Expectations belied

While the markets are not impressed, the Budget’s eyeing higher growth rates through infrastructure spending and by boosting consumption.

The markets were disappointed with the Union Budget 2009-10 with popular indices tanking nearly six per cent on July 6, the day of the Budget. Among key reasons for the disappointment was the conspicuous absence of major policy announcements. In a post-Budget note, Ridham Desai and Sheela Rathi of Morgan Stanley say that the key reason for the disappointment may be that the market was expecting a road map on wide-ranging reforms, including the oil sector, divestments, fiscal consolidation, insurance, foreign direct investment (FDI) and infrastructure.

Says Vikas Khemani, co-head, institutional equities, Edelweiss Securities, “While I believe that the Budget is not the only mechanism to communicate, it could have still done a better job of communicating how the government is going to contain the fiscal deficit, put a check on the expenditure and implement the infrastructure projects through public-private participation (PPP). Overall, it is definitely short on expectations, but one has to see it in light of the compulsions which the government had.”(Click for table)

The Budget also hiked the minimum alternative tax (MAT) from 10 per cent to 15 per cent even as it extended the carry-forward MAT credit period from 7 to 10 years-- certain companies, especially in the infrastructure space, are likely to face an increase in their tax expenses. Not the least, a higher fiscal deficit (projected at 6.8 per cent) would translate into an increase in bond yields and hence, a rise in interest costs for India Inc.

However, there are other reasons, which accentuated the decline in markets. “Stock markets had rallied on the formation of stable government and had expected that the reform process would continue, and hence, started trading at higher multiples. However, this exuberance has been spooked by the lack of path-breaking reforms,” says Aneesh Srivastava, CIO, IDBI Fortis Life Insurance Company. Concerns over the monsoons and weak global cues added to the woes.

On the positive side, there are broader measures that will enhance growth rates for India Inc and hence, could lift sentiments going ahead. The Budget aims to boost consumption through increased investment in physical and social infrastructure in both, rural and urban India. Among rural India-oriented schemes, it has hiked the allocation for ‘Bharat Nirman’ by 45 per cent to Rs 45,000 crore and NREGS by 144 per cent to Rs 39,100 crore; it hiked the allocation for JNNRUM by 87 per cent to Rs 12,900 crore for urban infrastructure. Likewise, the increase in income tax exemption (albeit by a mere Rs 10,000-15,000) and abolishing of 10 per cent surcharge on personal income tax leaves more money in the hands of the individual. The support to exporters and farmers provided earlier has also been extended. In the last few months, the government had cut duty rates and provided support for a large number of industries. The fact that there were no major increase in taxes is itself positive.

“The Budget is balanced in favour of growth at the cost of fiscal discipline. There is a lot of focus on infrastructure spending, employment generation and push to provide more money in the hands of the consumers,” says Motilal Oswal, CMD, Motilal Oswal Financial Services. Desai and Rathi think the big picture out of the budget looks more positive than negative.

Among measures which will be taken up later are a New Direct Taxes Code (in 45 days) for debate, a solution to tackle retail fuel pricing and implementation of GST (goods and service tax) by April 1, 2010. Among longer-term goals, the Budget indicates the government’s intention to reduce the fiscal deficit to 4 per cent by 2011-12 and lower stake in PSUs without losing control. All these are some other positive announcements that provide an indication of future moves.

Says V Vaidyanathan, MD & CEO, ICICI Prudential Life Insurance Company, “The signals that emerged from this budget speech were more important than the proposals themselves. The talk of 9 per cent growth sets the framework for the future. Once this is set as the agenda, all policy initiatives will align to it.”

Read on to know the impact of various proposals on individual sectors and companies.

Auto
While the Budget did not have any major provisions for the auto sector, the biggest plus is that it did not roll back the excise cut from the eight per cent levels announced in the previous stimulus packages. The additional excise duty cut by 25 per cent to Rs 15,000 per vehicle of engine capacity of 2,000 cc and above is not significant and might not make much of a difference to sales of utility and large car makers such as M&M and Tata Motors even if the companies pass on the benefit. The increase in JNNURM allocation by 87 per cent and the extension of deadline to purchase about 15,000 buses by state transport corporations from June 2009 to December 2009 should help bus makers Tata Motors and Ashok Leyland. Excise duty reduction on petrol-driven trucks to eight per cent is unlikely to have major impact as most operators prefer diesel or CNG. Increase in credit flow to the agricultural sector and the interest subvention scheme will improve affordability of farmers and help tractor makers such as M&M. Two-wheeler makers to benefit from the increased allocation to NREGS and the agricultural focus.

