23 January 2018
Preview
Budget 2018-19
Union Budget Expectations: What’s in whose kitty?
Question is rife whether the budget will be populist
India’s Union Budget 2018-19 will be presented on 1 February 2018. Expectations and
excitement run high as it will be the first post-GST and last full-year budget before the
General Elections in 2019.
We note that the 2018-19 Budget will be presented against the backdrop of
uncertainty over tax collections post implementation of the Goods & Services Tax
(GST). We expect the government to revise its deficit target to 3.4% of GDP for FY18
(higher than the budgeted estimate of 3.2%) and to 3.2% of GDP for FY19 (higher than
the target of 3% set last year). It means that the plan to meet the 3% deficit target will
be postponed by one year (to 2019-20) for the third time.
As the current government will present its last full-year budget before the 2019
General Elections, many in the market expect a heavier dose of populism. However,
we believe that the government has limited financial resources to propose any
targeted scheme for the poor. We also do not expect much relief on the tax front,
except some reduction in the corporate tax rate for medium-sized companies.
From an equity market perspective, it is important to see how the Budget is able to
make a difference to the rural sector, how the government is able to carry the burden
of expectations, and whether the Budget strikes a right balance between good
economics and good politics, especially with the General Elections around the corner
next year. Also, as GST-related dust is still settling down, the markets will be keenly
watching fiscal deficit projections and whether the long-term fiscal consolidation path
is adhered to. We do expect the government to focus on rural and capex spending to
boost sentiment and revive growth further. However, given the hard-achieved gains
on fiscal consolidation, flexibility to go overboard on spending is limited, in our view.
Consumption pick-up (especially rural and discretionary), cyclical recovery in corporate
facing banks and gradual pick-up in private capex are our key themes to play in CY18.
TITAN, EMAMI, UNSP, ICICI BANK, RBL, HDFC, SHTF, PETRONET, HPCL, TATA MOTORS,
M&M, L&T, JSP, BHARTI are among our top ideas.
st
3% fiscal deficit target
postponed to 2019-20, peg
FY19 deficit at 3.2% of GDP
Gross borrowings to touch
INR7t, implying net
borrowings to rise to
INR4.9t (or 2.6% of GDP) in
FY19
In its
previous budget,
the center had budgeted 12-year slowest growth of 6.6% in
total spending, making it clear that fiscal policy is reaching its limits (refer
our report
for detailed analysis).
Not surprisingly then, economic activity weakened
considerably in FY18, further pressurizing the government. Following the fiscal
consolidation path amid growing demand to support economic recovery is the
biggest challenge for the government. An anemic rural economy and a weak
investment cycle add to the concerns. It would, thus, be interesting to see how the
Center handles the fires that are already raging.
Exhibit 1: Motilal Oswal’s expectations on key fiscal indicators from Union Budget 2018-19
Economic indicators
Unit
INR b
Gross fiscal deficit
% of GDP
INR b
Gross market borrowings
% of GDP
INR b
Net market borrowings
% of GDP
INR b
Nominal GDP
% YoY
BE = Budget estimates, F = Our Forecasts
FY16
5,328
3.9
6,233
4.6
4,416
3.2
136,820
9.9
FY17
5,261
3.5
6,225
4.1
4,067
2.7
151,837
11.0
FY18BE
FY18F
FY19F
5,465
5,601
5,861
3.2
3.4
3.2
5,820
6,250
7,000
3.5
3.7
3.8
3,502
3,932
4,920
2.1
2.4
2.6
168,475
167,067
186,062
11.8
10.0
11.4
Source: Union Budget documents, MoSL
Research Team
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Nikhil Gupta – Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
8 August 2016
Investors are advised to refer through important disclosures made at the last page of the Research Report.
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
We will discuss four key themes in this note.
First,
we provide our projections of
FY18 revised estimates (RE) and budget estimates (BE) for FY19. We believe that
the deficit target of 3% of GDP will be postponed by one year for the third time
to 2019-20. We expect the government to revise the deficit target to 3.4% of
GDP for FY18 (higher than the budgeted estimate of 3.2%) and to 3.2% of GDP
for FY19 (higher than the target of 3% set last year).
Second,
we believe that capital spending of the government will be budgeted to
grow ~10% in FY19, following ~7% growth in FY18.
Third,
we believe that rural spending may be revised upward for FY18; however,
limited financial resources will make it difficult for the government to announce
a targeted scheme for the poor.
Fourth,
we expect the government to continue on its commitment to reduce the
corporate tax rate by lowering tax for companies with turnover of up to INR25b.
Such a measure could cost the government ~INR100b. Apart from this, we do
not expect the government to provide further direct/indirect tax relief.
