Institutional Equities

Interim Union Budget 2019-20

4 February 2019

The Devil Is In The Details; Consumption Positive Girish Pai

Optically, FY20 interim budget was along expected lines and belied concerns among sections of the market Head of Research
that it would go off balance in an election year. There are well-packaged sops by the government to those girish.pai@nirmalbang.com
who are apparently disaffected – farmers, SMEs, middle class, etc without unduly pushing up the fiscal
+91-22-6273 8017
deficit. Deeper analysis indicates that things are not as rosy as they seem to be at first sight. Here are 10
key points that struck us about the budget: (1) We believe it can swing the tide in favour of Bharatiya
Janata Party (BJP) in the upcoming general election, especially as it addresses disquiet seen lately from Research Team
farm distress. This may be seen positively by the market. Seen through this very narrow lens, its new
farmer-related spending is recurring in nature and is cumulatively significantly larger unlike the rare loan
waivers of the past. (2) Fiscal deficit is at 3.1% of GDP and not 3.4% as the revised nominal GDP is ~8%
higher. There is room to spend ~Rs700bn more if competitive populism escalates while holding on to the
3.4% number. (3) Fixed deposits and real estate become incrementally attractive as asset classes, possibly
Budget Review

to the detriment of flows into equities. (4) New large recurring expenditures that will expand in the future
have been partly funded by non-recurring revenue streams. (5) Off-balance sheet funding to keep market
borrowing low, but could exert pressure on cost of capital in the economy in the medium term. (6) States
will now be forced to respond to the direct income transfer scheme, thereby putting additional pressure on
their already weak finances. (7) Monetary policy direction seems uncertain post this budget while it was
clearly headed lower before this. (8) Pressure from both Centre and States to raise higher revenues could
mean a sharper focus on tax compliance (litigation!) and possibly distortion of the new Goods and Services
Tax or GST system through higher cess and local body tax or LBT. (9) In terms of portfolio positioning, it is
consumption all the way - both levered and unlevered - especially in low-ticket items. High CASA banks will
benefit. Wholesale-funded NBFCs with limited pricing power should be avoided (10) Investment-oriented
stocks could suffer not only because of likely capex cut by government, but also due to higher cost of
capital. Stay away from companies having large exposures to central and state governments as receivable
days could elongate. However, it could make existing capital assets eventually more valuable because of
likely higher pricing power in the mid-to-long term.
It could change the political tide in favour of BJP-led NDA coalition: Market’s concern in recent months has
been that the BJP-led National Democratic Alliance or NDA government was losing political ground in the run-up to
general elections in 2019 and that the chances of a rag-tag coalition coming to power was improving. Some of the
losses in recent state elections - in Madhya Pradesh and Rajasthan specifically - have been attributed to disaffected
farmers and small traders. All these sections and many more have been given sops in the budget. We believe the
budget could turn the tide in favour of the ruling coalition as giveaways are recurring in nature, unlike the episodic
ones of the past. Also, some of them are being implemented even before the general election. While the direct
income transfer amount may seem meagre on a per month basis, the government is marketing it as a top-up on a
lot of other things that have been provided in the past five years including affordable housing, subsidised food, free
health care, free sanitation, access to electricity, rural roads, gas connections, etc, If this message is communicated
well, we believe the NDA has a strong possibility of coming to power on its own.
Fiscal deficit at 3.1% of the new GDP could give room for more social spending: The 3.4% fiscal deficit to
GDP number in the budget is based on old GDP data. On recently revised GDP data which could not be
incorporated (where nominal GDP has been raised by ~8% from ~Rs210trn to ~Rs227trn), the number looks a
more palatable 3.1%. But it is too early to celebrate. The Congress party has indicated that the direct income
transfer scheme proposed in the budget wherein each eligible farmer household (with land holding of less than 5
acres) would be given Rs6,000/year, is too small and is calling for a much larger amount. The party is proposing to
come up with its own estimate in its election manifesto. If it is along the lines of the package given to farmers in
Telangana, this could be Rs25,000/ year at Rs10,000 per acre of land and 2.5 acres on an average. This could
mean spending 4x larger than Rs750bn discussed in the budget. The BJP has responded by stating that more
spending is on the cards in the post-election full-fledged budget. We therefore believe that the 0.3% improvement
that could have been achieved in fiscal deficit through a larger GDP base could be spent post 2019 general
election, irrespective of who comes to power. While politically this is good for the party implementing it structurally,
this a credit negative. Expansion of such schemes to more such disaffected segments of the population – the
unemployed for instance – is not a far-fetched possibility. This, especially so when we do not have a synchronized
election cycle across the entire chain of elected offices (local body, assembly and parliament).
 Institutional Equities
Will equities lose out incrementally in terms of retail flows?: One of the key factors supporting Indian equities in the
past 18-24 months has been strong domestic flows into equities. The trigger was demonetisation in November 2016
which led to both real estate and fixed income losing their charm as investment asset classes. However, the proposal to
raise the threshold on TDS on interest income to Rs40,000 from Rs10,000 could incrementally make fixed income more
