i Develop Stocks Advisory

Budget Analysis.... Friday, February 29, 2008 On the overall government accounting the Revenue Deficit for the year would be at 1.4% as compared to the target of 1.5% for the year 2007-08. Similarly, the fiscal deficit for the year is expected to settle at 3.1% as compared to the budgeted target of 3.3%. For the next year, FM has budgeted a Revenue Deficit of 1% and a Fiscal Deficit of 2.5%. FM expects the direct taxes proposals to be revenue neutral and indirect taxes proposals to cost the government Rs 5900 crore. It is clear that he is banking on the economy to continue to grow at a faster pace. Tax buoyancy on account of high economic growth is what will help the FM find money for all the grant give-away that he has announced in the budget today The fiscal deficit is Rs 133000 crs as against Rs 148000 crs in 08. The GDP is close to 53 lac crores and fiscal deficit is 2.5 % as against 3.1% for 08. The growth in GDP at factor cost at constant (1999-2000) prices for 2007-08 is estimated at 8.7 per cent as compared to the growth rate of 9.6 percent during 2006-07. The growth rate at current market prices during the 2006-07 (Quick Estimates) and 2007-08 (Advance estimates) have been put at 15.8 per cent and 13.2 percent respectively. The growth rate for 2008-09 has been assumed at 13.0 percent. For the years beyond 2008-09 a trend growth of 13.0 percent has been assumed. With the advance estimates of GDP at current market prices in 2007-08 being Rs. 46,93,602 crore, GDP at current market prices for 2008-09 is pegged at Rs.53, 03,770 crore. The debt waiver of 50K crs is one time write off in the Budget which needs to be adjusted in order to find out the adjusted fiscal deficit. Your attention is drawn to Budget 08 in which the provision of 40K was made for transfer of SBI stake from RBI to Govt of India which was routed through capital account on either side. While calculating the fiscal deficit in real terms we need to adjust this Rs 50 K crs if the same has entered the expenditure side of the Budget. If so then the fiscal deficit has to be 1.56% or around instead of 2.5% announced in the Budget on the fiscal deficit no of Rs 133000 crs. If the same is not routed through the Budget then the fiscal deficit stands at 2.5 % only and then in that case the market reaction to 60K write off itself is uncalled for. Therefore whatever way we look at the Budget sounds very well. It seems the same is not routed in the Budget and hence this is Budget neutral. The alternative analysis also suggest that the 60 K crs bad debts which must have been provided as bad in the books of PSU Banks will not get any budgetary support to that extent but the F M has gone on record to suggest that this money will be made available to the banking system for lending. This could be possibly suggesting the banking industry to pass a book entry to remove recoverable from the Balance Sheet as also remove the provisioning. This is big positive for banking instead of knee jerk analysis of negative one. Banking Industry will find their Balance Sheet cleaner which will help them to use the SLR for lending. The change in the slab gives Rs 55000 per employee which will be reintroduced in the system as spending which will stimulate growth in a major way. As regards non employees class traditionally in India the cult is to offer income for tax at an average rate of tax of 10% by offering the income till the highest slab of income. Now since the highest slab is raised to 5 lacs the average rate of tax comes to 11% which hardly matters for tax payers in the light of the fact that it is now very difficult to carry out transactions in cash due to the various checks introduced. Logically it means majority of the tax payers are going to use these slabs for generating higher taxable income. This means every tax payer who is generating additional income at the same rate of tax will add Rs 2.5 lacs to their disposable income. If Rs 55000 can really matter in case of salaried class then Rs 2.5 lac will definitely matters from the business class. This will stimulate growth substantially. Our analysis suggests that Rs 55000 spending from salaried class can add to close to 4 to 5 bn USD spending. Simultaneously Rs 2.5 lacs spending could add another 10 bn USD spending on a larger scale. The issue is that this additional 15 bn USD savings capitalisation could bring 10 to 12 bn USD revenue to exchequers in the form of different taxes such as service tax, cst, excise, professional tax, stt, it, customs, octroi, cess, entertainment tax, FBT, MAT, turnover tax. Municipal tax, water tax, road tax and so so on. The finest part is that in 08 FM had taken 16% higher estimate on revenue I e Rs 548122 crs as against Rs 473324 crs. The figures are now revised to Rs 585410 crs which was assigned to robust economic growth. Now in 09 the F M has estimated the revenue at Rs 687715 crs which is 18% higher than the revised robust nos of 08. This clearly shows that the F M is confident of no slow down even though the 18% estimate is on very higher base and larger than the estimate of last year (16%). It tantamount to 46% rise with reference to the budgeted estimates of 08. Yet if we say that the economy is slowing then it is really need to redefine the growth terminology. In fact, the 16% growth in revenues clearly suggests that Indian co will sustain at least 20% growth earnings and therefore the market has to respond very positively. This will pave the avenues for FII to invest in India straight away as their doubt on the nos will be dispensed with. FM has taken higher credit of Rs 43200 crs on account of dividend as against Rs 33900 crs (revised Rs 36100 crs) which goes well in favour of PSU stocks. It is fair indication that PSU cos will raise the dividend outgo by at least 20%. Wherever PSU stocks are available at dividend yield values, it makes a very strong case of investment. MTNL and Bongaigon stand out on these grounds. The analysis of Capital receipts suggests that the Govt borrowing is estimated at Rs 113000 crs as against Rs 136000 crs down by Rs 23000 crs. This shows Govt’s confidence in maintaining the fiscal deficit as per FRBM or even below that.. This is very encouraging and positive. The annexure 10 of the Receipt Budget shows that the amount of tax revenues raised