INSTITUTIONAL EQUITY RESEARCH India...

INSTITUTIONAL EQUITY RESEARCH

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India Strategy

Focus on job creation, rural economy, and GST INDIA | FY18 PRE‐BUDGET EXPECTATIONS

30 January 2017

• Spending focus on the rural economy and infrastructure to continue; job creation will

be on the top of the agenda • Announcements on GST implementation will be in the limelight • While consumption may not receive a big boost, household investment (primarily

housing) should receive impetus, as construction activity is one of the biggest job creators

• Expectations from this budget are at an all‐time high. Almost every section of society is counting on meaningful tax‐rate cuts, but we find limited scope for these. The government is likely to maintain its fiscal consolidation course and expect fiscal deficit in FY18 to come down to 3.2%.

Key expectations and plays for the upcoming budget: Rural reforms will be top‐of‐mind, followed by affordable housing: Given the government’s multi‐fold agri agenda – improving irrigation, increasing farmer income, higher allocation, and boosting lending to farmers – we expect several reforms in the agriculture sector in irrigation, insurance, employment, and housing. We expect 30% higher allocation for micro irrigation under the Pradhan Mantri Krishi Sinchai Yojana (PMKSY) and higher allocation towards Swachh Bharat Abhiyan and rural education. Separately, we foresee several announcements on affordable housing, including interest incentives for borrowers and increase in the refinancing quantum for affordable housing finance. Our picks based on this theme – Escorts, Hero Motocorp, Dabur, cement companies, Sintex Industries, and Mahindra & Mahindra Finance Continued focus on capital spending: Just like FY17, private capital spending is not likely to make a comeback in FY18, and could actually be worse off, considering that capacity utilisation across industries continues to remain low. To encourage private capital expenditure, the government will have to keep infrastructure spending at elevated levels. We expect increased allocation for roads, ports, and urban infra and higher allocation and visibility for flagship programs like 'Smart Cities' and 'Inland Waterways'. Our preferred plays from this space – NCC, VA Tech Wabag, IRB Infrastructure, and PNC Infratech Watch out for GST: GST will be implemented this fiscal and the finance minister has been indicating an ambitious target of 1st July in his recent media interactions. GST implementation will widen the tax base and will provide a significant push for improving the tax/GDP ratio. Indications about timely implementation of GST will be a significant positive for – automobile, building materials, FMCG, media, and retail sectors Other developments to watch for on taxes: We expect the corporate tax structure to be (eventually) streamlined at 25% vs. 30%, but if it happens in the current budget, it will be a significant positive. Service tax rate is likely to be raised by 2‐3% which will put pressure on the services sector with the Telecom sector seeing a significant impact. For oil & gas, there should be some relief in upstream cess and service tax/excise duty exemptions for natural gas products. Key plays are – Petronet LNG, Gujarat Gas, GSPL We also see increased tax incentives to promote renewable energy as well as wastewater treatment projects. Increase in customs duty for aluminium and copper will help key domestic players. Key plays are – Nalco, Hindalco, and Vednanta

Naveen Kulkarni (+ 9122 6667 9947) [email protected] Anjali Verma (+ 9122 6667 9969) [email protected] India Research Team


INDIA STRATEGY PRE BUDGET EXPECTATIONS

Economist’s view The union budget (on 1st February 2017) will be contingent on: (1) the quantum of savings for the government from lower currency liability after demonetisation, (2) whether RBI can legally transfer these savings to the government, and (3) usage of SUUTI funds. Savings to the government (from demonetisation) could be to the extent of Rs 200bn to Rs 1.5tn. As economic growth (consumption, production, jobs) has been hit hard by demonetisation, the private sector is not in a condition to revive growth; the central government will have to stimulate economic growth most aggressively. Limited funds (no tangible financial gains from demonetisation) is a constraint, so leaning on SUUTI funds (quality spending) will be a good idea in FY18 to boost economic and political growth. On a base‐case scenario, we assume the RBI’s/government’s currency liability to be lower by Rs 500bn for FY18. Due to nominal/no gains, FY18’s union budget is likely to be a regular one – with spending focus persisting on the rural sector and infrastructure, no meaningful income tax rebates, lower tax revenue growth, and muted capex. If a range is introduced for fiscal deficit (a beneficial scenario for the government as it will create room for giveaways and capex), FY18 fiscal deficit should be 3.0‐3.2%/3.4%. Wider the range, more qualitative will be the spending. Five scenarios for the government and the budget: 1. Handsome gains from demonetisation (no need for SUUTI dilution): This will lead

to a higher spending on rural sector (housing, roads), infrastructure (roads, railways), other capex, income tax rebates; no need for SUUTI dilution.

