Budget Expectations 2018-19

Elections vs. collections

Credibility Farm sector relief Jobs

FRBM Infra gap
Rating agency

Fiscal deficit (% of GDP)

-2.5 -2.8 -3.0 -3.2 -3.6

Kashyap Pujara, Executive Director – Head of Research Prithviraj Srinivas, SVP - Economist
kashyap.pujara@axiscap.in; +91 22 4325 1146 prithviraj.srinivas@axiscap.in 91 22 4325 1108 15 JAN 2018
 15 JAN 2018
Key things to watch for in this Budget
BUDGET EXPECTATIONS 2018-19

 The finance minister faces an interesting dilemma. The union government’s fiscal position can be judged to be in
fantastic health purely based on taxes collected but the fact is not all of these taxes accrue to the Center !! So the
finance minister will have to decide how to present the truth!

 The IGST conundrum: The Center’s tax growth is primarily from IGST. Purists will argue that only half of IGST
accrues to the Center and only that must be considered. Fiscal practitioners could argue that IGST is like a holding
account and that there would be a base level of taxes in transit at all times. Some level of IGST could be a
permanent feature in the union government’s float. We think a middle ground would be shown.

 What will the FM present: The budget will show a miss in FY18; 3.4% of GDP fiscal deficit instead of 3.2% target
and below 3.5% achieved in FY17. FY19 is likely to be pegged at 3.2% of GDP (same as FY18 target).

 Revenue: Non-tax receipts like spectrum, RBI dividend and divestment would be scaled back slightly.
Tax collections to improve on growth and greater compliance on GST. Optimistic tax buoyancy at 1.3 to account
for scale back in non-tax targets.

 Expenditure: Subsidy will rise due to food (expansion of price deficit MSP), interest (affordable housing) and fuel
(oil @ 65) offsetting benefits from DBT in fertilizers. Capex allocation will see greater thrust on irrigation,
rural roads and rural housing.

 Beneficiaries: (A) Rural focus: Cement, FMCG and infra; (B) Affordable housing push: Banks, Cement, Realty;
(C) Corporate tax cut: FMCG, retail.

 Losers: All insurance companies – If corporate tax rationalization leads to higher tax rate for insurance companies
who are currently paying 15%.

2
 15 JAN 2018
Sectoral expectations: Summary…
BUDGET EXPECTATIONS 2018-19

Sector Key budget expectations Impact

 Financial incentive to replace vehicles older than 10/15 years

Little impact
 Long-term measures for agri sector to push farmer productivity/ income
Autos Positive: CV OEMs,
levels up
Hero, M&M, Maruti
 Higher JNNURM orders for bus manufacturers and incentives for EVs

Positive
♦ Housing finance
 Final blueprint and roadmap of mega recap plan to fund PSU banks companies to benefit from
increased demand for
 Roadmap on merger plan of weak PSU banks
affordable housing
Banking and Financial  Support for ‘Housing for All’ by 2022
♦ Recapitalization to aid
Services  Separate tax exemption for term life insurance
large PSU banks with
 Increased tax on life insurance companies, bringing it in line with current growth capital
corporate tax rate
♦ Merger of PSU banks to
benefit PSU banks under
PCA

3
 15 JAN 2018
…Sectoral expectations: Summary…
BUDGET EXPECTATIONS 2018-19

Sector Key budget expectations Impact

Positive: L&T, Dilip Buildcon,

Capital goods and ♦ Higher budgetary allocation towards roads, railways, metro,
Sadbhav, ABB, Siemens, VA
Infrastructure defense and urban infra (AMRUT) projects
Tech and EPC players

Positive: Industry would

 Thrust on reviving rural economy through various incentives and higher
Cement benefit from better volume
infra spending
growth

♦ Corporate tax – Positive

 Outlining of reduction in corporate tax rate from 30% to 25% will benefit for ITC, HUL, GSK Cons,
full tax paying companies Nestle and Colgate
 Increased stimulus for rural India in the form of higher allocation to ♦ Rural stimulus – Positive for
FMCG & Retail
MNREGA and other rural employment initiatives HUVR, Dabur, Emami,
 Some relief to the jewellery industry in terms of lower custom duty on CLGT and JYL
gold import (custom duty was increased from 2% to 10% in 2012-13) ♦ Customs duty – Positive for
jewellery companies

