UNION BUDGET ANALYSIS - Kotak Securities · 2015. 3. 2. · Union Budget 2015-16 Please see the...

FEBRUARY 28, 2015

PRIVATE CLIENT RESEARCH

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

UNION BUDGET ANALYSIS: FY2015-16Credible & ResponsiveWhile being devoid of big bang announcements, Union Budget 2015-16focuses on all the relevant issues. Additional spends of Rs.700bn ininfrastructure from the Government, creating enabling climate forprivate sector investments and enabling reforms to bring long termmoney into the system (presumably to be used in infrastructure) are thehighlights. Reforms on black money, social security, predictability intaxation, ease of doing business, among others, are noteworthy. The3.9% FD is tolerable especially in view of the acceptance of the14thFinance Commission impact and is achievable. We expect RBI to cutinterest rates by 50-75bps over FY16. Markets will stay buoyant, ifexecution matches intent.

The FM has targeted real growth of 8.1% for FY16. The Central planexpenditure is targeted to rise by 37% to Rs.2.6trn, which is encouraging.Revenue and capital expenditure are projected to rise by similar margins.Infrastructure and manufacturing, which can create several jobs, havereceived significant attention. Infrastructure Funds, Tax free bonds, revampedPPP model and further clarifications on REITs / InVITs should help. We expectthese initiatives to boost growth rates, going ahead.

We opine that, the budget has set 'achievable' revenue targets for FY16. A16% growth in tax revenues looks within reach, based on a real GDP growthof 8.1% and nominal GDP growth of 11.5%. Increase in Service tax ratesand higher surcharge on super-rich should enable this growth, we opine.Growth in indirect taxes should be also supported by higher excise duty ondiesel/petrol, imposed in the latter part of FY15. Divestment target ofRs.695bn (strategic sale of Rs.285bn and divestment of Rs.410bn) should alsonot face major headwinds.

Subsidies are budgeted at 1.7% of GDP v/s 2.1% in FY15RE. The saving inrevenue expenditure (only 3% growth YoY in FY16BE) is sought to begainfully deployed towards capital expenditure (26% growth YoY in FY16BE).We believe the Government will not need to carry forward any fuel subsidyburden to the next fiscal. Thus, we think that, the FD target of 3.9% of GDPis achievable. We feel the 3.9% FD is tolerable as it is a result of higherspends towards capacity creation to aid long term growth.

The FM has tried to attract more funds from the private sector as well asthrough foreign investors. Various initiatives have been announced toincrease ease of doing business and remove uncertainties on the taxation offoreign capital like postponement of GAAR, extension of reducedwithholding tax, modified permanent establishment norms, etc.

Inflation (%)

Source: Economic Survey 2015-16

UNION BUDGET ANALYSIS

UNION-BUDGET ANALYSIS

Research Team+91 22 6621 6301

Sectoral impact

Budget Impact Sectors

Positive Banking & NBFC, Capital Goods & Engineering, Cement, Construction, Logistics and Real Estate

Neutral Auto & Auto Ancillary, Aviation, FMCG, IT, Media, Metals & Mining, Oil & Gas, Paints, Pharmaceuticals,Power, Shipping

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.

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Source: CSO

Union Budget 2015-16 Please see the disclaimer on the last page For Private Circulation 2

February 28, 2015 Kotak Securities - Private Client Research

One of the corner-stones of the budget has been the various reforms which havebeen announced. Initiatives on black money, social security, predictive taxation,subsidy rationalisation, infrastructure funding, ease of doing business,cooperative federalism, among others, should go a long way in improving thefinancial savings rate and funding long term investment needs of theGovernment.

Inclusive growth and inflation control have also found significant focus in thebudget and these should allow a more balance growth of the country in thelong term.

On the taxation front, corporate tax rates will be brought down to 25% from thecurrent 30% over 5 years, whereas exemptions are sought to be done awaywith in tandem. This brings in more predictability and should attract corporateinvestments. However, surcharge has been increased for companies from 10%to 12%.

In indirect taxes, surcharge and cess on excise duty have been subsumed in thebasic duty, which now stands at 12.5%. Service tax rate has been increased to14%, to bring it in line with the proposed GST rate. Excise duty of cigarettes hasbeen increased by 15% - 25%. Excise / customs duties on few items have beentinkered with to promote 'Make in India'. Individual tax payers will benefit dueto higher deduction on contribution towards Pension Funds as well as due tohigher medical insurance deduction and increased travel allowance.

Overall, we believe that, the budget has the heart in the right place in trying toprovide a significant thrust on growth through investment-related initiatives(increase in plan expenditure, adjusted for shift of schemes in light of 14thFinance Commission recommendations). There is a shift from demand pullgrowth (which resulted in high and sticky inflation) to supply push growth. Moreprivate sector investments will be encouraged only by reform initiatives takenoutside the budget, though.

The budget is silent on some important issues like labour reforms, FDI in moresectors, etc. We expect to get more clarity on these over the course of thefiscal.

From the stock market perspective, the corporate tax rate reduction over FY17-FY20 is a mild positive. The tax burden will increase slightly in FY16, though.GAAR has been postponed for two years likely with grand-fathering, whichshould improve sentiments. With the major event out of the way, the marketswill likely focus on issues like RBI action and global economy. Off-budget actionon budget initiatives will sustain the confidence of the markets over the mediumterm. Government's ability to pass significant legislations in ongoing parliamentsession would bode well for sustained market performance. We expect RBI toreduce rates by 50-75bps in FY16. We believe that, a bottoms-up approach willbe the best approach over this time-frame.



While being devoid of big bang announcements….The budget has adopted an incremental approach, rather than a big bang approachtowards various issues. Thus, there are no major announcements in term of invest-ments, subsidy rationalisation, deficit reduction plan, etc.

… the budget has focused on all the relevant issuesThe budget has proposed a near 37% increase in the central plan expenditure, bothon the revenue and capital fronts. This should help support growth at a time whenprivate sector is faced with high level of debts and low capacity utilization levels.Secondly, realizing the importance of the private sector as well as foreign fundingover the long term, the budget has proposed various enabling provisions to improveease of doing business, remove taxation ambiguities / concerns, attracting long termmoney, among others.

Various initiatives have been announced to improve the savings rate in the economyand bring in long-term money to support the economic growth. Reforms on blackmoney, social security, predictive taxation, subsidy distribution, infrastructure fund-ing, ease of doing business, cooperative federalism, among others, should go a longway in improving the financial savings rate and funding long term goals of the Gov-ernment.

With a view to make the growth inclusive, various steps have been incorporated.On inflation, the Government will now work with the RBI and a monetary policyframework will be formalized for long term inflation targeting. Higher allocation forfarm credit and focused programs to improve productivity, should help in reducinginflation on a structural basis.

The FM has targeted a FD of 3.9% for FY16. This is largely due to the higher ex-penditure as well as lower fiscal space post incorporating the recommendations ofthe 14th Finance Commission. We think this is tolerable especially in the backdropof a push to growth. We also believe it is achievable.

Thus, we take a constructive view of the budget which should go a long way inimproving the growth prospects of the economy, while giving the benefits of thesame to a larger cross-section of the society.

Real GDP Growth

(%) 2012-13 2013-14 2014-15

Agriculture & Allied activities 1.2 3.7 1.1

Industry 2.3 4.5 5.9

Mining & quarrying -0.2 5.4 2.3

Manufacturing 6.2 5.3 6.8

Electricity, gas & water supply 4.0 4.8 9.6

Construction -4.3 2.5 4.5

Services 8.0 9.1 10.6

Trade, Hotels, Transport, Communication 9.6 11.1 8.4

Finance, Real Estate, Other Businesses 8.8 7.9 13.7

Community, Social & Personal Services 4.7 7.9 9.0

Total 4.9 6.6 7.5

Source: Economic Survey FY15; Base year: 2011-12



A. Investments in infrastructure and manufacturing getsignificant attentionWith the private sector laden with high debt and low capacity utilization levels, it isup to the Government to pump up the investment cycle. The FM has, indeed, put alot of emphasis on the same. He has budgeted for a central plan expenditure in-crease of 37% YoY, both on the capital and revenue fronts. Allocations have beenmade to various areas like Ports, industrial corridors, Roads/Highways, Rurbanisationof India, Renewable Energy, Housing, Mining, Manufacturing, etc.

Railways and roads see huge increase in allocationsThe gross budgetary support (GBS) for roads and railways has been increased byRs.140bn and Rs.100bn, respectively, over FY15RE.

Central Plan outlay

Rs mns FY15RE FY16BE

Railways 643,017 983,650

Ports and Lighthouses 24,285 25,932

Shipping 130 11,361

Civil Aviation 83,002 53,610

Roads and Bridges 310,368 851,823

Inland Water Transport 770 2,067

Other Transport Services 850 5,725

Total 1,062,422 1,934,168

Source: Budget 2015-16

The Government has awarded nearly 1700 kms of road projects in the current fiscaland has a target to award 5500 kms for the full year FY15. It has set a target ofawarding projects for 20000 kms of roads in the next two years. Construction ofabout 4000 kms will be completed during FY15. However, for connecting each ofthe 1,78,000 unconnected habitations by all-weather roads, would require complet-ing 1,00,000 km of roads currently under construction plus sanctioning and buildinganother 1,00,000 km of road. The Government has already committed to increasethe target of road construction to 30 km / day over the next two years, as comparedto the current average of 3 km / day.

On railways, the central plan outlay is pegged at Rs.983bn for FY16 v/s Rs.643bn inFY15RE.

NIIF and tax–free bonds proposed

Mr. Jaitley has announced the setting up of a National Investment and InfrastructureFund (NIIF). The Government will help to fund it to the extent of Rs.200bn. In turn,the fund will raise debt, and in turn, invest as equity, in infrastructure finance com-panies such as the IRFC and NHB.

Apart from these, the FM has announced initiatives to attract more funds to thesector to support it over the longer term. He has proposed to permit tax-free infra-structure bonds for the projects in the rail, road and irrigation sectors. We believethat, with relatively higher returns on a post-tax basis, these bonds will find favor, asin the past.

Attracting PPP investments

With a view to attract more private sector funds, the FM has proposed to revampthe PPP mode of infrastructure development. The major issue involved is rebalanc-ing of risk. He has also indicated that, the sovereign will have to bear a major partof the risk.



We have already seen the road sector having adopted this model. A new scheme -Hybrid Annuity – has been devised and 13 projects worth Rs.144bn have alreadybeen awarded under this scheme. The hybrid model seeks to invoke the right mixof risk-sharing of both, EPC and BOT models.

