2
Our View
Economic policy reforms have for some years now mostly been taking place outside of the Union
Budget.
This year is not likely to be any different. The budget this year assumes critical importance in the
context of
(i) Fiscal consolidation to facilitate lower inflation and interest rate cuts, and
(ii) Policy measures and incentives to direct savings towards infrastructure and industrial investment
to boost non-inflationary economic growth.
Steps towards fiscal consolidation and boosting investments would also be important to attract foreign
capital inflows to finance the high current account deficit. Investors would also seek some roadmap for
major economic reforms like Goods and Services Tax, Direct Tax Code, Land Acquisition Bill, FDI in
insurance and pension.
To achieve the objective of fiscal consolidation, the Budget is likely to concentrate more on boosting
revenue growth and containing less productive expenditure without hurting economic growth. While the
government could go in for populist measures like a food security bill ahead of the elections, this is
likely to be balanced with rationalization of unproductive expenditure.
3
Our View
To induce efficient allocation of household savings away from non-productive assets like gold into
financial assets for funding infrastructure and industrial investment and ease CAD issues, the budget
could introduce
(i) Inflation-indexed bonds
(ii) Tax-saving incentives in insurance beyond the current Rs. 1 L limit under section 80C and
(iii) Extend tax exemption limits for medical insurance ,
(iv) Tax saving infrastructure bonds
These measures would not only boost investment but also promote consumption through lower
incidence of tax and consequently, higher disposable income for the middle class.
For healthy growth of the economy, the health of the capital market is important. Expect the budget to
spell out measures to improve the depth of the markets. This could lead to some rationalization of
Securities Transaction Tax and steps to deepen the corporate bond market and improve the regime for
foreign capital flows.
Scope for RGESS is expected to be widened and made more attractive for the common man.
The budget could be a good trigger for the markets if it lays out a credible outline for fiscal
consolidation and boosting investment. In the following slides we present a list of expectations from the
Union Budget 2013-14 and also the likely implications it would have for various sectors and stocks. We
have selected 6 stocks which we believe could be beneficiaries of the budget’s attempts to enhance
economic growth through fiscal consolidation and boosting investment.
4
Banking
Likely Budgetary Measures Impact Stocks to Watch
Allocation of equity capital for infusion in
PSU banks
Positive for PSU banks as it will enable them to
be compliant with stricter capital adequacy
Basel III norms. Besides this, the infusion will
cater to the credit needs of productive sectors of
the economy & help banks expand their
business
PSU Banks (+ve)
Reduction in lock-in period for tax saving
fixed deposits that are eligible for tax
benefits under section 80C from the current
5 years to 3 years
Positive for banks as it would lead to increased
flow of deposits. This move would also give
level playing field to these deposits against
Equity Linked Savings Schemes (ELSS), as far
as locking period is concerned.
Entire Banking sector (+ve)
Infrastructure status to affordable housing With Infrastructure status, affordable housing
segment may become more attractive to
developers as getting clearances and sanctions
to finance projects will be easier and faster.
HFCs like Dewan Housing, LICHF, Gruh &
banks like SBI, ICICI bank (+ve)
Providing capex based tax breaks to
corporates
Would fuel demand for incremental credit which
has remained muted in the current fiscal
Entire Banking sector (+ve)
Measures to direct household savings into
productive financial assets for funding
infrastructure and industrial investment
Increased flow of funds to infrastructure
financing companies
IFCs like IDFC
5
Construction/Infrastructure/Engineering
Likely Budgetary Measures Impact Stocks to Watch
MAT to be lowered/ abolished for
infrastructure players.
The move is likely to bring in more participation
and investments for long gestation infrastructure
projects.
L&T, ITNL, Sadbhav, HCC (+ve)
Creation of long term dedicated debt funds
for infrastructure.