4
 15 JAN 2018
…Sectoral expectations: Summary…
BUDGET EXPECTATIONS 2018-19

Sector Key budget expectations Impact

♦ Positive for Hindalco and

 Import duty on Aluminum to increase to10% from 7.5% Vedanta
Metals
 Customs duty on coking coal to cut down to nil from 2.5% ♦ Positive for domestic steel
producers

 Cut in cess rate for E&P companies (20% ad valorem currently) ♦ Positive: for upstream cos.
 Inclusion of natural gas in GST (20-25% tax currently) ♦ Positive: for CGD, GAIL,
Oil & Gas
GSPL, PLNG
 Exemption in excise duty for CNG used for natural gas vehicles ♦ Positive for CGD cos.

♦ Extend R&D sunset clause (150% deduction on R&D) beyond 2020

♦ Positive for companies
♦ Match GST refund rates to previous excise duty refund rates (20-25%
incurring high R&D
lower currently)
Pharma expenses
♦ Implement proposed reduction in corporate tax rates to 25% in a phased
♦ Positive for domestic
manner for all domestic companies irrespective of turnover/ profit
manufacturers
(currently limited to smaller companies)

5
 15 JAN 2018
…Sectoral expectations: Summary…
BUDGET EXPECTATIONS 2018-19

Sector Key budget expectations Impact

 Uptick in Power T&D expenditure Positive for all gencos and

discoms, as it will reduce cost
Power  Inclusion of electricity under GST
of power and boost overall
 Down-scaling of clean energy cess power demand

 Expanding beneficiaries of Pradhan Mantri Awas Yojana (PMAY) Positive: For all developers
focused on affordable
Realty  Further tax rationalization in REITs
segment. Incentives to REITs
 Increase deduction limit on housing interest and principal on housing loan positive for annuity players

 Reduction in customs duty on equipment for timely roll-out of networks

Neutral for all telecom service
 Relaxing withholding tax on distributors’ margin on SIM cards and
Telecom providers. Any cut in custom
prepaid vouchers
duty could be positive
 Lowering GST on telecom services

6
Macro backdrop of the budget
 15 JAN 2018
The concerns that need to be addressed
BUDGET EXPECTATIONS 2018-19

Investment rate continues to languish Consumer sentiment is souring on employment outlook

40% GFCF/GDP Consumer confidence (1Yr ahead eco expectations)

Real PFCE growth (Discretionary itens only*, RHS)
60 (Net response) 15
35% (%YoY)
40 12
30% 9
20
6
25%
26.4% 0 3
20% -20 0
May-12

May-13

May-14

May-15

May-16

May-17
Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17
Source: CEIC, Axis Capital Source: Source: RBI consumer sentiment survey covering 5000 HHs in 6 metros.

Farm sector realizations have crashed barring a few vegetables India is not outperforming on world trade growth
30 Rural wage growth (avg. for Men & Women)
(%YoY) 80
Food inflation (YoY%) India exports (value) World Trade (Value)
25
20 60 Correl = 84%

15 40
10 6.4 20
5
0
0
-5 -20
May-13

May-14

May-15

May-16

May-17
Nov-12

Nov-13

Nov-14

Nov-15

Nov-16

Nov-17

-40
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

*We remove non-discretionary items within private consumption like food & fuel to derive discretionary personal final consumption expenditure (PFCE) 8
 15 JAN 2018
Key expectations from the budget this year
BUDGET EXPECTATIONS 2018-19

For FY18: Decide between managing the

optics using IGST collections or use 0.5% of
GDP buffer space available under
N.K.Singh’s FRBM recommendations
Fiscal stance
For FY19: Stick to the glide path to shore up
credibility or alter the glide path to show ♦ Lower de facto corporate tax as per
realistic picture glide path
Revenue ♦ More graded income tax slabs
♦ Scale back asset sales target
measures ♦ Assume modest RBI dividend
♦ Push for affordable housing through ♦ Optimistic tax buoyancy assumption
intervention in land market and relaxing
eligibility criteria for credit subsidy Revival of
♦ Higher capex spending in roads (+18%),
irrigation, food supply chain and housing growth
♦ Tax incentive for buyers of stressed assets ♦ Savings from using DBT to be offset
by food and interest subsidy
♦ Given no large incidentals like 7 pay
Expenditure commission, can go slow on revenue
measures expenditure growth and bump up
in capex
♦ Use of DBT in all subsidy schemes
♦ Rework and implement price-deficit MSP
system
♦ Set-up challenge model for allocation of Reforms
resources to states rather than allocation
based on politics
♦ Incentivize defense R&D among MSMEs