Banking & financial services
The sector may have wished for higher FDI into banking and insurance. But, what the markets got to grapple was a stiff fiscal deficit at 6.8 per cent for 2009-10. This accentuated the disappointments. Any uptick in bond yields due to higher fiscal deficit would be negative for public sector (PSU) banks, and its impact would vary based on the composition of their bond portfolios.

However, the continuation of interest subsidy scheme and additional assistance of 1 per cent (for farmers who repay on schedule) would go down well with the farming community as well as PSU banks that have extensive network in these areas. This measure would augur well for banks to achieve 13 per cent credit growth target set for 2009-10, but its impact on profitability is marginal. The grant of Rs 7,000 crore for rural electrification schemes like RGGVY to boost rural electrification is positive for REC.

A measure that was expected was the infusion of capital in banks where government holding is at threshold 51 per cent. This is positive for smaller banks like Oriental Bank of Commerce, IDBI Bank and Central Bank.

To perk up infrastructure funding, the move to allow IIFCL to buy loans of banks would help release long-term funds (positive for banks focused on project financing), which will also reduce any asset liability mismatch of banks. IIFCL will refinance 60 per cent of bank’s future loans for PPP projects in vital sectors over the next 18 months.

Capital goods, Engg & power
Power companies should benefit on various counts. Increased spending towards creation of power capacity means that companies in the EPC space like BHEL, L&T and BGR Energy could now hope for more orders. Here, analysts believe the weighted deduction of 150 per cent of R&D spending would benefit BHEL adding about 3 per cent to its net profit in 2009-10. Besides, there was a 160 per cent increase in funds for the APDRP scheme to Rs 2,080 crore, aiming to strengthen existing power transmission and distribution (T&D) infrastructure. This is positive for ABB, Areva T&D and Siemens who supply equipment like meters, switchgears, conductor, insulators, etc. The benefit will extend to transformer companies such as EMCO and Bharat Bijlee as well. The budget has announced another Rs 7,000 crore towards rural electrification to enable supply of power to India’s hinterland. This would primarily benefit companies like KEC International, Kalpataru Power and Jyoti Structures. Besides positives, analysts estimate that some these companies like GMR Infra, GVK Power, Tata Power and Reliance Power might have to provide for higher taxes due to the increase in MAT rate to 15 per cent.

FMCG
Like many others, the FMCG sector is expected to gain indirectly. The gains would accrue in the form of increased consumption, both in rural and urban India, which is consequent to the hike in National Rural Employment Guarantee Scheme (NREGA), increase in allocation to irrigation programme and higher credit to the farm sector and secondly, increase in disposable income (personal tax exemption hiked) for urban consumers. The direct gains, though marginal (0.5-2.0 per cent increase in earnings), could accrue from abolishing of FBT. Likewise, the marginally negative proposals include the hike in MAT rate (impact on select companies) and hike in excise duty on shaving and tooth brushes (Colgate).

The removal of 8 per cent excise duty on branded jewellery is positive for Titan Industries and Gitanjali Gems. And, that cigarettes were spared from any increase in duties is also indirectly positive for ITC.

Infrastructure
The government’s intention to take the share of infrastructure spending to 9 per cent of the GDP (from 6 per cent currently) clearly indicates its long-term commitment towards the sector. For now, the significant jump in allocation of funds towards improving rural infrastructure is good news for the companies like IVRCL and Nagarjuna Constructions as they have higher exposure to rural sector projects. There was an 87 per cent higher allocation for JNNURM, which is targeted to improve urban infrastructure like transport, public utilities, bridges, stations, water treatment and sewage. In this space, companies like HCC, L&T, Gammon, Simplex Infrastructure and other mid-size companies could benefit. Also, since the allocation for NHAI (road projects) has been increased by 23 per cent, it would be good for companies like HCC and IRB Infrastructure, which operate in the road segment.

