Budget Preview 2012

Budgetary Transactions
Rs Crore Particulars Total Expense Total Revenue Gap (A-B) Financed By: Domestic receipts External receipts surplus/ deficit FY08 1,243,598 1,000,172 243,426 FY09 1,600,116 1,113,001 487,115 FY10 1,788,195 1,202,412 585,783

18 February 2011

With the Budget session for 2011-12 arriving shortly, the mood of capital markets starts tickling for the outcome that the budget will produce in the coming financial year. The budget is getting crucial for the government mainly on two grounds, as inflation on one hand caps the governments ability to increase tax rates by fear of passing on enhancing the inflationary pressures, where as on the other hand, it does not have any one time revenues/divestment (3G and BWA auctions) proposals to adjust their fiscal deficits. Thus, we arrive with the million dollar question as to how will the government manage their fiscal deficit gap, either through revenue sources or through additional borrowings. We believe that the fiscal deficit target for FY12 will be lower than FY11 mainly because of robust revenue growth and slower than anticipated government expenditure. However, revenue deficit as a % of total deficit remains the greater cause of concern as the government will have to maintain their increased reliance on one offs (like disinvestment) to achieve the fiscal deficit target. Also, in case of higher government borrowings, access of funds remains a medium term worry as state government balance sheets are largely debt ridden and restricted funding from RBI on the back of higher inflation. The government also has to manage the GDP growth target of 8.6% announced for FY11 in the coming fiscal as well and increase the public expenditure in order to ease out the current liquidity situation; but this may again trigger in an inflationary pressure. We believe that the focus of the government would be broadly on the following grounds;

243,817 12,038 12,430

366,713 12,351 (108,052)

541,913 18,183 (25,687)

Source: Department of Economic Affairs, Ministry Of Finance, HISL Advisory

Trend in Government Finance

Governmnet Debt as % of GDP
70 60 50 40 30 20 10 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Centre States

60

63.5

63

61.6

61

59.3 57.3 56.3 56.1

Increasing the share of revenue income: In our opinion, during FY12, the government can raise their revenue income through two major sources, levying an additional excise duty (like on diesel based cars, Tobacco etc) or cutting exemptions and bringing more services under the preview of service tax. Quick and effective implementation of GST will also increase the governments revenue share.

25.8 26.4 26.7 25.6 23.9 23.6 23.8 19.4 21.9

Source: Department of Economic Affairs, Ministry Of Finance, HISL Advisory

Managing the public expenditure with similar subsidy burden: We do not expect any major change in the subsidy pattern of the government which mainly divided in fuel and food segments. We do not expect diesel deregulation during the current session mainly on the back of higher crude prices and high inflation levels. On the food subsidy part, with supply side constraint easing out in the coming quarters, we may see some relief for the government. We believe that the Government may rejig the urea policy to manage their subsidy burden further.

Inflation Trends

23 18 13 8 3 (2) (7) (12) Oct-06 Oct-07 Oct-08 Oct-09 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Oct-10

Growth across all segments would be the key focus: More recently, the government has been quite aggressive in introducing schemes to promote employment, health, education and infrastructure in the rural areas and we expect similar pattern going forward as well. We believe that NREGA (National Rural Employment Guarantee Act) allocations to pick up in addition to the recent increase in NREGA wage rates. We also expect mining bill to be tabled as the government seems determined to implement the profit sharing clause.

Food Articles Fuel Group

Source: Bloomberg, HISL Advisory

Primary Atricles

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Surplus/Deficit (% of GDP) 3 1 -1 -3 -5 -7 -6.89 -6.6 -5.71 Overall surplus(+)/deficit(-) FY02 -2.76 9.26 8.93 -0.12 FY03 8.05 0.46 FY04 2.36 6.68 FY05 -3.47 -0.75 6.04FY06 -2.51 -1.18 -1.93 -0.080.25 FY07 4.85 3.76 FY08 FY09 -1.94 -4.09 -4.89 8.23 9.08 -0.41 FY10 10 8 6 4 2 0 Fiscal deficit (Net)

Revenue surplus(+)/deficit(-)

Source: Department of Economic Affairs, Ministry Of Finance, HISL Advisory

IIP Growth (%)

