UNION BUDGET ANALYSIS - Kotak Securities · FEBRUARY 29, 2016 PRIVATE CLIENT RESEARCH Registered...

FEBRUARY 29, 2016

PRIVATE CLIENT RESEARCH

Registered Office: Kotak Securities Limited, 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051.

UNION BUDGET ANALYSIS: FY2016-17Strong on purposeBudget 2016-17 has set a Fiscal Deficit (FD) target of 3.5% of GDP. Webelieve it is based on rational revenue projections, which makes thebudget more 'Achievable'. However, it is also subject to realisation ofone-off revenues like telecom spectrum revenues and divestment. TheFM has focused on sustaining and improving growth rates byproposing a 15% rise in plan expenditure and incorporating the impactof OROP / 7th pay commission. The meagre rise in plan capexexpenditure is disappointing, though there could be higher allocationtowards capex via Internal & Extra Budgetary Resources (IEBR). Planrevenue expenditure is budgeted to rise by 21%. We expect RBI to cutinterest rates by 25-50bps over FY17, which may provide the requiredsupport to the private sector. Markets are likely to stay buoyant, ifexecution matches intent.

The FM has tried to achieve a balance between growth and fiscalconsolidation. Despite the 11% rise projected in overall expenditure and15% rise in plan expenditure, FD is targeted to come down to 3.5% inFY17 from 3.9% in FY16RE. We opine that, the budget has set'achievable' tax revenue targets for FY17. A 12% growth in gross taxrevenues looks within reach, based on a nominal GDP growth of 11%.Telecom spectrum revenues need to be closely monitored, apart fromDivestment target of Rs.565bn (strategic sale of Rs.205bn and divestmentof Rs.360bn).

UNION BUDGET ANALYSIS

UNION BUDGET ANALYSIS

Research Team+91 22 6621 6301

Sectoral impact

Budget Impact Sectors

Positive Agro Chemicals, Banking & NBFCs, Capital Goods, Cement, Construction, Paints, Real Estate, ShippingNeutral Aviation, FMCG, Information Technology, Media, Metals & Mining, Pharmaceuiticals, PowerNegative Automobiles, Logistics, Oil & Gas

Source: Kotak Securities - Private Client Research

Disclaimer: We do not have any information other than information available to general public with regard to budget proposals. The industryexpectations are based on information got from sources like respective industry associations, FICCI, CII, companies, media and other public sources. Thisreport contains budget expectations of our experts and its impact on specific sectors and companies, which may or may not come true.

GDP growth

Source: CSO

Inflation (%)

Source: Economic Survey 2016-17

9.5

9.6

9.3

6.7

8.6 8.9

6.7

5.1

6.6

7.4

7.3

4

5

6

7

8

9

10

-6.0

-3.0

0.0

3.0

6.0

9.0

12.0

Union Budget 2016-17 Please see the disclaimer on the last page For Private Circulation 2

February 29, 2016 Kotak Securities - Private Client Research

With the FD number at 3.5% and the net government borrowing budgetedat Rs.4.25trn (v/s 4.40trn in FY16RE), we expect market yield to come downfurther from the current 7.7% levels. This may provide the required supportto the private sector, which has been reeling under low demand and highindebtedness. Government's intention to re-negotiate stuck PPP projectscould bring them back on track. Provision for the banking recapitalization ofRs250bn is similar to FY16, lower than our expectation.

The FM has targeted real GDP growth of 7.6% and a nominal growth of11% for FY17. The Central plan expenditure is targeted to rise by 15% toRs.5.5trn. While revenue expenditure is projected to rise by 21%, plancapital expenditure is budgeted to see a 3% rise, which is slightlydisappointing, though there could be higher allocation to capex throughIEBR. Rural development and some infrastructure sectors, which can alsocreate several jobs, have received significant attention. On the other hand,we understand that, the FM has provided Rs.54.6bn towards OROP andRs.680bn towards 7th Pay Commission outflows. These factors are expectedto provide a boost to growth in times when private sector capex is yet topick up.

The budget has announced the Income Declaration Scheme to bring inhitherto un-disclosed income under the tax net, albeit with overall payout of45% on that income. The budget is also seeking early resolution of disputeson the retrospective taxation issue and the several open income tax cases.These are expected to bring in tax revenues while also furthering the easeof doing business and reducing litigations.

On reforms, apart from the above, there are various announcements likestatutory backing to Aadhar for expanding the DBT regime, legal frameworkfor dispute resolution in PPP projects and public utility contracts, freeingtransport sector from constraints, comprehensive law to deal with resolutionof financial firms, among others. We note that important legislative agendaincluding GST, Bankruptcy Code and Real Estate Bill are pending inParliament. All these are expected to further facilitate ease of doingbusiness, in turn, encouraging private sector capex (interest rate reductionshould also help). The cut in corporate tax rate has come through, but onlyfor smaller companies and new manufacturing entities.

Overall, we believe that, the budget has tried to maintain the fiscaldiscipline, by targeting FD of 3.5%. Growth is expected to come in throughhigher consumption and from priority areas like rural and infrastructuresectors. While there is a shift to demand pull growth, we do not expect it tobe inflationary because of the low capacity utilization levels in the economy.Lack of service tax hike will also restrict inflationary pressures. More privatesector investments will be encouraged by reform initiatives taken outsidethe budget, though.

From the stock market perspective, no change in LT Capital Gains tax rules,is a big relief. Dividend tax in hands of investor (above Rs.1mn) will affecthigh networth investors, while increase of STT on options trades may havean impact on that segment of the markets, though temporary. GAAR will beimplemented w.e.f FY18, which was largely expected. With the major eventout of the way, the markets will likely focus on issues like RBI action andglobal economy. Off-budget action on budget initiatives will sustain theconfidence of the markets over the medium term. Government's ability topass significant legislations in ongoing parliament session would bode wellfor sustained market performance. We expect RBI to reduce rates by 25-50bps in FY17. We believe that, a bottom-up approach will be the bestapproach over this time-frame.



A. FM bats for fiscal rectitude – FD target set at 3.5%The FM has projected a fiscal deficit of 3.5% for FY17, as compared to 3.9%for FY16RE. It is commendable that the FM has stuck to the guided fiscal deficittarget. In fact, the fiscal deficit target of Rs.5.33trn in FY17BE is slightly lowerthan Rs.5.35trn in FY16RE. FD targets for FY18 / FY19 have been kept at 3% ofGDP. The FM has also proposed to constitute a Committee to review the imple-mentation of the FRBM Act and give its recommendations on the way forward.

The deficit is relatively lower because of a slower increase in capital expendi-ture. The impact of 7th Pay Commission and OROP recommendations, have beenlargely incorporated. We believe that, the real GDP growth target has been setat about 7.6% and GDP deflator at 3.5%. Nominal GDP growth is estimated togrow by 11%. We opine that fiscal deficit target is largely achievable. We dobelieve that, the Government will look at IEBR for funding higher levels ofcapex.

7th Central Pay Commission (CPC) and OROP recommendationslargely incorporatedThe FY17 FD target has been set at 3.5%, after incorporating the impact of thepartial implementation of CPC (Rs.680bn, we believe) and OROP (Rs.54.6bn, webelieve) recommendations. We expect, these payouts to support consumptionled GDP growth. FM has transferred 40% of the divisible tax pool (gross taxcollections – custom duty) to the states, as against 32% in FY14. The amount ofgrants has been correspondingly reduced to Rs.2.7tn from Rs.2.9trn in FY16.There is an increase of 13% in amounts transferred to states from Rs.5.1trn toRs.5.6trn in FY17.

Revenue estimatesFM has budgeted for gross tax revenue to increase by 12% to Rs.16.3trn fromRs.14.6tn in FY17 v/s 17% in FY16RE. Large increase in FY16RE was primarilydue to oil bonanza, resulting in over 50% increase in excise revenue in FY16REv/s FY15. Corporate tax revenue is budgeted to increase by 9% v/s 6% achievedin FY16RE. Income tax revenues have been pegged 18% higher over FY16 RE.Based on expectations of 11% nominal growth in FY17 GDP, we opine that,these projections are realistic.

Among indirect taxes, customs duty and excise duty revenues are expected togrow by 10% and 12%, respectively. Excise duties on petrol and diesel wereraised several times in FY16. Service tax revenues are expected to rise by 10%.Indirect taxes are expected to grow by 10.8%, primarily on account of higherexpected economic growth.

Disinvestment of equity in PSUs

Source: Annual Budget Documents

0

100

200

300

400

500



The tax estimates look reasonable, under the assumption of increase in taxcompliance and economic recovery. We also opine that, there could be a shortfall in tax revenue if GDP growth remains subdued. Net tax revenue is budgetedat Rs.10.54tn from Rs.9.47tn in FY16, increase of 11% against estimate of 11%increase in nominal GDP.

Revenue mobilization through disinvestment, dividends and othersNon-tax revenue is budgeted to grow by 25% to Rs.3.2trn from Rs.2.6trn inFY16. Government has budgeted for capital receipts to grow by 4% to Rs.6trnfrom Rs.5.8trn in FY16. FM has budgeted for Rs.565 bn from divestments(Rs.205bn from strategic sale and Rs.360 bn from divestments). We believe gov-ernment will likely raise the said amount, if the public sector general insurancecompanies come out with IPOs next year. Also IDBI’s strategic divestment is ontrack. Government hold 80% stake in IDBI bank, which has market capitaliza-tion of over Rs.110 bn. Although high from last year’s realization of Rs.253 bn,these estimates are achievable under stable market conditions.

FM has budgeted for Rs.1.23trn from dividend income v/s Rs.1.18trn dividendreceived in FY16. CPSE dividend payouts are budgeted to increase by 21% fromRs.443 bn to Rs.539 bn. We opine that government may direct cash rich CPSEsto make special dividend payouts, as was done by NMDC recently. FM has alsobudgeted for revenue mobilization of Rs.100 bn from Gold Bonds.

FM has budgeted for receipt of Rs.989 bn of communication revenues (includingspectrum auction revenues) in FY17 v/s Rs.573bn in FY16. We need to track thisvery closely. Although STT rates on options was increased from 0.017% to0.05%, tax collection from STT has been assumed at FY16RE number ofRs.74bn.

Expenditure estimatesBudget estimates for FY17 show a net increase of Rs.1.92trn in expenditureover the FY16RE. Plan expenditure is budgeted to increase by Rs.730bn, an in-crease of 15% YoY. We view the sharp increase in plan allocation positively.Within this, the capital plan expenditure is expected to rise by just 3%.

Non-plan expenditure is expected to rise by 9% as the subsidy burden is ex-pected to fall by 0.3% YoY to Rs.2.5trn in FY17 (1.5% of GDP). The FM hasbudgeted Rs.269bn as the government’s share of the oil subsidy burden in FY17v/s Rs.300bn in FY16. We understand that, there is no carry forward of subsidyburden from FY16. Food subsidy bill is estimated at Rs.1.34trn in FY17 v/sRs.1.39trn in FY16. Overall, the estimates for subsidies are realistic and we donot expect any major incremental number on the same. Total subsidy burden isRs.2.5trn (1.66% of GDP) in FY17 v/s Rs.2.57trn (1.9% of GDP) in FY16, a cut of23 bps as a percentage of GDP towards subsidy bill.

