Union Budget 2012-13

Fiscal consolidation = Subdued growth ?

Expectations were really never high from the budget after the recent electoral drubbing. The need of the hour was a clear roadmap for fiscal consolidation by cutting expenditure and subsidies. Instead, a slew of allocations were made to several schemes in an attempt to be populist. Bold reforms like action on the FDI or GST front were ruled out given the political compulsions, however, the budget platform could have well been used to send out a strong signal by addressing critical issues like land acquisition and the mining bill. While the FM did cover areas like infrastructure and agriculture, a detailed plan seems missing. The big move that took many by surprise was the two percentage point hike in both, excise duty and service tax rates. Widening of the service tax net was on the cards with a select negative list, but raising rates when GDP growth has fallen from 9% to 6.9% could prove to be costly. Almost all companies will fully pass on these hikes to customers, leading to inflationary pressures. This could result in RBI holding rates longer, especially in a high oil price environment. Widening of personal income tax slabs, which puts Rs2,000 extra in the hands of persons falling in the lowest tax slab of 10% and Rs22,000 for the 20% bracket, is a positive move. The equity market will take heart from the reduction in STT rates by 20% on delivery trades and introduction of the Rajiv Gandhi scheme for allowing income tax deduction of 50% to new retail investors (up to Rs50,000) who fall under income below Rs1mn. Qualified foreign investors are also allowed to access the bond market. These measures will go a long way in deepening these markets in the long run. An arithmetic check on the budget numbers reveals that the government has been far more realistic in its assumptions of tax revenue for FY13, unlike FY12. Taxes on personal income, service tax and excise duty look achievable. Corporate taxes and customs duty numbers appear somewhat overstated. Overall, the government risks missing the estimated revenue growth by 2-3 percentage points. The bigger worry however, is on the non-tax revenue and subsidy front. Unrealistic assumptions of income and understated subsidies were the reasons for the high spill-over of the fiscal deficit by 130 basis points over the budget estimates in FY12. The same could repeat in FY13 on at least one of the two fronts. The disinvestment target of Rs300bn hinges on the fate of the equity market, which is not in the best of health. A substantial portion of the non-tax revenue (Rs580bn) is budgeted to come in from communication revenues, the regular run rate for which is Rs160bn yearly. Meeting the non-tax revenue target heavily depends on sale of spectrum. Coming to subsidies, there is a clear case of understating of the expense as was the case last year. The budget projects a 12.2% fall in total subsidy in FY13 as against the rise of 24.7% in FY12. This looks highly improbable when one considers petroleum subsidy has been projected to drop by 36.4% in a scenario of rising crude oil prices. Fertiliser subsidy is also estimated to drop by 9.3%. The budget has projected fiscal deficit at 5.1% for FY13, which looks like a best case scenario to us. The Finance Minister will need the perfect execution (and some luck too) to meet this figure. Based on our internal workings, 5.4-5.5% looks more realistic. The government has its work cut out manage coalition while trying to reform and meet fiscal target without hampering growth.

