Union Budget FY 2019-20 Sectoral Impact - ITI Mutual Fund

Union Budget FY 2019-20
    Sectoral Impact

Union Budget FY 2019-2020 – Key Highlights

A Budget Focused on Long-term Sustainable Economic Growth
 Upfront recognition of importance of investment led growth to reach the goal of becoming a USD 5
trn economy.
 Measures to attract foreign capital to fund large investment requirements
 Improve strength of Indian financial system and deepen capital markets
 Spur Economic Activity
 Maintaining fiscal discipline and low inflation

Facilitating Investments
 Land parcels of Central Ministries and PSUs to be used for Infra development
 Focus on connectivity - Electricity grid, gas-grid, Bharat mala, Sagar mala, UDAAN-Airports
 Reviving the Public Private Partnership (PPP) model
 Push for affordable housing
 Credit Guarantee Corporation to be set up to facilitate long term infra financing
 Encouraging investments in start-ups and in sunrise technology areas such as Semi conductor
  Fabrication, solar photovoltaic cells, Lithium batteries, etc

Union Budget FY 2019-2020 – Key Highlights

Attracting Foreign Capital
 Increase in FPI Investment limit in companies from 24% to sectoral limits
 Streamline KYC norms for FPIs
 Government to access foreign markets to fund part of its borrowing
 Examining increasing FDI limits in Insurance, Media and Airlines Sectors
 Easing local sourcing norms

Strengthening financial system and capital markets
 Public Sector Bank recapitalisation Rs 70,000 crs
 One time credit enhancement to banks for portfolio buyouts from NBFCs
 Regulation of HFCs now with RBI
 Increase in minimum public shareholding in listed companies to increase India’s weight in global
indices
 Easing KYC norms for foreign investors

Union Budget FY 2019-2020 – Key Highlights

Spurring economic activity
 Push to promote adoption of electric vehicles
 Thrust on affordable housing
 Promoting MSMEs- faster payment release from Governments, interest subvention
 Easing local sourcing norms for single brand retail

Maintaining fiscal discipline and low inflation
 Fiscal deficit reduced from 3.4% in interim budget to 3.3%
 Lower GST collections to be made up by higher income taxes on rich and additional duties on auto
  fuels
 Additional resource collection from divestments
 Strategic PSU divestment a structural positive reform
 Strong 20% increase in allocation to rural focused programmes despite fiscal pressures

Automobiles

 Incentive on Electric Vehicles – Faster Adoption of Electric Vehicles Over Long Term
     • Tax Incentives for Electric Vehicles: Income Tax deduction upto Rs1.5 lakh for interest on loan to
     buy an EV
     • GST reduction proposed: The Government has proposed to the GST Council to reduce the GST
     on EVs to 5% from the current rate of 12%
     • Customs duty lowered: The customs duty on certain EV components (E-drive assembly, on board
     charger, E-compressor and charging gun) has been reduced to Nil.
 Customs duty has been raised on certain Auto parts in the range of 2.5-7.5% and on CBUs by 5%. -
Being pass-through, these are unlikely to have any material negative impact on the sector.

 Petrol and diesel prices have been raised by Rs2 per litre as an increase in the special additional
excise duty (SAED) as well as Road and Infrastructure Cess by Rs 1 per litre each on both fuels.
 20+% increase in expenditure on rural focussed schemes will help revive weak rural demand

    While there are no direct measures to boost auto demand, increase in auto fuel prices are
     negative at the margin. However, increased rural expenditure, improving liquidity for
                 NBFCs and attractive valuations make us positive on the sector.

Consumer Staples

 Excise duty on cigarettes Introduced at Rs5/1000 sticks, it opens up a new avenue to levy
duties above GST. However, quantum is too small to have a material impact.

 Increase in import duty on gold and precious metals from 10% to 12.5%.This will increase
gold prices in the near-term, in a already high price environment.

 Custom duty on Palm fatty acid distillate - Imposed at 7.5% (nil earlier). This will increase
input costs for toilet soap makers.

 Local sourcing norms have been eased for FDI in single brand sourcing.

   The tax proposals do not have a material impact on the sector. However, sustained thrust
   on the bottom of the pyramid and rural India, will benefit Consumer Staples. This together
        with the quality of companies present in the sector, makes our stance positive.

Consumer Durables

 Basic customs duty on indoor and outdoor units of Split Air Conditioners has been
increased from 10% to 20%. While increasing cost, in case of an inability to pass on prices in
a competitive market, this can hurt profitability.

 Inviting global companies to set up mega manufacturing plants. This can potentially
increase local sourcing and reduce dependence on imports.

Tax exemption on interest on housing loans for affordable housing increased to Rs. 3.5 lakh.
This could help Tier 2/3 end housing demand.

      AC segment will be negatively impacted. However, thrust on affordable housing and
      increased expenditure on rural sector is expected to benefit segments such as tiles,
          sanitary ware, electrical consumer goods makes us positive on the segment.

Banking & Financial Services

 PSU Bank Recapitalization by Rs 700 bn

 100% FDI in Insurance Intermediaries. FDI In Insurance Companies may be eased

 Credit Demand Positives - Revamp of Uday scheme, incentives for affordable housing and capex
push in Infrastructure

 Improved Regulatory Oversight – RBI as new regulator of Housing Finance Companies

 Improved Financial Flexibility for NBFC - Partial credit guarantee by government up to 10% for six
months on high-rated loan pool of NBFCs sold to PSU banks

● Deposit-taking and Systemically Important NBFCs will now pay tax on income related to bad and
doubtful debts in the year when the interest is actually received (at par with banks)

  Impetus to Investments and MSMEs coupled with recapitalization of PSU banks and easing
    liquidity in markets are positive for the sector. We remain positive on corporate banks,
                                  insurance and select NBFCs.