Trend in Subsidies

(Rs bn) FY12 FY13 FY14 FY15 FY16BE FY16RE FY17BE

Food 728.2 850.0 920.0 1176.7 1244.2 1394.2 1348.4

Total Fertiliser Subsidy 700.1 656.1 673.4 710.8 729.7 724.4 700.0

Indigenous (Urea) fertilisers 202.1 151.3 265.0 382.0 382.0 382.0 0.0

Imported (Urea) fertilisers 137.2 200.0 115.4 122.2 123.0 123.0 0.0

Sale of decontrolled fertiliser with concession to farmers 360.9 304.8 293.0 206.5 224.7 219.4 0.0

Urea Subsidy 0.0 0.0 0.0 0.0 0.0 0.0 510.0

Nutrient based Subsidy 0.0 0.0 0.0 0.0 0.0 0.0 190.0

Petroleum Subsidy 684.8 968.8 853.8 602.7 300.0 300.0 269.5

Interest subsidies 50.5 72.7 81.4 76.3 149.0 138.1 155.2

Other 15.7 23.2 17.8 16.1 15.2 21.4 31.3

Total Subsidies (Rs.bn) 2179.4 2570.8 2546.3 2582.6 2438.1 2578.0 2504.3

Source: Annual Budget 2016-17



Gross market borrowings are pegged at Rs.6trn, net market loans are estimatedat Rs.4.25trn vs Rs.4.4trn in FY16. Lower government borrowing bodes well forthe government bond yields. Public debt is expected to increase toRs.60.3trn from Rs.55.2trn in FY16 (9% increase in indebtedness overFY16RE), which is primarily held internally and only Rs.2.2trn is external. Weexpect G-Sec yield to moderate over the fiscal, along the lines of lower inflationand accommodative monetary policy. Based on our expectations of growth ratefor FY17, we feel that, the deficit targets are achievable. We expect RBI to re-duce rates further by 25-50 bps in FY17.

B. Focus on growth remains

Plan expenditure growth pegged at 15%...

With the private sector laden with high debt and low capacity utilization levels,it is up to the Government to pump up growth. The FM has, indeed, put empha-sis on the same. He has budgeted for a central plan expenditure increase of15% YoY. This compares favourably with the 3% growth in FY16RE.

Plan expenditure


Non-plan expenditure


0%

8%

16%

24%

32%

40%

0

1000

2000

3000

4000

5000

6000 Plan Expenditure (Rs bn - LHS) Growth (% - RHS)

0%

5%

10%

15%

20%

25%

0

4000

8000

12000

16000Non-Plan Exp (Rs bn - LHS) Growth (% - RHS)



…driven by plan revenue expenditureThe 15% growth in plan expenditure is largely driven by plan revenue expendi-ture, which is projected to grow by 21% YoY. Plan capital expenditure is bud-geted to increase by 3% YoY. However, we note that, the plan capital expendi-ture had risen by 35% YoY in FY16RE, whereas the revenue expenditure hadseen a de-growth of 6% over this period. We understand that, the Govern-ment will look at IEBR for further capital spends.

The FM has allocated significant sums to priority areas like agriculture, ruralsector, social sector and infrastructure sector, among others.

Central Plan Outlay by Sectors (Rs. Bn)

FY15 % of Total FY16BE % of Total FY16RE % of Total FY17BE % of Total

Agriculture & Allied Activities 98.0 2.3% 116.6 2.0% 109.4 1.9% 193.9 2.7%

Rural Development* 12.3 0.3% 31.1 0.5% 30.3 0.5% 27.5 0.4%

Irrigation & Flood Control 9.1 0.2% 7.7 0.1% 11.1 0.2% 10.2 0.1%

Energy 1,708.1 40.6% 1,673.4 28.9% 1,715.2 29.4% 2,058.8 29.2%

Industry and Minerals 440.1 10.5% 431.1 7.5% 455.1 7.8% 493.7 7.0%

Transport** 1,005.2 23.9% 1,934.2 33.4% 1,785.0 30.6% 2,298.7 32.5%

Communications 64.4 1.5% 120.3 2.1% 134.5 2.3% 138.1 2.0%

Science Technology & Environment 143.8 3.4% 190.2 3.3% 179.7 3.1% 209.3 3.0%

General Economic Services 167.7 4.0% 203.3 3.5% 386.0 6.6% 466.9 6.6%

Social Services*** 508.6 12.1% 810.2 14.0% 835.4 14.3% 1,002.9 14.2%

General Services 51.6 1.2% 265.6 4.6% 185.5 3.2% 162.5 2.3%

Grand Total 4,208.8 100.0% 5,783.8 100.0% 5,827.1 100.0% 7,062.5 100.0%

Source: Annual Budget Documents; * Includes provision for rural housing but excludes provision for rural roads; ** Includes provision for rural roads; *** Ex-cludes provision for Rural Housing; RE:Revised Estimate; BE:Budget Estimate

Significant amounts have been allocated for the infrastructure sector, especiallyfor roads and railways :

The total central plan outlay for the transportation sector (roads, railways)has been pegged at Rs.2.30trn, as compared to Rs.1.79trn for FY16RE.

Total investment in the road sector, including PMGSY allocation, has beenpegged at Rs.970bn. Nearly 10,000kms of National Highways will beawarded in 2016-17

Amendments will be made in the Motor Vehicles Act to open up the roadtransport sector in the passenger segment for elimination of permit raj

An action plan is proposed to be drawn up for revival of unserved andunderserved airports in partnership with State Governments includingsmaller airports of AAI.

The budget proposes to provide calibrated marketing freedom in order toincentivize gas production from deep-water, ultra deep-water and highpressure-high temperature areas

The government had announced plans to award a total of 10,000kms of road /Highway projects in the current fiscal. Additionally, nearly 50,000kms of Statehighways will be taken up for upgradation to national highways. Till January,government has awarded 7677kms and plans to award remaining projects byMarch 2016. According to data from the ministry of road, transport and high-ways, 3,980kms of roads/highways were constructed during April-December2015, against 2,475kms in the corresponding period of the previous financialyear. National Highways Authority of India (NHAI) plans to add around50,000kms of road network in the next five to six years with an investment po-tential of nearly $250bn. The Government has already committed to increasethe target of road construction to 30 km / day over the next two years, as com-pared to the current average of 3 km / day. Funds of Rs.970bn have been allo-cated to the road sector, including Pradhan Mantri Gram Sadak Yojana.



Some of the major allocations / initiatives for the rural / agriculture sector are :

The allocation for Agriculture and Farmers’ welfare has been pegged atRs.360bn.

Allocation for the rural sector has been pegged at Rs.878bn. On the otherhand, a sum of Rs.385bn has been allocated towards MGNREGS.

For irrigation, a dedicated Long Term Irrigation Fund is planned to be set upin NABARD with an initial corpus of about Rs.200bn. Implementation of 89irrigation projects, which are languishing for a long time, are planned to befast-tracked

Allocation under Pradhan Mantri Gram Sadak Yojana has been increased toRs.190bn, which is expected to connect remaining 65,000 eligible habitationsby 2019.

To reduce the burden of loan repayment on farmers, a provision of Rs.150bnhas been made towards interest subvention

Allocation under Prime Minister Fasal Bima Yojana has been pegged atRs.55bn

A program will be implemented for sustainable management of groundwater resources with an estimated cost of Rs.60bn, through 3 multilateralfunding

Soil Health Card scheme is planned to be extended to all 140mn farmholdings by March 2017.

2,000 model retail outlets of Fertilizer companies will be provided with soiland seed testing facilities during the next three years

A unified Agricultural Marketing e-Platform is to be developed, which willprovide a common e- market platform for wholesale markets

C. Reforms are a corner-stone of the budgetOne of the corner-stones of the budget has been the various reforms whichhave been announced. Initiatives on financial sector reforms, black money, pre-dictive taxation, ease of doing business, DBT, among others, should go a longway in improving the private sector comfort and funding long term goals of theGovernment.

Attracting PPP investments

With a view to attract more private sector funds, the FM had proposed to re-vamp the PPP mode of infrastructure development in the previous budget. Thecurrent budget addresses the dispute resolution mechanism for PPP projects.

A Public Utility (Resolution of Disputes) Bill is proposed to be introducedduring 2016-17 to streamline 16 institutional arrangements for resolution ofdisputes in infrastructure related construction contracts, PPP and publicutility contracts;

Guidelines for renegotiation of PPP Concession Agreements will be issued,keeping in view the long term nature of such contracts and potentialuncertainties of the real economy, without compromising transparency;

A new credit rating system is proposed to be introduced for infrastructureprojects which gives emphasis to various in-built credit enhancementstructures, instead of relying upon a standard perception of risk which oftenresult in mispriced loans.

We believe these will go a long way in assuaging concerns of private playersand will attract more funds to the sector over the medium term.



Clarity on Dividend Distribution Tax on SPVs to REITs and INVITsThe Real estate sector has been demanding removal of dividend distribution taxon the income distributed to REITs from quite some time as DDT was reducingthe effective returns of the investors and was preventing the REITs market toopen up. This was adversely impacting the rate of return for the investor asunder SEBI regulations both the SPV and business trust are obligated to distrib-ute 90% of their operating income to the investors.

DDT exemption on income to be distributed to REITs is expected to be quitepositive for the real estate sector. The exemption from the levy of DDT wouldonly be in respect of dividends paid out of current income after the date whenthe business trust acquires the shareholding in the SPV.

We believe these key changes should pave the way for REIT/INVIT listings in In-dia going forward.

Financial sector reforms With a view to help the financial sector with quick resolution, revival and

also liquidation of firms, a comprehensive Code on Resolution of FinancialFirms is proposed to be introduced as a Bill in the Parliament during 2016-17. This Code, together with the Insolvency and Bankruptcy Code 2015,when enacted, is expected to provide a comprehensive resolutionmechanism for the economy.

Apart from this, the RBI Act is expected to be amended to provide statutorybasis for a Monetary Policy Framework and a Monetary Policy Committeethrough the Finance Bill 2016, to bring in transparency to monetary policydecisions. The setting up of the framework was already announced in theprevious budget and providing a statutory status is a step in the rightdirection. We expect MPC to take form over next few months. ProposedMPC shall have 6 members – 3 Government nominees and 3 RBI officials(including Governor and Dy. Governor)

Ease of doing businessThere are various initiatives taken on this front. Some of them are as under.

The budget has proposed to enhance the threshold limit for audit ofaccounts from Rs.2.5mn to Rs.5mn for persons having income fromprofession. Also, it is proposed to increase the threshold limit of presumptivetaxation from Rs.10mn to Rs.20mn.

To reduce litigation for businesses, the budget has proposed a DisputeResolution Scheme to expedite about 0.3mn tax cases pending with the 1stAppellate Authority with disputed amount Rs.5.5trn. No penalty in respect ofIncome-tax cases with disputed tax up to Rs.1mn is proposed to be levied.Cases with disputed tax exceeding Rs.1mn will be subjected to only 25% ofthe minimum of the imposable penalty

On retrospective taxation, the high level committee to oversee any freshcase will is proposed to be chaired by the Revenue Secretary and consist ofChairman, CBDT and an expert from outside.

Also, in order to give an opportunity to the past cases which are ongoingunder the retrospective amendment, the budget has proposed a one-timescheme of Dispute Resolution for them, in which, assesses can settle thecase by paying only the tax arrears in which case liability of the interest andpenalty shall be waived.



We believe these are important provisions which can increase comfort ofvarious tax-payers, both domestic and foreign and lead to increasedinvestments, especially from foreign investors.

