Kr choksey budget 2016 04 03

2016 Budget Analysis with impact on

Capital Markets

By

Shri Deven R. Choksey

Themes Measures Period

Consumption Orientation

Stimulus driven 2008-2014

Capital Orientation

Infrastructure spending led allocation a model followed by NDA Government

1999-2003

Socialistic Orientation

A model followed by UPA government 2009-2014

Introduction to Budget themes

2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

QE Amount Effect on

QE1 $1650bn Crude 115%

Commodity 87.76

Bullion 47.31%

QE2 $600bn

QE3 $645bn

Consumer orientation : How it impacts?

Stimulus in US of $2895bn during 2008-2014 led to rise in commodity


Impact of Capital orientation

Thrust on infra spending in 1999-2004 has led to GDP rise from 3.97% to 7.9%


MGNREGA $2.89trn spend ; Employed 68.26trn workers.

Actual benefit didn’t reach rural labourer, detractor claim

Farmer loan waiver Irregularity & tampering resulted in Rs 65000cr welfare

project

Education loan interest waiver Provision of Rs2600crs under non plan scheme; till 2012-13

aggregate interest subsidy of Rs 3913crs incurred

Impact of Socialistic Orientation 2009-2014


Thrust on socialist orientation failed to stimulate growth

Making of


2014

Interim Budget

•Outlined fiscal consolidation by

setting 4.1% fiscal deficit target

•increase in FDI in insurance and

defense sector to 49%

2015

Full Budget

•Complete frame work for growth

under $1trn program covering

•- Railways

•- Defense

•- Infrastructure

•Various Programs under Make In

India

•Clean India

•Digital India

•Skill India

• Smart India

•Proposal to reduce corporate tax

from 30% to 25% over the next

4yrs.

2016

Full Budget

•Consumption oriented

•Agriculture & Rural Economic

Thrust

•Fiscal oriented

•Fiscal Deficit @ 3.5% of GDP

•Growth oriented

•Credit @ Rs. 9 trn

•Infra Spending @2.21 trn

Budget: A Powerful Framework of Transforming India’s Economy


Consumption orientation

1. Agriculture and Farmers’ Welfare

2. Rural Sector

3. Social Sector including Healthcare

4. Education, Skills and Job Creation

Fiscal Orientation

5. Fiscal Discipline – Fiscal Deficit pegged @ 3.5% of GDP

6. Financial Sector Reforms

7. Tax Reforms

Growth Orientation

8. Infrastructure and Investment

9. Governance and Ease of Doing Business

2016 Budget: A meticulous program of monetization of efforts under

9 Pillars of Growth :


AUTO:

Measures : Government imposed infrastructure cess ( 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) on all vehicles;

Impact: Passenger vehicle prices across the board will go up from 1% to 4%.

Measures : Government brought vehicles priced above Rs1 mn under 1% TDS (Tax to be deducted at source).

Impact: This is a marginal negative for buyers of SUVs et al.

REAL ESTATE:

Measures :First time home buyers will get deduction under Clause 37 & 43- for additional interest of Rs50k pa (over normal annual deduction of

Rs200k) for loans up to Rs3.5 mln sanctioned in F17 where house cost is not exceeding Rs5 mln.

Impact: This should improve the affordability by 3-4%, we estimate. However, listed companies will not be benefited as they have a higher ticket

size (~Rs5- 400 mln).

Measures : Government is providing 100% deduction of profits (MAT applicable) to companies for providing affordable housing having flats up to

30 sqmt in four metro cities and 60 sqmt in other cities which are approved during June 2016 to March 2019 and completed in three years.

Impact: Listed companies would have minimal benefit.

Policy & Sector impact


Real Estate Investment Trusts (REITs):

Measures : Provide tax pass through for REITs, the government has exempted Dividend Distribution Tax (DDT) w.r.t. distribution made

out of income of SPV (after specified date and shareholding) to the REITs and INVITs .

Impact: With this announcement, the government has cleared most of tax pass through requirements (spread over last three budgets),

and is getting closer to REIT formation. A few issues still remain (stamp duty, 3 years for long term capital gains calculation in the hands

of unit holder etc). We believe that REIT formation may still be 12-18 months away, partly also because of valuation gap between sellers

and buyers.