The move is likely to bring in more liquidity and
investments in the infrastructure sector/
All Infrastructure companies. (+ve)
Priority sector lending status for
infrastructure sector funding
The move will ease the cost of funding for the
infrastructure sectorAll Infrastructure companies. (+ve)
Concessional rate /Removal of service tax
for construction services.
The move is likely to ease margin pressures of
the construction companies.
All Construction Companies (+ve)
Impetus to manufacturing of defence
equipments in India
Broad guidelines likely given the magnitude of
dollars spent on defence equipmentL&T, Bharat Forge, M&M (+ve)
Removal of Customs duty exemptions to
imported capital goods required for certain
industries (currently zero/5%)
The move will encourage investments and
demand from domestic capital goods industry.L&T, Bhel (+ve)
6
FMCG/Media/Cement
Likely Budgetary Measures Impact Stocks to Watch
Customs duty on set-top box (STB) likely to
be reduced from existing 5%
Service tax and entertainment likely to be
imposed on the cable/DTH industry
Low cost of STB will reduce cost of customer
acquisition for cable/DTH players. Any hike in
taxes will be passed on the consumer.
All MSO’s like Hathway, Den, WWIL, Hinduja
Ventures (+ve)
Rural focus of the budget and direct tax relief
for the middle class
This will increase money in the hands of the
consumer
Godrej Consumer, HUL, Dabur, Marico, Asian
Paints (-ve)
Excise duty on cement may be raised by
changing the existing slab
In low growth scenario, cement players will
pass-on the increased cost to the end consumer
with lag effect, thereby impacting margins of
cement players in short to medium term
Cement players like ACC, Ambuja (-ve)
7
Metals / Automobiles
Likely Budgetary Measures Impact Stocks to Watch
Likely increase in import duty on steel This will help to protect the steel industry reeling
from high debt and lower profitability.
SAIL, JSW Steel, Tata Steel (+ve)
Reduction in export duty on iron ore fines
from the current 30%
Positive for iron ore miners as these would
reduce duty outflows on exports. This is likely to
increase the costs of iron ore procurement for
JSW Steel.
Sesa Goa , NMDC (+ve)
JSW Steel (-ve)
Increase in iron ore royalty Negative for iron ore miners and integrated steel
producers
NMDC. Sesa Goa, SAIL, Tata Steel, JSW Steel
(-ve)
Imposing Diesel Tax on large diesel
passenger vehicles
This will be negative for large diesel passenger
vehicle producers
M&M (-ve)
8
Oil & Gas
Likely Budgetary Measures Impact Stocks to Watch
Increase in the administered price of Natural
Gas
It is expected that Government would accept the
recommendations of the Rangarajan committee
Reliance, Oil India (+ve)
Ending the uncertainty over the under-
recovery sharing mechanism - A clear
formula for sharing between the government,
up-stream, mid-stream and the down
stream.
Very high probability given the move from the
government on raising diesel prices and putting
a cap on LPG
HPCL, IOC, Oil India (+ve)
Reintroduction of customs duty on crude oil
to boost revenues.
This is likely given the rising imports of crude oil
and the need to boost government revenues
Negative for oil refining companies
Cairn (+ve)
Additional Excise duty on diesel cars The move will bring down the under-recoveries
of oil PSU’s.
BPCL,HPCL (+ve)
Maruti,M&M (-ve)
Exemption of the 5 % import duty on
liquefied natural gas (LNG).
The move is likely to reduce the usage of diesel
and that will bring relief for the PSUs.
BPCL,HPCL (+ve)
Policies to promote domestic oil & gas
production and lower CAD
Domestic oil& gas producers to benefit RIL, Cairn (+ve)
9
Pharmaceuticals
Likely Budgetary Measures Impact Stocks to Watch
Increase in MAT rate from 18% to 20% Probability is high considering the fact that
government wants to let go off differentiated tax
structure
Overall sector (-ve)
Weighted deduction on In-house Research
to increase from 200% to 225%
There is a high probability since government
wants Indian companies to focus on innovation
All major companies who are high spenders
including Sun Pharma, Lupin, Cipla, Glenmark
(+ve)
Increase in allocation to NRHM (National
Rural Health Mission)
High probability since government has
consistently increased spending on the scheme
and will continue to maintain the trend.
