PRE-BUDGET EXPECTATIONS - 2018-19 - … · PRE-BUDGET EXPECTATIONS - 2018-19. Pre-budget view 2018 Jayant Manglik ... which could be a 30-50bps miss ... measures in the last 15 …

January 25, 2018

Religare Research Team

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PRE-BUDGET EXPECTATIONS - 2018-19

Pre-budget view 2018

Jayant Manglik

President - Retail Distribution

Religare Broking Limited

The Union Budget 2018 is round the corner and expectations are high. More so this time given the challenging backdrop of anticipation, data, aspirat ions and perceived potent ia l . The government may resort to certain relatively bolder bets considering that this is the last full Budget to be presented ahead of the general elections in 2019 including several state elections in between. On the other hand, conservatism may be in order if it perceives any budgetary action as being politically sensitive at this time.

The BJP's performance in the recently concluded Gujarat state election may have left a lot to be desired by the party's own expected metrics, and in this context, other state elections are expected to occupy the government's mind space. The second

challenge in the budget backdrop is the impact of the two structural reforms i.e. demonetization and GST, which has seemingly taken a toll on the country's economic progress and affected consumer and business sentiment. Further, with higher crude prices and uncertain revenue collections post GST implementation, the government's challenge on the fiscal front is no secret.

Nonetheless, we expect a few themes to take centre-stage in the upcoming Budget and these would chiefly revolve around the big rural push, greater focus on housing, attempts at addressing concerns of the middle-income population and the important fiscal deficit roadmap.

On the rural front, the government already has a stated objective of doubling farmer income by 2022. While some progress has been made on this front, Budget 2018 could increase its focus on agriculture and allied sectors considerably because almost 50% of the employed workforce in the country belongs to the agriculture sector. Thus, greater spend on rural infrastructure, push to irrigation schemes, etc. are expected to be in limelight. Also, 'Housing for All' has been a key agenda of the current government and is expected to get a further leg up in the upcoming budget, chiefly through the Pradhan Mantri Awas Yojana. More benefits aimed at promoting low-cost housing could also be on the cards and consumers may also be incentivised with a more attractive tax treatment.

As for the middle-income group, the expectations primarily revolve around greater disposable income in hand. With the implementation of GST, the anxiety related to indirect taxes (especially on household items, consumer durables, etc.) is now a thing of the past and thus greater disposable income for a common man can now primarily be achieved by reducing the tax rates or increasing the personal tax exemption limits or a bit of both. Notably, the previous budget did give some relief to small tax payers by reducing the tax rate from 10% to 5% in the lowest bracket. A similar move at the next level tax bracket i.e. 20% cannot be ruled out in this Budget. Moreover, some tinkering of the exemption limits under Sec 80C may be announced. Expectation of re-introduction of standard deduction facility for salaried individuals is also on the wish list.

However, the above expectations and the government's spending ability will be challenged by the pressure on the fiscal deficit. The fiscal deficit for FY18 is being pegged at 3.5%-3.7%, which could be a 30-50bps miss from the government's intended target. While the importance of enhanced public spending at a time when private capex is showing little signs of revival cannot be undermined, what will nonetheless be closed watched is the fiscal deficit target for FY19, because a substantial deviation from the target may not go down well with investors, economists and rating agencies alike. Of course, the sale of the government's HPCL holding to ONGC may allow it to stick to the fiscal deficit target while also meeting its divestment target.

Also, from the market point of view, the street seems divided on the possibility of introduction of the Long Term Capital Gains (LTCG) Tax in this budget. On this front, despite the fact that the government is facing some pressure on revenue collection front with the implementation of GST, it looks unlikely that LTCG will come through in this Budget. It must be noted that the government has already undertaken two bold reform measures in the last 15-months i.e. demonetization and GST. These seem to have already caused some kind of uneasiness amongst a section of the society. It seems unlikely that the government would want to create another ripple so soon, especially considering the elections calendar over the next 18-months. Also, the government may not want to disturb the strong inflows into equities, especially considering that it also has considerable disinvestment targets, which in turn will help it to take care of the fiscal deficit to a certain extent.