Exhibit 2: Motilal Oswal’s expectations from Union Budget 2018-19
FY17A
INR b
Total Receipts
Revenue receipts
Gross Taxes
Net Taxes
Direct taxes
Corporation Taxes
Income Taxes
Indirect taxes
Non-tax revenue
Non-debt capital receipts
Divestment
Total Expenditure
Total excl. Subsidies
Revenue expenditure
Interest payments
Defense
14,487
13,852
17,206
11,110
8,645
4,939
3,532
8,561
2,742
635
478
19,749
17,444
16,846
4,805
2,480
FY18BE
INR b
% of GDP
16,002
15,158
19,116
12,270
9,800
5,387
4,413
9,316
2,888
844
725
21,467
18,745
18,369
5,231
2,624
2,723
3,076
1,312
656
480
2,269
3,098
5,465
3,212
168,475
9.5
9.0
11.3
7.3
5.8
3.2
2.6
5.5
1.7
0.5
0.4
12.7
11.1
10.9
3.1
1.6
1.6
1.8
0.8
0.4
0.3
1.3
1.8
3.2
1.9
INR b
15,867
14,867
18,997
12,267
9,997
5,700
4,250
9,000
2,600
1,000
850
21,467
18,745
18,369
5,231
2,624
2,723
3,076
1,312
656
500
2,249
3,098
5,601
3,503
167,067
FY18F
% YoY
9.5
7.3
10.4
10.4
15.6
15.4
20.3
5.1
-5.2
57.5
78.0
8.7
7.5
9.0
8.9
5.8
18.2
4.9
2.4
5.1
4.2
16.0
6.7
% of GDP
9.5
8.9
11.4
7.3
6.0
3.4
2.5
5.4
1.6
0.6
0.5
12.8
11.2
11.0
3.1
1.6
1.6
1.8
0.8
0.4
0.3
1.3
1.9
3.4
2.1
INR b
17,749
16,749
21,525
13,899
11,285
6,400
4,900
10,240
2,850
1,000
800
23,610
20,610
20,200
5,794
2,900
FY19F
% YoY
11.9
12.7
13.3
13.3
12.9
12.3
15.3
13.8
9.6
0.0
-5.9
10.0
10.0
10.0
10.8
10.5
% of GDP
9.5
9.0
11.6
7.5
6.1
3.4
2.6
5.5
1.5
0.5
0.4
12.7
11.1
10.9
3.1
1.6
Subsidies
2,304
Grants to states & UTs
2,932
Pensions
1,282
Police
624
MGNREGA
480
Other
1,938
Capital expenditure
2,903
Fiscal Deficit
5,261
Revenue Deficit
2,993
Nominal GDP
151,837
BE = Budget estimates, F = Our Forecasts
10.0
3,000
10.2
1.6
3,229
5.0
1.7
1,450
10.5
0.8
689
5.0
0.4
550
10.0
0.3
2,588
15.1
1.4
3,410
10.1
1.8
5,861
3.2
3,451
1.9
186,062
11.4
Source: Union Budget documents, MoSL
23 January 2018
2
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
1
We believe that the 3%
deficit target will be
postponed for the third
time to 2019-20
3% deficit target to be postponed for the third time
Expect FY19 fiscal deficit to be budgeted at 3.2% of GDP
In its first Union Budget on 10
th
July 2014, the current government’s roadmap for
fiscal consolidation proposed to reduce fiscal deficit to 3% of GDP by 2016-17. In the
following two budgets, the 3% target was postponed to 2017-18 first and then to
2018-19. However, in the 2017-18 Budget, while the target was maintained for
2018-19, it appears highly susceptible once again. Considering that the government
is almost certain to miss its 2017-18 budget estimates (BE) of fiscal deficit of 3.2% of
GDP, we believe that the 3% deficit target will be postponed for the third time to
2019-20. According to our calculations, fiscal deficit for FY18 could be revised higher
by up to 20 basis points (bp) to 3.4% of GDP, and it could be pegged at 3.2% of GDP
for FY19
(Exhibit 3).
Exhibit 4: Gross market borrowings expected to rise to INR7t
in FY19 (INR t)
Net market borrowings
7.0
6.3
6.2
6.2
5.9
5.8
5.6
4.9
4.5
4.5
4.4
4.1
3.9
3.5
Gross market borrowings
Exhibit 3: 3% fiscal deficit target may be postponed by one
year yet again (% of GDP)
BE
3.9
3.6
3.9
Targets*
Actual/RE
3.2
3.4#
3.2#
3.5 3.5 3.5
3.0
3.0
2015-16
2016-17
2017-18
2018-19
FY14
FY15
FY16
FY17
FY18BE FY18F
FY19F
* One-year forward target
# Our expectations for 2017-18 and 2018-19
Source: Union Budget documents, MOSL
Scheduled repayments of
about INR2.1t imply net
market borrowings of
~INR4.9t in FY19 – up from
INR3.9t in FY18
In line with our deficit estimates, we believe that gross market borrowings could rise
from the revised estimate of INR6.3t in FY18 to INR7t in FY19. Scheduled
repayments of about INR2.1t imply net market borrowings of ~INR4.9t in FY19 – up
from INR3.9t in FY18
(Exhibit 4).
It, however, is also important to note that net market borrowings will be 2.6% of
GDP in FY19, higher than 2.4% in FY18, but lower than the levels seen in the
previous years
(Exhibit 5).
It also implies that market borrowings will finance ~84%
of fiscal deficit in FY19, higher than in the past two years, but lower levels than in
the previous years
(Exhibit 6).
It is obvious that one-off events such as
demonetization helped the government garner more resources from non-market
sources and, thus, the share of market borrowings in FY17 and FY18 was much
lower.