attractive, especially as the trailing 12- month return in most equity mutual funds have been unexciting. Similarly, the
proposed changes in rules for the real estate sector, especially in terms of reinvestment of capital gains from property
and notional rental income from a second property makes this asset class also incrementally more attractive. Real estate
players have also been given sops which could help firm up pricing.
Revenue picture looks aggressive and partly funded by unsustainable streams: The 18% GST revenue growth
seems quite aggressive in the context of the recent experience on this front. From a revenue run-rate of ~Rs1trn per
month in FY19, the number will have to be 18% higher. Market would start worrying if the projected number is not
achieved in 1QFY20. The Rs900bn disinvestment target in FY20 looks really tall, especially as the government is
struggling to hitits FY19 target of Rs800bn. That too, after unsustainable moves like Power Finance Corporation buying
Rural Electrification Corporation. Some strategic divestments (none done in the past five years although expectations on
this front were high) like that of Air- India or a large-scale IPO like that of Life Insurance Corporation of India could help.
Besides we are worried about the market environment in 2019, especially with likely lower risk appetite globally. What
worries us is that on the expenditure side the items are becoming recurring and structural whereas some of the items on
the revenue side are non-recurring. This could lead to surprise fiscal deficit slippage that may hurt India’s debt rating.
Off-balance sheet funding have helped lower the fiscal deficit optically, but would exert pressure on interest
rates in the medium term: In FY19, a large part of the food subsidy was funded by the massive increase in debt that
was taken on by Food Corporation of India or FCI (it increased from Rs700bn in FY17 to Rs1500bn by the end of FY19).
While the interest on the loans taken by FCI has to paid through the budget, the borrowing does not appear in the net
borrowing number. FCI borrowing is largely from the NSSF (national small savings fund). NSSF is slated to collect a
higher amount in FY20. However, as had been the case in the past, any increase in borrowing through the small savings
route leads to pressure on bank deposit rates and consequently lending rates in the economy. This is especially the case
as the incremental credit/deposit ratio is running higher than 100% and the banks have been forced to increase deposit
rates even before the budget.
Peer pressure will see states committing to spending on direct income transfer to farmers, thereby impacting
their financials: With both Telangana and Odisha having taken up variants of the direct income transfer scheme and
now that the Centre has implemented one, we believe that other states would face the pressure to do one of their own
because of competitive populism. This, in our view, could mean that state finances would be under pressure and their
collective fiscal deficit is likely to be far away from the FRBM laid down number of 2.5% of GDP. The combined fiscal
deficit of the Centre + States + off- balance sheet debt would mean that chances of an upgrade in India’s sovereign
ratings is unlikely in the near future and the risk of a downgrade rises. We believe the fiscal deficit at the Centre + States
+ off-balance sheet could be as large as 6.3%.
Monetary policy direction uncertain: Till the budget, the general impression was that repo rates were headed lower
because of a largely lower Consumer Price Index or CPI inflation (although core inflation is still elevated), a comfortable
position on the Indian rupee or INR, US Federal Reserve in a dovish mode, etc. However, with the budget and the slightly
uncertain math surrounding it, we believe the Reserve Bank of India may possibly change its stance from ‘calibrated
tightening’ to a ‘neutral’ one, but is unlikely to cut rates in a sustained manner. Our economist, Ms. Teresa John, is of the
view that there could be one cut of 25bps in 1QFY20. Beyond that RBI is likely to focus on GST numbers of 1QFY20 and
initial impact of the consumption on CPI inflation that the budget would unleash.
Revenue pressure could mean high tax litigation and possibly higher cess and LBT: With revenue pressure likely
to be high at both Centre and State levels, we believe that there is going to be a significant focus on tax compliance (or
litigation). Any product or service which is vulnerable to increase in cess or LBT, we believe, is likely to face it sooner
rather than later. The companies producing these products and services may see valuation compression because of the
uncertainty surrounding their taxation.
How to play this budget from a portfolio perspective: Focus on low-ticket consumption – both unlevered and
levered. High CASA banks will benefit. Wholesale-funded NBFCS with limited pricing power should be avoided.
We believe broad-based consumption and especially consumption which is rural focused will see a leg-up because of
some budget proposals. We believe consumer staples, consumer durables/electricals and low-ticket consumer
discretionary companies which have a large exposure to rural areas will benefit the most. Thus, both unleveraged and
leveraged (two-wheelers or entry-level cars) could see demand turning strong. Uptrading will be another thing to watch
out for. With the cost of capital likely to become a headache in the second-half of the next 12 months, we believe high-
CASA banks should be favoured. NBFCs which work on structurally thin spreads and are wholesale funded to a larger
extent should be avoided.
Investment-oriented part could suffer: This is because of not only a likely capex cut by government but also because
of higher cost of capital. But an over-focus on consumption over the long term could lead to higher capacity utilisation of
capital assets that are already functional, leading to pricing power. These could see valuation expansion. Be wary of
companies that have large exposure to government projects – both Central and State – as the receivable days are bound
to increase.

