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Our ViewEconomic policy reforms has for some years now mostly been taking place outside of the Union budget. This year is not likely to bedifferent. However, the budget this year assumes critical importance in the context of (1) fiscal consolidation to facilitate lower inflationand interest rate cuts and (2) policy measures and incentives to direct savings towards infrastructure and industrial investment to boostnon-inflationary economic growth. Steps towards fiscal consolidation and boosting investment would also be important to attract foreigncapital inflows to finance the high CAD.Investors would also seek some roadmap for major economic reforms like GST, DTC, 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 containinglesser productive expenditure without hurting growth. While the government could go for a populist measure like a food security bill aheadof the elections, this is likely to be countered with rationalisation of unproductive expenditure.To induce efficient allocation of household savings away from non-productive assets like gold into financial assets for fundinginfrastructure and industrial investment and ease CAD issues, the budget could:• Introduce inflation linked bonds• Offer tax-saving incentives in insurance beyond the current one lakh limit under section 80C and extend tax exemption limits for medical insurance• Reintroduce tax saving infrastructure bonds.These measures would not only boost investment but also promote consumption through lower incidence of tax and consequently higherdisposable 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 thedepth of the markets. This could lead to some rationalization of STT and steps to deepen the corporate bond market and improve theregime 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 thisnote, we present a list of expectations of the Union Budget 2013-14 and what implications it could hold for various sectors and stocks. Wehave selected 6 stocks which we believe could be beneficiaries of the budget’s attempts to enhance economic growth through fiscalconsolidation and boosting investment. 2
BankingLikely Budgetary Measures Impact Stocks to Watch Allocation of equity capital for infusion in Positive for PSU banks as it will enable them to PSU Banks (+ve) PSU banks 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 Reduction in lock-in period for tax saving Positive for banks as it would lead to increased Entire Banking sector (+ve) fixed deposits that are eligible for tax flow of deposits. This move would also give benefits under section 80C from the current 5 level playing field to these deposits against years to 3 years Equity Linked Savings Schemes (ELSS), as far as locking period is concerned. Infrastructure status to affordable housing With Infrastructure status, affordable housing HFCs like Dewan Housing, LICHF, Gruh & segment may become more attractive to banks like SBI, ICICI bank (+ve) developers as getting clearances and sanctions to finance projects will be easier and faster. Providing capex based tax breaks to Would fuel demand for incremental credit which Entire Banking sector (+ve) corporates has remained muted in the current fiscal Measures to direct household savings into Increased flow of funds to infrastructure IFCs like IDFC productive financial assets for funding financing companies infrastructure and industrial investment 3
Construction/Infrastructure/EngineeringLikely Budgetary Measures Impact Stocks to Watch MAT tax to be lowered/ abolished for The move is likely to bring in more participation L&T, ITNL, Sadbhav, HCC (+ve) infrastructure players. and investments for long gestation infrastructure projects. Creation of long term dedicated debt funds The move is likely to bring in more liquidity and All Infrastructure companies. (+ve) for infrastructure. investments in the infrastructure sector/ Priority sector lending status for The move will ease the cost of funding for the All Infrastructure companies. (+ve) infrastructure sector funding infrastructure sector Concessional rate /Removal of service tax The move is likely to ease margin pressure of All Construction Companies (+ve) for construction services. the construction companies. Impetus to manufacturing of defence Broad guidelines likely given the magnitude of L&T, Bharat Forge, M&M (+ve) equipments in India dollars spent on defence equipment Removal of Customs duty exemptions to The move will encourage investments and L&T, Bhel (+ve) imported capital goods required for certain demand from domestic capital goods industry. industries (currently zero/5%) 4
FMCG/Media/CementLikely Budgetary Measures Impact Stocks to Watch Custom duty on set-top box (STB) likely to Low cost of STB will reduce cost of customer All MSO’s like Hathway, Den, WWIL, Hinduja be reduced from existing 5% acquisition for cable/DTH players. Any hike in Ventures (+ve) taxes will be passed on the consumer. Service tax and entertainment likely to be imposed on the cable/DTH industry Rural focus of the budget and direct tax relief This will increase money in the hands of the Godrej Consumer, HUL, Dabur, Marico, Asian for the middle class consumer Paints (-ve) Excise duty on cement may be raised by In low growth scenario, cement players will Cement players like ACC, Ambuja (-ve) changing the existing slab pass-on the increased cost to the end consumer with lag effect, thereby impacting margins of cement players in short to medium term 5
Metals / AutomobilesLikely Budgetary Measures Impact Stocks to Watch Likely increase in import duty on steel This will help to protect the steel industry reeling SAIL, JSW Steel, Tata Steel (+ve) from high debt and lower profitability. Reduction in export duty on iron ore fines Positive for iron ore miners as these would Sesa Goa , NMDC (+ve) from the current 30% reduce duty outflows on exports. This is likely to increase the costs of iron ore procurement for JSW Steel (-ve) JSW Steel. Increase in iron ore royalty Negative for iron ore miners and integrated steel NMDC. Sesa Goa, SAIL, Tata Steel, JSW Steel producers (-ve) Imposing Diesel Tax on large diesel This will be negative for large diesel passenger M&M (-ve) passenger vehicles vehicle producers 6
