Implications of the Union Budget for specific sectors

From a broad perspective the cut in corporate taxes is a positive for most Indian companies. But this will happen over 5 years and there will be no change in the MAT. At a macro level, defense will be the big story and infrastructure points like power and roads will see huge investment push from the government. Similarly, the cut in corporate taxation from 30% to 25% is also a major positive for corporates across the board. But service tax net has been expanded and the rate of service tax has been raised from 12.36% to 14%. Also excise duty has been raised by 50 basis points which will add to cost of manufacture.

Defense Sector:

That could be the one big story from the Union Budget. The budget has announced an allocation of Rs.2.47 lakh crore for defense but has also included a caveat of focusing on more domestic manufacture. The companies like BEL, L&T, Bharat Forge and Tata Power which are active players in the defense sector are likely to benefit from this announcement.

Defense will be long term plays on this market. Typically defense contracts involve proto-typing which is time consuming and hence any benefits will be realized over the long term. But companies like L&T, BEL, Bharat Forge, Tata Power may be good stories from a long term perspective.

Cigarettes:

This sector has normally been at the receiving end of excise imposition in most budgets. This budget was especially stringent. Excise duty on small cigarettes below 65mm was sharply hiked by 25% while the excise duty on tobacco was raised from Rs.60 per kg to Rs.70 per kg. Not surprisingly, cigarette manufacturers like ITC, VST and Godfrey Philips were the worst hit in the market.

Pure cigarette plays may find the going tough. A more broad based play like ITC will be better placed over a longer term, as it leverages the distribution network of cigarettes to make a mark in retail.

Media:

For media companies it was all about coming into the service tax ambit. Media companies like Zee, Dish TV, TV Today were in the negative list of service tax. These companies will no longer remain outside the ambit of service tax. What is more, they will now be required to pay service tax at the enhanced rate of 14% from hereon. This would impact broadcasters like Zee, Sun TV who will see an impact on their profits.

Media companies are likely to face pressure in the short to medium term

Automobiles:

The impact on automobiles will be overall positive because of the budget. The budget has waived excise duty on electric and hybrid vehicles to encourage auto companies to invest more in green and environment friendly cars. Companies like M&M will benefit from this measure. Also the import duty on LCVs and HCVs has been raised from 10% to 40% which will be positive for domestic auto manufacturers. Positive for stocks like Ashok Leyland and Tata Motors.

The HCV stocks like Tata Motors and Ashok Leyland may be beneficial from the short term and a long term perspective. Cars will have to focus more on greener cars. M&M may be a long term value play.

Banks:

The budget has something for private and public sector banks. The government has promised to shift aggressively towards cashless transactions by incentivizing debit card and credit card transactions. This is a boost for private banks like ICICI Bank, Axis and HDFC Bank who have the best infrastructure to capitalize on this emerging trend. Banks like Axis have also benefited from the merger of the FPI and FDI definitions as it will give them more headroom for expanding foreign stake. PSU banks may be a more mixed game. The autonomous bank board may pave the way for bank holding companies and will eventually move towards making the banks more professionally run. But the allocation of Rs.7900 crore for bank recapitalization is grossly inadequate.

If the tech-based financial inclusion takes off, the private banks may be the bigger beneficiaries. PSU banks may be trading at lower P/Es but their primary goals of capitalization and NPA management is not adequately addressed in this budget.

Finance companies:

The positive announcement was the extension of the SARFAESI Act to NBFC companies with size in excess of Rs.500 crore. This will benefit two categories of companies. First are the large government sponsored institutions like REC, PFC and IDFC. Although they will now be on par with banks on debt recovery, their borrowers are also government bodies and hence actual implementation may be difficult. On the other hand private NBFCs like Shriram Transport, M&M Finance and Sundaram Finance will be better positioned. They will be able to make the best of the SARFAESI Act to improve their NPA status even better.

Going ahead, the focus should be more on private NBFCs rather than government sponsored NBFCs.

Real Estate:

The Budget has quite a few things going for real estate companies. Housing for all and a Rs.14,000 crore outlay for roads is a major push for construction companies. Also the decision to give REITs pass-through status is a major push for real estate. Companies that are short on cash can now leverage the REIT method where real estate assets can be packaged and hived off to REITS to overcome the problem of liquidity. If the REIT is properly implemented, then companies like Unitech, HDIL and DLF will benefit substantially.

If REITS address the problem of liquidity, it could be a turnaround for real estate companies. It would be better to wait out the implications before taking a call on real estate stocks.

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