Union Budget 2020-2021

Mixed bag, missed opportunities

GV Giri, IIFLCAP Amit Tiwari Swapnil Karkare

gvgiri@iiflcap.com amit.tiwari@iiflcap.com swapnil.karkare@iiflcap.com
(91 22) 4646 4676 (91 22) 4646 4649 (91 22) 4646 4696

February
01 February2020
2020 1
Summary

● The budget dashed the investor expectations of reform measures. The government tweaked the
personal income tax rates. However, without the exemptions of earlier regimes, these are not
attractive. Further, multiple tax regimes and tax rates complicate tax filing process rather than
simplifying it. The exemption further discourages already weak household savings.

● The government has been announcing growth revival steps outside the budget and that approach
could continue.

● While the fiscal math seems reasonable on the surface, it is based on relatively optimistic tax
assumptions for FY20RE and aggressive disinvestment receipts. The disinvestment target hinges
on strategic disinvestments that have got postponed from FY20 to FY21.

● The government continues to prioritize capital expenditure for pushing growth. However, so far
this has not triggered a sustained pick up in private investments and economic growth. While
focus on capital expenditure is a positive to improve the productivity of economy and lays the
foundation for long term growth, it is unlikely to trigger growth in the near term.

February 2020 2
Key policy initiatives

● The turnover threshold for tax audit raised from Rs10m to Rs50m if cash aggregate payments and
receipts are less than 5% of total payments/receipts. This should ease compliance burden on
SMEs.

● The government has raised the deposit insurance cover on bank deposits to Rs0.5m from 0.1m.

● ESOP tax payment for start up employees deferred by earlier of i) 48 months from the end of
relevant assessment year, ii) exit from the company iii) sale of share. The turnover ceiling for
availing deduction under 80-IAC has been raised from Rs250mn to Rs1bn. The availability of claim
has been extended to ten years from seven years. These proposals are a positive for start-ups.

● The government has announced few measures for capital markets: The FPI limit in corporate
bonds has been raised from 9% of outstanding stock to 15%, ii) Dividend distribution tax has been
eliminated but would be taxed in the hands of recipients iii) The government has proposed to sell
government’s residual stake in IDBI Bank, iv) The government will launch a debt ETF (with
government securities as underlying instruments). v) 100% tax exemption on interest, dividend
and capital gains income for Sovereign Wealth Fund investments in priority sectors made before
31st March 2024 and with a minimum lock-in period of three years.

February 2020 3
Key tax proposals

● The government has a proposed a new tax regime for individual tax payers. The number of tax
slabs have been increased from three to five. Thus income tax rate has been reduced to
- 10% (vs. previous rate of 20%), for income between Rs0.5m to Rs0.75m,
- 15% (vs. 20% earlier) for income between Rs0.75m to Rs1m,
- 20% for income between Rs1m to 1.25m (vs. 30% earlier),
- 25% for income between Rs1.25m to Rs1.5m (vs. 30% earlier) and
- 30% for income above Rs1.5m (vs. 30% earlier).

● The dividend distribution tax has been eliminated. However dividends would be taxable at
recipient's marginal tax rate.

● 10% TDS on capital gains and dividend payment from mutual funds. 5% TCS on overseas tour
packages (10% without PAN/Aadhar).

● The threshold for gap between consideration value and stamp duty value has been raised to 10%
(from 5% earlier) for taxing capital gains, business income etc. from real estate transactions.

● New electricity generating companies can also avail the lower tax rate of 15% which was
announced for manufacturing companies in September 2019.

February 2020 4
Government finances – Summary

(Rs bn) YoY (%)

FY18 FY19 FY20 RE FY21 BE FY20 FY21
RECEIPTS FY21 tax growth numbers seem reasonable
if we assume FY20(RE) will be achieved.
Revenue Receipts 14,352 15,529 18,501 20,209 19 9
However, recent track record of revised
Tax Receipts 12,425 13,172 15,046 16,359 14 9
estimates does not inspire confidence.
Non-Tax revenue 1,927 2,357 3,455 3,850 47 11
Capital receipts 1,157 1,128 816 2,250 (28) 176

Total Receipts 15,509 16,657 19,317 22,459 16 16 Disinvestment target has been raised to
Rs2,100bn for FY21, from Rs650bn in FY20
EXPENDITURE (RE). Achieving such a target will depend on
government’s willingness for strategic sale of
Revenue Expenditure 18,788 20,074 23,496 26,301 17 12 PSUs.
Capital Expenditure 2,631 3,077 3,489 4,121 13 18
While the government continues to prioritizes
Total Expenditure 21,420 23,151 26,986 30,422 17 13 capital expenditure over revenue
expenditure, growth in expenditure would
Revenue Deficit 4,436 4,545 4,995 6,092 10 22 depend on tax collection growth.
Fiscal Deficit 5,911 6,494 7,668 7,963 18 4

Revenue deficit (% GDP) 2.6 2.4 2.4 2.7 5 bps 27 bps Fiscal deficit is expected to decrease to
Fiscal deficit % GDP 3.5 3.4 3.8 3.5 33 bps -21 bps 3.5% of GDP. It is worth noting that the
Source: Government Budget Documents, IIFL Research fiscal deficit has not materially declined
after FY17 (post the oil bonanza).

