union budget analysis 2011-12

7/31/2019 Union Budget Analysis 2011-12

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Union Budget 2011-12

Analysis & Outlook

March 01, 2011


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2.

Agenda

Economic outlook in the context of budget

Impact of budget across key sectors

Impact of budget on capital market


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3.

Union Budget impact on ECONOMY


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4.

Key Messages

Key Challenges before the budget

Inflation, Current Account Deficit and Fiscal Consolidation

Growth to moderate to 8.3% in 2011-12 from 8.6 in 2010-11 as

against an 9% assumed in the budget

Fiscal targets in the budget over-optimistic. CRISIL expects

fiscal deficit at 5.0 % of GDP

Absence of one off gains

Moderating growth (base and implication for tax collections)

Expenditure slippages

Bond yield to settle at 7.9-8.2 per cent by March 2012


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5.

Growth: Stronger and Balanced- Set to moderate in 2011-12

Note: *revised numbers to be released in May 2011

Source: Central Statistical Organisation

Demand Drivers of Growth (%yoy)

37.5

9.6

2.1

9.110.4

8.57.0

2.6

7.08.6 9.0

0.3

8.7

17.7

25.7

17.8

6.0

-3.0

Q2FY10

Q3FY10

Q4FY10*

Q1FY11

Q2FY11

Q3FY11

Q2FY10

Q3FY10

Q4FY10*

Q1FY11

Q2FY11

Q3FY11

Q2FY10

Q3FY10

Q4FY10*

Q1FY11

Q2FY11

Q3FY11

Govt. Consumption Pvt. Consumption Fixed Investment


6/316.

Source: Ministry of Industry & CRISIL estimates

Inflation coming down But remains unacceptably high

WPI inflation, y-o-y%

7.07.6

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11


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Inflation Key Challenge in 2011-12

The budget is not expansionary in intent (non-inflationary)

Expenditures growth lower

Deficit target trimmed

Tries to address the supply side factors behind food price

volatility

Increased allocation, focus on agriculture and marketing reforms

Baby steps not sufficient

The budget assumes a inflation of 5 per cent in 2011-12;

Unlikely to achieve

Risks- Oil, commodity and food/monsoon


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Fiscal- Unrealistic on Expenditures

Source: Budget documents

15.4

13.7 13.6

14.3

15.815.6

15.4

14.0

10.0

14.0

18.0

FY05 FY06 FY07 FY08 FY09 FY10 FY11 RE FY12BE

Expenditure/GDP,%


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Tax/GDP- Improving, Yet Below Pre-crisis Levels

Source: Budget documents

Tax/GDP, %

9.4

9.9

11.0

11.9

10.8

9.5

10.0

10.4

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

FY05 FY06 FY07 FY08 FY09 FY10 FY11 RE FY12 BE


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Tax Buoyancy Stagnant Even With Higher Growth

Source: calculated from budget documents

1.2

0.9

1.6

0.2 0.2

1.3 1.3

0

0.3

0.6

0.9

1.2

1.5

1.8

1993-94

to 1996-

97

1997-98

to 2002-

03

2003-04

to 2007-

08

2008-09 2009-10 2010-11 2011-12

Tax buoyancy = Incremental tax/incremental nominal GDP


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Rupee Appreciation- A Volatile Path

Source: RBI and SEBI

-2.0

0.0

2.0

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

35.0

40.0

45.0

50.0

55.0

Net FII inflows (LHS) Rs/USD


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External Risks Steps to Correct The Bias in Foreign Flows

Issue: High current account deficit and reliance on short-

term/volatile flows to finance it

Raising the limits on foreign participation in the corporate bond

market by 20 billion is a positive move

Will bring money into infrastructure sector

Help improve the composition of foreign inflows (from volatile short

term to long term

Steps to promote FDI missing


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Liquidity Crunch In The Economy

Source: RBI & CCIL

-2000.0

-1000.0

0.0

1000.0

2000.0

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

0.0

3.0

6.0

9.0

Net LAF tranactions Rs billion (LHS) Call Rates (%)


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14.

Interest Rate Outlook

Bond yields to settle a tad lower in 7.9-8.2 range by March 2012

Fiscal Deficit target as % of GDP at 5, lower than 2010-11

Inflation lower in 2011-12


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15.

