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budget budget expectations 2018 expectations 2018

Budget

Budget Expectations 2018

Expectations 2018- -19

Elections vs. collections

19

Farm sector relief

Farm sector relief

Jobs

Jobs

Credibility

Credibility

FRBM

FRBM

Infra gap

Infra gap

Rating agency

Rating agency

Fiscal deficit (% of GDP)

Fiscal deficit (% of GDP)

-2.5

-2.8

-3.0

-3.2

-3.6

22 JAN 2018

22 jan 2018 22 jan 2018

22 JAN 2018

22 JAN 2018

Key things to watch for in this Budget

Key things to watch for in this Budget

BUDGET EXPECTATIONS 2018-19

The finance minister faces an interesting dilemma.

The finance minister faces an interesting dilemma. The union government’s fiscal position can be judged to be in

fantastic health purely based on taxes collected but the fact is not all of these taxes accrue to the Center !! So the

finance minister will have to decide how to present the truth!

The IGST conundrum

The IGST conundrum: The Center’s tax growth is primarily from IGST. Purists will argue that only half of IGST

accrues to the Center and only that must be considered. Fiscal practitioners could argue that IGST is like a holding

account and that there would be a base level of taxes in transit at all times. Some level of IGST could be a

permanent feature in the union government’s float. We think a middle ground would be shown.

We think a middle ground would be shown.

What will the FM present:

What will the FM present: The budget will show a miss in FY18; 3.4% of GDP fiscal deficit instead of 3.2% target

and below 3.5% achieved in FY17. FY19 is likely to be pegged at 3.2% of GDP (same as FY18 target).

Revenue:

Revenue: Non-tax receipts like spectrum, RBI dividend and divestment would be scaled back slightly.

Tax collections to improve on growth and greater compliance on GST. Optimistic tax buoyancy at 1.3 to account

for scale back in non-tax targets.

Expenditure

Expenditure: Subsidy will rise due to food (expansion of price deficit MSP), interest (affordable housing) and fuel

(oil @ 65) offsetting benefits from DBT in fertilizers. Capex allocation will see greater thrust on irrigation,

rural roads and rural housing.

Beneficiaries: (A)

Beneficiaries: (A) Rural focus: Cement, FMCG and infra; (B)

(C)

(C) Corporate tax cut: FMCG, retail.

(B) Affordable housing push: Banks, Cement, Realty;

Losers:

Losers: All insurance companies – If corporate tax rationalization leads to higher tax rate for insurance companies

who are currently paying 15%.

2

22 jan 2018 22 jan 2018 1

22 JAN 2018

22 JAN 2018

Sectoral expectations: Summary…

Sectoral expectations: Summary…

BUDGET EXPECTATIONS 2018-19

Sector

Sector

Key budget expectations

Key budget expectations

Impact

Impact

Financial incentive to replace vehicles older than 10/15 years

Long-term measures for agri sector to push farmer productivity/ income

levels up

Higher JNNURM orders for bus manufacturers and incentives for EVs

Little impact

Positive:

Positive: CV OEMs,

Hero, M&M, Maruti

Autos

Autos

Positive

Positive

♦ Housing finance

companies to benefit from

increased demand for

affordable housing

♦ Recapitalization to aid

large PSU banks with

growth capital

♦ Merger of PSU banks to

benefit PSU banks under

PCA

 Final blueprint and roadmap of mega recap plan to fund PSU banks

 Roadmap on merger plan of weak PSU banks

 Support for ‘Housing for All’ by 2022

 Separate tax exemption for term life insurance

 Increased tax on life insurance companies, bringing it in line with current

corporate tax rate

Banking and Financial

Banking and Financial

Services

Services

3

22 jan 2018 22 jan 2018 2

22 JAN 2018

22 JAN 2018

…Sectoral expectations: Summary…

…Sectoral expectations: Summary…

BUDGET EXPECTATIONS 2018-19

Sector

Sector

Key budget expectations

Key budget expectations

Impact

Impact

Positive:

Positive: L&T, Dilip Buildcon,

Sadbhav, ABB, Siemens, VA

Tech and EPC players

Capital

Capital goods and

goods and

Infrastructure

Infrastructure

Higher budgetary allocation towards roads, railways, metro,

defense and urban infra (AMRUT) projects

Positive

Positive: Industry would

benefit from better volume

growth

 Thrust on reviving rural economy through various incentives and higher

infra spending

Cement

Cement

♦ Corporate tax – Positive

for ITC, HUL, GSK Cons,

Nestle and Colgate

♦ Rural stimulus – Positive

HUVR, Dabur, Emami,

CLGT and JYL

♦ Customs duty – Positive

jewellery companies

Positive

 Outlining of reduction in corporate tax rate from 30% to 25% will benefit

full tax paying companies

 Increased stimulus for rural India in the form of higher allocation to

MNREGA and other rural employment initiatives

 Some relief to the jewellery industry in terms of lower custom duty on

gold import (custom duty was increased from 2% to 10% in 2012-13)