Clarity on REITsIn respect of Real Estate Investment Trusts (REITs) and Infrastructure InvestmentTrusts (INViTs), earlier the taxation on gains arising at the time of disposal of unitsby sponsor was deferred and the preferential capital gains regime was not availableto the sponsor at the time of disposal of units.

Now it has been proposed that the sponsor will be given the same treatment onoffloading of units at the time of listing as would have been available to him had heoffloaded his shareholding of special purpose vehicle (SPV) at the stage of direct list-ing or IPO. Along with this, the benefit of concessional tax regime of tax @15 % onSTCG and exemption on LTCG shall be available to the sponsor on sale of units ofREIT subject to levy of STT.

Also, earlier the rental income received at the level of SPV gets passed through byway of interest or dividend to the REIT but the rental income directly received by theREIT was taxable at REIT level and does not get pass through benefit. Now govern-ment has proposed a pass through status to the rental income arising to REIT.

These key changes should pave the way for REIT listings in India from April 2016.

Thus, we see a significant push from the Government as far as infrastructure invest-ments in FY16 are concerned. There is a corresponding urgency to attract more pri-vate sector investment over the medium to long term.

B. Fiscal deficit target – ‘achievable’The FM has projected a nominal GDP growth of 3.9% for FY16, as compared to4.1% for FY15. While the number is slightly higher than our expectations of 3.6%,we feel this is tolerable. The deficit is relatively higher because of the sharp increasein central plan expenditure as well as the reduced fiscal space due to the 14th Fi-nance Commission recommendations, which have been incorporated.

We believe that, the real GDP growth target has been set at about 8.1%, assuminginflation at 5%. We also expect nominal GDP growth of 11.5%.

Trends in deficits of Central Government

Source: Economic Survey 2015

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FY09 FY10 FY11 FY12 FY13 FY14 FY15 BE FY15 RE FY16 BE

Fiscal Deficit Revenue Deficit Primary Deficit



FFC recommendations incorporatedThe FD target has been re-set to 3.9% after incorporation of the suggestions of theFFC. Thus, the budget has transferred 42% of the divisible tax pool (gross tax col-lections – custom duty) to the states, as against 32% in the previous fiscal. Theamount of grants has been correspondingly reduced. There is 55% increase intransfer to states from Rs. 3.4 tn to Rs. 5.2 tn. In addition, central government shallsupport 31 schemes fully and another 24 schemes shall be funded with changedsharing pattern. Accordingly, 8 centrally-sponsored schemes have been de-linkedfrom central support of Rs.1.1trn (in FY14) and to that extent, the plan expenditureis lower by about Rs.1.1trn or 0.8% of GDP.

Revenue estimatesFM has budgeted for gross tax revenue to increase by 13% to Rs. 14.5 tn from Rs.12.5tn in FY15RE. Corporate tax revenue is budgeted to increase by 10.5% v/s8.2% achieved in FY15. Income tax revenues by 17.5% as compared to 15.3% inFY15. Based on our expectations of 11.5% nominal growth in FY16 GDP, we opinethat, these projections are realistic.

Among indirect taxes, customs duty and excise duty revenues are expected to growby 10.4% and 23.9%, respectively. Service tax revenues are expected to risesharply by 24.8%. We believe this is largely due to increase in the service tax ratefrom 12% to 14%. Effective rates of addition duty of excise (Road Cess) is raised toRs.6/litre for petrol and diesel from Rs.2/litre, however removal of education cessand change in CENVAT rates would result in no increase in effective duty on petro-leum products. Indirect taxes are expected to grow by 19.4%, primarily on accountof increased tax rates and expected economic growth.

The tax estimates look reasonable, under the assumption of increase in tax compli-ance and economic recovery. We also opine that, there could be a short fall in taxrevenue if GDP growth remains subdued. Net tax revenue is budgeted at Rs. 9.2 tnfrom Rs. 9.1 tn in FY15, increase of just 1.3% against estimate of 11.5% increasein nominal GDP due to large transfer to states (Rs. 5.2 tn from Rs. 3.4 tn).

Disinvestment of equity in PSUs (Rs bn)

Source: Annual Budget 2015-16

Non-tax revenue is budgeted at Rs. 2.2 tn against Rs. 2.2 tn in FY15. Governmenthas budgeted aggressively for capital receipts to grow by 14.6% to Rs. 6.4 tn fromRs. 5.5 tn in FY15. The Rs. 695 bn capital revenue is in form of profits from PSU/RBI/divestments, against Rs. 314 bn in FY15. Although high from last year’s realization,these estimates are achievable.

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Expenditure estimatesBudget estimates for FY16 show a net increase of Rs. 963 bn in expenditure overthe FY15RE. Plan expenditure is budgeted to remain flat. After adjusting for ex-penses incurred on transferred schemes in FY15, plan expenditure is budgeted toincrease by Rs.1trn, an increase of 23% YoY. We view the sharp increase in planallocation positively. Within this, the capital plan expenditure is expected to rise by34%.

Non-plan expenditure is expected to rise only by about 16% as the subsidy burdenis expected to fall by 8.6% YoY to Rs. 2.4 tn in FY16 (1.7% of GDP). The DirectBenefit Transfer (DBT) scheme will be implemented across 33 centrally-sponsoredschemes. As far as LPG is concerned, nearly 25mn households have been coveredand they are receiving about Rs.5.5bn since November 15, 2014.

The FM has budgeted Rs.300 bn as the government’s share of the oil subsidy bur-den in FY16 v/s Rs. 603 bn in FY15, a cut of 50%. The Government had carriedforward fuel subsidy of Rs.345bn from FY14 to FY15 and we believe that, the samehas been provided for in FY15. Overall, we feel that, the estimates for fuel subsidiesare realistic and do not expect any major incremental number on the same. Thisalso indicates that if the oil prices remain subdued, there may not be substantialburden on OMCs.

Trend in Subsidies

(Rs bn) FY12 FY13 FY14 FY15BE FY15RE FY16BE

Food 728.2 850.0 920.0 1150.0 1226.8 1244.2

Total Fertiliser Subsidy 700.1 656.1 673.4 729.7 709.7 729.7

Indigenous (Urea) fertilisers 202.1 151.3 265.0 360.0 382.0 382.0

Imported (Urea) fertilisers 137.2 200.0 115.4 123.0 121.0 123.0

Sale of decontrolled fertiliser with concession to farmers 360.9 304.8 293.0 246.7 206.7 224.7

Petroleum Subsidy 684.8 968.8 853.8 634.3 602.7 300.0

Interest subsidies 50.5 72.7 81.4 83.1 111.5 149.0

Other 15.7 23.2 17.8 9.5 16.3 15.2

Total Subsidies (Rs.bn) 2179.4 2570.8 2546.3 2606.6 2666.9 2438.1


Gross borrowings are pegged at Rs. 5.4 tn, net market loans are estimated atRs.4.56 tn vs Rs. 4.46tn in FY15. Lower government borrowing bodes well for thegovernment bond yields. Public debt is expected to increase to Rs. 68.9tn fromRs. 62.8tn in FY15 (10% increase in in-debt ness over FY15RE), primarily held indomestic market and only Rs. 2 tn of government debt is external. We expect G-Secyield to moderate over the fiscal, along the lines of lower inflation and accommo-dating monetary policy. Based on our expectations of growth rate for FY16, we feelthat, the deficit targets are achievable. We expect RBI to reduce rates further by 50-75 bps in FY16.



Plan expenditure


Non-plan expenditure


Variance in Non-Plan expenditure

(Rs bn) FY14 FY15BE FY15RE FY16BE

Interest Payments and Debt Servicing 3,743 4,270 4,114 4,561

Defence Expenditure 2,035 2,290 2,224 2,467

Fertilizer Subsidy 673 730 710 730

Food Subsidy 920 1,150 1,227 1,244

Petroleum Subsidy 854 634 603 300

Other Subsidies 99 93 128 164

General Services 1,405 1,544 1,552 1,697

Social Services 256 253 256 291

Economic Services 204 220 220 226

Non-Plan Grants to States 597 691 792 1,076

Other Non-plan Expenditure 275 324 308 365

Total (Non-Plan) Expenditure 11,061 12,199 12,132 13,122


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C. Reforms are a corner-stone of the budgetOne of the corner-stones of the budget has been the various reforms which havebeen announced. Initiatives on black money, social security, predictive taxation,subsidy distribution, infrastructure funding, ease of doing business, cooperative fed-eralism, among others, should go a long way in improving the financial savings rateand funding long term goals of the Government.

Social security

The budget has laid great thrust on social security and long term savings. Theseinitiatives, if successful, should lead to an increase in private financial savings.

The soon-to-be-launched Atal Pension Yojana will provide a defined pension, de-pending on the contribution, and its period. Here, to encourage people to join thisscheme, the Government will contribute 50% of the beneficiaries’ premium limitedto Rs.1,000 each year, for 5 years, in the new accounts opened before 31st Decem-ber, 2015.

On taxation, the FM has proposed that, the limit on deduction on account of contri-bution to a pension fund and the new pension scheme will be increased fromRs.0.10mn to Rs.0.15mn. Additional deduction of Rs.50000 for contribution to thenew pension scheme u/s 80CCD has also been proposed.

The Pradhan Mantri Suraksha Bima Yojna will be launched and proposes to coveraccidental death risk of Rs.0.20mn for a premium of just Rs.12 per annum. Addi-tionally, the Pradhan Mantri Jeevan Jyoti Bima Yojana will cover both natural andaccidental death risk of Rs.0.20mn. The premium will be Rs.330 per year for theage group 18-50.

We believe these initiatives, while providing additional social security, will lead tohigher savings rate for India.

Gold Bond scheme / Infrastructure funds

The budget has proposed setting up an alternate financial asset in the form of aSovereign Gold Bond, as an alternative to purchasing metal gold. The Bonds willcarry a fixed rate of interest, and also be redeemable in cash in terms of the facevalue of the gold, at the time of redemption by the holder of the Bond. Once again,this will bring in more money to the financial system as compared to being investedin non-income yielding assets like Gold.

As mentioned earlier, the Government has also proposed to permit tax-free infra-structure bonds for the projects in the rail, road and irrigation sectors. We believethat, with relatively higher returns on a post-tax basis, these bonds will find favorand will provide a long-term source of financing for the sector.

Ease of doing business

There are various initiatives taken on this front. Some of them are as under.