FY21 tax revenue growth estimates slightly aggressive but look reasonable due to optimistic revised
estimates of FY20

February 2020 5
Optimistic disinvestment receipts

(Rs bn) YoY (%)

FY18 FY19 FY20RE FY21BE FY20 FY21
Tax Revenue Income tax revenue growth for FY21 looks challenging
Gross Tax Revenue 19,190 20,805 21,634 24,230 4 12 given the weak nominal GDP growth and aggressive
----Corporation Tax 5,712 6,636 6,105 6,810 (8) 12 FY20RE.
----Income Tax 4,308 4,730 5,595 6,380 18 14
----Customs Duties 1,290 1,178 1,250 1,380 6 10
----Excise Duties 2,594 2,320 2,480 2,670 7 8
----Service Tax 812 69 12 10 (83) (15)
----Goods and Services Tax 4,446 5,816 6,123 6,905 5 13

Direct Tax 10,047 11,422 11,769 13,265 3 13

Indirect Tax 9,143 9,382 9,865 10,965 5 11

less devolution to states 6,730 7,615 6,560 7,842 (14) 20

Net Tax revenue 12,425 13,172 15,046 16,359 14 9 The non-tax revenue estimate assumes RBI
dividend of ~Rs800bn. However provision for
Non-tax Revenue 1,927 2,357 3,455 3,850 47 11 reserves by RBI could result in lower dividend.

Total Revenue 14,352 15,529 18,501 20,209 19 9

Non Debt Capital Receipts 1,157 1,128 816 2,250 (28) 176 The disinvestment proceeds in FY21 are significantly
----Disinvestment 1,000 947 650 2,100 (31) 223 higher than last year and would be tough to
achieve.
Total Receipts 15,509 16,657 19,317 22,459 16 16

Gross tax receipts (% GDP) 11.2 11.0 10.6 10.8 -38 bps 19 bps
Non-tax revenue (% GDP) 1.1 1.2 1.7 1.7 45 bps 2 bps
Source: Government Budget Documents, IIFL Research

The fiscal math for FY21 depends on slightly optimistic tax growth assumptions and aggressive
disinvestments target

February 2020 6
Govt. pushes capital expenditure

(Rs bn) YoY (%)

FY18 FY19 FY20RE FY21BE FY20 FY21
Non-Development Expenditure Pensions and interest expense is expected to
Interest 5,290 5,826 6,251 7,082 7 13 grow by ~13-14% YoY. Interest expense
Defence 2,827 2,908 3,163 3,231 9 2 growth is expected to be higher than nominal
Subsidies 2,244 2,230 2,636 2,621 18 (1) GDP growth.
Pensions 1,457 1,602 1,841 2,107 15 14
Police 801 804 906 936 13 3

Development expenditure Agriculture and urban development spending

is expected to grow in double digits. While the
government has retained the FY20 PM Kisaan
Agriculture and Rural 1,876 1,961 2,642 2,996 35 13
allocation at Rs750bn, even though it wasn’t
Transport 1,104 1,436 1,582 1,696 10 7
able to utilize this allocation in FY20.
Education 802 803 949 993 18 5
Health 530 545 638 675 17 6 MGNREGA allocation has been cut by Rs95bn
Urban Development 401 406 423 500 4 18 to Rs615bn

Total expenditure 21,420 23,151 26,986 30,422 17 13

Revenue expenditure 18,788 20,074 23,496 26,301 17 12
Capital expenditure 2,631 3,077 3,489 4,121 13 18 The government continues to prefer capital
expenditure for reviving growth. However,
this may not support growth revival in the
Total expenditure (% GDP) 12.5 12.2 13.2 13.5 100 bps 33 bps
near term.
Revenue expenditure (% GDP) 11.0 10.6 11.5 11.7 91 bps 20 bps
Capital expenditure (% GDP) 1.5 1.6 1.7 1.8 8 bps 13 bps
Source: Government Budget Documents, IIFL Research

Capital expenditure is expected to grow faster than revenue expenditure but could involve postponing
the relatively rigid revenue expenditure like subsidies.