2 Interim Union Budget 2019-20

 Institutional Equities
Economist’s views
With An Eye On Polls, Interim Budget Makes The Right Noise
Teresa John
teresa.john@nirmalbang.com Interim Union Budget 2019-20 made the right noise to appease the masses. The focus, as expected,
+91-22-6273 8114 was on boosting farm income, and supporting the middle class. The fiscal deficit for FY19 and FY20 is
pegged at 3.4% of GDP, which was a tad better than our estimate of 3.5%. Nevertheless, fiscal
consolidation has clearly taken a back seat, swerving away from the fiscal deficit target of 3.3% of
GDP for FY19 and 3.1% of GDP for FY20. The slippage in FY20 is mainly on account of the income
support scheme of Rs6,000 per year for farmers having land holding below 2ha, amounting to a total
of Rs750bn. In our view, the tax assumptions for FY19, particularly on indirect taxes, look a bit
optimistic, and consequently for FY20 as well. The gross borrowing for FY20 is pegged at Rs7,100bn,
above our estimate of Rs6,800bn, while the gross borrowing for FY19 is pegged at Rs5,710bn, above
the revised estimate of Rs5,355bn. The net borrowing (including buyback) for FY20 is pegged at
Rs4,240bn (better than our estimate of Rs4,336bn), while the net borrowing for FY19 has been revised
upwards to Rs4,227bn, from the budgeted Rs3,901bn. Aggressive tax assumptions, and higher-than-
expected gross borrowing are marginally negative for yields, but yields are likely to remain range-
bound. Income support for small and marginal farmers and the tax rebate for the middle class (those
with income up to Rs500,000 per annum will receive full tax rebate) undoubtedly bode well for
consumption. Yet, the question arises if it is a case of too little and too late. Moreover, while agrarian
spending has received a boost, rural spending remains muted.
Fiscal consolidation takes a back seat: The fiscal deficit for FY19 and FY20 is pegged at 3.4% of GDP,
which was a tad better than our estimate of 3.5%. Nevertheless, fiscal consolidation has clearly taken a back
seat, swerving away from the fiscal deficit target of 3.3% of GDP for FY19 and 3.1% of GDP for FY20.
Exhibit 1: 3.4% fiscal deficit for FY19 and FY20
Item (Rsbn) FY15 FY16 FY17 FY18A FY19BE FY19RE FY20
Revenue receipts (2+3) 11,013.8 11,953.3 13,742.0 14,351.2 17,257.4 17,296.8 19,776.9
% YoY - 8.5 15.0 4.4 20.3 20.5 14.3
Tax revenues (net to Centre) 9,036.2 9,445.6 11,013.7 12,426.0 14,806.5 14,844.1 17,050.5
% YoY - 4.5 16.6 12.8 19.2 19.5 14.9
Non-tax revenues including spectrum sale 1,977.7 2,507.7 2,728.3 1,925.2 2,450.9 2,452.8 2,726.5
% YoY - 26.8 8.8 (29.4) 27.3 27.4 11.2
Non-debt capital receipts (5+6) 514.8 455.9 653.7 1,158.2 922.0 931.6 1,025.1
% YoY - (11.4) 43.4 77.2 (20.4) (19.6) 10.0
Recovery of loans 137.4 208.5 176.3 156.2 122.0 131.6 125.1
% YoY - 51.8 (15.4) (11.4) (21.9) (15.8) (4.9)
Other receipts includes disinvestment 377.4 247.4 477.4 1,002.0 800.0 800.0 900.0
% YoY - (34.4) 93.0 109.9 (20.2) (20.2) 12.5
Total receipts (1+4) 11,528.6 12,409.2 14,395.8 15,509.4 18,179.4 18,228.4 20,802.0
% YoY - 7.6 16.0 7.7 17.2 17.5 14.1
Total expenditure (9+10) 16,636.7 17,732.7 19,751.9 21,426.7 24,422.1 24,572.4 27,842.0
% YoY - 6.6 11.4 8.5 14.0 14.7 13.3
Revenue expenditure 14,669.9 15,380.2 16,905.8 18,789.6 21,417.7 21,406.1 24,479.1
% YoY - 4.8 9.9 11.1 14.0 13.9 14.4
Capital expenditure 1966.8 2,352.5 2,846.1 2,637.0 3,004.4 3,166.2 3,362.9
% YoY - 19.6 21.0 (7.3) 13.9 20.1 6.2
Fiscal deficit {7-8} (5,108.2) (5,323.5) (5,356.2) (5,917.3) (6,242.8) (6,344.0) (7,040.0)
% of GDP (4.1) (3.9) (3.5) (3.5) (3.3) (3.4) (3.4)
Net borrowings including buyback 4,451.4 4,040.5 3,496.6 4,484.1 3,901.2 4,227.4 4,240.0
% of GDP 3.6 2.9 2.3 2.7 2.1 2.2 2.0
BE implies budget estimate, RE implies revised estimates.
Source: Budget documents, Nirmal Bang Institutional Equities Research

