Six Small Caps are in focus for 2015

Fund managers are scouring lesser-known mid and small-cap stocks to identify winners as frontline stocks trade at steep valuations. In January, domestic mutual funds bought shares of companies such as Aarti Drugs, Orbit Exports, Setco Automotive, Salzer Electronics, Caplin Point Laboratories and Swelect Energy Systems, which are tracked by fewer analysts. Brokers said fund managers' interest in these stocks is an indication that valuations of the popular mid-caps are steep after almost doubling in the last year or so.

Aarti Drugs

Who bought: DSP BlackRock MF

The stock has risen over 500 per cent in the past year as the company, which makes vitamins, antibiotics, anti-arthritis and anti-fungal medicines, has posted strong sales and profits in the first nine months of the current financial year. Despite the sharp run-up, analysts believe the stock has more steam left. "Aarti Drugs is constantly gearing up to cater to the demand with a diversified product basket of anti-diabetic, anti-inflammatory, anti-hypertensive and cardiovascular therapeutic drugs," says Vijay Dave, analyst, Sunidhi Securities. "The stock is a good buy for medium-term with an upside till Rs 1,444," said Dave. At the current price, the share is trading at 15 times 2015-16 estimated earnings.

Orbit Exports

Who bought: Birla Sun Life MF

Orbit Exports makes and exports novelty fabrics to South East Asian countries, the Middle East, Europe, and North America. The company's net profi ts jumped 27 per cent to Rs 20.37 crore in the nine months ended December 2014, while revenues grew 19 per cent to Rs 110 crore. The stock, which has surged over 300 per cent in the past year, is trading at 25 times trailing 12 months earnings. Some analysts said the stock is expensive compared with its peers. Analysts estimate the company's earnings per share to be at Rs 16.50 in 2014-15 and Rs 19 in 2015-16.

Setco Automotive

Who bought: IIFL MF

Shares of Setco Automotive, an auto ancillary company, have shot up by about 240 per cent in a year. The company is the largest producer of clutches for the medium and heavy commercial vehicle (M&HCV) segment. Global automobile companies, which have started manufacturing operations in India, would drive demand for Setco's clutches, said analysts. "Dependency on M&HCV segment, increased in-sourcing by MNCs and sizeable market share, Setco Automotive is in a sweet spot," says Prashant Biyani, analyst, SPA Capital. He recommends the stock with a buy rating and has a target price of Rs 353.

Salzer Electronics

Who bought: Pramerica Mutual

The stock has jumped 276 per cent in the past year as investors believe the electrical equipment maker would benefi t from an expected pick-up in economic activity. Engineering giant Larsen & Toubro holds 26 per cent stake in the company and two of its directors are also on Salzer's board. "Going forward, the company expects to sustain the growth momentum through better mining of large clients like GE and Schneider in addition to L&T and the demand revival in the domestic market," says Gaurav Dua, head of research, Sharekhan. "Though the stock has run up substantially, we retain our positive view on the stock and still see upside potential of around 15 per cent from the current level."

Caplin Point Lab

Who bought: Motilal Oswal MF

Caplin Point, an exporter of generic medicines, is almost debt-free with a market capitalisation of Rs 1,165 crore. It's performance has improved significantly in the last three years as it has, of late, started generating cash flows from operations. The company posted 35 per cent growth in revenue at Rs 166 crore for the nine months ended December 2014, while its profits grew 86 per cent to Rs 25 crore. At the current market price, Caplin Point is trading at 36 times trailing 12 months earnings.

Swelect Energy

Who bought: HDFC MF

Analysts expect Swelect Energy Systems, formerly Numeric Power Systems, to benefi t from the government's focus on alternative energy. The government's push for raising solar power generation capacity to 1,00,000 MW by 2022 is seen as an opportunity for solar equipment manufacturers. The stock trades at a price-to-earnings ratio of 33 times 2013-14 earnings. "We believe the company is well placed to tap the opportunity presented in the renewable energy segment and recommend a buy with a target price of Rs 700," says Akshay Jain, analyst, Ajcon Global Services.

