TANMAY OBSERVES!

Budget 2009-10 : What to expect?

UPA Government won the elections against the overall opinion of a hung parliament and markets gave a big thumbs up to this. But after discounting the election results on 18May09, indices haven't moved much further as Sensex is up by just 4.4% from that day's closing. Will things be different as we go into the big event called Union Budget on Monday 06July09?

Expectations - Sunny Side First:-

Insurance Bill - FDI in Insurance to be taken to 49% from current 26%. This proposal, if passed, can benefit stocks like EXIDE, DABUR, HDFC, ICICI BANK, RELCAP, SBI, ADITYA BIRLA NUVO as they are having exposure to Life Insurance JVs.
Education and Healthcare spending should receive a boost. Spending on these sectors remains very bad – the Indian Government spent just 4% of GDP on these areas as compared to 12% of GDP by the US Government.
Priority Sector and Infrastructure spending will also rise and more PPP (Public Private Partnership) initiatives can come to the fore. Infrastructure finance companies such as IDFC, PFC, REC can get some facilities to raise cheaper funds, e.g. through tax-free bonds.
• If Budget re-introduces Section 10 (23G) which allows income from investment in infrastructure, both via equity and debt, to be exempted from tax would benefit IDFC, IDBI & IFCI. 
• Extension of Section 80IA beyond 2010, if implemented, to benefit infrastructure developers like IVRCL, NAGARCONST, L&T’s Infrastructure SPV, and GMR INFRA.
• Introduction of Section 80M which provides for deduction in dividends received from subsidiaries for computation of dividend distribution tax - likely beneficiaries being companies which form SPVs like LT, GMR INFRA, IVRCL, HCC, NCC
• Economic Survey suggested removal of price controls on all drugs except on essential drugs - LUPIN, DR REDDY, RANBAXY, GLENMARK, BIOCON, CIPLA, GLAXO to benefit immensely
• Exemption under Section 80 for promoting R&D in Pharmaceuticals will benefit almost every Pharmaceutical company.
• Deregulation of Oil Prices - Oil marketing companies (mostly PSU) to benefit: HPCL,BPCL, IOC, MRPL, CHENNAI PETRO. Other beneficiaries include ONGC and GAIL as their subsidy burden will go down.
• Allowing Retail FDI up to 100% - key beneficiaries include companies that have exposure to retail trade like RELIANCE, BHARTI (with Walmart), PANTALOON
Fiscal Stimulus to export sectors - Indian exports have dropped for 8 consecutive months on the back of global recession and Imports also have fallen largely on account of reduction in Oil prices. Some sectors like Textiles have sufferred the most and likely to get some relief. Other major exporters are Auto Ancillary, Gems & Jewellery and Software Exports. Extension of STPI (Software Technology Parks of India) scheme will benefit smaller IT stocks.
• Will the corporate tax rate be cut - It is unlikely to happen given large fiscal deficit but if it happens, the companies that pay large taxes can benefit, such as SBI, ONGC, PNB, BOI, BOB, HDFC, NABARD, ICICIBANK and other bigger PSUs like NTPC, BHEL 
• Disinvestment - There must have been a lot of betting on this one and investors are looking very optimistically this time around with Left not present in the current UPA government. Eco Survey has suggested Rs 25000 Cr target each year for divestment. Given the large funding requirements for Infrastructure and other expenditure, Government may come out with a disinvestment target and likely candidates for that. NHPC, OIL, COAL INDIA, BSNL, Clarity on 3G auctions is also expected.
Some key structural reforms can be discussed in this Budget, such as GST (Goods and Services Tax). A lot of stress has been laid on this front but we will know if it will really be implemented by April 2010, the Budget is likely to provide concrete details in this respect.
• Incentives for setting up urea capacities and paying subsidies in full cash instead of bonds + cash - TATACHEM, CHAMBAL, NAGARFERT, RCF to benefit
• Maintaining Zero Customs Duty on Newsprints or setting up of import duty to benefit TNPL, JAGRAN, HT MEDIA, DCHL
• Capital infusion into PSU banks by Government - likely beneficiaries PNB, IDBI
• Infrastructure status to Healthcare Industry will help APOLLO HOSP, FORTIS HEALTH, MAX HEALTH, WOCKHARDT HOSPITALS, they will be able to increase investment but in addition to that easy funds availability will also be possible.
• Infrastructure status to hotels - positive for all hotels (INDIAN HOTELS, EIH, HOTEL LEELA, ROYAL ORCHID, KAMAT HOTELS)
• Abolition of FBT - positive for many Tech companies, especially large to medium like INFOSYS, MPHASIS, TCS, WIPRO, TECHM, KPIT, PATNI
• FDI in Aviation up to 49% - beneficial for aviation companies in reducing debt (KINGFISHER, SPICEJET)
• Steel industry demanding safeguard duty which if implemented fully can benefit HRC makers like SAIL, TATASTEEL, JINDAL STEEL, JSWSTEEL
• Increase in income tax exemption for interest payments on home loans to Rs 2.5lakh/year - positive for realty companies focusing on residential projects (UNITECH, PARSVNATH, DLF, OMAXE)
• Reduction in excise duty on Textile Machines - to benefit LMW and textile sector as a whole.
• JAIN IRRIGATION should benefit from a government focus on farm productivity, rural development, water infrastructure development and a potential increase in outlays for a micro Irrigation subsidy
• Bankruptcy Law:- Eco Survey suggested introduction of a separate Bankruptcy Law or a new section in Companies Law to facilitate exit of old/failed management easily. Also strengthening existing Companies Act to avoid re-occurrence of events like SATYAM.
• Reduction in STT and details on complete abolition - overall boost for stocks

