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Union Budget 2014-2015 Review
Budget FY2015 - a good start
Budget FY2015 highlighted the new government's rational approach towards policies for taxation, government spending and growth. Infrastructure, housing and finance sectors were amongst the biggest winners, with key measures announced to improve fund availability for low-cost housing (through National Housing Bank [NHB]), real estate projects (through Real Estate Investment Trusts [REITs]) and infrastructure development (through banks and infrastructure investment trusts). Amongst other key positives, foreign direct investment (FDI) limit in defense equipment and insurance sectors has been increased to 49%.
Fiscal prudence was maintained, sticking to a 4.1% fiscal deficit target. While the tax revenue assumptions may still be a bit on the optimistic side, but a key area where the budget math differed from the vote on account was in its assumption of higher non-tax receipts. This indicates the new government's resolve to accelerate the disinvestment agenda amongst other things. It has set the disinvestment target at ?58,425cr for FY2015.
In line with the government's election manifesto, smart cities, industrial corridors, higher education, low cost housing and various roads, ports, airports and other infra projects are expectedly going to be the thrust areas. The budget also indicated areas on which policy measures can be expected in the coming year such as coal availability, gas pipelines, urea, ship-building, etc. All in all, there is a lot in the budget that creates optimism of continued policy impetus yet to come across a range of sectors.
With the immense low-hanging fruits and huge decisive mandate, in our view, policy impetus is likely to continue in the weeks and months to come. Overall, we maintain our strongly positive view on the market with a continued preference for domestic cyclicals such as banking, infrastructure, capital goods, auto, cement as well as quality midcap stocks across a range of sectors.
- Increase in exemption limit for direct tax by Rs.50,000 to Rs.2,50,000 for individuals and to Rs.3,00,000 for senior citizens. Exemption under section 80C raised by Rs. 50,000 to Rs.1,50,000 for individuals.
- Agricultural growth maintained at 4%; allocation of Rs.8lakh cr for agricultural credit in FY2015 and Rs.25,000cr for increasing warehousing capacity.
- 15% additional allowance for investment above Rs.25cr in plant in Manufacturing sector for 3 years (till 31.03.2017).
- Positive for the sector as it will increase the disposable income of individuals, thereby boosting demand in personal mobility segments like two-wheelers and hatchbacks (positive for companies like Hero MotoCorp, Maruti Suzuki, Bajaj Auto, TVS Motors).
- Agricultural reforms will drive demand for tractors. Demand for two-wheelers in non urban areas will likely get a boost. Thus, a positive for companies like Mahindra & Mahindra, Hero MotoCorp, VST Tillers, and KirloskarOil Engines.
- Revival in investment cycle.
- Banks to be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending.
- The composite cap in the insurance sector is to be increased to 49% from 26% earlier with full Indian management and control through the FIPB route.
- Allocation for National Housing Bank increased to Rs.8,000cr to support rural housing and Rs.4,000crfor urban housing.
- Tax on long term capital gains increased from 10% to 20% for Debt Mutual Funds and eligibility for LTCG indexation benefit increased to 3 year tenure.
- Interest on loan in respect of self occupied house property raised from Rs.1.5 lakh to Rs.2 lakh.
- By exempting banks from regulatory requirements of CRR, SLR and Priority Sector Lending, vis-a-vis infrastructure lending, current regulatory burden in the form of lower blended yield by about 150-200bp will be eliminated. The move is a positive for all banks. IDFC could be one of the biggest beneficiaries as it was expected that CRR and SLR requirement will affect its profitability once it converts into a bank.
- Increase in cap to 49% will enable insurance firms to get capital from overseas players and this will lead to value unlocking. Positive for companies like Max India, HDFC, Exide, Elpro, Reliance Capital and ICICI Bank.
- Positive for housing finance companies like Repco Home Finance and Can Fin Homes.
- This will reduce tax arbitrage as compared to bank FDs, thereby affecting mutual fund industry including companies like Reliance Capital.
- Positive for all the banks.
Capital Goods: Positive
- The government has increased the composite cap of foreign investment in the defense sector from 26% to 49%. This would be applicable for companies with full Indian management and control.
- Allocation of Rs.1,000cr for development of rail connectivity in the North East region.
- Positive for the sector as it will accelerate investments in the defense sector. Defense equipment manufacturing companies like Bharat Forge, Astra Microwave Products, Pipavav Defence etc. will be beneficiaries.