BANKS:

Measures : FM favored consolidation of banks, which will see capital infusion of INR 25,000 crores next fiscal, once their balance sheet

are strengthened.

Impact: Over the long run the government will bring down stake in PSU to 52%. The Bank Board Bureau will be operational during

2016-17 and roadmap of consolidation of PSU will be spelt out. Our back of the envelope calculations suggest that PSBs are likely to get

benefit of ~INR400b (INR290b+ due to Revaluation reserve, ~INR85b due to FCTR and rest due to DTA) - ~25% of the required capital

of INR1.5T by FY18. DTA relaxation will help ICICIBC and AXSB to release ~30bp of CET1 capital. Banks with sizable foreign operation

will see a release of 25-40bp of CET1 release. Immediate capital release for PSBs along with the GOI stated capital infusion of INR300b

(INR50b in March 2016 and INR250b in FY17) will take care of medium term capital requirement of PSBs in our view.


Market Outlook 2016 – 17

Corporate Earnings Set to Grow


Sensex earning performance for last 10 yrs

Sensex 20873 @ Peak Valuation of 25.07 PE on 8th Jan 2008

Sensex 8451 @ Collapsed Valuation of 10.3 PE on 20th November 2008

As on 5th March 2016, Sensex trades at discount to its historical average valuation of 18.4x by 21%


Banks Tech Auto Capital Goods

& Infra Oil & Gas Diversified

Metals &

Minings Cement Power Telecom Pharma Media

Weighted Returns -7.47% -3.02% -2.10% -2.06% -1.54% -1.24% -0.95% -0.71% -0.57% -0.37% -0.03% 0.06%

-7.47%

-3.02%

-2.10% -2.06%

-1.54% -1.24%

-0.95% -0.71%

-0.57% -0.37%

-0.03%

0.06%

-8.00%

-7.00%

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

Ax

is T

itle

Sector leading market fall : Sensex

20% of the fall in Sensex came out of Banking Sector


Source: Capitaline

Q3FY16 numbers have not shown any negative surprise

Earnings momentum expected to turnaround.

Earnings Momentum :

(Rs. in Bn)


Expect the earnings downgrade cycle to reverse from Q3FY16 and upgrade cycle to start from Q4FY16 onwards

Market volatility should be considered as an buying opportunity with a 2-3 years

investment horizon.

Source: Bloomberg

EARNING UPGRADE Started

Sensex Trades @ 14.5X , a 20% discount of its historical PE of 18.4


Source: Bloomberg

Less than $2.5 bn investments been sold under short selling

position in F&O has resulted in 11.9% fall in last 2 months

Liquidity Crisis : Reasons for recent sell off in markets – Despite Good Earnings?


Low FII inflows have historically been followed up with strong market performance trend

Source: Bloomberg,NSDL

MARKET DRIVER : Why FIIs Inflows could rise?


Muted FII inflows in CY15 in comparison to last 3 years may lead to strong performance going forward

The Valuation gap between Large Cap and Midcap Indices remain high

MARKET DRIVER : VALUATION IS ATTRACTIVE


Large Cap valuations are more attractive to midcap valuations

KRChoksey Universe Expected Returns

Auto 42.2%

Banks 41.0%

Capital Goods & Infra 39.2%

Cement 19.2%

Media 23.8%

Oil & Gas 35.8%

Pharma 38.1%

Telecom 16.9%

Projected Sensex Return 19.3% | Expected outperformance by 7-10%

Sector outlook & Expected Returns

Projected : Outlook for 24 months


Period Total Investment CAGR ROI @ 10% CAGR ROI @ 20% CAGR ROI @ 30%

2 Year 24.00 26.55 29.19 31.92

3 Year 36.00 41.84 48.29 55.36

5 Year 60.00 77.17 98.71 125.46

10 Year 120.00 201.54 344.61 592.00

(Rs in lacs)

KRChoksey Equity Advisory : Systematic Approach by KRChoksey Advisory

• Invest Regularly

• Measure Risk

• Project Returns

Example of Systematic Monthly investment of Rs1lac


Thank You

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Team Contribution: Mrs. Vaishali Pitale |Mr. Vikash Khemka | Mr. Naveen Naik

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Kr choksey budget 2016 04 03