2. Fair gains from demonetisation + SUUTI dilution: Same as 1. 3. Fair gains from demonetisation – SUUTI dilution: Higher rural and road spending,

no income tax rebates, poor capex. 4. Minimal gains from demonetisation + SUUTI: Higher spending on rural,

infrastructure, minimal income tax rebates, tepid capex. 5. Minimal gains from demonetisation – SUUTI: Rural spending, usual infrastructure

(not defense) spending, no tax rebates, poor capex. No boost for consumption and investment: Government will not have the largesse to offer meaningful income tax rebates (that can boost consumption) as well as spend on capital expenditure. We have been of the view that public capex (states + centre) will be weak(ish) for next two years (click here). FYTD plan capital expenditure is down by 13% yoy, partially impacted by demonetisation and the poor spending capacity of the ministries. State governments have been boosting capex substantially, but this is likely to weaken due to 7th PC implementation over the next two years. High base to impact tax revenue growth. Hopefully, bounty from higher petroleum excise duty can be retained: FY17 gross tax collection is likely to be higher than budgeted at 18% yoy vs. 11.7% BE, led by higher excise and service tax collections; corporate tax collections will fall short of initial estimates. Economic activity is likely to be muted in 1HFY18 due to demonetisation, impacting FY18 tax collections (we have assumed FY18 growth pace to be better than FY17, except for income tax due to a high base in FY17). We do not anticipate any meaningful change in tax‐GDP ratio for FY18 (at 11.3% vs. 11.4% for FY17E). We have built‐in a 2% rise in service tax rate (to align with GST) and no reduction in petroleum excise duty rate. Expectations for FY18 (assuming nominal GDP growth of 12% vs. 11% in FY17) • Net tax revenue to rise by 11% vs. 17.6% in FY17. • Disinvestment (Rs300bn) + SUUTI (Rs 300bn) flows at Rs 500‐600bn. • Subsidy outgo at 1.5% of GDP; lower than 1.6% for FY17.



• Plan expenditure to increase by 15.4% vs. 12% in FY17 – at 3.7% of GDP, it is in line with FY17.

• Plan capital expenditure to rise by 10% – stable at 0.8% of GDP. • Fiscal deficit to fall by 1% – 3.2% of GDP vs. 3.5% in FY17.

