How To Profit From The Budget

How To Profit From The Budget

The direct tax collections soared 18.2 per cent during the first nine months of the current fiscal at Rs6.56 lakh crore.

Come January and markets gear up for the biggest economic event of the year - Union Budget. Indeed, there has been no other major consistent trigger for the markets than the the Budget over the years. Budget-2018 is by all means a major event, not only for those tracking stock markets, but also for all those whose lives will be affected by what may be announced on February 1 by none other than the Finance Minister of India Arun Jaitley. 

There is consensus in the investing world that the focus of the upcoming budget will be on the rural economy and the allied sectors that support the rural economic growth. What is difficult to fathom is which sectors and sub-sectors will get support of government spending and by how much. There is also a consensus in the market that the current government will continue to focus on infrastructure and banking sectors and will take efforts to revive the overall sentiments in the economy. 

Budget 2018 – Focus Areas 

In 2017, the Union Budget presented by Finance Minister Arun Jaitley was focused on eight broad themes – farming sector, youth, poor and unprivileged health care, infrastructure, prudent fiscal management, stronger institutions in financial sector, public services and education . 

The upcoming Union Budget 2018 may continue to build on the same broader themes, with special focus on infrastructure sector, rural sector and the banking industry. 

The fact that the Union Finance Minister had his very first pre-budget meeting with the agriculture groups goes to show the intended focus of the government in the coming budget. The growth of agriculture sector in the last four years has been lower than the growth recorded by the sector during the tenure of the previous government. Investors should no doubt focus on the sectoral announcement in the budget session. It will be interesting to see if any major announcement will be made in the space of corporate farming, where the farmers will be able to generate income in the form of rent for the leased land and also earn employment with retirement benefits. 

According to Mustafa Nadeem, CEO, Epic Research "Stocks related to agri based products and irrigation-related businesses are already doing good and have seen some momentum built up in the last couple of weeks. The fertiliser space is doing good and has outperformed in recent times with Chambal Fertilizer leading the pack and that is on our radar as well." 

Says Tejas Khoday, CEO and CoFounder, FYERS. "We expect the government to increase the allocation to MGNREGA scheme. It is also very likely that food and fertilizer subsidies will increase." 

Global investors who already have exposure to Indian equities and those who are sitting on the sidelines waiting for the announcement of policy decisions will be keenly watching on the observations specific to the recapitalisation of banks. For investors, it will be interesting to see if there will be any announcement on the merger of the financially weak PSU banks with the strong ones. The banking stocks will be closely tracked on the budget day.

Beyond the banking sector announcements, investors and credit ratings agencies will be eyeing the fiscal deficit target. There is a good chance that the fiscal deficit target may be increased to 3.5 per cent of the GDP from the current year target of 3.2 per cent. The increase in fiscal slippage will be closely analysed by the financial experts.

This year, there is an increasing probability that the government will not be able to maintain its fiscal deficit target of 3.2 per cent as was announced in the Union Budget 2017, even as the fiscal situation may turn grim in the upcoming fiscal. The crude oil prices have already touched $70 per barrel and it does look like the crude oil prices may remain stiff throughout 2018. The rising crude oil prices will undercut government's efforts to improve its balance of payments, thus making it difficult to maintain fiscal discipline. 

Divestment of PSUs will thus become the most important factor in the fiscal management for the coming year. Investors will be keen to know the divestment target for the next fiscal. The details on how the government intends to divest its stake will keep investors, especially institutional investors, excited. Previous year saw government successfully and efficiently divesting its stake through the ETF route.

The government spending in India reached its all-time high in the third quarter of 2017 to Rs396,284 crore.

Kotak Institutional Equities 

The equity market has pinned high hopes on increased government spending on housing and rural economy, which will drive consumption demand in FY2019. Stocks in housing, infrastructure and ‘rural’ sectors have jumped sharply in the past few months in anticipation of higher government spending and subsequent recovery in volumes, revenues and earnings. However, the government’s ability to spend will depend on its fiscal position. The market’s optimism may be belied if GST revenues were to fail to pick up meaningfully from current levels. 

Dinesh Thakkar, CMD, Tradebulls 

Which sectors will be in focus in the coming budget?
Agriculture and rural initiatives will be a core focus and infrastructure (affordable housing), financial (private and PSU banks) and auto and auto ancillaries would be in focus this coming budget. 

Do you expect any negatives for the market to be announced in the budget? 

