Union Budget 2018 - Angel Broking...Tata Motors, Eicher Motors, etc. GST rate on electric vehicles Current rate is 12% Expected to reduce to 5% Positive for M&M and Tata Motors BFSI

1 Please refer to important disclosures at the end of this report (22 January 2018) 1 1

Union Budget 2018-19 Preview

Will the budget focus on fiscal maths, election or

inflation?

The Finance Minister (FM) Arun Jaitley will present NDA’s fourth budget under the

current term on February 1, 2018. This year FM faces a unique dilemma of

balancing growth and inflation amid rising crude oil prices and bond yield. We

believe that the government is likely report a fiscal deficit target in the range of

3.4-3.5% of GDP, higher than budgeted target of 3.2%. However, the effect of the

slew of tax reforms would be seen in the form of rising revenue from FY19

onwards. Overall we expect (1) push in infrastructure spending to revive capex

cycle), (2) developmental schemes to push rural economy and (3) providing sops

/relaxation in income tax slabs / tax rate to boost consumption.

Amidst waning tailwinds, reforms likely to provide support

The government has been enjoying the fortunate tailwinds like falling crude oil

prices, bond yield and inflation in the last 2-3 years. As a result of these factors,

fiscal deficit was coming down as % of GDP. However, with rising crude oil prices

and bond yield, the government is now in a tougher spot to manage growth amid

inflation. However, the array of reforms likes GST (stable GST rates likely to push

collections from FY19 onwards); better tax compliance and digitization are likely to

keep the government’s kitty in a healthier position to fund development and

growth. Also, disinvestment targets and RBI dividend may be upped in order to

lower fiscal gap.

Rural economy and affordable housing to remain the concurring

theme

The government would continue its focus on rural economy and infrastructure

development with schemes like MNREGA, affordable housing, roads, irrigation,

interest subvention, credit support for small businesses, etc. We expect more

measures in the upcoming budget to remove distress from rural economy.

However, these measures in the form of subsidies like food (expansion of MSP

across categories), interest (affordable housing) and fuel (crude oil touching ~70$)

are likely to put stress on the fiscal prudence.

Major changes in taxation measures unlikely

We believe that any major change in corporate taxation is unlikely (while various

industrial bodies continue lobbying for various tax sops and rebates), as the

government’s focus will be to maintain fiscal discipline. In the personal taxation

space, government may offer minor relief/ exemptions to boost consumption,

especially from the bottom of the pyramid.

Budget conviction picks

With a focus on boosting rural and affordable housing space, we expect

consumption sector would continue to be a direct beneficiary from this budget. We

expect FMCG, consumer durables, retail and building material sectors to benefit

going ahead. We prefer companies like ITC, HUL, Maruti, etc. in this space. We

also expect the government’s impetus on housing sector and companies like, GIC

Housing and DHFL to remain our best play.

2


Please refer to important disclosures at the end of this report (22 January 2018)

2

Exhibit 1: Budget arithmetic

In ` cr FY16RE FY17RE FY18E FY19E Comments

Direct Tax 7,52,021 8,25,429 8,99,718 9,71,695 Direct taxes to increase with widening tax base and

higher tax compliance

Indirect Tax 7,07,590 8,83,943 10,16,534 11,69,015 GST implementation and digitization to boost

indirect taxes

Total 14,59,611 17,09,372 19,16,252 21,40,710

States 5,12,103 6,08,000 6,78,353 7,57,811 In-line with historical trend

Tax Revenue 9,47,508 11,01,372 12,37,899 13,82,898

Non Tax Revenue 2,58,576 2,74,584 2,90,070 3,08,483 Dividend from RBI may be upped

Disinvestment Revenue 25,312 56,500 60,000 60,000 Rationalization of disinvestment target

Other Capital Receipts (Ex-

borrowings) 18,905 19,040 22,105 24,735 In-line with historical trend

Total Revenue 12,50,301 14,51,496 16,10,073 17,76,116

Revenue Expenditure 15,47,673 16,92,286 18,82,941 20,65,325 Higher interest payment would offset effect of lower

subsidies

Capital Expenditure 2,37,718 2,86,282 3,06,063 3,42,484 Capex to increase, in-line with economy

