Union Budget 2015: Laying foundation for Growth, says Motilal Oswal

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Motilal Oswal's report on Union Budget FY15-16

Infrastructure, Tax rationalization, State empowerment are key messages

Budget 2015 was a keenly awaited event, given that this was the first full budget for the BJP led government. With the economy still reeling at 5-5.5% growth, corporate earnings seeing downgrades, RBI's reluctance to make aggressive rate cuts; the budget had to take some important steps. And it did so! The FM has laid a clear growth roadmap with focus on infrastructure, tax rationalization, fiscal consolidation and states empowerment. The revenue assumptions across categories are realistic under the current growth environment. While the headline deficit number at 3.9% look higher than the FRBM target of 3.6%, a very significant transfer of tax revenues to states had constrained FY16 finances for Centre (should get reflected in combined State and Centre deficit).

Market strategyWith the budget day behind, focus will shift on execution. Kick starting the investment cycle in 1H will be critical. RBI's monetary policy stance, in our view, will be largely unchanged and we expect over 100 bps rate cuts in 2015. Despite the recent earnings downgrades post 3Q, we believe that earnings recovery will begin in FY16. While corporate sector long term average growth is 15%, upcycle growth rates have averaged 25%. This phase, coinciding with low interest rates, can lead to significant depreciation in equities over the coming years. Sectors that are leveraged to revival in domestic investment and capex will see earnings recovery in FY16 and beyond. Financials, Autos (CVs & PVs), Infrastructure (includes Capital Goods), Energy (PSU OMCs), Urban consumption plays are our preferred sectors.

Overall budget impact, sector outlook and recos

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Power: Key proposal is increase in coal cess by INR100/ton. This will be a pass through under PPA, except for part capacity of JSWEL which is sold under short term PPA. We calculate possible impact of PAT at ~3%, which is marginal. Deen Dayal Upadhayaya Gram Jyoti Yojana (DDUGJY) saw an increase of 55% in allocation to INR42b, though the allocation for feeder separation scheme stood NIL, vs INR5b earlier.

Focus on Infrastructure continued with significant jump in investment announced in Roads and Railways. in budget with a new scheme targeting feeder separate for DISCOMs. In our recent meeting Ministry, this was cited as top priority and announcement of scheme was in-line with our interaction. Initial budget for the scheme earmarked at INR5b.

High focus on Infrastructure: 1) Roads sector witnessed quantum jump in budgetary allocation to INR400b (up 59% YoY), of which allocation towards NHAI projects stood at INR294b, up 96%. Total allocation, including internal resource is planned at INR826b, up ~2x. 2) Railway sector allocation too stood up by 53% YoY to INR984b, while allocation to Delhi Mumbai Industrial Corridor (DMIC) stood at INR12b, vs INR6.4b in RE 2015. 3) Major Ports of India proposed to be corporatized and converted into companies to attract investment and optimize huge land resource available, 4) Setup National Investment and Infrastructure Fund (NIIF) with annual inflow of INR200b, which would enable it to leverage and re-finance infrastructure projects through IRFC and NHB.

Reforms like FRP for DISCOMs, imported coal cost pass through, Brownfield expansion for Coal, Tariff review have already been taken towards reviving power sector in India. Improvement of demand, distribution reforms and improving availability of domestic fuel are next lag of reforms. While recovery would be gradual and developers return may be elusive/lower; lenders would be better placed with improved visibility on cash flows. We continue to like incumbents with sound growth visibility, strong financial position. NTPC, Powergrid, CESC and RattanIndia Power are top-picks.

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