Source: Axis Capital 9

 15 JAN 2018
The IGST conundrum
BUDGET EXPECTATIONS 2018-19

(Rs bn) April-November % y-o-y

FY17 FY18
April-Nov indirect tax collection growth is 19% y-o-y ,
Gross tax collected by center 9,333 10,873 17
but if we take only 50% of IGST collected, then
ow Direct 14
indirect tax collection run rate falls to 5.5%, which is
4,089 4,650
-Corporate 2,223 2,498 12
still better than 4% budget target
-Income 1,867 2,152 15

ow Indirect 5,243 6,223 19 IGST is an interim account. When a good is finally

-CGST - 854 consumed, the IGST so collected gets equally
-UTGST - 1 distributed between CGST and SGST. If the good is
-IGST - 1,383 exported, then rebates are claimed.
-GST comp cess - 309
-Customs 1,485 1,028 (31)
In the meantime, the center is showing IGST under its
-Excise 2,136 1,652 (23)
books. Given that there would be a base level of IGST
-Service 1,468 791 (46)
at all times, the center could consider showing a little
-Others 154 204 32
more than half of IGST in its year ending accounts.
NCCF (LESS) 43 26 (39)
Assignment to states (LESS) 3,078 3,853 25
- -
Net tax available to center 6,212 6,994 13 Even without IGST, states are seeing budget beating
Tax revenue of states (27 #s) 8,290 9,467 14
tax growth. This data includes taxes from stamp duty.
Total tax (Center + State) 14,502 16,461 14

Our FY18 fiscal deficit estimates assumes 4% y-o-y growth in indirect taxes; so the FM has some leeway to show
fiscal achievement . For FY19, we are more optimistic with 15% indirect tax projection.

10
Source: CEIC, Axis Capital
 15 JAN 2018
RBI dividend
BUDGET EXPECTATIONS 2018-19

RBI profits dipped by INR 352 bn RBI net injection (-) /absorption (+)

Surplus transferd to the government (LHS) Net repo MSS

8
% of gross income less expenditure (RHS) (Rs trn)

700 (%) 100 6

(Rs bn)
600
80 4
-352bn
500

400 60 2

300 40 0
200
20
100 (2)

May-17

Jul-17
Mar-17

Sep-17
Feb-17
Oct-16

Oct-17
Dec-16

Dec-17
Jan-17

Jan-18
Jun-17
Apr-17
Nov-16

Nov-17
Aug-17
0 0
2012-13 2013-14 2014-15 2015-16 2016-17

Source: CEIC, Axis Capital Source: RBI

RBI profits dropped in FY17 mostly due to excess liquidity in banking system (post demonetization) which the RBI
had to absorb by taking deposits at reverse repo rate. The RBI’s dividends to the government therefore suffered. The
banking system has been in surplus through FY18, so dividends expectations from the RBI and even the BFSI
segment would have to be scaled back.

In FY19, tax projections will be scaled up but non-tax collections would be scaled back

11
 15 JAN 2018
PSU recapitalization – details to be provided in the budget
BUDGET EXPECTATIONS 2018-19

The impact on fiscal is marginal if recap bonds are kept However, public debt figures will rise before taking the path
outside the balance sheet prescribed by N.K.Singh’s FRBM recommendation
2 Yr bank recapitalizaton plan (Rs bn) % of GDP
Public debt to GDP ratio (in %)
From budget 180 0.1%
70% 68% 68%
Banks capital raising 580 0.3% 67%

Recapitalization bonds 1,350 0.8% 65%

Total 2,110 1.3 %

60%

Estimated interest cost 101 0.1%

55%

FY18E

FY19E

FY20t

FY21t

FY22t

FY23t

FY24t

FY25t
FY12

FY14

FY15

FY16

FY17
FY13
Source: Axis Capital
Source: CEIC, Axis Capital

In 2015, PSU banks were busy supporting financial inclusion (Jan Dhan); in 2016, they were busy making provisions
(AQR) and supporting demonetization; in 2017, it was all about resolving NPAs. 2018 is likely to show genuine signs
of moving towards better health as banks begin to taste resolution on NPA assets and recapitalize with the help of the
government and sanguine capital market conditions.