February 2020 7
Subsidies rolled forward

(Rs bn) YoY (%)

FY18 FY19 FY20RE FY21BE FY20 FY21
Subsidies 2,244 2,230 2,636 2,621 18 (1)
----Food 1,003 1,013 1,087 1,156 7 6
----Fertiliser 664 706 800 713 13 (11)
----Petroleum 245 248 386 409 55 6 Subsidies are expected to decline marginally on
----Interest 221 200 259 282 30 9 account of lower fertilizer subsidy and modest
growth in food subsidy.
----Others 111 62 104 61 68 (41)
The government has been postponing the
Total Subsidies (% GDP) 1.3 1.2 1.3 1.2 11 bps -12 bps subsidy expenditure to adhere to fiscal deficit
target. It is unlikely to meet the projected
Food (% GDP) 0.6 0.5 0.5 0.5 0 bps -2 bps subsidy expense and may continue to delay the
Fertiliser (% GDP) 0.4 0.4 0.4 0.3 2 bps -7 bps inevitable payments
Petroleum (% GDP) 0.1 0.1 0.2 0.2 6 bps -1 bps
Interest (% GDP) 0.1 0.1 0.1 0.1 2 bps 0 bps
Source: Government Budget Documents, IIFL Research

The assumption of modest subsidy growth is unrealistic and is unlikely to be achieved. The government
would continue to postpone the payments to adhere to budget discipline.

February 2020 8
Fiscal consolidation – Revised roadmap again

Target
(% of GDP) FY20(RE) FY21(BE) FY22 FY23
The government has been unable to cut fiscal
Fiscal Deficit 3.8 3.5 3.3 3.1
deficit materially after FY17 (after oil bonanza)
Revenue Deficit 2.4 2.7 2.3 1.9 and this points to limits to government’s
Primary Deficit 0.7 0.4 0.2 0.0 ability to cut expenditure.
Gross Tax Revenue 10.6 10.8 10.7 10.7
Non tax Revenue 1.7 1.7 1.5 1.5
Government debt likely to decline by 4.6ppt
Central Government debt 50.3 50.1 48.0 45.5 of GDP by FY23, if the government adheres to
Source: Government Budget Documents, IIFL Research the medium term roadmap on fiscal
consolidation. That said, the track record on
medium term roadmap has been poor so far.

The fiscal consolidation roadmap lacks credibility after persistent postponement since several years.

February 2020 9
Long-term trends - Revenues

Tax buoyancy has fallen with deceleration in growth Income tax buoyancy expectation could be optimistic

(% of GDP) Direct Taxes Indirect Taxes (% of GDP) Corporate tax Income tax
7 5.0
6 4.0
5
4 3.0

3 2.0
2
1.0
1
0 0.0

FY01

FY10

FY19
FY20
FY00

FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09

FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18

FY21
FY00

FY06

FY13

FY19
FY01
FY02
FY03
FY04
FY05

FY07
FY08
FY09
FY10
FY11
FY12

FY14
FY15
FY16
FY17
FY18

FY20
FY21
Source: Government Budget Documents, IIFL Research. Source: Government Budget Documents, IIFL Research.

Dividends and profits are expected to decelerate Total revenue, relative to GDP, expected to stagnate in FY21
Interest receipts Dividends and profits Other non-tax revenues (% of GDP) Net Tax Revenue Non Tax Revenue
2.5 12
(% of GDP)
2.0 10

8
1.5
6
1.0
4
0.5 2

0.0 0 FY00

FY03

FY16

FY19
FY01
FY02

FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15

FY17
FY18

FY20
FY21
FY12

FY15
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11

FY13
FY14

FY16
FY17
FY18
FY19
FY20
FY21

Source: Government Budget Documents, IIFL Research. Source: Government Budget Documents, IIFL Research.

February 2020 10
Long-term trends - Expenditure

Interest, Subsidies and Defence make up ~40% of expenditure More than half the expenditure is unavoidable
Share in Central Govt. Agri + Rural Dev. Committed Expenditure
10% 60
Expenditure (FY21) (% of Total Expenditure)
3% Education Average
8%
29% 3% 55
24% Int. Exp
Transport 50
FY19 25% 23% Subsidies
7%
45
Police
7% Defence
13% 6% 40
4% 10% Pensions
11% 5%
9% 35
3% Others
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Source: Government Budget Documents, IIFL Research. Source: Govt. Budget Documents, IIFL Research; Note: Committed expenditure
includes salaries of CG employees (incl. defence), pension, interest and subsidies.
Revenue expenditure constitutes ~80% of total expenditure Subsidy burden is optically lower
(%) Revenue Expenditure Capital Expenditure Food Fertilizers Petroleum Others
100 3.0
Subsidies, (% of GDP)
80 2.5
2.0 Ex-petroleum subsidies
60
1.5
40 1.0
0.5
20
0.0
0
(0.5)
FY14

FY17
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13

FY15
FY16

FY18
FY19
FY20
FY21

FY00

FY05

FY19
FY01
FY02
FY03
FY04

FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18

FY20
FY21
Source: Government Budget Documents, IIFL Research. Source: Government Budget Documents, IIFL Research.