3 Interim Union Budget 2019-20

 Institutional Equities
Farm income in focus: The slippage in FY20 fiscal deficit target is mainly on account of the income support
scheme of Rs6,000 per year for farmers having land holding below 2ha, amounting to a total of Rs750bn or
0.3% of GDP. Ahead of elections, and given the agrarian distress, some form of farm income support was
inevitable. Yet, the question arises if it is a case of too little and too late.
Capex target may be difficult to achieve: Overall expenditure growth at 13.3% YoY in FY20 seems credible,
given an assumed nominal GDP growth of 11.5%. However, capital spending assumptions seem to be
aggressive. Capital expenditure in FY19 is estimated to grow 20% YoY, higher than the budgeted 13.7% YoY.
In our view, ahead of polls, revenue spending is likely to take precedence. Moreover, the farm income support
scheme comes into effect retrospectively from 1 December 2018, and will add Rs200bn to this year’s revenue
expenditure. Given the aggressive assumptions for FY19 capital spending, the FY20 target for capital
spending is unlikely to be achieved, despite reasonable growth assumptions. Assumptions on non-tax
revenues (mainly dividend from the RBI and public sector enterprises) and the divestment target are
ambitious, but not entirely impossible to achieve.
Exhibit 2: Agrarian spending gets a boost, but overall rural spending muted (Rsbn)
Major expenditure heads FY16A FY17A FY18BE FY18RE FY19BE FY19RE FY20BE
Pension 967.7 1,314.0 1,312.0 1,473.9 1,684.7 1,666.2 1,743.0
% YoY - 35.8 (0.2) 12.2 14.3 13.0 4.6
Interest 4,416.6 4,807.1 5,230.8 5,308.4 5,758.0 5,875.7 6,650.6
% YoY - 8.8 8.8 10.4 8.5 10.7 13.2
Defence 2,259.0 2,517.8 2,623.9 2,671.1 2,827.3 2,854.2 3,053.0
% YoY - 11.5 4.2 6.1 5.8 6.9 7.0
Total subsidy 2,418.3 2,040.3 2,403.4 2,297.2 2,643.4 2,662.1 2,966.9
% YoY - (15.6) 17.8 12.6 15.1 15.9 11.4
Fertiliser 724.2 663.1 700.0 649.7 700.8 700.8 749.9
% YoY - (8.4) 5.6 (2.0) 7.9 7.9 7.0
Food 1,394.2 1,101.7 1,453.4 1,402.8 1,693.2 1,713.0 1,842.2
% YoY - (21.0) 31.9 27.3 20.7 22.1 8.8
Petroleum 300.0 275.3 250.0 244.6 249.3 248.3 374.8
% YoY - (8.2) (9.2) (11.2) 1.9 1.5 50.3
Rural development 902.4 1,138.8 1,285.6 1,356.0 1,381.0 1,351.1 1,389.6
% YoY - 26.2 12.9 19.1 1.8 (0.4) 0.6
Agriculture and allied activities 236.9 501.8 569.9 565.9 638.4 866.0 1,499.8
% YoY - 111.8 13.6 12.8 12.8 53.0 134.9
Transport 874.1 1,022.0 1,243.8 1,070.9 1,345.7 1,454.0 1,561.9
% YoY - 16.9 21.7 4.8 25.7 35.8 16.1
Education 672.4 720.2 796.9 818.7 850.1 836.3 938.5
% YoY - 7.1 10.7 13.7 3.8 2.1 10.4
Healthcare 341.3 390.1 488.8 532.0 546.7 559.5 635.4
% YoY - 14.3 25.3 36.4 2.8 5.2 16.2
Source: Budget documents, Nirmal Bang Institutional Equities Research