What is the catch? 

Fiscal stimulus given some months back may be reverted to bridge the fiscal gap because money has to come from somewhere. If Economic Survey talks of phasing out STT/FBT/CTT and surcharges, that loss of income has to be taken care of by some rise in existing taxes. The FM has to walk the tightrope of raising taxes to increase Government income but still making people feel about the sops given out. Excise duty was slashed in Fiscal Stimulus package by around 2-4% which hit the Government income by Rs 30,000 Cr and if it gets to previous levels once again, Cement (excise duty may rise from 8% to 12%)/Auto (may rise from 8% to 10%)/FMCG (duty on cigarettes may rise)/Metals (may rise from 8% to 10 or 12%) may be impacted. If reduction in STT brings back Long Term Capital Gains Tax, it may have a negative effect. The government is almost certain to expand the 2009/10 budget deficit beyond the 5.5% set in an interim and pre-election budget in February. Any level of Fiscal Deficit past 6.5% of GDP will put pressure on bond prices. If it fails to bring forth a concrete plan  to bring the deficit back under control in subsequent years, the credit rating of India may also come under pressure, sparking selloff in equity markets as well.

Take informed decision, never hurry for locking money in stocks thinking of them like FDs forever:-

Many expect reforms to continue in a big way as UPA got clear majority, well they can continue but no government can eradicate all of Indian poverty in a single budget, every household in India has to get drinking water and electricity in their house but that can't happen in a single year, India can't beat China in a single term of a government. We have to keep in mind that these all are long-term developments and India can get there one day, so long-term is very bullish for this country. Any investor looking beyond 2-3 years is going to benefit by growth of India but many have a GetRichQuick attitude which normally gives GetPoorQuicker result. All want quick money but that can backfire also, so take informed decision and remember things can't change in a single day or a single announcement. There are many proposals pending to be executed even after being finalized 10 years back. This budget will also be approved clause-by-clause in the session of parliament after full debate and there is always time for implementation of any policy. Market is always forward looking and that is why "Buy On Rumours And Sell On News" strategy works many times.