March 16, 2012

Union Budget 2012-13

Budget at a Glance
20102011 A 7,885 5,699 2,186 4,089 124 228 3,736 11,973 8,183 7,265 2,340 918 3,790 3,142 648 11,973 10,407 875 1,566 2,523 (3.3) 1,648 (2.1) 3,736 (4.9) 1,396 (1.8) 638 623 384 47 42 1,734 3,451 1,383 1,358 710 4,460 2,987 7 1,466 20 7,931 (39) (2,193) 5,699 6,645 16.6 20112012 BE 7,899 6,645 1,254 4,678 150 400 4,128 12,577 8,162 7,336 2,680 826 4,415 3,636 779 12,577 10,972 1,469 1,606 3,073 (3.4) 1,604 (1.8) 4,128 (4.6) 1,448 (1.6) 606 500 236 69 25 1,436 3,978 1,641 1,517 820 5,327 3,600 6 1,720 20 9,324 (45) (2,635) (5.1) (19.7) (38.4) 46.8 (41.0) (17.2) 15.3 18.7 11.7 15.5 19.4 20.5 (7.6) 17.4 (0.5) 17.6 16.0 20.1 YoY Growth 0.2 16.6 (42.6) 14.4 20.9 75.1 10.5 5.0 (0.3) 1.0 14.5 (10.0) 16.5 15.7 20.3 5.0 5.4 67.9 2.5 20112012 RE 7,670 6,423 1,247 5,517 143 155 5,220 13,187 8,921 8,157 2,756 764 4,266 3,462 804 13,187 11,619 1,375 1,568 3,950 (4.4) 2,574 (2.9) 5,220 (5.9) 2,464 (2.8) 728 672 685 58 20 2,163 3,987 1,507 1,530 950 5,105 3,277 109 1,719 23 9,017 (40) (2,530) (24) 6,422 12.7 7,711 16.0 20.1 14.1 7.9 78.5 23.7 (52.6) 24.7 15.5 9.0 12.7 33.8 14.5 9.7 1,489.5 17.3 16.9 13.7 2.6 15.4 YoY Growth (2.7) 12.7 (42.9) 34.9 14.8 (32.2) 39.7 10.1 9.0 12.3 17.8 (16.8) 12.6 10.2 24.1 10.1 11.6 57.2 0.1 20122013 BE 9,357 7,711 1,646 5,552 117 300 5,136 14,909 9,699 8,656 3,198 1,043 5,210 4,205 1,005 14,909 12,861 1,647 2,048 3,504 (3.4) 1,858 (1.8) 5,136 (5.1) 1,938 (1.9) 750 610 436 80 25 1,900 5,050 1,944 1,867 1,240 5,815 3,732 124 1,958 23 10,776 (46) (3,019) 23.8 22.0 84.3 16.0 0.1 32.4 27.0 18.4 23.1 51.2 9.2 3.7 1,859.1 13.8 17.1 15.6 2.1 14.6 3.0 (9.3) (36.4) 37.6 24.5 (12.2) 26.7 29.0 22.0 30.5 13.9 13.9 13.9 13.9 (0.3) 19.5 15.5 19.3 YoY Growth over FY12 BE (%) 18.5 16.0 31.2 18.7 (22.4) (25.0) 24.4 18.5 18.8 18.0 19.3 26.2 18.0 15.7 29.0 18.5 17.2 12.1 27.6 YoY Growth (%) over FY12 RE 22.0 20.1 32.0 0.6 (18.3) 93.6 (1.6) 13.1 8.7 6.1 16.0 36.6 22.1 21.5 25.0 13.1 10.7 19.8 30.6

Rs bn 1. Revenue Receipts 2. Tax Revenue (net to Centre) 3. Non-tax Revenue 4. Capital Receipts $ 5. Recoveries of Loans 6. Other Receipts 7. Borrowings and other Liabilities* 8. 9. Total Receipts $ Non-plan Expenditure

10. On Revenue Account of which, 11. Interest Payments 12. On Capital Account 13. Plan Expenditure 14. On Revenue Account 15. On Capital Account 16. Total Expenditure 17. Revenue Expenditure 18. Grants for creation of capital assets 19. Capital Expenditure 20. Revenue Deficit % of GDP 21. Effective Revenue Deficit % of GDP 22. Fiscal Deficit % of GDP 23. Primary Deficit (20-11) % of GDP Subsidy Breakup Food Fertilizer subsidy Petroleum subsidy Interest subsidy Other subsidy Total Subsidies Tax collection breakup Indirect tax collection target Union excise duties Custom Duties Service tax Direct tax collection target Corporation tax Wealth tax Income tax Taxes of union territories Gross tax revenue Less-NCCD transfer Less-States' Share Less-States' share adjustment as per Actual 2010-11 Net tax revenues

Strategy Note

Union Budget 2012-13

Income Tax slabs

Income Slab (Rs) From Males 180,001 500,001 800,001 Females 190,001 500,001 800,001 Senior Citizens (60-80 yrs) 250,001 500,001 800,001 500,001 1,000,001 190,000 500,000 800,000 250,000 500,000 800,000 500,000 1,000,000 10 20 30 10 20 30 20 30 200,001 500,001 1,000,001 250,001 500,001 1,000,001 500,001 1,000,001 200,000 500,000 1,000,000 250,000 500,000 1,000,000 500,000 1,000,000 10 20 30 10 20 30 20 30 180,000 500,000 800,000 10 20 30 200,001 500,001 1,000,001 200,000 500,000 1,000,000 10 20 30 2011-12 To Tax rates (%) From 2012-13 To Tax rates (%)