Positive for

FMCG & Retail

FMCG & Retail

Positive for

4

22 jan 2018 22 jan 2018 3

22 JAN 2018

22 JAN 2018

…Sectoral

…Sectoral expectations:

expectations: Summary…

Summary…

BUDGET EXPECTATIONS 2018-19

Sector

Sector

Key budget expectations

Key budget expectations

Impact

Impact

♦ Positive

Positive for Hindalco and

Vedanta

♦ Positive

Positive for domestic steel

producers

 Import duty on Aluminum to increase to10% from 7.5%

 Customs duty on coking coal to cut down to nil from 2.5%

Metals

Metals

 Cut in cess rate for E&P companies (20% ad valorem currently)

 Inclusion of natural gas in GST (20-25% tax currently)

♦ Positive

Positive: for upstream cos.

♦ Positive

Positive: for CGD, GAIL,

GSPL, PLNG

♦ Positive

Positive for CGD cos.

Oil & Gas

Oil & Gas

 Exemption in excise duty for CNG used for natural gas vehicles

♦ Extend R&D sunset clause (150% deduction on R&D) beyond 2020

♦ Match GST refund rates to previous excise duty refund rates (20-25%

lower currently)

♦ Implement proposed reduction in corporate tax rates to 25% in a phased

manner for all domestic companies irrespective of turnover/ profit

(currently limited to smaller companies)

♦ Positive

Positive for companies

incurring high R&D

expenses

♦ Positive

Positive for domestic

manufacturers

Pharma

Pharma

5

22 jan 2018 22 jan 2018 4

22 JAN 2018

22 JAN 2018

…Sectoral expectations:

…Sectoral expectations: Summary…

Summary…

BUDGET EXPECTATIONS 2018-19

Sector

Sector

Key budget expectations

Key budget expectations

Impact

Impact

Positive

Positive for all gencos and

discoms, as it will reduce cost

of power and boost overall

power demand

 Uptick in Power T&D expenditure

 Inclusion of electricity under GST

 Down-scaling of clean energy cess

Power

Power

Positive:

Positive: For all developers

focused on affordable

segment. Incentives to REITs

positive for annuity players

 Expanding beneficiaries of Pradhan Mantri Awas Yojana (PMAY)

 Further tax rationalization in REITs

 Increase deduction limit on housing interest and principal on housing loan

Realty

Realty

 Reduction in customs duty on equipment for timely roll-out of networks

 Relaxing withholding tax on distributors’ margin on SIM cards and

prepaid vouchers

 Lowering GST on telecom services

Neutral

Neutral for all telecom service

providers. Any cut in custom

duty could be positive

positive

Telecom

Telecom

6

macro backdrop of the budget macro backdrop

Macro backdrop of the budget

Macro backdrop of the budget

22 jan 2018 22 jan 2018 5

22 JAN 2018

22 JAN 2018

The concerns that need to be addressed

The concerns that need to be addressed

BUDGET EXPECTATIONS 2018-19

I Investment rate continues to languish

nvestment rate continues to languish

Consumer sentiment is souring on employment outlook

Consumer sentiment is souring on employment outlook

Consumer confidence (1Yr ahead eco expectations)

Real PFCE growth (Discretionary itens only*, RHS)

GFCF/GDP

40%

60

15

(Net response)

35%

(%YoY)

12

40

30%

9

20

6

25%

26.4%

0

3

20%

-20

0

May-12

May-13

May-14

May-15

May-16

May-17

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Source: CEIC, Axis Capital

Source: Source: RBI consumer sentiment survey covering 5000 HHs in 6 metros.

India is not outperforming on world trade growth

India is not outperforming on world trade growth

Farm sector realizations have crashed barring a few vegetables

Farm sector realizations have crashed barring a few vegetables

30

Rural wage growth (avg. for Men & Women)

(%YoY)

80

India exports (value)

World Trade (Value)

(YoY%)

Food inflation

25

60

Correl = 84%

20

15

40

10

6.4

20

5

0

0

-20

-5

May-13

May-14

May-15

May-16

May-17

Nov-12

Nov-13

Nov-14

Nov-15

Nov-16

Nov-17

-40

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

*We remove non-discretionary items within private consumption like food & fuel to derive discretionary personal final consumption expenditure (PFCE)

8

22 jan 2018 22 jan 2018 6

22 JAN 2018

22 JAN 2018

Key expectations from the budget this year

Key expectations from the budget this year

BUDGET EXPECTATIONS 2018-19

For FY18:

