New Delhi: As Finance Minister Pranab Mukherjee rises to present the Union Budget 2011 today, he has a challenging economic situation to contend with. On the plus side, there has been a rebound in growth. But global crude oil prices are near $100 a barrel, inflation is high, as is the current account deficit. And there has been little progress on policy reform.
Inflation has been in double digits for most part of the year, driven by spikes in food prices. Bottlenecks in the supply of fruits, vegetables, fish, milk, eggs have to be ironed out. That means more investment, both public and private, in the agriculture sector. There is urgent need for more storage and cold chain facilities.
Petrol prices have been hiked seven times in the last one year alone. With global crude prices rising and inflation not moderating, the Finance Minister could slash duties on crude and petroleum products.
Here is a look at expectations of some brokerages in key sectors:
Banking, Financial Services and Insurance: Favourable policy prescription for financial sector is expected from this budget. Furthermore, re-capitalization of banks, increase in FDI limit for insurance and development of bond market will continue to remain key policy agenda for the budget. Focus would be on the fiscal consolidation and if there is a positive surprise (fiscal deficit lower than expected 4.5 ), state owned banking (SOB) stocks could rally else we could expect correction across the sector in the immediate term. We expect a budget proposal for re-capitalization of SOBs will be passed to strengthen the banks with adequate capital base particularly SBI.
Auto: The automotive sector, which has emerged stronger post the 2008 recession, continued its growth momentum in the current fiscal (YTD FY2011) with ~30 per cent growth in volumes. Noticeably, concerns related to the slowdown in the sector due to increased excise duty in the 2010-2011 budget were proved wrong as demand remained robust. However, with near-term headwinds in the form of higher raw-material prices, increasing fuel costs and rising interest rates, Society of Indian Automobile Manufacturers (SIAM) has urged the government to retain excise duty at the existing levels. We expect the status quo on excise duty to be maintained on small cars, two-wheelers and commercial vehicles. However,rates on large cars and utility vehicles is expected to be raised on account of concerns raised by the environment ministry.
Further, the sector stands to benefit from indirect sops such as higher outlay for the rural sector (driving expected consumer spending) and increased budgetary allocation for infrastructure spending (leading to increased road freight). Overall, we expect the Union Budget 2011-12 to be Neutral for the automobile sector.
Infrastructure: The infrastructure investment is a key factor to attain 9 per cent and double digit economic growth. However, there is a big gap in infrastructure targets and achievements with progress slow in several sectors like roads and Transmission and Distribution. A recent McKinsey study estimates that if current trends continue, India could suffer a GDP loss of $ 200 bn or 10 per cent of GDP by FY17E. The three key reasons for this are shortfalls in awarding projects, time and cost overruns in construction phase and potential funding shortfalls. The need for funds is enormous with the requirement pecked at Rs 12.7 lakh crore in FY11 and FY12. Prevailing high interest rates and high input costs (like crude, steel, cement etc) in current scenario is hurting infrastructure sector. Further increase in interest rates and input costs will make infra projects unviable in near future. Abolishing of MAT and reintroduction of section 10 (23G) of Income Tax Act could provide immediate relief to Infra developers.
Given that the sector plays a vital role in achieving the desired run rate of economic growth, we expect some announcements to come through, viz. higher allocation to flagship programs of Bharat Nirman, JNNURM, APDRP, AIBP and NHDP. Land acquisition and environment clearance are the two major bottlenecks hampering the timely execution of projects. Hence, roll out of policies to expedite these procedures would lend a fillip to the sector.
Power and Capital Goods: Government has revised its target of power generation capacity addition to ~ 62,000 MW from 78,000 MW during the current financial year. Although, we believe the capacity addition to be still lower at around ~54,000 MW on account of various execution hurdles. Delay in environmental clearance, land acquisition and fuel linkages continue to key issues faced by the power sector. Going forward, Import of BTG equipment from China will help the private players in setting up the capacities at the faster pace. We believe that investment pipeline for the sector will continue to be strong for the next six to seven years on account of structural demand supply imbalance and continued government focus to address it.
Capital goods industry is largely a proxy to long term economic growth. We believe that huge investment pipeline in power sector and investment in core industries presents the industry with a sustainable revenue visibility on a medium and long term. Key issues faced by the industry are increased imports from China and Korea, high interest rate environment and delay in execution on account of policy bottlenecks.
Oil & Gas: Rising crude prices have resulted in mounting under recoveries for the oil marketing companies (OMCs), which is expected to be ~`70,000cr in FY2011. The burden on OMCs could be higher in FY2012 if the crude stabilises at current levels. We expect the budgetary measures to be focused p g y on addressing these burdens by way of reducing duties on crude oil and petro products and allocating higher amount of cash compensation. However, we do not see material positives from these measures as these could only reduce the already mounting losses of the OMCs. We also expect some clarity over the tax holiday to the natural gas producers who were awarded blocks during the NELP I-VII rounds. Overall, the budget is expected to be neutral for the sector.
Information Technology: The information technology (IT) sector has outperformed the broader market over the last few months on the back of a strong revival in the sector’s fundamentals, especially on the demand side. For the upcoming Union Budget FY2011- 12, we remain optimistic about the extension of the STPI benefits for another year till the time the DTC comes into force. However, in the event of non-extension of the STPI benefits, we do not expect much impact on investor sentiments as the street has already factored in a higher tax rate for FY2012. We remain positive on the IT sector with a longer-term perspective. Our top picks from the sector are Infosys Technologies, HCL Technologies, Polaris Software and NIIT Technologies.
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