St r at egy Not e

Union Budget 2014-15

Good to begin with
ThisreportispublishedbyIIFLIndiaPrivateClientsresearchdesk.IIFLhasotherbusinessunitswithindependentresearchteamsseparatedby'Chinesewalls'cateringtodifferentsetsof
customershavingvaryingobjectives,riskprofiles,investmenthorizon,etc.Theviewsandopinionsexpressedinthisdocumentmayattimesbecontraryintermsofrating,targetprices,
estimatesandviewsonsectorsandmarkets.
AmarAmbani
HeadofResearch,IIFL
research@indiainfoline.com July10,2014
Themostanticipatedeventafterarecordelectionvictoryisnowbehindus.Mr.ArunJaitleysBudgetspeech
evoked confused response with wild swings during and after the Budget presentation. There was a feeling
among certain sections of the market that bolder reforms were warranted given the strength of this
governmentsmandate.AkintotheRailwayBudget,thedetailsweremissedalthoughthebroadpicturewas
conveyedreasonablywell.

Grosstaxrevenueprojectionwascutby~Rs15,000crorecomparedtointerimBudgetnumbersIndirecttax
revenue projected to grow by 20.3% yoy and direct tax by15.7%. While customs and service tax projections
appear reasonable, excise duty growth projections at 15.4% appear steep. On the direct tax front, personal
income tax projection has been substantially reduced (by Rs22,200 crore) compared to interim Budget, but
stillappearhigh.Perhaps,thegovernmentexpectsadditionalincomefromadvancerulingsettlementincase
of individual taxpayer disputes. Otherwise, there is a risk of falling short of the tax revenue target set by
Rs10,000crore.

Along expected lines, spending on Plan expenditure was substantially increased to support growth. Plan
expenditure growth is targeted at 21% to be spent towards agriculture, capacity creation in health and
education, rural roads, national highways, rail network expansion, among others. Surprisingly, nonPlan
expenditure was not projected to grow at a slower rate than set during the interim Budget. Nevertheless,
nonPlangrowthismuchlowerthanwhatisbeingspentonthePlanside.Subsidieshavebeenpeggedat2%
of GDP and only marginally higher than the interim Budget petroleum subsidy seems to be under control
with continued diesel deregulation and assuming gradual increase in LPG and Kerosene prices. Food subsidy
targetisreasonablebutfertilizersubsidylooksunderprovided,whichcouldresultinaworkingcapitalcrunch
forthesector.OnMGNREGA,theministeraimstoputthismoneytomoreproductiveuse.

To make up for the 13% yoy growth in total expenditure and Rs9,000 crore shortage in net tax revenue,
revenuefromeconomicactivities,particularlytelecomauctionsandothernontaxrevenuetargetshavebeen
raised higher. Nontax revenue is estimated to be 18% of the total revenue composition, Rs32,000 crore
higherthaninterimBudgetnumbers.Bydoingso,theFinanceMinisterstucktothefiscaldeficittargetof4.1%
thathispredecessorhadset.Thisiscertainlyastretchedtargetandcouldbemissedby20basispoints. Yet,
that would not be seen as an underachievement. The revenue deficit is pegged atRs378,248 crore, 2.9% of
GDP.

With only a few weeks to prepare, the FM announced some important steps like opening up FDI in defence
and insurance sectors. Increasing the capital budget for defence by Rs5,000 crore was also an important
move.

A major step undertaken was to boost financial savings and provide some relief for negative real returns in
theeconomy.AsopinedinourpreBudgetnote,theMinisterraisedindividualtaxslabstoRs2.5lakhsandalso
hikedthedeductionunderSection80CtoRs1.5lakhs.Toboostsavingsfurther,theannualceilingonPPFwas
raisedandKisanVikasPatraandNationalSavingsCertificatewithinsurancecover,wereintroduced.

On the direct tax front, status quo in corporate taxation came as a big relief to many. Inverted indirect tax
structurewasalsopartlyaddressedintheBudget.