Reintroduction of long term capital gains (LTCG) on equities might be negative for the market. We don’t expect LTCG to be introduced because of the dependence of the government revenues in the equity markets, given the amount of dis-investments they will have this year, especially ahead of an election year. However, if it is introduced, there might be minor change so it won’t impact equity flows in a big way. 

Amar Ambani, 

Partner & Head of Research, IIFL Wealth Management Ltd.
Going forward, the government looks discernibly committed to meet the 3% target for FY19, by increasing the tax revenue collections and controlling wasteful expenditure, but even here, a slippage of say 3.1% instead of 3.0% would not weaken the government’s strides on the path of fiscal consolidation. The government would like to signal lower rates and control its borrowings, and also meet the expectations of global rating agencies. credibly enough. We're at the lowest level of deficit in almost three decades, barring three or four occasions. The market duly acknowledges this feat from which it gains commensurate confidence. So, it would not fret over a gap of 10 to 15 basis points. 

Kaustubh Belapurkar, 

Head MF research, Morningstar India
Equitable tax treatments for Fund of Funds – Fund of funds (FoF) are taxed as debt funds, irrespective of the asset class in which investments are made. For instance, while equity funds enjoy beneficial taxation vis-à-vis debt fund, a fund of equity funds is taxed as a debt fund, thus making it relatively unattractive to equity investors. Similarly, global funds, whilst investing into global equities, get taxed as debt funds. The global funds can be useful diversification tool for investors, but the inferior tax treatment makes it relatively unattractive for investors. 

With a full quarter of the fiscal year still to go, the fiscal deficit target amount for the entire year has already been exceeded by 12 per cent. 

GST & Budget 2018 

The government has not been able to generate revenues as expected from the Goods and Services Tax (GST). The monthly collections were reportedly down to Rs80,000 crore (October & November) which is much below the figure of Rs95,000 crore collected in the initial few months. 

On the direct taxes front, the situation is much better, and it seems like the target set for direct tax collection will be achieved. However, the direct tax collections may not be good enough to compensate for the deficit in the GST revenues. 

It is a known fact that the GST revenues have come down in the recent months as large number of commodities were moved from the 28 per cent bracket to the 18 per cent bracket. In few cases, the commodities have been moved to even lower brackets. There were 178 items that were moved from the 28 per cent tax slab to the 18 per cent slab in November 2017. At least six items were moved from the 18 per cent tax slab to the 5 per cent slab and eight items were moved from the 12 per cent slab to the 5 per cent slab. Six items were moved from the 5 per cent slab to zero per cent slab. These changes have led to the decline in the GST revenue for the government. In spite of such reduction in tax rates on numerous products, there are numerous other demands from entrepreneurs requesting reduction in the GST rates on their products, such as e-learning educational software. 

According to Surendra Shinde, CEO of Chanakya Net Study Pvt. Ltd, “The previous tax regime attracted a 6 per cent VAT on e-learning educational software products. In the current tax regime, the GST rates on such products is 18 per cent. Government should reduce the GST rate on such educational products to at least 5 per cent, if not lower.” Only time will tell if the government will reduce the GST rates for more such products in the year 2018, which is also going to build up the pitch for the 2019 Lok Sabha elections. 

As far as low GST revenue collection is concerned, the ad hoc reduction in rates has not been the only reason. The patchwork design of the whole GST framework and the cumbersome compliance procedures have also had some impact on the GST revenue collection. 

The comments on the GST implementation in the budget will be extremely important from the point of view of small traders and businessmen. Any announcement indicating a road map for reforming the GST will be cheered by the investors. Incremental steps taken, if any, to resolve the compliance issues will be closely watched in the budget session. 

TAXATION 

Among the most pertinent and unarguably the most important announcements that corporate India will be watching out for will be the “promise to rationalise corporate tax rates” and “how the government will be prioritising its expenditure”. These announcements will send a signal to the market about the government's long-term goals and its strategy for economic revival. However, the markets will cheer any kind of rationalisation of corporate taxes, but the industry captains will be keeping their fingers crossed. The corporate tax rate was cut down to 29 per cent in the 2015 budget for those companies with total turnover of up to Rs5 crore. The tax rate was reduced to 25 per cent for the newly incorporated domestic firms in the 2016 budget. Now, corporate India will be expecting rationalisation of taxes for Infrastructure bigger companies. The US has already set the tone for economies across the world to reduce taxes and India may follow suit. 

