Budget 2016: From healthcare to real estate, a sector-wise break down of the budget's impact

Agrochemicals and Fertilizers

What the Budget has to offer

-Farm credit target at Rs 9 lakh crore vs Rs 8.5 Lakh crore. A provision of Rs 15,000 crore towards interest subvention.

-The budget aims to double the farmer’s income by 2022.

-Direct Benefit transfer of fertiliser subsidies in a few districts on a test basis.

-A dedicated Irrigation fund worth Rs 20,000 crore to be set up under NABARD.

-Implementation of 89 irrigation projects will be fast-tracked. (These projects require Rs 17,000 crore next year and Rs 86,500 crore in the next five years).

-Rs 6,000 crore for ground water management

-5 lakh ponds and 10 lakh compost pits for production of organic manure to be taken up under MGNREGA.

-5 lakh acres to be brought under organic farming over three year period.

-Allocation under Prime Minister Fasal Bima Yojana at Rs 5,500 crore to subsidise farm insurance.Bima Yojana at Rs 5,500 crore to subsidise farm insurance.

Impact on the sector

Crop Insurance and higher farm credit will strenghten the farmers spending capacity and boost usage of better quality  inputs such as agrochemicals and seeds.strenghten the farmers spending capacity and boost usage of better quality  inputs such as agrochemicals and seeds.

Direct benefit transfer in fertilisers is a step towards reduction of dependance of companies on subsidy payout by government.

Irrigation and Micro-irrigation will receive good funding boosting the prospects for manufacturers of pumps, pipes and micro-irrigation systems.

Impact on companies

Companies such as PI Industries, Kaveri Seeds and Monsanto stand to gain from a shift towards better seeds and agrochemicals.

Fertilizer companies such as Coromandel Fertilizers under our coverage universe and Jain Irrigation in the micro-irrigation space stand to gain as Direct transfer of subsidies to farmers will help clean up balance sheets.

Finolex Industries and Jain Irrigation stand to gain from higher spend on irrigation. Finolex Industries derives more than 70% of its Pipes revenues from the Agriculture space.

Automobiles

What the Budget has to offer

-Jump in capital expenditure on roads at  YoY to Rs 97,000 crore from Rs 82,600 crore last year.

-Allocation of Rs 19,000 crore for Rural Roads in Central budget (60% of total spend, 40% contribution from states), 2.23 lakh km of roads to be completed by 2019.

-Pay commission payout provided for in the Union as well as the Rail budget.

-No policy for scrapping of 15-year old commercial vehicles as was expected by the industry.

-Withdrawal of R&D benefits in a phased manned – 150% from 1-April 2017 and 100% from 1-April-2020.

-No Change in excise duty in any of the segments, but Pollution cess of 1% on small petrol, LPG and CNG cars; 2.5% on diesel cars of certain specifications; 4% on higher-end models.

-Reduction of tax rate from 25% to 10% on royalty and fees for technical services paid to a non-resident

-Waiving of the excise duty on the electric and hybrid vehicles

Impact on the sector

-Development of roads would help the road segment gain market share in the country’s overall freight movement thereby driving growth in commercial vehicles in the long run.-

-No policy for scrapping of old commercial vehicles as was expected is a negative for CV manufacturer

-Impetus on increased rural financing as well as aim to double farmers income by 2020 - positive for two wheelers, passenger vehicles and tractors.

Impact on companies

-Increased agriculture credit outlay will benefit two wheeler makers such as Hero Motocorp as well as tractor manufacturers like M&M.

-Increased thrust on road infrastructure is positive CV manufacturers such as Tata Motors and Ashok Leyland.

-We expect a 1.5% impact on Maruti of the cess imposed.

-Since there is no change in duty structure in 2/3 wheelers, Eicher Motors, Bajaj Auto and TVS also stand to gain on account of no bad news, rural income push as also Pay Commission Payout.

Banking & Finance

What the Budget has to offer

-Capital infusion in PSU banks was limited to Rs 25,000 crore

-Fiscal Deficit target for FY17 has been retained at 3.5%

-A comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in the Parliament during 2016-17.

-‘First – home buyers’, will be given a deduction for additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs 50 lakh. Other incentives for Affordable Housing construction will boost demand for small housing loans.

-Pay commission payout provided for in the Union as well as the Rail budget.

-Rs 9 lakh crore of farm loans vs Rs 8.5 lakh crore last year and crop insurance for the farmer in addition to Rs 15000 crore for interest subvention.

-Non-banking financial companies (NBFCs) shall be eligible for deduction to the extent of 5% of its income in respect of provision for bad and doubtful debts.NBFCs) shall be eligible for deduction to the extent of 5% of its income in respect of provision for bad and doubtful debts.

