union budget 2011-2012 banks, funds & microfinance the men ... · practical solution of higher...

The Men Among Boys To Give You A Head Start, ETIG spots some winners among mid-caps: banking, fertilisers, shippingand automobiles. But there are some losers as well. Sectors like cement, airlines, branded garmentswill bear the brunt as Pranabda’s Budget measures on service tax and excise begin to bite

Midcaps

investorimpact on

Lower borrowings will translate into bond trading gains for banks

Cement cos fall onconcerns over ability to pass on increasedexcise burden

Capital goods companiesBGR Energy, Thermaxtake a hit in the absenceof anti-dumping duty

Hospital services tobecome moreexpensive afterservice tax levy

UNION BUDGET 2011-2012

Interest subsidy on low-cost homes to help realty firms HDIL, Parsvnath & Dewan Housing 8

WWW.ECONOMICTIMES.COM

THE ECONOMIC TIMES | TUESDAY | 1 MARCH 2011

WE BELIEVE THE UNIONBudget 2011-12 is mildly positivefor the banking sector due to itsemphasis on continued fiscalgrowth and consolidation,thrust on financial inclusion aswell as increasing opportunitiesfor banks and other financialservices.

Specific measures include: a)Road map for banking licences —positive — should invigorate thesector with higher activity levels(private banks could face addi-tional competition), RBI likely tocome up with detailed guidelines;b) Capital infusion into publicsector banks — positive — will en-able them to remain on a highgrowth path; c) Higher limit forinclusion of housing loans as pri-ority sector loans —neutral — inline with higher real estateprices; d) Extension of tax ex-emption for investments in infra-structure bonds — positive —puts greater thrust on funding ofinfrastructure projects and alsoprovides greater funding diversi-ty for infrastructure financingcompanies; and e) Thrust on fi-nancial inclusion — positive—27% higher target for direct agri-cultural loans (increases accessto funding), and higher interest

subvention for timely loan repay-ments (lesser interest burdenhelpful for asset quality perform-ance), should channel greaterfunding into this segment.

For financial services, the rec-ommendations were largely pos-itive: a) Foreign investors al-lowed to invest in mutual fundsbroadens the scope of target in-vestors substantially (subject toknow your customer norms); b)Creation of an equity fund for in-vesting in microfinance compa-

nies — positive— “social” in-vestments fromsuch funds(should havelower expectedreturns on thecapital invested)would encouragegreater fundingstability and en-

courage wider lending by MFIsand increase financial inclusion,but slightly moderated; c) Widertax base for life insurance servic-es — slightly negative — widensscope of service tax to non-Ulipproducts and also raises taxes.

(Manish Chowdhary, vice-pres-ident, Investment Research, con-tributed to this article)

Banks, Funds &MicrofinanceWin the Day

Allowingforeigninvestors toinvest in MFswill broadenthe scope oftargetinvestors

Aditya NarainManaging Director & Head of India Research, Citigroup

Analysts’ Picks

We believe banks with higher sensitivity to capitalmarkets/mutual funds should benefit more. Among key stocks, SBI, Axis and Kotak Mahindra would be larger beneficiaries

SBI | AXIS BANK | KOTAK MAHINDRA

STOCKS TOWATCH OUT FOR

THE UNION BUDGET OF FY12did little to address investor con-cerns about the oil and gas sec-tor. It failed to address the larg-er issues plaguing the sector —the lack of transparent pricingand subsidy-sharing systems, al-though it has announced its in-tention to move to direct cashtransfers on kerosene over a pe-riod of time. An opaque pricingsystem, with the government de-ciding on periodic price in-crease without any link to globalprices, leaves the sector exposedto the vagaries of global crudeprices and makes it difficult forinvestors to assess total under-recoveries and earnings of com-panies. The lack of a transpar-ent subsidy-sharing systemexposes companies’ earnings tolarge volatility and risks.

Likely high crude oil prices inFY12E due to political unrest inthe Middle East will lead to largeunder-recoveries unless the gov-ernment raises domestic sellingprices significantly from thecurrent levels. With the onlypractical solution of higher do-mestic selling prices ruled outdue to high inflation and fivestate elections, the governmentand government-owned oil com-

panies will have to contend withvery high under-recoveries. At$110/bbl (dated Brent) averagecrude price for FY12E, total un-der-recoveries could be in the re-gion of `145,000 crore. Upstreamand downstream companies canbear around ̀ 50,000 crore out ofthis amount without harmingtheir profits. The governmentwill have to provide ̀ 95,000 crore(1% of the GDP) of compensa-tion to BPCL, HPCL and IOC,which it can ill afford, given an

already high fis-cal deficit (tar-get of 4.6% forFY12 BudgetEstimates).

The govern-ment has pro-vided `23,700crore of fuelsubsidies only

for FY12BE, which largely in-cludes the balance portion ofFY11 estimates and another`3,200 crore of nominal subsidyon kerosene and LPG, which itpays regularly to downstreamoil companies.

The government has provided`38,400 crore of subsidy pay-ment from the Budget for FY11estimates.

