Budget 2017: Sectors that stand out

Consumption and infrastructure are the winners

Investors initially seemed happy on Budget day, as evinced from the Sensex soaring 486 points at the end of the Budget session. But that was mainly because the long-term capital gains tax on equity transactions was left untouched by the Finance Minister. Stock market movement in the subsequent sessions was more circumspect.

The Budget is, however, not a damp squib for Indian companies and there are various positive takeaways for investors. The focus on rural India and the agri-economy will ensure that consumption in this segment revives. Similarly, increase in government capital expenditure will translate into demand for listed companies, improving their order flows. The digital India drive is another theme that will help companies that cater to this segment.

Here is a closer look at these themes.

Rural consumption

The Budget seeks to give a boost to rural consumption by emphasising on employment generation. The highest-ever allocation to the rural employment generation scheme, MNREGA, along with the increased thrust on rural housing, road construction and electrification will ensure that there is enough money in the hands of rural consumers. There are a host of measures to help farmers get credit, insure their produce and sell their products at better prices, too.

Companies that depend on the rural economy are well placed to make the most of this thrust. Tractor manufacturers such as Mahindra & Mahindra and two-wheeler makers such as Hero MotoCorp can make the most of this demand revival once the effects of demonetisation wear off. Sales in these segments have been hit in the first two months of 2017, but things are expected to normalise in the next couple of quarters. Similarly, agri input manufacturers such as Coromandel International, GSFC and Rallis India can also see better toplines if the purchasing power of farmers improves.

Infrastructure boost

Capital expenditure in FY18 is budgeted to increase 10.7 per cent. The total budgetary spending of ₹3,96,135 crore on infrastructure will have a trickle-down affect on other sectors such as cement, capital goods and steel, besides direct beneficiaries such as road construction companies, real estate companies and those supplying to the railways.

The ₹64,900 crore budgeted for roads that include construction budgets for highways, rural and coastal roads will translate into improved order books for road construction companies such as IRB Infrastructure, Ashoka Buildcon, L&T, Sadbhav Engineering, IVRCL, MEP Infrastructure and NCC. These companies are already witnessing good order inflows due to improved execution of road projects.

The allocation of ₹1.31 lakh crore for rail infrastructure is a positive for rail equipment manufacturers. These companies have been the beneficiaries of the Centre’s thrust to improve rail infrastructure in recent years, with companies in this segment witnessing strong order book growth. It’s best to keep an eye on companies such as Texmaco Rail and Engineering and Titagarh Wagons that operate in this space.

Many capital goods companies will draw the benefit of increased infrastructure spends. Companies that appear attractive from this stand-point include Sanghvi Movers, Engineers India, Cummins India, Larsen & Toubro and Techno Electric.

Cement companies derive a large chunk of their demand from rural housing (30 per cent) and infrastructure (20 per cent). These companies stand to gain due to the increase in allocation of 39 per cent to Pradhan Mantri Awas Yojana to ₹29,000 crore and increased investment in infrastructure that consumes cement, amounting to a total of ₹4.2 lakh crore. Cement companies that appear well placed to take advantage of this demand include UltraTech Cement and Ambuja Cement.

Real estate companies are down in the dumps due to large unsold inventory and sluggish demand. But companies in the listed space that cater to affordable housing such as Mahindra Lifespace Developers and Godrej Properties can benefit from the impetus given to affordable housing.

Affordable housing is now to be accorded infrastructure status, thus making it easier for the developers to raise funding.

Digital India

The Budget contains various proposals to give a push to the Digital India programme. Full exemption from customs duty has been given to makers of POS machines, scanners, fingerprint readers, iris scanners and micro-ATMs. TVS Electronics, which sells POS products and scanners, stands to gain.

The push to increase digital payments will benefit RS Software, which built the UPI platform and is also a partner in the Bharat Bill Payment System. Large IT players, including Infosys and TCS, will also see orders flowing from this drive.

Other sector gainers

The reduction in customs duty on liquefied natural gas (LNG) to 2.5 per cent from 5 per cent will increase the demand for natural gas. This is a positive for many listed companies, including importers such as Petronet LNG, transmitters such as GAIL (India), city gas distributors such as Indraprastha Gas and Mahanagar Gas. The proposed integrated public sector ‘oil major’ appears a good idea as it will create a company large enough to take on large international companies operating in this space. But this could take some time to fructify.

A lot of air-time was allotted to education in the FM’s speech. There are some listed companies in the education space such as Career Point Education and NIIT that could get a push on account of this.

Besides the themes discussed above, there are a couple of areas that impact listed companies that investors need to take note of.

Corporate tax tweak

The Finance Minister disappointed India Inc by selectively reducing corporate tax rate only for companies with annual turnover of less that ₹50 crore, from 30 to 25 per cent. Almost all the listed companies will be out of the ambit of this reduction.

According to capitaline, 2,187 companies had turnover less than ₹50 crore as on March 2016. But of these, 457 have no turnover at all and 1,086 recorded turnover less than ₹2 crore.

Almost half the companies recorded losses and some of them such as ABG Shipyard, Everonn Education, KS Oil and Agro Dutch Industries have run up fairly large losses. So there are hardly any fundamentally-sound listed company with annual turnover under ₹50 crore. However, firms listed on the SME platforms of BSE and NSE need another dekko after this tax change.

The minimum alternate tax was not altered, but the FM has allowed the MAT credit to be carried forward for 15 years instead of the 10 years. This change will help companies that have large MAT credits that need to be set off.

There are some losers due to the FM’s inaction too. SEZ developers, infrastructure and cement companies (Gujarat Pipavav Ports, IRB Infrastructure Developers, The Ramco Cement, India Cements), having units in specified locations in the north-east, and exporters (located in SEZs) will not have any relief as they will continue to pay a basic tax rate of 18.5 per cent under MAT.

Interest payment on foreign debt

Another provision that needs a closer look by investors is the restriction on the interest payment made on Indian companies to an associated company overseas. This change seeks to address the issue of ‘thin capitalisation’ wherein companies have more debt than capital.

The FM has stated that if such interest payments exceed ₹1 crore, it should be 30 per cent of the company’s EBIDTA or the actual interest paid, whichever is less. Also, if the lender of the debt to the Indian company is not an associated company or entity, but an associated entity has given a guarantee to the lender, such debt transaction shall also fall within the purview of this provision.

This provision could hurt subsidiaries of multi-national companies that are running their operations with debt taken from their parent or other group entities.

Since this is a part of the Base Erosion and Profit Sharing (BEPS) initiative, it is probably aimed at stemming movement of taxable profit out of India in the form of interest.

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