Information Technology & Media

Information Technology
 Increase in tax on buybacks
 Proposal to increased minimum public shareholding of listed companies from
current threshold of 25% to 35%
 Measures to boost foreign capital inflow may lead to INR appreciation

  The sector does not get materially impacted by budget proposals. However, budget
proposals relating to buybacks and increased equity supply from companies with high
   promoter holdings is incrementally negative for sector. We retain negative stance

 Media
  Print Media may be impacted due to introduction of basic customs duty of 10% on
 newsprint
  Proposal to review increase in FDI Limit in Media & Entertainment Sector

                             We retain negative stance

Capital Goods and Infrastructure

General
Govt. Plans to invest Rs100trn in infrastructure over the next five years
 After road and transmission system, National Grid Proposed in Gas, Rail network and Waterways

Power - Retirement of old & inefficient plants to be implemented

Transportation - Proposed centralized Electronic Invoice System will significantly reduce the compliance
burden

Railways - Higher share of PPP projects in rail electrification, rolling stock and passenger fright services

Real Estate
 Increased deduction from income tax of interest payment on affordable housing for first time home buyers
 Proposed development of infrastructure on land parcels held by central ministries
 FPI will now be allowed to invest in REITs
 Introduction of a monetary cap at Rs45 lacs instead of area based tax benefit u/s 80IBA - Mildly negative
for projects approved after Sep 2019

   The budget proposals are positive for the sector. Many budget proposals relating to financial
    markets such as attracting foreign capital, bank recapitalization, improving corporate bond
    markets etc. will also help this sector. Indian economy is coming out of a long phase of low
        investments and the budget gives a push to the sector. We retain our positive view

Oil & Gas

  Oil & Gas
   Oil Marketing Companies - Special additional excise duty and Road & infrastructure cess –
  No Impact as the same will be passed on
   Refining Companies - Excise duty on domestic crude production imposed at Re 1/tonne –
  Negligible Impact

     Imposition of additional taxes, while pass through, can dampen sentiments about
sustainability of marketing margins of OMCs during periods of high oil prices. Incrementally
                              we remain negative on the sector

Utilities

 GOI’s minimum 51% stake will now be calculated inclusive of stake of government controlled
institutions – Negative as increases the risk of further dilution in Central PSUs.
 Ensuring higher gas availability for stranded gas based plants – Positive for gas based utilities
 Retiring old and inefficient power plants – Positive for the sector, will improve the overall efficiency
 Development of gas grid – improving the gas availability and scope for price reduction –Positive for
gas based plants
 Proposals to make UDAY more effective – measures to improve financial health of SEBs – Positive for
the sector
 Proposals on power sector tariffs and structural reforms likely soon – Positive for the sector
100% electrification of all willing households in India by 2022 – Positive for the sector
 Withdrawal of custom duty on fuel imports for Nuclear plant as well as on imported goods required to
setup nuclear power plant – Positive

  The budget proposals overall are positive for business prospects. However, near term, there
  is prospect of increased supply from divestments in Central PSUs. We retain neutral view on
                                          the sector.

Overall Outlook

 Budget 2019-2020 clearly demonstrates Government’s dual focus on
    - Long term sustainable growth led by Investments
    - Improving ease of living for the common man

 Budget addresses the near term issue of recapitalization of PSU banks, better regulation of NBFC
sector and also the need to increase NBFC liquidity.

 Fiscal discipline is maintained by raising additional resources through taxes and divestments while at
the same time maintaining increased allocation to rural schemes

 Near term, impact on equity markets is neutral due to lack of fiscal stimulus led immediate earnings
growth and additional supply of equities due to increased public holding from 25% to 35%.

 Economic growth should improve in the medium term led by low inflation and higher investments.

 Focus on reforms and sustainable growth would act as a strong support despite near term volatility
due to global risk factors and higher supply of equities.

Portfolio Stance

      Sector/Segment                                                                 Portfolio Stance
      Large Caps                                                                    Overweight
      Mid Caps                                                               Underweight – Stock Specific
      Small Caps                                                             Underweight – Stock Specific

      Auto                                                                              Overweight
      Banking & Financial Services                                                      Underweight
      Consumer Staples                                                                  Overweight
      Consumer Durables                                                                 Overweight
      IT                                                                                Underweight
      Pharma                                                                            Overweight
      Capital Goods                                                                     Overweight
      Cement                                                                            Underweight
      Metals                                                                            Underweight
      Utilities                                                                           Neutral
      Oil & Gas                                                                         Underweight
      Telecom                                                                             Neutral

The portfolio stance indicated above may change from time to time, keeping in view market conditions. It must be clearly understood that the
portfolio stance stated above can vary substantially depending upon the perception of market conditions of the Fund Manager, the intention
being at all times to seek to protect the interests of the investors.

Disclaimer

This write up is for information purposes only and is not an offer to sell or a solicitation to buy any
mutual fund units/securities. This information alone is not sufficient and shouldn’t be used for the
development or implementation of an investment strategy. It should not be construed as investment
advice to any party. It should be noted that the data mentioned in the note are based on the budget
proposals presented by the Honorable Finance Minister in the Parliament of India on July 05, 2019. For
a detailed study, please refer to the budget documents available on indiabudget.nic.in.

The data used in this material is obtained by ITI Asset Management Limited (ITIAML) from the sources
which it considers reliable. While utmost care has been exercised while preparing this document,
ITIAML does not warrant the completeness or accuracy of the information and disclaims all liabilities,
losses and damages arising out of the use of this information.

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