Crude ShockAwaits Oil Cos &Debt-Heavy Govt

The govt hasto raisedomesticselling pricessignificantlyfrom thecurrent levels

Sanjeev PrasadExecutive Director & Co-HeadInstitutional Equities, Kotak Securities

Analysts’ Picks

More focus on private oil & gas cos such as RIL and Cairn India.Among PSU companies, ONGC and OIL have more visibility as theyproduce crude and stand to benefit from higher crude prices

CAIRN INDIA | RELIANCE | ONGC | OIL INDIA

STOCKS TOWATCH OUT FOR

*ETMUPM10311/ /08/K/1*

*ETMUPM10311/ /08/K/1*ETMUPM10311/1R1/08/K/1

*ETMUPM10311/ /08/Y/1*

*ETMUPM10311/ /08/Y/1*ETMUPM10311/1R1/08/Y/1

*ETMUPM10311/ /08/M/1*

*ETMUPM10311/ /08/M/1*ETMUPM10311/1R1/08/M/1

*ETMUPM10311/ /08/C/1*

*ETMUPM10311/ /08/C/1*ETMUPM10311/1R1/08/C/1

MID-CAP BUY SELL HOLD

Market Cap (`Cr) 2581

PE Ratio 11.20

Dividend Yield (%) 1.29

Inst. Holding (%) 54.27

Sales (TTM in `Cr) 6308

Profit (TTM in `Cr) 304

NagarjunaConstruction

A boost to PPP, thanksto a proposed new poli-cy, will benefitNagarjuna, which hasmany power projectsunder this scheme.Further, a 23% rise in in-frastructure funds allo-cation at ̀ 214,000crore will result in easyavailability of credit forthe execution of largeprojects.


PE Ratio 11.38





MRPL

The market wasbetting on a reductionin customs duty oncrude oil & petroleumproducts which did notmaterialise in Budget2011, and this couldhave squeezedmargins for MRPL. Butthe reduction incorporate surchargewill marginally reduceits tax burden.


PE Ratio 41.47





P&G Hygiene

The reduction in exciseduty on sanitarynapkins and babydiapers from 10% to1% with no Cenvatcredit is a big positivefor the company,which manufacturesWhisper. It has amarket share of over12% in the Indiansanitary napkinsmarket.


PE Ratio 31.73





NationalFertilizer

Granting infrastructurestatus to the fertiliserindustry is a keypositive, which willenable producers toenjoy investment-linked tax incentives.A substantial increasein agriculture credittarget and the interestsubvention schemewill ensure liquidityfor farmers.


PE Ratio 33.33





Ruchi SoyaIndustries

The company is likelyto gain indirectly fromfund allocationstowards palm oil, risein allocation underRashtriya Krishi VikasYojana and improvedcredit to farmers.Augmentation ofwarehousing andcapital investment formodern storagecapacities is a positive.


PE Ratio 60.67





Shoppers Stop

The addition of 10%excise duty on bran-ded garments can hurtearnings. Apparelsaccount for 60% of thetotal revenue forShoppers Stop. Theexcise duty along withthe recent price hikepressure faced due torise in cotton pricescan reduce salesvolume and margins.


PE Ratio 9.47





Patni ComputerSystems

The 50 bps increase inMAT would raise thetax outgo marginallyfor the company,whose tax incidence isover 12% of its pre-taxincome. This wouldoffset the benefit of a250 bps cut incorporate surchargetax. Expiry of STPI taxexemption would alsoincrease the tax outgo.


PE Ratio -6.92




Profit (TTM in `Cr) -95

Raymond

A mandatory 10%excise duty on 60% ofthe retail value ofgarments will impactthe overall profita-bility. Raymond worksat lower marginscompared to its textilesegment, which maydrop further. A lowercorporate taxsurcharge may offersome relief.

CMP: ` 56.90 CMP: ` 106.60CMP: ` 100.60

CMP: ` 1661.55 CMP: ` 265.70CMP: ` 448.80

CMP: ` 102.00 CMP: ` 354.90


PE Ratio -4.81




Profit (TTM in `Cr) -1723

Suzlon EnergyCMP: ` 46.65


PE Ratio 28.03





Thermax

Removal of 2.5%excise duty onequipmentmanufactured for ultramega power projects isa positive. ButThermax may notbenefit immediatelysince its plant, in jointventure with Babcockand Wilcox, willcommence productionnext year.

CMP: ` 565.15


PE Ratio 6.88





Tulip Telecom

Tulip Telecom is likelyto benefit from theproposed plan toconnect 1,500educational institutesvia optical fibrenetwork. The proposalto extend ruralbroadbandconnectivity to 2.5lakh panchayats overthe next three years isa positive.


PE Ratio 17.15





TVS Motor

TVS Motor, like othercompanies operatingin the sector, will berelieved since exciseduties have not beenrevised. However, theautomobile sector isgrappling with higherinput costs. This,coupled with rise inauto finance rates,could put the brakeson the sector’s growth.

CMP: ` 143.95

CMP: ` 50.75


PE Ratio 11.87





UnitedPhosphorus

The government’sincreased focus onagricultural productionand productivity inBudget FY12 is likelyto benefit thecompany in themedium term. Interestsubvention andincreased agriculturalcredit target will boostsales of farm inputsand drive profitability.

CMP: ` 135.65


PE Ratio 13.90





Voltas

The exemption onexcise duty for ACequipment andrefrigeration panelsfor cold-chaininfrastructure couldbenefit the company.However, thisrepresents a small partof Voltas’ revenues.Reduction in surchargeto 5% will benefit itmarginally.

CMP: ` 164.70

CMYK

Shree CementThe ad-valorem duty on cementcould raise duties perbag. Reduction incustoms duties on keyimported rawmaterials should help.North-based cementcos may pass onhigher excise coststo consumers.


PE Ratio 83.00Inst. Holding (%) 12.84



Focus on environmentmanagement markedby a ̀ 200-croreallocation forremediationprogrammes from NCEFund could be apositive.

`12,668cr

Total debt against theeq. capital of ̀ 311 cr

union budget 2011-2012 banks, funds & microfinance the men ... · practical solution of higher...

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