The broad contours of Budget 2012-13 were centred around increasing taxes, keeping subsidies under control and giving a thrust on kick-starting the investment cycle. The Budget has tried to touch upon everything and may end up being inflationary in nature (bad for interest rate cuts) while not achieving any significant growth prospects. The robust tax revenue growth of 19.5 per cent, which is supported by the 200 basis points increase in excise duty to 12 per cent and measures to increase tax collections from services, gives an impression of fiscal consolidation but is optimistic (looking at the weakening industrial production).
And, so are assumptions on non-tax revenue and disinvestment targets. Non-tax revenue receipts are estimated at Rs 1,60,000 crore, including Rs 42,000 crore from 2G licence re-auctions. We are uncertain about the receipt of the same in FY13 given multiple legal hurdles that could delay the auction. The divestment target of Rs 30,000 crore could also be at risk given that it has fallen far short of the target set in FY12.
The fiscal deficit target for FY13 at 5.1 per cent of gross domestic product (GDP) is a decline from 5.9 per cent in FY12. In addition, the higher allocation under capital account at 30 per cent year-on-year also gives the first impression of an investment and growth-oriented Budget. But we believe there is considerable scope for slippages. In our view, the Budget fails considerably on the much-needed fiscal consolidation front. A higher-than-expected expenditure Budget and the intent for fiscal consolidation should have reflected in meaningful cuts in non-plan expenditure. In addition, there is a considerable understatement of fuel subsidy; Rs 43,600 crore as petroleum subsidy for FY13; we believe about Rs 40,000 crore is spillover of FY12. Further, the Budget is silent on fuel price rises.
We have enumerated the impact of Budget proposals on small- and mid-cap stocks. While it is positive for infrastructure, some consumer companies, mid-cap banking, cement and agri-input sectors, it is negative for commercial vehicles.
Below are five stocks from the small and mid-cap space, that we think are among the most impacted by the proposals:
Marico: The increase in excise duties across the board and in the consumer sector, in particular, should have a negative impact on demand for consumer goods in the durables and non-durables space. Consumption demand has been slowing on account of slower income growth and higher inflation. Increase in excise duty will add to the pressure. However, distinction has to be made for companies operating from excise-free zones as they stand to benefit in this situation. While Dabur will also gain, there are more gains for Marico + both get more than 50 per cent of their sales from such excise free areas. Hence, the general increase in prices may either aid margin expansion or if they hold the price line, it will aid volume growth.
Ashok Leyland: Excise duty on commercial vehicles or CV (chassis) has been increased from 10 per cent to 15 per cent, compared to expectations of an increase to 12 per cent. Eicher Motors (HOLD) would be negatively impacted, as 85-90 per cent of its CVs are sold as chassis. Ashok Leyland (HOLD) will benefit from the proposals as nearly 35 per cent of its CV production comes from tax free-zones. If all the benefits would be retained, it would translate into an eight per cent increase in Ashok Leyland’s EPS.
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India Cements: Cement companies will benefit from abolition of differential price-based excise duty, only five per cent import duty on coal and change in structure of charging excise duty from factory gate to retail sale price minus 30 per cent abatement. Though the ad-valorem excise rate has gone up by 200 basis points to 12 per cent, the rate would be charged on the basis of the new structure. Additionally, the specific duty rate of Rs 160 per tonne has been brought down to Rs 120 per tonne. Thus, effective excise duty will come down by Rs 20 per tonne. Positive from expectation perspective and would provide some relief for companies already struggling with cost pressures. India Cements (BUY) imports nearly 50 per cent of its coal requirements and will benefit. The impact of all proposals should lead to an increase of 15 per cent in its EPS.
Chambal Fertilisers: Budget is positive for urea manufacturers but negative for complex fertilisers. FY12 fertiliser subsidy is estimated at Rs 68,000 crore while that for FY13 is estimated at Rs 61,000 crore, which is negative for the sector. The current five per cent customs duty on equipment for fertilisers has been scrapped. Further, deduction for capex, which was at 100 per cent for FY12 has been enhanced to 150 per cent for FY13. Overall, the proposals are positive for players like Chambal (HOLD).
Tamil Nadu Newsprint: Excise duty rates increased to six per cent (up from five per cent earlier), which should have an adverse impact on paper manufacturers, though it is likely to be passed on. However, customs duty of 2.5 per cent on waste paper has been scrapped, while basic customs duty on imported steam coal (earlier five per cent) has been withdrawn/exempted, while the countervailing duty has been reduced from five per cent to one per cent. Consequently, customs duty on imported coal stands reduced to one per cent, from 10 per cent earlier, which will positively impact Tamil Nadu Newsprint (BUY).
The author is Head Institutional Equities at Emkay Global