Central government fiscal account

____________Rs Bn____________ __________YoY Growth__________ __________% of GDP__________

GDP at 7.0%

GDP at 7.5%

GDP at 8.0%

GDP at 7.0%

GDP at 7.5%

GDP at 8.0%

GDP at 7.0%

GDP at 7.5%

GDP at 8.0%

FY17BE FY17PC FY18E FY18E FY18E FY17BE FY17PC FY18E FY18E FY18E FY17BE FY17PC FY18E FY18E FY18ENominal GDP 150650 150594 168178 168933 169689 11.0 10.9 11.7 12.2 12.7 Revenue receipts 13770 13921 15086 15686 16597 14.2 15.4 8.4 12.7 19.2 9.1 9.2 9.0 9.3 9.8Tax (net) 10541 11142 12057 12357 12568 11.2 17.6 8.2 10.9 12.8 7.0 7.4 7.2 7.3 7.4Non ‐ tax 3229 2779 3029 3329 4029 24.9 7.5 9.0 19.8 45.0 2.1 1.8 1.8 2.0 2.4Capital receipts 6010 5775 6137 6045 5933 3.8 ‐0.3 6.3 4.7 2.7 4.0 3.8 3.6 3.6 3.5Recovery of loans 106 106 108 108.0 108.0 ‐43.8 ‐43.9 1.9 1.9 1.9 0.1 0.1 0.1 0.1 0.1Other reciepts (mainly PSU disinvestment) 565 300 500 600.0 700.0 123.2 18.5 66.7 100.0 133.3 0.4 0.2 0.3 0.4 0.4Borrowings and other liabilities 5339 5369 5529 5337 5125 ‐0.2 0.3 3.0 ‐0.6 ‐4.5 3.5 3.6 3.3 3.2 3.0Total receipts 19781 19696 21223 21731 22530 10.8 10.3 7.8 10.3 14.4 13.1 13.1 12.6 12.9 13.3Non‐plan expenditure 14280 14346 15363 15559 15842 9.2 9.7 7.1 8.5 10.4 9.5 9.5 9.1 9.2 9.3Revenue A/c 13274 13340 14363 14509 14692 9.5 10.0 7.7 8.8 10.1 8.8 8.9 8.5 8.6 8.7 Interest payments 4977 4977 5475 5475 5475 12.4 12.4 10.0 10.0 10.0 3.3 3.3 3.3 3.2 3.2 Defence 1628 1628 1823 1872.2 1904.8 13.6 13.7 12.0 15.0 17.0 1.1 1.1 1.1 1.1 1.1 Subsidies 2504 2420 2525 2580 2690 ‐2.9 ‐6.1 4.3 6.6 11.2 1.7 1.6 1.5 1.5 1.6 Food 1348 1348 1400 1450.0 1500.0 ‐3.3 ‐3.3 3.9 7.6 11.3 0.9 0.9 0.8 0.9 0.9 Fertilisers 700 700 700 700.0 700.0 ‐3.4 ‐3.4 0.0 0.0 0.0 0.5 0.5 0.4 0.4 0.4 Petroleum 269 185 235 240.0 300.0 ‐10.2 ‐38.3 27.0 29.7 62.2 0.2 0.1 0.1 0.1 0.2 Others 187 187 190 190.0 190.0 17.0 17.3 1.6 1.6 1.6 0.1 0.1 0.1 0.1 0.1Capital A/c 1006 1006 1000 1050.0 1150.0 5.4 5.3 ‐0.6 4.4 14.3 0.7 0.7 0.6 0.6 0.7Plan expenditure 5500 5350 5860 6172 6688 15.3 12.1 9.5 15.4 25.0 3.7 3.6 3.5 3.7 3.9Revenue A/c 4036 4100 4510 4797.0 5125.0 20.5 22.4 10.0 17.0 25.0 2.7 2.7 2.7 2.8 3.0Capital A/c 1464 1250 1350 1375.0 1562.5 2.9 ‐12.1 8.0 10.0 25.0 1.0 0.8 0.8 0.8 0.9Total revenue expenditure 17310 17440 18873 19306 19817 11.8 12.7 8.2 10.7 13.6 11.5 11.6 11.2 11.4 11.7Total capital expenditure 2470 2256 2350 2425 2713 3.9 ‐5.1 4.2 7.5 20.2 1.6 1.5 1.4 1.4 1.6Total expenditure 19781 19696 21223 21731 22530 10.8 10.3 7.8 10.3 14.4 13.1 13.1 12.6 12.9 13.3Fiscal deficit 5339 5369 5529 5337 5125 ‐0.2 0.3 3.0 ‐0.6 ‐4.5 3.5 3.6 3.3 3.2 3.0

Source: India Budget, PhillipCapital India Research Gross tax revenue

_______________Rs Bn_______________ ____________YoY Growth____________ ____________% of GDP____________ Weak Base‐case Strong WeakBase‐case Strong WeakBase‐case Strong

FY17BE FY17PC FY18E FY18E FY18E FY17BE FY17PC FY18E FY18E FY18E FY17BE FY17PC FY18E FY18E FY18EGross Tax Revenue 16309 17241 18650 19113 19439 11.7% 18.1% 8.2% 10.9% 12.7% 10.8% 11.4% 11.1% 11.3% 11.5%Direct Tax 8471 8312 8860 9098 9156 12.6% 10.5% 6.6% 9.5% 10.2% 5.6% 5.5% 5.9% 6.0% 6.1%Personal Income Tax 3532 3590 3949 4093 4057 18.1% 20.0% 10.0% 14.0% 13.0% 2.3% 2.4% 2.6% 2.7% 2.7%Corporation Tax 4939 4722 4911 5005 5100 9.0% 4.2% 4.0% 6.0% 8.0% 3.3% 3.1% 3.3% 3.3% 3.4%Indirect tax 7797 8888 9790 10016 10282 10.8% 26.3% 10.1% 12.7% 15.7% 5.2% 5.9% 6.5% 6.7% 6.8%Excise Duty 3187 4100 4305 4387 4510 12.2% 44.3% 5.0% 7.0% 10.0% 2.1% 2.7% 2.9% 2.9% 3.0%Customs Duty 2300 2228 2362 2429 2495 9.8% 6.3% 6.0% 9.0% 12.0% 1.5% 1.5% 1.6% 1.6% 1.7%Service Tax 2310 2560 3123 3200 3277 10.0% 21.9% 22.0% 25.0% 28.0% 1.5% 1.7% 2.1% 2.1% 2.2%