2
Union Budget 2014-15
The Budget was particularly positive for infrastructure, housing and agriculture. While the FM touched upon
the need for capital infusion in PSU banks, the figure of Rs13,400 crore allocated this year was much lesser
thanRs15,800crorethepreviousyear.Whilebankswereaskedtolendtoinfraprojectsforthelongterm,it
remains unclear whether their long term borrowings attract lower CRR and SLR norms. While end of
retrospective taxation was needed to build confidence for investing in India, nothing concrete came in the
Budget.

The biggest negative from a capital market viewpoint was the increase in rate of long term capital gains
(LTCG)indebtmutualfundsto20%andtheperiodforLTCGraisedto3yearsinsteadof1year.

The Budget lays a broad roadmap for economic recovery and attempts to set in order the accounts, both in
terms of deficit and quality of spending. The actual implementation on the ground will propel the economy
andthemarkettoaneworbit.

Otherhighlightsofthebudget

Convergence with International Financial Reporting Standard (IFRS) by Adoption of the new Indian
AccountingStandards(2ndAS)byIndianCompanies.
More productive, asset creating and with linkages to agriculture and allied activities wage employment
wouldtobeprovidedunderMGNREGAruraldevelopment
Agriculture Long Term Rural Credit Fund to set up for the purpose of providing refinance support to
CooperativeBanksandRegionalRuralBankswithaninitialcorpusofRs5,000crore
IntroductionofuniformKYCnormsandinterusabilityoftheKYCrecordsacrosstheentirefinancialsector.
Introduceonesingleoperatingdemataccount
Uniformtaxtreatmentforpensionfundandmutualfundlinkedretirementplan
Incomearisingtoforeignportfolioinvestorsfromtransactioninsecuritiestobetreatedascapitalgains.
Concessionalrateof15%onforeigndividendswithoutanysunsetdatetobecontinued.
The eligible date of borrowing in foreign currency extended from 30
th
June 15 to 30
th
June 17 for a
concessionaltaxrateof5%oninterestpayments.Taxincentiveextendedtoalltypesofbondsinsteadof
onlyinfrastructurebonds.

Incometaxslabsfor201415
Taxslabs Individualtill60yrs
SeniorCitizenabove
60yrsandbelow80yrs
SeniorCitizenabove
80yrs
Notax 0Rs250,000 0Rs300,000 0Rs500,000
10% Rs250,000500,000 Rs300,000500,000
20% Rs500,0001,000,000 Rs500,0001,000,000 Rs500,0001,000,000
30% AboveRs1,000,000 AboveRs1,000,000 AboveRs1,000,000

3
Union Budget 2014-15
BudgetataGlance
Rsbn 20122013A 20132014BE 20132014RE 20142015BE
1.RevenueReceipts 8,792 10,563 10,293 11,898
2.TaxRevenue(nettoCentre) 7,419 8,841 8,360 9,773
3.NontaxRevenue 1,374 1,723 1,932 2,125
4.CapitalReceipts$ 5,311 6,090 5,612 6,051
5.RecoveriesofLoans 151 107 108 105
6.OtherReceipts 259 558 258 634
7.BorrowingsandotherLiabilities* 4,902 5,425 5,245 5,312
8.TotalReceipts$ 14,104 16,653 15,904 17,949
9.NonplanExpenditure 9,967 11,100 11,149 12,199
10.OnRevenueAccountofwhich, 9,143 9,929 10,277 11,146
11.InterestPayments 3,132 3,707 3,801 4,270
12.OnCapitalAccount 824 1,171 872 1,053
13.PlanExpenditure 4,136 5,553 4,755 5,750
14.OnRevenueAccount 3,292 4,433 3,719 4,535
15.OnCapitalAccount 844 1,121 1,037 1,215
16.TotalExpenditure 14,104 16,653 15,904 17,949
17.RevenueExpenditure 12,435 14,362 13,995 15,681
18.Grantsforcreationofcapitalassets 1,157 1,746 1,382 1,681
19.CapitalExpenditure 1,669 2,291 1,909 2,268
20.RevenueDeficit 3,643 3,798 3,703 3,783
%ofGDP (3.6) (3.3) (3.3) (2.9)
21.EffectiveRevenueDeficit 2,486 2,052 2,321 2,102
%ofGDP (2.5) (1.8) (2.0) (1.6)
22.FiscalDeficit 4,902 5,425 5,245 5,312
%ofGDP (4.8) (4.8) (4.6) (4.1)
23.PrimaryDeficit(2011) 1,770 1,718 1,445 1,042
%ofGDP (1.8) (1.5) (1.3) (0.8)
*IncludesdrawdownofCashBalance
$DoesnotincludereceiptsinrespectofMarketStabilizationScheme

