 "More gainers than losers in India Inc from Union Budget 2015")
Even as the markets initially reacted negatively due to lack of ‘Big Bang’ measures and as they sought clarity on various issues, it seems there are more gainers than losers from the Union Budget proposals. One statement by the finance minister, “time for take-off”, perhaps sums it for India Inc.
For one, though not immediately, gradual lowering of the corporate tax rate from 30 per cent currently to 25 per cent over four years starting 2016-17 will add to their earnings and enhance cash flows in the long run.
It lays significant emphasis on infrastructure — roads, power, ports, rail, airports and housing. By doing so, the Budget in the medium term aims to kick-start the investment cycle. Signaling that companies that make or maintain infra, such as IL&FS Transportation, IRB Infra, Sadbhav Engineering, Ashoka Buildcon or Larsen & Toubro, financiers like IDFC, Rural Electrification Corporation (REC) and Power Finance Corp (PFC), and equipment and service providers like BHEL, ABB, Siemens, L&T and BGR Energy stand to gain. Power Grid, too, is seen among the gainers.
More important, this time the government is aiming to bring down the hurdles for faster execution and timely funding as well. For instance, it aims to set up five Ultra Mega Power Projects (UMPPs) of 4,000 megawatt (Mw) each, totaling 20,000 Mw and entailing a total investment of Rs 100,000 crore. All approvals will be taken in advance and bid winners will only run the risk of project development and execution.
Both the power financiers, PFC and REC, stand to gain from UMPP projects. This will boost credit demand and profitability and rub-off favourably on these companies. PFC, being the nodal agency for UMPP projects, stands to gain more than others from this move.
Vinay Khattar, associate director & head of research, Edelweiss, says: “These are significant steps taken in the right direction for the entire infrastructure space”, adding that a similar model will be followed for projects in roads, ports and the rail sector.
Separately, a National Investment and Infrastructure Fund (NIIF) with initial contribution of Rs 20,000 crore is proposed. This would enable raising of debt and, in turn, to invest as equity in infrastructure finance companies. In other words, making funds accessible to companies for many new projects.
The measures, including the one to build 100,000 km of road, point to significant orders for companies. Road and infra builders like NBCC, NCC, Ashoka Buildcon and Sadbhav Engineering are among the companies better placed to seize the opportunities, due to their stronger balance sheets. Infra equipment providers like SREI and Sanghvi Movers will also benefit from higher demand.
Khattar says, “For the infrastructure space, the Budget allocation has gone up significantly to more than Rs 75,000 crore and that is a major delta for a one-year time frame. Already, 100,000 km of road is under construction and that is where the first level of focus is. In the coming years, the focus is to incrementally build another 100,000 km. Companies, especially on the EPC (engineering, procurement and construction) side at this particular time could be good bets.”
The government’s target of 20 million houses in urban areas and 40 million in rural India by 2022 will also have a cascading impact for realty companies, financiers (LIC Housing, HDFC, DHFL, Repco, Gruh Finance), steel companies (Tata Steel, JSW Steel, SAIL) and paint companies (Asian Paints, Berger). The proposed rationalisation of the capital gains tax regime for sponsors of real estate investment trusts and pass-through status for rental income from owned-assets is also positive. Among the key gainers would be DLF, Prestige and Purvankara.
Adding 60 million toilets should lead to gains for India’s leading sanitary-ware and tile companies HSIL, Cera, Somany Ceramics and Kajaria, which will also gain from building on new houses.
Through all these, cement companies — UltraTech, Ambuja, ACC and Shree Cement, as well as smaller entities in this segment like JK —should see higher demand for the commodity which has seen single-digit growth in recent months.
While the government aims to provide the initial boost —funds worth about Rs 100,000 crore (Rs 75,000 crore by way of higher infra allocation, and Rs 20,000 crore towards initial contribution to NIIF) on this front, the markets are not sure on how well the private sector is placed to provide its share of funding. Nevertheless, a beginning has been made. Coupled with more clear policies, as well as viability gap fund provisions, this should see more action for many companies.
Private lenders such as YES Bank, Kotak Mahindra, IndusInd and Axis Bank stand to gain from the move of having a composite limit for foreign direct investment and foreign portfolio investment, allowing foreign institutional investors room to further raise their stake in these banks. In the banking, financial services and insurance space, while the infra boost will prop credit growth, measures allowing non-bank finance companies (over Rs 500 crore) access to the Sarfaesi Act is positive for Bajaj Finance, M&M Finance and many more. Likewise, moving toward a bankruptcy code with judicial capacity (as SICA and BIFR are not yielding sufficient results) will strengthen the banking system, lowering bad loans for the sector.
Among automobile companies, commercial vehicle makers such as Ashok Leyland and Tata Motors, as well as Maruti and Hero, are seen as gaining. Aided by creation of more roads. Allocations to the agricultural sector should benefit companies such as Jain Irrigation, Finolex Industries and Rallis.
While there are many gainers, some could also feel the heat. As in the past, companies like ITC will be impacted due to the weighted average rise in excise duty on cigarettes by 16 per cent, the fourth sharp duty rise in a row. While it should be able to pass on the rise and sustain margins, as seen in the past, the company’s volumes are already under pressure, due to price increases in the past 12-odd months.
While corporate tax will fall in the long run, the rate for 2015-16 is up due to the rise in surcharge from 10 per cent to 12 per cent. Thus, companies with income exceeding Rs 10 crore will now be liable to an effective tax rate of 34.61 per cent as against 33.99 per cent till now. The rate for Minimum Alternate Tax also stands increased from 20.96 per cent to 21.34 per cent and so is Dividend Distribution Tax from 20.47 per cent to 20.92 per cent. This could take away some of the gains for all companies.