JAM and GSTThe FM has reiterated his preference for DBT for subsidies. The Economic Sur-vey had spoken about the JAM Trinity – Jan Dhan, Aadhar and Mobile for plug-ging leakages and restricting the subsidies to the targeted beneficiaries only.DBT has been effective implemented for transferring the LPG subsidy and willbe extended to the Kerosene subsidies in due course. The budget has also pro-posed to introduce DBT on pilot basis for fertilizer in a few districts across thecountry, with a view to improving the quality of service delivery to farmers.

The budget proposes to introduce a bill in the current session, for Targeted De-livery of Financial and Other Subsidies, Benefits and Services by using theAadhar framework. A social security platform is proposed to be developed usingAadhar to accurately target beneficiaries. We believe this will be a transforma-tive piece of legislation which will benefit the poor and the vulnerable, whileplugging leakages in the system.

We believe that, these reforms have the potential to improve the expendituremanagement initiative of the Government.

Black moneyWith a view to bring back un-disclosed income to the formal sector, the budgethas proposed a limited period Compliance Window for domestic taxpayers todeclare undisclosed income or income represented, by paying tax at 30%, andsurcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undis-closed income.

The surcharge levied at 7.5% of undisclosed income will be called Krishi Kalyansurcharge to be used for agriculture and rural economy. The window for disclos-ing this income will be open from 1st June to 30th September, 2016 with anoption to pay amount due within two months of declaration. Post this, the Gov-ernment will focus all resources for bringing the still un-declared income to theformal economy.

We see this move as positive as it will increase the revenue for the Governmentfrom a source, which has remained relatively untapped. The FM has not takenany credit for this amount in the budget.

D. Tax proposals

Direct Taxes

In terms of direct tax, no major changes have been proposed on personal in-come tax for the financial year 2016-17. However, for individuals with incomeupto Rs.0.5mn, the ceiling of tax rebate has been raised under section 87A fromRs.2000 to Rs.5000. This will provide additional tax saving of Rs.3000 per an-num. The FM has increased the limit of deduction of rent paid under section80GG from Rs.24000 per annum to Rs.60000, to provide relief to those who livein rented houses and do not own houses, but are not receiving benefit underHRA. The tax benefit from this relief can be Rs.3,600 (10% tax bracket). Thesemeasures indicate the FM’s concern for the low income groups. At the sametime he has not lost sight of the need to raise tax revenue. Thus, for individualsreceiving dividends in excess of Rs.1mn, the FM has imposed additional tax atthe rate of 10% (over and above 15% DDT paid by companies) of gross amountof dividend will be payable by the recipients. The FM has also raised surchargefrom 12% to 15% on individuals having income above Rs.10mn.



With aim of creating pensioned society and to eliminate tax arbitrage betweendefined benefit (EPF) and defined contribution (NPS) schemes, FM changed thestructure of EPF scheme from EEE to EET. Withdrawal up to 40% of the corpusat the time of retirement would be tax exempt in the case of NPS. In case ofsuperannuation funds and recognized provident funds, including EPF, the samenorm of 40% of corpus to be tax free will apply in respect of corpus createdout of contributions made after 1.4.2016. Also, monetary limit for contributionof employer in recognized Provident and Superannuation Fund of Rs.1.5 lakhper annum is proposed for taking tax benefit.

Direct tax


For the ‘first – home buyers’, FM proposes to give deduction for additional in-terest of Rs.50,000 per annum for loans up to Rs.35 lakh sanctioned during thenext financial year, provided the value of the house does not exceed Rs.50 lakh.

On the corporate tax front, the tax rate remained intact although there wereexpectations that the FM may cut the rate with a view to bringing it closer to25%. However, for SMEs with turnover not exceeding Rs.50mn, the corporatetax rate has been reduced to 29% plus surcharge and cess. The FM has alsogiven an option for new manufacturing companies on or after 1.3.2016 to betaxed at 25% plus surcharge and cess, provided they do not claim profit linkedor investment linked deductions and do not avail of investment allowance andaccelerated depreciation. Here, the FM’s intention move towards phasing out oftax exemptions is clearly evident. Dividend distribution made out of income ofSPV to the REITs and Investment Trusts having specified shareholding will not besubjected to Dividend Distribution Tax, in respect of dividend distributed afterthe specified date.

On tax avoidance measures, determination of residency of foreign company onthe basis of Place of Effective Management (POEM) is proposed to be deferredby one year to 1-4-2017. Timeline for implementation of General Anti Avoid-ance Rules (GAAR) has been maintained from 1.4.2017 (FY18 onwards).

Indirect Taxes

On indirect tax, contrary to expectations, the service tax rates have beenleft unchanged, save for a 0.5% Krishi Kalyan Cess, on all taxable services,WEF 1st June 2016. This will increase the effective service tax rate to 15%as compared to 14.5% currently. Proceeds from this are proposed to beexclusively used for financing initiatives for improvement of agriculture andwelfare of farmers.

While peak excise and customs duty have been maintained, a few changeshave been made for select items.

0%

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Indirect tax


TDS has been proposed to be levied at the rate of 1 % on purchase of luxurycars exceeding value of Rs.1mn and purchase of goods and services in cashexceeding Rs.0.20mn. Equalization levy of 6% of gross amount has beenproposed on payment made to non- residents exceeding Rs.0.1mn a year incase of B2B transactions. We believe this is largely for E-commercecompanies. Infrastructure cess of 1% has been levied on small petrol, LPG,CNG cars, 2.5% on diesel cars of certain capacity and 4% on other higherengine capacity vehicles 13 and SUVs. This will be a slight negative for thesecar companies.

Excise duty of 1% without input tax credit or 12.5% with input tax credithas been levied on articles of jewellery [excluding silver jewellery, other thanstudded with diamonds and some other precious stones], with a higherexemption and eligibility limits of Rs.60mn and Rs.120mn respectively. Exciseon readymade garments with retail price of Rs.1000 or more raised to 2%without input tax credit or 12.5% with input tax credit. This will be amarginal negative for these companies

Clean Environment Cess has been increased from Rs.200 per tonne to Rs.400per tonne on coal, lignite and peat. We expect this to be passed on to theend users, leading to increased cost for them.

Export duty on Iron ore having Fe content below 58 has been reduced to Nilfrom 10%. We think this is positive for the iron ore miners, as there arehardly any buyers of iron ore for the grade below 58 and over 85% of theiron ore export constitutes of fines or low grade ore. This would also led tothe improvement in export competitiveness of domestic iron ore industry, asGoa looks at resuming mining.

Import duty has been increased on Aluminum to 7.5% from 5%. We thinkthis is positive for the aluminum industry, as it will restrict cheaper importsand help domestic aluminum producers to take a price increase and sellhigher volumes (as import accounts for ~56% of the domestic demand sharein 2015-16 vs 39% in FY12, leading to a sharp fall in capacity utilisation to50%).

While direct tax proposals are expected to result in revenue loss of Rs.10.6bn,the indirect proposals are expected to yield Rs.207bn, resulting in net gains ofRs.196bn.

0%

10%

20%

30%

40%

0

2000

4000

6000

8000

10000 Direct Tax (Rs bn - LHS) Growth (% - RHS)



E. Capital marketsContrary to expectations, the budget has proposed a gradual reduction in cor-porate tax rate from 30% to 25% only for smaller companies. On exemptionsalso, a few of them have been tinkered with and are not expected to have anymajor impact on the profits of the companies.

On the other hand, additional dividend tax @10% has been levied on grossamount of dividend received by the share-holder, if the total amount of divi-dend received by him in a fiscal is more than Rs.1mn. This is in addition to theDDT paid by the companies currently. This will reduce the dividend income inthe hands of the share-holder but may not have any major impact on the divi-dends declared by companies.

The budget has increased STT for transactions in Options from 0.017% to0.05% and this may have some impact on the volumes in this market, thoughtemporary. The FM has stated that, GAAR will be implemented WEF April 2017.While this may be a sentiment negative, we believe this was largely expectedby the markets.

With the major event out of the way, the markets will likely focus on issues likeRBI action and global economy. Off-budget action on budget initiatives will sus-tain the confidence of the markets over the medium term. We expect RBI toreduce rates by 25-50bps in FY17. We believe that, a bottom-up approach willbe the best approach over this time-frame.



BUDGET HIGHLIGHTS FY2016-17

Customs duty

Pre-budget Post-budget

Food Processing

Cold chain including pre-cooling unit, packhouses, sorting and grading lines

and ripening chambers 10% 5%

Refrigerated containers 10% 5%

Metals/Mining

Primary aluminium 5% 7.5%

Zinc alloys 5% 7.5%

Iron ore fines with Fe content below 58% (Export Duty) 10% Nil

Iron ore lumps with Fe content below 58% (Export Duty) 30% Nil

Jewellery

Imitation jewellery 10% 15%

Renewable Energy

Industrial solar water heater 7.5% 10%

Capital goods

Specified machinery required for construction of roads CVD – Nil CVD – 12.5%

Textiles

Specified fibres and yarns 5% 2.5%


Excise duty

Item Pre Budget Post Budget

FMGC

Aerated Beverages 18% 21%

Cigarettes (Rs/ 1000 sticks)

Non filter:

<65 mm 70 215

65 mm-70 mn 110 370

Filter:

<65 mm 70 215

65 mm-70 mn 70 260

70 mm-75 mn 110 370

Other 180 560

Food processing

Refrigerated containers 12.5% 6%

Fertilizers

Micronutrients which are covered under 1(f) of Schedule 1

Part (A) of the Fertilizer Control Order, 1985 12.5% 6%

Textiles

To increase Tariff Value of readymade garments and made up 30% of retail sale price 60% of retail“sale price

Footwear

Rubber sheets & resin rubber sheets for soles and heels 12.5% 6%

Renewable Energy

Solar lamp 12.5% Nil

Electronics & IT hardware

Routers, broadband Modems, Set-top boxes, DVR, CCTV Camera 12.5% 4% [without CENVAT credit]

or 12.5% [with“CENVAT credit]

Automobiles

Specified parts of Electric Vehicles and Hybrid Vehicles 6% Upto FY16 6% without time limit