23 January 2018
3
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
Exhibit 5: Net market borrowings may rise in FY19 vis-à-vis
FY18, but will be lower than in previous years (% of GDP)
Net borrowings
5.0
4.7
4.0
Exhibit 6: Expect net borrowings to account for ~84% of FD
in FY19 (%)
Share of net market borrowings in fiscal deficit
95.3
3.6
3.2
90.2
2.7
2.4
2.6
84.5
87.2
82.9
77.3
70.2
83.9
FY12
FY13
FY14
FY15
FY16
FY17
FY18F FY19F
FY12
FY13
FY14
FY15
FY16
FY17
FY18F FY19F
Source: Union Budget documents, MOSL
What to expect from the 2018-19 Budget?
Exhibit 7
below categorizes major
expectations from the Union Budget, based on the probability of these measures
being adopted and their popularity (measured by its potential impact on the equity
market). A reduction in the corporate tax rate, higher allocation to MGNREGA and a
focus on capex appear to be high on agenda. On the contrary, we hope that the
government will resist from announcing any targeted schemes for the poor.
Exhibit 7: How do various expectations rank in terms of probability and popularity?
Probability
HIGH
-- Incentivize adoption of digitalization
-- Provide additional incentives to
encourage start-ups
-- Revisit its skill development program
-- Reduce corporate tax rate
-- Increase capital spending by ~10%
-- Increase MGNREGA budget to >=INR550n
LOW
-- Increase spending on education and
health sectors
-- Increase the limit under tax-free
infrastructure bonds
-- Roadmap on PSU banking recapitalization
-- Targeted schemes for poor people such as
cash incentives to rural sector and universal
basic income (UBI) plan
LOW
By Popularity, we imply its potential impact on the stock markets
HIGH
Popularity
Source: MoSL
23 January 2018
4
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
2
Over the past three years,
capital spending of the
central government has
grown at an average of
16.7%, more than double
the average growth of 7.8%
in revenue spending
Limited role of the Center in reviving investment cycle
Center’s thrust to revive capex cycle
As private investment has remained considerably weak over the past few years, the
burden of reviving the capex cycle in the economy is also borne by the Central
government.
Higher fiscal capex will help crowd-in the private sector
is a widely held
general argument. In response, the Center has certainly increased its capital
spending. Over the past three years, capital spending of the central government has
grown at an average of 16.7%, more than double the average growth of 7.8% in
revenue spending. Consequently, the share of capital spending in the Center’s total
spending was budgeted to increase to 14.4% in FY18, the highest level in a decade
(Exhibit 8).
It is also important to note that capital spending of the government is highly
concentrated, as almost three fifths is spent on three areas – defense (27.9%),
railways (17.8%) and roads & bridges (16.5%). Spending on police and loans to
states/UTs/foreign governments are the only other two items with budgeted
spending of over INR100b. Together, these five areas account for more than 70% of
the Centers’ total capex
(Exhibit 9).
Exhibit 8: Share of capex in total spending was budgeted at
the highest level in a decade
26
22
18
14
10
FY97
FY00
FY03
FY06
FY09
FY12
FY15 FY18BE
Source: Union Budget documents, MOSL
Share of capital spending in total spending (%)
Exhibit 9: Where does the Center invest – defense, railways
and roads?
(% of
capex)
Others,
27.8%
Loans &
advances,
6.7%
Police, 3.3%
Defense,
27.9%
Roads &
bridges,
16.5%
Railways,
17.8%
Areas with budgeted spending of >INR100b
How big is the Center in the overall scheme of things?
Considering the fiscal constraints, the Center may have probably tried its best to
increase capital spending. What, however, is more important to note is the share of
the center’s capex in total investments in the economy? According to recent data
for FY16, the private corporate sector (financial + non-financial) accounted for ~41%
of total investments, while households (primarily real estate) contributed another
~35%
(Exhibit 10).
Of the remaining ~24%, public sector undertakings (PSUs)
accounted for ~11%, and the center and state governments formed ~13%. Our
analysis of the monthly finances of the Center and states makes us believe that
states accounted for ~8%, while the Center’s contribution was ~5%.
23 January 2018
5
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
Exhibit 10: Who are the key investors in the economy?
Exhibit 11: Center’s share in total investments has increased
(% of total
investments)
Households
, 34.5%
Center,
5.1%
States,
7.7%
PSUs,
11.4%
RS = Revenue spending
Pvt corp,
41.2%
5.7
4.3
FY12
5.5
4.1
FY13
6.3
4.6
FY14
6.9
4.1
FY15
Center
States
7.7
9.1
5.1
FY16E
5.7
FY17E
Source: Central Statistics Office (CSO), Budget documents, MOSL
The Center still remains the
smallest player in the
economy’s overall
investment milieu,
accounting for <6%
In FY17 (for which official data are not yet available), we believe that the share of
government(s) increased further at the cost of households
(Exhibit 11).
However,
the Center still remains the smallest player in the economy’s overall investment
milieu, accounting for <6%. There is, thus, a serious limit on the ability of the Center
to revive the investments cycle by crowding-in the private sector.
We expect the Center to continue growing capital spending by ~10% YoY in FY19
(following the past years’ strategy) and keeping the share at ~14.5% of total
spending.
23 January 2018
6
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
3
The share of rural spending
has increased from sub-6%
between FY14 and FY16, to
7.6% in FY18
How much more can the government support rural sector?
