Expectations From Union Budget On Specific Sectors & Its Impact

One of the key points to understand is what impact the Union Budget has on key industry groups? In most budgets the focus has been on the tariff structures in terms of excise duties and customs duties. With the shift towards GST, the focus may be more on rates of GST and not so much on the niceties of duty rates and duty structure. There are some macro themes that will impact companies across the board while there will be micro themes which will only impact a limited set of stocks or sectors. Here is what some key sectors expect from the Union Budget…

What budget could mean for the Automobile sector…

Remember, the auto sector was one of the worst hit by the demonetization drive. Some of the macro themes in the budget may have larger implications for the auto sector. Firstly, the decision to put more money in the hands of people through tax breaks and exemptions will have a salutary impact on auto demand. We expect the biggest impact in demand for two-wheelers and entry level cars. Ironically, these sectors were the worst hit by the demonetization. The rural spending theme could also have larger ramifications for the auto sector. Normally, a good monsoon followed by aggressive rural spending can have a multiplier effect on automobiles demand. The rural incomes typically could translate into higher demand for two wheelers, tractors, MHCVs and other farm equipment. Automobiles could benefit substantially from the macro thrust in the Union Budget.

Implications of the Budget for the banking sector…

Both PSU banks and private banks could have positive ramification from the Union Budget. The government is likely to increase its allocation to bank recapitalization and that will improve the health and lending capacity of PSU banks. Secondly, the government is likely to give dovish signals on rates via checks on fiscal deficit. This will mean higher credit off-take for banks and also appreciation in the bonds portfolio of banks and will benefit PSU and private banks in the process. Lastly, the government could target 26-28% growth in capital spending this year. This could translate into humongous demand for bank lending to infrastructure sector. The special efforts of the government to work out rescue packages for stressed sectors will also be positive.

What the Union Budget could mean for the Metals Sector…

The government has already supported the metals sector through minimum import price (MIP) and countervailing duties on imports. With dumping from China still a threat, we could see this trend getting accentuated in the budget. The government may, in fact, add to the list of countries that are likely to fall in the negative list as dumping candidates. Combined with globally strong prices and rising demand from China and the US, metals could be in focus in the coming year. Lastly, the government is likely to push for a rescue package for metals, which are among the most indebted in terms of bank debt. That also could be positive for metal stocks.

What the Union Budget will mean for the Power Sector…

The government is already considering measures to prop up the PSU companies that are into power generation, power distribution, power trading and power financing in a big way. This could be short term positive for power companies. The budget may also contain substantial incentives for renewable power and this could happen in a variety of ways. For example, the government may agree to the demand to classify solar parks as SEZs and also give them the benefit of MAT exemption. Solar companies may also be permitted to issue and raise money through the Green Bonds route. This is likely to reduce the cost of funding for renewable companies substantially, one of the key preconditions for sustainability of this sector.

Implications for realty and Housing Finance companies…

We are clubbing these two sectors as they are likely to be driven by a common set of factors. The government is likely to give enhanced incentives for low cost housing as well as additional exemption under Section 24 of the Income Tax Act. These will be salutary for realty companies and for HFCs. The Union Budget could see some genuine progress on REITS. The notes issued by REITS may be given the much needed pass-through status and they may also be made eligible bonds for banks to meet Tier-2 capital requirements. Additionally, we also expect the infrastructure and BOT companies to benefit from the government thrust on Smart Cities as well as the focus on expanding highway coverage across India.

Finally, some corporate across-the-board impacts…

Some impacts will be felt across the board. The budget may look to cut the rates of corporate taxes. This will be positive for most sectors that are into the high tax bracket as this is likely to happen without the exemptions being withdrawn. Secondly, the MAT may also be reduced proportionately, which at 18.5% is inordinately high at current levels. We also believe that trends like digitization could be positive for companies across the board, irrespective of the industry or sectoral group that they belong to.

In a nutshell, most sectors have positive expectations from the Union Budget. Of course, IT and pharma have not been covered, but not much is really expected from the budget. Their primary worries remain global issues like US FDA, Form 483, Border Tax, Immigration restrictions etc. That will be a different battle at a different level altogether.