investment strategy-01mar15

Union Budget Review
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Union Budget Review
01mar15
www.capitaladvisors.co.in

Backdrop
• While economy has recovered cyclically, the ground reality is different – a
sluggish growth.
• For last few years, in the pursuit to achieve fiscal deficit number as per
FRBM, the side effect has been on public expenditure. Also, private
investment cycle has been clouded by stretched balance sheets,
investment cycle has been clouded by stretched balance sheets,
continuing implementation bottlenecks, increasing bad loans among
public sector banks. With slower real growth (than expected) and lower
inflation, revenue collection for Centre has been below its expectations,
limiting resources availability. Additionally, other issues of black money
kept abroad and higher current account deficit has been impacting. This
also means more money moving towards non-financial assets.
Accordingly, economic recovery backed by higher government spending
was considered to be feasible solution to the problem.
• With this backdrop, we think what Union Budget had a clear priority to
focus on - economic recovery.

Budget at a glance – realistic assumptions
Source – HDFC MF

Budget’s key assumptions
Source – HDFC MF

Key highlights - 1/2
Non tax proposals :
• Ambitious target of achieving a fiscal deficit of 3.9% in current financial year, 3.5% in FY 2016-
17 and 3% in FY 2017-18.
• Goods & Services Tax expected to be implemented by 2016
• GDP expected at 8-8.50% in FY16
• GDP expected at 8-8.50% in FY16
• Tax free infrastructure bond to be introduced for road, rail and irrigation projects
• To introduce a sovereign gold bond with returns on par with gold prices
• Investment in infrastructure to go up by Rs.70,000 crore. (Rs.700 Bn)
• National infrastructure fund to be established
• Forward Markets Commission (FMC) to be merged with SEBI
• To allow foreign investments in Alternate Investment Funds
• To set up an agency to provide financial data security
• Cash transactions being discouraged
• To do away with the distinction between FDI and FPI
• Government to set up Public Debt Management Agency to strengthen Indian bond market

Key highlights 2/2
Tax proposals (including GAAR) :
• To cut basic rate of corporate tax from 30% to 25%, over the next 4 years beginning 2016-17
• Wealth tax replaced with 2% additional surcharge on super rich having income of Rs.1 crore
(Rs.10 Mn) and above.
• Mere presence of a fund manager would not constitute Permanent Establishment.
• Financial institutions to be prosecuted for negligence in order to curb black money
• Financial institutions to be prosecuted for negligence in order to curb black money
• Sukanya Samridhi Scheme gets EEE status (tax free)
• To provide additional deduction of Rs. 50,000 for contribution to NPS under Section 80 CCD.
• Travel allowance exemption for individuals to be increased from Rs. 800 per month to Rs. 1600
per month
• Alternate Investment Funds: Category 1 and Category 2 to get pass through status
• An increase in surcharge of 2% from 10% to 12% on additional income-tax payable by
companies on distribution of dividends and buyback of shares, or by mutual funds and
securitisation trusts on distribution of income.
• Service tax exemption withdrawn on the services provided by mutual fund agents to an asset
management company.
• Government defers rollout of anti-tax avoidance rules GAAR by two years. GAAR to apply
prospectively from April 1, 2017. Retrospective tax provisions will be avoided.

What we liked - 1/2
• A significant announcement was FM’s proposed law to tackle black
money including provisions of Imprisonment of up to 10 years and 300
per cent penalty on tax, for concealing income or assets abroad. This
along with the Benami Transactions (Prohibition) Bill, PAN disclosure for
any purchases of more than Rs.1 lakh – Rs.0.1 Mn, shall check the
any purchases of more than Rs.1 lakh – Rs.0.1 Mn, shall check the
circulation of black money in the domestic economy. This also will go in
adding back these components to GDP number.
• To develop a sovereign gold bond and to introduce gold monetization
scheme to allow depositors to earn interest. This will channelize
resources from non-productive physical assets to more productive
financial assets.
• The budget stepped up allocation by 0.5% of GDP (including infra spend
by central public sector enterprises), with a particular focus on roads and
railways — where multiplier and productivity effects are typically the
largest. This was a bold and much-needed thrust.

What we liked - 2/2
• Equally important is the announcement to create a comprehensive
bankruptcy code of global standards. Bankruptcy and exit appear
particularly difficult in the Indian context. It is hoped that a world-class
bankruptcy code — implemented with equal vigor will facilitate exit when
warranted. Potentially, this could ease some of the current frictions and
warranted. Potentially, this could ease some of the current frictions and
stresses in the public private partnership (PPP) framework. Also, NBFCs
registered with RBI and having asset size of Rs 500 cr (Rs.5 Bn) and
above may be considered for notifications as ‘Financial Institution’ in
terms of the SARFAESI Act, 2002. This may provide them more teeth to
recover money from defaulters.
• The other area where the budget scores highly is institutional process of
an agreement between the government and the Reserve Bank of India on
a formal monetary policy framework to keep inflation below 6% and for
the setting up of a monetary policy committee. Inflation-targeting is clearly
working and the sooner the institutionalized process, the better it is.

What we think could be challenges
• What if oil prices were to rise again? Increased oil subsidies will likely
impinge on capex spending — as it typically has in the past.
• This budget expectation will require a sharp pick-up in growth. What if
that does not materialize?
• What if asset sales — which are budgeted at a whopping Rs.90,000 crore
• What if asset sales — which are budgeted at a whopping Rs.90,000 crore
(Rs.900 Bn) — do not materialize?
• What if one needs more resources for public sector bank recapitalization
— which are sorely needed, but which got a paltry allocation of Rs.8,000
crore (Rs.80 Bn) ?
• This also means that shortfalls in revenue or overruns in expenses on
count of any of any of abovementioned event/s would result in capex
being cut.

Investment Strategy
Investment Strategy
01mar15

Equity is not cheap on historical parameters…
• Nifty TTM PE has crossed its critical level, i.e., last 10 years Average + 1SD. On month-ended
data basis, in last 10 years, this has happened only 16% of times. We have recently cut our
view from Overweight to Neutral, as markets have run up ahead of numbers. Also, going by
recent Budget announcements, while longer term picture remains positive, near term market
upside is totally dependent on global liquidity and the same is always difficult to predict.
• As a strategy for someone who is underweight on Equity, better to participate through SIP /
STP mechanism.

India - Fixed Income view – status quo . . .
• Post, Budget announcement, we believe, RBI shall continue with policy
rate cut actions, but may take a halt in near term as fiscal deficit target
has been increased for FY16 from 3.6% of GDP to 3.9% of GDP.
• There are enough global variables (crude prices, Greek’s stance on
remaining part of Euro, rate hike in US, etc.), for which RBI may like to
keep some kind of buffer (in terms of rate cut).
• We continue to expect further rate cut by 50 bps in CY2015. Accordingly,
we expect longer end to perform better in next couple of months.
Source – MOSL Research

India - View on Currency & Commodity
• We still remain positive on US
Dollar considering strength in US
economy vis-à-vis other
economies. Also, expectation of
higher interest rates in mid-2015
higher interest rates in mid-2015
may keep dollar strong in future.
Accordingly, INR may depreciate.
But, considering stronger foreign
exchange reserves position, INR
may relatively appreciate against
other trading countries.
• The drop in gold prices has lowered the consumption as well as
investment demand for it. Strengthening of dollar will put further pressure
on the downside. In INR terms, rupee may remain range-bound.
Source – investing.com

Contact Details
Jignesh Shah
Capital Advisors
+ 91 – 9820296989
jshah@capitaladvisors.co.in

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Thanks for your attention
Thanks for your attention

investment strategy-01mar15

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