34 32 30 28 26 24

GFCF as a % of GDP

17 12 7 2
Dec-09 Feb-10 Oct-09 Apr-09 Apr-10 Jun-09 Jun-10

-8 -13

Aug-09

Aug-10

Oct-10

-3

22 20 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 Gross Fixed Capital Formation as a % of GDP
Source: RBI, HISL Advisory

YoY
Source: Bloomberg, HISL Adviasory

MoM

To conclude, we feel being cornered on several grounds the government may not implement any aggressive measures to resolve the current fiscal deficit. However we are more concerned with the share of revenue deficit as % of total deficit as well as the government borrowing programme for the next year and the quality of the borrowings. The government has so far clarified that they want to curb the inflation with achieving the growth targets, however with the current budget session; we need to see the actual implementation of the same.

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Sector wise expectations from FY12 Budget and Implications Automobile / Tractors Budget Expectations Rise in excise duty by 2% on premium cars running on diesel Excise duty on petrol to remain unchanged Further assistant to agriculture More incentive for green cars Import duty on tyres to increase Lower allocation in JNNURM Probability Medium High High High Medium Medium Impact Negative: Rise in prices Positive : No change in prices Positive: Tractors demand to rise Positive: Rise in expenditure on R&D Positive for tyre companies, negative for automobile companies Lower allocation transport (Buses) to public Related companies Tata Motors, Maruti Suzuki All auto companies Mahindra Escorts and Mahindra,

Mahindra and Mahindra Positive: Apollo Tyres, MRF, CEAT, JK Tyres (Negative for all auto companies) Negative for Tata Motors and Ashok Leyland

Capital Goods / Power Budget Expectations Basic Customs Duty exemption on Capital Goods for Power Plants Extension of Section 80-IA(iv) of the Income Tax Act which ends on March 31, 2011. Encouragement to renewable power companies through enhanced allocations Increased allocation to power sector Probability High Impact Positive: Would lower the cost of power plant, thereby improving the profitability Positive: Would improve the profitability of the power plant as it allows for tax exemption for 10 years within first 15 years of commissioning the plant Positive: Would improve the profitability of the power plant Positive for capital goods companies as it would mean additional orders and improve revenue visibility Related companies NTPC, Lanco Infratech, Tata Power, JSW Energy, BHEL NTPC, Lanco Infratech, Tata Power, JSW Energy, Adani Power Tata Power, Lanco Infratech, Moser Baer, Suzlon BHEL, Larsen BGR Energy and Toubro,

Low

High

High

Cement Budget Expectations Probability Impact Positive for companies having PAN India presence while Negative for South based companies Demand for cement to improve Reduction costs in key raw material Related companies Madras cement, Dalmia Cement, and India cement to suffer while Grasim Industries, Ultra Tech, Shree Cement, and JK Cement to benefit Positive for companies Positive for companies all all cement cement

Uniform excise duty

Medium

More spend on infrastructure - road Cut in import duty on coal, gypsum

Medium Medium

Coal and Iron Ore & other mining companies Budget Expectations Increase in freight rates for iron ore for exports and coal in the rail budget The New Draft Mining Bill may be tabled in the parliament with clause of 26% profit sharing with the people displaced from land Probability Low Impact High negative impact for iron ore mining companies, steel companies and coal mining companies Negative impact for all mining companies including steel and power companies which have captive mines Related companies Sesa Goa, Steel companies with captive coal blocks, power companies All mining and steel and power companies with captive iron ore, coal, manganese ore blocks, copper and zinc

Medium

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Farm Credit Budget Expectations Farm credit target for the next year under priority sector lending may be increased by 20% to Rs 450,000 crore Financials Budget Expectations To manage the supply side constraints, particularly those of food articles, we expect a major initiative by the Government, be it productivity enhancing investments, improvement in cold storage chains, investment in R&D in agriculture or reduction in mandi tax among others. Probability Impact Positive: As the government manages the supply side constraints well, we may see slow down in further tightening in the monetary policy and with increase in government spending, the current liquidity situation will also ease out. Related companies Probability High Impact Positive for rural input sectors such as fertilizers, insecticides and tractors Related companies All agri input companies may benefit from the same

High

All Banks and NBFCs

Limit of refinancing from IIFCL to commercial bank loans for PPP projects in critical sectors expected to be raised. Any development towards, Government to provide additional funding to public-sector banks to maintain tier-I capital as per Basel III norms. Considering the state elections, Government may provide subsidy/concessions on interest rates to State Electricity Boards Increasing FDI limit in insurance from 26% currently to 49%

