>FY13 budget – No surprises (CLSA)

India’s FY13 Union budget partially delivered on the market expectations of a move towards fiscal consolidation and incentives to revive investment cycle, even while working within obvious political constraints. While possible fiscal slippages are likely, we are encouraged by the Government budgeting for a 38% in non-defence capex and a slew of measures to help infrastructure sector. Our positive view on Indian equities hinges on sustained affirmative policy action and global liquidity.


Government assumptions more realistic, but slippages still likely
■ Government has embarked on the right path of fiscal consolidation with the target to reduce fiscal deficit from 5.9% of GDP in FY12 to 5.1% in FY13.
■ Increase in excise duties, service tax rates and widening the base should drive tax buoyancy, although collections will likely be impacted as excise duties on petroleum products (40% of excise duties) were left unchanged. Impact on fiscal deficit will be smoothened as some costs (30%+ of tax revenues) are also directly linked to tax collections.
■ The usual underfunding of subsidies as well, which will mean that the actual fiscal
deficit would be about 5.3-5.5% unless crude corrects materially.
■ Higher fiscal deficit and tax increases should put an upward pressure on inflation.


Several initiatives revive investment cycle
■ Several initiatives to revive infrastructure investment visible with lowering imports duty on coal to 0% from 5%, and doubling of tax free infra bonds to Rs600bn should help roads, power and the housing sector.
■ The government itself is budgeting to increase its non-defence capex by 38% to Rs1.2trn should be a positive for the investment cycle
■ Opening up of the ECBs for low cost housing, airlines, power and reduction in withholding tax from 20% to 5% for infra borrowers should be a positive.


Some progress on financial sector reforms
■ Rajiv Gandhi Equity Scheme (RGES) to broad-base equity participation from retail households can be a kicker for the flagging equity participation by retail.
■ The above scheme entitles a new equity investor an income tax deduction of Rs25,000 from income for an investment of Rs50,000 into equities market.
■ Three key reform bills – pension, insurance and banking – expected to be introduced in the budget session


Retain positive market view, replacing M&M with BPCL in top 5 picks
■ The budget announcements positive for M&M (no excise on diesel vehicles), IRB (thrust on roads) and Jet Air (reduction in withholding tax) and for sectors like power (coal import duty reduction) and steel (increase in imports duty.
■ The announcement were negative for upstream oil companies (increase on crude cess), BHEL (no increase in imports duty on equipment), telcos (high expectation of the Government on auction proceeds) and property (imposition of TDS)
■ With the rising oil prices, risks to economic growth are rising but our optimistic view on the markets (Sensex target cut to 20,000; implies 14x, 1x PEG) hinges on global liquidity and sustained affirmative policy action, which should improve the investment outlook. We expect auto fuel price hike after the current parliamentary session in early April.
■ We tweak our model portfolio and replace Mahindra & Mahindra (recently downgraded by Abhijeet Naik on tractor growth concerns) with BPCL. The recent M&A benchmarks for BPCL’s upstream assets suggest an optimistic SoP of Rs1100/sh (with 60% of the value coming from E&P business) or a 50%+ upside. Potential auto fuel price hike could be a near-term trigger.
■ Other top ideas continue to be ICICI Bank, Yes bank, Tata Motors and Infosys.


To read full report: INDIA STRATEGY
RISH TRADER