Current Affairs

Stock Watch Ahead of Union Budget FY15

Indian equity markets have been showing a northward trend, and reached an all-time high level on July 08, 2014 on the hopes of strong pro-growth reforms to be introduced by the newly-elected Modi-led government to kick-start growth in Asia’s third largest economy.

A look at the lists of the key concerns and expectations in different sectors and related stock to watch-out for;

Information Technology

Key concerns

-Regulations pertaining to transfer pricing between the parent company and its subsidiaries

-Tax treatment given to revenue earned overseas

-Slower development of domestic market for software services

-Possibility of unfavourable tax treatment to revenue from Special Economic Zones (SEZ) that will be crucial for medium and small sized players

-Current regime of applying service tax as well as value added tax (VAT) on software licenses, which increases cost to final consumers

Expectations

-Tax incentives for development centres in smaller cities

-Continuity of SEZ scheme without additional tax burden

-Increased focus on government expenditure on automation and data consolidation across departments

-Simplified tax treatment for transfer pricing and overseas branch revenue

Stocks to Watch: TCS, Wipro, Vakrangee

Telecom

Key concerns

-Current complex tax structure for telecom operators impacting operating efficiency

-Restrictions on mergers and acquisitions

-Lack of clarity on tax treatment to past acquisitions in the sector

-delay in the implementation of more favourable spectrum sharing rules

Expectations

-Abolition of retrospective tax changes

-Higher overseas borrowing limits based on operational capabilities of telecom players

-Incentives for domestic handset manufacturers

-Tax incentives for infrastructure players

Stocks to Watch: Bharti Airtel, Idea Cellular, Reliance Communications

FMCG

Concerns

– High inflation eating into the disposable incomes of consumers.

– Decline in discretionary consumption

– Host of taxes like excise duty, import duty, MAT, service tax etc. increasing the price of products.

– Slowdown in rural economy on back of a bad monsoon

Expectations

– Rationalising excise duties and minimum alternate tax

– Implementing Goods and Service Tax (GST) to eliminate double taxation

– Reduction in income tax burden on individuals that will increase the disposable incomes

– Provision for a relief package for rural India in the event of a drought to support the rural economy

– Cigarette manufacturers are bracing themselves for an aggressive increase in excise duty on cigarettes

Stocks to watch out for: HUL, ITC, Emami, Britannia

Pharma & Healthcare sector

Concerns

Slow growth in the domestic market in the aftermath of the implementation of the new drug price control order. Little incentive to incur large expenditure on R&D

Expectations

Provision of tax exemption or holiday for Export Oriented Undertakings (EOUs)

Reduction in minimum alternate tax (MAT)

Weighted deduction on R&D expenditure to be extended to all kinds of R&D rather than only in-house R&D.

Further tax incentives to encourage R&D and innovation

Exemption of excise duty on drugs used as trade samples

Infrastructure status to healthcare to increase the penetration of healthcare services in the country

Reduction of duties on the devices and equipment’s used by healthcare industry

Encouraging public private partnership measures to promote healthcare

Stocks to watch out for: Sun Pharma, Lupin, Glenmark Pharma, Apollo Hospitals, Fortis Healthcare

Power Sector

Expectations

– The industry expects the Finance Minister to promote private investment in the coal mining.

– Reduction in customs duty on imported coal which is at present around 4%.

– Incentives to set up clean energy – Wind, Solar and Hydel power plants.

– Reduction or exemption on custom duty on import of goods for Renovation & Maintenance of power station. At present, the total duty which includes custom duty and CVD on import of goods for Renovation & Modernization of power generation plant 25.8%.

– Appointment of a coal regulator.

– The industry expects the Finance Minister to provide a roadmap to ensure fuel availability for the power plants

Concerns

Fall in production from Reliance’s KG Basin led to lower utilization of the plants. This has resulted in many projects becoming unviable.

Lack of adequate grid connectivity from surplus central region to power deficient southern region

Going ahead, availability of coal for the new plants will be a major challenge. Coal India may not be able to produce enough coal to meet new demand

Top Picks: NTPC, Tata Power, PowerGrid and Torrent Power

Banking and Finance

Expectations

· An increase in FDI limit in insurance to 49% from 26%

· Revival in infrastructure spending that will increase credit off take

· Incentivise household deposits, which will enhance the deposit base of the banks

· Roadmap to adhere to the Basel III norms over the next five years.

· Increase in tax deduction for interest on housing loan from the current limit of Rs 1.5 Lakh. This may shore up demand for housing loans going ahead.

· Increase in allocation for Re-capitalisation of public sector banks for this fiscal. The previous government in the interim budget had earmarked 11,200 crore for this fiscal to meet capital adequacy norms

Concerns

· Rise in stressed loans due to delay in clearances and slowdown in economy.

· Credit off take has been low due to lower investment activity in the last fiscal.

· Need for capital infusion in the case of public sector banks to adhere to the Basel III norms

Stocks to watch out: SBI, Punjab National Bank, LIC Housing Finance, HDFC, IDFC, ICICI Bank and Axis Bank

Metals & Mining

Expectations

· Increase in customs duty on steel which is currently at 5%

· Constraint on free trade agreement (FTA) which will reduce the dumping of surplus inventory in the Indian markets.

· Reduction in the exports duty on iron ore to 15% from 30% currently and removal of import duty on iron ore which is currently at 2.5%

· Increase in aluminium import duty from 2.5% to 5% currently.

· Divestments in PSU with clear timelines and procedures

Concerns

· Slow land acquisition and environment clearance procedures which restricts mining activities and hence the supply of raw material mainly coal and iron ore.

· FTA with countries such as South Korea and Japan which allows them to dump surplus inventory in the Indian market.

Real Estate

Expectations

· Prioritize status of affordable housing

· Tax concessions on affordable housing

· Clarity and push forward towards REIT

· An extension or clarity on SEZs can boost the momentum on development of commercial portfolio

Concerns

· Lack of clarity in the accounting and disclosure by the companies

· Existing land acquisition bill makes it difficult for the developers to acquire land

Auto Sector

Concerns

-Reduction in excise duty in interim budget unable to build sustainable demand for vehicles

-No hike in depreciation benefit for fleet owners despite truck industry is seeing longest slowdown in the last 20 years

-Limited disposable income in hand of middle class due to high inflation and low salary hikes

-Significant difference between factory gate and showroom prices due to multi-layered tax structure

Expectation

-Increase tax incentives to encourage production of the electric vehicles, presently electric vehicles gets only a marginal benefit in the custom duty.

Stocks to watch out for: ONGC, Indian Oil, BPCL, HPCL

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