Source: Union Budget Document 2015-2016



BUDGET AT A GLANCE

Central Government Finances

(Rs bn) FY2013 FY2014 FY2015 FY2016 BE FY2016 RE FY2017 BE

Receipts

1. Revenue receipts (2d + 3) 8,792 9,532 11,015 11,416 12,061 13,770

2. Gross tax revenue (2a + 2b ) 10,313 11,387 12,449 14,495 14,596 16,309

2a. Direct taxes 5,537 6,385 6,957 7,980 7,520 8,471

2a1. Corporation tax 3,563 3,947 4,289 4,706 4,530 4,939

2a2. Income tax 1,965 2,429 2,657 3,274 2,991 3,532

2a3. Other taxes 8 10 11 0 0 0

2b. Indirect taxes 4,776 5,002 5,491 6,515 7,076 7,838

2b1. Customs duty 1,653 1,721 1,880 2,083 2,095 2,300

2b2. Excise duty 1,765 1,702 1,900 2,298 2,841 3,187

2b3. Service tax 1,326 1,548 1,680 2,098 2,100 2,310

Taxes on UTs 31 31 32 36 39 41

2c Transfers to States and UTs 2,915 3,182 3,378 5,240 5,062 5,703

2ci Transfers to National Calamity fund 28 46 35 57 59 65

2d Tax revenue (Net of Centre) 7,419 8,159 9,036 9,198 9,475 10,541

3. Non-tax revenue 1,374 1,374 1,979 2,217 2,586 3,229

4. Capital receipts (4a + 4b + 4c) 5,311 5,447 5,622 6,359 5,793 6,010

4a. Recovery of loans 151 125 137 108 189 106

4b. Other receipts (Disinvestments) 259 294 377 695 253 565

4c. Borrowings and other liabilities 4,902 5,029 5,107 5,556 5,351 5,339

5. Total receipts (1 + 4) 14,104 14,979 16,637 17,775 17,854 19,781

Expenditure

6. Non-plan expenditure (7 + 8) 9,967 11,061 12,010 13,122 13,082 14,281

7. Non-plan revenue expenditure 9,143 10,190 11,094 12,060 12,127 13,274

7a. Interest payments 3,132 3,743 4,024 4,561 4,426 4,927

7b. Subsidies 2,571 2,546 2,583 2,438 2,578 2,504

7b1. Food 850 920 1,177 1,244 1,394 1,348

7b2. Fertilizer 656 673 711 730 724 700

7b3. Petroleum 969 854 603 300 300 269

7b4. Others 96 99 92 164 159 187

7c. Grants to States and UTs 480 606 771 699 1,082 1,184

7d. Others 2,961 3,296 3,716 4,361 4,040 4,659

8. Non-plan capital exp. 824 871 916 1,062 955 1,006

9. Plan expenditure (10 + 11) 4,136 4,533 4,626 4,653 4,772 5,500

10. Plan revenue expenditure 3,292 3,527 3,576 3,300 3,350 4,036

11. Plan capital expenditure 844 1,006 1,050 1,353 1,422 1,464

12. Total expenditure (6 + 9) 14,104 15,594 16,637 17,775 17,854 19,781

13. Revenue expenditure (7+10) 12,435 13,718 14,670 15,360 15,477 17,310

14. Capital expenditure (8+11) 1,669 1,877 1,967 2,414 2,377 2,470

Memo Items

15. Revenue Deficit (13-1) 3,643 3,570 3,655 3,945 3,416 3,540

16. Fiscal Deficit (12-{1+4a+4b}) 4,902 5,029 5,107 5,556 5,351 5,339

17. Primary Deficit (16-7a) 1,770 1,286 1,083 995 925 412

18. Gross domestic product (GDP) 101,133 112,728 124,882 142,987 135,672 150,650

PD/GDP (%) 1.8 1.1 0.9 0.7 0.7 0.3

RD/GDP (%) 3.6 3.2 2.9 2.8 2.5 2.3

FD/GDP (%) 4.8 4.5 4.1 3.9 3.9 3.5

Source: Annual Budget 2016-17



SECTOR SUMMARY

Sector Summary

Sector BudgetImpact Preferred Picks

Agro Chemicals Positive -

Automobiles Negative Maruti Suzuki India, Tata Motors

Aviation Neutral -

Banking & NBFC Positive Axis Bank, HDFC Bank, ICICI Bank, SBI,IDFC Bank

Capital Goods and Engg. Positive Cummins India, Engineers India,Greaves Cotton, L&T, Praj Industries,Blue Star, Voltas

Cement Positive Grasim Industries, Ultratech Cements

Construction Positive IRB Infrastructure Developers,Nagarjuna Construction, PNC Infratech,NBCC

FMCG Neutral Dabur India, ITC

Information Technology Neutral Infosys Technologies, KPIT Technologies,Tata Consultancy Services

Logistics Negative Allcargo Logistics, Adani Port,Gujarat Pipavav Port, Container Corp

Media Neutral Dish TV India, TV18 Broadcast,Zee Entertainment

Metals & Mining Neutral Tata Sponge, National Aluminium

Oil & Gas Negative GSPL, MRPL

Paints Positive Asian Paints

Pharmaceuticals Neutral Alembic, Sun Pharma

Power Neutral Tata Power

Real Estate Positive Phoenix Mills

Shipping Positive Great Eastern Shipping Company,Shipping Corporation of India




SECTOR IMPACT ANALYSIS



Pesticides capacity and production (000 tonnes)

Source: Chemicals.nic.in

Pesticide consumption (Kg/ha) global comparison

Source: FCCI, Industry reports, Analysis by Tata Strategic

AGROCHEMICALS

BUDGET HIGHLIGHTS & IMPACT

Krishi Kalyan CessImpact: The budget proposes to impose Krishi Kalyan Cess at the rate of0.5% on all taxable services. The proceeds of the same would be utilizedfor financing various initiatives related to the agricultural sector which wouldhelp in welfare of farmers. The budget is focusing on doubling farmers' incomein the next five years. Focus toward increasing farmers' welfare would improvethe financial health of farmers who got affected by bad monsoons for pasttwo years. This would encourage higher spending towards agrochemicalsand would be positive for agrochemicals companies.

We do not have active coverage on this sector

BUDGET IMPACT: POSITIVE

0

70

140

210

280

350

FY10 FY11 FY12 FY13 FY14 FY15

Capacity Production

0

3

6

9

12

15

18



2 Wheeler - Sales volume (mn units)

Source: SIAM

Passenger vehicles - Sales volume (mn units)

Source: SIAM

CVs - Sales volume (‘000 units)

Source: SIAM

AUTOMOBILES


Infrastructure cess on passenger vehiclesImpact: Finance minister has levied infrastructure cess on passenger vehiclesin the range of 1-4%. Infrastructure cess of 1% has been levied on petrol/LPG/CNG driven passenger vehicles of length upto 4m and engine capacityupto 1200cc, 2.5% has been levied on diesel run passenger vehicles of lengthupto 4m and engine capacity upto 1500cc and 4% on other higher enginecapacity motor vehicles/SUVs and bigger sedans.

In the current subdued demand environment, hiking car prices will be adifficult proposition. Further the price differential between petrol and dieselcars will widen, leading to some shift in demand from diesel to petrol runvehicles. This development is marginally negative for M&M, Maruti Suzukiand Tata Motors.

Additional 1% tax at source on cars above Rs1 mnImpact: In the budget, the Finance Minister has proposed collection of 1%tax at source on cars exceeding value of Rs1 mn. The purpose of this taxis to garner tax in advance and collect data about persons incurring highexpenditure but not paying taxes.

In isolation, additional one percent tax on cars above Rs1 mn is not expectedto have significant impact on cars sales. However, combining this withinfrastructure cess, the increase in car prices will be meaningful and thatcould lead to customers shifting their preference to lower priced models/cars.

Opening up the road transport sector in the passenger segmentImpact: Government will enact necessary amendments in the Motor VehiclesAct in order to open up the road transport sector in the passenger segmentand the States will have the choice of adopting the new legal framework.

Government wants to boost road transport by empowering entrepreneursto operate buses on various routes. Successful implementation will lead toadditional demand of buses and will be positive for players like Ashok Leyland,Tata Motors, Eicher Motors and SML Isuzu.

Emphasis on rural spendingImpact: Budget focused on increased spending in rural areas in order torevive the stressed rural economy. Finance Minister laid emphasis on bothagriculture and rural development. Government is targeting doubling farmincome over the next five years and laid emphasis on rural employment andinfrastructure.

Recovery in farm and rural segment will be positive for tractor players likeEscorts, M&M and in the two wheeler space Hero Motocorp stands to benefit.

BUDGET IMPACT: NEGATIVE

-

3

6

9

12

15

18

- 0.5 1.0 1.5 2.0 2.5 3.0 3.5

-

250

500

750

1,000



Impact on EPS (Rs)

Company Pre-Budget EPS Post-Budget EPS Current TargetFY16E FY17E FY16E FY17E Price Price

Preferred picksMaruti Suzuki 157.3 214.6 157.3 214.6 3,237 4,722Tata Motors 33.9 36 33.9 36 300 440

OthersHero MotoCorp 151.4 173.6 151.4 173.6 2,500 2,864M&M 53.1 66.3 53.1 66.3 1,228 1,350Ashok Leyland 3.4 4.1 3.4 4.1 88 99Escorts 7.6 14.6 7.6 14.6 126 161.0TVS Motors 9.2 13.6 9.2 13.6 268 271Apollo Tyres 21.1 22.3 21.1 22.3 158 200Eicher Motors * 480.3 596 480.3 596 18,901 18,288Bajaj Auto 124.8 140.9 124.8 140.9 2,201 2,686Motherson Sumi 9.1 13.1 9.1 13.1 227 291

Source: Kotak Securities - Private Client Research; * FY16 is 15 month period



AVIATION


Increase in excise duty on Aviation Turbine Fuel (ATF)Impact: In the budget, excise duty on ATF has been increased from 8%to 14%. However, ATF for supply to aircraft under the Regional ConnectivityScheme will continue to attract 8% excise duty.

ATF is the single largest cost component for aviation sector. Currently theairline sector is operating in favorable environment with low ATF prices,healthy passenger traffic growth and high load factors. Thereby increasein excise duty is marginally negative for Spicejet, Jet Airways and Indigo.

Benefits related to maintenance, repair and overhauling (MRO) ofaircraftsImpact: Following benefits were extended for MRO of aircrafts - 1/ Toolsand tool kits are exempted from basic customs duty, CVD and SAD whenimported by MROs for maintenance, repair, and overhauling 2/ Excise dutyexemption extended to tools and tool kits when procured by MROs formaintenance, repair, and overhauling 3/ Removed restriction of one yearfor utilization of duty free parts for maintenance, repair and overhaul ofaircraft.

We believe that this will lower the MRO related expenses. This will bemarginally positive for the aviation sector

Revival plan for underserved/unserved airportsImpact: Government is drawing an action plan for 160 airports/ air stripsthat are unserved/underserved. As per the government, these airports/ airstrips will cost Rs500-1,000mn each. Further, 10 of the 25 non-functionalair strips with the Airport Authority of India will also be developed

Additional airports will increase domestic traffic but on the other hand, lowload factors on these routes can impact profitability. We do not see anyimpact of this development on the aviation sector in the near to mediumterm.

We do not have active coverage on this sector

BUDGET IMPACT: NEUTRAL

Domestic passenger traffic (mn passengers)

Source - Civil Aviation Ministry, DGCA

ATF prices (Rs/KL)

Source - IOCL

- 10 20 30 40 50 60 70 80 90

30000

40000

50000

60000

70000

80000

90000



BANKING & NBFCS


The budget has earmarked Rs.250 bn for the recapitalization of state-runbanks.Impact: Rs.250 bn has been earmarked for recapitalization of PSU banksduring FY17 in line with the announcement made earlier during unleashingof Indradhanush plan. We believe this is important for revitalizing capitalstarved PSU banks which are facing elevated stress on their assets. Thiswould be second tranche from Rs.700 bn recapitalization plan to augmentcore equity capital of PSU banks and enhance their future lending capabilities.However, this is a meager amount in comparison with the humongous capitalrequirements by these PSU banks over next few years to meet the BASELIII norms. Nonetheless, government has indicated that they are committedto ease off the banking stress and if need arises, further funding can bedone. On the other hand, PSU banks are likely to issue fresh equity to publicin a phased manner, without affecting the majority shareholding status ofGOI.

Net market borrowing is estimated at Rs.4.25 tn during FY17 (BE) asagainst Rs.4.40 tn during FY16 (RE).Impact: Government's net borrowing during FY17 to fund the fiscal deficitis lower than the street expectations and hence it is not likely to put pressureon the bond yields through crowding out effect. We expect 10 Yr G-sec bondyield to trend lower on expectation of cut in the policy rates by RBI as FMhas stick to the fiscal rectitude. Instead, banks would find opportunity tobook treasury profit in the falling yield environment.