Overall sector (+ve)
10
Power
Likely Budgetary Measures Impact Stocks to Watch
Extension of sunset clause for power
generating co’s beyond 2013. (Currently an
undertaking is eligible for tax benefits only if it
begins to generate power by 31/03/2013)
Will ensure long term investments in the power
sector
Tata Power, CESC, JSW Energy (+ve)
UMPP timeline for coal tie up to be modified
to 3 years from signing of FSA (currently 3
years from the date of issuance of Provisional
Certificate.)
Will ensure greater participation and more
funds in the sector.
Tata Power, Reliance Power (+ve)
11
Real Estate
Likely Budgetary Measures Impact Stocks to Watch
Industry status be accorded to real estate
sector
The move is likely to bring in additional liquidity
and lower the cost of funds for the sector.
All real estate players (+ve)
Exemption Limit for interest paid on
borrowed capital to be revised upwards.
The move will bring in additional investments
and make housing more affordable
Sobha Developers, Prestige Estates ,HDIL (+ve)
Creation of structures like REIT’s, Real
Estate Funds etc
The move will bring in additional funds and bring
more participation
All real estate players (+ve)
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Our Top Picks for the ensuing risk-on rallyOur Top Picks
IDFCCMP 158.1
Budget’s strong focus to boost infrastructure & industrial investments augurs well for the company. Besides this,
recent reform initiatives by the government in the infrastructure sector will bring down the perceived risk of higher bad
assets in the infrastructure portfolio.
Infrastructure would be one of the key focus areas in the upcoming budget: a) robust investments are likely to be
announced b) clarity on various taxation issues are likely to be put up and c) various incentives and removal of
bottlenecks for speedy implementation of the projects are likely to be announced. All the above are likely to augur well
for L&T.
L&TCMP 1444.0
ICICI Bank
CMP 1121.9
Budget’s focus to promote investment & consumption growth to fuel demand for credit. It would also benefit from likely
incentives to direct household savings to insurance and a likely roadmap for higher foreign investment in insurance.
Godrej
Consumer CMP 725.2
Rural focus of the government & likely direct tax reliefs for the middle class will put more money in hands of the
consumer, thereby benefiting FMCG players.
M&MCMP 898.0
M&M is the largest manufacturer of tractor. Increase in credit flow to farmers and no extra tax on large vehicles would
act as a positive trigger.
Would benefit from (1) Government’s policies to promote domestic oil&gas production and reduce CAD and (2)
possible increase in customs duty on crude oil
CairnCMP 304.3
13
Research Team
Vivek Mahajan Hemant Thukral
Head of Research Head – Derivatives Desk
022-42333522 022-42333483
[email protected] [email protected]
Fundamental Team
Avinash Nahata Head of Fundamental Desk 022-42333459 [email protected]
Akhil Jain Metals & Mining/Mid Caps 022-42333540 [email protected]
Sunny Agrawal FMCG/Cement/Mid Caps 022-42333458 [email protected]
Sumit Jatia Banking & Finance 022-42333460 [email protected]
Shreyans Mehta Construction/Real Estate 022-42333544 [email protected]
Dinesh Kumar Information Technology/Auto 022-42333531 [email protected]
Pradeep Parkar Database Analyst 022-42333597 [email protected]
Quantitative Team
Jyoti Nangrani Sr. Technical Analyst 022-42333454 [email protected]
Raghuram Technical Analyst 022-42333537 [email protected]
Advisory Support
Indranil Dutta Advisory Desk – HNI 022-42333494 [email protected]
Suresh Gardas Advisory Desk 022-42333535 [email protected]
Sandeep Pandey Advisory Desk 022-30004011 [email protected]
ABML research is also accessible on Bloomberg at ABMR
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