Senior Citizens (Above 80 yrs)

Sectoral impact
Automobile
Key Announcement Excise Duty hiked by 2% across the board Excise Duty for large cars increased from 22% + Rs15,000 to 27% Extend weighted deduction of 200% for R&D expenditure in an in-house facility for a further period of 5 years beyond March 31, 2012 Higher excise duty on chasis Import duty on CBU of premium vehicles of more than 2.5 litre diesel or 3 litre petrol engine would be increased to 75% from 60% Increase in custom duties on non-alloy flat rolled steel products Increase in agricultural credit Increase in allocation to Pradhan Mantri Gram Sadak Yojna by 20% No specific duty on diesel cars Impact Negative for the sector Negative for M&M and Tata Motors Positive for the sector Negative for Tata Motors and Ashok Leyland Positive for domestic OEMs Negative for the sector Positive for M&M, Hero Motocorp Positive for M&M, Hero Motocorp Positive for M&M, Tata Motors and Maruti

Aviation
Key announcements Direct import of ATF permitted for Indian Carriers ECB permitted for working capital requirement of airline industry for a period of one year, subject to a total ceiling of US$1bn Full exemption from basic customs duty and CVD for new and retreaded aircraft tyres Full exemption from customs duty and CVD on parts of aircraft and testing equipment for maintenance and repair of aircraft imported by third-party Maintenance, Repair and Overhaul (MRO) units Impact Positive for the whole sector Positive for the whole sector Positive for the whole sector

Positive for the whole sector

Strategy Note

Union Budget 2012-13

FMCG
Key announcements

Increase in general excise duty from 10% to 12%.

A 10% ad valorem duty is being imposed in addition to the existing specific duty on cigarettes length exceeding 65mm Increase in excise duty on Biris, Pan Masala and Guthka Basic customs duty on Titanium dioxide reduced from 10% to 7.5%. Basic customs duty on Power weeding machine for coffee plantations reduced from 7.5% to 5% Levy of excise duty of 6% on sunglasses or goggles, for correcting vision Customs duty on gold raised from 2% to 4% Excise duty of 1% has been extended to unbranded gold jewellery

Impact Negative for most of the FMCG companies Negative for cigarette companies. Marginal impact on ITC as it can easily pass on the effect of higher taxes to consumers through price hikes Positive for ITC Positive for paint companies Positive for Tata Coffee Negative for Titan Negative for Titan Positive for Titan

Financials
Key announcements FY13 fiscal deficit targeted at 5.1% of GDP with net market borrowings of Rs4.8tn. Rs160bn provided for capitalization of PSU Banks; considering creation a financial holding company to raise resources for capitalizing PSU Banks Lending to agriculture sector targeted to grow at 21% yoy to Rs5.75tn Interest subvention to farmers on short-term crop loans extended to FY13; additional 3% subvention for prompt paying farmers Interest on savings deposits to be tax exempt upto Rs10,000 Financial package of Rs39bn announced towards waiver of loans of handloom weavers and their cooperative societies. IIFCL has put in place a structure for credit enhancement and take-out finance wrt infrastructure projects Various measures announced that enhances financial viability of power/infrastructure projects and aviation companies Interest rate subvention of 1% on housing loans upto Rs1.5mn on property value of upto Rs2.5mn extended for FY13 Customs duty on imports of Gold increased from 2% to 4% Rajiv Gandhi Equity Saving Scheme introduced allowing income tax deduction of 50% to new retail investors on investment upto Rs50,000 directly in equities whose annual income is below Rs1mn Securities Transaction Tax (STT) reduced from 0.125% to 0.1% on cash delivery transactions IPO process to be simplified; companies to issue IPOs of Rs100mn and above in electronic form through nationwide broker network Impact Fiscal deficit math appears a bit aggressive; market borrowings could be higher pressurizing yields and credit growth. Negative for the Banking sector in general Higher recapitalization fund was expected considering requirements of SBI and weak capital position of some mid/small size banks. Positive for the Banking sector Positive for Banks; would support agri credit growth and facilitate in meeting PSL targets Positive for Banks; would boost savings balance and therefore improve CASA ratio Negative if the Government fails to re-imburse the banks