Path to 60% public debt to GDP will be delayed by bank recapitalization

12
 15 JAN 2018
Rural push – only a few levers available that can give quick results
BUDGET EXPECTATIONS 2018-19

Rural push - assessment of policy levers

In terms of actionable rural stimulus
High plans, the central government has only
Credit to agri Interest subsidy a few levers in its control. The key
Interest waiver problem that the government needs to
address this time is fall in farm sector
Price deficit
realization; for this, increasing credit
MSP
availability or investment in marketing
Implementable

infrastructure would not help.

A direct intervention into the market like
Loan waivers increasing MSP and raising
procurement is the only way to get
quick results. To shield itself from
Expand criticism for procuring and letting the
Rural procurement food rot in poor storage units, we think
infrastrucutre the government can incentivize setting
up of ‘soup kitchens’ like Amma
Low High Canteen in Tamil Nadu and more
Addresses current issue
recently Indira Canteen in Karnataka,
which has the added benefit of
addressing the urban poor.
Source: Axis Capital

Rural push is likely to increase the food and interest subsidy bill

13
 15 JAN 2018
Sticking to FRBM has its benefits
BUDGET EXPECTATIONS 2018-19

Capital costs in the economy depend on fiscal credibility

Net market borrowing (Union Govt.) 10 Gec (RHS)  The central

government plays
8 (% of GDP) (%) 13
an important role
in setting long-term
funding costs in
6 11
the economy.

4 9  Keeping long-term
borrowing costs
anchored helps
2 7 the current
deleveraging
cycle and the
0 5 nascent optimism
on investment
Mar-00
Mar-01
Mar-02
Mar-03

Mar-05
Mar-06

Mar-08
Mar-09

Mar-11
Mar-12

Mar-14
Mar-15

Mar-17
Mar-04

Mar-07

Mar-10

Mar-13

Mar-16

Mar-18E
Mar-19E
cycle upturn

Source: Axis Capital

Borrowing costs in the economy would fall if S&P follows through on Moody’s upgrade last year

14
 15 JAN 2018
Working assumptions for FY19 budget
BUDGET EXPECTATIONS 2018-19

(R s b n) F Y18 BE F Y18 (Axis) F Y19 (Axis) % y- o - y Ab s Yo Y C o mments

G ross Ta x Revenu e 19,116 19,140 22,103 15 2,963 Tax bouyancy assumed at 1.3
Corporation tax 5,387 5,431 6,137 13 706 Maintain current run rate
Income tax 4,413 4,020 4,824 20 804 Maintain current run rate
Indirect tax 9,316 9,688 11,142 15 1,453 Improves on growth and measures to raise GST compliance
Less: To Sta tes & Union Territories & NCCF 6,846 6,846 7,836 14 990
Net ta x revenu es 12,270 12,294 14,267 16 1,973
Non tax revenues (incl dividend, interest, etc) 2,888 2,744 2,626 (4) (119) Low spectrum estimate and no RBI dividened boost
Non-debt capital receipts (incl divestment) 844 994 670 (33) (324) Rs. 55k divestment figure
Revenu e exp end itu re 18,369 18,669 19,976 7 1,307 Post 7th pay comission, there is some space to go slow
- ow Interest 5,231 5,231 5,401 3 170 Impact of bank recapitalization
- ow Su b sid ies 2,635 2,707 2,835 5 128
Food 1,453 1,500 1,600 7 100
Fertilizer 700 700 680 (3) (20) Savings from DBT
Petroleum 250 275 300 9 25 Cru d e oil p rice @ 65/b b l
Interest 232 232 255 10 23

67mn individuals used the scheme in FY18, down from

- ow MGNREGA 480 480 550 15 70 74mn in FY14. Additional allocation can impact
2-5mn individuals

