FY12 will be a tale of two halves for Indian market

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FY12 will be a tale of two halves for Indian market

Reaction on Budget 2011-12 by Tarun Bhatia, Director – Capital Markets, CRISIL Research.

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Reaction on Budget 2011-12 by Tarun Bhatia, Director - Capital Markets, CRISIL Research .

While Budget 2011-12 has not rolled back the stimulus for the markets, it is low on significant policy actions. Hence, CRISIL Equities believes it is essentially neutral for the domestic equity markets. The markets are expected to cheer the lower-than-expected fiscal deficit target of 4.6% and an effective revenue deficit of 1.8% for FY12. However, CRISIL believes 4.6% is challenging based on its GDP growth estimate of 8.3% for 2011-12, which is lower than the government's target of 8.75-9.25% growth.

Higher capital outlay and other policy measures for infrastructure, education and realty sectors are expected to boost sentiments and support the players' growth, but the overall impact on profitability may not be significant. The allocation to infrastructure has been raised by 23.3% to Rs 2.14 lakh crore. The FII limit for investment in corporate bonds (with maturity over five years) issued in the infrastructure sector has been raised by US$20 bn. Further, the additional deduction of Rs 20,000 for investment in long-term infrastructure bonds would be extended in FY12. While these measures will facilitate financing infrastructure projects, we believe, execution delays rather than financing pose a bigger challenge for infra companies. The budget allocation for education too has been increased by 24%, which includes Rs 21,000 crore under Sarva Shiksha Abhiyan. The liberalization of interest subvention of 1% on housing loans and enhancing of housing loan limit to Rs 25 lakh for units under priority sector lending would be positive for players in affordable and low income housing.
 
On the taxation front, increase in exemption limits - resulting in uniform tax relief of Rs 2,000 - would be positive for consumer discretionary items. On the one hand, reduction in surcharge from 7.5% to 5% is positive for corporates; on the other, increase in MAT rate from 18% to 18.5% is negative. Further, the Direct Taxes Code (DTC) is expected to be rolled out as scheduled and the Goods and Services Tax (GST) Amendment Bill will be introduced in this parliament session.

Continuing with its divestment agenda, the government has set a target of raising Rs 40,000 crore through divestment of its stake in central public sector undertakings. However, volatile market conditions could put a spoke in the government's divestment wheel. We believe the allowance of foreign investors to invest in the domestic market through the mutual fund route is a key positive and is expected to lead to higher flow from foreign investors. Further, it would prove to be a shot in the arm for the domestic mutual fund industry in the long run.

CRISIL Equities believes that FY12 will be a tale of two halves for the Indian market. In the first half, we expect the market to continue to remain subdued due to concerns on high commodity prices, inflation and earnings downgrade, while in the second half we expect potential absence/bare minimum impact of most of these factors would provide buoyancy to the markets. A strong GDP growth expectation coupled with attractive valuation could support the market in the second half. On the back of global concerns and earnings downgrade we have tempered our returns expectations. We expect the Nifty to trade at 6200-6400 (Sensex 20700-21200) by the year-end (December 31). We expect banking, IT and pharma will deliver strong returns but remain neutral on telecom and infrastructure, and negative on real estate.