Anand Rathi Securities has come out with its report on Budget FY12-Preview. According to the research firm, overall expectations from the budget are modestly positive for almost all sectors except Autos. Despite concerns regarding likely increase in fiscal deficit in FY12, we expect cash balance transfer from FY11 to FY12 to improve the fiscal situation substantially.
Passive fiscal consolidation to continue:
Fiscal consolidation to continue: FY12 budget is not likely to see any one-off revenue bonanza as in FY11. On our assumption of 16.5 per cent growth in tax revenue and 9.6 per cent growth in total expenditure, we estimate the fiscal deficit at 4.5 per cent in FY12.
Market borrowing to be low: In FY12, net market borrowing is likely to be Rs 3.5trn. However, the carrying forward, from FY11 to FY12, of a substantial cash balance (-Rs 700bn) would substantially reduce the need for market borrowing in FY12.
Emphasis on agriculture: The major focus is likely to be on agriculture, with special emphasis on improving productivity through greater investment, technology use and innovation.
Modestly positive for most sectors: While most sectors – Cap Goods, Consumer, Oil & Gas, Cement, Construction, Financial Services, Pharmaceuticals, Power and Technology – expect modest positive impact of the budget, the Auto sector is likely to be impacted negatively.
Stock ideas: We expect positive impact of the budget on Oil PSUs, Educomp, Everonn and NIIT.
Macro: Budget FY12 – Passive fiscal consolidation to continue- The FY12 budget throws up many challenges for the Finance Minister. While economic growth has bounced back, high and sticky inflation is the main macro concern. The FY11 fiscal deficit is likely to be 4.7 per cent, lower than the budgeted 5.5 per cent, due to high tax revenue, healthy one-off revenue from the 3G auction and higher-than estimated nominal GDP. While no major jump in revenue is likely in FY12, expenditure, especially on the social sector, is likely to be elevated. In view of the likely large cash transfer from FY11, we expect the fiscal deficit to decrease further, to 4.5 per cent of the GDP in FY12.
Sectoral Expectation:
Autos: We expect a hike in excise duty, of 0-2 per cent, back towards the original pre-stimulus levels. This would affect all auto companies. We think this could be slightly offset by the expected increased allocations to MGNREGA, JNNURM as well as other rural development schemes, which would further galvanize CV, tractor and two-wheeler demand. Overall, we expect the impact of the FY12 Budget to be marginally negative.
Capital Goods & Infrastructure: We expect the thrust on the infrastructure sector to continue and measures are expected to ease funding constraints. Extension of Sec 80 IA benefits beyond Mar’ 11 is also expected. We expect greater allocation of funds in the power transmission and distribution sector, with a focus on rural electrification and APDRP. Increase in fund allocation for Defence and renewable energy is also likely.
Cement: We do not expect any change in excise duty. The thrust on infrastructure and affordable housing schemes, along with a likely increase in the deduction limit for interest on home loans, would be positive for the cement sector.
Construction: The thrust on infrastructure spending, with a sharper focus on the public-private partnership (PPP) model, clarity on takeout financing and increase in investment limit of infrastructure bonds would be positive for all construction companies.
Consumer: We expect abatement on excise duty to be reduced, and a 5 per cent hike in excise duty on cigarettes. A roadmap for the GST is also expected to be announced. A lower abatement rate would result in lower EBITDA margins. Measures to curb food prices and greater allocation for rural employment schemes would drive consumption.
Financial Services: Key measures expected to impact the sector are the government’s fiscal deficit position, withdrawal of interest subventions, nod for raising long-term tax-free infrastructure funds by banks and reduction in the lock-in period for fixed deposits qualifying for tax deductions. Companies expected to benefit are all banks and infrastructure finance companies (REC, PFC, IDFC).
Metals & Mining: We do not expect the government to hike excise duty on metals due to the current inflationary pressures. We expect the Budget to be positive for steel, while iron ore miners may be hit.
Oil & Gas: The budget may offer some relief to oil PSUs as the government may announce measures to protect the sector from the spiralling crude price, similar to what it did during the 2008 crude-price spike. We expect the government to announce reduction of i) customs duty on crude and oil products and ii) excise duty on petrol/diesel to help in reducing sector under-recoveries. Further, to boost gas consumption, government may announce a "declared goods" status for natural gas apart from reducing customs duty on LNG. The government might also consider long-pending demands of the sector, which include i) clarity on a seven-year tax holiday for natural gas, ii) flexibility on a seven-year tax holiday and iii) providing infrastructure status to the sector.
Pharmaceuticals: We expect the difference between excise duty on formulations and APIs to come down. This would be marginally positive, as excise duty is generally passed on. Continuation of the 200 per cent weighted deduction on R&D spend would be positive for the sector. The hospital industry may benefit if infrastructure status is provided.
Property: We expect the budget to be largely neutral for the property sector. Surprises could come in the form of increasing priority-sector housing loans to Rs 3m (from Rs 2m now) and grant of infrastructure status. In addition, the government’s continuing thrust on the ‘Housing-For-All’ program and emphasis on affordable housing could result in measures to boost the sector.
Technology: We do not expect the Software Technology Parks of India (STPI) clause to be extended. Hence, neutral for India’s IT Services sector as this has already been factored in. However, we expect the government to increase spending on education, e-governance and Defence.
Telecom: We do not expect Union Budget FY12 to have any direct significant impact on the telecoms sector, as most key issues for the industry (spectrum policy, regulatory levies, M&A) are likely to be addressed outside the Budget, possibly as part of the National Telecoms Policy, 2011.
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