The Bankruptcy law is sought to be reformed to bring about legal certainty andspeed. A comprehensive Bankruptcy Code will be introduced in fiscal 2015-16, thatwill meet global standards and provide necessary judicial capacity.

Secondly, online central excise and service tax registration will be done in twoworking days, whereas the time limit for taking CENVAT credit on inputs and inputservices has been increased from six months to one year as a measure of businessfacilitation.

In respect of transfer of share of a foreign company deriving its value, directly orindirectly, substantially from the shares of an Indian company, if this is under ascheme of amalgamation or demerger, there will be no capital gains tax liability.

The budget has also proposed that, the threshold limit for applicability of transferpricing regulations to specified domestic transactions has been increased fromRs.50mn to Rs.200mn.



Black money

The budget has clearly focused on addressing the black money issue. The Govern-ment will introduce a bill in the Budget session of the Parliament specifically dealwith such money stashed away abroad. Strict action is proposed to be taken againstoffenders including jail terms.

On the domestic front, a new and more comprehensive Benami Transactions (Prohi-bition) Bill is proposed to be introduced in the current session of the Parliament. Thislaw will enable confiscation of benami property and provide for prosecution, thusblocking a major avenue for generation and holding of black money in the form ofbenami property, especially in real estate.

The Finance Bill includes a proposal to amend the Income-tax Act to prohibit accep-tance or payment of an advance of Rs.20,000 or more in cash for purchase of im-movable property and has also made it mandatory to quote the PAN for any pur-chase or sale exceeding the value of Rs.0.10mn,

We opine that, these initiatives will go a long way in curbing the black-money flowsand also bring in additional liquidity to the formal system.

JAM and GST

The FM has reiterated his preference for DBT for subsidies. The Economic Surveyhad spoken about the JAM Trinity – Jan Dhan, Aadhar and Mobile for pluggingleakages and restricting the subsidies to the targeted beneficiaries only. DBT hasbeen effective implemented for transferring the LPG subsidy and will be extendedto the Kerosene subsidies in due course.

The FM has reiterated its target of implementing GST WEF FY16 and will try topresent the Constitutional Amendment Bill during the budget session itself.

We believe that, these reforms have the potential to improve the expenditure man-agement initiative of the Government (JAM) and also improving profitability andease of doing business for the corporate sector.

D. Inclusive growth remains a focus areaEquitable growth (sabka saath, sabka vikash) has been one of the important corner-stones of BJP’s election campaign. With a view to make the growth more sustain-able, the Government has focused on inclusive growth. The budget has announcednew schemes and initiatives to ensure rural upliftment, employment creation, edu-cation, agricultural growth and public health. Higher allocations have also beenmade to the hitherto neglected states in North-East (allocation is increased fromRs.270 bn to Rs.285 bn).

Given, a large proportion of India’s population doesn’t have any kind of insurance,FM announced Pradhan Mantri Suraksha Bima Yojana, which will cover accidentaldeath risk. Similarly, the government will also launch the Atal Pension Yojana,which will provide a defined pension, depending on the contribution, and its period.The third Social Security Scheme that the FM announced is the Pradhan MantriJeevan Jyoti Bima Yojana which covers both natural and accidental death risk ofRs.0.20mn.

Rurbanising India has been one of the objectives of the new Government. ShyamaPrasad Mukherji Rurban Mission was announced for integrated project based infra-structure in the rural areas. The mission is aimed at providing basic infrastructurefacilities to rural areas, such as roads, drinking water, electricity and sanitation, andcould help to stem migration from the countryside to cities.

While 93% of urban households had electricity for lighting, only 55% of ruralhouseholds had access to electricity, Census 2011 data shows. In terms of availabil-ity of water within the home, 71% of urban households had access, compared withonly 35% of rural households. While 81% of urban households had latrines, only31% of rural households had similar access. Around 63% of rural households hadno drainage compared with 18% of urban households.



Self Employment and Talent Utilisation (SETU): Government has announced thesetting up of a Self- Employment and Talent Utilisation (SETU) mechanism. SETUwill be a Techno-Financial, Incubation and Facilitation Programme to support allaspects of start up businesses, and other self-employment activities, particularly intechnology-driven areas. An amount of Rs.10 bn is being set up initially in NITIAayog for SETU.

ATAL Innovation Mission (AIM): FM stated that AIM will be an Innovation Pro-motion Platform involving academics, entrepreneurs and researchers and draw uponnational and international experiences to foster a culture of innovation, R&D andscientific research in India.

FM announced a Swachh Bharat Cess on all or certain taxable services at a rate of2% from a date to be notified. Proceeds from this Cess would be utilized forSwachh Bharat initiatives. In a related development, the Scheduled rate of CleanEnergy Cess levied on coal lignite and peat is being increased form Rs. 100 pertonne to Rs. 300 per tonne. The effective rate of Clean Energy Cess is being in-creased from Rs. 100 per tonne to Rs. 200 per tonne. Similarly, Excise duty on sacksand bags of polymers of ethylene other than for industrial use is being increasedfrom 12% to 15%. The FM made adequate provision for the schemes for the poorwith allocation of Rs. 690 bn to the education sector including mid-day meals, Rs.331 bn to the health sector and Rs. 795 bn for rural development activities includingMGNREGA, Rs. 224 bn for housing and urban development, Rs. 103 bn for womenand child development, Rs. 42 bn for Water Resources and Namami Gange.

The FM proposed to create a Micro Units Development Refinance Agency (MUDRA)Bank, with a corpus of Rs. 200 bn, and credit guarantee corpus of Rs. 30 bn, whichwill refinance Micro-Finance Institutions through a Pradhan Mantri Mudra Yojana.

8 Centrally Sponsored Schemes have been delinked from Support of the Centre and24 schemes to be run with the Changed Sharing Pattern while 31 Schemes will GetFull Support of the Centre. The plan outlay of 2015-16 reflects the compositionalshift in the allocations for various Programmes and Schemes in view of high devolu-tion; 42% of Union Taxes, to States as per the recommendation of 14th FinanceCommission. Consequent to this substantially higher devolution, many schemes onthe State subjects are delinked from Central support. However, since some of theseschemes represent national priorities especially those targeted at poverty alleviation,Centre has decided that it will continue to contribute to such schemes.

As per the Budget, centre has decided to support fully those schemes, which aretargeted to the benefits of socially disadvantaged group. In case of some CentrallySponsored Schemes, the Centre: State funding pattern will undergo a change withStates to contribute higher share. The details of Plan outlays in 2015-16 are to beseen against this backdrop.

Central Plan Outlay by Sectors (Rs. Bn)

FY14 % of Total FY15BE % of Total FY15RE % of Total FY16BE % of Total

Agriculture & Allied Activities 177.9 2.9% 115.3 2.0% 102.0 2.4% 116.6 2.0%

Rural Development* 387.8 6.4% 30.6 0.5% 18.7 0.4% 31.1 0.5%

Irrigation & Flood Control 4.4 0.1% 18.0 0.3% 9.0 0.2% 7.7 0.1%

Energy 1,823.9 30.2% 1,662.7 28.7% 1,548.8 36.3% 1,673.4 28.9%

Industry and Minerals 334.3 5.5% 402.1 7.0% 394.0 9.2% 431.1 7.5%

Transport** 1,039.6 17.2% 1,162.0 20.1% 1,062.4 24.9% 1,934.2 33.4%

Communications 162.1 2.7% 130.1 2.2% 130.3 3.1% 120.3 2.1%

Science Technology & Environment 135.4 2.2% 187.9 3.2% 148.2 3.5% 190.2 3.3%

General Economic Services 260.6 4.3% 263.2 4.6% 173.0 4.1% 203.3 3.5%

Social Services*** 1,637.2 27.1% 794.3 13.7% 642.9 15.1% 810.2 14.0%

General Services 72.6 1.2% 79.1 1.4% 38.9 0.9% 265.6 4.6%

Grand Total 6,035.7 100.0% 4,845.3 83.8% 4,268.1 100.0% 5,783.8 100.0%

Source: Annual Budget 2015-16; * Includes provision for rural housing but excludes provision for rural roads; ** Includes provision for rural roads;*** Excludes provision for Rural Housing; RE:Revised Estimate; BE:Budget Estimate



E. Inflation - attacking supply side constraints in agricul-tureThe FM has tried to address some structural issues in agriculture. These initiativesare expected to address the supply side constraints and ease inflation in the longerterm.

Reiterating that the Government’s commitment to farmers runs deep, the FM pro-posed to fully support Agriculture Ministry’s organic farming scheme –“Paramparagat Krishi Vikas Yojana”. Stating that the Pradhanmantri Gram SinchaiYojana is aimed at irrigating the field of every farmer and improving water use ef-ficiency to provide ‘ Per Drop More Crop’’, the budget has proposed allocation ofRs.53 bn to support micro-irrigation, watershed development and the PradhanMantri Krishi Sinchai Yojana.

In order to support the agriculture sector with the help of effective agriculture creditand focus on small and marginal farmers, the FM proposed to allocate Rs. 250 bnto RIDF in NABARD, Rs. 150 bn for Long Term Rural Credit Fund; Rs. 450 bn forShort Term Co-operative Rural Credit Refinance Fund; and Rs. 150 bn for ShortTerm RRB Refinance Fund. In addition, government has set up an ambitious targetof Rs. 8.5 tn of agricultural credit. Stating the Government’s commitment to sup-porting employment through MGNREGA, FM proposed an allocation of Rs. 347 bnfor the program.

We opine that, effective implementation of the initiatives is the key to remove sup-ply bottle-necks and bring about a structural shift in the rate of inflation. In thebackdrop of a challenging fiscal situation, effective implementation rather than highspends, will alleviate the supply side issues effectively. The previous budgets hadallocated money towards these initiatives. However, the same was not effectivelyutilized, resulting in continued wastage and high inflation.



TAX PROPOSALS

Direct TaxesIn terms of direct tax, no major changes have been proposed on personal incometax and corporate tax front for the financial year 2015-16. There has been emphasison stable tax policy and fight against black money. The budget emphasized on giv-ing tax benefits to middle class and manufacturing sector to encourage Make inIndia.

The FM has kept the tax slabs for individuals unchanged while he increased thesurcharge from 10% to 12% for the individuals, HUFs, AOPs, etc with annual in-come exceeding Rs.10mn and abolished wealth tax. This proposal is estimated togenerate net additional tax revenue of Rs.80bn.

The budget raised the exemption limits of deduction in respect of health insurance(from INR 15000 to INR 25000), transport allowance, contribution towards pensionscheme (raised from Rs.0.10mn to Rs.0.15mn), etc which would result in additionaltax benefits for individuals.