For those who invest in equities, there may some tweaks in the definition of Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) tax. As of now, the definition of long term is any investment held for more than one year. There is a possibility that the long term could be termed as any investment held for more than three years and any investment sold before three years to be considered as short term. The STCG tax stands at 15 per cent currently.

Conclusion:- 

Investors have all the right reasons to remain bullish on the markets when it comes to one of the major economic events of the year 2018 . The Budget that will unfold in a couple of weeks from now is all set to be an expansionary one. While the agriculture, banking and infrastructure sectors will remain in the limelight throughout the budget session, investors can expect the budget to boost their sentiments. 

While the government will attempt to pacify farmers, small traders and entreprenuers, investors can expect higher budgetary allocation to the fertiliser sector and announcement of some benefits to the first-time home buyers. Without getting carried away by the Budget hoopla, investors can stick to their high conviction stocks in their core portfolio. 

Anuj Puri, Chairman, ANAROCK Property Consultants

Tax rationalisation on REITs : 
Listing of REITs has been long pending in India and as of now, the first REIT is yet to be listed. Simplification in taxation norms may give an impetus to the listing that will benefit the entire real estate sector by the enhanced participation of type of investors. 

Higher income tax benefits for the first time home buyers : 
Presently, a first-time home buyer can claim an additional tax deduction of up to Rs50,000 in each financial year under section 80EE of the Act, provided certain conditions are fulfilled. This slab of additional tax exemption should be increased so as to revive demand by incentivising first time home buyers.

Reduction in GST rates :
Presently, under-construction properties are levied GST of 12%, which is significantly higher than the previous taxes. The government should strive to make GST a tax neutral proposition so as to help in reviving demand in the real estate sector. Clarity and transparency on input tax credit will also help in rationalising the taxes. 

B. J. Maheshwari, 

Whole-time director and CS-cum-CCO, Dwarikesh Sugar Industries 

Tax Rate :
In the Finance Bill 2017, the finance minister reduced the corporate tax rate from 30% to 25% for small domestic companies in case where the turnover/ gross receipts were upto Rs50 crore.
 It is suggested that planned reduction in corporate tax rates may be accompanied with at least 1% rate cut each year may also be extended for all domestic companies effective from FY2018-19 to boost confidence among tax paying industry. It would be appropriate to remove the levy of surcharge and education cess on corporate and non-corporate taxpayers.
 Consistent with the reduction of rates of tax, the rate of DDT may also be reduced suitably so as to be competitive in terms of the comprehensive tax burden.
 Similarly, the income tax rates for unincorporated bodies, i.e. firms, limited liability partnerships (LLPs), etc., should also be reduced to 25% from the current 30% 

Kunal Bajaj, 

Founder & CEO, Clearfunds.com
Clearfunds would like to see tax laws changed to make it easier for wealthier Indians to give back to those who are most in need 

Infrastructure, Rural and Financial Sectors are likely to get attention in terms of priority in Union Budget 2018 

Ms. Nitasha Shankar, 

Sr. Vice President and Head of Research at YES Securities (I) Ltd
Considering the government’s long term vision as well as the trend set through the earlier budgets, the focus will remain largely on housing, infrastructure and the rural economy. Thus, companies catering to these areas will be the key beneficiaries. These include those involved in construction, cement, building material (tiles, paints, pipes), housing finance, FMCG, consumer durables, among others. 

Within infrastructure, areas such as housing, rural connectivity, digital connectivity, metro projects, waterways, sanitation, urban and rural infrastructure, irrigation, and rural electrification are likely to continue to be in focus, as was seen through the sharp rise in allocation towards the same in the previous budget. Within the real estate space, the focus is likely to be on measures towards boosting the affordable housing through various measures and schemes – including efforts taken to liquidate inventory in the system as well as providing platforms to raise capital for builders. 

George Alexander Muthoot, 
MD, Muthoot Finance Ltd

We expect rural economy, infrastructure and affordable housing to have key impetus in the last full budget of the current government. We also expect the TDS for NBFC interest should be raised from the current Rs5,000 (NBFC)/Rs10,000 (bank), especially as the limits were last set two decades ago in 1997. 

Soumen Chatterjee, 

Head of Research, Guiness Securities
We don’t see LTCG coming in this budget; however, there may be some probability of STCG tax definition being tweaked to make it three years, but that will only come with STT rates being rationalised and parity in tax treatment. 