For FY18: Decide between managing the

optics using IGST collections or use 0.5% of

GDP buffer space available under

N.K.Singh’s FRBM recommendations

Fiscal stance

Fiscal stance

For FY19:

For FY19: Stick to the glide path to shore up

credibility or alter the glide path to show

realistic picture

♦ Lower de facto corporate tax as per

glide path

♦ More graded income tax slabs

♦ Scale back asset sales target

♦ Assume modest RBI dividend

♦ Optimistic tax buoyancy assumption

Revenue

Revenue

measures

measures

♦ Push for affordable housing through

intervention in land market and relaxing

eligibility criteria for credit subsidy

♦ Higher capex spending in roads (+18%),

irrigation, food supply chain and housing

♦ Tax incentive for buyers of stressed assets

Revival of

Revival of

growth

growth

♦ Savings from using DBT to be offset

by food and interest subsidy

♦ Given no large incidentals like 7 pay

commission, can go slow on revenue

expenditure growth and bump up

in capex

Expenditure

Expenditure

measures

measures

♦ Use of DBT in all subsidy schemes

♦ Rework and implement price-deficit MSP

system

♦ Set-up challenge model for allocation of

resources to states rather than allocation

based on politics

♦ Incentivize defense R&D among MSMEs

Reforms

Reforms

9

Source: Axis Capital

22 jan 2018 22 jan 2018 7

22 JAN 2018

22 JAN 2018

The IGST conundrum

The IGST conundrum

BUDGET EXPECTATIONS 2018-19

(Rs

(Rs bn)

bn)

April

April- -November

November

FY17

FY17

9,333

% y

% y- -o o- -y y

FY18

FY18

10,873

April-Nov indirect tax collection growth is 19% y-o-y,

but if we take only 50% of IGST collected, then

indirect tax collection run rate falls to 5.5%, which is

still better than 4% budget target.

Gross tax collected by center

17

ow Direct

-Corporate

-Income

14

12

15

4,089

2,223

1,867

4,650

2,498

2,152

IGST is an interim account. When a good is finally

consumed, the IGST so collected gets equally

distributed between CGST and SGST. If the good is

exported, then rebates are claimed.

ow Indirect

-CGST

-UTGST

-IGST

-GST comp cess

-Customs

-Excise

-Service

-Others

19

5,243

-

-

-

-

1,485

2,136

1,468

154

6,223

854

1

1,383

309

1,028

1,652

791

204

(31)

(23)

(46)

32

In the meantime, the center is showing IGST under its

books. Given that there would be a base level of IGST

at all times, the center could consider showing a little

more than half of IGST in its year ending accounts.

NCCF (LESS)

Assignment to states (LESS)

(39)

25

43

26

3,078

-

6,212

8,290

14,502

3,853

-

6,994

9,467

16,461

Even without IGST, states are seeing budget beating

tax growth. This data includes taxes from stamp duty.

Net tax available to center

Tax revenue of states (27 #s)

Total tax (Center + State)

13

14

14

Our FY18 fiscal deficit estimates assumes 4% y

Our FY18 fiscal deficit estimates assumes 4% y- -o o- -y growth in indirect taxes; so the FM has some leeway to show

y growth in indirect taxes; so the FM has some leeway to show

fiscal achievement . For FY19, we are more optimistic with 15% indirect tax projection.

fiscal achievement . For FY19, we are more optimistic with 15% indirect tax projection.

10

Source: CEIC, Axis Capital

22 jan 2018 22 jan 2018 8

22 JAN 2018

22 JAN 2018

RBI dividend

RBI dividend

BUDGET EXPECTATIONS 2018-19

RBI profits dipped by INR 352

RBI profits dipped by INR 352 bn

bn

RBI net injection (

RBI net injection (- -) /absorption (+)

) /absorption (+)

Net repo

MSS

Surplus transferd to the government (LHS)

% of gross income less expenditure (RHS)

8

(Rs trn)

700

100

6

(%)

(Rs bn)

600

80

4

-352bn

500

60

2

400

300

40

0

200

20

(2)

100

May-17

Jul-17

Mar-17

Sep-17

Feb-17

Oct-16

Oct-17

Dec-16

Dec-17

Jan-17

Jan-18

Jun-17

Apr-17

Nov-16

Nov-17

Aug-17

0

0

2012-13

2013-14

2014-15

2015-16

2016-17

Source: CEIC, Axis Capital

Source: RBI

RBI profits dropped in FY17 mostly due to excess liquidity in banking system (post demonetization) which the RBI

had to absorb by taking deposits at reverse repo rate. The RBI’s dividends to the government therefore suffered. The

banking system has been in surplus through FY18, so dividends expectations from the RBI and even the BFSI

segment would have to be scaled back.