Outlook 2010-11 and 2011-12

Note: * CSO Advance estimates, ** revised estimates, budget document 2011-12

2010-11 2011-12

Real GDP factor cost (y-o-y percentage growth) 8.6* 8.3Supply-side

Agriculture 5.4* 2.7

Industry 8.1* 7.9

Services 9.6* 9.9

Demand-side

Private final consumption expenditure 8.4 8.1

Government final consumption expenditure 9.7 9.1

Gross fixed capital formation 13.1 8.1

Other macroeconomic variables

WPI inflation (average) 9.0 5.8-6.0

Interest rate (10-year G-sec March-end) 8.1-8.3 7.9-8.2

Exchange rate (Rs-$ March end) 43.5-44.0 43.0-44.0

Fiscal deficit (As % of GDP) 5.1** 5.0


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16.

Union Budget impact on INDUSTRY


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17.

Upward trend in revenues continue, margin pressure sets in

Based on sample of 200 leading companies across 20 different sectors

The set excludes oil refining and marketing companies and banks

Source: CRISIL Research

Aggregate Sales and Operating margins

-

500

1,000

1,500

2,000

2,500

3,000

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

P

(In Rs Bn)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

(In per cent)

Sales (Rs bln) Operating margin (per cent) (RHS)


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18.

Key takeaways from budget

Attempt to maintain the growth momentum

No change in central excise and peak customs duty

Excise duty and service tax net widened

Change in tax slabs to preserve purchasing power of the middle classamidst inflation

Effective benefit for an individual would be minimal.

Continued thrust on infrastructure and social sector spending

Budget impact neutral on most sectors


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19.

Budget impact - Overall view on industries

Banking and Finance

Household appliance

Residential Housing

Roads

Power

Fertiliser

Auto

Construction

IT services

Textiles

Hotels

Cement


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20.

Revenue momentum to continue, margins to be under pressure

Aggregate Sales and Operating margins

7,4357,765

9,245

10,521

1,747 1,843 1,9752,098

19.9%21.4%

23.7%23.5%

2008-09 2009-10 2010-11 E 2011-12 P

Sales (Rs Bn.) Operating profit (Rs Bn.)

Operating margin (per cent) (RHS)

Based on sample of 200 leading companies across 20 different sectors

The set excludes oil refining and marketing companies and banks



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21.

Key challenges: Firm Commodity prices and interest rates


Crude Oil Interest Rates

Steel Aluminium

Brent crude oil prices

0

20

40

60

80

100

120

140

Jan-01

Jun-

Nov-

Apr-

Sep-

Feb-

Jul-03

Dec-

May-

Oct-

Mar-

Aug-

Jan-06

Jun-

Nov-

Apr-

Sep-

Feb-

Jul-08

Dec-

May-

Oct-

Mar-

Aug-

Jan-11

($/Barrel)

10 year G-sec yield

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Jan-03

May-03

Sep-03

Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

(per cent)

Domestic steel prices

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

Jan-01

Jun-

Nov-

Apr-

Sep-

Feb-

J

ul-03

Dec-

May-

Oct-

Mar-

Aug-

Jan-06

Jun-

Nov-

Apr-

Sep-

Feb-

J

ul-08

Dec-

May-

Oct-

Mar-

Aug-

Jan-11

(Rs/ton)Domestic aluminium prices

0

20000

40000

60000

80000

100000

120000

140000

160000

Ja

n-01

Jun-

Nov-

Apr-

Sep-

Feb-

J

ul-03

Dec-

May-

Oct-

Mar-

Aug-

Ja

n-06

Jun-

Nov-

Apr-

Sep-

Feb-

J

ul-08

Dec-

May-

Oct-

Mar-

Aug-

Ja

n-11

(Rs/ton)


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22.

Banking sector outlook

Credit growth is expected to be 20-21 per cent in 2010-11

due to buoyant economic growth, recovery in export markets and focus oninfrastructure

Credit growth to moderate to 18-19 per cent in 2011-12, because of

higher lending rates

Industrial and services credit growth to be around 18 per cent in 2011-12

Retail credit growth to improve to 14 per cent in 2011-12

GNPA to increase from 2.4 per cent in 2009-10 to 2.9 per cent in 2010-

11

5-10 per cent of restructured assets expected to turn in to NPAs

SMEs and sectors such as real estate still not out of the woods

Net interest margin for the banking system is expected to come under

pressure in 2011-12 due to increase in cost of funds

Capital to Risk Weighted Assets Ratio (CRAR) of banks as of 2009-10

stood at 14.5% , much higher than the regulatory prescription


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23.