4
Union Budget 2014-15
Sect or al impact

Agriculture
KeyAnnouncement Impact
Toformulatenewureapolicy Positiveforallfertilizerplayers
Toencouragenewinvestmentandcapacityadditioninthe
chemicalsandpetrochemicalssector,BCDonreformatehas
beenreducedfrom10%to2.5%
Positiveforallchemicalsandpetrochemicalplayerslike
SupremePetrochem,AtulLtd,CoromandalInternational
Targeting4%sustainablegrowthinagriculture.Various
initiativesannouncedtoboostagriculturesectorsoilhealth
cardforfarmers,mobilesoiltestinglabs,2newagriand
horticultureuniversities,NationaladaptationfundandAgri
techinfrastructurefund
Positiveforallfertilizer,seedsandagrochemicalplayers
TargetofRs8tnhasbeensetforagriculturecreditduring2014
15togiveeasyaccessofloanstofarmers
Positiveforallfertilizer,seedsandagrochemicalplayers
Rs10bnprovidedforPradhanMantriKrishiSinchayeeYojna
forassuredirrigationtomitigatetheriskofdeficientrains
PositiveforJainIrrigation,FinolexIndustries,Supreme
Industries,AstralPolytechnik

Auto
KeyAnnouncement Impact
RetainedexcisedutycutsannouncedinInterimbudgetuntil31
Dec2016
Onexpectedlines,nomajorstockreaction
Increaseincustomsdutyflatrolledsteelproductsfrom5%to
7.5%
Marginallynegativeforallautomanufacturers
CapitalgainstaxonFMPs
NegativeforMSIL,BajajAuto,HeroMotocorpwhichhold
significantamountsinFMPs
Concessionalrateoftaxof15%ondividendreceivedbyan
Indiancompanyfromitsforeignsubsidiaryproposedto
continuewithoutanysunsetdate
PositiveforTataMotors
Extensionofinterestsubventionwithrespectfarmloans Positiveforruraldemand.BeneficialforM&M,HeroMotocorp

Banking&FinancialServices
KeyAnnouncement Impact
SeriousintenttocontainFiscalDeficitat4.1%andnetmarket
borrowingatRs4.6tnforFY15
Positiveforbanksingeneralasrestrainedborrowingswillnot
exertupwardpressureonbankingsystemliquidityandbond
yields
AllocatedRs134bnforPSUBanksrecapitalisation;though
higherascomparedtotheinterimbudget,itislowerthan
marketexpectations.Further,noconcreteroadmapprovided
forlongtermcapitalinfusionfromgovernment.
NegativeforPSUBanksespeciallyforthosewithlowTier1
capitalsuchasCentralBank,UCOBank,DenaBank,Allahabad
Bank,VijayaBank,UBI,etc
Bankstobepermittedtoraiselongtermfundsforlendingto
infrastructuresectorwithminimumregulatorypreemption
suchasCRR,SLRandPSL
PositiveforPSUbanksandprivatecorporatelendersasit
wouldeaseALMrisksandimproveprofitabilityininfralending.
MajorpositiveforIDFCwhichintheprocessofconvertinginto
abankandhasalargeinfraexposure.
Banksencouragedtoextendlongtermloanstoinfrastructure
sector
PositiveforinfrafinancingcompaniessuchasPEC,REC,PFS,
SREI,etcasbankfundingcouldbecomemorecompetitive.
SixnewDebtRecoveryTribunalsareproposedtobesetupfor
NPAresolution
PositiveforPSUBanksingeneral
Taxdeductionforinterestpaidonhousingloanforaself
occupiedpropertyraisedtoRs2lacsandvariousmeasures
announcedtoboostdevelopmentoflowcostaffordable
housing
PositiveforHFCssuchasHDFC,LICHousing,IndiabullsHousing
Fin,RepcoHomeFin,GruhFinanceandPSUBanksingeneral