Similarly for domestic companies, the surcharge has been increased by 2%. Thesurcharge in case of domestic companies having income exceeding Rs.10mn andupto Rs.100mn would be levied at 7% and surcharge at 12% would be levied ondomestic companies having income exceeding Rs.100mn. While for the foreigncompanies and domestic companies paying MAT, there is no change in surcharge.

On Corporate tax front, the budget proposed reducing corporate tax from 30% to25% over the next 4 years, starting FY17. However, the budget also talked aboutrationalization and removal of various tax exemptions and incentives to reduce taxdisputes and improve administration. The budget also rationalized capital gains forsponsor exiting at the time of listing of REITs and Infra Investment Trust.

The budget has given sops to FIIs by rationalizing the MAT provisions for FIIs. Thusprofits corresponding to their income from capital gains on transactions in securitieswould not be subject to MAT and would be liable to tax at a lower rate. In additionGAAR has also been deferred by 2 years and now has been proposed to be leviedfrom FY18. These measures would encourage FIIs investment in the stock market.

Direct tax

Source: Economic Survey 2014-15, Annual Budget FY2015-16

Indirect TaxesOn indirect tax, the FM made few changes in headline rates for excise and servicetax while keeping basic custom duty rate unchanged. The FM raised the effectiveservice tax rate from 12.36% to 14% and effective excise duty from 12.36% to12.5%. The FM talked about implementation of GST from FY17. The increase inservice tax is one of the few steps which have been taken towards the implemen-tation of the same.

0%

10%

20%

30%

40%

0

2500

5000

7500

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



The indirect taxes proposals have addressed the Swatch Bharat Mission. In the bud-get, the FM increased the Clean Energy Cess from INR 100 to INR 200 per tonne ofcoal to finance clean environment initiatives. He also raised excise duty on polyeth-ylene sacks and bags (other than for industrial use) from 12% to 15%. He also pro-posed to exempt services by common affluent treatment plants from service tax. Inorder to fund the Swatch Bharat mission, he enabled provision to levy SwachhBharat Cess at a rate of 2% or less on all or certain services based on need. Thecess would be effective from date which would be notified later.

On service tax front, the negative list has been pruned to widen the tax base. Thenew services which has been brought under service tax includes amusement facili-ties, entertainment events, job work for alcoholic liquor, construction of airports andports, distributor and agents of mutual funds, etc. On the other hand, certain ser-vices have been exempted from service tax which include transport of goods forexport by road from factory to land customs station, services of pre-conditioning,pre-cooling and ripening of fruits and vegetables, etc.

In order to discourage the consumption of tobacco and tobacco products the FMonce again raised the excise duty on cigarettes, cigars, cheroots, etc. The exciseduty on cigarettes has been increased by 25% for upto 65 mm and by 15% forother lengths.

On custom duty front, the budget raised custom duty on Metallurgical coke from2.5 % to 5%, iron and steel and articles of iron and steel from 10% to 15%, oncommercial vehicle from 10 % to 40%. While the budget gave sops to sectors suchas electronics and hardware, renewable energy, capital goods supporting infra sec-tor, etc. The budget reduced basic custom duty on LCD, LED TV below 19 inchesfrom 10% to nil, exempted specified parts of LCD and LED panels, etc.

While direct tax proposals are expected to result in revenue loss of Rs.83bn, theproposals. On indirect taxes are expected to yield Rs.234bn, resulting in a net gainof Rs.Rs.151bn.

Indirect tax

Source: Economic Survey 2014-15, Annual Budget FY2015-16

-20%

0%

20%

40%

60%

-2000

0

2000

4000

6000

8000Indirect Tax (Rs bn - LHS) Growth (% - RHS)



Capital markets – marginal benefitThe budget has proposed a gradual reduction in corporate tax rate from 30% to25% over the period FY17 to FY20. Thus, there is some visibility of a lower taxburden for corporate India. However, this may be compensated by reduced exemp-tions, details of which are not available.

On the other hand, the surcharge has been increased from 10% to 12% and hence,it will lead to a higher burden in FY16 and will set off some of the benefit due toaccrue WEF FY17.

GAAR has been deferred by two years. Also, GAAR provisions would be applicationprospectively, which should be a positive for the market sentiments. Distinction be-tween FDI and FII investments are to be done away with and the same may benefita few stocks.

With the major event out of the way, the markets will likely focus on issues like RBIaction and global economy. Off-budget action on budget initiatives will sustain theconfidence of the markets over the medium term. We expect RBI to reduce rates by50-75bps in FY16. We believe that, a bottoms-up approach will be the best ap-proach over this time-frame.



BUDGET HIGHLIGHTS FY2015-16

Customs duty

Pre-budget Post-budget

Chemicals/Petrochemicals

Ulexite ore 2.50% 0%

Isoprene and Liquefied Butane 5% 2.50%

Ethylene Dichloride, VinylChloride Monomer and Styreme Monomer 2.50% 2%

Butyl Acrylate 7.50% 5%

Antraquinone 7.50% 2.50%

Fertilisers

Sulphuric Acid 7.00% 5%

Metals/Mining

Metallurgical Coke 2.50% 5%

Chapters 72 and 73 - iron and steela and article of iron and steel 10% 15%

Electronics

HDPE 7.50% 0%

Black Lignite Unit Module 10% 0%

Organic LED 10% 0%

Magnetron of upto 1 KW 5% 0%


Excise duty

Item Pre Budget Post Budget

FMGC

Ciggerettes Rs/ 1000 sticks

Ciggerettes< 65mm (RS/1000) 1150 1438

Ciggerettes 75 mm-85mm (RS/1000) 3290 3784

Ciggerettes 70 mm-75mm (RS/1000) 2250 2588

Ciggerettes< 65mm (RS/1000) 1650 1898

Cut tobacco Rs 60 per kg Rs 70 per kg

Auto

Chassis of ambulances 24% 12.5%

Electronics/Hardware

Wafers for integrated circuit 12% 6%

Inputs for LED drivers 12% 6%

Mobiles phones 1% without CENVAT credit or 1% without CENVAT credit6% with CENVAT credit or 12.5% with CENVAT credit

Consumer Goods

Leather footwear more than Rs 1000 12% 6%

Mineral Waters 12% 18%

Polyethelene Sags & Bags 12% 18%

Oil & Gas

High speed diesel 14% + Rs 5 per litre 14% + Rs 15 per litre

Source: Union Budget Document 2015-2016



BUDGET AT A GLANCE

Central Government Finances

(Rs bn) FY2014 FY2015 BE FY2015 RE FY2016 BE

Receipts1. Revenue receipts (2d + 3) 10,293 11,898 11,263 11,4162. Gross tax revenue (2a + 2b ) 11,589 13,645 12,514 14,4952a. Direct taxes 6,363 7,362 7,056 7,980

2a1. Corporation tax 3,937 4,510 4,261 4,7062a2. Income tax 2,417 2,843 2,786 3,274

2a3. Other taxes 10 10 10 02b. Indirect taxes 5,226 6,283 5,458 6,515

2b1. Customs duty 1,751 2,018 1,887 2,0832b2. Excise duty 1,795 2,071 1,855 2,298

2b3. Service tax 1,649 2,160 1,681 2,098Taxes on UTs 31 34 34 36

2c Transfers to States and UTs 3,182 3,822 3,378 5,240

2ci Transfers to Nat Calamity fund 47 51 51 57

2d Tax revenue (Net to Centre) 8,360 9,773 9,085 9,198

3. Non-tax revenue 1,932 2,125 2,178 2,217

4. Capital receipts (4a + 4b + 4c + 4d) 5,420 6,223 5,549 6,359

4a. Recovery of loans 108 105 109 1084b. Other receipts (Disinvestments) 258 634 314 695

4c. Borrowings and other liabilities 5,245 5,312 5,283 5,4364d. Drawdown of Cash Balances -192 172 -157 120

5. Total receipts (1 + 4) 15,713 18,121 16,812 17,775

Expenditure6. Non-plan expenditure (7 + 8) 11,149 12,199 12,132 13,122

7. Non-plan revenue expenditure 10,277 11,146 11,219 12,0607a. Interest payments 3,801 4,270 4,114 4,561

7b. Subsidies 2,555 2,607 2,667 2,4387b1. Food 920 1,150 1,227 1,244

7b2. Fertilizer 680 730 710 7307b3. Petroleum 855 634 603 301

7b4. Others 101 93 128 1647c. Grants to States and UTs 616 699 803 1,086

7d. Others 3,305 3,570 3,636 3,9758. Non-plan capital exp. 872 1,053 913 1,062

9. Plan expenditure (10 + 11) 4,755 5,750 4,679 4,65310. Plan revenue expenditure 3,719 4,535 3,669 3,300

11. Plan capital expenditure 1,037 1,215 1,011 1,35312. Total expenditure (6 + 9) 15,904 17,949 16,812 17,775

13. Revenue expenditure (7+10) 13,995 15,681 14,888 15,36014. Capital expenditure (8+11) 1,909 2,268 1,924 2,414

Memo Items

15. Revenue Deficit (13-1) 3,703 3,783 3,625 3,94516. Fiscal Deficit (12-{1+4a+4b}) 5,245 5,312 5,126 5,556

17. Primary Deficit (16-7a) 1,445 1,042 1,013 99518. Gross domestic product (GDP) 113,205 128,767 126,537 141,089

PD/GDP (%) 1.3 0.8 0.8 0.7RD/GDP (%) 3.3 2.9 2.9 2.8

FD/GDP (%) 4.6 4.1 4.1 3.9




SECTOR SUMMARY

Sector Summary

Sector BudgetImpact Preferred Picks

Automobiles Neutral Tata Motors, Maruti Suzuki India

Aviation Neutral -

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

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

Cement Positive Grasim Industries, Shree Cement

Construction Positive IRB Infrastructure Developers,Nagarjuna Construction

FMCG Neutral Dabur India, Marico

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

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

Media Neutral Dish TV India, TV18 Broadcast,Zee Entertainment

Metals & Mining Neutral JSW Steel

Oil & Gas Neutral MRPL, Petronet LNG

Paints Neutral Kansai Nerolac Paints

Pharmaceuticals Neutral Lupin, Cadila Healthcare,Torrent Pharmaceuticals

Power Neutral Tata Power, NTPC

Real Estate Positive Phoenix Mills

Shipping Neutral Great Eastern Shipping Company,Shipping Corporation of India




SECTOR IMPACT ANALYSIS



2 Wheeler - Sales volume (mn units)

Source: SIAM

Passenger vehicles - Sales volume (mn units)

Source: SIAM

CVs - Sales volume (‘000 units)

Source: SIAM

AUTOMOBILES

BUDGET HIGHLIGHTS & IMPACT

Increase in custom duty for commercial vehicleImpact: Finance Minister has increased tariff rate on commercial vehicles from10% to 40%. However, customs duty on commercial vehicles in CKD kits andelectrically operated vehicles including those in CKD condition will remainunchanged at 10%.