Ca p ita l Exp end itu re 3,098 2,998 3,598 20 600 Mostly into rural housing, irrigation and urban infrastructure
Tota l Exp end itu re 21,467 21,667 23,574 9 1,906
Fiscal deficit (5,465) (5,635) (6,011) (376)
Fisca l % of G DP (3.2) (3.4) (3.2)

Source: RBI, Axis Capital

15
 15 JAN 2018
Working assumptions for FY19 general government financing
BUDGET EXPECTATIONS 2018-19

Partic ul ars F Y15 F Y16 F Y17 F Y18BE F Y18R E F Y19E C o mments

F isc al defic it (% o f GDP)
Central Govt (4.1) (3.9) (3.5) (3.2) (3.4) (3.2) We see a strong chance that states will do better
than budget in FY18. Tax collection for 27 states is
State Govt (2.6) (3.6) (3.0) (2.6) (2.6) (2.5)
collectively growing at 14% y-o-y (Apr-Nov) versus
Total govt (6.7) (7.5) (6.5) (5.8) (5.9) (5.7) budget target of 12%.
F isc al defic it (INR b n)
Central Govt (5,108) (5,274) (5,351) (5,465) (5,635) (6,011)
State Govt (3,272) (4,934) (4,495) (4,310) (4,310) (4,688)
Total govt (8,380) (10,208) (9,846) (9,775) (9,945) (10,700) Total financing requirement
M k t. b o rro wing (INR b n)
Central Govt borrowings 4,547 4,406 4,082 3,502 4,052 4,508
Improved states fiscal health could translate to
State Govt borrowings 2,360 2,612 3,293 3,468 3,468 3,751
lower borrowing next year
Total govt requirement 6,907 7,018 7,375 6,970 7,520 8,259
M k t. b o rro wing % a GDP
Central Govt borrowings 3.7% 3.2% 2.7% 2.1% 2.4% 2.4%
State Govt borrowings 1.9% 1.9% 2.2% 2.1% 2.1% 2.0%
Total govt requirement 5.6% 5.1% 4.9% 4.1% 4.5% 4.4%
S o urc es o f funding fo r mark et b o rro wing (INR b n)
Banks 1,887 2,750 2,634 3,029 3,332 Assumes 15% growth in FY18 and 10% in FY19
Insurance Companies 2,412 2,451 2,679 3,001 3,301 Assumes 12% growth in FY18 and 10% in FY19
Financial Institutions (PDs, MF, Takes into account opening up of FII space in FY18
1,946 2,099 1,891 2,000 2,200
PF, Corp+FIIs) and 10% growth in FY19
Reserve Bank of India (364) 505 1,099 (900)
Total 5,881 7,806 8,304 7,130 8,833
F unding gap (INR b n)
Surplus/deficit (1,026) 788 928 (390) 574

Source: RBI, Axis Capital 16

Sectoral expectations
 15 JAN 2018
Auto
BUDGET EXPECTATIONS 2018-19

Item Current status Possible changes in budget Impact

 Vehicle -  Financial incentive to replace Positive for CV players

modernization vehicles over 10/15 years old
scheme

 Farm income/ -  Long-term measures in agri sector Positive for Tractor OEMs
productivity to improve farmer productivity/ (M&M and Escorts) and OEM’s
income levels with higher rural dependence
(Maruti and Hero)

 JNNURM orders -  Increased allocation under the Positive for Ashok Leyland
(STU bus procurement scheme for STU procurement (>45% market share in STU),
program) of buses, and incentives for electric and Tata Motors
buses

Largely positive, as always

18
 15 JAN 2018
Financials
BUDGET EXPECTATIONS 2018-19

Sector Item Current status Possible changes in budget Impact

Positive – PSU banks
Final blueprint on types of bonds (especially for large PSU
Capital allocation to PSU A mega recap plan of
or interest rates on these bonds; banks like SBIN, BOB
banks Rs 2.1 trn
Specific roadmap of funding that require growth
Banks capital)
Associate banks of SBI
Roadmap on merger plan of Positive for PSU banks
Merger of PSU banks and Bhartiya Mahila
weak PSU banks under PCA
bank merged with SBI
Additional tax sops;
Increase in ticket sizes/ current Positive for housing
Housing for All by 2022 4% subsidy on interest
NBFC limits; finance lenders (Banks
and affordable housing rate for home loans
Using of land bank of PSUs for and HFCs)
affordable housing
Creating a separate tax Positive for Life
Separate tax exemption for term
exemption for term life Part of 80C with ceiling Insurance companies
life insurance
Insurance insurance of Rs 0.15 mn (SBI Life)
Increase in tax rate on Raising it to bring it in line with Negative for all Life
At ~15% currently
life insurance companies corporate tax rate Insurance companies