5
Union Budget 2014-15
KeyAnnouncement Impact
IncreaseinFDIlimitinInsurancesectorfrom26%to49%
Wouldaddresslongtermcapitalrequirementsforinsurance
companiesandunlockvalueforIndianpromoters.Positivefor
MAXIndia,RelianceCapital,HDFC,ICICIBank,SBI,Bajaj
FinanceandKotakBank
RBItocreateaframeworkforlicensingsmallbanksandother
differentiatedbanks.
PositiveforNBFCsthatareaspiringforabankinglicense
Measurestakentoreviveexecutionandinvestmentsinthe
powersector1)stressonincreasingavailabilityofcoal2)
extensionof10yeartaxholidayforundertakingsthatbegin
operationsbyendFY173)variouscustomandexcisebenefits
announcedforrenewableenergysector
Positiveinparticularforpowerfinancingcompaniessuchas
PFC,REC,PFSandSREIInfra

CapitalGoods
KeyAnnouncement Impact
10yeartaxholidayextendedtotheundertakingswhichbegin
generation,distributionandtransmissionofpowerby31
st

March17
Positiveforpowertransmissioncompanies.Wouldbenefit
companieslikeKEC,JyotiStructures,KalpataruPower,Alstom
T&D
IncreaseinFDIindefenceequipmentmanufacturingfrom26%
to49%
PositiveforBEL,AstraMicrowave,L&T,BharatForge
BCDonmachinery,equipments,etc.requiredforsettingupof
solarenergyproductionprojectsreducedto5%.
PositiveforBHEL,Thermax
BCDreducedfrom10%to5%onforgedsteelringsusedinthe
manufactureofbearingsofwindoperatedelectricity
generators
PositiveforSuzlon
Excisedutyreducedfrom12%toNilonforgedsteelringsused
inthemanufactureofbearingsofwindoperatedelectricity
generators
PositiveforSuzlon
BCDisexemptedonspecifiedpartsofLCDandLEDpanelsfor
TVs.
PositiveforcompaniesVideocon,MircElectronics
Rs5bnprovidedforUltraMegaSolarPowerProjectsin
Rajasthan,Gujarat,TamilNadu,AndhraPradeshandLaddakh
PositiveforBHEL,SolarIndustriesLtd,Thermax
Rs5bnforDigitalIndiatoprovidebroadbandconnectivityand
otherITfacilitiesatvillagelevel.
PositiveforFinolexCables,SterliteTechnologies

Cement
KeyAnnouncement Impact
Emphasisoninfrastructuredevelopment:Investmentof
Rs380bnonnewroads,housingforallby2022,constructionof
newports,newairports,ghatdevelopmentandsmartcities
Positiveforthesector
Changeinexcisedutyoncoal Neutralforthesector;Minimalimpactoncost

6
Union Budget 2014-15
FMCG
KeyAnnouncement Impact
CustomdutyonPalmoilFattyDistillatereducedfrom7.5%to
Nilandcrudeglycerinefrom12.5%toNilforsoaps
manufacturing
PositiveforHULandGCPL
Excisedutyoncigarettesincreasedby72%forcigarettesof
lengthnotexceeding65mmandby11%21%forcigarettesof
otherlengths.Similarincreasesareproposedoncigars,
cherootsandcigarillos
NegativeforVSTIndustries,GodfreyPhillips,ITC.Webelieve
ITCcouldlessentheimpactbyreducingcontributionof64mm
cigarettes(whichiscurrentlylowerat~9%comparedtoother
players(VST~40%+).
Excisedutyincreasedfrom12%to16%onpanmasala,from
50%to55%onunmanufacturedtobaccoandfrom60%to70%
onjardascentedtobacco,gutkhaandchewingtobacco
PositiveforcigarettemanufacturerslikeITC,VSTIndustries,
GodfreyPhillips
Reductioninexciseonfoodprocessingunitfrom10%to6% PositiveforNestle,HUL,BritanniaandGSKConsumer
Excisedutyreducedfrom12%to6%onfootwearofretailprice
exceedingRs500perpairbutnotexceedingRs1,000perpair.
FootwearofretailpriceuptoRs500perpairwillcontinueto
remainexempted
PositiveforBata,LibertyShoes
Customsdutyonhalfcutorbrokendiamondsincreasedfrom
NILto2.5%andoncut&polisheddiamondsandcolored
gemstonesfrom2%to2.5%
NegativeforTBZ,GitanjaliGems,PCJeweller