Finally, the budget also tried to ease out funding worries by allowing IIFCL to finance up to 60 per cent of a bank’s loan for PPP projects. This could benefit companies operating in the BOT projects space such as HCC, IRB Infra and Nagarjuna Construction among others. However, analysts believe that the impact of increased MAT rates could be marginally negative for the companies like GMR Infra, GVK Power, IRB Infra and IVRCL among others.

Metals
Though nothing much has been done for the metal sector, indirect gains could accrue from increased spending on infrastructure and housing, which is good for ferrous and non-ferrous companies. The increased rate of MAT however, might impact earnings to the extent of 4-5 per cent of Jindal Steel & Power, considering that its subsidiary Jindal Power comes under MAT. It would also have a marginal impact on Sterlite Industries, which has exposure to the power sector. Also, the service tax levied on railway freight could be marginally negative for Sesa Goa.

Oil & Gas
The auto fuel price hike from July 2 was a major positive going into the budget. Though the deregulation policy would have to wait, in the interim the proposal to set up an expert committee to oversee changes in the fuel pricing policy (though short of expectations) is positive and indicates that it is still on the government agenda. The change of excise duty structure on branded auto fuels is however, neutral for oil marketing companies, as cost increases can be passed on to the consumers.

Inclusion of future gas producers under tax holiday net (similar to crude oil producers) from NELP VIII blocks would make future investments attractive. Since these benefits were expected for all gas blocks (NELP 1-VII), the extension only to NELP VIII is not positive for RIL. Moves to allow 100 per cent deduction on expenditure on cross-country pipelines is positive for GAIL.

Increase in MAT to 15 per cent could impact earnings of companies like RIL and Cairn India by about 5-6 per cent, which however will be based on deferred tax claimed.

Pharmaceuticals
Higher allocation under the National Rural Health Mission and insurance for BPL (below poverty line) families should help companies such as Apollo Hospitals when they rollout hospitals in the rural areas. Companies with large rural presence such as Glaxo, Cipla and Ranbaxy also stand to benefit from this. Customs duty reduction and excise duty exemption on life saving drug (LSD) formulations and bulk drugs used for their manufacture though marginal, should benefit companies in this area such as Cipla, Cadila, Aventis and Piramal. The extension of tax exemption on export profit by a year should benefit CRAMS players and export-oriented companies such as Ranbaxy, Dr Reddy’s, Glenmark, Aurobindo, Dishman and Divi’s. Reduction in customs duty to 5 per cent and exemption of excise duty and CVD on two life saving devices used in treatment of heart conditions should benefit stent maker, Opto Circuits.

Software services
The Indian software services sector may be coming to grips with global economic meltdown, and in this scenario, with most of the expectation calls answered the budget is positive feel experts. IT companies were expecting a minimum two-year extension and as it turned out, would have to be contended with an extension for another year up to March 31, 2011. This move could expand earnings; however Crisil feels that tier-2 players would benefit more. The extension of STPI benefits would be earnings positive for HCL Technologies and Tech Mahindra.

The scrapping of FBT is positive as it would help reduce employee costs as well as the administrative headaches. However, it would not materially impact earnings of Tier1 IT companies. For example, in 2008-09, Infosys paid FBT of about Rs 30 crore (0.4 per cent of profit before tax). Another marginal positive, is the removal of duty on packaged software. However, these positives are partly nullified by an increase in MAT rate that could dent profitability in the short-term. The Tier2 IT players would be more impacted by this move compared to larger companies.

Telecom
The budget did not have any major provisions for the telecom sector, but the increase in MAT to 15 per cent would increase tax outgo for players like Bharti, Idea and Reliance Communications. The withdrawal of customs duty exemption on set top boxes of 5 per cent would increase the cost of imported units by Rs 60-Rs 80 and will be marginally negative for RCOM and Bharti, which are looking at expanding in this fast growing home entertainment space. The exemption of 4 per cent special CVD for one more year on parts imported for the manufacture of mobile phones should enable operators to continue to subsidise their handsets with subscriptions and new offers.