14-15, which needs to be accounted for. Though the fiscal deficit targets in the interim budget 14-15was contained at 4.10%, the actual picture will only emerge in the actual budget of the Modi Government. GDP growth which has fallen to adecade low should be immediately targeted higher to increase productivity, employment and also curb inflation through increase in supply.Inflation: Inflation targeting should not be the prerogative of the RBI only and we believe this government understands the need to increaseproductivity across sectors, particularly in food production through mechanization of farming practices and increasing use of high nutrients toincrease food productivity.Manufacturing & Infrastructure: Despite the introduction of the New Manufacturing Policy earlier, nothing has been done to increaseg p g y gmanufacturing activities in the country. Boost in manufacturing would bring down inflation, generate the much needed skilled employment andservices growth. The fall in the INR vs major currencies is an added advantage to boost manufacturing exports. Across the board infrastructuredevelopment is needed to propel the economy.Energy: The government must focus to increase Oil & Gas exploration in the country through investment enabling environment especially forglobal investors who can bring in the expertise and the capital. Alternatively, incentives to alternative energy uses and enablers can reducedependency on fossil fuel.p y

Top Pre-budget picks:ILFS Transportation, Engineers India, IDFC, Coromandel Fertilisers, Blue Star, Escorts, M&M Ltd, BHEL, LICHF, Indian Hotels, Bajaj Electricals,Power Grid, Bajaj Hindustan.


The Government of India is scheduled to present the Union Budget for FY14-15 on July 10, 2014. In this forthcoming Budget majorchallenge for the Modi Government will be economic revival via controlling fiscal deficit and inflation with the possibility of adrought like situation evolving in parts of India and limited headroom to trim expenditure. While we expect some progress in long

Maintaining fiscal deficit target - challenge for the government

term reforms, announcement of encouraging manufacturing policy, revival in infrastructure investment, food procurement anddistribution revamp, but expecting a lot from the new Government may be optimistic.

GDP Growth & Fiscal Deficit Trend India’s real GDP growth is expected to bed 5 5 t i FY14 15 hil fi laround 5.5 percent in FY14-15, while, fiscal

deficit is likely to come in at 4.3 percent of GDP(Microsec estimate) vis-a-vis a interim budgettarget of 4.1 percent. We expect the newgovernment to be more realistic in its taxestimates unlike the interim budget estimates.estimates unlike the interim budget estimates.We expect total revenue to grow by 9.98percent against the interim budget estimate of12.96 percent growth, mainly due to lower taxcollection. However, increased divestment (asalso recommended by SEBI) partly making upfor it. While we expect non-plan expenditure togrow a tad higher than interim budgetestimates (largely due to a higher oil subsidyburden led by rising crude prices), planexpenditure should be revised down to controlfiscal balances

Source: Bloomberg, Microsec Research3

fiscal balances.


Status quo on income-tax rates:We do not expect any major changes in income-tax rates. In case of personal income-tax, the Government may hike the deductionlimit under Section 80C of the Income Tax Act to INR100,000 (on long-term financial savings instruments such as housing loan

Key Expectation on the Revenue Front

repayment, five-year and above tenure fixed deposits, provident funds and life insurance policy premiums). The limit could beextended by around INR50,000 to INR150,000 from INR100,000 currently.

Clear road map for the Goods and Services Tax:Among the most awaited tax reforms in India is implementation of GST. It has been delayed comprehensively due to lack of

b t th C t d t t G t Whil t t t t t GST th i ti tconsensus between the Centre and state Governments. While most state governments seem to agree on GST, the same is contingentupon the Centre compensating states for loss in revenues. GST is a progressive tax reform, which will provide an efficient taxcollection system.

Disinvestment target to be revised upwards:Given the buoyancy in capital markets, we expect the disinvestment target to be revised upwards in line with SEBI guidelines forGiven the buoyancy in capital markets, we expect the disinvestment target to be revised upwards in line with SEBI guidelines fortrimming Government stake in PSUs.

Some relief in medical exemption:We expect some relief in medical exemption which has been set at INR15,000 per annum since 1998. Expectations are that it will beincreased to INR50,000.

Import duty on gold to slash:The government is likely to review gold import duty, which was hiked to 10 percent from 2 percent in 2012. We expect the importduty to be slashed by 2 percent to 8 percent from 10 percent currently as concerns on the external front mainly in Current AccountDeficit have abated.

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Focus on FDI:We expect announcements on opening up of new sectors to FDI like defence, construction, infrastructure and railways apart from thelikely hike in FDI limit for the insurance sector.