Commercial vehicle imports form a miniscule portion of the overall sales inIndia. Accordingly, we do not see any significant impact of this move on salesperformance of players like Ashok Leyland, Tata Motors and Eicher Motors.

Lowering of excise duty on chassis of vehicles used as ambulanceImpact: The FM announced reduction in excise duty on chassis of vehicles usedas ambulances from 24% to 12.5%.

Vehicles made by OEM's like Force Motors and Maruti Suzuki are used asambulances. For these companies, only a small proportion of vehiclesmanufactured are used as ambulance. Thereby, if at all, these companies retainbenefit of lower excise with themselves, the positive implication on earningswill be marginal.

Reduction in excise duty on Metal Core PCB and LED driverImpact: Excise duty on inputs used in the manufacture of Metal Core PCB andLED driver for LED lights and fixtures and LED lamps, is reduced from 12%to 6%. Special Additional Duty (SAD) on inputs used in the manufacture ofLED drivers and MCPCB for LED lights, fixtures and LED lamps has been reducedfrom 4% to nil.

In the auto ancillary space, FIEM Industries manufactures LED lights/lamps.Reduction in LED light prices will help in increasing penetration for LED luminairesin the domestic market.

Impact on EPS (Rs)

Company Pre-Budget EPS Post-Budget EPS Current TargetFY15E FY16E FY15E FY16E Price Price

Preferred picksMaruti Suzuki 119.5 190 119.5 190 3,621 4,181

Tata Motors 53.6 62.4 53.6 62.4 593 661

OthersHero MotoCorp 131.2 177.7 131.2 177.7 2,685 3,198

M&M 54.1 55.8 54.1 55.8 1,292 1,412

Ashok Leyland 0.9 2.4 0.9 2.4 70 78

Escorts 6.7 16.0 6.7 16.0 134 160

TVS Motors 7.5 12.1 7.5 12.1 278 300

Apollo Tyres 18.8 22.9 18.8 22.9 175 251

Eicher Motors 227.6 484.6 227.6 484.6 16,256 16,853

Bajaj Auto 116 134.5 116 134.5 2,153 2,556

Source: Kotak Securites - Private Client Research

BUDGET IMPACT: NEUTRAL

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3

6

9

12

15

18

- 0.5 1.0 1.5 2.0 2.5 3.0 3.5

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250

500

750

1,000



AVIATION


Service tax abatement for executive class travel reducedImpact: Service tax abatement for executive class (business/first) air travel isreduced from 60% to 40%. Consequently, service tax would be payable on60% of the value of fare for business class as against 40% earlier. Servicetax payable on economy class stands unchanged at 40% of the fare.

We do not think increase in service tax will make difference to business/firstclass travelers and accordingly we do not expect any negative impact on demandfrom higher class passenger.

Key industry demand of reduction in sales tax on ATF remains unfulfilled makingthis budget neutral for the sector.

We do not have active coverage on this sector


Domestic passenger traffic (mn passengers)

Source - Civil Aviation Ministry, DGCA

ATF prices (Rs/KL)

Source - IOCL

-

10

20

30

40

50

60

70

80

40000

50000

60000

70000

80000

90000



BANKING & NBFCS


Net market borrowing is estimated at Rs.4.56 tn during FY16 (BE) asagainst Rs.4.53 tn during FY15 (RE).Impact: Government's net market borrowing during FY16 to fund the fiscaldeficit is lower than the street expectations and hence it is not likely to putmuch pressure on the G-Sec yields through crowding out of private investments.This in turn will not be negative for PSU banks from MTM provisioningrequirements on their Investment book.

To do away with the distinction between different types of foreigninvestments especially FII & FDI.Impact: The proposal to do away with the distinction between different typesof foreign investments, especially between FII & FDI, and replace them withcomposite caps is likely to aid select private sector banks in attracting foreigninvestments. Foreign shareholding in private sector banks is capped at 74%of paid-up voting equity capital and within this limit, FII stake is capped at 49%.The liberalization of foreign investments, including fungibility between FII, FDIand other sources would provide more headroom to banks having FIIshareholding close to 49% in raising money from FIIs.

The target of credit flow to the farmers has been hiked from Rs.8.0 tn inFY15 to Rs.8.5 tn in FY16 (BE).Impact: The target assigned to PSU banks in augmenting the credit flow toagriculture sector is slightly lower than the run-rate seen in previous severalyears. In percentage terms, YoY increase in disbursement target is only 6.3%during FY16 as against 22% / 14% seen during FY14/15. Hence, it is slightlypositive for the state owned banks which have been witnessing higher assetimpairments.

Scrapping the BIFR (Bureau for Industrial and Financial Reconstruction) andSICA (Sick Industrial Companies Act) and replacing it with a newbankruptcy rule.Impact: The new comprehensive bankruptcy code meeting the global standardsis likely to help banks in recovering dues if promoters default. We also believethis would bring legal certainty and speed and hence improve the ease of doingbusiness environment in the country.

The budget has provided Rs.79.4 bn for recapitalization of state-run banks.Impact: Rs.79.4 bn has been earmarked for recapitalization of PSU banks duringFY16 (Rs.113 bn proposed in FY15; revised estimates at Rs.70 bn) to augmenttheir core equity capital and enhance their future lending capabilities. However,this is a meager amount in comparison with the humongous capital requirementsby the PSU banks over next few years to meet BASEL III norms. Governmenthas been indicating that these PSU banks are likely to issue fresh equity topublic in a phased manner, without affecting the majority shareholding statusof GOI.

NBFC's with more than Rs.5.0 bn to come under SARFAESI Act.Impact: The would allow a lender to recover non-performing assets withoutcourt's intervention. With the inclusion of NBFCs under this act, these institutionswould be able to better manage their loan assets. Although structurally thisis positive for the sector, given the limited repossession, near-term benefitsare likely to be capped.

Setting up of Micro Units Development Refinance Agency (Mudra Bank)with a corpus of Rs.200 bn.Impact: The new bank will refinance loans of microfinance companies at alower rate which would result into a lower rate for MSME borrowers and henceincrease in credit demand.

BUDGET IMPACT: POSITIVE

Trends in RoE (%)

Source: RBI

Trends in RoA (%)

Source: RBI

Trends in NIM (%)

Source: RBI

0

4

8

12

16

20

FY12 FY13 FY14

All Banks

PSU Banks

New Pvt Sector Banks

0.00

0.50

1.00

1.50

2.00

FY12 FY13 FY14

All Banks

PSU Banks


0.00

1.00

2.00

3.00

4.00

FY12 FY13 FY14

All Banks

PSU Banks




Impact on ABV (Rs)

Company Pre-Budget ABV Post-Budget ABV Current TargetFY15E FY16E FY15E FY16E Price Price

Preferred picksAxis Bank 177.8 199.3 177.8 199.3 613 615

ICICI Bank 138.9 154.6 138.9 154.6 346 390

HDFC Bank 241.0 281.8 241.0 281.8 1071 1165

SBI 122.8 133.4 122.8 133.4 302 350

IDFC 107.2 114.2 107.2 114.2 173 210

OthersAllahabad Bank 101.9 111.1 101.9 111.1 109 112

Andhra Bank 82.1 86.1 82.1 86.1 85 91

BoB 131.0 153.4 131.0 153.4 185 210

DCB 52.2 58.2 52.2 58.2 114 132

HDFC Ltd 188.2 209.9 188.2 209.9 1335 1409

Indian Bank 190.9 193.2 190.9 193.2 184 200

Indian Overseas Bank 30.0 40.2 30.0 40.2 49 40

J&K Bank 96.9 103.4 96.9 103.4 112 114

LIC Housing 166.1 192.8 166.1 192.8 479 562

M&M Finance 78.0 88.0 78.0 88.0 248 250

PNB 125.3 142.1 125.3 142.1 166 178

STFC 396.5 449.9 396.5 449.9 1219 1250




CAPITAL GOODS & ENGINEERING


Additional depreciation on Plant and MachineryImpact: Additional depreciation of 20% will be allowed on new plant andmachinery installed by a manufacturing unit or a unit engaged in generationand distribution of power. In current times of weak industrial capex, this measureis an incentive for manufacturers to undertake capex plans.

No increase in capital expenditure on DefenceImpact: Capital expenditure on defense for 2015-16 has been maintained atprevious fiscal's levels of Rs 945 bn. Impact would be neutral.

Five new Ultra Mega projectsImpact: The government has proposed to set up 5 new Ultra Mega PowerProjects, each of 4000 MW, in the Plug-and-Play mode. These projects willhave all its clearances and linkages in place. Depending upon the extent ofcorporate interest in these UMPPs (recent bidding interest has not beenencouraging), sizeable orders could flow for BHEL and L&T.

Thrust on renewable energyImpact: Target of renewable energy capacity revised to 175000 MW till 2022,including 100000 MW Solar, 60000 MW Wind, 10000 MW Biomass and 5000MW Hydro. Excise duty on pig iron SG grade and Ferro-silicon-magnesium formanufacture of Cast components of wind operated electricity generators is beingfully exempted.

Thrust on LED lighting to boost energy conservationImpact: Excise duty on inputs for use in the manufacture of LED drivers andMCPCB for LED lights, fixtures and lamps, is being reduced from 12% to 6%.This augers well for companies like Havells, Bajaj Electricals and Cromptonin the long term.

SAD reduced to nilImpact: Special Additional Duty (SAD) has been reduced to nil compared to4% earlier. This is likely to reduce the cost of raw materials for manufacturers.Generally positive for capital goods manufacturers.

Thermax's order intake (Rs mn)

Source: Company

Voltas's order book (Rs bn)

Source: Company


-

5,000

10,000

15,000

20,000

25,000

0

10

20

30

40

50



Additional road cess on petrol and dieselImpact: Increase in road cess on Petrol and Diesel has been increased by Rs4 per liter (Earlier at Rs 2 per liter). This would be positive for Infrastructuresector mainly the road builders as the proceeds from the same would go intohighway development.