Rural spending remains muted: Agricultural spending is expected to grow 134.9%YoY, boosted by the farm
income support scheme. In addition, food and fertiliser subsidies have not been trimmed. Nevertheless, fuel
subsidies are expected to increase the most, at over 50% YoY in FY20, probably reflecting the delay in
subsidy pay-out in the current financial year. Spending on transport infrastructure, education and healthcare is
expected to be robust, rising 16.1%, 10.4% and 16.2%YoY, respectively. On the other hand, rural spending is
expected to remain muted, rising only 0.6%YoY in FY20. As Exhibit 3 illustrates, spending on key rural
schemes such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) are budgeted to
decline marginally. Spending on the rural roads programme, Prime Minister’s Gram Sadak Yojana, is
budgeted to rise 22.6% YoY, mainly because it has consistently failed to meet the spending target.

4 Interim Union Budget 2019-20

 Institutional Equities
Exhibit 3: Rural spending under pressure
Rsbn FY16A FY17A FY18BE FY18RE FY19BE FY19RE FY20BE
MGNREGA 385.0 482.1 480.0 551.7 550.0 610.8 600.0
% YoY - 25.2 (0.4) 14.4 (0.3) 10.7 (1.8)
PM Gram Sadak Yojana 26.9 179.2 190.0 168.6 190.0 155.0 190.0
% YoY - 565.3 6.0 (5.9) 12.7 (8.1) 22.6
PM Awas Yojana 100.4 160.7 230.0 225.7 210.0 199.0 190.0
% YoY - 60.1 43.1 40.5 (7.0) (11.8) (4.5)
Source: Budget documents, Nirmal Bang Institutional Equities Research

Middle class gets a boost: In a bid to soothe another part of the electorate, the middle class, an income-tax
rebate has been introduced for those with income up to Rs500,000 per annum. Currently, income up to
Rs250,000 per annum is tax-free, while those with income between Rs250,000 to Rs500,000 are liable to pay
5% tax. In addition, the standard deduction for the salaried middle class has been increased to Rs50,000 from
40000 earlier. The TDS limit for interest payment has also been increased from to Rs40,000 from Rs10,000
earlier.
Indirect tax assumptions in FY19 are a tad optimistic: Goods and Services Tax or GST revenues were
budgeted to increase over 99% YoY in FY19. However, GST revenues for April-December 2018 are under
60% of budgeted revenues, even as the tax rate has been cut. Therefore, we believe the revised estimates for
GST revenues may be a tad optimistic, even assuming some buoyancy in the last three months of the fiscal.
Consequently, in our view, meeting the GST target for FY20 may also be difficult.