Emphasis on controlling subsidies & other social schemes ……

Focus on controlling subsidy:Budget is expected to lay emphasis on controlling subsidies. We expect the Government to continue to stay firm on deregulation ofpetroleum prices and also rationalise fertiliser subsidy Food subsidy is likely to remain elevated especially with increased risk of apetroleum prices and also rationalise fertiliser subsidy. Food subsidy is likely to remain elevated, especially with increased risk of asub-normal monsoon. The government can lower the LPG cylinder cap from the current 12 to 9 and further to 6, as was originallyenvisaged by the UPA government. However, overall subsidy burden for FY14-15 is likely to be a tad higher than interim budgetestimates largely due to a higher oil subsidy burden led by rising crude prices.

Kick start of infrastructure investments:We expect some revival in infrastructure investments. Invite states for collaboration by forming a coordination committee (as a lotof reforms need state help and involvement). Along with that, measures such as improving the clearance mechanism, providing taxsops/benefits and channelizing long-term, low-cost funding for infrastructure projects, increase in tax saving limit for investmentin tax-free bonds, etc are likely to be taken to boost growth in the infrastructure sector. Rail, Road and rivers could be the focusareas which could have a spillover effect on the economy.

New measures for agriculture, manufacturing, power sectors:The government is expected to announce some new measures in agriculture, manufacturing and power sector to control inflation,generate additional employment and remove the power sector (especially, state electricity boards) from its shackles.

Limited allocations for Flagship programmes :Limited allocations for Flagship programmes :With the government committed to curtail expenditure, we expect some flagship programmes to witness restricted budgetaryallocation. However, deep cuts are unlikely. We except some changes in the terms of benefits and improved liquidity in RGESS(Rajiv Gandhi Equity Savings Scheme), primarily meant for inducing higher retail participation in equities and increased limitunder Section 80C of Indian Income Tax Act.

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Fiscal Deficit Estimation for FY2013-14 & FY2014-15

Government Accounts FY2013-14 FY2014-15 Interim FY2014-15 ME

1. Revenue Receipts 10332 11671 11363 1.1 Tax Revenue (net) 8360 9864 9556 1.2 Non-Tax Revenue 1972 1807 18072. Other Receipts 338 675 587A. Total Receipts (1+2) 10670 12346 119503. Non-Plan Expenditure of which 11150 12079 12170 3.1 Capital Expenditure 873 1001 970 3.2 Revenue Expenditure 10277 11078 11200 Subsidy 2555 2557 2675 Food 920 1150 1150 Fertilizer 680 680 680 Oil 855 634 740

Others 101 93 105 Others 101 93 1054. Plan Expenditure 4755 5553 5260B. Total Expenditure (3+4) 15905 17632 17430Fiscal Deficit (B-A) 5235 5286 5480as a % of GDP 4.6 4.1 4.3

Source: Interim Budget FY 2014-15, Microsec Research 6

GDP at market price 113550 128400 127744


SECTOR- WISE EXPECTATIONS & IMPACT


AGRICULTURE

EXPECTATIONS IMPACT

An agri-rail network with dedicated links transporting agricultural produce across India Positive: for all seed companies & fertilizer companies.

R i i i U i i Positive for Urea manufacturers. Industry will get relief fromRevision in Urea pricing Positive for Urea manufacturers. Industry will get relief from significant delays in payment of subsidy

Remove food & vegetable from the Agriculture Produce and Marketing Committee (APMC) Acts.

This will give confidence alternative marketing models and push investment in storage and handling infrastructure by the food processing industry and agri-businesses.

Increase public investment in agriculture & cheaper agriculture inputs and credit & also increase in spending like irrigation project.

positive for irrigation companies, fertilizers companies, seed companies.

Increase the import duty on sugar from 15% to 40% It will be a big relief to sugar millsIncrease the import duty on sugar from 15% to 40% It will be a big relief to sugar mills.

Improve the subsidy under Micro Irrigation Scheme from the existing 50% to 80% of the actual market cost for the General Category farmers and 90% for the women farmers.

Positive for Irrigation companies like Jain Irrigation Systems Ltd.

The mandatory ethanol-blending cap increased from 5% to 10% & consideration of an upward revision in the price of ethanol. Huge opportunity for sugar manufacturing companies.


AUTO AND CEMENT

EXPECTATIONS IMPACT

Increased export incentives for vehicles.Positive-Export Incentive scheme, if announced, can boostdemand. Positive for Maruti Suzuki, Hero Moto, Mahindra andMahindra, Bajaj Auto.