- Positive for companies involved in manufacturing signals, locomotives and also contractors. KEC international, BHEL, ABB etc would stand to benefit.
Consumer Goods: Mixed
- An increase in the specific excise duty on cigarettes has been proposed, which will be in the range of 11% to 72%.
- Reduction in excise duty on footwear from 1 2% earlier to 6%.
- Custom duty on fatty acids, crude palm stearin, RBD and other palm stearin, and specified industrial grade crude oils reduced from 7.5% earlier to Nil.
- It is a negative for cigarette manufacturing companies like ITC, Godfrey Phillips and VST Industries.
- It is a positive for footwear manufacturing companies like Bata India and Relaxo Footwear.
- Positive for soap and Oleo manufacturers. This could benefit Adi-Finechem, HUL, GCPL.
- Rs.14,389cr has been provided for the Pradhan Mantri Gram Sadak Yojna(PMGSY).
- Infrastructure Investment Trusts (InvITs) have been proposed for infrastructure projects.
- An investment of Rs.37,880cr in national highways and state roads has been proposed which includes an allocation of Rs.3,000cr for the North East. A target of national highway construction of 8,500km has been announced (vs 4,000km in the 2013-14 budget)
- Allocation of Rs.3,600cr fund for safe drinking water through community water purification plants in next 3 years.
- National Building Construction Corporation would be a beneficiary since it draws construction orders from the government.
- This is a positive for Build Operate Transfer (BOT) players as they can encash their operating portfolios for further investment in other project or to reduce their debt. Companies like IRB Infrastructure Developers, IL&FS Transportation Networks and Ashoka Buildcon could be huge beneficiaries.
- Positive for companies which are into engineering procurement and construction (EPC) of roads. IRB Infrastructure Developers, IL&FS Transportation Networks & Ashoka Buildcon would be beneficiaries.
- Positive for companies like VA Tech Wabag, Thermax, etc which are into EPC and maintenance of water treatment plants.
Metals & Mining: Negative
- Revision of royalty on minerals to ensure greater revenue for State Governments.
- Increase in basic customs duty on imported flat-rolled stainless steel products from 5% to 7.5%.
- Increase in export duty on bauxite from 10% earlier to 20%.
- Increase in custom duty in metallurgical coal from nil to 2.5%.
- Proposal to develop an additional 15,000km of pipelines through public-private partnership (PPP) model.
- Negative for the sector as it will increase the procurement cost of raw materials.
- Positive for domestic steel manufacturers as demand for locally manufactured steel will rise.
- Positive for domestic aluminium manufacturers.
- Negative for steel manufacturers.
- This will help increase the usage of gas and reduce dependency on oil as a transport fuel. Thus, a positive for companies like GAIL, Petronet LNG, IGL, Welspun Projects and GSPT.
- Investment allowance at the rate of 15% to a manufacturing company that invests more than Rs.25cr in any year in new plant and machinery. The benefit would be available for three years, ie for investments upto March 31st, 2017. This will enhance investments in the sector, and hence the sector's growth.
- The measure is positive for the sector, but the effect will be more pronounced in small companies like Indoco Remedies and Dishman Pharmaceuticals & Chemicals, which will see their earnings inch higher. Indoco RemediesRs. stock price is expected to rise higher by 8-10% on this account.
- Additional benefits announced for the Power sector including an extension of the 10-year tax holiday.
- Reduction in basic customs duty from 10% to 5% on forged steel rings used in the manufacture of bearings of wind operated electricity generators.
- This will be a positive for companies whose power projects are near completion. Companies like CESC, ReliancePower, Jaiprakash Power and Adani Power will be beneficiaries.
- It will reduce the cost of setting up wind power projects. This could be beneficial for Suzlon Energy.
Real Estate: Positive
- Incentives for Real Estate Investment Trusts (REITs). Complete pass through for the purpose of taxation.
- Additional allocation for National Housing Bank of Rs.4,000cr for low cost housing (total allocation now stands at Rs.12,000cr). Extended additional tax incentive on home loans shall be provided to encourage people, especially the young, to own houses.
- This would bring investment in rental properties. Therefore companies like DLF, Prestige Estate and Nesco, which have a substantial rental properties portfolio, can encash these properties and pay off their piled up debts.
- This would be beneficial for companies like Poddar Developers and Puravankara Projects among others, which operate in the low cost housing segment.
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