Considerable increase in government’s rural spending
The government has increased its rural spending (Ministry of Agriculture & Allied
Activities + Ministry of Rural Development) sharply over the past three years. As
against average growth of ~9% in total spending, rural spending has grown at an
average of ~16%. Consequently, the share of rural spending has increased from sub-
6% between FY14 and FY16, to 7.6% in FY18
(Exhibit 12).
Total rural spending
amounted to ~INR1.6t, with major allocation toward rural employment (under
Mahatma Gandhi National Rural Employment Guarantee Act, MGNREGA). About a
decade ago, spending under MGNREGA was raised from INR120b to INR300b in
FY09 (election year). We note that spending on MGNREGA continued to hover at
INR300-350b up to FY15, which was then raised to INR373b in FY16 and further to
~INR480b each in FY17 and FY18BE
(Exhibit 13).
It is obvious that the government will revise its MGNREGA spend higher for FY18, as
more than INR493b has already been spent under the program (up to 22
nd
January
2018).
Exhibit 12: Share of rural spending in total spending has
increased over the past few years (%)
9.2
8.2
7.6
6.8
6.4
5.6
5.8
5.6
6.8
7.6
9.1
Rural spending
Exhibit 13: Spending on MGNREGA is likely to touch
INR500b in FY18
600
(INR b)
450
300
150
0
FY08
FY10
FY12
FY14
FY16
FY18BE
Values up to 2008-09 are revised estimates, not actual
Source: Union Budget documents, MOSL
Spending on rural employment
FY08
FY10
FY12
FY14
FY16
FY18*
* Ministry of Agriculture & allied activities + Ministry of Rural
development
Trade-off between rural spending and inflation is for real
Rural spending of the
central government has a
serious impact on rural
wage growth – a good
proxy for buoyancy in the
rural sector
Although the industry is asking the government to allocate INR600b for MGNREGA
in FY19, some serious thinking is required, in our view. This is because rural
spending of the central government has a serious impact on rural wage growth – a
good proxy for buoyancy in the rural sector.
Exhibit 14
confirms a very high positive
correlation between the Center’s rural spending (with a lag of six months) and real
rural wages. The recovery in rural wages in FY17 and FY18 was also mirrored by a
sharp rise in rural spending by the central government.
23 January 2018
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 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
Exhibit 14: Strong correlation between central government
rural spending and rural wages…
Rural spending (-6m)
40
20
0
-20
-40
Jan-13 Oct-13
(% YoY)
Jul-14 Apr-15 Jan-16 Oct-16
Jul-17
(% YoY,
12mma)
Real rural wages (RHS)
8
6
3
0
1
-2
-4
0
5
y = 0.5191x - 1.2822
R² = 0.3155
10
15
Real rural wage growth (%, YoY)
Red dots represent FY16 and FY17
Source: Controller General of Accounts (CGA), Labour Bureau, MOSL
Exhibit 15: …translates into higher retail inflation for the
economy
12
8
4
RS = Revenue spending
This triangular correlation
between the government’s
rural spending, rural wages
and inflationary pressures
in the economy says it all
However, we also note that rural wages have a direct correlation with inflationary
pressures in the economy
(Exhibit 15).
Higher growth in (real) rural wages coincides
with higher inflation. This triangular correlation between the government’s rural
spending, rural wages and inflationary pressures in the economy says it all. Thus, the
government needs to remain cautious about spending too much on the rural sector,
as it may fuel further inflationary pressures in the economy.
23 January 2018
8
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
4
What kind of tax reliefs do we expect?
Government may continue reducing corporate tax rate…
In 2015, the Finance Minister, Mr Arun Jaitley, had announced a proposal to bring
down the corporate tax rate from 30% to 25% over the next four years (beginning
2016-17). In its 2016-17 Budget, the corporate tax rate for companies with turnover
not exceeding INR50m was reduced by 1% to 29% (plus surcharges and cess). In the
last budget (2017-18), the income tax rate for smaller companies with annual
turnover up to INR500m was reduced to 25%. Although the government provides
data on the effective corporate tax rate based on profit before taxes (PBT), the
announcements are made based on turnover of companies. However, since the
effective tax rate for smaller companies was in excess of 29%, the reduction must
have provided them significant relief
(Exhibit 16).
It is also important to note that
the effective tax rate for large companies, with PBT of over INR5b, was ~26% in
2015-16, primarily because of many exemptions they enjoyed.
The real challenge is to cut
tax rates for larger
companies, which account
for more than 85% of total
corporate taxes
We believe that the
government could cut the
tax rate for companies with
turnover of up to INR5b
(PBT of ~INR1b, assuming
~20% PBT margin), and risk
gross tax collection of
~INR100b this year
Assuming a PBT margin of ~20%, the effective tax rate would be applicable to
companies with PBT of up to INR100m, which account for only 14% of total
corporate tax liability
(Exhibit 17).
Thus, the cost of cutting corporate tax rate for
smaller companies would have been much smaller. The real challenge is to cut tax
rates for larger companies, which account for more than 85% of total corporate
taxes. Our calculations suggest that in order to reduce the tax rate from ~29% to
25% for companies (with turnover up to INR25b and assumed PBT of up to INR5b), it
could cost in excess of INR200b to the exchequer in 2018-19. Further, for largest
companies (with PBT above INR5b), a reduction in the corporate tax rate by 1%
would cost in excess of INR100b to the exchequer.
With the tax collections – due to recently implemented GST – remaining uncertain,
we expect the government to remain cautious in its third year of commitment too.