Source: CGA, PhillipCapital India Research FYTD tax revenue

Nov‐16, (Rs Bn) YoY Apr‐Nov'16 (Rs Bn) YoY Apr‐Nov'15 YoY FY17BE YoYGross tax revenue 1144 54.6 9333 21.5 7678 20.8 17,241 18.1%Corporation tax 149 164.3 2223 9.0 2040 8.2 4,722 4.2%Income tax 168 40.7 1867 20.9 1543 10.1 3,590 20.0%Customs duty 205 20.0 1485 6.8 1391 15.7 2,228 6.3%Excise duty 329 43.4 2136 46.0 1463 70.2 4,100 44.3%Service tax 219 44.3 1468 27.1 1155 24.4 2,560 21.9%

Source: CGA, PhillipCapital India Research



FY17 fiscal account (Apr‐Nov 2016) (Rs bn) 2011‐12 2012‐13 2013‐14 2014‐15 2015‐16 2016‐17 YoY MoMRevenue Receipts 3,928 4,458 5,027 5,417 6,381 7,961 24.8 14.1% of BE 49.7% 47.6% 47.6% 45.5% 55.9% 57.8%Tax Revenue 3,205 3,696 3,962 4,133 4,649 6,212 33.6 17.2% of BE 48.20% 47.90% 44.80% 42.30% 50.50% 58.90%Non‐tax Revenue 723 762 1,065 1,283 1,732 1,750 1.0 4.2% of BE 57.70% 46.30% 61.80% 60.40% 78.10% 54.20%Non‐debt capital Receipts 145 89 89 74 207 326 57.1 11.0% of BE 26.4% 21.4% 13.5% 10.0% 78.1% 48.5%Total Receipts 4,073 4,547 5,116 5,490 6,588 8,287 25.8 13.9% of BE 48.2% 46.5% 45.6% 43.4% 53.9% 57.4%Non‐Plan Expenditure 5,394 6,243 7,302 7,805 8443 9225 9.3 13.9% of BE 66.1% 64.4% 65.8% 64.0% 64.3% 64.6%On Revenue Account 4,854 5,663 6,615 7,212 7,832 8,651 10.5 12.7% of BE 66.2% 65.4% 66.6% 64.7% 64.9% 65.2%of which interest payments 1,659 1,829 2,144 2,327 2,526 2,667 5.6 17.6% of BE 61.9% 57.2% 57.8% 54.5% 55.4% 54.1%On Capital Account 540 580 687 593 611 574 ‐6.1 35.8% of BE 65.3% 55.6% 58.7% 56.3% 57.6% 57.0%Plan Expenditure 2,213 2,434 2,910 2,937 2,980 3,642 22.2 6.7% of BE 50.1% 46.7% 52.4% 51.1% 64.1% 66.2%On Revenue Account 1,878 1,990 2,342 2,315 2,002 2,792 39.5 8.0% of BE 51.7% 47.3% 52.8% 51.0% 60.7% 69.2%On Capital Account 335 444 568 621 978 850 ‐13.1 2.7% of BE 42.9% 44.1% 50.7% 51.2% 72.3% 58.0%of which loans disbursed 95 92 120 151 165 251 51.7 3.5% of BE 48.1% 47.8% 60.9% 66.0% 71.6% 92.8%Total Expenditure 7,607 8,676 10,212 10,742 11,423 12,867 12.6 11.8% of BE 60.5% 58.2% 61.3% 59.8% 64.3% 65.0%Fiscal Deficit 3,534 4,129 5,096 5,251 4,835 4,580 ‐5.3 8.1% of BE 85.6% 80.4% 93.9% 98.9% 87.0% 85.8%Revenue Deficit 2,805 3,195 3,930 4,111 3,453 3,482 0.8 6.2% of BE 91.3% 91.2% 103.5% 108.6% 87.5% 98.4%Primary Deficit 1,875 2,301 2,951 2,925 2,309 1,913 ‐17.2 ‐2.7% of BE 129.4% 118.7% 171.8% 280.8% 232.1% 464.0%

Source: Budget document, PhillipCapital India Research



What the budget can unveil for various sectors Sector Expectation from the budget Impact (Positive/Negative/Neutral) Likelihood Maximum impact Automobile

Incentivise replacement of old vehicles (+15)