February 2020 11
Long-term trends - Deficits

Rising revenue deficit points to worsening quality of deficit Primary deficit has worsened in FY20
(% of GDP) Central Govt. State Govts. (% of GDP) Central Govt. - Primary Deficit
7 5
Revenue Deficit
6 4
5
3
4
3 2
2
1
1
0 0
(1) (1)
FY01

FY08

FY15
FY00

FY02
FY03
FY04
FY05
FY06
FY07

FY09
FY10
FY11
FY12
FY13
FY14

FY16
FY17
FY18
FY19
FY20
FY21

FY01

FY08

FY15
FY00

FY02
FY03
FY04
FY05
FY06
FY07

FY09
FY10
FY11
FY12
FY13
FY14

FY16
FY17
FY18
FY19
FY20
FY21
Source: Government Budget Documents, RBI, IIFL Research. Source: Government Budget Documents, IIFL Research.
But, substantially higher on including off-balance sheet
Fiscal deficit is low on reported basis… spending
(% of GDP) Central Govt. State Govts. (% of GDP) Centre Off-Balance Sheet Borrowings PSE Borrowings EBR
9 14
8 Centre's Consolidated Fiscal Deficit
Fiscal Deficit 12
7
6 10
5 8
4 6
3
4
2
1 2
0 0
FY01

FY08
FY00

FY02
FY03
FY04
FY05
FY06
FY07

FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21

FY04

FY14

FY21
FY00
FY01
FY02
FY03

FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13

FY15
FY16
FY17
FY18
FY19
FY20
Source: Government Budget Documents, IIFL Research. Source: Government Budget Documents, IIFL Research.

February 2020 12
Long-term trends - Debt

Central Government debt has touched 50% of GDP Central government’s debt is ~5.6x its annual revenue
Central Government Debt (% of GDP) (x) Central Government Debt/Revenue Receipts
75 8
7
60
6
45 5
4
30 3
15 2
1
0 0
FY03

FY05

FY20
FY00
FY01
FY02

FY04

FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19

FY21

FY15
FY16
FY17
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14

FY18
FY19
FY20
FY21
Source: Government Budget Documents, IIFL Research Source: Government Budget Documents, IIFL Research

State government debt has stabilised in the last couple of years State government debt is only 1.7x its annual revenue
State Government Debt (% of GDP) (x) State Government Debt/Revenue Receipts
40 3.0
2.5
30
2.0
20 1.5
1.0
10
0.5

0 0.0

FY09

FY14
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08

FY10
FY11
FY12
FY13

FY15
FY16
FY17
FY18
FY19
FY20
FY03

FY18
FY00
FY01
FY02

FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17

FY19
FY20

Source: CEIC, RBI, IIFL Research Source: CEIC, RBI, IIFL Research

February 2020 13
Budget track record: Credibility Challenge
Revised and actual revenues have declined due to
overestimation of GST revenues Estimates for capex are volatile vis-à-vis the actuals
(% of Budgeted Estimate) Revised Actual (% of Budgeted Estimate) Revised Actual
110 120
Gross Tax Revenue Capital Expenditure
100 110
100
90
90
80
80
70
70
60 60
50 50
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Source: Government Budget Documents, IIFL Research Source: Government Budget Documents, IIFL Research
Even actual total expenditure was lower than BE and RE for
last three years Subsidy to FCI is now delayed at least by one year
(% of Budgeted Estimate) Revised Actual (Rs. Bn.) Paid during the year (LHS) Paid in the yr incurred (RHS) (%)
110 1,500 100
Total Expenditure Subsidy payment to FCI
100 1,250 80
90 1,000
60
80 750
70
40
500
60 20
250
50
0 0
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Source: Government Budget Documents, IIFL Research Source: Government Budget Documents, IIFL Research. Note: FY20 data is based
on revised estimates