In FY19, tax projections will be scaled up but non

In FY19, tax projections will be scaled up but non- -tax collections would be scaled back

tax collections would be scaled back

11

22 jan 2018 22 jan 2018 9

22 JAN 2018

22 JAN 2018

PSU recapitalization

PSU recapitalization – – details to be provided in the budget

details to be provided in the budget

BUDGET EXPECTATIONS 2018-19

The impact on fiscal is marginal if

The impact on fiscal is marginal if recap

outside the balance sheet

outside the balance sheet

2 Yr bank recapitalizaton plan

2 Yr bank recapitalizaton plan

recap bonds are kept

bonds are kept

However, public debt figures will rise before taking the path

However, public debt figures will rise before taking the path

prescribed by

prescribed by N.K.Singh’s

N.K.Singh’s FRBM recommendation

FRBM recommendation

(Rs bn)

(Rs bn)

% of GDP

% of GDP

Public debt to GDP ratio (in %)

Public debt to GDP ratio (in %)

From budget

180

0.1%

70%

68%

67%68%

Banks capital raising

580

0.3%

Recapitalization bonds

1,350

0.8%

65%

Total

Total

2,110

2,110

1.3%

1.3%

60%

Estimated interest cost

101

0.1%

55%

FY20t

FY21t

FY22t

FY24t

FY25t

FY18E

FY19E

FY23t

FY12

FY14

FY15

FY16

FY17

FY13

Source: Axis Capital

Source: CEIC, Axis Capital

In 2015, PSU banks were busy supporting financial inclusion (Jan Dhan); in 2016, they were busy making provisions

(AQR) and supporting demonetization; in 2017, it was all about resolving NPAs. 2018 is likely to show genuine signs

of moving towards better health as banks begin to taste resolution on NPA assets and recapitalize with the help of the

government and sanguine capital market conditions.

Path to 60% public debt to GDP will be delayed by bank recapitalization

Path to 60% public debt to GDP will be delayed by bank recapitalization

12

22 jan 2018 22 jan 2018 10

22 JAN 2018

22 JAN 2018

Rural push

Rural push – – only a few levers available that can give quick results

only a few levers available that can give quick results

BUDGET EXPECTATIONS 2018-19

Rural push

Rural push - - assessment of policy levers

assessment of policy levers

In terms of actionable rural stimulus

plans, the central government has only

a few levers in its control. The

problem

problem that

that the

the government

government needs

address

address this

this time

time is is fall

realization

realization; for this, increasing credit

availability or investment in marketing

infrastructure would not help.

A direct intervention into the market like

increasing

MSP

procurement is the only way to get

quick

results.

To

criticism for procuring and letting the

food rot in poor storage units, we think

the government can incentivize setting

up

of

‘soup

kitchens’

Canteen in Tamil Nadu and more

recently Indira Canteen in Karnataka,

which

has

the

added

addressing the urban poor.

High

The key

needs to to

farm sector

sector

key

Interest subsidy

Credit to agri

Interest waiver

fall in in farm

Price deficit

MSP

Implementable

Implementable

Loan waivers

and

raising

shield

itself

from

Expand

procurement

Rural

infrastrucutre

like

Amma

Low

High

Addresses current issue

Addresses current issue

benefit

of

Source: Axis Capital

Rural push is likely to increase the food and interest subsidy bill

Rural push is likely to increase the food and interest subsidy bill

13

22 jan 2018 22 jan 2018 11

22 JAN 2018

22 JAN 2018

Sticking to FRBM has its benefits

Sticking to FRBM has its benefits

BUDGET EXPECTATIONS 2018-19

Capital costs in the economy depend on fiscal credibility

Capital costs in the economy depend on fiscal credibility

Net market borrowing (Union Govt.)

10 Gec (RHS)

The central

government plays

an important role

in setting long-term

funding costs in

the economy

8

13

(% of GDP)

(%)

6

11

Keeping long-term

borrowing costs

anchored helps

the current

deleveraging

cycle and the

nascent optimism

on investment

cycle upturn

4

9

2

7

0

5

Mar-00

Mar-01

Mar-02

Mar-03

Mar-05

Mar-06

Mar-08

Mar-09

Mar-11

Mar-12

Mar-14

Mar-15

Mar-17

Mar-04

Mar-07

Mar-10

Mar-13

Mar-16

Mar-18E

Mar-19E

Source: Axis Capital

Borrowing costs in the economy would

Borrowing costs in the economy would fall if

fall if S&P

S&P follows

follows through on Moody’s

through on Moody’s upgrade last

upgrade last year

year

14

22 jan 2018 22 jan 2018 12

22 JAN 2018

22 JAN 2018

Working assumptions for

Working assumptions for FY19

FY19 budget

budget

BUDGET EXPECTATIONS 2018-19

(Rs bn)