Exhibit 4: Indirect tax assumptions for FY19 are optimistic

(Rsbn) FY16A FY17BE FY17A FY18BE FY18A FY19BE FY19RE FY20E
Corporation tax 4,532.28 4,939.24 4,849.23 5387.4473 5,712.02 6,210.00 6,710.00 7,600.00
% YoY - 8.98 6.99 11.10 17.79 8.7 17.5 13.26
Income tax 2,876.37 3,531.74 3,646.04 4,412.55 4,082.06 5,290.00 5,290.00 6,200.00
% YoY - 22.78 26.76 21.02 11.96 29.6 29.59 17.20
Direct taxes 7,408.65 8,479.95 8,502.26 9,811.10 9,811.87 11,508.72 12,000.00 13,800.00
% YoY - 14.46 14.76 15.39 15.40 17.3 22.30 15.00
Custom duty 2,103.38 2,300.00 2,253.70 2,450 1,369.28 1,125.00 1,300.38 1453.88
% YoY - 9.35 7.15 8.71 (39.24) (17.84) (5.03) 11.80
Excise duty 2,880.73 3,186.70 3,817.56 4,069.00 2586.36 2,596.00 2,596.12 2596.0
% YoY - 10.62 32.52 6.59 (32.25) 0.37 0.38 -
Service tax 2,114.14 2,310.00 2,544.98 2,750.00 812.29 - 92.83 -
% YoY - 9.26 20.38 8.06 (68.08) (100) (88.57) (100.00)
Other taxes - - 44.83 46.79 267.42 52.41 53.42 59.43
% YoY - - - 4.37 496.52 (80.4) (80.02) 11.25
GST - - - - 3,720.76 7,439.00 6,439 7,612
% YoY - - - - - 99.9 73.06 18.22
Indirect taxes 7,098.25 7,796.70 8,661.07 9,315.79 8,756.11 11,212.41 10,481.75 11,721.31
% YoY 9.84 22.02 7.56 1.10 28.1 19.71 11.8
Gross tax revenues 14,556.48 16,308.88 17,158.22 19,126.89 18,567.98 22,721.13 22,481.75 25,521.31
% YoY - 12.04 17.87 11.47 8.22 22.4 21.08 13.5
Net tax revenues 9,437.65 10,541.01 11,013.72 12,270.14 12,426.62 14,806.49 14,844.06 17,050.46
% YoY - 11.69 16.70 11.41 12.83 19.15 19.45 14.9
Source: Budget documents, Nirmal Bang Institutional Equities Research

5 Interim Union Budget 2019-20

 Institutional Equities
Sector-wise views

Banking and Financials Sector: Positive

Steps impacting housing and developer finance segment
 Section 80I-BA extended for one year: This directly benefits affordable housing construction companies and would have a
second-order positive impact on housing finance segment. This is also helpful from a developer finance credit quality
perspective.
 Levy of income tax on notional rent on second self-occupied property exempted: This is positive for physical real estate
and would have a second-order positive impact on housing finance segment. This is also helpful from a developer finance
credit quality perspective.
 Benefit of rollover of capital gains under Section 54 extended from one to two residential houses: This is positive for
physical real estate and would have a second-order positive impact on housing finance segment. This is also helpful from a
developer finance credit quality perspective.
 Period of exemption of tax on notional rent on unsold inventory increased from one to two years: This is helpful from a
developer finance credit quality perspective.
Steps impacting farm credit
 Extension of interest subvention via KCC (Kisan Credit Card) to animal husbandry and fisheries segment: This is
incrementally positive for KCC lending business of banks. There would be 2% subvention and an additional 5% for timely
repayment.
 Structured income support for farmers: Pradhan Mantri Kisan Samman Nidhi will provide director cash transfer of Rs6,000
per annum into accounts of farmers having cultivable land of up to 2ha. This will, at the margin, indirectly improve farm credit
quality.
 Farmers affected by natural calamities will now receive interest subvention for full period of re-schedulement rather
than one year: This is incrementally beneficial for crop loan credit quality.