Accordingly, we believe that the government could cut the tax rate for companies
with turnover of up to INR5b (PBT of ~INR1b, assuming ~20% PBT margin), and risk
gross tax collection of ~INR100b this year. Larger companies may have to wait for at
least one more year.
Exhibit 17: …which account for <15% of total tax receipts
<= zero
4%
28.2
25.9
> INR5b
54%
INR 0-10m
3%
INR 10-
100m
7% INR 100-
Exhibit 16: Effective tax rate highest for smaller companies…
30.3
Effective tax rate (%)
29.4
29.0
28.5
28.6
0-10m 10-100m
100-
500m
500-
1,000m
1-5b
> 5b
All
INR 1-5b
17%
500m
9%
INR 500-
1,000m
6%
Profit before taxes (PBT)
Data for 2015-16
Source: Union Budget documents, MOSL
23 January 2018
9
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
…however, we don’t expect any more relief
Further, while the government may continue on its path to reduce the corporate tax
rate for small-to-medium sized companies (with turnover of over INR500m and up
to INR25b), it may resist any further changes in direct taxes. Consequently, it is likely
to keep the income tax rates (and slabs) unchanged in 2018-19 Union Budget.
Moreover, on the indirect tax front too, while rationalization of GST is a continuous
development, we believe the government should try to broaden the coverage of
GST rather than reducing GST rates on different baskets. The former will make it a
comprehensive tax structure and lead to efficiency gains.
23 January 2018
10
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
Key budget expectations
Current state
Major budget
Expected change, if
Key stocks to watch
of the sector
expectations
expectations are met
out for
Auto
Demand recovery is
We do not expect any
Focus on rural markets could
Hero MotoCorp, TVS Motor,
underway across segments,
changes in indirect taxes.
place the 2W industry back
M&M
after experiencing multiple
However, we expect higher
on the growth path. This,
shocks (demonetization, BS3 allocation toward rural-
coupled with the benefit of
th
to BS4 transition, and GST,
focused schemes.
normal monsoon and 7 Pay
among others) over the last
Commission, could drive 2W
12 months.
volume CAGR of 10-12%
over FY17-19E.
CV volume growth
We expect introduction of a
The scrappage scheme
Ashok Leyland, Bosch
moderated to ~9% in
scrappage scheme, which
(depending on whether it is
9MFY18.
would incentivize scrapping
mandatory/voluntary, and
of trucks older than 10
also magnitude of
years.
incentives) can drive 15-18%
CAGR for CVs (v/s current
estimate of ~12%).
Infrastructure would be
Ramp-up in infrastructure
one of the focus areas in
activity will aid demand for
the Budget; this segment
tippers and lead to overall
is likely to see higher
CV demand CAGR of 12-15%
allocation.
(v/s current estimate of 8-
10%) over the next two
years.
Capital
Defense: Sector companies
Increased allocation toward
An increase in budgeted
Bharat Electronics, L&T,
Goods &
await an increase in orders
capital spending in the
spending would be positive
Bharat Forge
Infrastructure
from the government post
Budget.
for companies as it implies
the thrust toward "Make in
higher ordering and
India". FY18 budgetary
execution.
allocation at INR865b for
capital spending.
Roads: Increased budgetary
Increased budgetary support
Higher road ordering and
L&T, Sadbhav, KNR, Ashoka
support in FY18 (INR1.2t),
for road is expected to help
construction would be a
Buildcon, Cummins India
along with various steps
maintain continuity in
positive for the companies in
taken by the government,
ordering and execution. We
the sector.
has helped the sector revive. expect an increase of 10-
15% in budgetary allocation.
Railways: Government is
Increased budgetary support
Higher railway spending is a
L&T, Siemens India, ABB
taking steps to decongest
and, in turn, spending by the key positive for rail
India, Crompton Greaves,
the existing network,
Indian Railways. Expect the
equipment suppliers and
KEC Intl.
improve safety of
allocation to increase by
contractors.
passengers and return the
10% for FY19.
railways to profitability.
Budgetary support in FY18
stood at (INR1.3t)
Namame Gange: While
National Mission for Clean
Higher allocation toward
VA Tech Wabag, L&T, KEC
much ground work has been Ganga: Increased allocation
Ganga clean-up would be
Intl
laid, ordering for the
under this mission would
positive in terms of orders
Namame Gange mission is
imply pick-up in orders and
for companies in the
yet to pick up. FY18
execution.
wastewater treatment
allocation was at INR23b.
space.
Cement
Cement dispatches
Increased infrastructure
Higher spend toward
SRCM, JKCE,
increased 17% MoM in
spending to benefit the
infrastructure and low-cost
BCORP,UTCEM,TRCL,DBEL
November 2017, and are
cement sector.
housing could boost cement
expected to increase in
demand.
double-digits owing to low
base.
Demonetization had
Benefits offered under low-
affected cement dispatches
cost housing are likely to
pan-India, except south, last
boost demand from the
year. This has resulted in a
individual housing segment,
low base for most of the
which was impacted by
regions.
demonetization.
Sector
23 January 2018
11
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
Key budget expectations
Sector
Current state
Major budget
Expected change, if
Key stocks to watch
of the sector
expectations
expectations are met
out for
Prices have seen an uptick in
Budget announcement on
most regions in Jan 2018.