Government could introduce fleet modernization scheme.Positive-Companies which have a strong petrol based portfoliomay benefit from switchback in demand from diesel cars topetrol cars. Positive for Maruti Suzuki.

Government could extend incentives to agricultural sectorPositive- This policy decision could lead to Higher demand fortractors and two wheelers Positive for Hero Moto MahindraGovernment could extend incentives to agricultural sector. tractors and two wheelers. Positive for Hero Moto, Mahindraand Mahindra, Bajaj Auto.

Higher impetus towards infrastructure spending includingprojects such as DMIC, River interlining, low cost housing etc. Positive for the sector . Positive for UltraTech Cement, Shree

Cements, JK Lakshmi Cement, JK Cement.

Government could impose additional cess .It is marginally negative for the sector in the near term but itwill be a long term positive for the sector , as additional cess willgo to fund affordable housing in the country.


BFSI

EXPECTATIONS IMPACT

The Government may consider reducing its stake in Public SectorBanks (PSBs) to 51% and give a road map of creating a holdingcompany.

Positive for all PSBs specially those who are suffering from capitalconstraints. Banks Like UBI, CBI, BOI, Allahabad Bank etc. may bebenefited more.

Norms for fixed deposits eligibility for tax benefit u/s 80C may berelaxed from 5 years to 3 years.

Positive for the Banks to raise deposits and will help in their ALMprofile.

Allocation of around INR11300 crore for capital infusion in PSBsin interim budget may remain the same.

Though the budget amount is not sufficient for the PSBs but maysort out some capital related problems.

Tax breaks for Affordable housing & higher budgetary allocationfor 100 new smart cities.

Positive for low cost housing finance companies like LICHF,Dewan Housing Finance, Can Fin Homes, Repco Home FinanceLtd. etc.

The Government may announce large investment in infrastructurespace and measures for expedite of the stalled projects.

Positive for the Banks as well as Infrastructure finance companieslike IDFC, IFCI, REC, PFC etc.

Positive for the insurance companies. Increase in foreign limit willbring them closer to listing The only listed insurance company-Increase in foreign limit (from 26% to 49%) in Insurance sector. bring them closer to listing. The only listed insurance companyMax India is the front runner to take the standing opportunitythen.


CONSUMER DURABLES

EXPECTATIONS IMPACT

Extension of reduced Excise Duty up to 31st March, 2015 and removal of inverted duty structure

Positive: Excise Duty reduction will partially mitigate the cost pressures and boost local manufacturing.

This would benefit the industry which is growing from last six month after stagnation of nearly two years.

Implementation of Goods and Services Tax Positive: This would make tax system simpler and transparent.

Reduction of Customs Duty on import of magnetron and other inputs for manufacturing of microwaves ovens, LCD/LED television and project imports to 0%

Positive: This would boost manufacturing set-ups and new technologies.


ENGINEERING AND CAPITAL GOODS

EXPECTATIONS IMPACT

Government could increase CCI limit and relaxing of ECB limits ison the card.

Positive: It will pave the way for time bound clearance for longgestation projects and the increase of ECB limits will address theproblems of the sector who are reeling under the pressure ofrising domestic interest rates and unfavorable regulatory hurdlesin the recent times.

Increased spending on major infrastructure and water relatedprojects.

Positive: It will revive demand for capital goods and positive companies like L&T,Va Tech Wabag.

P i i I ill d h i diff i l b d i d

Government could impose anti dumping duty on power equipments.

Positive: It will reduce the price differential between domestic and overseas players (especially Chinese). Positive for BHEL, L&T and other new players planning to establish a domestic manufacturing base.

Positive: Government expected to take some bold decisions for

Increase in capex for up gradation of railways network.

Positive: Government expected to take some bold decisions formodernizing the railways and release funds for the long pendingrailway infrastructure project. positive companies like Texmaco,Titagarh Wagons,KEC.


FMCG

EXPECTATIONS IMPACT

Raise tax on retail price of cigarettes from 45% to over 60% Negative for ITC because major contribution in the ITC’s revenues is from tobacco products

Interest grant on loans for re-plantation of tea Positive for tea companies like Dhunseri Petrochem & Tea Ltd., Mcleod Russel India Ltd.


INFRASTRUCTURE & REAL ESTATES

EXPECTATIONS IMPACT

Higher budgetary allocations for infra plans including JNNURM, NHDP, and Bharat Nirman among others. Positive as it is beneficial for EPC companies.

E t i f t b fit d S 80I t t ti t Positive for asset owners like ITNL,GMR, GVK, IRB among Extension of tax benefits under Sec 80I to construction sector. , , , gothers.