Union Budget impact on Capital market


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24.

Equity Markets outlook

We view the Budget 2011-12 as neutral for equity markets

No roll back of stimulus

Budget was low on any significant policy action

While the reduction of corporate surcharge is marginallypositive, the impact is partly negated by the increase in MAT

rate

We maintain our stance that the Equity Markets for 2011 will beA Tale of Two Halves

Concerns over inflation, high crude prices & earning downgrades would

weigh on investor sentiments in the first half We expect most of the concerns to ease out in the second half of the

year. A strong GDP growth expectation (8.3% as per CRISIL

Research) coupled with attractive valuation would support markets in

the second half


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25.

Equity Markets outlook

The Government plans to raise Rs 40,000 crore via

disinvestment in PSUs. We expect it to materialize in the

second half of FY12, due to improved equity market conditions

S&P CNX NIFTY to be at 6200-6400 (SENSEX at 20700-21200) by

2011 end

Expect SENSEX EPS of ~Rs 1274 in FY12 and ~Rs1500 for

FY13 translating into earnings growth of 18%

At our target range, SENSEX and NIFTY will be trading at ~15x,

in line with the historical average


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26.

Budget Impact on IER companies under coverage

Positive impact

Market Cap Fundamental Fair value CMPRs mn Grade (Rs) (Rs)

Ashiana Housing 2,342 3/5 220 125

Omaxe 23,605 2/5 176 136

Parsvnath

Developers

12,816 2/5 63 29

Vipul 1,758 2/5 31 15

Building Products Increased expenditure on rural housing

schemes such as Indira Awas yojana

Visaka Industries 1,589 3/5 151 100

Consumer

Durables

Increase in income tax exemption limits Symphony 7,099 3/5 829 1,011

Food Products Increase in export duty on de-oiled rice

bran cakes to benefit domestic users

KSE 534 3/5 190 167

Metals & Mining No export duty on iron ore pellets to

encourage value addition process for

iron ore fines

MSP Steel & Power 3,553 2/5 75 61

Paper & Forest

Products

Reduction in customs duty on waste

paper is a positive

Rainbow Papers 4,605 3/5 67 53

Sector Budget event Company Name

Real Estate Interest subvention & increase in priority

limit is a positive for companies in

affordable housing


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27.

Budget Impact on IER companies under coverage

Negative impact

Market Cap Fundamental Fair value CMP

Rs mn Grade (Rs) (Rs)IT Services Non extension of STPI,SEZ under MAT

regime

Polaris Software

Lab

18,037 4/5 235 182

Infinite Computer

Solutions

7,034 3/5 269 160

Omnitech

Infosolutions

1,806 3/5 282 130

Zylog Systems 6,595 3/5 656 401

Construction &

Engg

SEZ under MATregime Marg 3,643 3/5 320 110

Cement Change in excise duty Sagar Cements 2,009 2/5 202 135

OCL India 5,920 3/5 178 104Industrial

Conglomerates

Century Plyboards

India

13,086 3/5 73 59

Hotel Res taurants

& Leisure

Introduction of 10% service tax Savera Industries 490 2/5 73 41

Textiles & Apparel Excise duty on branded garments Aarvee Denims &

Exports

1,406 3/5 75 60

Kewal Kiran

Clothing

6,039 4/5 560 490

Shri Lakshmi

Cotsyn

1,791 2/5 150 86

Company NameSector Budget event


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C t b d


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29.

Corporate bonds

Increase in FII limit in corporate bonds

The impact is expected to be felt over a longer term and will help in deepening

the Indian bond markets.

In the short term, the corporate bond market yields are expected to remainrange bound.

Increase in budgetary allocation towards infrastructure sector

Likely to result in an increasing number of corporate bond and equity issuancesfor fund raising by infrastructure companies and institutions.

It would boost the investment avenues for mutual funds, insurance companiesand PF trusts

N P i S t


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30.

New Pension System

Penetration of Swavalamban

The proposal to prepone the exit age and the governments contribution beingextended to 5 years from 3 years would help increase penetration levels in the

PFRDA initiative.


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union budget analysis 2011-12

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