Pradhan Mantri Awas Yojana
Higher operating cost due to (which was INR29,000 crore
increase in fuel on account
last year) will be a key
of rising petcoke prices and
monitorable.
freight on account of rising
diesel prices.
Cigarette volumes have
We expect a blended GST
We expect ITC to implement
ITC
come under pressure after
increase of ~15%.
a weighted-average price
a 16% increase over earlier
hike of 14-15% to pass on
levels of GST.
impact of higher GST rate.
Any increase in ad valorem
duty needs to be watched
out. Unlike earlier years, the
company has not taken any
price increase ahead of the
Budget this year. If the
expected increase comes
through, volumes could
come under further
pressure. We model in
cigarette volume increase of
4% in FY19.
Government’s allocation
We expect an increase in
We see broad implication
toward rural schemes has
allocation toward the rural
across our coverage
increased over the past
sector ahead of upcoming
universe; however, rural
year. Rural growth has
elections in a few states in
salience is higher for HMN,
resumed over the past two FY19 and then the general
HUVR, Colgate, Dabur and
quarters, and now stands
election in May 2019.
Britannia.
higher than urban growth
Any increase in rural
(we note that, in FY15,
spending/infrastructure
rural markets were
spending/tax exemption will
growing at 1.5-1.6x of
boost consumers’ pockets,
urban markets)..
benefiting the FMCG sector.
Slow recovery environment
Higher allocation of funds to
Would help kick-start
PSU banks and large private
with continued stress in core core sectors like
investment cycle and boost
banks
sectors. Worries on asset
infrastructure, housing –
government’s objective of
quality have impacted
particularly affordable
providing housing for all.
growth in affordable housing housing and urban
space.
development.
Continued stress addition
Higher tax relief/concessions
Will boost profitability and
All corporate banks –
and NCLT referral of large
for loan loss provisions.
lead to more capital
particularly SBI, PNB, ICICIBC
accounts have led to
available for lending.
elevated provisioning
requirements.
Capital position of PSU banks
Government can
Would boost capitalization
All PSU banks – particularly
remains weak, which limits
announce/give further
levels and enable PSU banks
SBI, PNB, BOB
their ability to cleanse their
clarity on the
to make adequate
balance sheet and boost
recapitalization package that provisions. This would, thus,
lending.
it recently announced.
enable PSU banks to focus
on loan growth.
Tax deducted at source limit
TDS limit of INR10,000 needs
This will incentivize savers
All banks will benefit –
for banks stands at
to be increased, as this was
and enable banks to boost
particularly the larger ones
INR10,000. Tax on term
last set in 1997. Also, the tax their deposit growth which
deposits also needs to be
rate on FDs can be made
currently has been quite
rationalized given muted
lower to help them compete tepid.
deposit growth/lower
better with debt mutual
returns v/s other products
funds.
Transitioning from paper
To encourage more MSMEs
Reduced operating costs,
Retail-focused banks
money to digital payments.
to adopt cashless payments,
higher transaction fee
GOI may offer tax rebate on
income and increased float
Consumer
Financials:
Banks &
Insurance
23 January 2018
12
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
Key budget expectations
Sector
Current state
of the sector
Major budget
Expected change, if
expectations
expectations are met
digital transactions with a
in the banking system.
cap.
Life insurance penetration is
Lowering GST rate applicable
Improved incentive to buy
low in India and GST of 18%
to insurance premiums.
life insurance and higher
on insurance premium is a
AUM growth.
drag.
Penetration of term
Introduction of separate tax
This will aid growth in high-
insurance in the country is
benefits on term insurance
margin protection business,
very low, despite significant
the composition of which in
reduction in mortality
total industry premium still
charges
remains in single-digit
Allocation under MUDRA
We expect higher budgetary
This will encourage flow of
scheme currently stands at
allocation for the MUDRA
credit and reduce cost for
INR2.44t.
scheme.
the MSME segment.
Key stocks to watch
out for
All life insurance companies
Positive for life insurance
companies, particularly ICICI
PruLife and HDFC Life
All HFCs – biggest
beneficiaries are likely to be
REPCO, DEWH and HDFC.
Among asset financiers,
SCUF and CIFC are likely to
be the key beneficiaries.
Financials:
NBFC
Healthcare
Exemption limit for interest
Increase in the exemption
deductible for housing loans limit.
u/s 24 for tax calculation
purpose stands at INR0.2m.
PMAY allocation was
Expect increased allocation
INR290b in FY18.
for the PMAY.
Increased taxes on inputs
To allow claim on input tax
and input services consumed credit.
by healthcare providers –
they are not eligible to claim
any input tax credit. This
results in increased cost to
patients.
No incentives for hospitals
100% deduction of expenses
and diagnostic centers to
related to accreditation
undergo accreditation.
would enable hospitals and
diagnostic laboratories to
improve/maintain quality of
service as required by NABH
and NABL.
Medical re-imbursement
Increase the limit to
limit of INR15,000.
INR35,000-50,000.
Boost to housing and, in
turn, housing loan growth.
Boost to housing and, in
turn, housing loan growth.
Effective cost to patients
Sun Pharma, Alkem, Lupin,
would reduce, improving
Dr Lal PathLabs, Thyrocare,
outlook for the hospital and
Apollo hospitals, Fortis
diagnostic business.