High

Positive: With refinancing of infrastructure loans, the banks will be able to increase credit off take and will also encourage the PPP format further. Positive: Supports the public sector banks to maintain the credit off take above 20% as per RBI guidelines Positive: As state electricity boards, incurring cash losses, any relief in this regards will be beneficial for them as well as power financing companies. Positive: Will increase the capital inflows for the industry which is much required during the current turbulent times

All Commercial Banks

Medium

All Public Sector Banks

Low

REC, PFC

Medium

ICICI Bank, HDFC, Mahindra, Max India

Kotak

FMCG Budget Expectations Incentives to increase the disposable income in rural areas like increasing allocation of NREGA Increase in excise duty of tobacco by 8-10% No Changes in excise duty expected due to on-going roll out of GST and high inflation rate Full exemption on import duty on nylon cloth for tea bags (currently 10%). Probability Impact Positive: Increasing disposable income of people in rural areas would encourage them for impulse purchases impacting the revenues positively. Negative: Would impact the revenues and may encourage consumer to shift to lower brands Neutral to Positive: Would impact the demand for products positive translating into higher revenues Positive: Would reduce packaging cost of tea the Related companies All FMCG companies majorly HUL

High

High

ITC HUL, Britannia, Dabur other FMCG companies HUL, ITC and

High

Low

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Infrastructure Budget Expectations Addition of fund allocation to infrastructure projects IT Budget Expectations Extension of the sunset clause on tax exemption for software technology parks under Sec. 10A / B which is due to expire in March 2011 Increase of allocation of funds for education sector Logistics Budget Expectations The proposed implementation of GST and the development of logistics parks and free trade warehousing zones Media Budget Expectations FDI relaxation in media companies: TRAI has recommended relaxing FDI norms for cable (49% to 74%), DTH (49% to 74%) and Radio (20% to 49%). Tax holiday for the capital intensive business such as Gaming, Animation, VFX Categorization of Broadcasting, DTH and cable services as part of infrastructure industry for their rapid expansion. Reduction of Custom Duty of 5% to Nil on Set top boxes Custom Duty to be levied on Newsprint. Currently, it has a Nil status. Reduction in License fees from the current 10% to 6%. Already approved by TRAI Oil and Gas Budget Expectations Expect a marginal cut in import duty on crude and diesel along with reduction in Excise duty on diesel Probability Medium Impact Positive: May moderate the inflation levels but the government will also lose a revenue stream Related companies All Oil Marketing Companies, Under recoveries can also help ONGC and GAIL Probability Impact Positive: Higher FDI investment will lead companies to access low cost of capital. Positive: Because they have to spend huge amount towards Research and Development of the sectors Positive: Get the benefit of 80i (Tax), available cost of funds at lower cost. Positive: Cost of acquisition to reduced by 5% and early breakeven of customer. Negative: Margins under pressure Positive: margins Improve to be Related companies WWIL, Dish TV, ENIL, Hathway, Den Network, etc. Probability Impact Positive: Reduce intermediaries and streamline supply chain operations Related companies Probability Impact Positive: While this would be beneficial for the sector, companies that are relatively less prepared (SEZ strategy) would benefit more. Tier-II players which are not yet prepared for SEZs would benefit. Positive for the education Sector Related companies Probability High Impact Positive: Good order intake for infrastructure companies Related companies All Infrastructure companies

High

Mphasis, TechMahindra, Patni, Infotech Enterprise, Hexaware, Polaris, HCLTech, Wipro, TCS etc

High

Educomp,NIIT Ltd, Everonn and Core Project

Medium

Gateway Distriparks, Concor, Allcargo etc

High

Medium

UTV Software

Medium

Broadcasting companies, Dish TV, WWIL

High

Distribution companies such as Dish TV, WWIL, Hathway, Den Network, etc Print and Media companies

