More gainers than losers in India Inc from Union Budget 2015
A closer analysis suggests that a large number of Indian companies stand to benefit from the Budget
For one, though not immediately, the gradual lowering of corporate tax rate from 30 per cent currently to 25 per cent over four years starting 2016-17 will add to their earnings and enhance cash flows.
In the immediate term, with its emphasis oninfrastructure – roads, power, ports, and housing – the Budget aims to kick-start the investment cycle signalling that companies that make or maintain infra like IL&FS Transportation, IRB Infra, Sadbhav Engineering, Ashoka Buildcon, L&T, financiers like IDFC, REC and Power Finance and equipment providers like BHEL, ABB, Siemens, L&T and BGR Energy stand to gain.
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Power Grid, too, is seen among gainers. More importantly, this time there will likely be few hurdles. For instance, the government is aiming to set up five UMPPs totalling 20,000 MW, entailing an investment of Rs 100,000 crore, wherein all approvals will be taken in advance and bid winners will only run the risk of development and execution.
Both the power financiers, PFC and REC, stand to gain from UMPP projects. This will boost credit demand and profitability and rub off favourably on these companies. PFC, being the nodal agency for UMPP projects, will gain more than others from this move.
“These are significant steps taken in the right direction for the entire infrastructure space”, said Vinay Khattar, Associate Director & Head of Research, Edelweiss, adding that it is felt that a similar model will be followed even for projects in roads, ports and the rail sector.
Infrastructure building measures such as building 100,000 kilometres of road point to significant orders for companies. Road and infra builders like NBCC and NCC are among companies better placed to seize growth opportunities due to their stronger balance-sheets. Infra equipment providers like SREI and Sanghvi Movers will also benefit from higher demand.
“For the infrastructure space, the budget allocation has gone up significantly to more than Rs 75,000 crore and that is a major delta for a one year time frame,” said Khattar. “Already one lakh kilometres of road is under construction and that is where the first level of focus is; and in the coming years the focus is to incrementally build another one lakh kilometers of road. Companies especially on the EPC side at this particular time could be good bets.”
The government’s target of 20 million houses in urban and 40 million in rural India by 2022 will also have a cascading impact for realty players, financiers (LIC Housing, HDFC, DHFL, Repco, Gruh Finance, etc) and paint companies (Asian Paints, Berger). The proposed rationalisation of capital gains tax regime for sponsors of REIT and pass-through status for rental income from owned-assets is also positive. Among key gainers are DLF and Purvankara.
Focus on adding 60 million toilets should lead to gains for India’s leading sanitary-ware and tile companies HSIL, Cera, Somany Ceramics and Kajaria which will gain from building on new houses.
Through all these, cement companies especially, UltraTech, Ambuja, ACC, Shree Cement as well as smaller players in this segment should see higher demand for the commodity which has seen single-digit growth in the recent months.
With all this infrastructure activity at their doorstep, commercial vehicle makers such as Ashok Leyland, Eicher and Tata Motors also have an opportunity at hand to grow.
While the government aims to provide the initial contribution totalling about Rs 100,000 crore (Rs 70,000 crore by way of higher infra allocation, and Rs 20,000 crore towards initial contribution to an infra fund) on this front, the markets are not very sure on how well the private sector is placed to provide its share of funding. Nevertheless, a beginning has been made, which, coupled with more clear policies as well as viability gap fund provisions, should see more action for many companies.
Private banks such as Yes Bank, Kotak Mahindra, IndusInd and Axis Bank stand to gain from the move of having a composite limit for foreign direct investment (FDI) and foreign private investors (FPI), allowing foreign institutional investors (FIIs) headroom to up their stake in these banks. In the Banking, Financial Services and Insurance (BFSI) space, while infra boost will prop up credit growth, measures allowing NBFCs (over Rs 500 crore) access to Sarfesi Act is positive for Bajaj Finance, M&M Finance and others. Likewise, moving towards a bankruptcy code with judicial capacity (as SICA and BIFR are not yielding sufficient results) will strengthen the system lowering bad loans for the sector.
While there are many gainers, some may also feel the heat. As in the past, companies like ITC will be impacted due to the weighted average hike in excise duty on cigarettes by 16%, the fourth consecutive sharp hike in duties. While it will be able to pass on the hike and sustain margins, the company’s volumes are already under pressure due to price hikes.
While corporate tax will fall in the long run, for 2015-16 the tax rate is up due to hike in surcharge from 10% to 12%. Thus, companies with income exceeding Rs 10 crore will now be liable to effective tax rate of 34.61% as against 33.99 %. The rate for MAT also stands increased from 20.96% to 21.34%, as is dividend distribution tax (DDT) from 20.47% to 20.92%.
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