(Rs bn)

FY18 BE

FY18 BE

FY18 (Axis)

FY18 (Axis)

FY19 (Axis)

FY19 (Axis)

% y-o-y

% y-o-y Abs YoY

Abs YoY

Comments

Comments

Gross Tax Revenue

Gross Tax Revenue

19,116

19,116

19,140

19,140

22,103

22,103

15

15

2,963

2,963

Tax bouyancy assumed at 1.3

Corporation tax

5,387

5,431

6,137

13

706

Maintain current run rate

Income tax

4,413

4,020

4,824

20

804

Maintain current run rate

Indirect tax

9,316

9,688

11,142

15

1,453

Improves on growth and measures to raise GST compliance

Less: To States & Union Territories & NCCF

Less: To States & Union Territories & NCCF

6,846

6,846

6,846

6,846

7,836

7,836

14

14

990

990

Net tax revenues

Net tax revenues

12,270

12,270

12,294

12,294

14,267

14,267

16

16

1,973

1,973

Non tax revenues (incl dividend, interest, etc)

2,888

2,744

2,626

(4)

(119)

Low spectrum estimate and no RBI dividened boost

Non-debt capital receipts (incl divestment)

Revenue expenditure

Revenue expenditure

- ow Interest

- ow Subsidies

- ow Subsidies

844

994

670

(33)

7 7

(324)

1,307

1,307

170

128

128

Rs. 55k divestment figure

Post 7th pay comission, there is some space to go slow

Impact of bank recapitalization

18,369

18,369

5,231

2,635

2,635

18,669

18,669

5,231

2,707

2,707

19,976

19,976

5,401

2,835

2,835

3

5 5

Food

1,453

1,500

1,600

7

100

Fertilizer

700

700

680

(3)

(20)

Savings from DBT

Petroleum

250

275

300

9

25

Crude oil price @ 65/bbl

Crude oil price @ 65/bbl

Interest

232

232

255

10

23

67mn individuals used the scheme in FY18, down from

74mn in FY14. Additional allocation can impact

2-5mn individuals

- ow MGNREGA

480

480

550

15

70

Capital Expenditure

Capital Expenditure

3,098

3,098

2,998

2,998

3,598

3,598

20

20

600

600

Mostly into rural housing, irrigation and urban infrastructure

Total Expenditure

Total Expenditure

21,467

21,467

21,667

21,667

23,574

23,574

9 9

1,906

1,906

Fiscal deficit

(5,465)

(5,635)

(6,011)

(376)

Fiscal % of GDP

Fiscal % of GDP

(3.2)

(3.2)

(3.4)

(3.4)

(3.2)

(3.2)

Source: RBI, Axis Capital

15

22 jan 2018 22 jan 2018 13

22 JAN 2018

22 JAN 2018

Working assumptions for

Working assumptions for FY19 general government financing

FY19 general government financing

BUDGET EXPECTATIONS 2018-19

Particulars

Particulars

Fiscal deficit (% of GDP)

Fiscal deficit (% of GDP)

Central Govt

FY15

FY15

FY16

FY16

FY17

FY17

FY18BE

FY18BE

FY18RE

FY18RE

FY19E

FY19E Comments

Comments

(4.1)

(3.9)

(3.5)

(3.2)

(3.4)

(3.2)

We see a strong chance that states will do better

than budget in FY18. Tax collection for 27 states is

collectively growing at 14% y-o-y (Apr-Nov) versus

budget target of 12%.

State Govt

(2.6)

(3.6)

(3.0)

(2.6)

(2.6)

(2.5)

Total govt

Fiscal deficit (INR bn)

Fiscal deficit (INR bn)

Central Govt

State Govt

Total govt

Mkt. borrowing (INR bn)

Mkt. borrowing (INR bn)

Central Govt borrowings

(6.7)

(7.5)

(6.5)

(5.8)

(5.9)

(5.7)

(5,108)

(3,272)

(8,380)

(5,274)

(4,934)

(10,208)

(5,351)

(4,495)

(9,846)

(5,465)

(4,310)

(9,775)

(5,635)

(4,310)

(9,945)

(6,011)

(4,688)

(10,700) Total financing requirement

4,547

4,406

4,082

3,502

4,052

4,508

Improved states fiscal health could translate to

lower borrowing next year

State Govt borrowings

2,360

2,612

3,293

3,468

3,468

3,751

Total govt requirement

Mkt. borrowing % a GDP

Mkt. borrowing % a GDP

6,907

7,018

7,375

6,970

7,520

8,259

Central Govt borrowings

State Govt borrowings

Total govt requirement

Sources of funding for market borrowing (INR bn)

Sources of funding for market borrowing (INR bn)