but not realised are Rs 79076 crs out of which disputed demands are Rs 51333 crs which means Govt has scope to recover Rs 27743 crs which will go long way to reduce fiscal deficit further. This entire sum is from corporation tax and income tax. One grave area where Govt has to work hard is arrears of non tax revenues of Rs 37198 crs from PSU’s. The same yardsticks needs to be applied which are being applied for recovery tax arrears from corporates and individuals. By any stretch of imagination Rs 37198 crs is large sum which will have major impact of the fiscal deficit. Though Rs 32000 rise in non plan expenditure mainly is on account of interest and defence allocations, the increase in plan expenditure of Rs 31285 crs will have far reaching impact of the upliftment of economy especially in schooling, welfare and women benefit will go a long way of redefining the paradigm of Budget. Coupled with the fact the Govt is likely to take very strong measures to kerb leakages in the expenditure. In fact, if introduced in letter and spirit the smart card delivery system to make available the food subsidy to the end beneficiaries then the same can be used for PDS and fertiliser subsidies which will result in savings of at least 30% to the exchequer. The sector which immerges from the allocation is clearly energy which has been given higher allocation of Rs 93814 crs as against Rs 72230 crs. This includes power, petroleum, coal & lignite and non conventional energy. Hence the top priority for investors could also be energy sector. Few other sectors which have got higher allocations are Iron and Steel Rs 9551 crs as against Rs 4334 crs, Fertiliser from Rs 434 crs 1858 crs, petrochemicals Rs 4110 crs from Rs 2573 crs, roads and bridges Rs 31199 crs from Rs 24851 crs. RCF has been granted plan outlay Rs 812 crs as against Rs 253 crs which should benefit RCF in a big way. Neyveli Lignite has been granted plan outlay of Rs 2717 crs as against Rs 1930 crs, MTNL Rs 2430 crs as against Rs 2042 crs, BSNL Rs 21059 crs as against Rs 16139 crs, Bhel Rs 1016 crs as against Rs 836 crs. These allocations were also increased for ONGC, BPCL, MRPL, NTPC, Power Grid, HPCL, IOC, GAIL. However these are not budgetary support. Only Delhi Metro Rail has got Rs 1500 crs budgetary support. The proposals of providing 5-year tax holiday for setting up hospitals in non-urban cities/tier-2 and tier-3 towns and 2-star, 3-star and 4-star hotels in UNESCO declared world heritage sites. The proposed increase in expenditure on the development to National highways is another positive move. These will certainly give a further boost to the infrastructure sector of the country. Finance Minister has proposed to cut excise duty on paper and paperboards to 8 percent from 12 percent this will help boost investments, enabling the industry to compete with imported paper. Also has increased fund allocation for education by 20 percent to 344 billion rupees in 2008-09. This is in line with our expectations. Newsprint costs have risen by 15% which augurs well for domestic paper industry which is a clear winner. Government on Friday extended a five-year tax holiday, currently given only to hospitals in the rural areas, to those across the country, sending the shares of healthcare providers higher. Big positive for healthcare industry. The Finance Minister Palaniappan Chidambaram, in his budget for 2008/09, also proposed an excise duty of 8 per cent for all goods produced in the pharmaceutical sector, down from 16 per cent. Excise duty on small cars, two, three wheelers, buses and their chassis will come down to 12 per cent from the current level of 16 per cent, while in case of hybrid cars the duty will be lowered to 14 per cent from the current 24 per cent. Though there is no definition given on the hybrid car it implies where the source of fuel is more than one. It indirectly implies that the cars having with gas fuel will get lower duty because it is practically impossible to have petrol and diesel as duel fuels in the car. This is again in line with our expectations. This should go a long way in creating more demand for hybrid as well as hydrogen cars and MINDA Industries should be the largest beneficiary being in monopolist situation as far as gas kits are concerned. The duty exemption on naphtha for use in the manufacture of polymers has been withdrawn and the normal rate of five percent customs duty has been imposed to remove distortions that arise due to its export from refineries and import by manufacturers of polymers. However, naphtha imported for the production of fertilizers will continue to the exempt from import duty. Business of production of seeds and manufacture of agricultural implements added to the list of companies allowed weighted deduction of 150 per cent on any expenditure on in house scientific research. Tax income arising from saplings or seedlings grown in a nursery exempted. This should be a big re rating trigger for seed companies such as Basant Agro, Monsanto and J K Agri. Parent company allowed to set off the dividend received from its subsidiary company against dividend distributed by the parent company; provided that the dividend received has suffered DDT and the parent company is not a subsidiary of another company. This will resolve some anomaly of double taxation of DDT. Based on our budget analysis we do not consider that market may fall from these levels though knee jerk reaction is always expected. In the short run market will react to global clues but in long run the budget ramifications will be felt. The budget which is full of growth stimulates would attract more foreign funds than ever especially when the foreign markets are doing badly. The immerging winners are Monsanto, J K Agri, Basant Agro, Tata Motors, Bajaj Auto, Mahindra, Maruti, Minda Industries, Rainbow Paper, Sirpur Paper, Rama Paper, BEL, Bhel, BEML, J P Associates, DLF, Unitech, Parshwanath, Bombay Dyeing, IFCI, IDBI, all auto component companies, steel cos, all mining cos such as panyam, sandur, jeyswal neco, MSP Steel, transformer cos such as Accurate Transformer, LIC Housing and the star performers could be PSU stocks once again. We maintain our long term target of Nifty 7K and remain positive. Market will react to OI positions in the short run which is pegged at 58K as of yesterday.