Avendus Capital Private Limited (Avendus), a full service, integrated investment banking and securities broking group, takes a look at The Budget and unveils companies that may do well after the Budget
Sustained deficit expansion could mark an early end to falling rates
• FY10 fiscal deficit is now forecast at INR4,010bn compared with INR3,328bn forecast in the interim budget.
Crowding of private borrowing may add to upward bias on rates
• Budget anticipates fall in revenue receipts from personal income tax, customs and excise.
• This adds to the upward bias on the fiscal deficit.
Bad for borrowers, but good for savers?
• Upward bias to rates and the crowding would be bad for large borrowers in infrastructure and other sectors.
• But, could improve other income for cash surplus companies in FMCG, IT Services and others.
Deficit expansion and tax cut-back can add to demand, for some
• Directed spending (NREGS and the Yojanas) adds to spending power.
• Good for rural sales of consumer non-durables.
• Removal of surcharge could expand disposable salaried income by c6% (if marginal tax rate falls from c34% to c30%).
• Could stimulate urban demand for consumer durables.
Revision to tax rates has selective sectoral impact
Personal tax payers at the high end of the range are the gainers
• The government has been surprisingly generous, given the low expectations for any cut in tax rates.
• And, the fears of a possible rise in rates, given the constraint on resources.
MAT assessees are the prominent losers
Removal of FBT brings relief, particularly to IT Services
Extension of tax benefit under sections 10A and 10B for another year
• Uncertain how long this benefit would continue.
Early to assess the impact of introduction of GST
Service tax extends into sensitive areas of legal and medical practitioners
• Legal services, other than individual providers and clients.
• Cosmetic and plastic surgery.
• Transport of goods by rail.
Limited resources, but more could have been done for infrastructure
Stimulus for infrastructure falls short of the widely expected big‐bang thrust
What has been done is restricted to relatively ordinary increase in allocations
Absence of any path breaking, novel approach to stimulate infrastructure spending
How could more have been done?
• Raise more budgetary resources through disinvestment and tax surcharge.
• Or, by not lifting the surcharge.
Some novel approach to attract private sector funds
• Tax‐exempt bonds for high‐networth individuals and institutions.
• Structural reform to project Indian infrastructure as an attractive asset class to global debt and equity investors.
• Lift hurdles in the path of quick implementation of projects.
• Public‐private partnership in some critical projects.
Surprising lack of action on soft reform
Why the expectations had been raised
• The most stable government to assume office in a decade.
• Without dependence on fickle allies.
• Or, on ideologically rigid parties.
Disinvestment is a particularly severe disappointment
• The opportunity exits ‐ market conditions are conducive.
• Several public sector enterprises in Oil & Gas, Capital Goods and Utility have the right credentials.
Hopes had risen on deregulation of prices of petroleum products
• The rise in retail prices of automobile fuels was a surprise.
• And, raised hopes of more bold action in the Budget.
Little inclination to tackle daunting matters such as labour reform
• Such as, easier exit for unviable firms.
Could the consumption engine compensate for low infrastructure spend?
Investors’ reaction on July 6, 2009, suggests that expectations were unduly high
• Euphoric reaction after the election results in mid‐May pointed to strong faith in and expectations from the new government.
But there has been a positive surprise on the consumption side
• Rise in allocation for targeted programs may be termed as ‘populist’, possibly with justification.
• But, they do help to preserve rural demand.
• Cut in surcharge on personal income tax was a surprise.
• Some segments of investors may have factored in a rise in marginal tax rates.
• Rise in disposable income could stimulate urban consumption demand.
Is the economy better off with a near‐term stimulus to consumption rather than investment?
• In the near term, the additional funds could have a stronger impact on consumption demand.
• While the slow pace of projects may delay the beneficial effect of allocating these funds to projects.
• Tata Motors (TTMT IN, NR) to outperform due to anticipated improvement in domestic commercial vehicle demand, especially in a rising market.
• Hero Honda (HH IN, NR) is likely to outperform due to continued rising demand from rural India, especially in a side‐ways or declining market.
• Shree Cement (SRCM IN, NR) remains our top pick as its superior EBITDA/tonne provides the maximum headroom to absorb any negative surprises.
• Also, as it depends on roadways, it is least susceptible to the impact of service tax imposition.
• ACC (ACC IN, NR) stands to lose relative to peers due to its higher share of railroad transport in its overall multi‐modal mix.
Construction & Engineering ↓
• L&T (LT IN, NR) having risen 48% since mid‐May09, is more vulnerable to correction due to budget measures falling short of general expectations.
• While the negatives for BHEL (BHEL IN, NR) in the Budget are lower, it is likely to correct in line with the sector, although it may outperform LT.
• The lack of any major announcements for the roads sector is likely to negatively impact sentiment for stocks such as IRB Infra Developers (IRB IN, NR).
• HDFC Bank (HDFCB IN, NR) as despite the decline in FY09, NIM remains the highest among peers.
• SBI (SBIN IN, NR) which has risen 26% since mid‐May09, is vulnerable due to its premium valuation and higher NPL ratios.
• Bank of Baroda (BOB IN, NR) as continuous improvement in asset quality, high business growth and uptrend in profitability ratios are the key positives.
• Hindustan Unilever (HVLR IN, NR) would benefit from an acceleration in demand through rising incomes, both urban and rural.
• Further, it would benefit from an inflationary scenario as price‐led growth would kick in for categories like personal products.
• Nestle (NEST IN, NR) expensive valuations notwithstanding, is likely to gain from favorable demographics and any increase in consumer incomes.
IT Services (↔)
• Infosys Technologies (INFO IN, NR) is trading at 17.3x FY10E earnings; we expect 2.2% earnings CAGR from FY09 to FY11.
• Zee is likely to gain the most from the digitalization of the sector, given its robust pay model.
• HTML is likely to gain from lower newsprint prices, stimulus package and a revival in print advertising in metros.
Oil & Gas (↓)
• Cairn (CAIR IN, NR) is likely to be vulnerable to the increase in MAT rate.
• Despite the extension of tax holiday under section 80IB, the increase in MAT rate is likely to impact Reliance Industries (RIL IN, NR).
• We expect the global environment for pharma generics to get more challenging; policy changes would be directed to rationalize healthcare costs.
• Other challenges are regulatory issues, increasing competition and currency risks; domestic markets provide strongest growth and revenue visibility.
• Positive bias towards companies focused on the domestic market; strong growth in rural markets with government‐led increase in disposable income.
• Top picks: Cipla (CIPLA IN, NR) and Piramal Healthcare (PIHC IN, NR).
Steel & Iron Ore (↓)
• TATA and SAIL appear better bets than their peers due to their higher proportion of captive resources.