Positive for CV players, as government‐backed incentives would encourage fleet owners to replace old vehicles and boost replacement‐led demand

High Ashok Leyland, Tata Motors

At least 20% anti‐dumping duty on tyres

Positive for domestic players. Tyres can then be imported at a duty rate of 0‐10% depending on trade agreements. Currently, duty on natural rubber imports is 20%, putting local players at a disadvantage while Chinese players consistently gain market share

Medium JK Tyres, MRF, Apollo Tyres, Ceat

Additional taxes on diesel engines given the backdrop of large diesel bans in few states, and focus on environment

Negative Low M&M

Concessions for hybrid/electric vehicles to continue

Positive. Several concessions were given for hybrid/electric vehicles last year. These should continue if not increase

High Maruti

Increase in agricultural support/credit Positive, as higher allocation under the scheme would help spur rural demand

High Hero Motocorp, M&M, Bajaj Auto, Escorts

Agri Multi‐fold agenda of improving irrigation, increasing farmer income, higher allocation, and boosting the lending to the farmers. Higher allocation to crop insurance and soil card projects

Positive for agri companies – both input and output

High Kaveri, Chamba, Coromandel Fertiliser, UPL

Banking

Higher allocation towards capitalisation of public sector banks

Positive; will help in cleaning NPAs and improving loan growth

High positive for PSU banks

Increase in the tax deduction limits on home loan interest U/S 24 (current limit at Rs 200,000) and on the principal amount U/S 80C (current limit at Rs 150,000)

Will boost loan growth of HFCs and banks High Positive for housing finance and high‐CASA banks

Incentives for using cashless and digital channels for payment

Positive for banks’ operating efficiency High Positive for banks

Introduction of additional deduction on investment in infrastructure bonds

Positive, as it would boost capital expenditure in the infrastructure sector

Medium Positive for corporate banks

Interest incentive for borrowers and increase in refinancing quantum for affordable housing finance

Positive, as it would boost disbursement in the affordable segment

High HFCs in the affordable segment

Building materials

Increased allocation in schemes such as Housing for All, Smart Cities, Swachh Bharat Abhiyan, and other infrastructure development schemes

Positive High Kajaria, Somany Ceramics, AGL, Century Ply, Greenply, Greenlam,Uniply

Cement 1) smooth and early alignment to GST 2) Lower taxation brackets with gst for cement industry 3) reduction in transaction fees for digital transactions 4) increased spending on infrastructure 5) incentives to industry for usage of alternate fuels 6) reduction in import duty of fuel 7) faster laws for execution of projects and stricter penalties for delays in execution 8) stricter law framework for cheque returns due to insufficient funds 9) increase in disposable incomes in hands of consumers 10) reduction in freight surcharges during peak season

Positive Medium to High

Positive for the sector as a whole



Sector Expectation from the budget Impact (Positive/Negative/Neutral) Likelihood (high/medium/low)

Stock(s), which will see the maximum impact

Capital goods

Higher allocation to capital spending led by railways, roads, and AMRUT projects

Positive High L&T, Siemens, KEC, ABB, Cummins, VA Tech Wabag

15% increase in the defence budget Positive High BEL, BEML, L&T, Astra Microwave

Extension of incentives to wind power (GBI @ Rs 0.5/kWh and AD @ 80% vs. 40%) expiring by FY17, or VGF to discoms for procuring wind power

Positive High Inox Wnd, Suzlon

Capital goods

Higher allocation to IREDA & SECI to support growth of renewable power

Positive High Inox Wnd, Suzlon

30% higher allocation for micro irrigation under PMKSY

Positive High Pump companies, KSB, KBL and Shakti Pumps

Increase in spending on the Ganga clean‐up

Positive High Va Tech Wabag, L&T, ENGR

Diagnostics Enhancing tax exemption on preventive health check‐ups to a maximum of Rs 20,000 u/s 80‐D from current Rs 5,000 Nil customs duty for medical cyclotrons and other devices

Positive for organised diagnostics chains, as the total number and value of tests would improve

Medium Thyrocare and Dr Lal Pathlab

Electrical Rural Electrification ‐ increased allocation / accelerated spending on Deendayal Upadhyaya Gram Jyoti Yojana

Positive Medium Havels, V‐guard, Bajaj Electrical, CG Consumer, KEI

FMCG

Increase in excise duty on cigarettes by 10‐15%

Negative for cigarette manufacturers. However, we believe that because of ITC’s strategy of downtrading customers to 64mm from 69mm, it will be able to pass on the excise‐duty hike to consumers and maintain EBIT and volume growth