February 2020 14
Sector summary

Stocks affected
Sector Impact Key measures Positively Negatively
Agriculture Negative ● While this budget was touted as an opportunity for the government to implement Fertiliser
NBS in urea and begin transferring fertiliser subsidy directly to farmers, the companies
government has not implemented either of these key reforms. Besides, customs duty
on fertiliser inputs has also not been cut. All these are significant negatives for the
fertiliser industry.
● On the contrary, the Finance Minister said the government wants to change the
prevailing incentive regime, which encourages excessive use of chemical fertilisers.
She specifically emphasised encouraging organic and other innovative fertilisers. This
again is negative for the chemical fertiliser industry: urea as well as non-urea.
● The budgeted fertiliser subsidy for FY20-21 has been slashed by ~11% from Rs800b
for FY20 to Rs713b for FY21, with proportionately lower budgeted allocations across
both urea and non-urea fertilisers. Consequently, there is no progress on clearing the
past subsidy backlog, which according to industry estimates is seen ballooning to a
record ~Rs600bn by Mar-2020.
● Meanwhile, the food subsidy has been cut drastically (by ~Rs750bn for FY20), but this
appears to be funded via borrowings by the FCI from the NSSF.
● The NREGA allocation has been cut from Rs710bn to Rs615bn.
● Budgetary allocation for agriculture and allied activities stands at Rs1,548bn, up
marginally vs. last year’s BE (Rs1,515bn), but up significantly vs. last year’s RE
(Rs1,208bn). The reason last year’s RE was so sharply lower than the BE is mainly
because payouts under the PM-KISAN scheme were sharply lower than expected,
reportedly due to challenges in identifying beneficiaries.
● The agricultural credit target has been raised from Rs12 trillion to Rs15 trillion.
● Overall, we are disappointed at the lack of vision from the government with regard to
implementation of much-needed structural reforms such as urea decontrol and
encouragement for genetically-modified seeds.

February 2020 15
Sector summary

Stocks affected
Sector Impact Key measures Positively Negatively
AMCs Neutral ● Withdrawal of 80C benefits under the new personal tax regime – this would affect
equity flows as incentives for ELSS investments will be withdrawn. Although this is
negative, we do not see a risk at this point given the new tax structure is optional (and
not advantageous for a shift as per our calculations). Thus we see low risk to equity
AUM growth – Neutral
● Dividends likely to be taxed at the assesse / investors marginal tax rate. This could shift
the preference for schemes with growth option which have preferred tax treatment
(10% capital gain tax). No likely impact of AUM – Neutral
● Push for debt-ETFs consisting of government securities for retail investors – competition
to debt MF schemes – however shift is likely to be limited given lower return profile –
Neutral

Banks Positive ● Losses of merged banks: GOI would make amendments to the Income Tax Act to ensure PNB, UNBK, CBK,
that amalgamated PSU Banks are able to take the benefit of unabsorbed losses and INBK
depreciation of the amalgamating entities.
● Extending MSME restructuring window to March 31, 2021 (from March 31, 2020) FB, CUBK, KVB,
Regional banks who have high MSME exposure could continue to report low NPA from DCB
these accounts.
Neutral ● DICGC allowed to increase deposit insurance coverage to Rs0.5mn per depositor (from Equitas/ Ujjivan
Rs0.1mn currently) – This is positive for depositors, will not materially change anything
for banks.
● Divestments: Balance holding of GOI in IDBI Bank to be sold in secondary market
(47.11% as of 3QFY20).

February 2020 16
Sector summary

Stocks affected
Sector Impact Key measures Positively Negatively
Capital Neutral ● FY20 (RE) for total Capex indicated a 3% increase over FY20 (BE), to Rs3,489bn (13% L&T
Goods YoY). There is a marginal cut of 2% for housing & urban affairs, a 7% / 3% increase in
capex outlay for defence & railways while road sector was left unchanged.
● FY21 (BE) total capex is pegged to grow by 18% YoY to Rs4,121bn (2-Yr Cagr of 16%).
While this optically looks impressive in the current environment, Defence, Road (&
Highways) and Railways which contribute 64% towards the total capex, are budgeted
to see a 3%/ 14%/3%, respectively.
● Telecom sector is at #4 with 6% share and targeted to grow 422% YoY. Housing &
urban infra (5% share) is expected to grow 10% YoY. Atomic energy & Department of
Space contributing 8/7% each of total capex are expected to grow their capex by 16%
/ 7% respectively.
● From capex perspective rail, road, housing & urban infra and defence/ space / nuclear
are more meaningful and relevant drivers. Amongst these six, road, urban infra and
nuclear power are the only three buckets which are expected to grow by double digit.
This is less impressive vs. the expectation from the budget to drive significant thrust
on infrastructure spend. Scheme-wise – significant thrust seen in Amrut & smart cities
(40% YoY), housing (9%), water (15%), rural roads (40%) and irrigation (40%)
Marginally ● Within Railways, from the perspective of physical targets, we see thrust coming back L&T, KECI, KPP Titagarh,
Negative on construction of new lines and gauge conversion (growth of 67%/50%), while rail Texmaco
electrification target of 6000km is flat YoY. Doubling of lines and track renewals grow
at softer pace. Wagons (12,000) and coaches (4,000) are likely to drop by 8/19%.
● In Rupee terms, there is 4% drop in key segments of rail capex (60% of mix) after a
30% Cagr growth over FY18-20 (RE), despite a 3% increase in total rail capex in FY21
(BE). Track renewals. New lines and road safety (17% share) are expected to grow in
20-45% range, rest all segments decline in 10-18% range in FY21 (BE).