R.M. Vishakha, MD & CEO, IndiaFirst Life Insurance 

5% tax rates for term life insurance products :
The government demonstrated a hands-on approach to financial inclusion by launching PMJJBY, the GST-exempt insurance scheme. Reinforcing this intent will be lowered GST tax rates on term products, with the life insurance sector and the administration jointly working towards enhanced pan-India penetration. 

Move to centralised tax regime :
The core operations of most insurers happens out of one central hub. A large part of compliance and business challenges can be addressed, if the current requirement of state-wise, decentralised registration could move towards centralisation, akin to the service tax regime. 

Rajesh Bhatia, Global CFO, Uflex 

The Government of India has imposed anti-dumping duty on aluminium foil being imported from China–a country that accounts for almost 65-70% of the global aluminium foil production. Uflex has recently operationalised its aseptic liquid packaging manufacturing plant at Sanand, Gujarat, reaffirming its commitment towards the government’s 'Make in India' initiative. One of the layers of the aseptic liquid packaging is aluminium foil, which imparts high barrier properties required for protecting the liquid being packed and imports thereof are subjected to the anti-dumping duty. 

Ironically as it may sound, similar anti-dumping duty is not being levied on the import of finished aseptic liquid packaging from China, which also has a layer of aluminium foil and is, therefore, dealing a body blow to the manufacturers of aseptic liquid packaging in India, who are subjected to anti-dumping duty when they import aluminium foil from China. Aseptic liquid packaging manufacturers in India are at a clear disadvantage despite huge investments made in the state-ofthe art manufacturing plants. We urge the Government of India for instituting a level playing field by imposing similar anti-dumping duty on the aluminium component of the aseptic liquid packaging being imported from China. 

Anupam Arya, Director Fabriclore 

"If we wish to compete with mass-produced synthetics and highlight the varied local produce of different states, naturally produced or obtained yarns need tax relief. Usage of naturally, locally produced dyes, yarns, and processes applied or job work availed towards completing natural fibres or naturally produced fabrics, should be tax exempt to stand a fighting chance against the synthetically produced, cheaper stuff." 

Ambuja Cement 

CMP : Rs276.60
BSE CODE : 500425
Face Value : Rs2
BSE Volume : 157,039 

Ambuja Cements, set up in 1986, has grown ten-fold in the last decade. With a cement capacity of over 18.5 million tonnes, it is among the largest and the most profitable cement companies in India. The company also has one of the lowest capital cost per tonne of cement in the industry. Ambuja Cements was the first company in India to introduce bulk cement movement by sea. An all-weather port of the company is situated at Muldwarka, Gujarat, which is 8 kms from the company’s Ambujanagar plant and handles ships with 40,000 DWT. 

Recently, the company was ranked 7th by the internationally renowned Dow Jones Sustainability Index in the construction material category, making it the only Indian manufacturer to be awarded such a high rank. 

On the financial front, the net sales of the company increased 14.18 per cent to Rs2319.64 crore in the second quarter of FY18 as against Rs2031.44 crore in the same quarter last year. The company’s PBDT decreased 6 per cent to Rs476.25 crore in the second quarter of FY18 on a yearly basis. The company’s net profit also declined marginally 1.9 per cent to Rs272.42 crore in Q2 FY18 as against a net profit of Rs277.02 crore in Q2 of the previous year. 

On the valuation front, the company maintained a PE ratio of 32.10x as against its peer ACC (40.71x). The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 6.69 per cent and 12.89 per cent, respectively. The company is virtually debt-free and has been maintaining a healthy dividend payout of 48.97 per cent. 

The Supreme Court, in December, lifted the ban on the use of pet coke in cement production, which augurs well for the company. Also, considering the continuous impetus to the infrastructure sector in the budget, we recommend our investors to BUY the stock

ZEE Entertainment 

CMP : Rs614.20
BSE CODE : 505537
Face Value : Rs1
BSE Volume : 114,999 

Zee Entertainment Enterprises Ltd is a part of the media industry in India. It owns multi-linguistic television channels under the Zee brand. It also distributes feature films and manages live entertainment events. The company operates in the content and broadcasting segment with operations in over 170 countries. It offers content in multiple languages and offers about 38 international and over 30 domestic channels. Recently, Zee announced the acquisition of 9X Media’s six music channels for Rs1.6 billion. These six channels across four languages will allow Zee to expand its portfolio from the current 33 channels to 39 channels. 