High ITC

Lower custom duty on gold (currently at 10%)

Will lead to fall in smuggling and unaccounted gold, which will help level the playing field and be positive for organised players

High Titan

Rural demand stimulus Will help increase demand for consumer goods; positive for all FMCGs

High HUL, Emami, Dabur

Stimulus to drive cashless transactions Increase in cashless transactions will lead to improvement in ticket size and purchase frequency for discretionary items

Medium HUL, Emami, Dabur, Jubilant Foodworks

Healthcare

Maintaining weighted deduction on capex (u/s35AD) by hospitals (with at least 100 beds that have started operation on or after 1st April 2012) at 150% vs. 100% guided for FY18 in the previous budget; extension of this benefit to hospitals with 50 beds

Positive for leading healthcare peers who are expanding their network hospitals and trying to connect the interior areas through technology

Medium Apollo Enterprises, HCG, Narayan Hudyalay, Fortis, etc. will be the key beneficiaries

Special deduction for investment on digitisation, i.e., maintaining electronic health record (250% of spend), accreditation (100%), and for remote care covering tele‐medicines (250%)



Sector Expectation from the budget Impact (Positive/Negative/Neutral) Likelihood

(high/medium/low)


Infra

Increased allocation – with special focus on roads, ports, and urban infra

Positive High EPC players (NCC, PNC, J Kumar, KNR, ITDC), IRB, Ashoka, Sadbhav, Adani Ports

Removal of MAT/DDT for BOT projects and/or SEZ units

Positive Low BOT players (IRB, Ashoka, Sadbhav), Adani Ports

Increased allocation and visibility on flagship programs like 'Smart Cities' and 'Inland Waterways'

Positive High EPC players (NCC, Ahluwalia Contracts), Adani Ports

Infra

Provision for group tax filing for infrastructure companies with multiple SPVs

Positive Medium BOT Players ‐ IRB, Ashoka, Sadbhav, Adani Ports

Extension of 80‐IA benefit to up‐gradation/extension of the existing infrastructure facility

Positive Medium NCC, JKIL, KNR, PNC, HCC, Sadbhav, Ashoka

IT Services

Withdraw or reduce the rate of minimum alternate tax for units in SEZs

Positive Low Infosys

Provide boost to Engineering Research & Development (ERD) activities with incentives like weighted deduction for R&D expenses and additional depreciation on investments especially with a 'Make in India' program focus.

Positive Medium HCL TECH, Cyient, LTTS, KPIT

Media Reduction in custom duty for importing of STBs

Positive for DTH and cable companies as it will reduce the procurement costs for STBs

Low Dish TV

Reduction in license fees to 6% for the DTH industry from currently 10% Grant of infrastructure status to the cable industry to reduce lending rates for the industry Implementation of GST or inclusion of DTH / cable TV services in the negative list of service taxes

Metals

Decrease in customs duty for coking coal (2.5% now)

Positive for steel companies, as they rely largely on imported coking coal – the price of which has increased substantially

High JSW Steel, SAIL & Tata Steel

Decrease in customs duty for nickel (5% now)

Positive for stainless steel producers, as the price of nickel has increased significantly in 2016

Medium Marginally positive for SAIL

Increase in customs duty for unwrought aluminium (7.5% now)

Positive for aluminium producers, as higher duty will result in better domestic realisations and volumes

High Nalco, Hindalco, Vedanta

Increase in customs duty for copper (5% now)

Positive for copper producers, as higher duty will result in better domestic realisations & volumes

High Hindalco & Vedanta

Decrease in coal cess by Rs 200 Positive for aluminium producers Low Nalco, Hindalco & Vedanta

Midcap

Higher focus on solar power to promote renewable energy. Tax benefit to water and waste‐water treatment projects

Positive for EPC and equipment players Medium Praj, Pennar, PEBS

Higher allocation and benefit for rural housing and low‐cost housing, clean India, and rural education

Positive for prefabricated players High Sintex



Sector Expectation from the budget Impact (Positive/Negative/Neutral) Likelihood

(high/medium/low)


NBFC

Clarity on scrappage policy Positive for CV financiers, as buyers have postponed purchases due to uncertainty on the vintage and benefit on scrappage

High Shriram Transport/ Cholamandalam

Cut in import duty on gold Negative for gold finance NBFCs, as the lending rate per gram will decline