Impact: There are no major steps/reforms for the financial sector in the interim budget. At the margin, however, some of the steps
will benefit financials. (1) Increase in threshold for non-taxability of interest income to Rs40,000 would mildly alleviate concern
regarding the current ‘liabilities war’ ongoing in the banking sector. (2) Steps taken regarding the real estate sector will have a
second-order positive impact on housing finance and developer finance segments from both disbursement and asset quality
perspective. (3) Steps taken pertaining to farm credit would, at the margin, help business as well as credit quality in farm-lending
segment.
Top picks: ICICI Bank, IndusInd Bank, City Union Bank, Federal Bank, Ujjivan Financial Services, Repco Home Finance.
Shivaji Thapliyal
shivaji.thapliyal@nirmalbang.com

6 Interim Union Budget 2019-20

 Institutional Equities
Consumer Electricals and Capital Goods Sector: Positive
 Rise in allocation to various schemes: Under the Saubhagya Yojana, free electricity connection will be provided to almost
every household by March 2019. Under the Ujjwala scheme, 60mln free LPG connections have already been given while 20mn
more will be distributed by March 2020. Allocation for Deen Dayal Upadhyay Gram Jyoti Yojna (DDUGJY) has been increased
by 8% and allocation to IPDS scheme has been raised by 33% in FY20BE versus FY19RE.
 Higher focus on uplifting rural income: Consumer demand in rural areas is likely to improve through measures such as
Pradhan Mantri Kisan Samman Nidhi (Rs750bn outlay) and higher farm credit.
 Impetus to real estate sector: Various measures announced to provide a fillip to the real estate sector can boost demand for
consumer durable and electrical products.
 Tax cuts for middle-class: Proposals for reducing personal tax outgo for middle class can lead to higher disposable income
and has potential to boost consumption of consumer durables and electrical products.
 Abolition of customs duty: To promote Make in India, customs duty on 36 capital goods items has been abolished. Further, a
single-point approval system and a digitalised process for faster import and export transactions will be introduced.
 Allocation to various infrastructure and construction projects increased: The Pradhan Mantri Gram Sadak Yojana for
construction of rural roads has been allocated Rs190bn in FY20BE versus Rs155bn in FY19RE. Total allocation for roads
ministry has been increased by 12% to Rs1.1trn in FY20BE. The capital expenditure programme for Indian Railways is worth
Rs1,586bn in FY20BE (up 14% from FY19RE), of which capital support from the budget has been proposed at Rs646bn.
Rolling stock/signaling/metro rail projects saw an increase of 64%/39%/19%, respectively, in FY20BE.
Impact: We believe the budget proposals can lead to higher disposable income for the rural areas as well as for middle-class
population which could spur demand for consumer durable and electricals sectors. The capital goods sector stands to selectively
benefit from higher budgetary allocation to specific segments.
Top stock picks: Whirlpool of India, Crompton Consumer, Solar Industries, KEC International.
Chirag Muchhala
chirag.muchhala@nirmalbang.com

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Cement Sector- Neutral
 Focus on boosting farm income is an indirect positive: The budget’s focus on boosting agricultural income with various
measures that include the assured income support to small and marginal farmers under the Pradhan Mantri’s Kisan Scheme
will indirectly help cement sector demand. Further, interest subvention of 2% for the entire period of reschedulement of loans
in the event of a natural calamity and prompt repayment incentive of 3% will provide relief to the farmer community. These
measures will be an indirect positive for the sector as individual house builders in rural areas account for a sizeable chunk of
total housing sector demand.
 Allocation to infrastructure with focus on roads to continue rising, and yet another reason for cement demand revival:
The budgetary allocation to the Pradhan Mantri Gram Sadak Yojana has been revised to Rs190bn in the budget estimate for
FY2019-20 from Rs155bn in the revised estimates for FY2018-19 The focused area of the road segment continues to receive
higher allocation. This will be an overall positive for the cement sector, although measuring the direct benefits to estimate
incremental cement demand will be difficult. With road project implementation gaining shape aggressively to the execution
stage, it has led to a structural shift in cement sector demand in the past three to four quarters.
 Benefits for the real estate sector: The interim budget has given a push to the real estate sector by extending the benefits
under Section 80-IBA of the Income Tax Act by one more year i.e. to housing projects approved till 31 March 2020. Further, the
measure to extend the period of exemption from levy of tax on notional rent on unsold inventories, from one year to two years,
from the end of the year in which the project is completed augurs well for the real estate sector. With the benefits extended to
the real estate sector, cement demand may get a boost albeit with a lag period.
Impact: We believe the budget is largely neutral for the cement sector as it lacks any direct trigger. The measurement of cement
demand from indirect steps like higher rural sector allocation, infrastructure spending and steps to ease pressure on the real estate
sector has limited accuracy. However, directionally we feel the indirect measures will help demand recovery for the sector. But the
quality of demand (infrastructure over housing) will be key in determining the quality of earnings. Higher demand from infrastructure
(low-cost housing or road segment) will imply limited positives for the sector. These measures (infrastructure-related) will boost
revenue growth for the sector, but will impact operating performance/margins as has been the case in the past few quarters. Boost
to the rural economy, if it gets converted to IHB (individual house builder) segment demand, will be key positive for cement sector
besides giving a boost to the organised real estate segment in urban areas.
Top stock picks: The Ramco Cements, JK Cement