Easing availability of long term debt paper for infrastructure. Positive for infrastructure sector as a whole, as will address funding requirements on the debt side.

Abolition of MAT or at least reduction of it during tax holiday. Positive for L&T, GMR, GVK, ITNL.IRB.

Tax holiday to extend to another 10 years and continued spending on road infrastructure Positive for asset owners like ITNL,GMR, GVK, IRB among spending on road infrastructure. others.

Government to announce the tax breaks for Real EstateInvestment Trusts (REIT), post which SEBI will finaliseguidelines for sops for the investments trusts.

Positive for DLF, Jaypee Infratech,Sobha developers.

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Tax breaks for Affordable housing & higher budgetary allocation for 100 new smart cities.

Positive for developers in the affordable housing segment.Positive for NBCC,HDIL, Godrej Properties.


IT, MEDIA & ENTERTAINMENT

EXPECTATIONS IMPACT

Promote e-governance and provide incentives for use oftechnology across the industries

Positive for the sector, however, the impact would be limited asmost of the Indian players are export oriented, seems likely

MAT on SEZs should be eliminated or minimized Positive for the sector, seems likely

Road map to vision for 100 smart cities Positive for the sector, however, the impact would be limited asmost of the Indian players are export oriented, very likely

Restore customs duty on set top boxes from 10% to 5% Positive for all cable and DTH operators, seems unlikely

Rationalization of Taxes and reduction in license fee for DTH P i i f Di h TV d Bh i l lik loperators from current levels of 10% to 6% Positive for Dish TV and Bharti, seems less likely

Rationalization of taxes on DTH operators, who currently paytaxes to both central and state governments

If implemented, will be positive for DTH players, seems lesslikely


METAL, MINERAL & MINING

EXPECTATIONS IMPACT

Removal of steel products from ambit of FTA Positive to most steel producers especially flat steel producerslike JSW Steel, Bhushan Steel, TATA Steel, SAIL.

Bauxite export ban or higher export duty from 10% to 30% Negative for GMDC, Sesa Sterlite.

Removing import duty on iron ore from 2.5% to nil Positive for JSW Steel, Bhushan Steel,Essar Steel.

HOTEL & TRAVEL

EXPECTATIONS IMPACT

Low-cost airports in smaller towns. Infrastructure status to Hotels and boosting of Travel & Tourism Industry

Positive for the sector. Positive for Indian Hotels, MahindraHolidays & Resorts, Thomas Cook and Cox & Kings.

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Hotels and boosting of Travel & Tourism Industry Holidays & Resorts, Thomas Cook and Cox & Kings.


OIL & GAS

EXPECTATIONS IMPACT

To continue the ongoing diesel price deregulation Positive - Easing of subsidy burden for the upstream companies

Direct Benefit Transfer in case of Kerosene oil to thebeneficiaries

Positive by way of reduction in fuel subsidy by INR~18000-20000crores

May implement fixed realization for ONGC, OIL India @$60-65/bbl

Positive impact as it provide clarity regarding the realization forthe public oil exploration companies

Rationalising of subsidy mechanismPositive. We expect more structured policy framework in thisregard instill clarity & confidence among the Indian oil & gascompanies

Policies to expedite domestic E&P activities Positive as this measure induce overseas investments in thePolicies to expedite domestic E&P activities India hydrocarbon space which eventually revive the sector

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PHARMACEUTICALS & HEALTHCARE

EXPECTATIONS IMPACT

Reduction of customs duty on life saving drugs and related medical equipments Positive for all drug manufacturers.

Increase in tax holiday period for setting up a hospital in rural areaIncrease in tax holiday period for setting up a hospital in rural area from 5 years to 10 years Positive for the hospital companies.

Incentives or deductions for expenditures on R&D activities. Positive for the pharma sector mainly for companies with high R&D expenditure.

Increase in deduction for medical expenses for individuals from INR15000 to INR50000. Positive for healthcare sector indirectly.


POWER & DEFENCEPOWER & DEFENCE

EXPECTATIONS IMPACTPositive: Improvement of coal supplies is inevitable for the

Speedy coal block allocations and improvement in rail corridorsfor coal evacuation.

Positive: Improvement of coal supplies is inevitable for thesurvival of thermal power plants and government need to executesubstantial policy changes in order to provide superior fuel supplyand also government likely to address the critical railway linkwhich have been stuck owing to land acquisition issues. Positivefor NTPC,TATA Power.,

Introduction of Tax free bonds for the power sector. Positive: Positive for power sector as a whole, as will address funding requirements on the debt side.