Impact on sector

-The lower than expected capital infusion in PSU banks will mean that PSUs will have to come into the market to raise capital at depressed valuations.

-A 3.5% fiscal deficit for FY17 will mean that fresh offering of government debt will be lower than what the market has factored in over the last few weeks. This should lead to lower bond yields and hence higher treasury gains for banks.

-Higher Income for government employees should boost savings

-Affordable housing is becoming a sector that Banks will increasingly focus on given low delinquency levels in this space.

-Farm loan growth will become more secure with insurance for farmers against crop failures

Impact on companies

-PSU Banks such other than SBI, Union Bank and Bank of Baroda will have to approach the market to raise capital.

-NBFCs such as Gruh Finance, Repco Home Finance, Dewan Housing, LIC Housing, Can Fin Homes as well as most banks would stand to benefit from incentives given towards promoting first time home buyers and also towards low cost housing.

-NBFC’s such as Shriram Transport Finance, REC and PFC will get a tax shield for provisions upto 5% of income. This would provide some breather to these NBFC’s that are exposed to the Infrastructure industry

Cement

What the Budget has to offer

-Jump in capital expenditure on roads at  YoY to Rs 97,000 crore from Rs 82,600 crore last year.

-Allocation of Rs 19,000 crore for Rural Roads in Central budget (60% of total spend, 40% contribution from states), 2.23 lakh km of roads to be completed by 2019

-Pay commission payout provided for in the Union as well as the Rail budget

-Incentives for Affordable Housing construction will boost demand for small houses

-No Change in freight rates for cement or any such commodity in the Rail Budget

-10% additional Tax on dividends in the hands of firms 
 
Impact on sector

-Pick-up in demand on account of Infrastructure spend, low-cost housing and home-renovation by government employees (loaded with pay-commission payout) will boost demand for a sector that has been struggling with single digit growth in demand and over-capacity

-Lack of cost hikes in the rail budget is a positive
 
Impact on companies

-Increased thrust on road infrastructure is positive for cement demand,especially as the government aims to build cement roads. ACC and Ultratech as large across the country cement manufacturers stand to gain from higher cement demand.

-Grasim is the holding company for Ultratech, while Ambuja is the holding company for ACC. Dividend from these holdings will now be taxed at 10% in the hands of these holding companies.

Consumer

What the Budget has to offer

-Pay commission payout provided for in the Union as well as the Rail budget

-The budget aims to double the farmer’s income by 2022.

-Excise duty increased for cigarettes by 10%, in line with expectations

-Higher excise on readymade garments priced at Rs 1,000 or more. Nil (without CENVAT credit) or 6%/12.5% (with CENVAT credit)

-Reduction in excise duty for rubber sheets for soles and heels from 12.5% to 6%; Additionally, an increase in abatement from retail sales price for calculating excise duty for footwear from 25% to 30%.

-Articles of Jewellery (excluding silver jewellery , other than studded with diamonds or other precious stones namely, ruby, emerald and sapphire) with a higher threshold exemption upto Rs. 6 crore in a year and eligibility limit of Rs 12 crore, to be levied with 1% excise duty (without CENVAT credit) or 12.5% (with CENVAT credit).

-100% FDI to be allowed through FIPB route in marketing of food.FDI to be allowed through FIPB route in marketing of food.

Impact on sector

-Increase in rural spending along with the 7th pay commission would provide a fillip to consumption growth

-Footwear industry stands to gain from lower raw material prices and higher abatement availability while providing for excise

-Increase in excise duty would hurt the jewellery industry

-100% FDI in food processing sector would attract investments

Impact on companies

-For ITC, the hike was on expected lines and the company takes price hikes to offset the hike

-Arvind and Pantaloon Fashion and Retail will be impacted by higher excise on readymade garments

-Bata would stand to gain from lower excise duty on rubber sheet imports and also from the increase in abatement while calculating excise from retail sales price.

-Increase in excise for articles of Jewellery to negatively impact Titan and PC Jeweller

Infrastructure (Construction and Capital Goods)

Budget Expectations

What the budget does

-Will commission 9 km/day of broad gauge lines in FY18 and 13km/Day by FY19

-Proposed an allocation of Rs 55,000 crore in the Budget for Roads and Highways. This will be further topped up by additional Rs 15,000 crore to be raised by NHAI through bonds. Thus the total investment in the road sector, including PMGSY allocation, would be Rs 97,000 crore during 2016-17. In addition, nearly 50,000 kms of State highways will also be taken up for up-gradation as National Highways.

-Rs 31,300 crore of Bond issuance by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority during 2016-17.