Additional surcharge on corporatesImpact: Increase in surcharge from 10% to 12% to lead to minor increasein corporate tax outgo. Minor negative.

Impact on EPS (Rs)


Preferred picks

Cummins India 25.1 30.1 25.1 29.8 897 1,050

Engineers India Ltd 13.4 17.8 13.4 17.6 206 260

Greaves Cotton 6.2 7.9 6.2 7.8 149 165

Praj Industries Ltd 3.1 4.4 3.1 4.4 62 75

Others

ABB Ltd * 10.8 21.5 10.8 21.3 1,400 1,194

AIA Engineering 36.5 46.3 36.5 45.9 1,135 1,180

Alstom T&D India Ltd 5.7 9.0 5.7 8.9 524 350

Bajaj Electricals Ltd (2.2) 10.7 (2.2) 10.6 215 240

Bharat Electronics 132.4 165.8 132.4 164.3 3,732 3,480

BHEL 7.8 13.5 7.8 13.4 262 270

Blue Star Ltd 8.9 14.5 8.9 14.4 316 360

Carborundum Universal Ltd 6.6 12.0 6.6 11.9 185 240

Crompton Greaves 5.6 9.0 5.6 8.9 177 200

Elgi Equipment Ltd 2.8 4.8 2.8 4.8 148 102

Havells India Ltd 7.3 10.6 7.3 10.5 270 295

Kalpataru Power Transmission 11.7 11.3 11.7 11.2 236 192

Larsen & Toubro 45.4 59.2 45.4 58.7 1,768 1,714

Siemens India # 15.0 29.6 15.0 29.3 1,337 1,100

Suzlon Energy - 27 -

Thermax 19.6 25.0 19.6 24.8 1,157 1,176

Time Technoplast Ltd 5.4 6.8 5.4 6.7 50 60

Va Tech Wabag Ltd 44.1 63.8 44.1 63.2 1,750 1,405

Voltamp Ltd 27.0 46.0 27.0 45.6 690 660

Voltas Ltd 9.6 11.5 9.6 11.4 254 287

Source: Kotak Securites - Private Client Research; * December year ending; # September year end-ing



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 and rural housing to add to cementdemand growthImpact: Positive. Cement demand is expected to gain momentum withcontinuous thrust of government on infrastructure creation. Government hasproposed higher allocations for roads and railways to boost infrastructure growth.Along with this, continued focus on rural housing, urban development and microirrigation is likely to translate into higher demand growth for the cement sector.

Additional investment allowance in AP for new investmentsImpact: Positive. Government has announced additional investment allowance(@ 15%) and additional depreciation (@35%) to new manufacturing units setup during the period 01-04-2015 to 31-03-2020 in notified backward areas ofAndhra Pradesh and Telangana. This would be positive for south based cementcompanies.

Increase in excise duty and coal cessImpact: Marginally Negative. Excise duty has been hiked to 12.5% from12.36% and clean energy cess has also been hiked to Rs 200 per metric tonneof coal from Rs 100 per metric tonne of coal. We expect companies to passon the incremental impact of excise duty to the end users.

Higher effective corporate tax rateImpact: Marginally Negative. Impact of higher surcharge in the budget mayhave a modest negative impact on earnings. Longer-term, proposed declinesin corporate tax shall be a positive for companies paying full tax.

Impact on EPS (Rs)


Preferred picks

Grasim 205.4 276.4 205.4 276.4 3,753 4,206

Shree Cements 176.4 343.3 176.4 343.3 10,529 11,424

Others

ACC 72.4 77.2 72.4 77.2 1,678 1,476

Ultratech Cements 82 108 82 108 3,136 3,171

India Cements 1.1 2.5 1.1 2.5 100 115



170

200

230

260

290

320

350 North South

West East

0%

30%

60%

90%

120%

0

100

200

300

400

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



CONSTRUCTION


Higher allocation and road cess to fund investments in roads and railwaysImpact: Positive. Outlay on roads and railways has been increased by Rs 140bn and Rs 100 bn respectively which is likely to spur investments in both thesectors. Sum of Rs 400 bn is also to be made available through conversion ofexisting excise duty on petrol and diesel to the extent of Rs 4 per litre into RoadCess to fund investment in roads and other infrastructure. Along with this,government plans to complete 1 lakh km of roads under construction alongwith sanctioning and building of another 1 lakh km by 2022. This is likely toboost investments in the road sector which has lagged in last two years dueto funding constraints and lack of interest from private developers. This is expectedto be positive for road players like IRB, ITNL, NCC, Sadbhav Engineering andAshoka Buildcon.

Increased allocation for micro irrigationImpact: Positive. Allocation of Rs 53 bn to micro-irrigation, watersheddevelopment and the 'Pradhan Mantri Krishi Sinchai Yojana' is likely to be positivefor players engaged in irrigation and water supply related projects. Companieslike NCC, JKIL, Simplex Infrastructure, Pratibha industries are likely to benefitfrom the same.

Setting up of National Investment and Infrastructure Fund (NIIF) and Taxfree infrastructure bonds for the projectsImpact: Positive. Government has also proposed the setting up of a NationalInvestment and Infrastructure Fund (NIIF) with an initial corpus of Rs.200 bnwhich can be leveraged by infrastructure companies. Initial corpus of Rs 200bn would enable the trust to raise debt and, in turn, invest as equity ininfrastructure finance companies. This is likely to ease long term funding forthe sector and projects having long project life cycle especially road BOT projects.

Along with this, tax free infrastructure bonds have also been proposed for projectsin the rail, road and irrigation sectors. This is also likely to boost investmentin these sectors.

Initiatives to improve funding for the sectorImpact: Positive. Government also plans to create a more liberal system ofraising global capital and funding the seed capital. This would also includerevisiting the PPP mode of infrastructure development in order to attractinvestments from private sector. Rebalancing of risks, viability grant fundingand government bearing higher risks for toll projects are some of the proposalsbeing worked out for attracting the private sector towards long gestation projects.

Higher service tax for airport and port constructionImpact: Negative. Exemption to construction, erection, commissioning orinstallation of original works pertaining to an airport or port is being withdrawn.This is likely to be slight negative for companies involved in EPC projects forairports and ports as it would result in higher taxation burden for them.





Order book Trend (Rs bn)

Source: Companies

Revenue trend (Rs mn)

Source: Companies

0

50

100

150

200

250

IRB Infra ILFS NCC Ltd SimplexInfra

Q1FY15 Q2FY15 Q3FY15

Impact on EPS (Rs)


Preferred picks

IRB Infra 16 18.7 16 18.7 257 300

NCC Ltd 1.1 2.6 1.1 2.6 79 86

Others

IL&FS Transportation Network 18.7 19.7 18.7 19.7 213 216

Simplex Infra 12.6 19.6 12.6 19.6 398 435

JP Associates - - - - 25 24




FMCG Industry Size (Rs bn)

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

FMCG


Changes in excise duties for cigarettesImpact: The budget has raised excise duties for cigarettes. Excise duties forcigarettes <65mm in length have been raised by 25%, while the duty on othercigarettes has been raised 15%. The overall rise in ITC's weighted averageexcise duties would be around 16.5%. The rise is higher than our expectations,and would lead to a negative revision in earnings, in our opinion. The sameis a negative for cigarette companies in general. We note that excise duty ontobacco (raw material) has also been raised 17%, which will have only marginalimpact, given high gross margins in cigarettes.

Modest Benefits to consumption on account of changes in personel incomtax, expected softness in subsidies spendsImpact: Greater disposable incomes as enabled by higher slabs/ greaterexemptions to the middle class shall have a modest impact on the FMCG sector.As expected central government outlays on subsidies and social sector haverisen, although modestly; these too, shall support rural consumption to a degree.

Positive Statements on GST rollout in FY17Impact: The FM has made promising statements on GST implementation. GSTis a significant positive for FMCG companies on account of greater parity withunorganized sector, as also supply chain benefits.

Excise duties on bags and sacks used in packaging has been raised from12% to 18%Impact: The same shall have a modest negative impact on margins, assumingall else remains equal. However, we think that companies in the sector shallbe able to pass on such impacts to a large degree.

Rise in excise duties for select food productsImpact: The budget has raised excise duties on condensed milk and peanutbutter. These shall have a marginal negative impact on the concerned companies(Nestle and Agrotech Foods, in the listed space).

Changes in tax ratesImpact: Impact of higher surcharge in the budget may have a modest negativeimpact on earnings. Longer-term, proposed declines in corporate tax shall bea positive for companies paying full tax, including ITC and Nestle.

Impact on EPS (Rs)


Preferred picks

Dabur India 6.1 7.9 6.1 7.9 264 286

Marico 8.9 11.1 8.9 11.1 356 389

Others

Colgate Palmolive 41.2 46.9 41.2 46.9 1,945 1,874

Godrej Consumer 27.1 35.4 27.1 35.4 1,135 1,240

Hindustan Unilever 18.2 22.7 18.2 22.7 910 940

ITC 12.3 13.8 12.3 13.3 361 334

Nestle India 122.9 142.6 122.9 142.6 7,024 6,275



0

550

1100

1650

2200



Excise Duties : Cigarettes (Rs/ ‘000 sticks)

Rs/ 1000 sticks FY10 FY11 FY12 FY13 FY14 FY15 FY16

Filter:

75mm-85mm 1,759 1,959 1,959 2,309 2,725 3,290 3,784

70mm-75mm 1,323 1,473 1,473 1,718 2,027 2,250 2,588

<70mm 819 969 969 1,194 1,409 1,650 1,898

<65mm (Int. FY13) (Int. FY13) (Int. FY13) 669 669 1,150 1,438

<60mm 669 669 (Cl. FY13) (Cl. FY13) (Cl. FY13)

Non-Filter

60mm-70mm 1,323 1,473 1,473 (Cl. FY13) (Cl. FY13) (Cl. FY13)

<60mm 669 669 669 (Cl. FY13) (Cl. FY13) (Cl. FY13)

<65mm (Int. FY13) (Int. FY13) (Int. FY13) 669 669 1,150 1,438

Source: Budget documents; Note - Int FY13 = Introduced in FY13, CLFY13 = The slab is not applicable any more/subsumed in other slabs FY13onward



Indian IT Services-BPO Industry;exports & domestic

Source : Nasscom

Growth in number of employees

Source : Nasscom

Rupee / US$

Source : Bloomberg

INFORMATION TECHNOLOGY


Tax rates to be cut from 30% to 25% starting FY17Impact: This will have a marginal impact. Several of the companies have taxrate at around the 25% mark as tax exemptions have been diluted over a periodof time. Thus, we do not expect any major impact on financials. The surchargeon FY16 tax will also have a marginal impact.