Total Expenditure 17,85,391 19,78,568 21,89,004 24,07,809

Fiscal Deficit 5,35,090 5,37,799 5,78,931 6,31,693

% of GDP 3.9 3.5 3.4 3.3

Govt. likely to miss FY18 fiscal deficit target of

3.2%, may marginally increase FY19E pre-set fiscal

deficit target from 3%

Source: Budget Documents, Angel Research

Key Fiscal Indicators (% of GDP)

FY14 FY15RE FY16RE FY17RE FY18E FY19E

Gross Tax Revenue 10.0 9.9 10.8 11.2 11.3 11.3

Devolution to State 2.8 2.7 3.8 4.0 4.0 4.0

Net Tax to Centre 7.2 7.2 7.0 7.2 7.3 7.3

Direct Tax 5.6 5.6 5.5 5.4 5.3 5.1

Indirect Tax 4.4 4.3 5.2 5.8 6.0 6.1

Capital Receipt (ex borrowing) 0.4 0.3 0.3 0.5 0.5 0.4

Plan Expenditure 4.0 3.7 3.5 3.7 3.4 3.4

Non-Plan Expenditure 9.7 9.6 9.6 9.3 9.5 9.3

Subsidies 2.2 2.1 1.9 1.7 1.6 1.5

Total Capital Expenditure 1.7 1.5 1.8 1.9 1.8 1.8

Total Expenditure 13.7 13.3 13.2 13.0 12.9 12.7

Revenue Deficit 3.1 2.9 2.5 2.1 2.1 2.0

Fiscal Deficit 4.4 4.1 3.9 3.5 3.4 3.3

Primary Deficit 1.1 0.8 0.7 0.4 0.1 0.1


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3

Exhibit 2: Bond Yields have started firming up

Source: RBI

Exhibit 3: CPI inflation has increased in recent times

Source: Bloomberg

Exhibit 4: Subsidies have been kept under check

Subsidy Break-down (`cr) FY14 FY15 FY16RE FY17RE FY18E FY19E

Major Subsidies 2,44,717 2,49,016 2,41,857 2,32,705 2,40,339 2,49,526

Fertilizer Subsidy 67,339 71,076 72,438 70,000 70,000 70,000

yoy growth (%) 3% 6% 1.9% -4.0% 4.0% 4.0%

Food Subsidy 92,000 1,17,671 1,39,419 1,35,173 1,45,339 1,48,246

yoy growth (%) 8% 28% 18.5% 1.0% 2.0% 2.0%

Petroleum Subsidy 85,378 60,269 30,000 27,532 25,000 31,280

yoy growth (%) -12% -29% -50.2% -8% -9% 25%

Interest Subsidy 8,137 7,632 13,808 18865 23,204 23,204

yoy growth (%) 12% -6% 80.9% 4% 23% 23%

Other Subsidy 1,778 1,610 2,136 3,128 4,066 4,066

yoy growth (%) -23% -9% 32.7% 46% 30% 30%

Total Subsidy 2,54,632 2,58,258 2,57,801 2,54,698 2,67,609 2,76,796

yoy growth (%) -1% 1% -0.2% -1% 5% 3%

% to GDP 2.2% 2.0% 1.8% 1.68% 1.57% 1.45%


Exhibit 5: GST collections have tapered but likely to pick up in FY19

Source: FINMIN

5

5.5

6

6.5

7

7.5

8

8.5

9

9.5

Jan-1

2

Apr-12

Jul-1

2

Oct-…

Jan-1

3

Apr-13

Jul-1

3

Oct-…

Jan-1

4

Apr-14

Jul-1

4

Oct-…

Jan-1

5

Apr-15

Jul-1

5

Oct-…

Jan-1

6

Apr-16

Jul-1

6

Oct-…

Jan-1

7

Apr-17

Jul-1

7

Oct-…

Jan-1

8

0

2

4

6

8

10

12

14

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Apr-14

Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

94,063

90,669

92,150

83,384

80,808

70,000

75,000

80,000

85,000

90,000

95,000

1,00,000

Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

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Exhibit 6: Sectoral budget expectations

Head Current Status Expected Change Potential Impact

Agro chemicals / fertilizers

Allocation to fertilizer and other

reforms like soil health card

Adequate allocation of `70,000cr

in last budget

Increase in allocation/ focus to

marquee programs

Positive for the entire agri input

and fertilizer companies

Automobile

Commercial vehicles; Incentives on

scrapping of old vehicles that are

more than 10-15 years old. No Incentive

Incentives to the tune of 8-10% of

vehicle cost

It would encourage replacement of

older vehicles, thereby boosting

demand for CVs. Positive for CV

manufacturers like Ashok Leyland,

Tata Motors, Eicher Motors, etc.

