Union Budget 2011-12 Analysis & Outlook

March 01, 2011

Agenda
Economic outlook in the context of budget Impact of budget across key sectors Impact of budget on capital market

2.

Union Budget impact on ECONOMY

3.

Key Messages
Key Challenges before the budget
Inflation, Current Account Deficit and Fiscal Consolidation

Growth to moderate to 8.3% in 2011-12 from 8.6 in 2010-11 as against an 9% assumed in the budget Fiscal targets in the budget over-optimistic. CRISIL expects fiscal deficit at 5.0 % of GDP
Absence of one off gains Moderating growth (base and implication for tax collections) Expenditure slippages

Bond yield to settle at 7.9-8.2 per cent by March 2012

4.

Growth: Stronger and Balanced- Set to moderate in 2011-12

Demand Drivers of Growth (%yoy) 37.5

25.7 17.7 9.6 2.1 Q2FY10 Q3FY10 Q1FY11 Q2FY11 Q4FY10* 10.4 -3.0 17.8

9.1

8.5

7.0 2.6

7.0

8.6 9.0

8.7 6.0 0.3

Q3FY11

Q2FY10

Q3FY10

Q1FY11

Q2FY11

Q3FY11

Q2FY10

Q3FY10

Q1FY11

Q2FY11

Q4FY10*

Govt. Consumption

Pvt. Consumption

Fixed Investment

Note: *revised numbers to be released in May 2011 Source: Central Statistical Organisation

5.

Q4FY10*

Q3FY11

Inflation coming down But remains unacceptably high

WPI inflation, y-o-y%
12.0

10.0 7.6

8.0

7.0

6.0

4.0

2.0

0.0 Dec-09 Dec-10 Apr-09 Apr-10 Feb-10 Aug-09 Aug-10 Feb-11 Oct-09 Jun-09 Oct-10 Jun-10

-2.0

Source: Ministry of Industry & CRISIL estimates

6.

Inflation Key Challenge in 2011-12

The budget is not expansionary in intent (non-inflationary)
Expenditures growth lower

Deficit target trimmed Tries to address the supply side factors behind food price volatility
Increased allocation, focus on agriculture and marketing reforms Baby steps not sufficient

The budget assumes a inflation of 5 per cent in 2011-12; Unlikely to achieve

Risks- Oil, commodity and food/monsoon

7.

Fiscal- Unrealistic on Expenditures

Expenditure/GDP,%
18.0

15.8 15.4 14.3 14.0 13.7 13.6

15.6

15.4

14.0

10.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 RE FY12BE

Source: Budget documents

8.

Tax/GDP- Improving, Yet Below Pre-crisis Levels

Tax/GDP, %
13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 RE FY12 BE 9.9 9.4 11.0 11.9 10.8 10.4 10.0 9.5

Source: Budget documents

9.

Tax Buoyancy Stagnant Even With Higher Growth

Tax buoyancy = Incremental tax/incremental nominal GDP
1.8 1.6 1.5 1.2 0.9 0.6 0.3 0 1993-94 to 199697 1997-98 to 200203 2003-04 to 200708 2008-09 2009-10 2010-11 2011-12 0.2 0.2 1.2 0.9 1.3 1.3

Source: calculated from budget documents

10.

Rupee Appreciation- A Volatile Path

Net FII inflows (LHS) 2.0 Rs/USD 55.0

50.0

0.0 Mar-09 Mar-10 Jan-09 Jan-10 May-08 May-09 May-10 Sep-08 Sep-09 Sep-10 Nov-08 Nov-09 Nov-10 Jan-11 Jul-08 Jul-09 Jul-10

45.0

40.0

-2.0

35.0

Source: RBI and SEBI

11.

External Risks Steps to Correct The Bias in Foreign Flows

Issue: High current account deficit and reliance on shortterm/volatile flows to finance it Raising the limits on foreign participation in the corporate bond market by 20 billion is a positive move
Will bring money into infrastructure sector Help improve the composition of foreign inflows (from volatile short term to long term Steps to promote FDI missing

12.

Liquidity Crunch In The Economy

Net LAF tranactions Rs billion (LHS) 2000.0 Call Rates (%) 9.0

1000.0 6.0 0.0 3.0 -1000.0

-2000.0 Dec-09 Aug-09 Aug-10 Dec-10 Jun-09 Jun-10 Oct-09 Feb-10 Apr-09 Apr-10 Oct-10

0.0

Source: RBI & CCIL

13.