In conclusion, it will be interesting to see if the Finance Minister bites the bullet by sacrificing fiscal prudence in the interim to spur economic growth, or manages to present a please-all Budget 2018 despite the fiscal constraints.

Sectoral Budget Wishlist

Pre-budget expectations FY18-19

Expectations Impact Stocks

Allocate more funds for conserving water, suitable

fertilizer, irrigation, crop schemes, storage, farm

education and research

Creation of Farmer policy for Disbursing debt/ loans

at low interest cost

Increase in budget allocation for Pradhan Mantri

Fasal Bima Yojana (PMFBY) to INR 13,000 Crs from

INR 10,701 Crs (Current fiscal)

PMFBY is benefitting farmers to get full claim

against crop damage, by just paying nominal

premium

All Agriculture Companies

Increase in allocation for investment policy in ureaTo Benefit Urea manufacturers, as the

domestic urea capacity is falling shortAll fertilizer companies


Restore incentives given on R&D in the form of

weighted tax deduction to previous levels

This could result in lower tax expenses to

certain extentPositive for all auto companies

Passenger vehicles should be kept under two tax

rates under GST compared to multiple rates now

This would rationalize the overall tax structure

and may lead to lower prices

Positive for Maruti Suzuki, Tata Motors,

M&M

Policy to replace vehicles older than 10-15 years It would increase demand for new vehiclesPositive for M&M, Tata Motors, Ashok

Leyland, Eicher Motors


Increase in capital infusion for PSU banksWill help improve capital ratios and build their

provision coverage ratios Positive for all PSU Banks

Focus on rehabilitating stressed assets in banksThis will help in resolving asset quality issues

faced by banksPositive for all Banks

Increase limits on affordable housingHigher income would also receive benefit of

interest subsidy

Positive for Banks & Housing Finance

Companies


Increased budget allocations to government

initiatives like AMRUT and Smart Cities

Positive impact on the order-book of capital

goods manufacturers

Positive for Va Tech Wabag, Voltas,

Kalpataru Power Transmission, KEC

International, Siemens India

Increase investment in infrastructurePositive impact on the order-book of capital

goods manufacturers

Positive for Larsen & Toubro (L&T),

Bharat Earth Movers

Increase in custom duty on power equipmentsEncourage domestic capital goods

manufacturing companiesPositive for BHEL & Thermax

Increase capex allocation for DefencePositive impact on the order book of Defence

companies

Positive for Bharat Electronics and

Bharat Earth Movers


Excise duty rationalization and simplification-

Reduce excise duty from current rate of 12.5% plus

specific duty to 6-8% without any specific duty

This will create a uniform rate structure for the

cement industryPositive for all cement companies

Increase spending on infra project including housing

and roadsHigher demand for cement Positive for all cement companies

Imposition of clean energy cess on pet coke It would increase the cost of operations for

cement manufacturersNegative for all cement companies

Agriculture

BFSI

Auto and Auto ancillary

Cement

Capital Goods

It will benefit to generate more income to

farmers and achieve the goal of doubling

farmer income by 2022

Positive for Companies like Jain

Irrigation, UPL, Kaveri Seeds,

Coromandel, GNFC, GSFC, Monsanto, etc



Increase tax exemption limit / Increase income tax

slabs

Positive for the entire sector in general since it

would lead to increase in disposable income &

consumer spending

All FMCG companies

Emphasis on rural development, infrastructure and

skill development through a range of measures and

higher allocations

Steps taken could improve the rural income and

spending power and result in demand uptick for

FMCG goods

All FMCG companies, especially those

expanding their presence in rural India

Increased allocation towards Housing For All

initiative and development of Smart Cities

Increased allocation would be long term

beneficial for companies engaged in electrical

equipment / appliances, white goods and

building materials segments (paints, tiles,

plywood, adhesives)

Positive for Asian Paints, Berger Paints,

Greenply Ind, Century Plyboard, Kajaria

Ceramics, Pidilite Industries, Whirlpool,

Voltas, Symphony, Havells, Bajaj

Electricals, V-Guard

Emphasis on driving the agriculture growth

Higher agricultural income would improve

spending power and drive the demand for

FMCG goods

All FMCG companies

Hike in cess component on cigarettes and other

tobacco products (cess is over and above the 28%

GST rate)