Removal of Special Additional Duty on certain inputs, and componentsImpact : This should help in reducing the manufacturing cost and hence, capexcosts for Indian IT companies should reduce

Digital India initiative with overall allocation of Rs.5bnImpact : This shoud provide opportunities for most companies especially thosewhich focus on domestic market.

The provisions of the Union Budget have been largely neutral tomarginally positive for the sector, in our opinion.We remain optimistic on the longer term prospects of the industry. Indian vendorshave moved up the value chain. They are focusing on newer opportunities likecloud computing, analytics, mobility, etc. Newer pricing models will likely makethem participate more in the growth prospects of the clients while also makingbusiness more non-linear. Also, focused smaller companies with expertise onselect verticals will be able to move up the value chain and attract larger clients,thereby, improving their longer term prospects. Companies, however, needto contend with higher competitive pressures and improve efficiencies.

We expect decent returns for the stocks over the medium term, subject to nearterm volatility. We like TCS and Infosys among larger names. We also retainour positive bias for select mid-caps like KPIT Cummins.

Impact on EPS (Rs)


Preferred picks

TCS 110.4 126.1 110.4 126.1 2675 2786

Infosys 109.5 123.7 109.5 123.7 2296 2399

KPIT Cummins 13.4 16.8 13.4 16.8 211 224

Others

HCL Tech 107.2 114.5 107.2 114.5 2021 1804

Cyient 32.1 39.7 32.1 39.7 551 539

Mphasis 31.8 33.9 31.8 33.9 380 370

NIIT Limited 1.6 5.7 1.6 5.7 45 48

NIIT Technologies 30.9 37 30.9 37 399 405

Oracle 150.6 159.6 150.6 159.6 3277 3527

Wipro 35 39.5 35 39.5 659 624

Zensar 59.7 69.3 59.7 69.3 723 643



0

25

50

75

100

FY13 FY14 FY15

Exports Domestic

0

700

1400

2100

2800

3500

34.0

44.0

54.0

64.0

74.0



LOGISTICS


Cold chain companies exempted from paying service taxImpact: Positive. Cold chain companies hitherto were paying service tax onpre-conditioning, pre-cooling and other value added services provided by them.From FY16, these companies would be exempted from paying service tax whichis expected to bring down the cost of service provided by these companies makingthem competitive and enable them to attract business. We estimate this exemptionto benefit Snowman Logistics and Concor

CFS operators exempted from paying service taxImpact: Positive. CFS operators hitherto were paying service tax on serviceslike transportation, storage and other value added services. From FY16, thesecompanies would be exempted from paying service tax for all the above activitieswhich is expected to bring down the cost of service provided by these companiesmaking them competitive and enable them to attract business. We estimatethis exemption to benefit Allcargo, Adani port, Gateway Distriparks and Concor.

Corporatization of portsImpact: Neutral. Government intends to initiate steps aimed at corporatizingIndia's major ports in FY16. This is estimated to bring professionalism and givefinancial autonomy.to major ports and make them compete with private sectorports. We can also expect IPO of few of the major ports including JNPT, Kandlaand Chennai Port. We estimate this measure to increase competition for privateports including Adani, Gujarat Pipavav and Essar.

Withdrawal of service tax exemption for construction, erection,commissioning or installation of original works for a portImpact: Positive. Port operators hitherto were not paying any service tax onoriginal works as it formed part of exemption list of service tax. The governmenthas now removed original works for Ports and Airports from the list of exemptedservices which is estimated to increase the capex for port companies. This measurewould negatively impact Adani, Gujarat Pipavav and Essar.

Increase in corporate surcharge from 10% to 12%Impact: Negative. We estimate this measure to increase effective tax rateif companies from 33.9% to 34.5% which should t impact earnings in FY16by 50 bps

Impact on EPS (Rs)


Preferred picks

Allcargo Logistics 18.9 24.5 18.8 24.3 330 390

Gujarat Pipavav Port 8.6 10.1 8.6 10.1 215 260

Adani Ports and SEZ 11.2 14.7 11.2 14.7 330 380

Others

Gateway Distriparks 16.4 19.5 16.2 19.3 415 425

Bluedart 63.0 73.0 62.0 72.0 7110 3795

Concor 53.4 62.0 53.4 62.0 1545 1550



Container volumes at 12 majorports (mn TEUs)

Source: Kotak Securities - Private ClientResearch, Indian Ports Association

Volumes for Adani Port andGujarat Pipavav Port (mntonnes)

Source: Company

0.00

2.00

4.00

6.00

8.00

0

20

40

60

80

100

120



BUDGET IMPACT: NEUTRAL MEDIA


Changes in service tax rate:Impact: Higher service tax rates (14% versus 12.4% earlier) shall have a modestnegative impact on the subscriber payments in the TV broadcasting space; theimpact shall also fall on higher payments made by advertisers. Net-net, webelieve the impact of these on the sector shall be marginal.

Positive comments on GST rollout from FY17Impact: As expected, the government has made positive comments on therollout of GST from 2017. The same shall reduce the multiplicity of taxes forplatform providers, and shall provide a level playing field to DTH players. Tothat extent, the same is a positive for DTH players.

Basic customs duty on black light unit modules used in LED/ LCDmanufacture, as well as organic LED TV modules, has been reduced from10% to nil.Impact: We expect the impact of these to be marginally positive for televisionbroadcasters and platform providers.

Changes in Income tax rateImpact of higher surcharge could have a modest negative impact on earningsof Sun TV, Zee Entertainment. However, longer-term, decline in peak corporatetax shall be a positive.

Impact on EPS (Rs)


Preferred picks

Dish TV - 0.6 - 0.6 85 87

HMVL 18.1 22.0 18.1 22.0 229 358

TV18 Broadcast 0.8 1.4 0.8 1.4 33 38

Zee Entertainment 9.5 12.0 9.5 12.0 346 421

Others

DB Corp 18.4 22.5 18.4 22.5 393 404

ENIL 22.2 25.8 22.2 25.8 619 670

Jagran Prakashan 7.7 9.4 7.7 9.4 133 140

Sun TV Network 19.8 20.9 19.8 20.9 410 418


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

Source: FICCI - KPMG report

0200400600800

100012001400



China HRC Export Price (US$/t)

Source: Bloomberg

CRB Metals Index

Source: Bloomberg

METALS & MINING


Sustained infrastructure thrust to stimulate steel demand by roof forall by 2022 and various infrastructure activities for road, railways andirrigation projects.Impact: Positive for steel companies as higher outlay for housing, road, railwaysand irrigation projects would help demand for steel.

The rate of Clean Energy Cess increased from Rs100/tonne to Rs200/tonneImpact: Clean energy cess on Coal increased from Rs100/tonne to Rs200/tonne,following with 6.3% increase in freight rate in Railway Budget. We believethe landed cost of coal is likely to rise 4-5% for all metal producers (Aluminiumand Steel). This would lead to US$20-30/tonne increase in production cost forAluminium producers and Rs150/tonne for steel manufacturers.

Increase in custom duty on metallurgical coke to 5% from 2.5%Impact: We do not see any significant impact on the company under ourcoverage, as they coke oven battery and import metallurgical coal and notcoke. Increase in import duty will impact merchant coke-oven batteries andcompanies like Kalyani Steel who do not have coke over battery.

SAD on melting scrap of iron & steel including stainless steel scrap formelting, copper scrap, brass scrap and aluminium scrap is being reducedfrom 4% to 2%.Impact: Decline in SAD will neutralize impact on CENVAT credit leading tounchanged scrap prices in domestic market. This will also marginally reducethe working capital requirement for importers.

Impact on EPS (Rs)


Preferred picksJSW Steel 86.7 108.1 86.7 108.1 1010 1,300



440

465

490

515

540

700

800

900

1000



Naphtha ($/bbls)

Source: Bloomberg

Crude Oil ($/bbl)

Source: Bloomberg

OIL & GAS


Additional Duty of Excise i.e. Road CessThe effective rates of the Additional Duty of Excise (commonly known as RoadCess) levied on Petrol and High Speed Diesel Oil is being increased from Rs.2 per litre to Rs.6 per litre only. Schedule Rates of the Additional Duty of Exciselevied on Petrol and High Speed Diesel Oil is being increased from Rs. 2 perlitre to Rs. 8 per litre.

Education Cess and Secondary and Higher Education Cess, presently applicableto petroleum products, including petrol and High Speed Diesel, are beingexempted.

Rates of duty of excise (CENVAT) on Petrol and High Speed Diesel Oil (bothbranded and unbranded) are also being revised.

Tables below summarizes the changes in various duties applicable to petroland diesel:

Petroleum SubsidyImpact: Neutral. The FM has budgeted Rs. 300 bn (includes Rs. 220 Bn forsubsidy on LPG and Rs.80 Bn for Kerosene subsidy) as the government's shareof the oil subsidy burden in FY16 v/s Rs. 603 bn in FY15, a cut of 50%. TheGovernment had carried forward fuel subsidy of Rs.345bn from FY14 to FY15and we believe that, the same has been provided for in FY15. Overall, we feelthat, the estimates for fuel subsidies are realistic and do not expect any majorincremental number on the same. This also indicates that if the oil prices remainsubdued, there may not be substantial burden on OMCs.


45

65

85

105

125

145

40

60

80

100

120

CENVAT SAED AED Education Total Education

Rs. / Litre Rs. / Rs. / Cess Rs. / Litre Cess

Litre Litre (as % of

aggregate

of

duties of

excise)

Unbranded petrol

8.95 6 2 3% 17.46 5.46 6 6 NIL 17.46Branded petrol

10.1 6 2 3% 18.64 6.64 6 6 NIL 18.64Unbranded Diesel

7.96 NIL 2 3% 10.26 4.26 NIL 6 NIL 10.26Branded Diesel

14% +Rs. 5

/litre or Rs.

10.25 / litre,

w hichever is

low er

Duty rates applicable prior upto 28.02.02105 Duty rates applicable w ith effect from 01.03.2015

CENVAT SAED AED Total

6 NIL 12.62NIL 2 3% 12.62 6.62 NIL

Source: Union Budget 2015-16; Note: ADE means Additional Duty of Excise, SADE meansSpecial additional Duty of Excise

Change in excise duty



Income TaxImpact: Neutral. For domestic companies, the surcharge has been increasedby 2%. The surcharge in case of domestic companies having income exceedingRs.10 Mn and upto Rs.100 Mn would be levied at 7% and surcharge at 12%would be levied on domestic companies having income exceeding Rs.100 Mn.While for the foreign companies and domestic companies paying MAT, thereis no change in surcharge.

