India - Markets give thumbs up to Budget 2010

Markets give thumbs up to Budget 2010

Courtesy of Equitymaster.com

The Union Budget 2010 brought some cheers to the Indian markets, which had been reeling under fear for the past few days with respect to the government's stimulus withdrawal. However, the Finance Minister did not tinker much with the stimulus but for partially rolling back some excise duty benefits. However, much of this seemed in line with what the markets had been expecting. Anyways, realty, auto, and metals stocks led today's gains.

The BSE Sensex and NSE Nifty closed with gains of around 175 points (1.1%) and 65 points (1.4%) respectively. Mid and small cap stocks also closed with gains. The BSE Midcap and BSE Smallcap indices closed higher by 1.5% and 1.1% respectively. On the broader BSE, one stock lost today for every two that closed in the positive.

Among other key Asian markets, while China closed marginally in the red, Hong Kong (up 1%) and Japan (up 0.2%) were among the gainers. European markets have opened today on a positive note.

Apart from just a small rollback of the stimulus, one of the key reasons for today's gains was the clear roadmap announced by the government with respect to reducing its fiscal deficit over the next 3-4 years. As against an estimated figure of 6.9% and 5.5% of GDP in FY10 and FY11 respectively, the rolling targets for fiscal deficit are pegged at 4.8% and 4.1% for FY12 and FY13 respectively. Also, as the Budget notes, taking into account the various other financing items for fiscal deficit, the actual net market borrowing of the government in FY11 would be around Rs 3,450 bn, which would leave enough space to meet the credit needs of the private sector.

Auto stocks gained strongly today, Key gainers here included Bajaj Auto, Tata Motors, and Ashok Leyland. A lower than expected rollback of excise duty seemingly enthused investors in these stocks. Then there was the lowering of personal income taxes that we believe might foster increased spending by consumers on discretionary items like automobiles. But for the increase in the ad valorem component of excise duty on large cars and multi-utility vehicles by 2% points to 22%, today's was a positive budget for the auto sector as a whole. We also believe that the extension of R&D benefits will encourage more investments in the sector and will make it competitive in the long run.

Realty stocks were amongst the biggest gainers on the broader markets today. The BSE-realty index closed up by almost 3%. Key gainers here included HDIL, DLF, and Unitech. These gains were on the back of some relief provided by the Budget to real estate companies. As the Finance Minister announced, with a view to provide one time interim relief to the housing and real estate sector that was impacted by the global recession, the government has allowed pending projects to be completed within a period of five years instead of four years for claiming a deduction on their profits. The Budget has also proposed to relax the norms for built-up area of shops and other commercial establishments in housing projects to enable basic facilities for their residents. The realty firms couldn't have asked for more!

This is given that these companies have already been amongst the biggest beneficiaries of the government's fiscal stimulus programme that has helped them restructure their strained balance sheets. The interesting thing is that these realty companies have come back to their greedy ways by not lowering property prices by keeping them artificially inflated through hoarding. Some like Deepak Parekh of HDFC have come out heavily on these companies' tactics. But now, given that the Finance Minister has allowed them some more time to relax, real estate companies and their investors are making merry.

Key India Budget Highlights

Courtesy of L&T Mutual Funds, India, here are the budgetary highlights for FY11.

• Total expenditure proposed for FY11 stands at Rs.1108749 cr (US$239.6-billion) up by 8.6%. Plan expenditure up by 15%. Non plan expenditure up by 6%.Fiscal Deficit estimated at 5.5% for FY11 (from 6.9%FY10), 4.8% in FY12 and 4.1% in FY13.Direct tax proposals in form of lower income tax slabs would lead to a loss of Rs.26,000cr. (US$5.6-billion)
• Indirect tax proposals would lead to a gain of Rs.46,500 cr. (US$9.8-billion)
• Total tax revenue and other receipts would lead to Revenue Gain of Rs.20,500cr. (US$4.4-billion)
• Corporate Tax: MAT increased from 15% to 18%
• Surcharge on corporate tax reduced from 10% to 7.5%.
• Need to review stimulus, move to fiscal prudence, says FM
• Partial withdrawal of fiscal stimulus measures through roll back of excise duties
• Excise duty on all non oil products increased from 8% to 10%.
• GST and DTC to be introduced together by April 2011.
• Service Tax rate retained at 10%
• Subsidy to oil companies to be given in cash and included in budgetary estimates.
• Subsidy on Fertilisers to be reduced.
• Divestment receipts expected to be more than Rs.25,000 cr (US$5.39375-billion) in FY10. Disinvestment targets for FY11 to the tune of Rs. 40000 crs. (US$8.63-billion)
• To provide Rs 165 bln (US$3.58-billion) to PSU (Public Sector Undertaking, or State-run) banks
• Infrastructure spending pegged at Rs. 1,73,552 crs (US$37.4-billion), which is 46% of plan outlay.
• Net borrowing for FY11 set at Rs 3,45,000 cr (US$74.4-billion) ; Gross borrowing at Rs 4,57,000 cr (US$98.6-billion)

Equity View

• Hike in excise duty has been on expected lines.
• Increase in MAT would impact some corporates.
• Increase in tax slabs for individuals will give more in hand of consumers, key positive as it would enhance consumption.
• Hike in petrol prices by ~Rs. 2.50 on account of increase in duties would lead to inflation spike in near term.
• Overall we believe budget would push higher consumption and over period private capex would pick up. Economy would thrive without the requirement of large government expenditure over medium term.

Fixed Income View

• Net borrowing number of Rs 3.45 lakh crores (US$74.4-billion) a reasonable number. Bond markets expected to take it positively.
• However divestment and 3G auction revenue estimates on higher side for FY11. There could be risk of not meeting these targets as planned. Risk of fiscal deficit slippage (increasing from budgeted 5.5%) exists.
• Discontinuing practice of issuing bonds for oil and fertilizer companies and giving cash a positive fiscal consolidation measure. Will reduce interest burden in the long run.
• Fuel price hike due to increase in duties lead to inflationary effect and negative for bonds
• Continued support to PSU banks through capital infusion to help maintain their credit quality for issuance of CDs and Bonds.