Sectoral view on the upcoming BUDGET 2019 by IndiaNivesh Securities

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Union Budget 2019 by Kailash Desai, COO, Endress+Hauser India.

In recent times, budgets have been accompanied with lesser fanfare in terms of roll outs and dole outs for industries and individuals. However, the government needs to push forward the current economy. We believe some of the measures below will offer a leg up to kick-start the capex process, re-energise the falling consumer sentiment, help revitalise several sectors such as automobiles and defence, and leave more money in the pockets of the individuals by relaxing the tax exemptions and increasing brackets. Overall, we expect the government to address the slowdown and boost demand by lending an impetus to the rural economy. LTCG tax has not brought in any incremental income to the government and should be preferably rolled back.

In return, STT should be increased since it is a guaranteed income unlike the former. BSVI and electric vehicles are together putting a great stress on auto OEM companies and some relaxations are needed in that area as well. With NDA-2 in place and gradual streamlining of defence policies, we expect an increase in total sector allocation for FY20 to be maintained at mid-single digit levels (at ~6% levels). Notably, if we go by the Interim Budget, capital outlay witnessed a maximum increase of ~10% Overall, we believe infrastructure, defence and agriculture will be the themes to look out for post the budget as well as in the future. (Vinay Pandit, Head – Institutional Equities)

Budget expectations on key sectors:

Consumer
(Rajiv Bharti, Lead Analyst – Consumer)

The Interim Budget was largely a non-event for the consumer sector with marginal changes. It announced custom duty hikes on toiletry, perfumes, and juices, and left GST on cigarettes unchanged. Similarly, it continued the tax changes announced in September 2018 on gold imports. With no announcement on a reduction in broader individual tax rates, a demand trigger was missed. Our expectations for the sub sectors are given below:

Retail

1. Extending the threshold of the 5% GST levy to articles with MRP up to Rs2,000 from Rs1,000 at present
2. Sops to make accepting digital payments cheaper than cash (read: credit cards)
3. Clarity on B2C e-commerce under inventory-based and marketplace-based models and the allowable holding structure
4. Relaxation or abolishment of the angel tax

FMCG

1. Rationalizing GST on low-price high-nutrition biscuits, i.e. sub Rs100 per kg category
2. Benign hike in excise duty on cigarettes of all lengths
3. Reduction in import duty on cut and polished diamonds and maintaining of import duty (hiked in Sep
2018) on imported gold jewellery
4. Maintaining status quo on custom duty on footwear at 15-20%; on furniture, mattresses, beddings at
20%; and on crude & refined edible vegetable oils at 30-35%

Infrastructure, Defence and Capital Goods
(Santosh Yellapu, Lead Analyst)

Infrastructure: The government had projected a massive outlay of Rs100tn over next 5 years, almost twice the amount spent in the last 5 years. We expect the Union Budget to be on the same lines as that of the Interim Budget with no major changes. We had seen an increase in allocation towards the Infrastructure sector at R s4.56tn. Notably, capex for Indian Railways saw a 21% increase in allocation to Rs1.58tn for FY2020. The road sector, on the other hand, witnessed a slightly high allocation at Rs830bn (with Rs190bn towards rural roads) with the government pledging connectivity to every ‘unconnected’ village. We look forward to a higher allocation made towards government’s flagship projects like ‘Sagarmala’, inland waterways, UDAAN, and coastal development. Also, the government could make higher allocations towards existing projects as well as start new metro projects in more cities. Despite the slow progress made on ‘Smart Cities’ program, we expect possible increase in allocation. The defence sector is a key driver of the ‘Make in India’ program. We expect the streamlining of policy announcements to continue and the capital outlay to be maintained at ~Rs1tn, a 10% increase on the FY2019 revised budgeted spend. Capital outlay for IAF is expected to see ~10% increase to Rs393bn. We expect the above plans for infrastructure to be retained as a focus area for the current and the next 5 years.