Positive: Currently, the biggest bottleneck is the lack of adequatetransmission line, but if the government want to implement ‘24x7

l ’ h h ldIntroduce 24x7 power supply power supply’ commitment than this transmission sector could seesome serious capex in the near term and main beneficiary wouldbe Power Grid.

Speedy MoEF approvals to power projectsPositive: Government could implement single window clearancewhich would be positive for the sector Positive for NTPC TATASpeedy MoEF approvals to power projects. which would be positive for the sector. Positive for NTPC.,TATAPower.

Increase in FDI limit in defence sector from 26% currently and clarity on defence export policy.

Positive: FDI in defence would be key to the revival of domesticmanufacturing and government could raise the FDI cap in thesector to 49% with prior approval by the Foreign InvestmentPromotion Board (FIPB).Positive for BEL,L&T,TATA Power.( ) , ,

Expect higher budgetary allocation in defence.Positive for Bharat Electronics, L&T, TATA Power.


RETAIL

EXPECTATIONS IMPACT

Reduction in import duty for gold. Positive: It is positive for organised players like Titan, TBZ, PCJewelers .

Implementation of GST to reduce the number of different laws/taxes across states.

Positive: It will help simplify the entire tax structure, thereby, cutting the business costs and help generate more revenues.

Hik i i t ti li it Positive: It will increase disposable income which will help toHike in income-tax exemption limit . Positive: It will increase disposable income which will help toboost consumer spending.


TELECOM

EXPECTATIONS IMPACT

Allowance for refund of unused CENVAT Credit pertaining to telecom networks

Positive. If implemented, will release much needed cash for the incumbents, as they have invested heavily in the network

Demand for a unified tax structure to replace the regime of Seems likely. On implementation, will remain lucrative on the p gmultiple taxes, levies, and charges

y p ,bottom line front. Positive for Bharti, Idea, and RCOM

A phased reduction in USOF levy to 1% from current levels of 5%

Seems less likely. Acceptance of the same is likely to add on to the telecom companies’ bottom lines

Higher depreciation allowance on batteries used in telecom towers and tax benefits under section 35AD for tower companies

Positive for Bharti Infratel . If implemented, will positively impact its cash flows. Seems less likely.

Identification of additional spectrum bands and a road map to Neutral, the impact of the same will be determined by bidding in make the same available to telecom companies through auctions the auctions. Likely to be addressed.

Easier Merger and Acquisition norms, a rationalized penalty regime and incentives for new services and speedy roll outs

Unlikely to be touched in budget. If addressed, will remain positive for the sector in long run

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Road Map for National Optic Fibre Network and BroadbandHighways

Positive for Telecom Companies, Power Grid, L&T, SterliteTechnologies, Vindhya Telelink etc, very likely. However, the impact may vary based on contracts awarded


TEXTILES

EXPECTATIONS IMPACT

Increase allocation for the Technology Upgradation Fund Scheme (TUFS)

Positive: Facilitate modernisation and up gradation of the textiles industry (organised and the unorganised ) by expanding credit at lower interest rates.

Reduction in the excise duty from 12% to 8% on man-made Positive: It will promote production and consumption of man-Reduction in the excise duty from 12% to 8% on man-made fibers.

Positive: It will promote production and consumption of man-made fibres in large quantities.


i R h Ph 9 33 66 2 2 il i h i iMicrosec Research: Phone No.: 91 33 66512121 Email: [email protected]

Ajay Jaiswal: President, Investment Strategies, Head of Research: [email protected]

Fundamental Research Fundamental Research

Name Sectors Designation Email ID

Nitin Prakash Daga IT, Telecom & Entertainment VP-Research [email protected]

Sutapa Roy Economy Research Analyst [email protected]

Sanjeev Jain BFSI Research Analyst [email protected]

Soumyadip Raha Oil & Gas Executive Research [email protected]

Anik Das Capital Goods, Power Research Analyst [email protected]

Neha Majithia Metal, Mineral, mining Research Analyst [email protected]

Ajoy Mukherjee Pharma & Agri Inputs Research Analyst [email protected]

Saroj Singh Auto , Cement Executive Research [email protected]

Khusboo Jaiswal Mid Cap Research Executive [email protected]

Technical & Derivative Research

Vinit Pagaria Derivatives & Technical Sr.VP [email protected]

Ranajit kumar Saha Technical Research Sr. Manager [email protected] g

Institutional Desk

Abhishek Sharma Institutional Desk Dealer [email protected]

PMS Division

Siddharth Sedani PMS Research VP [email protected]

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Research-Support

Subhabrata Boral Research Support Asst. Manager Technology [email protected]


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Union Budget 2014-15 Preview