Infrastructure
KeyAnnouncement Impact
10yeartaxholidayextendedtotheundertakingswhichbegin
generation,distributionandtransmissionofpowerby31
st

March17
Positiveforallcompanies,willincreaseorderinflow
Bankswillbeallowedtogivelongtermloanstoinfrastructure Positiveforallcompanies,wouldincreasecapitalavailability
InfraREIT Positiveforallcompanies,wouldincreasecapitalavailability
16newportprojectsareproposedtobeawardedthisyear
withafocusonportconnectivity
PositiveforportcompanieslikeAdaniPort
PresentcorpusofPooledMunicipalDebtObligationFacility
enlargedtoRs500bnfromRs50bn
PositiveforcompaniesinthewatersegmentlikeVaTech,L&T,
Thermax
Rs1bnprovidedforMetroProjectsinLucknowandAhmedabad PositiveforcompaniesforRelianceInfra,Voltas,Siemens,L&T
InvestmentofRs378.8bninNHAI,TargetofNHconstructionof
8500kmincurrentfinancialyear,Rs143.9bnprovidedforrural
roadsdevelopment
PositiveforroadconstructioncompanieslikeIRB,JKIL,L&T

IT
KeyAnnouncement Impact
DDTtobepaidongrossdistributedprofits
Tomarginallyimpactcashflowsofsectorcompaniesasmany
ofthemhaveahealthypayoutpolicy
HighertaxabilityontransferofMFunitsotherthanequity
orientedfunds1)longtermcapitalgainstaxincreasedto20%
from10%2)holdingperiodforqualifyingaslongtermcapital
gainsincreasedto36monthsfrom12months
MarginalnegativeforthesectorasITcompanieshave
significantliquidinvestments,apartofwhichcouldbeinto
suchMFunits.

Media
KeyAnnouncement Impact
Servicetaxintroducedonrevenuefromadvertisementsin
broadcastmedia,isbeingextendedtocoversuchsaleson
othersegmentslikeonlineandmobileadvertising.
Negativeforallthecompanies
Saleofspaceforadvertisementsinprintmediahoweverwould
remainexcludedfromservicetax
PositiveforprintmediacompanieslikeJagranPrakashan
CommunityRadioStationstobeincreasedfrom400to600
PositiveforradiobroadcastingcompanieslikeEntertainment
Network

7
Union Budget 2014-15
Metals&Mining
KeyAnnouncement Impact
RationalisationofcustomsdutyonMetCoal.ReducedCVD
from6%to2%andincreaseBCDfromnilto2.5%
PositiveforsteelmanufacturerslikeTataSteel,SAIL,JSWSteel
andJSPL
RationalisationofcustomsdutyonthermalCoal.CVD
maintainedat2%andincreaseBCDfrom2%to2.5%
WillbemarginallynegativeforplayerslikeHZL,Hindalco,
NALCO
BCDonstainlesssteelflatproductstoincreasefrom5%to7.5% PositiveforplayerslikeJindalStainless
Exportdutyonbauxiteincreasedfrom10%to20%
PositiveforSesaSterlite,NegativeforGMDC,Ashapura
Minechem
BCDoncoaltarpitchreducedfrom10%to5%.
MarginallypositiveforaluminiumproducerslikeSSLT,
Hindalco,NALCO
CleanEnergyCessleviedoncoal,ligniteandpeatincreased
fromRs50/tontoRs100/ton.
WillbemarginallynegativeforplayerslikeHZL,Hindalco,
NALCO,HZL
RoyaltyratestobeincreasedthroughMMDRActwhichhas
beenpendingsince2012
Negativeforallplayers
Largeallocationtoroadconstruction Positiveforthesector
Concessionalrateoftaxof15%ondividendreceivedbyan
Indiancompanyfromitsforeignsubsidiaryproposedto
continuewithoutanysunsetdate
PositiveforHindalco