First time home buyers will get deduction for additional interest ofRs.50,000 per annum for loans up to Rs.3.5 mn sanctioned during FY17,where house cost does not exceed Rs.5.0 mn.Impact: This proposal is likely to boost demand for affordable housing andhence it would be positive for mortgage financing companies. Banks likeSBI, ICICI bank and Axis bank while players like LIC Housing and HDFC Ltdfrom HFCs would be the biggest beneficiaries in our coverage space.

A comprehensive code on resolution of financial firms together with theInsolvency and Bankruptcy Code 2015 are likely to providecomprehensive resolution mechanism in the economy.Impact: Government has indicated that a comprehensive code on resolutionof financial firms will be introduced as a bill in the parliament during FY17.This Code is likely to provide a specialized resolution mechanism to dealwith bankruptcy situations in banks, insurance companies and financial sectorentities. The new comprehensive bankruptcy code meeting the globalstandards is likely to help banks in recovering dues if promoters default.We also believe this would bring legal certainty and speed and hence improvethe ease of doing business environment in the country.

Amendments in the SARFAESI Act to enable 100% FDI in ARCs and 100%FPI in security receipts used in the transactions.Impact: ARCs can play an important role in cleaning the stressed assets inthe banking system. Government has proposed to amend the SARFAESI Act(2002) to enable the sponsor of an ARC to hold up to 100% stake in theARC and permit non-institutional investors to invest in Securitization Receipts.100% FDI in ARCs and 100% FPI in security receipts used in the transactionswould attract foreign capital and will help the banking system tackle themenace of bad loans.

Credit & deposit growth (%)

Source: RBI, * indicates data as on Feb 05,2016

Trend in branch expansion

Source: RBI


5%

11%

17%

23%

29%

35% Credit Deposit

0

10

20

30

40

HH (Fin) HH (Phy) HH(Total)

GrossSavings

FY05 FY10 FY11FY12 FY13 FY14

Savings as a % of GDP

Source: CSO, Economic Survey



Bank Board Bureau is likely to be operational during FY17. Roadmap forbanking consolidation is expected in near future.Impact: Bank Board Bureau is likely to work as a link between governmentand bank and would monitor the performance of PSU banks. It will also advisethe government on top-level appointments at PSU banks as well as on waysto raise funds and mergers and acquisitions to the lenders. Consolidationin banking sector is the need of the hour. We need stronger banks withbigger balance sheets which would have the appetite to fund larger capexrequirements in the economy.

Impact on ABV (Rs)

Company Pre-Budget ABV Post-Budget ABV Current TargetFY16E FY17E FY16E FY17E Price Price

Preferred picksAxis Bank 198.1 225.3 198.1 225.3 375 510ICICI Bank 131.4 156.9 131.4 156.9 190 312HDFC Bank 280.1 330.1 280.1 330.1 972 1200SBI 119.2 139.9 119.2 139.9 159 259IDFC Bank 38.8 41.4 38.8 41.4 46 83

OthersAllahabad Bank 67.0 82.8 67.0 82.8 43 50Andhra Bank 66.7 80.8 66.7 80.8 46 50BoB 77.0 110.8 77.0 110.8 132 140DCB 57.2 62.0 57.2 62.0 71 100HDFC Ltd 211.5 235.3 211.5 235.3 1060 1380IDFC Ltd 63.4 67.0 63.4 67.0 38 80Indian Bank 161.3 179.2 161.3 179.2 76 125J&K Bank 103.6 123.5 103.6 123.5 63 100LIC Housing 176.3 203.0 176.3 203.0 422 550M&M Finance 82.3 78.3 82.3 78.3 206 200PNB 45.6 99.9 45.6 99.9 71 90STFC 432.3 482.7 432.3 482.7 806 1060Union Bank 119.3 140.9 119.3 140.9 107 120




Capex announcements (INR tn)

Source: Company

Annual Wind Installations-India (MW)

Source: Company

CAPITAL GOODS


Decline in capital expenditure budget for defenceImpact: Capital expenditure on defense for 2016-17 has been reduced by9% over the FY16BE level. We have seen that in recent years actual spendingon defence has lagged the budgeted targets. Taking cognizance of this, theFM may have reduced the budget spending to bring it closer to realistic level.This is a minor negative for BEL.

Increase in customs tariff rates on Capital Goods EquipmentImpact: The customs tariff rate has been hiked from 7.5% to 10% forspecified category of capital goods. Aimed at providing level playing fieldfor domestic capital goods industry.

Applicability of basic customs duty, CVD and SAD on defence importsImpact: Imports of specified goods for defence purposes by contractors ofthe Government of India, PSUs or sub-contractors of PSUs would now attractbasic customs duty, CVD and SAD. This move is aimed at boostingindigenisation of defence manufacturing.

Accelerated depreciation limited to maximum 40% in FY18Impact: Marginally negative for wind power companies viz. Suzlon Energyand Inox Wind. Currently companies owning wind assets are entitled toclaim 80% depreciation against investments made right in the first yearof operations. This would get limited to 40% from FY18 (not applicable inFY17). However we believe that the negative impact would be limited asaccelerated depreciation constitutes to only 8-10% of industry volumescurrently.

Increased allocation of Rs 970 Bn for road constructionImpact: Government has proposed for an investment of Rs 970 Bn for roadconstruction in FY17. This includes Rs 550 Bn for NHAI/MoRPH and additionalRs 150 Bn to be raised by NHAI through bonds. We believe that companieslike L&T, Cummins India, Elgi Equipment, Sanghvi Movers would benefit fromincreased activity in road construction.


0

1000

2000

3000

4000

0

1

2

3

4

5 Govt Pvt



Impact on EPS (Rs)


Preferred picksCummins India Limited 27.1 30.9 27.1 30.9 809 1020Engineers India Limited (EIL) 8.8 12.0 8.8 12.0 150 210Greaves Cotton 7.9 9.4 7.9 9.4 119 160Praj Industries Ltd 3.5 4.8 3.5 4.8 73 105Larsen & Toubro 44.3 54.5 44.3 54.5 1,111 1,408Blue Star Ltd 9.8 14.7 9.8 14.7 316 404Voltas Ltd 9.4 11.2 9.4 11.2 226 281

OthersAIA Engineering 44.9 48.1 44.9 48.1 804 865Carborundum Universal 7.8 11.3 7.8 11.3 170 123Bajaj Electricals 8.1 14.2 8.1 14.2 158 225Crompton Greaves 1.4 5.8 1.4 5.8 130 135Elgi Equipment 3.1 5.2 3.1 5.2 125 110Siemens India * 20.9 29.6 20.9 29.6 988 1095Havells India 9.2 10.5 9.2 10.5 272 320Pidilite Industries 16.9 17.4 16.9 17.4 586 610ABB Ltd * 14.2 25.6 14.2 25.6 1,025 895AIA Engineering 44.9 48.1 44.9 48.1 770 865Bajaj Electricals Ltd 8.1 14.2 8.1 14.2 157 225Bharat Electronics 54.6 63.9 54.6 63.9 1,056 1,277BHEL (1.6) 5.9 (1.6) 5.9 95 123Carborundum Universal Ltd 7.8 11.3 7.8 11.3 171 193Crompton Greaves 1.4 5.8 1.4 5.8 128 135Cummins India 27.1 30.9 27.1 30.9 833 1,020Elgi Equipment Ltd 3.1 5.2 3.1 5.2 124 110Engineers India Ltd 8.8 12.0 8.8 12.0 148 210Havells India Ltd 9.2 10.5 9.2 10.5 274 320Siemens India * * 20.9 29.6 20.9 29.6 993 1,095Suzlon Energy (7.2) (18.8) (7.2) (18.8) 13 NAThermax 23.1 24.4 23.1 24.4 732 820Time Technoplast Ltd 5.7 6.9 5.7 6.9 44 69Va Tech Wabag Ltd 18.3 26.1 18.3 26.1 470 600Voltamp Ltd 41.0 47.0 41.0 47.0 684 939

Source: Kotak Securities - Private Client Research; * December year ending; * * September year ending



Cement prices trend (Rs/50 kg bag)

Source: Dealer feedback

Trend in capacity utilizations

Source: Kotak Securities - Private Client Research, CMA

CEMENT


Focus on infrastructure development mainly irrigation and roads to addto cement demand growthImpact: Positive. Cement demand is expected to gain momentum withcontinuous thrust of government on infrastructure creation. Governmenthas proposed higher allocations for roads, irrigation and railways to boostinfrastructure growth. Along with this, initiatives to promote low cost housingare likely to translate into higher demand growth for the cement sectorwhich has been lagging from past several quarters.

Excise duty exemption on RMCImpact: Positive. Government has extended the excise duty exemption,presently available to Concrete Mix manufactured at site for use inconstruction work to Ready Mix Concrete. We view this to be positive forcement companies having exposure towards RMC sales such as UltratechCements, ACC etc

Increase in coal cessImpact: Marginally Negative. Clean energy cess has also been hiked toRs 400 per metric tonne of coal from Rs 200 per metric tonne of coal. Weexpect companies to pass on the incremental impact of excise duty to theend users.

Impact on EPS (Rs)


Preferred picks

Grasim 226.0 354.0 226.0 354.0 3317 4116

Ultratech Cements 84.5 131.6 84.5 131.6 2767 3009

OthersACC 39.7 50.9 39.7 50.9 1191 1296

Shree Cements* 141.5 329.4 141.5 329.4 10078 11200

India Cements 4.0 4.0 4.0 4.0 67 95



170

200

230

260

290

320

350

380 North South

West East

77.0%

77.2%

77.4%

77.6%

77.8%

78.0%

0

100

200

300

400

Effective capacity (MT - LHS)Total dispatches (MT -LHS)Capacity utilization (% - RHS)



CONSTRUCTION


Higher allocation for roads to be positive for road based companiesImpact: Positive. Government plans to award nearly 10,000 km of roadprojects in FY17 also and has earmarked Rs 550 bn for the road segment.It also expects to raise nearly Rs 150 bn from NHAI bond issue for fundingthe road projects. Government has also enhanced the allocation for PradhaanMantri Gram Sadak Yojana to Rs 190 bn which is just 60% of the total fundingas remaining 40% would be contributed by states. Thus, includes state andcentre funding, allocation for Pradhaan Mantri Gram Sadak Yojana standsat Rs 270 bn.

Cumulatively, allocation for roads stands at Rs 970 bn which is expectedto be utilized for road EPC, BOT and hybrid annuity projects. This is expectedto enhance the order inflows for the road based players like IRB Infra, ITNL,Sadbhav Infra, Ashoka Buildcon, NCC, Simplex Infra, KNR Constructions, PNCInfratech etc

Increased allocation for irrigation to lead to better order inflows fromthis segmentImpact: Positive. Government plans to bring 28.5 lakh hectares underirrigation to be implemented through 'Pradhan Mantri Krishi Sinchai Yojana'.Government plans to create a Long Term Irrigation Fund in NABARD withan initial corpus of about Rs 200 bn. These funds are expected to be utilizedfor putting nearly 89 irrigation projects on a fast track which had beenlanguishing for a long time. This is likely to result in incremental order inflowsfor developing irrigation projects and would be positive for players like NCC,Simplex Infra, JKumar Infraprojects, Sadbhav Enginnering in terms of betterorder inflows.

Levy of infra cess and NHAI bond issues to ease funding for the sectorImpact: Positive. Government has levied Infrastructure cess of 1% on smallpetrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity and 4% onother higher engine capacity vehicles and SUVs. This is likely to be utilizedfor funding infrastructure projects and would be positive for the sector alongwith NHAI bond issue of Rs 150 bn.