3.7%

1.9%

5.6%

3.2%

1.9%

5.1%

2.7%

2.2%

4.9%

2.1%

2.1%

4.1%

2.4%

2.1%

4.5%

2.4%

2.0%

4.4%

Banks

Insurance Companies

Financial Institutions (PDs, MF,

PF, Corp+FIIs)

Reserve Bank of India

Total

Funding gap (INR bn)

Funding gap (INR bn)

1,887 2,750 2,634

2,412 2,451 2,679

3,029 3,332 Assumes 15% growth in FY18 and 10% in FY19

3,001 3,301 Assumes 12% growth in FY18 and 10% in FY19

Takes into account opening up of FII space in FY18

and 10% growth in FY19

(900)

7,130 8,833

1,946 2,099 1,891

2,000 2,200

5,881 7,806 8,304

(364)

505 1,099

Surplus/deficit

(1,026)

788

928

(390)

574

16

Source: RBI, Axis Capital

sectoral sectoral expectations expectations

Sectoral

Sectoral expectations

expectations

22 jan 2018 22 jan 2018 14

22 JAN 2018

22 JAN 2018

Auto

Auto

BUDGET EXPECTATIONS 2018-19

Item

Item

Current status

Current status

Possible changes in budget

Possible changes in budget

Impact

Impact

 Vehicle

modernization

scheme

-

 Financial incentive to replace

vehicles over 10/15 years old

Positive

Positive for CV players

CV players

 Farm income/

productivity

-

 Long-term measures in agri sector

to improve farmer productivity/

income levels

Positive

Positive for Tractor OEMs

(M&M and Escorts)

(M&M and Escorts) and OEM’s

with higher rural dependence

(Maruti and Hero)

(Maruti and Hero)

 JNNURM orders

(STU bus procurement

program)

-

 Increased allocation under the

scheme for STU procurement

of buses, and incentives for electric

buses

Positive

Positive for Ashok Leyland

Ashok Leyland

(>45% market share in STU),

and Tata Motors

Tata Motors

Largely positive, as always

Largely positive, as always

18

22 jan 2018 22 jan 2018 15

22 JAN 2018

22 JAN 2018

Financials

Financials

BUDGET EXPECTATIONS 2018-19

Sector

Sector

Item

Item

Current status

Current status

Possible changes in budget

Possible changes in budget

Impact

Impact

Positive

Positive – PSU banks

(especially for large PSU

banks like SBIN, BOB

that require growth

capital)

Final blueprint on types of bonds

or interest rates on these bonds;

Specific roadmap of funding

Capital allocation to PSU

banks

A mega recap plan of

Rs 2.1 trn

Banks

Banks

Associate banks of SBI

and Bhartiya Mahila

bank merged with SBI

Roadmap on merger plan of

weak PSU banks

Positive

Positive for PSU banks

under PCA

Merger of PSU banks

Additional tax sops;

Increase in ticket sizes/ current

limits;

Using of land bank of PSUs for

affordable housing

Positive

Positive for housing

finance lenders (Banks

and HFCs)

Housing for All by 2022

and affordable housing

4% subsidy on interest

rate for home loans

NBFC

NBFC

Creating a separate tax

exemption for term life

insurance

Positive

Positive for Life

Insurance companies

(SBI Life)

Separate tax exemption for term

life insurance

Part of 80C with ceiling

of Rs 0.15 mn

Insurance

Insurance

Increase in tax rate on

life insurance companies

Raising it to bring it in line with

corporate tax rate

Negative

Negative for all Life

Insurance companies

At ~15% currently

19

22 jan 2018 22 jan 2018 16

22 JAN 2018

22 JAN 2018

Capital Goods and Infrastructure…

Capital Goods and Infrastructure…

BUDGET EXPECTATIONS 2018-19

Item

Item

Current status

Current status

Possible changes in budget

Possible changes in budget

Impact

Impact

 Road capex (urban +

rural + NHAI)

 FY18 outlay on road at

Rs 1.43 trn (up 10% YoY)

boosted by MoRTH allocation

 To further increase by

20-25% in FY19

Positive

Positive for EPC companies

EPC companies

with strong balance sheets

with strong balance sheets

 Railway capex

 FY18 at Rs 1.31 trn

(up 8% YoY)

 To further increase by

10-15% in FY19

Positive

Positive for L&T, ABB, Siemens,

L&T, ABB, Siemens,

and other EPC companies

 Capital outlay for

metro rail

 FY18 at Rs 180 bn

(up 15% YoY)

 To further increase by

10-15% in FY19

Positive

Positive for L&T, J Kumar,

L&T, J Kumar,

BEML, Siemens, Simplex

BEML, Siemens, Simplex etc.