-3 new Dedicated Freight Corridors announced in the Rail budget

-Defence capital spend has gone up from Rs 81,400 crore (2015-16 RE) to Rs 86,340 crore, but is lower than Rs 94,588 crore budgeted in the last budget

-Allocation of Rs 3,000 crore p.a for Nuclear Power Generation capacities

-Basic Customs Duty reduced on refrigerated containers from 10% to 5%.

-Excise duty on refrigerated containers from 12.5% to 6% 

Impact on sector

-Development of roads would help the road segment gain market share in the country’s overall freight movement thereby driving growth in commercial vehicles in the long run.

-A rise in actual Capital spend would be positive for the Indian Defence companies

-Reduction of indirect taxes on refrigerated containers helps manufacturing companies as well as cold chain warehouses. 

Impact on companies

-Overall we believe the budget is very positive for companies that cater to the road sector which include L&T and Reliance Infrastructure.

-L&T is already working on the Dedicated Freight corridor and stands to gain from higher spend in the Railways space

-The allocation of Rs 3,000 crore for Nuclear Power power opens up new order opportunities for L&T, Alstom and Thermax

-The bond issuance by NHAI, PFC, REC and other companies in this field will help them garner funds to boost the capex in this space.

-The Higher defence capex is a positive for companies like BEL, L&T and Bharat Forge

The 7th pay commission payout is a positive for Voltas and Bluestar, while the reduction of indirect taxes on  refrigerated containers is a positive for Snowman Logistics and Gateway Distriparks

Healthcare

Budget Expectations

What the budget does

-Benefit of deductions for R&D reduced to 150% from April 2017 and to 100% from April 2020

-New health insurance scheme to protect against hospitalisation expenditure

-3,000 Stores under Prime Minister’s Jan Aushadhi Aushadhi Yojana will be opened during 2016-17.

Impact on sector

-Negative as incentives for R&D are reduced and this is a focus area for companies that are spending heavily on filing generic dosiers in developed markets

-The New Health Insurance scheme will be a challenge for Private Insurance Companies

-The Government promoted medical stores will be a challenge for generic and branded generic segment in the Indian market that is already facing threat from growing preference for Natural medication

Impact on companies

-Most companies with exposure to International generics as well as companies like Biocon and Glenmark that are focussed on new molecules would be negatively impacted.

Real Estate 

Budget Expectations

What the budget does

-100% deduction for profits to an undertaking from a housing project for flats upto 30 sq. metres in four metro cities and 60 sq. metres in other cities, approved during June 2016 to March 2019, and is completed within three years of the approval.  Minimum Alternate Tax will, however, apply to these undertakings.

-‘First – home buyers’, will be given a deduction for additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs 50 lakh.

-Any distribution made out of income of SPV to the REITs and INVITs having specified shareholding will not be subjected to Dividend Distribution Tax. 

Impact on sector

-Additional interest deduction of Rs 50,000 per annum would result in an increase in demand from first-time home buyers who constitute around 40-50% of the demand.

-Clarity on taxability of REIT distributions, could lead to some exchange-traded REITs in FY17 and beyond

Impact on companies

-Most of the companies that we cover come in the premium segment. Companies that we do not cover such as  Ashiana Housing and Poddar Developers in the mid-income group\Tier-II & III towns would stand to benefit from the government’s push for low cost housing.

-Commercial real estate is poised for multi-year growth; there is greater scope for re-rating, with several tailwinds in place. The REIT model could be a positive for companies with exposure to commercial real estate such as Prestige, Phoenix Mills, Oberoi Realty, Brigade Enterprise and Indiabulls Real Estate

Oil & Gas

What the Budget has to offer

-Cess has been shifted to ad-valorem basis at 20% of crude price instead of a fixed rate of Rs 4500/MT

-Incentivising gas discovery and exploration by providing calibrated marketing freedom

-10% additional Tax on dividends in the hands of firms

Impact on sector

-Although a shift to ad-valorem cess would benefit the upstream sector, the quantum of cess is higher than our estimate

Impact on companies

-ONGC and OINL would stand to benefit as the new ad-valorem rate of 20% is in alignment with the lower level of crude oil. As the rate of 20% is above or expectation of 10%.

-ONGC and IOC hold shares of each other, while GAIL holds 10% of ONGC’s equity. With the government now imposing 10% additional tax on dividend income above Rs 10 Lakhs, these companies will be liable to pay additional tax on the dividend that they receive from their cross holdings in each other.

-Any fresh discoveries by Reliance, ONGC, Oil India or Cairn India will allow them to market the same with some restrictions.

The author is VP-Research, Motilal Oswal Securities Limited.