GST rate on electric vehicles Current rate is 12% Expected to reduce to 5% Positive for M&M and Tata Motors

BFSI

Final roadmap for recapitalisation

of public sector banks

The plan is worth `2.11 Lakh cr

out of which `1.35 cr will be in the

form of front-loaded

recapitalisation bonds

Details on the types of bonds or the

interest rates on these bonds

Positive for PSU banks, as it would

improve credit growth

Budgetary allocation to the core

sectors, including metals, which

account for large part of the stress

and faster resolution under NCLT.

Govt. spending has improved

metal demand and total `1.23

Lac Cr worth of cases have been

referred to NCLT

Increased spending on infrastructure

and focus on capex revival (both Govt

and Pvt)

Lower slippages, provision and

consequent improvement in

bottom-line

Affordable housing credit Last year, incentives like interest

subvention were introduced

Increase in tax exemption limit for

home loan

Housing finance companies to

benefit

Strengthening Banking Board

Bureau

Implemented from 1st

April, 2016

& appointing industry veterans on

board

Measures to bring in more

accountability on PSU Banks and

further guidelines on consolidation

Ability of PSU banks to raise funds

would increase and reduce stress

Capital Goods

Allocation towards Defence /

Railways/Metro

Last 2-3 years spending toward

these sectors are stagnant Allocation is expected to increase

Positive for Defence players like,

BEML, BEL, etc. and railway players

like BEML, Titagarh Wagons, etc.

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5


FMCG

Increase in rural spending Relatively lower allocation in last

budget

Increase in allocation to

marquee programs

.Positive for the entire FMCG sector, which

has significant rural exposure

Increase in income tax exemption Basic exemption limit is `2.5 lakh Increase up to `3 lakh Higher disposable income would boost

demand for FMCG companies

IT

TDS rate

Last year, TDS was reduced from

10% to 2% for payments made to

call centres.

To be reduced to 2% for all

software transactions

Will improve the margins of the small IT

companies

Cascading effect of Dividend

Distribution Tax on dividend

At present, the dividend received by

Indian company is taxed at 15%.

There is subsequent dual levy of

dividend distribution tax on this,

when distributed to its shareholders

of parent company in India

Tax already paid on the

dividend is expected to be

allowed to be set off against

tax liability from dividend

distribution tax of the parent

company in India.

Will benefit MNC companies

Infrastructure

Increased allocation for infrastructure

sectors like Roads, Railways, Housing

and Urban Development

Total capital outlay of

`2.41Lakh Cr

Increase in budgetary

allocation

Positive for infrastructure & capital goods

companies

Metal

Import duty on Aluminum 7.5% currently Increase to 10% Positive for Hindalco & Vedanta

Customs duty on coking coal 2.5% currently Reduce to Nil Positive for domestic steel players

Oil & Gas

Inclusion of natural gas in GST 20-25% tax currently 5% Positive for City Gas Distribution

companies

Reduction of Basic custom duty on

Liquefied Natural Gas Currently 2.5% Reduce to Nil

Positive for City Gas Distribution

companies

Pharma

GST Refund Rates Currently 20-25% lower than the

previous excise duty refund rates. Expected to reduce Will benefit all pharma companies

R&D Sunset clause Only till 2020 Extension is expected Will benefit all pharma companies

Source: Company

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6


Real Estate

GST rates Under-construction properties are

levied a GST of 12% Expected to reduce Revival in subdued demand

Deduction limit on interest and

principal on housing loan

Deduction

Interest – `2,00,000

Principle -`1,50,000

Expected to increase

Improved housing demand positive for

housing finance and real estate

developers

Single-window clearance Multiple agency approval

required at different stages

Expect to reduce clearance

time for projects Positive for real estate developers

Increased allocation toward

‘Housing for All’ 2022 scheme and

other housing schemes

Allocation to Affordable Housing by

24.8% to `38,043cr

Expected to increase

allocation Positive for affordable housing developers

Retail

Import duty on gold Custom duty was increased from 2%

to 10% in FY2013 Expected to reduce

Positive for jewellery companies like Titan,

PC Jeweller, TBZ, etc.

Source: Angel research

Please refer to important disclosures at the end of this report