 Capital outlay on

defense

 FY18 at Rs 887 bn (modest

increase of 8% YoY)

 Modest growth of 5-10%

in FY19

Positive

Positive for BEL, Cochin

BEL, Cochin

Shipyard, L&T, Reliance

Shipyard, L&T, Reliance

Defence

Defence

 Capex for urban

Infrastructure

 Rs 196 bn in FY18,

up 7% YoY

 To increase further by 15-20%

in FY19

Positive

Positive for ABB, Siemens,

ABB, Siemens,

VA Tech, Schneider

VA Tech, Schneider etc.

Higher capital outlays in infra positive for EPC companies

Higher capital outlays in infra positive for EPC companies

20

22 jan 2018 22 jan 2018 17

22 JAN 2018

22 JAN 2018

…Capital Goods and Infrastructure

…Capital Goods and Infrastructure

BUDGET EXPECTATIONS 2018-19

Capex for key schemes

Capex for key schemes

Growth YoY (%)

Growth YoY (%)

(Rs bn)

(Rs bn)

FY15

FY15

FY16

FY16

FY17 RE

FY17 RE

FY18 BE

FY18 BE

FY18

FY18

FY19E

FY19E

Defence Capex

820

815

818

887

8

5-10

Railways

643

935

1,210

1,310

8

10-15

Metro (Under Min. of Urban Development)

61

93

157

180

15

10-15

Roads (MORTH)

274

469

524

649

24

20-25

Rural Roads (PMGSY)

142

183

190

190

0

20-30

Rural Housing

Urban Infra

Renewable Energy

111

43

20

101

77

40

160

183

39

230

196

50

44

7

27

30-40

15-20

20-30

Urban T&D (Int. Power Development Scheme)

6

10

45

58

29

15-20

Rural Electrification (DDUGJY)

34

45

34

48

43

20-30

Total budget allocation

Total budget allocation

2,154

2,154

2,768

2,768

3,360

3,360

3,798

3,798

13

13

Growth (%)

9

29

21

13

Source: Budget documents, Axis Capital

21

22 jan 2018 22 jan 2018 18

22 JAN 2018

22 JAN 2018

Commodities

Commodities

BUDGET EXPECTATIONS 2018-19

Sector

Sector

Item

Item

Current status

Current status

Possible changes in Budget

Possible changes in Budget

Impact

Impact

Cement

Cement

 Thrust on reviving

rural economy by

various incentives

and higher infra

spending

 NA

 Tax benefit/ interest rate

concession to new

projects and higher

allocation for rural

schemes/ loan waiver

Positive

Positive – industry to benefit

from volume growth

Metals

Metals

 Import duty on

Aluminum

 Current duty at 7.5%

 Increase it to 10%

Positive

Positive for Hindalco,

Vedanta and NALCO

 Reduction in custom

duty on coking coal

 Current custom duty

at 2.5%

 Reduce it to nil

Marginally positive

Marginally positive for steel

companies

Higher allocation to housing/infra positive for cement

Higher allocation to housing/infra positive for cement

22

22 jan 2018 22 jan 2018 19

22 JAN 2018

22 JAN 2018

FMCG and Retail

FMCG and Retail

BUDGET EXPECTATIONS 2018-19

Item

Item

Current status

Current status

Possible changes in budget

Possible changes in budget

Impact

Impact

 Increased

spending in

rural

 As part of infrastructure

development, central

government along with

state government runs

various schemes. These

initiatives are also

focused on generating

employment

 Expectation of a populist

budget given general

elections in 2019;

increased budgetary

allocation likely for rural

India

Positive

Positive for rural-focused companies like Emami

(50% of sales), Dabur (45% of sales), Bajaj Corp

(42% of sales), Jyothy Lab (40% of sales), Colgate

(38% of sales) and HUL (35% of sales)

 Corporate

tax

 Tax rate of 30%

(excluding cess)