February 2020 17
Sector summary

Stocks affected
Sector Impact Key measures Positively Negatively
Capital Positive ● Solar pumpsets - Thrust on standalone solar pumps in farms and encourage Shakti Pumps, Kirl
Goods farmers to solarize their gird connected pumps brothers, VGRD

● Accelerated development of highways - Delhi-Mumbai Expressway and two other L&T

packages would be completed by 2023. Chennai-Bengaluru Expressway would
also be started.
Positive ● Expand national gas grid from 16200km to 27000km KPP, L&T, KECI (new
entrant)
Positive ● Thrust on capex in Data centre parks pan India KKC, Schneider
Electric, ABB, SIEM
Positive ● Old thermal power plant with high carbon emissions (above pre-set levels) will BHEL, L&T
be advised to shut down and look to replace those site with clean power plants
Positive ● MoEFC Will notify incentives for clean air for cities with population over 1 m – GEPIL, BHEL, L&T
allocate 4000cr as incentive for FY21 – FGDs award to get thrust in state gencos
Positive ● 148km long Bengaluru suburban train with an estimated cost of Rs186bn - 20% BHEL, KECI, L&T,
equity by center and facilitate upto 60% external funding BHEL
● More TEJAS type trains ABB Power Grids
(APPSIL), BHEL
● 4 nos of projects for Station redevelopment KECI, L&T
Marginally ● High speed train – Mumbai- Ahmedabad corridor will be pursued actively - L&T
negative comment did not sound encouraging on the pace of implementation give stiff
stance from Maha State government

February 2020 18
Sector summary

Stocks affected
Sector Impact Key measures Positively Negatively
Consumer Positive ● Thrust on Electronics manufacturing & supply chain in India - mobile phones, Dixon, Amber
Electricals electronics, semi-conductor packaging

Positive ● Increase in import duties on mobile phone components Dixon

- PCBA of mobile phones to have 20% duty vs 10% earlier.
- mobile phones ringer / vibrator and Display panel to attract 10% duty vs nil earlier
Marginally ● Increase in import duties on consumer electrical appliances from 10% to 20% Bajaj Electricals V. Guard – 15-
negative - Kitchen appliances - mixer/ grinders, coffee makers, cookers, toasters, ovens (~10% imports) 20% imports in
- Fans CDs
- Water heaters Crompton –
- Personal grooming products – hair removing appliances, hair/hand dryers mostly local Havells - less
● Increase in duties to help curtail imports in near term and rampant competition from sourcing than 15%
various organised and unorganized players. imports in
● Move will encourage more local assembly and sourcing, though interim increase in growing ECDs
cost increase may have to be absorbed in a weak market, if competitive pressure (PG & kitchen
remains high appliances)
Negative ● Increase in import duty on compressors for ACs & refrigerators – from 10% to 12.5% HAVL (Lloyds),
- Compressors are mostly imported due to limited manufacturing capacity in India, Amber,
so an industry wide impact on cost inflation Whirlpool
● Duty increased for commercial freezers from 7.5% to 15%

February 2020 19
Sector summary

Stocks affected
Sector Impact Key measures Positively Negatively
Cement Marginally ● Allocation for cement intensive scheme PMAY increased by 9%; allocation for road
negative sector increased by 11%; capital outlay for railways increased by 3%. These
increases are not encouraging enough, in our view, after a weak allocation growth
for the previous year also.
● No new announcements to boost housing demand.

Consumer Negative ● Basic customs duty on compressors of refrigerators and air conditioners has been Voltas, Blue Star
durables increased from 10% to 12.5%. and other
AC/refrigerator
manufacturers
Consumer Negative ● Cigarettes: Negative for ITC – NCCD increased to Rs44.5paisa/stick for all segments Bata ITC
discretionary for except Kings and Rs73.5paisa/stick for Kings. This results in a ~14% increase in total
& FMCG cigarettes tax per stick and in turn 5% downgrade to our EPS estimates.
● Footwear: Marginally positive for Bata – Increase in custom duty on imported
footwear from 25% to 35% to marginally benefit Bata as its products become more
price competitive.
Exchanges Neutral ● MCX – introduce CTT on indices and option contracts on goods – these are new
products on which trading is likely to start from FY21. No changes in existing CTT.
This was on expected lines – Neutral
● IEX – Reforms in gas market and likely announcement of a gas exchange
(transparent price discovery mechanism) – Positive
● BSE and NSE – Rupee Dollar derivative contracts to be traded in IFSC, Gift City –
Positive
● To setup an International Bullion Exchange in Gift City - Positive

February 2020 20
Sector summary

Stocks affected
Sector Impact Key measures Positively Negatively
Gas Positive ● Proposed to expand National Gas grid from 16,200kms to 27,000kms.
● Reforms to be under-taken to deepen the gas market.