19
 15 JAN 2018
Capital Goods and Infrastructure…
BUDGET EXPECTATIONS 2018-19

Item Current status Possible changes in budget Impact

 Road capex (urban +  FY18 outlay on road at  To further increase by Positive for EPC companies
rural + NHAI) Rs 1.43 trn (up 10% YoY) 20-25% in FY19 with strong balance sheets
boosted by MoRTH allocation

 Railway capex  FY18 at Rs 1.31 trn  To further increase by Positive for L&T, ABB, Siemens,
(up 8% YoY) 10-15% in FY19 and other EPC companies

 Capital outlay for  FY18 at Rs 180 bn  To further increase by Positive for L&T, J Kumar,
metro rail (up 15% YoY) 10-15% in FY19 BEML, Siemens, Simplex etc.

 Capital outlay on  FY18 at Rs 887 bn (modest  Modest growth of 5-10% Positive for BEL, Cochin
defense increase of 8% YoY) in FY19 Shipyard, L&T, Reliance
Defence

 Capex for urban  Rs 196 bn in FY18,  To increase further by 15-20% Positive for ABB, Siemens,
Infrastructure up 7% YoY in FY19 VA Tech, Schneider etc.

Higher capital outlays in infra positive for EPC companies

20
 15 JAN 2018
…Capital Goods and Infrastructure
BUDGET EXPECTATIONS 2018-19

Capex for key schemes

G rowth YoY (% )
(Rs b n) FY15 FY16 FY17 RE FY18 B E FY18 FY19E
Defence Capex 820 815 818 887 8 5-10
Railways 643 935 1,210 1,310 8 10-15

Metro (Under Min. of Urban Development) 61 93 157 180 15 10-15

Roads (MORTH) 274 469 524 649 24 20-25

Rural Roads (PMGSY) 142 183 190 190 0 20-30

Rural Housing 111 101 160 230 44 30-40

Urban Infra 43 77 183 196 7 15-20
Renewable Energy 20 40 39 50 27 20-30
Urban T&D (Int. Power Development Scheme) 6 10 45 58 29 15-20

Rural Electrification (DDUGJY) 34 45 34 48 43 20-30

Tota l b u d g et a lloca tion 2,154 2,768 3,360 3,798 13

Growth (%) 9 29 21 13
Source: Budget documents, Axis Capital

21
 15 JAN 2018
Commodities
BUDGET EXPECTATIONS 2018-19

Sector Item Current status Possible changes in Budget Impact

Cement  Thrust on reviving  NA  Tax benefit/ interest rate Positive – industry to benefit
rural economy by concession to new from volume growth
various incentives projects and higher
and higher infra allocation for rural
spending schemes/ loan waiver

Metals  Import duty on  Current duty at 7.5%  Increase it to 10% Positive for Hindalco,
Aluminum Vedanta and NALCO

 Reduction in custom  Current custom duty  Reduce it to nil Marginally positive for steel
duty on coking coal at 2.5% companies

Higher allocation to housing/infra positive for cement

22
 15 JAN 2018
FMCG and Retail
BUDGET EXPECTATIONS 2018-19

Item Current status Possible changes in budget Impact

 Increased  As part of infrastructure  Expectation of a populist Positive for rural-focused companies like Emami
spending in development, central budget given general (50% of sales), Dabur (45% of sales), Bajaj Corp
rural government along with elections in 2019; (42% of sales), Jyothy Lab (40% of sales), Colgate
state government runs increased budgetary (38% of sales) and HUL (35% of sales)
various schemes. These allocation likely for rural
initiatives are also India
focused on generating
employment

 Corporate  Tax rate of 30%  Outlining of reduction in Positive for high tax paying companies like ITC,
tax (excluding cess) corporate tax rate from HUL, Nestle, GSK Consumer, Colgate
30% to 25%