Milind Raginwar
milind.raginwar@nirmalbang.com

FMCG Sector: Positive

 Focus on marginal farmers: Considering that the minimum support price or MSP scheme announced last year had not
yielded significant results, the government in the interim budget announced for 2019 has chosen to provide a direct income
benefit of Rs6,000 annually to nearly 120mln farmers involving an annual outlay of more than Rs750bln. It has also provided an
attractive interest subvention scheme.
 Direct tax sops for middle class: It has also been proposed to provide an income-tax rebate equivalent to the tax being paid
by those individuals whose income does not exceed Rs500,000. This will provide an annual benefit of up to Rs12,500 to
nearly 30mln households involving an outlay of Rs185bln.
 Other measures: Pension plan for nearly 420mln workers in the unorganised sector is also another positive move that could
aid consumption Other initiatives like the focus on infrastructure and affordable housing are likely to improve consumer
sentiment via employment generation.
Impact: In our opinion, the outlay of nearly Rs1,000bln will aid consumption as these target segments have a high marginal
propensity to consume. Home and Personal Care or HPC companies such as Colgate-Palmolive (India), Dabur India, Emami and
Hindustan Unilever - which derive nearly 35%-50% of their sales from rural areas - would be large beneficiaries of this consumption
stimulus. We also believe that food, beverage and retail companies would also enjoy the benefits of sops for both rural and middle-
class households.
Top picks: Hindustan Unilever, Dabur India, Britannia Industries, Jubilant FoodWorks.
Vijay Chugh
Vijay.chugh@nirmalbang.com

8 Interim Union Budget 2019-20

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Real Estate Sector– Positive

Key highlights of the budget which will have a positive impact on real estate companies are:
 Allowance under Section 80I-B for affordable housing to be extended for one more year.
 Notional rent on unsold inventory of real estate developers will be charged after two years instead of one year.
 Recommendation made to GST Council to reduce GST on unfinished houses from 18% to 6%.
Positive impact on buyers which will help push sales:
 Capital gains exemption for purchase of houses extended up to two houses as against one earlier under Section 54. The limit
on capital gains is Rs20mn.
 Notional rent on the second house, which was liable for tax earlier, has now been exempt. Notional rent will now be levied
from the third house onwards.
Impact: Positive.
Top picks: Nesco, Brigade Enterprises, Phoenix Mills, Prestige Estates Projects.

Amit Agarwal
Amit.agarwal@nirmalbang.com

Pharmaceutical Sector: Marginally positive

Expanded allocation to Ayushman Bharat (health insurance scheme for the poor) - Allocation to the scheme has gone up
167%.
• In FY2019-20, the government has allocated Rs64bn towards Ayushman Bharat Scheme which is intended to provide
health insurance cover to over 100mn poor families .The allocation in the previous year was Rs24bn. The higher cover
may be in anticipation of larger enrolment in the scheme.
• Overall allocation to the Department of Health and Human Welfare has been increased by 13% to Rs613.98bn. Excluding
the allocation to Ayushman Bharat scheme, the increase in allocation to the Department of Health and Human Welfare is
6%.
Impact: Hospitals will be major immediate beneficiaries, and among pharmaceuticals majors those selling hospital products
(injectables – general, anti-infective and oncology) may benefit.
Top picks: Cipla (40% of sales from domestic market), Dr. Reddy’s Laboratories (15% of sales from domestic market), Sanofi India
(75% sales from domestic market).

Vishal Manchanda
vishal.manchanda@nirmalbang.com

9 Interim Union Budget 2019-20

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10 Interim Union Budget 2019-20

 Institutional Equities
Disclaimer
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11 Interim Union Budget 2019-20