The biggest achievement of this budget is that it has been able to maintain the fiscal deficit target within its limits despite the twin pressures of higher outlays and greater investment. That is the big macro takeaway for companies. Many key sectors had some key expectations from the Union Budget and they need to be evaluated in this background.
The tax rate has been left untouched in this budget. Not surprising because this continues to be the largest source of revenue for the government. This has been slightly disappointing because the cut in corporate tax rates was supposed to be initiated this fiscal. However, there are two things that stand out. Firstly, the exemptions look set to go entirely by 2020 and hence that may coincide with the reduction of corporate tax. Secondly, for new companies, the government is willing to offer the benefit of 25% tax right away if they are willing to forgo their tax benefits.
There seems to be a clear preference to tax luxury cars at a penal rate and that is unlikely to go down well as they are the high margin products. Apart from this penal tax rate on luxury cars, the budget also proposes an infrastructure cess on companies across the auto space. Most of these higher taxes will be passed on to consumers putting further pressure on mid and small sized car sales. On the other hand, for two wheelers and small cars, as well as tractors, the massive increase in rural spends is a major positive. Thus, the overall impact on the sector is likely to be mixed.
The disappointment over a lower than expected allocation of Rs.25,000 crore for bank recapitalization is likely to be a negative for banks. However, there are 2 major positives for banks that are not all that visible. Firstly, the government has in-principle agreed to reduce its stake in PSU banks to below 50%. IDBI will be the test case and if it succeeds then the plan may extend across many more PSU banks. Secondly, the pass-through benefit for asset reconstruction companies (ARCs) is a major positive for banks as it is likely to help banks to better monetize their resources. But above all, the fiscal responsibility of maintaining fiscal deficit at 3.5% next year has meant that yields have crashed in the market. A fall in debt yields means that most banks will have book profits on their bond books. Overall it looks to be marginally positive for banks.
The exemption to real estate investment trusts (REITS) from the imposition of dividend distribution tax is a major positive for real estate stocks. Firstly, it will enable many real estate companies to better monetize their real estate properties. Secondly, it will enable real estate to be more elegantly packaged as a distinct asset class for investors. Another benefit for Real Estate companies is the higher benefit for low to medium cost housing from the Section 24 perspective.
This is likely to be the big beneficiary from the higher rural spend. Most FMCG companies have been clamoring with the government for greater rural spending. They have probably got more than they bargained for. Of course, ITC has something to be worried about as once again the company has been at the receiving end as far as excise duties on cigarettes is concerned.
This was one sector that was positive for the day. Apart from the benefit of higher rural spending, the NBFCs have been put at par with banks as far as benefits of making provision for doubtful assets are concerned. This was a demand of the NBFCs for a long time and this should be positive for the NBFCs.
Oil & Gas:
The budget has promised a more favorable policy for deep sea drilling of oil and gas. For oil extractors, the major negative was that there was a shift to calculating duty on an ad valorem basis. This has been negative on the back of the already weak oil prices globally.
Overall, there has been an attempt by the government to tax the low hanging fruits like petrol, diesel, ATF and cigarettes. That was bound to happen, anyways. In a year when the government has been trying to meet its fiscal deficit targets despite higher allocations, some tax contribution was inevitable. On balance, the positives of higher rural spending and infrastructure should outweigh the negatives.
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