However, if the Budget’s aim of kick-starting growth through focus on infrastructure and housing starts delivering, the higher demand should more than offset the increase in taxes for companies.
For one, though not immediately, gradual lowering of the corporate tax rate from 30 per cent currently to 25 per cent over four years starting 2016-17 will add to their earnings and enhance cash flows in the long run.
It lays significant emphasis on infrastructure — roads, power, ports, rail, airports and housing. By doing so, the Budget in the medium term aims to kick-start the investment cycle. Signaling that companies that make or maintain infra, such as IL&FS Transportation, IRB Infra, Sadbhav Engineering, Ashoka Buildcon or Larsen & Toubro, financiers like IDFC, Rural Electrification Corporation (REC) and Power Finance Corp (PFC), and equipment and service providers like BHEL, ABB, Siemens, L&T and BGR Energy stand to gain. Power Grid, too, is seen among the gainers.
More important, this time the government is aiming to bring down the hurdles for faster execution and timely funding as well. For instance, it aims to set up five Ultra Mega Power Projects (UMPPs) of 4,000 megawatt (Mw) each, totaling 20,000 Mw and entailing a total investment of Rs 100,000 crore. All approvals will be taken in advance and bid winners will only run the risk of project development and execution.
Both the power financiers, PFC and REC, stand to gain from UMPP projects. This will boost credit demand and profitability and rub-off favourably on these companies. PFC, being the nodal agency for UMPP projects, stands to gain more than others from this move.
Vinay Khattar, associate director & head of research, Edelweiss, says: “These are significant steps taken in the right direction for the entire infrastructure space”, adding that a similar model will be followed for projects in roads, ports and the rail sector.
Separately, a National Investment and Infrastructure Fund (NIIF) with initial contribution of Rs 20,000 crore is proposed. This would enable raising of debt and, in turn, to invest as equity in infrastructure finance companies. In other words, making funds accessible to companies for many new projects.
The measures, including the one to build 100,000 km of road, point to significant orders for companies. Road and infra builders like NBCC, NCC, Ashoka Buildcon and Sadbhav Engineering are among the companies better placed to seize the opportunities, due to their stronger balance sheets. Infra equipment providers like SREI and Sanghvi Movers will also benefit from higher demand.
Khattar says, “For the infrastructure space, the Budget allocation has gone up significantly to more than Rs 75,000 crore and that is a major delta for a one-year time frame. Already, 100,000 km of road is under construction and that is where the first level of focus is. In the coming years, the focus is to incrementally build another 100,000 km. Companies, especially on the EPC (engineering, procurement and construction) side at this particular time could be good bets.”
The government’s target of 20 million houses in urban areas and 40 million in rural India by 2022 will also have a cascading impact for realty companies, financiers (LIC Housing, HDFC, DHFL, Repco, Gruh Finance), steel companies (Tata Steel, JSW Steel, SAIL) and paint companies (Asian Paints, Berger). The proposed rationalisation of the capital gains tax regime for sponsors of real estate investment trusts and pass-through status for rental income from owned-assets is also positive. Among the key gainers would be DLF, Prestige and Purvankara.
Adding 60 million toilets should lead to gains for India’s leading sanitary-ware and tile companies HSIL, Cera, Somany Ceramics and Kajaria, which will also gain from building on new houses.
Through all these, cement companies — UltraTech, Ambuja, ACC and Shree Cement, as well as smaller entities in this segment like JK —should see higher demand for the commodity which has seen single-digit growth in recent months.
While the government aims to provide the initial boost —funds worth about Rs 100,000 crore (Rs 75,000 crore by way of higher infra allocation, and Rs 20,000 crore towards initial contribution to NIIF) on this front, the markets are not sure on how well the private sector is placed to provide its share of funding. Nevertheless, a beginning has been made. Coupled with more clear policies, as well as viability gap fund provisions, this should see more action for many companies.
Private lenders such as YES Bank, Kotak Mahindra, IndusInd and Axis Bank stand to gain from the move of having a composite limit for foreign direct investment and foreign portfolio investment, allowing foreign institutional investors room to further raise their stake in these banks. In the banking, financial services and insurance space, while the infra boost will prop credit growth, measures allowing non-bank finance companies (over Rs 500 crore) access to the Sarfaesi Act is positive for Bajaj Finance, M&M Finance and many more. Likewise, moving toward a bankruptcy code with judicial capacity (as SICA and BIFR are not yielding sufficient results) will strengthen the banking system, lowering bad loans for the sector.
Among automobile companies, commercial vehicle makers such as Ashok Leyland and Tata Motors, as well as Maruti and Hero, are seen as gaining. Aided by creation of more roads. Allocations to the agricultural sector should benefit companies such as Jain Irrigation, Finolex Industries and Rallis.
While there are many gainers, some could also feel the heat. As in the past, companies like ITC will be impacted due to the weighted average rise in excise duty on cigarettes by 16 per cent, the fourth sharp duty rise in a row. While it should be able to pass on the rise and sustain margins, as seen in the past, the company’s volumes are already under pressure, due to price increases in the past 12-odd months.
While corporate tax will fall in the long run, the rate for 2015-16 is up due to the rise in surcharge from 10 per cent to 12 per cent. Thus, companies with income exceeding Rs 10 crore will now be liable to an effective tax rate of 34.61 per cent as against 33.99 per cent till now. The rate for Minimum Alternate Tax also stands increased from 20.96 per cent to 21.34 per cent and so is Dividend Distribution Tax from 20.47 per cent to 20.92 per cent. This could take away some of the gains for all companies.
However, if the Budget’s aim of kick-starting growth through focus on infrastructure and housing starts delivering, the higher demand should more than offset the increase in taxes for companies.