Healthcare
This would not only reduce
cost (which would drive
profitability), but also
improve quality of service.
Media
Higher re-imbursement
would incentivize patients
to take better quality
medicines, driving
business for top pharma
companies in India.
Weighted deduction of
Allow weighted deduction of
This measure would provide
~150% on approved
at-least 200% on approved
boost to R&D effort for
expenditure incurred on
expenditure incurred on
building complex molecule
R&D activities.
R&D activities pertaining to
pipeline.
indigenous development of
medical technology or bio-
technology. Also, extend
benefit to expenses outside
approved facilities.
Ads on digital media are
GST rate on digital
Lower rates to further boost
Zee Entertainment
subject to 18% GST rate
advertising may be reduced.
digital advertising.
Enterprises
(while print at 5%).
Some relief on import duty
Relief would provide
Dish TV
Set-top boxes (STBs) are
on STB.
impetus to the ongoing
subject to 20% import duty
digitization drive
(raised recently).
23 January 2018
13
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
Key budget expectations
Sector
Metals/
Mining
Current state
Major budget
of the sector
expectations
Rise in coking coal prices is
Reducing in import duty.
impacting cost of production
of steel.
Iron ore supply has
Miners are lobbying for a
tightened after recent
reduction in export duty on
closure of mines in Odisha
iron ore up to 60% Fe.
Government had increased
Cess may be reduced to
cess from INR4,500/mt to
10%.
20% ad valorem for
upstream companies.
Inclusion of natural gas
under the purview of GST.
Expected change, if
Key stocks to watch
expectations are met
out for
This will improve margins of
Tata Steel, SAIL, JSW Steel,
Indian steel companies.
Jindal Steel
We believe it is unlikely
NMDC
because the steel industry
is aggrieved by the spike in
iron ore prices recently.
Lowering of cess will be
ONGC, OIL, CAIR IN
positive for upstream
companies.
Oil & Gas
Expect natural gas inclusion
Inclusion will make natural
GAIL, GSPL, PLNG, IGL, MGL,
in GST, possibly in the 5%
gas competitive compared
GUJGA
slab, in line with GST on coal. to dirtier fuels like coal and
FO.
Expect clarity on modality
for FY19; we build in nil
subsidy burden for OMCs
and upstream.
Clarity on subsidy burden
IOCL, BPCL, HPCL, ONGC, OIL
would impact upstream and
downstream companies.
In H1FY18, subsidy on LPG
and kerosene amounted to
INR90b. Higher crude oil
prices are expected to result
in INR470b under-recoveries
in FY19.
Compression of gas is
Reduction or exemption of
Reduction in excise duty
viewed as ‘manufacturing’ of excise duty charged on
would be earnings-neutral
goods and attracts excise
CNG/PNG volumes of CGDs.
for CGDs, but lower retail
duty of 14.4%.
gas prices may boost
consumption.
Last year, import duty on
LNG was reduced to 2.5%
from 5%.
To increase affordability of
natural gas (cleaner fuel), we
expect removal of 2.5%
customs duty on LNG
imports, irrespective of the
usage.
100% tax exemption for
Increase in carpet area in
developers with 30 sq.mt.
case of metro cities from
projects in metros (60sq.mt.
30sq.mt. to 60sq.mt.
– non metro) shall be
entitled for benefits.
Currently, principal
Increase in deduction limit
repayment toward housing
on principal and interest on
loan is allowed as a
housing loans.
deduction u/s 80C
(INR150,000), interest u/s 24
(INR200,000) and 80EE
(INR50,000).
18% GST shall be charged for
Reduction in GST rate to 8-
under construction property, 12% shall aid in pushing
rd
of which 1/3 is allowed as
demand ahead
rebate, converting to an
effective rate of 12%.
LTCG exemption is allowed
on REITs if held for
Reduce holding period of
36months.
REITs to 12 months.
In the last budget, INR29,000
crore was allocated toward
Further increase in budget
PMAY scheme to build
allocation toward PMAY
houses.
scheme.
IGL, MGL, GUJGA
Real Estate
Lower import tax will boost
IGL, GUJGA, MGL, PLNG,
gas usage in India, benefiting GAIL, GSPL
companies across the gas
value chain. Positive for CGD
companies and LNG
importers.
This will incentivize
All real estate companies
developers to take up
projects.
This should lead to increased
All real estate companies
demand in the sector.
This should boost demand.
All real estate companies
Make REITs an attractive
asset class for investment.
This would boost
construction activity and aid
in creating affordable
houses.
Real estate companies with
retail, commercial and hotel
assets
23 January 2018
14
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
Key budget expectations
Sector
Retail
Current state
Major budget
Expected change, if
Key stocks to watch
of the sector
expectations
expectations are met
out for
Sector sentiment is showing
Any move to boost income
Any increase in disposable
Broad implications across
revival over a weak base, led at the hands of the
consumption is a positive.
our coverage universe.
by structural changes
consumer will be a positive.
Fat tax will be a negative for
happening in the jewellery
We also await if any fat tax is QSRs.
segment.
imposed on QSRs.
Duality of pressure in
Tax holiday in 11-15 years of
Better and optimal
N.A.
traditional services and
operation of SEZ is available
utilization of the SEZ re-
growing opportunity in
only on creation and
investment reserve;
emerging technologies have
utilization of the SEZ re-
promotion of continued
been impacting companies
investment reserve.
investments in SEZs and
based on portfolios and
Clarifications are needed on
incurring of capital
strategies.