 Custom duty  Current duty at 10%  Jewellery association has Positive for all jewellery companies
on gold demanded lowering the
import custom duty to 4-5%

Positive for FMCG and Retail companies

23

Oil & Gas
Item Current status
 Cut in cess rate for  E&P companies are required
E&P companies to pay cess at 20% of
realized crude oil price
 Inclusion of natural  Natural gas along with key
gas in GST petroleum products (petrol,
diesel, jet fuel) and crude oil
is not included in GST
 Exemption in excise  Compression of gas is
duty for CNG used viewed as “manufacturing”
for natural gas of goods and attracts excise
vehicles duty of 14.4%
Promoting natural gas as principal fuel by giving tax benefits to CGD players;
Petrol and diesel inclusion in GST may take more time, as it requires states’ consensus
15 JAN 2018
BUDGET EXPECTATIONS 2018-19
Possible changes in budget Impact
 Cut in cess rate to 5-8% of Positive for ONGC, Oil India
realized crude, as rise in crude and Cairn
pushed the cess up much beyond
earlier fixed rate of Rs 4,500/t
 Natural gas inclusion in GST, Positive for CGD companies,
possibly in the 5% slab in line GAIL, GSPL and PLNG, as GST
with GST on coal inclusion makes natural gas
competitive vs. other fuels (coal,
petrol and diesel), pushing gas
demand up
 Cut/ exemption in excise duty Neutral for CGD companies as
charged on CNG volumes of cut in excise will be passed on.
CITY GAS DISTRIBUTION (CGD) However, lowering of retail gas
companies price may boost consumption
24
 15 JAN 2018
Power
BUDGET EXPECTATIONS 2018-19

Item Current status Possible changes in budget Impact

 Power T&D  ~Rs 106 bn spent on such  Increase by 20-25% Positive for power gencos, as
expenditure schemes in FY18 BE higher capex helps reduce T&D
losses and, improve power
demand by SEBs

 Include electricity  Not included  Likely to be included Positive for gencos and SEBs as
in GST it will reduce cost of power due
to offset on input credit. This will
also boost power demand in
manufacturing sector (40% of
power consumption)

 Clean energy cess  Current cess at Rs 400/ton  Down-scaling of the cess Positive for gencos, as it would
reduce cost of power

25

Real Estate
Item
 Extend provisions of section
80IBA (income tax
exemption) to housing units
up to 150 sqm carpet area
(MIG category)
 REIT: Reduce holding
period for LTCG
 REIT: Exemption of stamp
duty on transfer of assets
into REIT
 Higher tax deduction on
home loans
Focus to remain on government’s vision of Housing for All by 2022 and REITs
Current status
 Provisions of section 80IBA are
applicable for affordable
housing units up to 60 sqm
carpet area for EWS and LIG
 Holding period for LTCG is 36
months
 Stamp duty is applicable while
transferring assets into REIT
 Rs 2,00,000 on interest and
Rs 1,50,000 on principal
15 JAN 2018
BUDGET EXPECTATIONS 2018-19
Possible changes in budget
 Extend the benefit to
MIG category, which is
already covered in
PMAY for mortgage
interest subvention
 Reduction in holding
period to 12 months
 One-time exemption
while transferring assets
into REIT will make it a
more viable product for
both developers and
investors
 To be increased further
Impact
 Positive: For all developers
with mid-income housing
projects
 Positive: For realty
companies with strong
annuity portfolios such as
DLF, Phoenix Mills,
Prestige Estates and Brigade
 Positive for realty companies
with strong annuity portfolios
such as DLF, Phoenix Mills,
Prestige Estates and
Oberoi Realty
 Positive: For all developers
26
 15 JAN 2018
Telecom
BUDGET EXPECTATIONS 2018-19

Item Current status Possible changes in budget Impact

 Customs duty on  Currently at 29.8%  Cut it below 25% Positive for telecom service
equipment providers and infrastructure
companies

 Relaxing  Currently at 10%  Cut it down to 1% Positive for telecom service

withholding tax on providers
distributors’ margin

 Lowering GST on  Currently at 18%  Reduce it to 12% Positive for telecom service
services providers

27
Axis Capital Limited is registered with the Securities & Exchange Board of India (SEBI) as “Research Analyst” with SEBI-registration number INH000002434 and which registration is valid up to
03/12/2020.