Positive for Banks and IFCs; could address ALM issues and also allay asset quality concerns to some extent Positive for Banks and IFCs; allays asset quality concerns to some extent Positive for HFIs like HDFC, LICHF, Dewan Housing and GIC Housing and Banks with lower loan size Marginally positive for Gold loan companies as it would support Gold prices and lower LTV of existing book

Positive for Brokerage companies

Positive for Brokerage companies

Positive for financial services companies

Strategy Note

Union Budget 2012-13

IT
Key announcements Introduction of Advanced pricing agreement (APA) in 2012 Impact To likely help in reducing transfer pricing related litigation with a more transparent and codified process To increase the cost for companies with India focused business; lack of clarity on service tax refunds, dual levy of service tax and VAT Positive for education companies like Educomp, Everonn, etc Positive for education companies having presence in vocational segment like Educomp, Everonn, Aptech etc

Increase in service tax and Excise duty Increase in outlay for School/literacy/higher education (up 19%) Additional allocation of Rs10bn for National Skills development fund

Infrastructure and capital goods

Key announcements Infrastructure investment of Rs50tn for the twelfth five year plan To ease access of credit to infrastructure projects, IIFCL has put in place a structure for credit enhancement and take-out finance Allowing Qualified Foreign Investors (QFIs) to access Indian corporate debt market Allocation of the Road Transport and Highways Ministry enhanced by 14% to 253.6bn Target of covering a length of 8,800 kilometer under NHDP next year ECB allowed for capital expenditure on the maintenance and operations of toll systems for roads and highways, if they are part of original project Full exemption from import duty on specified equipment imported for road construction by contractors To provide low cost funds to stressed infrastructure sectors, rate of withholding tax on interest payment on ECBs proposed to be reduced from 20% to 5 for 3 years for certain sectors Launch of Infrastructure Debt Fund with an initial size of Rs80bn earlier this month More sectors added as eligible sectors for Viability Gap Funding under the scheme Support to PPP in infrastructure Customs duty on coal reduced from 5% to nil and CVD also reduced from 5% to 1% till upto 31.3.2014 Irrigation sector added as eligible sectors for Viability Gap Funding under the scheme - Support to PPP in infrastructure No mentioning about the import duty on power equipment Impact Positive for the sector Positive for the sector Positive for the sector with easy access to finance through bind market Positive for the road developers and road construction companies Positive for the road developers and road construction companies Positive for the road developers like IRB and ITNL

Positive for the companies in the road construction segment

Positive for the sector

Positive for the sector Positive for the sector Positive for power generation companies thereby benefiting power equipment players Positive for the companies in the irrigation space like IVRCL & NCC Negative for BTG manufacturers like BHEL, BGR & Thermax

Strategy Note

Union Budget 2012-13

Metals & Mining

Key announcements Increase in customs duty on non-alloy, flat-rolled steel (HRC & CRC) from 5% to 7.5% Customs duty on coal reduced from 5% to nil and CVD also reduced from 5% to 1% till upto 31.3.2014 Increase in excise duty from 10% to 12% Full exemption from basic customs duty to coal mining project imports Custom duty reduced for machinery and instruments needed for surveying and prospecting for minerals Customs duty on plant and machinery imported for iron ore pellet plants or iron ore beneficiation plants reduced from 7.5% to 2.5% Increased export duty on chromium ore from Rs3,000/ton to 30% ad valorem Reduced customs duty on nickel ore and concentrate and nickel oxide/ hydroxide from 2.5% or 7.5% to Nil Coal India Limited advised to sign fuel supply agreements with power plants, having long-term PPAs with DISCOMs and getting commissioned on or before March 31, 2015 Reduced customs duty on coating material for manufacture of electrical steel from 7.5% to 5% Impact Positive for steel companies like Tata Steel, JSW, JSPL Positive for sponge iron producers and non-ferrous companies like NALCO, Sterlite, HZL Negative for the sector Positive for coal mining companies - Coal India, JSPL Positive for mining companies and metal companies with captive mines Positive for JSPL, Godawari Power Neutral Neutral Positive for JSPL, Sterlite, NALCO Neutral