Infra In-line ● Allocation to capital expenditure of Ministry of Road and Transport - up 15% to All road
Rs819.74bn. contractors
● Interest, dividend and capital gains for Sovereign Funds from infra investments done
until 2024 (with 3 year lock-in) is 100% exempt – positive for funding for infra projects –
specifically buyouts post completion, INVITs, ToT .

Life Mildly ● Introduction of the new tax regime for personal income tax rates proposes lower tax SBI Life
Insurance Negative rates in lieu of most of the deductions and exemptions available currently, including ICICI Pru Life
under section 80C related to investments in certain product classes such as insurance, HDFC Life
ELSS, PF, PPF etc. The new tax regime is optional but if adopted by majority of tax
payers, it may result in lower inflows for insurance savings products too under 80C. We
believe the number of taxpayers migrating to the new tax regime will be materially low
due to no material tax benefits compared to the current regime. Hence, it could be
marginally negative for life insurance companies if their premium growth gets impacted.
However, insurance products still remain tax free at the time of withdrawal/maturity
compared to other investment classes such as equity, debt, real estate or commodities.

February 2020 21
Sector summary

Stocks affected
Sector Impact Key measures Positively Negatively
Logistics Positive ● A National Logistics Policy is likely to be announced soon – Positive
● Government to provide viability gap funding for setting up of efficient warehouses in line
with WDRA norms; the projects can be taken either by central PSUs such as FCI and
CWC, or on PPP basis along with States (who would facilitate land) – Positive
● Indian Railways to setup a ‘Kisan Rail’ through PPP mode as well as refrigerated coaches
in Express and Freight trains to facilitate seamless cold supply chain at pan India basis –
Positive
● Focus on developing inland Waterways to facilitate movement of cargoes; Jal Dhubri-
Sadiya connectivity to be completed by 2022 - Positive
● Significant focus on infrastructure development which would optimise logistics costs;
plans to spend Rs1.70 lakh crore on transport infrastructure - Positive

Media Positive ● The reduction in basic customs duty to 5% from 10% on newsprint is a positive for print DB Corp, HT
media companies. Media, Jagran
Prakashan

Metals Positive ● Basic customs duty on Calcined Petroleum Coke has been reduced from 10% to 7.5%. Hindalco,
● Any positive outcome from the review of FTAs would be beneficial for steel industry. Vedanta and
NALCO for CPC
NBFCs Positive ● SARFAESI Act extended to NBFCs with Asset size of Rs1.0bn or more (Rs5bn earlier) and All HFCs, NBFCs
for loan size of Rs5mn and above (Rs10mn earlier). This will benefit a) NBFCs with an
asset size between Rs1-5bn and b) all NBFCs (including large ones) with exposures to
ticket sizes between Rs5-10mn.

Neutral ● The Partial Credit Guarantee Scheme will be revised. However, no details are available.

February 2020 22
Sector summary

Stocks affected
Sector Impact Key measures Positively Negatively
Oil & Gas Neutral ● The budget provides petroleum subsidy towards LPG and SKO for FY20 at Rs 386bn 3%
higher than the previous budget. For FY21, the subsidy amount has been raised by 6% to
Rs409 bn. However, within this, subsidy for LPG has risen 9.4% to Rs373bn while
provision for Kerosene has been reduced (perhaps as consumption is declining)
Negative ● The removal of Anti dumping duty ($27-$80/MT) on PTA, just after it was extended for RIL, IOCL
five years in June 2019, is negative.
● Reduction in custom duty on propane and butane from 5% to 2.5% Gujarat Gas
Positive ● It is proposed to expand the national gas grid from the present 16,200 km to 27,000 km CGD’s, GAIL
● Basic custom duty on Butyl Acrylate increased from 5% to 7.5%
BPCL
Ports Positive ● Plans to corporatise one major port and list the same subsequently; focus on bringing
more efficiency through use of technology on sea-ports – Positive

Power Neutral ● Proposal to replace all conventional meters with smart meters in 3 years - Positive Genus Power,
● Allocation of Rs220bn to power and renewable sector – this is inadequate in our view – Tata Power (Tata
Negative Solar)
● Under PM-KUSUM scheme – would provide solar pumps to 2m farmers; also plans to
enable farmers to setup grid connected solar generation capacity – Positive
● Proposal to setup large solar power capacity alongside rail tracks by Indian Railways -
Positive
● Lower corporate tax rate of 15% to new domestic companies engaged in electricity
generation – Positive
● Shutting of power plants which have completed their life and are emitting emissions
above the pre-set norms - Positive