Enhancing private sector participationImpact: Positive. In order to enhance private sector participation,government has resolved to set up a) Public Utility (Resolution of Disputes)Bill b) Guidelines for renegotiation of PPP Concession Agreements c) Newcredit rating system for infrastructure projects. This is likely to ease theprocess of claim and dispute settlement along with easier funding from banks.We believe this will be positive for the sector.

Higher service tax for mono rail and metro rail projectsImpact: Negative. Service tax of 5.6% has been proposed on EPC of monorail or metro related projects in respect of contracts entered into on or after1st March 2016. This is likely to increase the cost of projects focused onmono rail and metro and is expected to be negative for companies focusedon EPC in this segment.




Order book Trend (Rs bn)

Source: Companies

Revenue trend (Rs mn)

Source: Companies

0

50

100

150

200

250

IRB Infra ILFSTransportation

NCC Ltd SimplexInfrastructure

Q1FY16 Q2FY16 Q3FY16

0

25000

50000

75000

100000

IRB Infra ILFSTransportation

NCC Ltd SimplexInfrastructure

FY12 FY13 FY14 FY15 FY16

Proposed phasing out of Section 80 IA benefits from April, 2017Impact: Neutral. It has been proposed that no deduction shall be availableif the construction activity commences on or after 1st day April, 2017. Thus,for projects where the construction has already commenced, the BOT playerwould continue to avail Section 80 IA benefits for a period of 10 years.Projects where construction activity is not expected to commence beforeApril, 2017 are likely to be impacted by the same. However, most of theconstruction companies have mentioned that for any future bidding of theprojects, companies would be factoring in full tax rate in their assumptionswhile bidding for the projects. Thus it is not likely to adversely impact futureproject inflows.

Clarity on Dividend Distribution Tax on SPVs to REITs and INVITsImpact: Positive. Sector has been demanding removal of dividend distributiontax on the income distributed to INVITs from quite some time as DDT wasreducing the effective returns of the investors and was preventing the InVITmarket to open up. This was adversely impacting the rate of return for theinvestor as under SEBI regulations both the SPV and business trust areobligated to distribute 90% of their operating income to the investors.

DDT exemption on income to be distributed to INVITs is expected to be quitepositive for the real estate sector. The exemption from levy of DDT wouldonly be in the cases where the business trust either holds 100% of the sharecapital of the SPV or holds all of the share capital other than held byGovernment or Government bodies. Also, the exemption from the levy ofDDT would only be in respect of dividends paid out of current income afterthe date when the business trust acquires the shareholding in the SPV.

These key changes should pave the way for REIT/INVIT listings in India goingforward.



Impact on EPS (Rs)


Preferred picks

IRB Infra 17.8 16.7 17.8 16.7 216 295

NCC Ltd 3.7 3.9 3.7 3.9 61 85

PNC Infratech 24.2 30.4 24.2 30.4 611 611

NBCC 27.3 34.5 27.3 34.5 1079 1079

Others

IL&FS Transportation Network 4.8 8.3 4.8 8.3 65 73

Simplex Infra 14.9 24.4 14.9 24.4 196 292

KNR Construction 29.6 36.0 29.6 36.0 595 595




FMCG industry size (US$ bn)

Source: Industry Reports, Kotak Securi-ties - Private Client Research

FMCG


Changes in excise duties for cigarettes:Impact: The budget has raised excise duties for cigarettes. Excise dutiesfor cigarettes have been raised by around 10% across cigarette lengths.Although in line with our expectations, this is well below consensus estimates(as per polls reported by media) of around 15% hike in excise duties. Wesee the development as a positive for cigarette companies. While the impacton earnings estimates for ITC is modest (+1.5%, as we had factored in baseeffect, and as we think that the company shall undertake calibrated hikes),we think that the visibility impact is important. Further, we view this asan important signal of the government policy as regards cigarettes - exciseduty gains shall likely be the most significant driver of excise duty hikes(rather than sharp cuts in cigarette consumption. The rise in excise dutyfor unmanufactured tobacco (64% from 55% earlier) shall have a modestimpact given high gross margins in the cigarette industry.

Benefits to consumption on account of rural pushImpact: The Budget raises the allocation of Ministry of Agriculture andFarmers' Welfare and to the Ministry of Rural Development. We believethis shall help alleviate the stress witnessed in the rural economy over thepast few quarters. As such, we expect the budget to have a modest positiveimpact on FMCG companies. Companies with higher percentage of salesfrom rural sector (HUL, Dabur, Colgate) shall see benefits.

Benefits to urban consumption on account of Seventh Pay Commission/OROPImpact: On expected lines, the budget has provisioned for disbursementson account of Seventh Pay Commission/ OROP, which shall have a positiveimpact on urban consumption. The impact of the same has been wellanticipated.

Signals of further delays in GST rollout a negativeImpact: From the lack of alignment of current excise duties/ service taxto the ones likely in GST regime, it appears that the government is notconfident about the passage/ implementation of GST in the near future.Since the GST has been the most awaited reform measure by the FMCGindustry, the same may be viewed as a modest incremental negative overthe long-term. However, we believe that stocks such as Britannia (NotCovered), Marico (ACCUMULATE), are immediate -term beneficiaries as ahike was being expected in products such as biscuits and edible oils.

Impact on EPS (Rs)


Preferred picks

Dabur India 7.1 8.2 7.1 8.2 237 287

ITC 12.5 13.8 12.5 14.0 296 337

OthersColgate - Palmolive 21.6 25.2 21.6 25.2 820 909

Godrej Consumer 33.2 38.3 33.2 38.3 1188 1257

HUL 19.2 22.4 19.2 22.4 830 8.5

Marico 5.7 6.7 5.7 6.7 237 240

Nestle 58.4 127.8 58.4 127.8 5008 4850



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40

50



Excise Duties : Cigarettes (Rs/ ‘000 sticks)

Rs/ 1000 sticks FY11 FY12 FY13 FY14 FY15 FY16 FY17

Filter:75mm-85mm 1,959 1,959 2,309 2,725 3,290 3,790 4,17070mm-75mm 1,473 1,473 1,718 2,027 2,250 2,590 2,850<70mm 969 969 1,194 1,409 1,650 1,900 2,090<65mm (Int. FY13) (Int. FY13) 669 669 1,150 1,440 1,585

Source: Budget documents; Note - Int FY13 = Introduced in FY13, CLFY13 = The slab is not applicable any more/subsumed in other slabs FY13 onward



Indian IT Services-BPO Industry;exports & domestic

Source : Nasscom

Growth in number of employees

Source : Nasscom

Rupee / US$

Source : Bloomberg

INFORMATION TECHNOLOGY


6% Equalisation LevyThe Finance Bill proposed to impose Equalisation Levy of 6% of the amountof consideration for specified services received or receivable by a non-residentnot having permanent establishment ('PE') in India, from a resident in Indiawho carries out business or profession, or from a non-resident havingpermanent establishment in India.

Impact - In our view the same would not have any impact as the sameis applicable for E-commerce transactions.

Proposed Phase out of Sec 10AA ( Special Provision in respect of newlyestablished units in SEZ)The FM has indicated phasing out of various exemptions and deductions.In this respect benefits available to IT Sector under sec 10AA would beremoved for units commencing activities on or after 1st April 2020.

Impact - The same would not have any immediate effect.

Taxation of PatentIt is proposed to insert new section to provide that where the total incomeof the assesse includes any income from by way of royalty in respect ofpatent developed and registered in India then such royalty shall be taxedat ten percent. The concessional rate would be allowed only to the firstinventor and whose name is entered on the patent register .

Impact - We do not expect any material impact as IT companies alreadypay tax at higher rates

Tax incentive for startupsWith a view to providing an impetus to start-ups and facilitate their growthin the initial phase of their business, it is proposed to provide a deductionof one hundred percent of the profits and gains derived by an eligible start-up . The benefit of hundred percent deduction of the profits derived fromsuch business shall be available to an eligible start-up which is setup before01.04.2019.

Impact - We do not expect any immediate impact on this provision

The provisions of the Union Budget have been largely neutral for thesector, in our opinion.We remain optimistic on the longer term prospects of the industry. Indianvendors have moved up the value chain. They are focusing on neweropportunities like cloud computing, analytics, mobility, etc. Newer pricingmodels will likely make them participate more in the growth prospects ofthe clients while also making business more non-linear. Also, focused smallercompanies with expertise on select verticals will be able to move up thevalue chain and attract larger clients, thereby, improving their longer termprospects. Companies, however, need to contend with higher competitivepressures and improve efficiencies. Growth rates of the industry are expectedto be slightly lower as compared to the previous fiscal on a larger base andas the industry reorganises itself to the changed priorities of clients.

We expect decent returns for the stocks over the medium term, subjectto near term volatility. We like Infosys and TCS among larger names. Wealso retain our positive bias for select mid-caps like Geometric.

Focus on skills initiativesThe Finance Minister has continued with the focus on skills initiatives withcontinued allocations to the same.

Impact - We expect related companies to benefit from the same.


0

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100

FY13 FY14 FY15 F16

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55

90

125



Impact on EPS (Rs)


Preferred picks

TCS 122.3 136.8 122.3 136.8 2177 2562

Infosys 58.7 67.5 58.7 67.5 1084 1305

Geometric 15.4 16.8 15.4 16.8 145 183

KPIT Cummins 14.4 16.5 14.4 16.5 134 160

NIIT Limited 4.5 7.1 4.5 7.1 70 92

Others

HCL Tech 40.4* 58.5 40.4* 58.5 813 879

Cyient 32.4 38.9 32.4 38.9 422 489

Mphasis 33.3 38.2 33.3 38.2 421 448

NIIT Technologies 44.3 47.1 44.3 47.1 420 548

Oracle 156.1 181.1 156.1 181.1 3217 3561

Wipro 36.5 39.6 36.5 39.6 520 574

Zensar 73.5 81.9 73.5 81.9 843 872

Source: Kotak Securities - Private Client Research; * - 9 month period



Volumes at major ports (mntonnes)

Source: Kotak Securities - Private ClientResearch, Indian Ports Association

Volume at Mundra port (mntonnes)

Source: Company

LOGISTICS


Phase out of incentives under Section 10AA for newly established unitsin Special economic zones (SEZ)Impact: Negative - Government would not be allowing any deduction tounits commencing manufacture or production of on or after 1st day April,2020 in a SEZ. Currently, units are allowed to claim 100% deduction of profitsderived from the exports from the SEZ for a period of five consecutive yearsbeginning with the year of manufacturing and then deduction of 50% ofthe profit for the next five consecutive assessment years. The new legislationintroduced in the current budget would impact the sale and rental of SEZunits impacting companies like Adani Port.

Abolishing Section 80IA, 80IAB, and 80IB which provides for deductionof profits derived from development of infrastructure facility and SEZsImpact: Negative - Government would provide deduction of 100 percentof the profits on investments made by companies on infrastructure facilityand development of SEZs under section 80IA; 80IAB, and 80IB, provided thefacility commences commercial operation and starts claiming deduction onor before 31st March, 2017. This would impact companies like Concor,Gateway Distriparks, Allcargo, Gujarat Pipavav Port and Adani Port whichclaim section 80IA benefits on the capex repeatedly.

Deduction under section 35AD reduced from 150 per cent to 100 percentof capexImpact: Negative- Budget has reduced the deduction of specific businesseslike cold chain facility and warehousing facility for storage of agriculturalproduce from 150 percent to 100 per cent of capital expenditure w.e.f. 1stApril 2017. Lower deduction would negatively impact companies likeSnowman, Gati and TCI who own large and multiple warehouses.