Oil & GasLikely Budgetary Measures Impact Stocks to Watch Increase in the administered price of Natural It is expected that Government would accept the Reliance, Oil India (+ve) Gas recommendations of the Rangarajan committee Ending the uncertainty over the under- Very high probability given the move from the HPCL, IOC, Oil India (+ve) recovery sharing mechanism - A clear government on raising diesel prices and putting formula for sharing between the government, a cap on LPG up-stream, mid-stream and the down stream. Reintroduction of customs duty on crude oil This is likely given the rising imports of crude oil Negative for oil refining companies to boost revenues. and the need to boost government revenues Cairn (+ve) Additional Excise duty on diesel cars The move will bring down the under-recoveries BPCL,HPCL (+ve) of oil PSU’s. Maruti,M&M (-ve) Exemption of the 5 % import duty on The move is likely to reduce the usage of diesel BPCL,HPCL (+ve) liquefied natural gas (LNG). and that will bring relief for the PSUs. Policies to promote domestic oil & gas Domestic oil& gas producers to benefit RIL, Cairn (+ve) production and lower CAD 7
PharmaceuticalsLikely Budgetary Measures Impact Stocks to Watch Increase in MAT rate from 18% to 20% Probability is high considering the fact that Overall sector (-ve) government wants to let go off differentiated tax structure Weighted deduction on In-house Research There is a high probability since government All major companies who are high spenders to increase from 200% to 225% wants Indian companies to focus on innovation including Sun Pharma, Lupin, Cipla, Glenmark (+ve) Increase in allocation to NRHM (National High probability since government has Overall sector (+ve) Rural Health Mission) consistently increased spending on the scheme and will continue to maintain the trend. 8
PowerLikely Budgetary Measures Impact Stocks to Watch Extension of sunset clause for power Will ensure long term investments in the power Tata Power, CESC, JSW Energy (+ve) generating co’s beyond 2013. (Currently an sector undertaking is eligible for tax benefits only if it begins to generate power by 31/03/2013) UMPP timeline for coal tie up to be modified Will ensure greater participation and more Tata Power, Reliance Power (+ve) to 3 years from signing of FSA (currently 3 funds in the sector. years from the date of issuance of Provisional Certificate.) 9
Real EstateLikely Budgetary Measures Impact Stocks to Watch Industry status be accorded to real estate The move is likely to bring in additional liquidity All real estate players (+ve) sector and lower the cost of funds for the sector. Exemption Limit for interest paid on The move will bring in additional investments Sobha Developers, Prestige Estates ,HDIL (+ve) borrowed capital to be revised upwards. and make housing more affordable Creation of structures like REIT’s, Real The move will bring in additional funds and bring All real estate players (+ve) Estate Funds etc more participation 10
Top PicksOur Top Picks for the ensuing risk-on rally Cairn Would benefit from (1) Government’s policies to promote domestic oil&gas production and reduce CAD and (2) CMP 304.3 possible increase in customs duty on crude oil Godrej Rural focus of the government & likely direct tax reliefs for the middle class will put more money in hands of the Consumer consumer, thereby benefiting FMCG players. CMP 725.2 ICICI Bank Budget’s focus to promote investment & consumption growth to fuel demand for credit. It would also benefit from likely CMP 1121.9 incentives to direct household savings to insurance and a likely roadmap for higher foreign investment in insurance. Budget’s strong focus to boost infrastructure & industrial investments augurs well for the company. Besides this, IDFC recent reform initiatives by the government in the infrastructure sector will bring down the perceived risk of higher bad CMP 158.1 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 L&T announced b) clarity on various taxation issues are likely to be put up and c) various incentives and removal of CMP 1444.0 bottlenecks for speedy implementation of the projects are likely to be announced. All the above are likely to augur well for L&T. M&M M&M is the largest manufacturer of tractor. Increase in credit flow to farmers and no extra tax on large vehicles would CMP 898.0 act as a positive trigger. 11
Research Team Vivek Mahajan Hemant Thukral Head of Research Head – Derivatives Desk 022-42333522 022-42333483 email@example.com firstname.lastname@example.orgFundamental TeamAvinash Nahata Head of Fundamental Desk 022-42333459 email@example.comAkhil Jain Metals & Mining/Mid Caps 022-42333540 firstname.lastname@example.orgSunny Agrawal FMCG/Cement/Mid Caps 022-42333458 email@example.comSumit Jatia Banking & Finance 022-42333460 firstname.lastname@example.orgShreyans Mehta Construction/Real Estate 022-42333544 email@example.comDinesh Kumar Information Technology/Auto 022-42333531 firstname.lastname@example.orgPradeep Parkar Database Analyst 022-42333597 email@example.comQuantitative TeamJyoti Nangrani Sr. Technical Analyst 022-42333454 firstname.lastname@example.orgRaghuram Technical Analyst 022-42333537 email@example.comAdvisory SupportIndranil Dutta Advisory Desk – HNI 022-42333494 firstname.lastname@example.orgSuresh Gardas Advisory Desk 022-42333535 email@example.comSandeep Pandey Advisory Desk 022-30004011 firstname.lastname@example.orgABML research is also accessible in Bloomberg at ABMR 12
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