Low

Medium

the

DTH pure play player - Dish TV and SunTV

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Pharma Budget Expectations Decrease in peak customs duty from existing 10% Customs duty on all life saving drugs such as Anti-biotic, Anti cancer and HIV should be exempted Tax holiday on healthcare infrastructure in tier-2 and tier-3 towns; should be extended from 5 years to 10 years FDI cap may be reduced 100% to 49% Real Estate Budget Expectations Increase in exemption interest payment and repayments Probability limit for on loan Low Medium Impact Positive: Provides additional cushion to real estate players for repayment Positive: Likely increase in real estate investments Related companies DLF, HDIL Parsvanath, Unitech, from Medium Negative for the Sector Probability Medium Impact Positive Positive for company's domestic Pharma Cipla,Sun Pharma,Ranbaxy Related companies All Pharma company's

High

High

Positive for the Hospitals Sector

Fortis, Apollo Hospital MNC Pharma Company: Pfizer, GlaxoSmithline Pharma, Novartis, Merck

Increase in limit of Income tax deduction for home loans Retail Budget Expectations Withdrawal of service tax on rental of immovable property FDI in retail

All Real Estate Companies

Probability Low

Impact Positive: Reduce rental cost of retailers leading to better profitability Positive: Provide access to capital and technology improving the efficiency and profitability Positive: Increasing disposable income of people in rural areas would encourage them for impulse purchases impacting the revenues positively.

Related companies Pantaloon Retail, Shoppers Stop, Trent, Provogue Pantaloon Retail, Stop, Trent Shoppers

Low

Incentives to increase the disposable income in rural areas like increasing allocation of NREGA

High

Pantaloon Retail, Vishal Retail

Provogue,

Textile Budget Expectations Increased allocation to encourage expansion of capacities from Rs 4725 cr Reduction of excise duty on synthetic yarn from 10% to 4% in line with cotton yarn Urea Budget Expectations Probability Impact Related companies The announcement of a road map for urea subsidy rationalization may come in either of the forms: NPS III may be continued with increase in urea prices being announced to the tune of 3-5% with special subsidy for naphta and fuel based plants for another year NBS scheme for urea being announced on the similar lines as that for complex fertilizer Probability High Impact Positive: Encourage expansion in the sector leading to economies of scale and increasing global competitiveness Positive for Synthetic companies as they would become competitive with cotton companies Related companies Alok Industries, Welspun India, Vardhman Textiles, RSWM, Sangam India RSWM, Sangam India, Alok Industries

Medium

High

Muted positive impact for urea companies and alternate fuel based urea manufacturers

RCF, Nagarjuna Fertilizers, Chambal Fertilizers, GNFC and Madras fertilizers All urea manufacturers and other players such as Tata Chemicals, GSFC and FACT

Medium

Positive for all urea manufacturers

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Advisory Group Karun Mutha SVP & Head - Equity & Derivatives Advisory Tel +91-22-67897833 Email: karun.mutha@hsbcinv.com

Fundamental Team Supriya Madye Jignesh Shial Hitesh Punjabi Prerna Jhunjhunwala Chetan Thacker Priyanka Rai Quantitative Team Tina Khetan Akshay Bhagwat Nikunj Shah Pritesh Shah Technical Team Mukesh Singh Rahul Randeria Advisory Support Tony Nawani Prakash Modi

Designation/Sectors covered AVP AnalystAuto, Cement, Infra AnalystFinancials, Real Estate AnalystIT, Pharma AnalystRetail, FMCG, Capital Goods AnalystMetal, Mining, Agri Assistant Manager (Production) 022 39673815 supriya.madye@hsbcinv.com 022 39673818 deepan.sankaranarayanan@hsbcinv.com 022 39673820 jignesh.shial@hsbcinv.com 022 39673823 hitesh.punjabi@hsbcinv.com 022 39673822 prerana.jhunjhunwala@hsbcinv.com 022 39673821 chetan.thacker@hsbcinv.com 022 39673852 priyanka.rai@hsbcinv.com

Deepan Sankaranarayanan AnalystMedia, Logistics

Derivative Analyst Derivative Analyst Derivative Analyst Associate - Derivative Analyst

022 67897828 tina.khetan@hsbcinv.com 022 67897830 akshay.bhagwat@hsbcinv.com 022 39673998 nikunj.shah@hsbcinv.com 022 67897831 priteshshah@hsbc.co.in

Vice President- Technical Analyst Technical Analyst

022 67897816 mukesh.singh@hsbcinv.com 022 67897817 rahul.randeria@hsbcinv.com

Manager Assistant Manager

022 67897825 tony.nawani@hsbcinv.com 022 67897826 prakash.modi@hsbcinv.com

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