Interest Rate Outlook

Bond yields to settle a tad lower in 7.9-8.2 range by March 2012
Fiscal Deficit target as % of GDP at 5, lower than 2010-11 Inflation lower in 2011-12

14.

Outlook 2010-11 and 2011-12

2010-11 Real GDP factor cost (y-o-y percentage growth) Supply-side Agriculture Industry Services Demand-side Private final consumption expenditure Government final consumption expenditure Gross fixed capital formation Other macroeconomic variables WPI inflation (average) Interest rate (10-year G-sec March-end) Exchange rate (Rs-$ March end) Fiscal deficit (As % of GDP) 9.0 8.1-8.3 43.5-44.0 5.1** 5.8-6.0 7.9-8.2 43.0-44.0 5.0 8.4 9.7 13.1 8.1 9.1 8.1 5.4* 8.1* 9.6* 2.7 7.9 9.9 8.6* 2011-12 8.3

Note: * CSO Advance estimates, ** revised estimates, budget document 2011-12

15.

Union Budget impact on INDUSTRY

16.

Upward trend in revenues continue, margin pressure sets in

Aggregate Sales and Operating margins Sales (Rs bln) (In Rs Bn) 3,000 2,500 2,000 1,500 1,000 500 Mar-11 P Dec-08 Dec-09 Sep-08 Sep-09 Sep-10 Dec-10 Jun-09 Mar-09 Mar-10 Jun-10 Operating margin (per cent) (RHS) (In per cent) 30.0 25.0 20.0 15.0 10.0 5.0 0.0

Based on sample of 200 leading companies across 20 different sectors The set excludes oil refining and marketing companies and banks Source: CRISIL Research

17.

Key takeaways from budget

Attempt to maintain the growth momentum
No change in central excise and peak customs duty Excise duty and service tax net widened Change in tax slabs to preserve purchasing power of the middle class amidst inflation
Effective benefit for an individual would be minimal.

Continued thrust on infrastructure and social sector spending Budget impact neutral on most sectors

18.

Budget impact - Overall view on industries

Banking and Finance

Power

IT services

Household appliance

Fertiliser

Textiles

Residential Housing

Auto

Hotels

Roads

Construction

Cement

19.

Revenue momentum to continue, margins to be under pressure

Aggregate Sales and Operating margins Sales (Rs Bn.) Operating margin (per cent) (RHS) 10,521 23.5% 7,435 23.7% 7,765 21.4% 9,245 19.9% Operating profit (Rs Bn.)

1,747

1,843

1,975

2,098

2008-09

2009-10

2010-11 E

2011-12 P

Based on sample of 200 leading companies across 20 different sectors The set excludes oil refining and marketing companies and banks Source: CRISIL Research

20.

21.
100 120 140 20 40 60 80 0

10000

15000

20000

25000

30000

35000

40000

45000

50000

5000 (Rs/ton)
($/Barrel)

Crude Oil

Steel

Key challenges: Firm Commodity prices and interest rates

Source: CRISIL Research

Domestic steel prices
Brent crude oil prices

Jan-01 JunNovAprSepFebJul-03 DecMayOctMarAugJan-06 JunNovAprSepFebJul-08 DecMayOctMarAugJan-11

Jan-01 JunNovAprSepFebJul-03 DecMayOctMarAugJan-06 JunNovAprSepFebJul-08 DecMayOctMarAugJan-11

10.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

100000

120000

140000

160000

20000

40000

60000

80000

(per cent)

Interest Rates

Aluminium

(Rs/ton)

0 Jan-01 JunNovAprSepFebJul-03 DecMayOctMarAugJan-06 JunNovAprSepFebJul-08 DecMayOctMarAugJan-11

10 year G-sec yield

Domestic aluminium prices

Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11

Banking sector outlook

Credit growth is expected to be 20-21 per cent in 2010-11
due to buoyant economic growth, recovery in export markets and focus on infrastructure

Credit growth to moderate to 18-19 per cent in 2011-12, because of higher lending rates
Industrial and services credit growth to be around 18 per cent in 2011-12 Retail credit growth to improve to 14 per cent in 2011-12

GNPA to increase from 2.4 per cent in 2009-10 to 2.9 per cent in 201011
5-10 per cent of restructured assets expected to turn in to NPAs SMEs and sectors such as real estate still not out of the woods

Net interest margin for the banking system is expected to come under pressure in 2011-12 due to increase in cost of funds Capital to Risk Weighted Assets Ratio (CRAR) of banks as of 2009-10 stood at 14.5% , much higher than the regulatory prescription

22.

Union Budget impact on Capital market

23.

