Motilal Oswal has come out with a report on Union Budget 2011-12.
The Union Budget 2012 has been presented amidst assumptions of a robust economic environment in FY12 with nominal GDP growth of 14%, tax revenue growth of 18% and a significantly lower fiscal deficit at 4.6% (vs 5.1% YoY). The path to fiscal consolidation (a key focus point), however, will be difficult as subsidies are under provided at current global commodity prices. No rollback in excise duty and alignment of direct tax structure to eventual new DTC (Direct Taxes Code) are the key highlights on tax front.
Aggressive subsidy accounting; challenging disinvestment target: While we think that the government has been realistic in its tax revenue projections, it has routinely overshot its subsidy estimates by a margin. We estimate FY12 subsidy burden to be Rs1.7t vs government's estimate of Rs1.4t. As a result, our fiscal deficit estimate stands at 4.8% vs budgeted 4.6%. We believe the budget assumes lower oil prices (~80-90% of actual) and normal monsoons, inturn driving a strong agricultural growth (critical for 8.5-9%). While disinvestment target of Rs400b appears challenging in the current market conditions, the pipeline of Rs180b overflowing from FY11 improves visibility of this target.
ITC, BHEL, Autos and Financials among key beneficiaries; Iron ore worst hit: Key beneficiaries are ITC (no hike in excise on cigarettes), Autos (no rollback in excise), Financials (lower borrowing plan) and BHEL (level playing field on expansions). Key adversely impacted sectors were Iron-ore (higher export duty), SEZ developers and units operating in SEZs (MAT applicability), Cement (hike in excise duty) and Retail (no mention of FDI increase).
Execution of key reforms is critical: The important catalyst for equities will be the execution of key reforms proposed: (i) Introduction of GST Bill, (ii) DTC will be introduced from April 2012, (iii) Move towards direct subsidy for Below Poverty Line by April 2012 (LPG, kerosene and fertilizer), (iv) Food Security Bill to be tabled in FY12, and (v) Improving access to long term funds for infrastructure projects through various measures.
Tapping foreign savings to ease domestic liquidity: A breakthrough measure for Indian mutual fund industry is to permit SEBI-registered mutual funds to accept subscriptions from foreign investors for equity schemes. This would enable Indian mutual funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market. FII limit on corporate bonds has been raised to US$40b, and this could be a key step towards easing of the tight liquidity conditions.
Back to basics for the market: Steady earnings growth; reasonable valuation Post-budget, we believe the focus of markets will shift back to global oil prices and inflationary trends. Our earnings estimates for the Sensex universe indicates an 19.7% EPS growth in FY12, which has remained unchanged post 3QFY11 results season. Post a ~14% correction in CY11YTD, Indian equities trade at P/E of 14x FY12 EPS, inline with long-term averages.
Sectoral Impact:
Automobiles, Positive:
The Budget was positive for the Auto sector. Contrary to general expectations, excise duty was kept unchanged and there was no introduction of differential excise duty on diesel vehicles.
Volume growth in the domestic market continues to be robust across segments. Short-term headwinds exist in the form of increase in selling price (due to rising RM costs and emission norm changes), fuel price hikes, and hardening interest rates. EBITDA margins are estimated to moderate from higher levels.
The Budget has continued with government's focus on achieving fiscal consolidation without hurting growth (FY12 GDP growth target of 9%, +/- 25bp).
Lower than expected borrowing and enhanced FII limit for investment in corporate bonds are steps in right direction to maintain adequate liquidity in the system (key concern for the sector). Further, robust economic outlook augurs well for asset quality.
Government is committed to provide capital to banks to ensure that funds are not a constraint for growth
Steps taken for the development of the corporate bond market are in the right direction. Government's re-assurance to undertake key financial sector reforms including insurance, SBI (Subsidiary Banks) Amendment bill and SARFAESI Act (facilitate faster recovery of NPAs) are all positive developments.
Post-budget, we are upgrading our FY12 EPS estimates by 3-9% having factored in higher cement prices and ~30% increase in domestic linkage coal price by Coal India, with highest increase in Ambuja (~8%), Birla Corp (~8%) and Shree Cement (~9%). We factor in ~Rs15/bag QoQ increase in 4QFY11 and Rs6/bag increase in FY11 over average FY10.
We believe we have already witnessed bottom-of-the-cycle utilization, which should gradually improve from hereon given sustainable demand drivers.
Given the continuing focus on infrastructure, we expect pick-up in order flows for construction companies. Momentum is expected to accelerate in latter half of FY12 and FY13.
Volatile raw material prices and high cost of borrowing will depress net margins in the near term.
We believe valuations largely factor in concerns thereby limiting downside. Significant pick up in order-flows can improve earnings visibility and re-rate the sector.
The proposals announced in the budget have been positive for the Engineering sector.
Removal of excise duty on power equipments for expansion of mega/ultra mega power projects will create a level playing field for domestic BTG manufacturers in comparison with Chinese/Korean counterparts.
Reduction in CVD to 5% and nil SAD on materials used for high voltage transmission equipment is positive for domestic companies like Crompton, BHEL and L&T who have transformer facilities in India.
15% increase in defense spend is meaningful and a big positive for companies like L&T which has technological expertise in patrolling boats, submarines and cruise missiles.
Accordance of infrastructure status for cold storage projects will attract substantial bank funding for such projects.
The number of projects has also trebled from 24 to 70. Excise duty exemption on air-conditioning and conveyor belt systems is a positive for companies like Voltas and Blue Star.
We remain positive on the sector and expect the budget to have a favorable impact on engineering companies.
Post-budget, we are upgrading our earnings estimates of ITC by 4-5% to factor in higher volume growth of 7% in FY12; we retain FY13 volume growth at 6%. We estimate 10% increase in net realization in FY12 (7% earlier) and 7% in FY13 (5.5% earlier). We are increasing target price of ITC to Rs200 (earlier Rs190).
There has been no big demand impetus as increase in tax-exempt income slab is marginal and NREGA allocation has been flat, although it has been linked to inflation.
Reduction in duty in palm styrene will benefit HUL, but will find it difficult to hold on to gains due to competitive intensity in the laundry business.
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