February 2020 23
Sector summary

Stocks affected
Sector Impact Key measures Positively Negatively
Real Estate Negative ● The government was expected to take further steps to boost housing demand; however
in the budget it unveiled an alternative personal taxation regime, which does not allow
any tax benefits on Housing (interest/principal on loan u/s 24 and u/s 80C). This regime
comes at a time when government is pushing for affordable housing (under ‘housing for
all’) by offering tax sops, making it unclear as to what is the govt’s long term vision for
growth in the sector. This could as well have a negative impact sentimentally on the
buyer behaviour.
● The government has extended the benefits of affordable housing by 1 more year, to
both the developer (u/s 80 IBA, tax exemption to developer) and to first time home
buyer (u/s 80EEA, additional interest allowance). Homebuyers will have to continue in
the old regime of taxation to avail this benefit.
● The variation between the circle rate valuation and transaction valuation was earlier not
taxed upto 5%, this has been relaxed to 10%, and will marginally positive for secondary
market transactions.
● The abolishment of DDT and taxability in the hands of the investor takes away the Embassy
special status that REITs has (exemption from DDT). Unless specifically exempt later, REIT
dividend now is taxable in hands of unitholders and should negatively impact the post
tax yield for REITs.

February 2020 24
Sector summary

Stocks affected
Sector Impact Key measures Positively Negatively
Telecom Neutral ● For FY20, revised telecom receipts at Rs590bn appear optimistic. We expect rev
share receipts to be ~Rs170bn. Instalments from earlier auctions (before the
moratorium kicked in from Nov 2019) are estimated to yield Rs150bn. The
government apparently is planning to tackle the Rs270bn shortfall through AGR
case related receipts. The outcome of the modification petition on the AGR case in
the Supreme Court would lend more visibility on this. Having said that, achieving
this target appears to be a stretch unless telcos are asked to pay >20% of their AGR
liabilities upfront and non-telcos also chip in.
● For FY21, the government’s budgeted receipts are Rs1.33trn. This also appears
highly optimistic considering: 1) rev share receipts of Rs200-210bn (after assuming
20% industry revenue growth); and 2) moratorium on past spectrum payments.
Though fresh spectrum auctions are planned for FY21, they are unlikely to yield
large windfall to the government considering high reserve prices and telcos’
stretched balance sheet. Thus, the government appears to have made optimistic
assumptions on spectrum auctions and AGR receipts.
● The abolition of DDT and the parent being allowed to deduct dividend income from
its subsidiary/associate from its PBT as long as its own dividend payout is higher
than the dividend income received should result in Holdco discount narrowing.
Bharti Infratel does not get any set-offs since Indus is not a subsidiary (only 42%
stake). This dual DDT incidence will go away yielding ~Rs4bn savings/annum.
● Basic Customs Duty has been increased on mobile phone components such as PCB
assembly (from 10% to 20%), touch panel and display assembly (0% to 10%). This
may result in slightly higher handset prices.

February 2020 25
Disclosure : Published in 2020, © IIFL Securities Limited (Formerly ‘India Infoline Limited’) 2020

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February 2020 26
A graph of daily closing prices of securities is available at http://www.nseindia.com/ChartApp/install/charts/mainpage.jsp, www.bseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes.
(Choose a company from the list on the browser and select the “three years” period in the price chart).

Name, Qualification and Certification of Research Analyst: Abhijit Akella (PGDM), Abhishek Murarka (PGDM), Abhishek Sharma (PGDM), Akul Broachwala (Chartered Accountant, CFA), Ameya Karambelkar
(PGDM), Amit Tiwari (MBA), Anupam Gupta (PGDBM), Arash Arethna (PGDM), Avi Mehta (PGDBM), Balaji Subramanian (MBA), Devesh Agarwal (PGDBM), G.V. Giri (MBA), Harshvardhan Dole (B.Tech, PGBDA), J.
Radhakrishnan (CWA, CFA), Joseph George (Chartered Accountant, Chartered Financial Analyst), Kunal Shah (PGDM), Mohit Agrawal (Chartered Accountant), Percy Panthaki (Chartered Accountant), Pratik Chheda
(Chartered Accountant), Rahul Jeewani (PGDM), Renu Baid (MMS - Finance), Rishi Jhunjhunwala (Chartered Accountant), Rishi Masand (MS Finance), Sameer Gupta (PGDM), Suraj Chheda (PGDM), Swapnil Karkare
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Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.
SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.
Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.
Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 227 stocks rated in the IIFL coverage universe, 101 have BUY ratings, 8 have SELL ratings, 85 have ADD ratings and 32 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as
comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there is a
significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such
demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in certain
industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social conditions.
This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.

February 2020 27