On the financial front, the net sales of the company increased 5.99 per cent to Rs1351.47 crore in the second quarter of FY18, as against Rs1275.08 crore in the same quarter last year. The company’s PBDT increased 11.51 per cent to Rs559.96 crore in the second quarter of FY18 on a yearly basis. The company’s net profit also improved 5.89 per cent to Rs347.04 crore in Q2 FY18 as against a net profit of Rs327.74 crore in Q2 of the previous fiscal. 

On the valuation front, the company maintained a PE ratio of 39.56x as against its peer Sun TV Network (39.79x). The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 22.57 per cent and 28.61 per cent, respectively. The company has a debt-to-equity ratio of 0.29x. 

We believe Zee’s efforts to widen TV genre/language presence; increased focus on movie/music production and events business would allow it to sustain healthy earnings growth over the next few years. Also, the media and entertainment industry is set to grow well in the coming years due to the changing consumption pattern, increasing penetration of television and digital media and higher surplus income with the consumers. Zee Entertainment’s stock stands to benefit from this trend. 

TPL Plastech 

CMP : Rs691
BSE CODE : 526582
Face Value : Rs10
BSE Volume : 193 

TPL Plastech Ltd (TPL) is a subsidiary of Time Technoplast. The company commenced operations in 1995 and has become the second largest manufacturer of drums, especially bulk packaging. TPL also manufactures polymer drums and pipes. The company has manufacturing facilities at 5 locations and has a current capacity of about 28,000 MT. The company employs over 280 personnel. 

Time Technoplast Ltd. (TTL) acquired 75 per cent equity stake in the company in 2006. TPL has a huge client base catering to more than 225 customers in chemical and petrochemical industry. TPL’s clients include Godrej Industries, Grasim, Gulf, Petrochem, L&T, Jubilant, Sanstar , UPL, Shapoorji Pallonji, NCC etc. 

On the financial front, the net sales of the company increased 7.65 per cent to Rs45.47 crore in the second quarter of FY18, as against Rs42.24 crore in the same quarter last year. The company’s PBDT increased 22.01 per cent to Rs4.49 crore in the second quarter of FY18 on a yearly basis. The company’s net profit also improved 12.59 per cent to Rs3.04 crore in Q2 FY18 as against a net profit of Rs2.70 crore in the Q2 of the previous year. 

On the valuation front, the company has a PE ratio of 49.40x. The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 19.68 per cent and 23.79 per cent, respectively. The company has a debt-to-equity ratio of 0.60x and a price-to-book value of 8.36x. TPL has been maintaining a healthy dividend payout of 21.29 per cent. 

Industrial packaging industry is largely dependent on chemicals and pharmaceuticals; building and construction industry; lubricants; and bulk food and beverages, all of which are expected to be in favour in the upcoming budget. Also, with the government giving priority to water and sewerage infrastructure development, we expect growth in the pipe segment of the company. We recommend a BUY on the scrip. 

Swelect Energy 

CMP : Rs481
BSE CODE : 532051
Face Value : Rs10
BSE Volume : 2,009

Swelect energy systems is a solar products company and a leading solar project implementer. The company has a strong presence in global energy market for over 30 years. With a manufacturing facility of 105 MW, the company operates multiple revenue streams in the solar photovoltaic space in terms of product sale, projects and power sale

The acquisition of HHV ST solar modules and the expansion of the Salem plant gives Swelect a distinct status as one of the very few companies in India to have total backward integration in the manufacturing process. This has given the company greater market visibility as an EM. 

On the financial front, the net sales of the company increased 68.83 per cent to Rs47.24 crore in the second quarter of FY18, as against Rs27.98 crore in the same quarter last year. However, the company’s PBDT decreased 32.32 per cent to Rs7.79 crore in the second quarter of FY18 on a yearly basis. The company’s net profit also declined from Rs7.71 crore in Q2FY17 to Rs3.63 crore in Q2FY18. 

On the valuation front, the company has a PE ratio of 17.70x. Also, with a debt-to-equity ratio of 0.10x, the company is virtually debt-free. Swelect has been maintaining a healthy dividend payout of 24.84 per cent. The company is also expected to give good quarterly numbers. 

With the Central and state governments promoting renewable energy and increased awareness for sustainable energy, the future outlook for the renewable industry in general and Swelect in particular looks positive. 

Also, Swelect, with its long term business visibility and brand recall in the market, is well-positioned to become a pioneer in the renewable energy market. We recommend our readerinvestors to BUY the scrip.