Oil&Gas
KeyAnnouncement Impact
ProductionandexploitationofCoalBedMethanereserveswill
beaccelerated
PositiveforRIL,ONGC
AllocationofRs634bnforpetroleumsubsidy
Looksreasonableiftheannouncedreformsondieselpricede
regulationcontinuetobeimplemented
UsageofPNGtoberapidlyscaledupinaMissionmode PositiveforIGL,GujGas
BasicCustomsdutyonreformateisbeingreducedfrom10%to
2.5%.BasicCustomsdutyonpropane,ethane,ethylene,
propylene,butadieneisbeingreducedfrom5%to2.5%
MarginallypositiveforRIL
ProposaltodeveloppipelinesusingappropriatePPPmodels PositiveforGAIL,GSPL
RemovalofcustomsandexcisedutiesonLPGfornondomestic
exemptedcategory
Pricestocomedownfornonsubsidizedcylinders,Impactis
neutralforthesector

RealEstate
KeyAnnouncement Impact
IncentivisingREITsandgrantingtaxpassthroughstatusto
avoiddoubletaxation
PositiveforDLF,PeninsulaLand,SobhaDev,PhoenixMills
AllocationofRs40bnforNationalHousingBanktoprovide
affordablehousing
PositiveforlowcosthousingdeveloperslikeHDIL,Unitech,
Puravankara
Deductionlimitoninterestonhousingloanraisedfrom
Rs150,000toRs200,000
Positiveforallrealtyplayers
Developingonehundredsmartcities Positiveforallrealtyplayers

Telecom
KeyAnnouncement Impact
GovthasbudgetedRs455bninFY15Communicationsreceipts
ofwhichweestimate~Rs265bnisfromonetimefeeand
spectrumauctions
Ideahasalreadyissuedfreshequitytoamassfundsfor
upcomingauctions;itislikelytoincurthehighestrenewal
payoutscomparedtopeerswhileBhartiisrelativelyprotected
fromneartermlicenserenewals

8
Union Budget 2014-15
Travel&Tourism
KeyAnnouncement Impact
IntroductionofeVisapolicyinphasedmanneratnineairports
withinnext6months
Tofurtherfacilitatevisaonarrivalpolicy;+vefortour
operatorslikeCox&Kings,ThomasCook
DevelopmentofnewairportsunderPPPinTier2and3cities
Improvedconnectivitywouldbepositiveforalltravelrelated
companies

Utilities
KeyAnnouncement Impact
10yeartaxholidayextendedtotheundertakingswhichbegin
generation,distributionandtransmissionofpowerby31
st

March17
Positiveforallpowergenerationandtransmissioncompanies.
Variousstepstobeundertakentoimproveavailabilityofcoal
topowerplants
Positiveforallpowergenerationcompanies
CleanEnergyCessleviedoncoal,ligniteandpeatincreased
fromRs50/tontoRs100/ton.
NegativeforPowergeneratingcompanieswhichcannotpass
ontheincreaseincoalcosts.CompanieslikeJSWEnergy,KSK
Energy,JPCL
RationalisationofcustomsdutyonthermalCoal.CVD
maintainedat2%andincreaseBCDfrom2%to2.5%
Willbemarginallynegativeforpowerproducerswhichuse
importedcoal,playerslikeJSWEnergy,LITL,JVPL

Recommendationparametersforfundamentalreports:
BuyAbsolutereturnofover+15%
AccumulateAbsolutereturnbetween0%to+15%
ReduceAbsolutereturnbetween0%to10%
SellAbsolutereturnbelow10%

Publishedin2014.IndiaInfolineLtd2014

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