Credit of input services would be allowed on transport of goods incontainers by rail at a reduced abatement rate of 60% (reduced from70%)Impact: Neutral - Lower abatement would not impact the container trainoperators (CTOs) as they charge the customers on cost + taxes basis.

Increase in service tax by 50 bps on account of levy of Krishi Kalyan CessImpact: Neutral - Government would impose an additional cess of 50 bpson account of levy of Krishi Kalyan Cess on all taxable services with effectfrom 1st June, 2016, to finance and promote initiatives to improve agriculture.We expect logistics companies to pass on this increase to the customerswithout impacting there finances.

Excise duty lowered from 12.5% to 6% and customs from 10% to 5%on refrigerated containers.Impact: Positive - For shipping lines in container shipping including SCI andcompanies likes Snowman logistics

Provision of Rs 80 bn for the Sagarmala projectImpact: Positive- Sagarmala aims at improving port infrastructure alongwith hinterland connectivity giving fillip to the entire logistics sector in thecountry.

Amendments in the Motor Vehicle ActImpact: Positive - The government intends to abolish permit-raj and openup the road transport sector in the passenger segment. More entrepreneurswill be able to operate buses on various routes, subject to certain efficiencyand safety norms. The major benefit of this game changing initiative willbe provision of more efficient public transport facilities, greater publicconvenience, new investment in the moribund sector, creation of jobs, growthof startup entrepreneurs, healthy competition and other multiplier effects.


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120



Impact on EPS (Rs)


Preferred picksAdani Port 13.1 16.8 13.1 16.8 196 320Gujarat Pipavav 5.5 6.5 5.5 6.5 147 175Allcargo 10.5 12.3 10.5 12.3 137 225Concor 59.3 66.3 59.3 66.3 1,153 1,660

OthersGateway Distriparks 11.0 13.8 11.0 13.8 238 304Bluedaart 80.0 90.9 80.0 90.9 5,320 5,500




BUDGET IMPACT: NEUTRAL MEDIA


Changes in excise duties of set-top-box and inputs:Impact: Earlier, the excise duty for set-top-box and similar instruments incable TV as well as internet was 12.5% (with CENVAT credit). The Budgethas introduced an option of payment of 4% (without CENVAT credit) in thebudget. This would expand the procurement possibility set for set-top-boxmanufacturers. Further, the Budget has reduced the excise duty formanufacture of parts of such equipment to zero (12.5%). This would havea long-term positive impact on manufacturing of indigenous set-top-boxesand aid the media industry. In the near - term, we would expect only marginalpositives from these as most set-top-boxes are imported as of now (near- term impact is likely to be nil).

Hike in service tax from 14.5% to 15%Impact: The same shall have a marginal negative impact on earnings ofcompanies. However, we note that the expectation was for a 2 ppt hikein service tax. To that extent, the hike is incrementally a positive for thesector.

Signals of further delays in GST rollout a negativeImpact: From the lack of alignment of current excise duties/ service taxto the ones likely in GST regime, it appears that the government is notconfident about the passage/ implementation of GST in the near future.Since the GST has been the most awaited reform measure from certain sub-sectors (broadcasting platform owners, exhibition companies), the same maybe viewed as a modest incremental negative.

Impact on EPS (Rs)


Preferred picks

Dish TV 2.3 3.0 2.3 3.0 68 103

TV18 Broadcast 1.1 2.1 1.1 2.1 34 67

Zee Entertainment 10.5 13.8 10.5 13.8 373 428

OthersENIL 21.5 21.3 21.5 21.3 635 683

HMVL 24.0 27.6 24.0 27.6 260 300

Sun TV Network 21.7 22.6 21.7 22.6 321 362


Industry size - Media & Enter-tainment (Rs bn)

Source: FICCI - KPMG report

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METALS & MINING


Sustained infrastructure thrust to stimulate steel demand by variousinfrastructure activities.Impact: Positive for steel companies as higher outlay for housing, road,railways and irrigation projects would help demand for steel.

Increase in custom duty on primary aluminium to 7.5% from 5% andother aluminium products to 10% from 7.5%Impact: An increase in import duty is positive for the aluminium industry,as it will restrict cheaper imports and help domestic aluminium producersto take a price increase and sell higher volumes (as import accounts for~56% of the domestic demand share in FY16 vs 39% in FY12, leading toa sharp fall in capacity utilisation to 50%). Hindalco, National Aluminiumand Vedanta, are key beneficiaries of increase in custom duty.

Increase in custom duty on zinc alloys to 7.5% from 5%Impact: An increase in import duty is positive for the zinc producers, asit will restrict cheaper imports and help domestic zinc alloy producers tooperate at higher capacity and sell higher volume (as import volume of zincalloys has double compared to previous year). Thereby, creating anincremental demand for zinc. Hindustan Zinc is a key beneficiary.

Reduction in export duty on iron ore fines and lumps having Fe contentbelow 58% to NIL from 10% and 30% respectivelyImpact: Reduction in export duty is positive for the iron ore miners, as thereare hardly any buyers of iron ore for the grade below 58% and over 85%of the iron ore export constitutes of fines or low grade ore. This would alsolead to the improvement in export competitiveness of domestic iron oreindustry, as Goa looks to resume mining. Marginally positive for Vedanta.

The rate of Clean Environment Cess (earlier Clean Energy Cess) increasedfrom Rs200/tonne to Rs400/tonneImpact: We believe the landed cost of coal is likely to rise 4-5% for all metalproducers (Aluminium and Steel). This would lead to US$20-30/tonne increasein production cost for Aluminium producers and Rs150/tonne for steelmanufacturers.


Global HRC Prices (US$/t)

Source: Bloomberg

CRB Metals Index

Source: Bloomberg

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300

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400

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China U.S North Europe

475

550

625

700

775



Impact on EPS (Rs)


Preferred picksTata Sponge 16.3 45.4 16.3 45.4 371 540National Aluminium 2.7 2.9 2.7 2.9 33 44

OthersJSW Steel NM 106.3 NM 106.3 1,126 1,180Hindustan Zinc 18.1 17.6 18.1 17.6 160 175




Naphtha ($/bbls)

Source: Bloomberg

OIL & GAS


Change in rate of Oil industries development CessImpact: Negative for upstream companies. The Finance Bill, 2016, haschanged the method of OIDB Cess calculation from fixed rate to ad valorem.Prior to this budget, the cess rate was Rs. 4500/metric ton (i.e. $9/bbls).Post this budget, the OIDB Cess is 20% ad valorem.

Break-even crude oil price - post amendment on cess in Union budget 2016-2017

Particulars Unit Comments

Earlier, OIDB Cess - Fixed rate US$ 9/bbls Assuming Rs.68/US$Now, 20% ad valorem 20% As against market expectation of 10%Hence, ($9/bbls / 20%) is break-even US$ 45/bbls Upstream companies will pay higher taxes if

crude price increase above US$ 45/bbls andwill not be able to pass on to refineries.

Current crude oil price US$ 36/bbls

Source: Kotak securities-private client research. Note: The impact of cess will be different at different crudeoil level.

Just to put things in perspective, we assume crude oil price to move higher inlong term, say $100/bbls.

Illustration highlighting impact of change in OIDB cess

Particulars ($/bbls) Pre-budget Post-budget

Assuming crude oil price (Just an example) 100 100OIDB Cess - Fixed rate 9 -OIDB Cess - 20% ad valorem - 20Net realization to upstream companies 91 80In our example, upstream companies realization will declineby 12% to US$80/bbls as against US$91/bbls.

Source: Kotak securities-private client research. Note: The impact of cess will be different at differentcrude levels.

We believe upstream companies will have to bear this additional burden andwill not be able to pass it on.

Incentivizing domestic gas discoveryImpact: Positive for upstream companies. As part of the drive towards self-sufficiency, the government is considering to incentivise gas production fromdeep-water, ultra deep-water and high pressure-high temperature areas,which are presently not exploited on account of higher cost and higher risks.A proposal is under consideration for new discoveries and areas which areyet to commence production, first, to provide calibrated marketing freedom;and second, to do so at a pre-determined ceiling price to be discovered onthe principle of landed price of alternative fuels.

Petroleum SubsidyImpact: Neutral. The FM has budgeted Rs. 269.5 bn (includes Rs. 198.03bn for subsidy on LPG and Rs.71.47 bn for Kerosene subsidy) as thegovernment's share of the oil subsidy burden in FY17 v/s Rs. 30 bn in FY16,a cut of ~10%. Overall, we feel that, the estimates for fuel subsidies arerealistic and do not expect any major incremental number on the same.


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Impact on EPS (Rs)


Preferred picksGujarat State Petronet Ltd 8.1 9.2 8.1 9.2 126 150MRPL 0.7 8.9 0.7 8.9 57 63

OthersAban Offshore 50.1 49.6 50.1 49.6 156 168Cairn India 7.3 7.4 7.3 7.4 118 126Castrol India 12.5 14.0 12.5 14.0 367 455CPCL 34.2 34.5 34.2 34.5 172 152Indraprastha Gas 30.2 36.4 30.2 36.4 508 510Oil India Ltd 37.7 40.7 37.7 40.7 310 425Petronet LNG 12.2 15.1 12.2 15.1 235 220


Comparision

5D 1M 2M 3M 6M 1Y 2Y 3Y

CO1 Comdty (0) 1 (6) (22) (35) (44) (68) (69)BPCL (1) (14) (10) (15) (13) 6 59 126HPCL 4 (14) 6 (16) (14) 17 70 172IOCL 1 (7) (2) (11) (8) 14 2 37RIL 1 (7) (8) (0) 13 13 2 22MRPL 3 (13) (13) (15) 2 (9) (29) (4)CPCL 1 (7) (25) (12) (25) 130 (55) 38OIL INDIA (4) (13) (7) (17) (29) (34) 7 (32)BSE OIL AND GAS INDEX (2) (11) (8) (12) (6) (13) 4 (5)SENSEX (1) (7) 3 (12) (12) (20) 44 22

Source: Bloomberg

Dollar vs brent

Source: Bloomberg

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75

85

95

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127

147

167 Brent crude (LHS) Dollar index (RHS)



Volumes for Asian Paints (mn litres)

Source: Company, Industry

PAINTS


100% deduction on profits of housing projectsImpact: Positive - The government would be providing 100% deductionon profits of housing project for flats upto 30 sq. meters in four metro citiesand 60 sq. meters in other cities, approved during June 2016 to March 2019and completed in three years. We expect this to spur development ofresidential projects creating demand for decorative paints.

Home loan interestImpact: Positive - Additional interest deduction of Rs 50,000 per annumfor loans up to Rs 35 lakh sanctioned in FY17 for first time home buyers,where house cost does not exceed Rs 50 lakh is estimated to create moredemand for homes and for decorative paints.

Impact on EPS (Rs)


Preferred picksAsian Paints 19.1 23.2 19.1 23.2 848 925

OthersKansai Nerolac 6.6 7.7 6.6 7.7 270 275Berger Paints 5.7 7.0 5.7 7.0 229 275



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PHARMACEUTICALS


Fund allocation increasesImpact: Funds allocated for Health and family welfare at Rs 384.5bn, higherthan Rs 294.6bn in FY16 and Rs 358.74bn in FY15. The healthcare spendin India has been lower at ~4.0% of GDP (inc Centre and State) which islower than over 10% spend in EU, US and ~6-7% of developing countrieslike Brazil’s and Russia’s GDP.