On Corporate tax front, the budget proposed reducing corporate tax from 30%to 25% over the next 4 years, starting FY17. However, the budget also talkedabout rationalization and removal of various tax exemptions and incentives toreduce tax disputes and improve administration.

Impact on EPS (Rs)


Preferred picksPLNG 10.1 12.8 10.1 12.8 179 200

Oil India Ltd 49.2 57.9 49.2 57.9 498 585




Volume growth of paint companies (%)

Source: Company, Industry

PAINTS


Increase in corporate surcharge from 10% to 12%Impact: Negative. We estimate this measure to increase effective tax rateof companies from 33.9% to 34.5% which should impact earnings in FY16.

Impact on EPS (Rs)


Preferred picksKansai Nerolac 65.4 80.4 65.1 80.1 2350 2800

OthersAsian Paints 16.5 19.3 16.2 19.1 820 945



4.0

6.5

9.0

11.5

14.0

16.5GDP growthVolume growth



PHARMACEUTICALS


Fund allocation disappoints marginallyImpact: Funds allocated for Health and family welfare at Rs 331.5bn, slightlylower than Rs 338.8bn in FY15 but higher than Rs 327.4bn in FY14. Thehealthcare spend in India has been lower at ~4.0% of GDP (inc Centre andState) which is lower than over 10% spend in EU, US and ~6-7% of developingcountries like Brazil and Russia.

Higher surcharge, no impact on our coverage universe, except for LupinImpact: The surcharge on income tax has been revised from 10% to 12%,but companies under MAT (Minimum Alternate Tax) have been given a relief.Hence, except for Lupin (Lupin's tax rate is ~32%), most of our coverage universecompanies will not be impacted. Even for Lupin, the impact is very marginal.

Higher depreciation rate of 35% (earlier 20%) for capex in backward areasof Andra Pradesh and TelanganaImpact: Due to presence of many pharma companies in Andra Pradesh andTelagana region, we expect few companies to benefit from this move. Amongstour coverage universe, Dr Reddy's could benefit if capex are announced in thebackward region of the states. However, our interaction with the managementsuggests no material impact on our estimates.

Impact on EPS (Rs)


Preferred picks

Lupin Ltd 63.3 73.9 62.8 73.4 1,775 1,775

Cadila Hc 68.8 85.4 68.8 85.4 1,964 1,964

Torrent Pharma 54.6 69.2 54.6 69.2 1,385 1,385

OthersCipla 24.2 30.9 24.2 30.9 684 684

Dr Reddy's 156.3 174.4 156.3 174.4 3,662 3,662

Sun Pharma 35.5 39.9 35.5 39.9 1,026 1,026



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

13.0

4514.7

41

0

25

50

75

100

2013 2020

Exports Domestic

0

2

4

6

8

10

12

14

9% CAGR

12% CAGR



POWER


Increase in import duty on coalImpact: The FM has increased clean coal cess by Rs 100 per ton. This is expectedto be a minor negative for JSW Energy as it would not be able to pass-throughthe cost, as substantial part of the power generation is sold in merchant market.

Five UMPPs to be set upImpact: The FM has proposed setting up of five UMPPs. However, given thedistressed balance sheets of the private sector utilities, there may not be significantinterest in bidding for the UMPPs. Allocation of recent UMPP bids was put offdue to lack of adequate number of bidders.

Impact on EPS (Rs)


Preferred picks

NTPC 11.1 11.1 11.1 10.9 156 157

Tata Power 1.1 2.9 1.1 2.8 87 110



Installed power capacity (MW)

Source: CEA

HBA coal price (Indonesia) USD/ton

Source: Bloomberg

0

5000

10000

15000

20000

25000

50

70

90

110

130



Ticket size split of launched units during H12014

Source: Knight Frank Research

Contribution to investment in Real Estate (2005-13)

Source: Cushman & Wakefield Research

REAL ESTATE


Clarity on REITsImpact: Positive. In respect of Real Estate Investment Trusts (REITs) andInfrastructure Investment Trusts (INViTs), it has been proposed that the sponsorwill be given the same treatment on offloading of units at the time of listingas would have been available to him had he offloaded his shareholding of specialpurpose vehicle (SPV) at the stage of direct listing or IPO. Along with this, thebenefit of concessional tax regime of tax @15 % on STCG and exemption onLTCG shall be available to the sponsor on sale of units of REIT subject to levyof STT.

Also, earlier the rental income received at the level of SPV gets passed throughby way of interest or dividend to the REIT but the rental income directly receivedby the REIT was taxable at REIT level and does not get pass through benefit.Now government has proposed a pass through status to the rental income arisingto REIT.

These key changes should pave the way for REIT listings in India from April2016.

Higher service tax to be negative for the sectorImpact: Negative. Service tax rate has been enhanced from 12.36% to 14%.This is likely to increase the burden on end user from 3.71% to 4.2% aftertaking into account abatement of 30%. This may impact the demand slightlysince developers would pass on the increased impact of service tax.


Impact on EPS (Rs)


Preferred picksPhoenix Mills 10.8 11.7 10.8 11.7 388 419





Baltic Dry Index (points)

Source: Bloomberg

Baltic dirty tanker index (points)

Source: Bloomberg

SHIPPING


Defence capital expenditure hiked from Rs 820 bn to Rs 950 bnImpact: Positive. The government in the current budget has increased thecapital allocation from Rs 820 bn to Rs 950 bn (+16% YoY) for defence capitalexpenditure. Around 20% of this capital expenditure is for the navy. We estimatethis to be positive for shipyard companies like Pipavav and ABG. These shipyardsmay receive some of these orders who are struggling to get any order fromthe commercial segment

Comprehensive policy expected shortly to promote Indian ship buildingindustryImpact: Neutral. Government was expected to announce a new comprehensiveshipbuilding policy to give respite to shipbuilders who are currently making losses.We estimate the new policy to have got deferred again which would coverareas like subsidy for shipbuilders, infrastructure status for shipbuilding industry,interest subvention and indigenization. The new policy is expected to help thedomestic shipbuilding companies like ABG Shipyard, Bharati Shipyard and PipavavDefence to improve their cashflow and also make them more competitive.

Increase in corporate surcharge from 10% to 12%Impact: Negative. We estimate this measure to increase effective tax rateof companies from 33.9% to 34.5% which should impact earnings.

Impact on EPS (Rs)


Preferred picksGreat Eastern Shipping 49.4 60.2 49.4 60.2 355 380

SCI 2.8 5.7 2.8 5.7 60 70

OthersABG shipyard -86.0 -34.0 -87.0 -35.0 238 200

Pipavav Shipyard 1.1 1.1 1.1 1.1 74 54



400

900

1400

1900

2400

500

800

1100

1400



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, [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 purposes only.

RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a sufficientfundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previousinvestment 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 and distributionhouse.Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), MCXStock Exchange Limited (MCX-SX), United Stock Exchange of India Limited (USEIL) and a dealer of the OTC Exchange of India (OTCEI). Our businesses include stockbroking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository servicesand Portfolio Management.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 Mutual LifeInsurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are under the process of seeking registrationunder 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 last fiveyears. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minorpenalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor hasour 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 construed asan 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 general in-formation of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financialsituations, 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 completeness cannotbe guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients ofthis material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material maygo up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives aswell as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studyingcharts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on acompany's fundamentals.We do not have any information other than information available to general public with regard to budget proposals. The industry expectations arebased on information received from sources like respective industry associations, FICCI, CII, companies, media and other public sources. This reportcontains budget expectations of our experts and its impact on specific sectors and companies, which may or may not 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 the informationdiscussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned thatany forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may makeinvestment 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 the PrivateClient Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of theInstitutional 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 or shortpositions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earnbrokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor orlender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information andopinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short positionin the above mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and does not consider risk appetiteor investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed asinvitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investmentdecisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG 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 or com-panies 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 or viewsexpressed 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: NoWe or our associates may have received compensation from the subject company in the past 12 months. We or our associates may have managed or co-managedpublic offering of securities for the subject company in the past 12 months. We or our associates may have received compensation for investment banking ormerchant banking or brokerage services from the subject company in the past 12 months. We or our associates may have received any compensation for productsor services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. We or our associates havenot received any compensation or other benefits from the subject company or third party in connection with the research report. Our associates may have financialinterest in the subject company.Research Analyst or his/her relative's financial interest in the subject companies: Infosys - Yes. Others - NOKotak Securities Limited has financial interest in the subject companies: Axis Bank, BoB, HDFC Bank, ICICI Bank, PNB, SBI, HDFC, IDFC, LIC Housing, STFC, AshokLeyland, Eicher Motors, Hero MotoCorp, M&M, Tata Motors, Bharat Electronics, BHEL, Crompton Greaves, Cummins India, Havells, L&T, Siemens India, Va Tech,Voltas, ACC, Grasim, India Cement, Shree Cement, Ultratech, NCC, Colgate, Dabur, GCPL, HUL, ITC, Marico, Nestle, HCL Tech, Infosys, Kpit Tech, TCS, Wipro, AdaniPort, Allcargo, Concor, GDL, GPPL, DB Corp, Dish TV, Kajaria Ceramics, Cairn India, Cadila Healthcare, Cipla DRL, Lupin and Sun Pharmaceuticals.Our associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date ofpublication of Research Report.Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately pre-ceding the date of publication of Research Report: NoKotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the dateof publication of Research Report: NoSubject Company 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. (Choose acompany 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, TelephoneNo.: +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/INF 011133230, OTCINB 200808136,MCXSX INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164 and PMS INP000000258. NSDL: IN-DP-NSDL-23-97. CDSL: IN-DP-CDSL-158-2001. Our researchshould not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors includingtheir financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities are subject to marketrisk; please read the SEBI prescribed Combined Risk Disclosure Document prior to investing. Derivatives are a sophisticated investment device. The investor isrequested to take into consideration all the risk factors before actually trading in derivative contracts .Compliance Officer Details: Mr. Sandeep Chordia. 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 - 18002099292Level 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: Sandeep Chordia)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) at [email protected] call on 91- (022) 6652 9160.

UNION BUDGET ANALYSIS - Kotak Securities · 2015. 3. 2. · Union Budget 2015-16 Please see the...

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Transcript of UNION BUDGET ANALYSIS - Kotak Securities · 2015. 3. 2. · Union Budget 2015-16 Please see the...