Oil & Gas

Key Announcement Increase in cess for crude oil production from Rs2,500 per ton to Rs4,500 per ton Removal of custom duty on import of LNG or natural gas for the purpose of power generation Pilot project for direct transfer of subsidies for LPG and Kerosene Petroleum subsidy for FY13 estimated at Rs436bn Oil and gas / LNG storage facility and oil & gas pipelines made eligible for Viability Gap Funding Impact Negative for ONGC, Oil India and Cairn India Positive for Petronet LNG Positive for OMCs Negative for ONGC, Oil India and OMCs, much lower allocation than expected Positive for GAIL, Petronet LNG, GSPL

Pharmaceuticals
Key announcements Excise duty hike from 10% to 12% MAT to be levied on companies operating in SEZ with Limited liability partnership (LLP) status; with effect from the 1st April, 2013 National Rural Health Mission (NRHM) allocation increased by 14% to Rs208bn Impact Negative for all companies Negative for the companies like Sun Pharma and Cadila Healthcare having SEZ presence through LLP Positive for small companies involved under govt tendering

Strategy Note

Union Budget 2012-13

Power
Key announcements 80IA benefit extended by 1yr till Mar'13 Customs duty on coal reduced from 5% to nil and CVD also reduced from 5% to 1% till upto 31.3.2014 Reduction in withholding tax on interest payments on ECB from 20% to 5% for three years. Additional depreciation of 20% in the initial year is proposed to be extended to new assets acquired by power generating companies Full exemption from basic duty for the fuels like Natural Gas, LNGs,Uranium concentrate and Sintered Uranium Dioxide in natural and pellet form for power generation Coal India Limited advised to sign fuel supply agreements with power plants, having long-term PPAs with DISCOMs and getting commissioned on or before March 31, 2015 ECB to part finance rupee debt of existing power projects Impact Positive for all companies commissioning the plant before Mar'13. Mildly negative for regulated model as grossing of ROE will happen at MAT rate Positive for companies having merchant plant with fuel as a imported coal like JSW Energy and Adani power Positive for power sector as a whole Positive for power sector as a whole

Mildly positive for Lanco and neutral for NTPC

Positive for power generation companies Positive for power sector as a whole

Real Estate
Key announcements Allow ECB for low cost affordable housing projects Extension of 1% interest subvention on housing loans up to Rs1.5mn where the cost of the house is <Rs2.5mn Enhance provisions under Rural Housing Fund from Rs30bn to Rs40bn Set up Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loans Rate of withholding tax on interest payment on ECBs proposed to be reduced from 20% to 5% for 3 years Investment linked deduction of capital expenditure is proposed to be provided at the enhanced rate of 150% as against the current rate of 100% Impact Positive for the sector Positive for the sector Positive for the sector Positive for the sector

Positive for the sector

Positive for the sector

Telecom
Key announcements FY13 receipts at Rs582bn including spectrum usage & license fees+potential excess spectrum charge above 6.2Mhz and proceeds from likely 2G/4G auction later in the year; FY12 receipts estimated at Rs166bn vs budgeted Rs296bn VGF funding for telecom towers, optic fibres & cables Hike in service tax to 12% Exemption from customs duty, CVD and SAD on parts, components and accessories for manufacture mobile phones extended to parts of memory cards; validity period of SAD exemption extended from Mar' 12 to Mar' 13 Impact Negative for telcos; out of budgeted Rs582bn, about Rs170bn is annual spectrum usage and license fees implying revenues of ~Rs412bn from excess spectrum charge and 2G/4G auctions Positive for telcos Negative: would result in increased cost of mobile services

To enhance handset affordability

Strategy Note

Recommendation parameters for fundamental reports: Buy Absolute return of over +10% Market Performer Absolute return between -10% to +10% Sell Absolute return below -10%

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