Base Erosion and Profit Shifting (BEPS) project to be implemented fromFY17EImpact: This implementation would require companies to provide country-by-country report annually and for each tax jurisdiction in which they dobusiness, its overall transfer pricing policies and its global allocation of incomeand economic activity in order to assist tax administrations in evaluatingthe presence of significant transfer pricing risk. Negative for Sun Pharma,Sun expect its tax rate to increase going ahead partly due to BEPS.

Tax on Royalty income lowered to 10%Impact: Companies earning royalty income of a patent developed andregistered in India will have to pay only 10% tax rate compared to company'stax rate. Positive for Cipla as it has granted rights to Salix Pharma for Rifaximincomplexes patent family controlled by Cipla.

3,000 Jan Aushadhi Yojana stores to be opened in FY17Impact: Government remained committed on making the medicinesaffordable and will be opening 3,000 stores under Prime Minister's JanAushadhi Yojana in FY17. Jan Aushadhi Yojana sell only generic drugs wherethe prices of medicines are low compared to the branded medicines availableat chemist stores. In a country with over six lakh chemist stores, mere 3,000stores will not move the needle much but it does highlight the stepsgovernment will/might take going ahead to make medicines affordable.


Indian Pharma market split - Domestic/exports (US$ bn)

Source: Pharmaexil, Kotak Securities - Private Client Research

Indian domestic market size over 2000 to 2013 (US$ bn)

Source: Bloomberg

10.2% CAGR

12.4% CAGR

02468

1012141618

15.034

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Domestic Exports



Impact on EPS (Rs)


Preferred picks

Alembic Pharma 22.0 33.1 22 33.1 618 750

Sun Pharma 22.9 37.1 22.9 37.1 854 923

OthersCadila Hc 15.1 15.6 15.1 15.6 314 360

Cipla 23.6 27.4 23.6 27.4 514 560

Dr Reddy's 143.9 132.2 143.9 132.2 3,036 2,640

Lupin 50.8 82.1 50.8 82.1 1,764 2,220

Torrent Pharma 101.4 70.8 101.4 70.8 1,261 1,345




POWER


Increase in clean environment cessImpact: The effective rate of Clean Environment Cess on coal is beingincreased from Rs.200 per tonne to Rs.400 per tonne. This is expected toresult in a marginal increase in cost of power. Companies governed byregulated return model would be able to pass on to consumers. However,companies like JSW Energy that sell part of their power generation on amerchant basis would have to absorb the cost increase.

Impact on EPS (Rs)


Preferred picks

Tata Power 8.3 9.4 8.3 9.4 59 84

OthersNTPC 12.1 11.4 12.1 11.4 149 119

Source: Kotak Securites - Private Client Research


Installed power capacity (MW)

Source: CEA

HBA coal price (Indonesia) USD/ton

Source: Bloomberg

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Office Space: Supply & Demand

Source: JLL Research

Declining unsold inventory in Mumbai, Chennai & Bangalore

Source: JLL Research

REAL ESTATE


Clarity on Dividend Distribution Tax on SPVs to REITs and INVITsImpact: Positive. Real estate sector has been demanding removal of dividenddistribution tax on the income distributed to REITs from quite some timeas DDT was reducing the effective returns of the investors and was preventingthe REITs market to open up. This was adversely impacting the rate of returnfor the investor as under SEBI regulations both the SPV and business trustare obligated to distribute 90% of their operating income to the investors.

DDT exemption on income to be distributed to REITs is expected to be quitepositive for the real estate sector. The exemption from levy of DDT wouldonly be in the cases where the business trust either holds 100% of the sharecapital of the SPV or holds all of the share capital other than held byGovernment or Government bodies. Also, the exemption from the levy ofDDT would only be in respect of dividends paid out of current income afterthe date when the business trust acquires the shareholding in the SPV.

These key changes should pave the way for REIT/INVIT listings in India goingforward.

Focus on affordable low cost housingImpact: Positive. In order to promote low cost housing, 100% deductionhas been provided for profits to an undertaking in housing project for flatsupto 30 sq. metres in four metro cities and 60 sq. metres in other citiesapproved during June 2016 to March 2019 and completed in three years.Along with this, exemption from service tax is also provided on constructionof affordable houses up to 60 square metres under any scheme of the Centralor State Government including PPP Schemes. This would be positive forplayers engaged in building affordable housing.

Deduction of additional interest on loans below Rs 5 mnImpact: Positive. Government has also allowed deduction for additionalinterest of Rs 50,000 per annum for loans up to Rs 3.5 mn sanctioned in2016-17 for first time home buyers, where house cost does not exceed Rs5 mn. This is expected to encourage buyers and hence would be positivefor companies engaged in low cost housing.

Impact on EPS (Rs)


Preferred picksPhoenix mills 11.4 12.9 11.4 12.9 241 372



Retail space: Supply & Demand

Source: RBI



Baltic Dry Index (points)

Source: Bloomberg

Baltic dirty tanker index (points)

Source: Bloomberg

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SHIPPING


Zero taxation/100% input tax credit on the services provided by Indianshipping companiesImpact: Positive- Indian shipping companies were not provided any inputtax credit for the services they provide to the customers either from Indiaor abroad. The new legislation will bring down the cost of services providedby shipping companies making them competitive vis-a-vis foreign shippinglines.

Waiver of customs duty on ship repair equipmentImpact: Positive- Shipbuilding/ship repair companies are now exemptedfrom paying 10% customs duty on raw materials, parts, material handlingequipment and consumable for repairs of ocean-going vessels. This weestimate to bring down the capex and benefit the entire shipbuilding industry

Impact on EPS (Rs)


Preferred picksSCI 11.2 11.0 11.2 11.0 56 66GE Shipping 85.2 95.7 85.2 95.7 279 360

OthersPipavav Defence -8.8 -7.0 -8.8 -7.0 61 76



Fundamental Research Team

Dipen [email protected]+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305

Teena VirmaniConstruction, [email protected]+91 22 6621 6302

Saday SinhaBanking, NBFC, [email protected]+91 22 6621 6312

Arun AgarwalAuto & Auto [email protected]+91 22 6621 6143

Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448

Ritwik RaiFMCG, [email protected]+91 22 6621 6310

Sumit PokharnaOil and [email protected]+91 22 6621 6313

Amit AgarwalLogistics, Transportation, [email protected]+91 22 6621 6222

Meeta Shetty, [email protected]+91 22 6621 6309

Jatin DamaniaMetals & [email protected]+91 22 6621 6137

Pankaj [email protected]+91 22 6621 6321

Jayesh [email protected]+91 22 6652 9172

K. [email protected]+91 22 6621 6311

Technical Research Team

Shrikant [email protected]+91 22 6621 6360

Amol [email protected]+91 20 6620 3350

Derivatives Research TeamSahaj [email protected]+91 79 6607 2231

Rahul [email protected]+91 22 6621 6198

Malay [email protected]+91 22 6621 6350

Prashanth [email protected]+91 22 6621 6110

RATING SCALE

Definitions of ratingsBUY – We expect the stock to deliver more than 12% returns over the next 9 months

ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 9 months

REDUCE – We expect the stock to deliver 0% - 5% returns over the next 9 months

SELL – We expect the stock to deliver negative returns over the next 9 months

NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposesonly.

RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a suffi-cient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target.The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA – Not Available or Not Applicable. The information is not available for display or is not applicable

NM – Not Meaningful. The information is not meaningful and is therefore excluded.

NOTE – Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark.

DisclaimerKotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage anddistribution house.Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE),Metropolitan Stock Exchange of India Limited (MSEI), United Stock Exchange of India Limited (USEIL). Our businesses include stock broking, services renderedin connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and PortfolioManagement.Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited(CDSL).Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old MutualLife Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analystunder SEBI (Research Analyst) Regulations, 2014"We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in lastfive years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters orlevied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any otherauthorities; nor has our certificate of registration been cancelled by SEBI at any point of time.We offer our research services to clients as well as our prospects.This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any otherperson. Persons into whose possession this document may come are required to observe these restrictions.This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construedas an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the generalinformation of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives,financial situations, or needs of individual clients.We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completenesscannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. Therecipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in thismaterial may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options andother derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysiscenters on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not matchwith a report on a company's fundamentals.We do not have any information other than information available to general public with regard to budget proposals. The industryexpectations are based on information received from sources like respective industry associations, FICCI, CII, companies, media and otherpublic sources. This report contains budget expectations of our experts and its impact on specific sectors and companies, which may or maynot come true.Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis theinformation discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and othersare cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investmentbusinesses may make investment decisions that are inconsistent with the recommendations expressed herein.Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by thePrivate Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, targetprice of the Institutional Equities Research Group of Kotak Securities Limited.We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long orshort positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securitiesand earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein oract as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and relatedinformation and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may haveproprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general innature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advicebefore investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager.Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to thePCG research recommendation.The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company orcompanies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations orviews expressed in this report.No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent.Details of Associates are available on our website ie www.kotak.comResearch Analyst has served as an officer, director or employee of subject company(ies): NoWe or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates may have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. We or our associates may have received compensation forinvestment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have receivedany compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in thepast 12 months. We or our associates have not received any compensation or other benefits from the subject company(ies) or third party in connection withthe research report. Our associates may have financial interest in the subject company(ies).Research Analyst or his/her relative's financial interest in the subject company(ies): Infosys - YesKotak Securities Limited has financial interest in the subject Company(ies): Axis Bank, HDFC Bank, ICICI Bank, IOB, SBI, HDFC, LIC Housing, M&M Financial, BajajAuto, Hero MotoCorp, M&M, Maruti, Tata Motors, TVS Motor, Kajaria Ceramics, ABB, Bajaj Electricals, Bharat Electronics, BHEL, Crompton Greaves, CumminsIndia, L&T, Va Tech, Voltas, ACC, Grasim, Ultratech, IRB Infra, KNR Construction, NCC, PNC Infratech, GCPL, HUL, ITC, Nestle, Geometric, HCL Tech, Infosys,Oracle Financial Services, TCS, Wipro, Adani Port, Blue Dart, HMVL, Sun TV, Zee Ent, Cairn India, Petronet LNG, Asian Paints, Cipla DRL, Lupin, SunPharmaceuticals, NTPC, Tata Power and Phoenix Mills - YesOur associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately precedingthe date of publication of Research Report.Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the monthimmediately preceding the date of publication of Research Report: NoKotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately precedingthe date of publication of Research Report: NoSubject company(ies) may have been client during twelve months preceding the date of distribution of the research report."A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choosea company from the list on the browser and select the "three years" icon in the price chart)."Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051,Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road,A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF011133230, MSEI INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164 and PMS INP000000258. NSDL: IN-DP-NSDL-23-97. CDSL: IN-DP-CDSL-158-2001, Research Analyst INH000000586. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor isrequested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professionaladvice before investing. Investments in securities are subject to market risk; please read the SEBI prescribed Combined Risk Disclosure Document prior toinvesting. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually tradingin derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal . Call: 022 - 4285 6825, or Email: [email protected] case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at '[email protected]' and for demat account related queries contact us [email protected] or call us on:Online Customers - 30305757 (by using your city STD code as a prefix) or Toll free numbers18002099191 / 1800222299, Offline Customers - 18002099292 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: ManojAgarwal ) at [email protected] or call on 91- (022) 4285 6825. Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) [email protected] or call on 91- (022) 6652 9160.

UNION BUDGET ANALYSIS - Kotak Securities · FEBRUARY 29, 2016 PRIVATE CLIENT RESEARCH Registered...

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Transcript of UNION BUDGET ANALYSIS - Kotak Securities · FEBRUARY 29, 2016 PRIVATE CLIENT RESEARCH Registered...