DISCLOSURE
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
1) Axis Capital Limited (ACL), the Research Entity (RE) as defined in the Regulations, is engaged in the business of Investment banking, Stock broking and Distribution of Mutual Fund products.
2) ACL is registered with the Securities & Exchange Board of India (SEBI) for its investment banking and stockbroking business activities and with the Association of Mutual Funds of India (AMFI) for
distribution of financial products.
3) ACL has no material adverse disciplinary history as on the date of publication of this report
4) ACL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the recipients of this report should be aware that
ACL may have a conflict of interest that may affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
5) The research analyst or any of his / her family members or relatives may have financial interest or any other material conflict of interest in the subject company of this research report.
6) The research analyst has not served as director / officer, etc. in the subject company in the last 12-month period ending on the last day of the month immediately preceding the date of publication
of this research report.
7) The RE and / or the research analyst or any of his / her family members or relatives may have actual / beneficial ownership exceeding 1% or more, of the securities of the subject company as at
the end of the month immediately preceding the date of publication of this research report.
8) In the last 12-month period ending on the last day of the month immediately preceding the date of publication of this research report ACL or any of its associates may have:
i. Received compensation for investment banking, merchant banking or stock broking services or for any other services from the subject company of this research report and / or;
ii. Managed or co-managed public offering of the securities from the subject company of this research report and / or;
iii. Received compensation for products or services other than investment banking, merchant banking or stockbroking services from the subject company of this research report and / or;
iv. Received compensation or other benefits from the subject company of this research report or any other third-party in connection with this report
9) The other disclosures / terms and conditions on which this research report is being published are as under:
i. This document is prepared for the sole use of the clients or prospective clients of ACL who are / proposed to be registered in India. It may be also be accessed through financial websites
by those persons who are usually enabled to access such websites. It is not for sale or distribution to the general public.
ii. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.
iii. Nothing in this document should be construed as investment or financial advice, or advice to buy / sell or solicitation to buy / sell the securities of companies referred to in this document.
iv. The intent of this document is not to be recommendatory in nature
v. The investment discussed or views expressed may not be suitable for all investors
vi. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in
this document (including the merits and risks involved), and should consult its own advisors to determine the suitability, merits and risks of such an investment.
vii. ACL has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or
fairness of the information and opinions contained in this document
viii. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time
without any prior approval
ix. Subject to the disclosures made herein above, ACL, its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as
principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other
business from, any company referred to in this report. Each of these entities functions as a separate, distinct entity, independent of each other. The recipient shall take this into account
before interpreting the document.
x. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of ACL. The views expressed are those of
analyst and the Company may or may not subscribe to all the views expressed therein
xi. This document is being supplied to the recipient solely for information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published,
copied, in whole or in part, for any purpose and the same shall be void where prohibited.
xii. Neither the whole nor part of this document or copy thereof may be taken or transmitted into the United States of America (to U.S. Persons), Canada, Japan and the People’s Republic of
China (China) or distributed or redistributed, directly or indirectly, in the United States of America, Canada, Japan and China or to any resident thereof.
xiii. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document may come shall inform themselves about, and observe,
any such restrictions.
xiv. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including but not
limited to loss of capital, revenue or profits that may arise from or in connection with the use of the information.
xv. Copyright in this document vests exclusively with Axis Capital Limited.
 Axis Capital Limited
Axis House, C2, Wadia International Centre, P.B Marg, Worli, Mumbai 400 025, India.
Tel:- Board +91-22 4325 2525; Dealing +91-22 2438 8861 - 69;
Fax:- Research +91-22 4325 1100; Dealing +91-22 4325 3500

DEFINITION OF RATINGS

Ratings Expected absolute returns over 12 months

BUY More than 10%

HOLD Between 10% and -10%

SELL Less than -10%

ANALYST DISCLOSURES

1. The analyst(s) declares that neither he/ his relatives have a Beneficial or Actual ownership of > 1% of equity of subject company/ companies
2. The analyst(s) declares that he has no material conflict of interest with the subject company/ companies of this report

29