Moderate or no hike in cess would result in

volume growth revival in cigarettes. Through

selective price hikes, manufacturers will be able

to smoothly pass on the marginal hike

Positive for ITC, VST Ind and Godfrey

Philips

Steps to revamp the direct tax system (like

reduction in corporate tax rates)

A meaningful cut in the corporate tax rates

would benefit the full tax payers, as lower

taxes would positively impact their bottomline

Positive for FMCG / consumer companies

like Colgate, GSK Consumer, Nestle, ITC,

Asian Paints, Berger Paints, Symphony,

etc


Increase in funds allocation for development of

Rural infra

Will help in development of rural infrastructure

like roads, and railways, also improvement of

other facilities which is necessary for growth of

rural economy like electricity, irrigation,

warehouse, etc

All infrastructure companies


Removal of import duty on ferro nickel and stainless

steel scrap from 2.5% currently

This move would reduce the raw material cost

for the steel industry

Positive for steel players- JSW Steel,

Tata Steel, Sail, etc

Increase spending on infra project including housing

for all and roadsHigher demand for metal products Positive for all metal companies

Export duty on iron ore to be reduced to zero for

grades between 58-62%It would increase iron ore exports Positive for Vedanta

Import duty on Aluminium to be increased to 10%

from 7.5%

Domestic companies would benefit as import

price will increasePositive for Vedanta, Hindalco

FMCG / Consumer Discretionary

Infrastructure

Metal


Implementing GST for power sectorWill help in reduction of power cost and boost

demand for power companiesAll Power Manufacturing Companies

Increase allocation towards power for all schemes

like Integrated Power Development Scheme (IPDS),

Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY)

Will give boost to power sector; help all discom

players to get government support,

furthermore this scheme will aid towards debt

restructuring for players in the sector

NTPC, Power Grid, Adani Power, JSW

Energy, etc

Focus on Renewables EnergyTo Boost Make in India initiative as well as

projects dealing in renewable energySuzlon, Inox Winds, Tata Power

Power



Infrastructure status for the sectorFunds for construction will be available to the

developer at much lower interest ratesPositive for all real estate companies

Tax sops to homebuyers and tax incentives for first-

time home buyers increase from Rs 50,000 to Rs 2

lakh

It will push demand for real estate and housing

finance

Positive for all real estate and housing

finance companies

Rationalisation of the GST rates from the current

12% to 6% and bringing stamp duty under the ambit

of GST

Lower taxes would push demand in the sector Positive for all real estate companies


Reduction in custom duty on Gold imports from 10%

to 4%

The moderation in duty would boost customer

demand, uplift business sentiment and help

industry become more compliant and

organized

Positive for Titan, TBZ, PC Jewellers, etc

Continued push towards labour reforms (like

announcement of a comprehensive National

Employment Policy)

This policy would provide fiscal incentives for

employers across labour-intensive sectors like

Leather / Footware to create more jobs

Positive for all leather / footwear

companies


Higher allocation towards Technology Upgrade

Fund Scheme (TUFS) subsidy

The move would result in investment uptick in

downstream segments, facilitating higher value

addition and sector's contribution to GDP and

exports

Positive for all textile companies

Continued push towards labour reforms (like

announcement of a comprehensive National

Employment Policy)

This policy would provide fiscal incentives for

employers across labour-intensive sectors like

Textiles to create more jobs

Positive for all textile companies

Retainment of duty reimbursement to Garment

exporters at the pre-GST stage of 7.5% drawback

(from current 2%)

The move would boost the apparel exports,

which has remained stagnant over the last few

quarters due to heightened competition

Positive for all garment exporters

Retail

Textiles

Real Estate

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PRE-BUDGET EXPECTATIONS - 2018-19 - … · PRE-BUDGET EXPECTATIONS - 2018-19. Pre-budget view 2018 Jayant Manglik ... which could be a 30-50bps miss ... measures in the last 15 …