Automobiles and Auto Ancillaries
(Mayur Milak, Lead Analyst – Auto)

The Society of Automobile Industry (SIAM) has requested for a GST rate cut on all vehicles from the current 28% to 18% to spur demand. The industry has witnessed a number of unfavourable factors, including cost increases due to ABS norms, higher insurance costs and tighter financing due to the NBFC fiasco. The real challenge is right ahead with costs expected to go up by 12-15% w.e.f April 2020 following the introduction of BSVI emission norms. Our sense is that the government may postpone this demand to its next budget to nullify the impact of BSVI cost increase. Hence, we don’t expect the GST cut to happen in the current budget. SIAM has also requested for an incentive-based vehicle scrappage scheme for replacement of older commercial vehicles. We expect some measures on this front from the current budget.

Banking
(Ravikant Bhat, Lead Analyst – BFSI)

The upcoming Union Budget will be presented against the backdrop of an improving credit and NPA cycle in the banking sector. Apart from some familiar announcements on farm credit and bank recapitalisation, the Budget is likely to take forward MUDRA, reform IBC, and announce a roadmap for consolidation among PSBs. We elaborate on these points below:

Agriculture credit: Notable among familiar expectations is the agriculture credit target, which has been consistently raised every year. The agriculture credit target was set at Rs11tn in the FY19 Budget, indicating a CAGR of 8.2% over FY15–19. The outstanding commercial bank credit to agriculture and allied sectors in Mar’19 touched Rs11.1tn, surpassing the set target. This is likely to be reiterated with an enhanced target. PSU bank recapitalisation: In the period between FY15 and FY19, the government infused over Rs2.5tn in public sector banks by way of direct equity through budgetary resources but largely by issuing recapitalisation (recap) bonds. The recap bonds were announced in Sep’17 and the first tranche of Rs800bn was issued in Jan’18, followed by subsequent issuances. The Interim Budget of FY20 made no provision for
recapitalisation. The recap bonds stabilised core equity of PSBs that was undergoing a rapid depletion due to rising NPAs. It also aided the exit of 3 out of 11 PSBs placed under the RBI’s Prompt Corrective Action (PCA). As the NPA cycle turns, we believe the PSU bank recapitalisation program shall taper off and the actual recapitalisation commitment in the upcoming Budget shall be based on consolidation considerations. Weaker banks might be allotted sustenance capital later.

MUDRA scheme: As per the FY19-20 Interim Budget, banks had Rs7.23tn outstanding under MUDRA loans disbursed to ~156 mn borrowers. Given the government’s thrust on self-employment and entrepreneurship, one can expect a review as well as directional guidance to expand MUDRA.

The Insolvency and Bankruptcy Code (IBC): The Finance Minister first mentioned bankruptcy law reform in the FY16 Budget speech and followed it up with the bankruptcy law for a time-bound resolution of stressed assets. However, petitions and counter-petitions appear to be derailing the promise the IBC showed initially. The government is likely to propose further amendments to the IBC to restrict endless petitions and ensure a time-bound resolution of stressed loans as originally envisaged.

PSB consolidation: Though PSB consolidation has less to do with the budgetary process, we expect the Budget to announce a roadmap for consolidating PSBs. We expect the Budget to initiate at least one more consolidation.

Pharmaceuticals
(Sapna Jhawar, Lead Analyst – Pharma)

Currently, there are no incentives for hospitals and diagnostic centres to undergo accreditation. Against this, the industry should be given 100% deduction on approved expenditure incurred for securing accreditation from National Accreditation Board for Hospitals and Healthcare Providers (NABH), and from National Accreditation Board for Testing and Calibration Laboratories (NABL).

The current 5-year tax benefit on capex for hospital projects should be extended to 7–10 years. Weighted deduction of ~200% on approved expenditure incurred on R&D activities should be enhanced to 250%. here should be focus on creating in-house capacities for API mega parks to compete with API imports from China in India and around the globe.