(i) if reserve can be utilized
expenditure.
Margins are under pressure
in the year of creation and
in the near term, led by
(ii) if the reserve can be used
regulatory risks around H1B
for any other unit.
visas in the US.
Apart from the pick-up in
Reintroduction of Section
Double taxation would be
MCX, BSE
activity on equity exchanges, 80E of the Act of the
avoided, boosting
regulatory reform has been
Securities Transaction Tax
confidence in the markets,
encouraging increased
allowing STT and CTT as a
and positively impacting
products, higher
rebate against tax instead of volumes.
participation and allowing
being allowed as expense for
Avoidance of double
exchanges to trade multiple
computing taxable income.
taxation, thereby resulting in
asset classes.
STT exemption on
a pick-up in trading volume
commodity options as they
on commodity options.
converge into respective
underlying futures contracts
upon which CTT would
anyway be applicable.
The tenure for spectrum
Financial relief in the form
Approval of increased (16
Bharti Airtel, Idea, Reliance
payment is 10 years.
of more time (16 years) to
years) tenure for spectrum
Ind.
However, Telecom
make spectrum payments. payment and lower
Commission has approved
government levies will
the same be increased to 16
increase the cash flow of the
years.
deb-laden telecom
operators.
License fee (8%) and SUC (3-
Redefining adjusted gross
Exempting 4G network
4%) of AGR.
revenue (AGR) and
equipment from BCD will
bringing down license fee
reduce the cost of rolling out
and SUC to a uniform 1%
networks and boost 4G
of AGR.
penetration (especially in
rural areas).
Industry has enough
No new spectrum auction
High spectrum investment
spectrums across bands at-
for at least a year.
done in the last 4-5 years
least for next one year.
through M&A may offer
little incentive to participate
in spectrum auction, thus
limiting telecom receipts
from auction
Telecom services, at present,
Industry demands that the
fall in the 18% slab of GST
GST rate be brought down
rate.
to 12%.
Telecom towers (at present)
do not fall within the
purview of ‘plant and
machinery’ under the GST
law
Telecom towers may be
Tower operators to get the
included within the scope
benefit of input tax credit on
of ‘plant and machinery’.
towers under the GST law.
Technology
Exchanges
Telecom
23 January 2018
15
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
Key budget expectations
Sector
Utilities
Current state
Major budget
of the sector
expectations
The Ministry of Power (MoP)
Extension of Sec 80-IA till
has initiated a series of
FY20E.
reforms in terms of domestic
coal supply improvement,
subsidy for LNG for gas
power project, DISCOMs
restructuring, etc. However,
with supply being higher
than demand, operating
rates remain low.
Monsoon has been good this
year, although not evenly
spread compared to the
previous year. Farmers have
been impacted by lower
commodity prices.
Expected change, if
expectations are met
The measures are more
facilitator in nature and
would help keep up
investment.
Key stocks to watch
out for
NPTC, PWGR, JSW Energy,
CESC and COAL
Others
Agro
chemicals
Fertilizers
Increase in MSP on food
Increased focus on
grains and pulses.
improving warehousing and
Increased investments in
cold storage would help
agricultural infrastructure
lower wastage, as 8-10% of
such as irrigation facilities,
food grains in India are lost
warehousing and cold
every year only due to post
storage to boost farm
harvest wastages. This
income.
would in turn boost farm
Enhancement in capital
income.
subsidy for cold stores and
its extension to all capital
investments in back-end
supply chain logistics.
Passing on of the subsidy
The backlog of existing
benefit for fertilizers to
fertilizer subsidy (INR230b) if
farmers through
cleared before
implementation of DBT.
implementation of DBT
Amendment in New
would provide significant
Investment Policy (NIP)
boost to the industry. The
involving investment
companies would receive
benefits for urea
subsidy in their account
manufacturers to tackle
within 7 days of completion
shortage in domestic
of sale to the farmer.
capacity.
PI Industries, Insecticides
India,
Dhanuka Agritech,
Monsanto India,
Coromandel International
Coromandel International
23 January 2018
16
 Motilal Oswal Financial Services
INDIA BUDGET GALLERY
INDIA STRATEGY GALLERY
 Motilal Oswal Financial Services
THEMATIC/STRATEGY RESEARCH GALLERY
 Motilal Oswal Financial Services
Union Budget 2018-19 | Preview
NOTES
23 January 2018
18
 Motilal Oswal Financial Services
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Union Budget 2018-19 | Preview
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Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is
not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States.
Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S.
persons. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional
investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional
investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and
interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S.
registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and
therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a
subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in
the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following
representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Disclaimer:
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person
or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of
offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or
appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations
as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to
determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative
products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of
the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time
without any prior approval. MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities
mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities
functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already
available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed therein. This document is
being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not
directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would
be contrary to law, regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to
certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or
representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
The
person accessing this information specifically agrees to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or
employees responsible for any such misuse and further agrees to hold MOSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this
information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring
Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com,
Contact No.:022-30801085.
Registration details of group entities.: MOSL: SEBI Registration: INZ000158836; CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100.
Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.:
INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd.
offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
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