Equity Markets outlook

We view the Budget 2011-12 as neutral for equity markets
No roll back of stimulus Budget was low on any significant policy action

While the reduction of corporate surcharge is marginally positive, the impact is partly negated by the increase in MAT rate We maintain our stance that the Equity Markets for 2011 will be A Tale of Two Halves
Concerns over inflation, high crude prices & earning downgrades would weigh on investor sentiments in the first half We expect most of the concerns to ease out in the second half of the year. A strong GDP growth expectation (8.3% as per CRISIL Research) coupled with attractive valuation would support markets in the second half

24.

Equity Markets outlook

The Government plans to raise Rs 40,000 crore via disinvestment in PSUs. We expect it to materialize in the second half of FY12, due to improved equity market conditions S&P CNX NIFTY to be at 6200-6400 (SENSEX at 20700-21200) by 2011 end Expect SENSEX EPS of ~Rs 1274 in FY12 and ~Rs1500 for FY13 translating into earnings growth of 18% At our target range, SENSEX and NIFTY will be trading at ~15x, in line with the historical average

25.

Budget Impact on IER companies under coverage

Positive impact
Sector Real Estate Budget event Interest subvention & increase in priority limit is a positive for companies in affordable housing Company Name Ashiana Housing Omaxe Parsvnath Developers Vipul Building Products Consumer Durables Food Products Metals & Mining Increased expenditure on rural housing schemes such as Indira Awas yojana Increase in income tax exemption limits Increase in export duty on de-oiled rice bran cakes to benefit domestic users No export duty on iron ore pellets to encourage value addition process for iron ore fines Reduction in customs duty on waste paper is a positive Visaka Industries Symphony KSE MSP Steel & Power Market Cap Fundamental Fair value Rs mn Grade (Rs) 2,342 3/5 220 23,605 12,816 1,758 1,589 7,099 534 3,553 2/5 2/5 2/5 3/5 3/5 3/5 2/5 176 63 31 151 CMP (Rs) 125 136 29 15 100

829 1,011 190 75 167 61

Paper & Forest Products

Rainbow Papers

4,605

3/5

67

53

26.

Budget Impact on IER companies under coverage

Negative impact
Sector IT Services Budget event Non extension of STPI,SEZ under MAT regime Company Name Polaris Software Lab Infinite Computer Solutions Omnitech Infosolutions Zylog Systems Construction & Engg Cement SEZ under MATregime Change in excise duty Marg Sagar Cements OCL India Industrial Conglomerates Hotel Restaurants Introduction of 10% service tax & Leisure Textiles & Apparel Excise duty on branded garments Century Plyboards India Savera Industries Aarvee Denims & Exports Kewal Kiran Clothing Shri Lakshmi Cotsyn Market Cap Fundamental Fair value CMP Rs mn Grade (Rs) (Rs) 18,037 4/5 235 182 7,034 1,806 6,595 3,643 2,009 5,920 13,086 490 1,406 6,039 1,791 3/5 3/5 3/5 3/5 2/5 3/5 3/5 2/5 3/5 4/5 2/5 269 282 656 320 202 178 73 73 75 560 150 160 130 401 110 135 104 59 41 60 490 86

27.

Mutual Funds
Increase in Dividend Distribution Tax (DDT) for money market and debt funds for institutional investors Corporate plans of money market, liquid and debt funds will now be taxed at par with bank fixed deposits (30%). The increase in DDT for money market and liquid funds will impact flows from corporates into such schemes.
Category wise share of debt funds - as on December 31, 2010

Liquid, 23%

Debt, 28%

Gilt, 1%

FMP, 21%

Ultra Short Term Debt, 27%

Difference in yields and liquidity as compared to other investment avenues will be critical. Foreign investors allowed to invest in mutual funds This will widen the investor base of mutual funds and give non-SEBI registered foreign investors an opportunity to invest in Indian equity markets.
28.

Corporate bonds
Increase in FII limit in corporate bonds The impact is expected to be felt over a longer term and will help in deepening the Indian bond markets. In the short term, the corporate bond market yields are expected to remain range bound. Likely to result in an increasing number of corporate bond and equity issuances for fund raising by infrastructure companies and institutions. It would boost the investment avenues for mutual funds, insurance companies and PF trusts

Increase in budgetary allocation towards infrastructure sector

29.

New Pension System

Penetration of Swavalamban The proposal to prepone the exit age and the governments contribution being extended to 5 years from 3 years would help increase penetration levels in the PFRDA initiative.

30.

www.crisil.com www.standardandpoors.com

31.