Union Budget – Key Themes and Implications for specific Stocks

For Indian companies, the implications will be based on 6 broad themes…

Converging the FDI / FPI story

The budget has made an attempt to remove the distinction between FDI and FPI limits. This will provide the much needed leeway for banks like IndusInd, Axis Bank, Yes Bank and Federal Bank to raise their foreign holdings. Also Axis had a problem in the MSCI inclusion due to the absence of any FII limit. With this convergence, all the private banks will be eligible for inclusion in the MSCI. This would make a difference in terms of ETF demand for these stocks as their buying is normally determined by their inclusion and weightage in the MSCI.

This budget makes a compelling story for private sector banks as an outcome of the FDI/FPI convergence story as well as the focus on moving towards a cashless payment system.

Financial Inclusion via JAM

The budget is very strong on encouraging financial inclusion with a combination of JanDhan, Aadhar and Mobile. This is going to open many doors of opportunity. Payment banks, once licensed, will be able to open up the vast rural market and service people at the bottom of the pyramid. This will be a major positive for companies like Bharti Airtel as well as companies like Hindustan Unilever which are best positioned to serve the bottom of the pyramid. This would be a long term story riding on the financial inclusion theme. This trend will also be positive for companies like SKS Micro and Shriram Transport Finance which will be able to leverage the power of technology to expand their reach at minimal cost.

Budget is big on automobiles

The budget has a lot of positives for automobiles, especially those in the consumer auto segment. Companies like Tata Motors will benefit from the higher customs duties on LCV/HCV. The scrapping of excise on green cars will be a positive for stocks like M&M which has a strong focus on green cars. But the biggest benefit could come from the finance minister putting more money in the hands of the people. Higher exemptions and lower inflation has improved purchasing power and that should translate into greater demand for consumer autos.

Streamlining Regulation

The decision to merge the FMC into SEBI will be a major positive for commodity markets as it will lead to better regulation and safer markets. MCX, which has faced serious problems of credibility after the NSEL episode, will be a major beneficiary of this merger. Many financial companies and brokers will now be in a position to offer a more unified offering of equities, derivatives and commodities as also be in a position to leverage on the synergies of these 3 sectors. It may be interesting to focus on brokers who are in a position to leverage on these synergies.

A silent push for IT sector

There has been a push to make IT services more competitive. The tax rate on royalties for technical services has been cut from 25% to 10%. Thus lower tax payable on royalties will make Indian IT companies more competitive. For IT companies a lot of concern is over the volatility in the rupee. Decisions like convergence of FPI and FDI as well as a more friendly regime for FPIs are positives. This coupled with penalties on black money will mean that the rupee will remain stable and any move will be calibrated rather than sudden. This will help IT companies better plan their forex exposures. The boost to small and medium IT companies will also form a strong support structure for the IT industry in India. Focus on companies like Infosys and HCL Tech for positive vibes.

Renewable Energy versus traditional energy

The government has already indicated that the focus will be on renewable energy and this budget has taken the first steps in that direction. A creation of the NIIF with a corpus of Rs.20,000 crore is a major push for renewable energy. The doubling of coal cess is a clear indication that the government wants to promote is renewable energy at the cost of thermal energy, which is coal based. The FM has also announced a massive 5-fold expansion of the renewable energy capacity from 33,000 MW to 175,000 MW by 2022. This could create a renewable energy opportunity worth $160 billion. The moral of the story is that the opportunity from hereon is going to be renewable energy at the cost of dirty energy. Not surprising that traditional power generators and equipment took a hit. It may be time to look at specific plays. Stocks like Suzlon may be interesting, provided it can get its financials in order. Like auto, power companies need to start thinking green.

Final Word:

What exactly was the enduring theme of the Union Budget 2015-16? To be fair it can be seen as the first step towards 3rd generation reforms. The first generation commenced in 1991 with focus on duty cuts, privatization and triggering private enterprise. The 2nd generation reforms began a decade ago with big thrust on infrastructure and foreign investment. The 3rd generation reforms will be built on 3 parameters. Let me elaborate.

The first will be an attempt to reach out to the bottom of the pyramid. That is when the real impact of reforms will be felt. The second will be to create a world class physical, manufacturing and human skill infrastructure. The third parameter will be creating an industry and agriculture that is in tune with the demands of the future. It will be appropriate to say that this budget may have set out by taking the first step towards 3rd generation reforms.

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