Medium Manapurram Finance/ Muthoot Finance

Various reforms in the agriculture sector in irrigation, insurance, employment, housing

Positive for companies with high rural exposure, as it will improve cash flow in the rural economy

High Mahindra & Mahindra Finance

Oil & gas Reduction of ad valorem oil production cess from 20% to 8%

Positive for oil upstream players Low to medium

ONGC, Oil India, Cairn India

Service tax exemption on E&P Positive for oil upstream players Low ONGC, Oil India, Cairn India

Treating natural gas as mineral oil for tax holiday purposes

Positive for gas upstream players Low ONGC, RIL

Service tax exemption on LNG imports and regasification

Positive for gas importers and distributors Medium Petronet LNG, Gujarat Gas, GSPL, GAIL, IGL, MGL

Exemption of 5% customs duty on LNG imports for all consuming sectors

Positive for gas importers and distributors Medium Petronet LNG, Gujarat Gas, GSPL, GAIL, IGL, MGL

Declared goods status for natural gas Positive for gas importers and distributors Low to medium

IGL, Gujarat Gas, MGL, GAIL, GSPL, Petronet LNG

Excise duty exemption in CNG Positive for CGD companies Low to medium

IGL, MGL, Gujarat Gas

Section 35AD income tax deduction for CGD

Positive for CGD companies Low to medium

IGL, MGL, Gujarat Gas

Inclusion of GST on crude, auto‐fuels, and natural gas and its derivatives

Positive for OMCs, upstream, and gas players

Low IOCL, BPCL, HPCL, ONGC, Oil India, IGL, Gujarat Gas etc

Reduction of excise duty on ATF to 8% from 14%

Positive for airlines and OMCs in terms of demand

Low to medium

Airlines, IOCL, BPCL, HPCL, RIL

Reduction of excise duty on auto fuels Sentimentally positive for OMCs Low to medium

IOCL, BPCL, HPCL

Imposition of customs duty on crude and products

Neutral to positive for refiners, positive for offshore oil producers

Medium IOCL, BPCL, HPCL, MRPL, CPCL, RIL, ONGC

Mission mode targets for expansion of natural gas usage

Positive for gas distributors High IGL, Gujarat Gas, MGL, GAIL, GSPL, Petronet LNG

CBM gas pricing and hike Positive for gas upstream players Medium RIL, ONGC Pharma Restoration of weighted deduction on

R&D (u/s 35(2AB)) to 200% from current 150%, and extension of this benefit to clinical trial expenses (for ones that are outsourced)

Positive for leading pharma peers as they depend on outsourced services

Medium Sun Pharma, Lupin, Dr Reddy, will be key beneficiaries



Sector Expectation from the budget Impact (Positive/Negative/Neutral) Likelihood (high/medium/low)


Power

Extension of sunset clause for power plants under Sec 80‐IA beyond FY17

Positive Low Power generation companies

‘Tax consolidation regime’, especially for road and power sectors. Will allow set‐off of losses/MAT credit from one Special Purpose Vehicle (SPV) against profits/tax of another SPV

Positive Low Private power companies

Roll back of the increase in clean‐energy cess (was raised to Rs 400/tn from Rs 200/tn in the last budget)

Positive Low Power generation companies

Focus on the T&D scheme led by higher allocation to Deendayal Upadhyaya Gram Jyoti Yojana (DDUGY) and Integrated Power Development Scheme (IPDS)

Positive High PGCIL, and T&D equipment companies

Transportation

Financial incentive for costal shipping Positive for container movement and coastal shipping players

High SCI, Shreyas Shipping, Mercator lines, Dredgign corporation, Concor, Gateway Distriparks, ABG shipyard,

Tonnage tax benefit on the profit from the sale of a ship

Positive for shipping companies that buy and sell ships as their primary business Tonnage tax benefit will help to built domestic shipping capacity

Low

Shipping services are blocked into the CENVAT chain; therefore they are unable to pass on service tax, which adds to the cost of operations. The Industry has requested a zero rating

Positive for consumers as it will reduce cost of EXIM trade

High

Shipbuilding subsidy to promote "Make in India" and employment

Positive, will enable companies to compete with international players and generate employment

Medium Shipbuilding companies

New dredging policy for ports and inland waterways

Positive Medium Ports and dredging players

Increased allocation to DMICDC and Sagarmala projects

Positive for logistics and shipping players. To support Make in India and reduce logistics’ cost of trade

High

Increase in visa on arrival to more countries, reduction on duties on ATF for domestic travel

Positive for aviation and hospitality, as the government is promoting tourism and aviation

High Indigo, Spicejet, Jet Airways

Telecom

Increase of service tax from existing 15% to 16‐18%

Negative for Telecom service providers High Bharti Airtel, Idea Cellular

Govt may re‐acution 700MHz band of spectrum in FY18, hence it may announce reduction of base price of 700MHz band

Source: PhillipCapital India Research Estimates



Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%

SELL <= ‐15% Target price is less than or equal to ‐15%.