 Outlining of reduction in

corporate tax rate from

30% to 25%

Positive

Positive for high tax paying companies like ITC,

HUL, Nestle, GSK Consumer, Colgate

HUL, Nestle, GSK Consumer, Colgate

ITC,

 Custom duty

on gold

import

 Current duty at 10%

 Jewellery association has

demanded lowering the

custom duty to 4-5%

Positive

Positive for all jewellery companies

Positive for FMCG and Retail companies

Positive for FMCG and Retail companies

23

22 jan 2018 22 jan 2018 20

22 JAN 2018

22 JAN 2018

Oil & Gas

Oil & Gas

BUDGET EXPECTATIONS 2018-19

Item

Item

Current status

Current status

Possible changes in budget

Possible changes in budget

Impact

Impact

 Cut in cess rate for

E&P companies

 E&P companies are required

to pay cess at 20% of

realized crude oil price

 Cut in cess rate to 5-8% of

realized crude, as rise in crude

pushed the cess up much beyond

earlier fixed rate of Rs 4,500/t

Positive

Positive for ONGC, Oil India

ONGC, Oil India

and Cairn

Cairn

 Inclusion of natural

gas in GST

 Natural gas along with key

petroleum products (petrol,

diesel, jet fuel) and crude oil

is not included in GST

 Natural gas inclusion in GST,

possibly in the 5% slab in line

with GST on coal

Positive

Positive for CGD

GAIL, GSPL and PLNG, as GST

inclusion makes natural gas

competitive vs. other fuels (coal,

petrol and diesel), pushing gas

demand up

CGD companies,

 Exemption in excise

duty for CNG used

for natural gas

vehicles

 Compression of gas is

viewed as “manufacturing”

of goods and attracts excise

duty of 14.4%

 Cut/ exemption in excise duty

charged on CNG volumes of

CITY GAS DISTRIBUTION (CGD)

companies

Neutral

Neutral for CGD

cut in excise will be passed on.

However, lowering of retail gas

price may boost consumption

CGD companies as

Promoting natural gas as principal fuel by giving tax benefits to CGD players;

Promoting natural gas as principal fuel by giving tax benefits to CGD players;

Petrol and diesel inclusion in GST may take more time, as it requires states’ consensus

Petrol and diesel inclusion in GST may take more time, as it requires states’ consensus

24

22 jan 2018 22 jan 2018 21

22 JAN 2018

22 JAN 2018

Power

Power

BUDGET EXPECTATIONS 2018-19

Item

Item

Current status

Current status

Possible changes in budget

Possible changes in budget

Impact

Impact

 Power T&D

expenditure

 ~Rs 106 bn spent on such

schemes in FY18 BE

 Increase by 20-25%

Positive

Positive for power gencos, as

higher capex helps reduce T&D

losses and, improve power

demand by SEBs

 Include electricity

in GST

 Not included

 Likely to be included

Positive

Positive for gencos and SEBs as

it will reduce cost of power due

to offset on input credit. This will

also boost power demand in

manufacturing sector (40% of

power consumption)

 Clean energy cess

 Current cess at Rs 400/ton

 Down-scaling of the cess

Positive

Positive for gencos, as it would

reduce cost of power

25

22 jan 2018 22 jan 2018 22

22 JAN 2018

22 JAN 2018

Real Estate

Real Estate

BUDGET EXPECTATIONS 2018-19

Item

Item

Current status

Current status

Possible changes in budget

Possible changes in budget

Impact

Impact

 Extend provisions of section

80IBA (income tax

exemption) to housing units

up to 150 sqm carpet area

(MIG category)

 Provisions of section 80IBA are

applicable for affordable

housing units up to 60 sqm

carpet area for EWS and LIG

 Extend the benefit to

MIG category, which is

already covered in

PMAY for mortgage

interest subvention

 Positive:

Positive: For all developers

with mid-income housing

projects

 REIT

REIT: Reduce holding

period for LTCG

 Holding period for LTCG is 36

months

 Reduction in holding

period to 12 months

 Positive:

Positive: For realty

companies with strong

annuity portfolios such as

DLF, Phoenix Mills,

DLF, Phoenix Mills,

Prestige Estates

Prestige Estates and Brigade

Brigade

 REIT

REIT: Exemption of stamp

duty on transfer of assets

into REIT

 Stamp duty is applicable while

transferring assets into REIT

 One-time exemption

while transferring assets

into REIT will make it a

more viable product for

both developers and

investors

 Positive

Positive for realty companies

with strong annuity portfolios

such as DLF, Phoenix Mills,

DLF, Phoenix Mills,

Prestige Estates

Prestige Estates and

Oberoi

Oberoi Realty

Realty

 Higher tax deduction on

home loans

 Rs 2,00,000 on interest and

Rs 1,50,000 on principal

 To be increased further

 Positive:

Positive: For all developers

Focus to remain on

Focus to remain on government’s vision of

government’s vision of Housing

Housing for

for All

All by

by 2022 and REITs

2022 and REITs

26

22 jan 2018 22 jan 2018 23

22 JAN 2018

22 JAN 2018

Telecom

Telecom

BUDGET EXPECTATIONS 2018-19

Item

Item

Current status

Current status

Possible changes in budget

Possible changes in budget

Impact

Impact

 Customs duty on

equipment

 Currently at 29.8%

 Cut it below 25%

Positive

Positive for telecom service

providers and infrastructure

companies

 Relaxing

withholding tax on

distributors’ margin

 Currently at 10%

 Cut it down to 1%

Positive

Positive for telecom service

providers

 Lowering GST on

services

 Currently at 18%

 Reduce it to 12%

Positive

Positive for telecom service

providers

27

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