Contact Information (Regional Member Companies)

SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 RafflesCityTower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA: Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG: Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN: Phillip Securities Japan, Ltd 4‐2 Nihonbashi Kabutocho, Chuo‐ku

Tokyo 103‐0026 Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141

www.phillip.co.jp

INDONESIA: PT Phillip Securities Indonesia ANZTower Level 23B, Jl Jend Sudirman Kav 33A,

Jakarta 10220, Indonesia Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809

www.phillip.co.id

CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, OceanTower Unit 2318

Shanghai 200 001 Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940

www.phillip.com.cn

THAILAND: Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, VorawatBuilding, 849 Silom Road,

Silom, Bangrak, Bangkok 10500 Thailand Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921

www.phillip.co.th

FRANCE: King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance

75008 Paris France Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017

www.kingandshaxson.com

UNITED KINGDOM: King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street

London, EC4N 6AS Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835

www.kingandshaxson.com

UNITED STATES: Phillip Futures Inc. 141 W Jackson Blvd Ste 3050

The Chicago Board of TradeBuilding Chicago, IL 60604 USA

Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA: PhillipCapital Australia Level 10, 330 Collins Street

Melbourne, VIC 3000, Australia Tel: (61) 3 8633 9800 Fax: (61) 3 8633 9899

www.phillipcapital.com.au

SRI LANKA: Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha,

Colombo 2, Sri Lanka Tel: (94) 11 2429 100 Fax: (94) 11 2429 199

www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

Management(91 22) 2483 1919

Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946(91 22) 6667 9735

Research IT Services Pharma & Speciality Chem

Dhawal Doshi (9122) 6667 9769 Vibhor Singhal (9122) 6667 9949 Surya Patra (9122) 6667 9768Nitesh Sharma, CFA (9122) 6667 9965 Shyamal Dhruve (9122) 6667 9992 Mehul Sheth (9122) 6667 9996Banking, NBFCs Infrastructure StrategyManish Agarwalla (9122) 6667 9962 Vibhor Singhal (9122) 6667 9949 Naveen Kulkarni, CFA, FRM (9122) 6667 9947Pradeep Agrawal (9122) 6667 9953 Deepak Agarwal (9122) 6667 9944 Aashima Mutneja (9122) 6667 9764Paresh Jain (9122) 6667 9948 Logistics, Transportation & Midcap TelecomConsumer & Retail Vikram Suryavanshi (9122) 6667 9951 Naveen Kulkarni, CFA, FRM (9122) 6667 9947Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Media Manoj Behera (9122) 6667 9973Jubil Jain (9122) 6667 9766 Manoj Behera (9122) 6667 9973 TechnicalsPreeyam Tolia (9122) 6667 9950 Metals Subodh Gupta, CMT (9122) 6667 9762Cement Dhawal Doshi (9122) 6667 9769 Production ManagerVaibhav Agarwal (9122) 6667 9967 Yash Doshi (9122) 6667 9987 Ganesh Deorukhkar (9122) 6667 9966Economics Mid‐Caps & Database Manager EditorAnjali Verma (9122) 6667 9969 Deepak Agarwal (9122) 6667 9944 Roshan Sony 98199 72726Engineering, Capital Goods Oil & Gas Sr. Manager – Equities SupportJonas Bhutta (9122) 6667 9759 Sabri Hazarika (9122) 6667 9756 Rosie Ferns (9122) 6667 9971Vikram Rawat (9122) 6667 9986

Sales & Distribution Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747 Bharati Ponda (9122) 6667 9943Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745Bhavin Shah (9122) 6667 9974Ashka Mehta Gulati (9122) 6667 9934 ExecutionArchan Vyas (9122) 6667 9785 Mayur Shah (9122) 6667 9945

Corporate Communications

Vineet Bhatnagar (Managing Director)

Jignesh Shah (Head – Equity Derivatives)

Automobiles



Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co‐managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the

company(ies) covered in the Research report No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.



Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

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