Sector-wise Expectations from Union Budget 2015-16

Automobile
Expected Impact: Neutral

FY2015 has been a year of recovery for the automobile industry. Improved economic outlook, positive consumer sentiments post the election of a stable and reform driven government at the centre, and reduction in excise duty (during March 2014 to December 2014) have created optimism leading to improvement in auto volumes. In 9MFY2015, the automotive volumes have grown by 9% yoy. Two-wheelers have been the biggest beneficiaries, reporting an 11% yoy growth, followed by passenger cars which grew by 3% yoy. Even the MHCV segment has improved, showing flat volumes as against a

double-digit decline in the last two years. We expect the industry’s growth to accelerate over the next two years given the better economic outlook, downtrend in fuel prices and reduction in interest rates. The government, in December 2014, reversed the excise duty cuts (of 4 to 6% provided earlier) in light of improvement in volumes; therefore we expect status quo to be maintained on this front.

The sector however will stand to benefit from indirect sops such as increased budgetary allocation for infrastructure spending (increase in road freight) and increase in income tax benefits.

Overall, we expect the Budget to be broadly Neutral for the Automobile sector.


Budget Expectations

	Head	Item	Current Status	Expected Change	Potential Impact
	Excise Duty	Small cars, two-wheelers,	Charged at 12%	No change	Status quo with respect to excise
		three-wheelers, tractors			duty; impact to be neutral
		and commercial vehicles
		Large cars and utility	Charged at 24% to 30%	No change	Status quo with respect to excise
		vehicles			duty; impact to be neutral

Top Picks

	Company	Reco	CMP	Target Price	EPS (`)		P/E (x)		EV/EBITDA (x)
			(`)	(`)	FY2015E	FY2016E	FY2015E	FY2016E	FY2015E	FY2016E
	Ashok Leyland	Buy	67	78	0.8	2.8	80.5	23.8	20.1	12.3
	Hero Motocorp	Accumulate	2,853	3,242	131.4	159.3	21.7	17.9	14.2	11.4

 


Banking

Expected Impact: Positive

In January 2015, the RBI started the rate-cutting cycle with a 25bp cut due to structural downward movement in inflation. Further rate cuts also depend on the government sticking to fiscal consolidation targets. We do expect the government to meet the fiscal deficit target in this budget, which is expected to provide room for further monetary easing by the RBI. Moreover, the usual measures to encourage savings and investments, such as increase investment limits and home loan limits for tax breaks to individuals, are expected in this budget too.

PSU banks are facing capital constraints, requiring an estimated `15,400cr of capital to increase Common Equity Tier1 (CET 1) to even the bare 8% level. Newly adopted criteria for capital infusion on the basis of a bank’s efficiency in performance is a step in the right direction. More measures that target efficiency

improvement in PSU banks would be watched out for. Also, on the off-chance that a structural roadmap for possible consolidation or reduction of government stake in PSU banks is announced, that could be a significant structural re-rating trigger for PSU banks.

The key issue for PSU banks is the huge pile-up of NPAs and restructured loans. Up to 75-80% of all restructured loans are stemming from problem sectors like metals & mining, infra & engineering, textiles and chemicals/bulk drugs. Government measures to revive these sectors that can accelerate recovery of

NPAs, would be a major positive that could come out of this budget for PSU banks.

Overall, we expect Budget to be positive for the Banking Sector.

Budget Expectations

Head	Current Status	Expected Change	Potential Impact
Tax-saving fixed deposits	5-year lock-in period	3-year lock-in period	Positive for banks
Life Insurance, Mutual	`1.5lakh investment limit	`2lakh investment limit	Positive for Max India, Reliance Capital, etc.
Funds
Home Loans	Tax deduction available on interest	Further increase in limits	Positive for banks and housing finance
	and principle repayment of home		companies
	loans
Reviving problem sectors	Metals, infra, textiles, chemicals	Revival measures/reforms such	Visibility on improvement of asset quality
of the economy	account for 75-80% of restructured	as accelerated auctions, land	would be a significant positive for PSU banks
	loans	acquisition, anti-dumping duties
		to protect against imports, etc.
Capital infusion in PSU	`15,400cr shortage just for taking	Recapitalising bank; structural	Positive for PSU banks
banks + structural	CET 1 capital adequacy to 8%.	reforms for improving efficiency
reforms encouraging	Structural operating inefficiencies &
efficiency/consolidation	lack of continuity of top
	management, etc.

Top Picks

Company	Reco	CMP	Target Price	EPS (`)		PE (x)		P/ABV (x)
		(`)	(`)	FY2015E	FY2016E	FY2015E	FY2016E	FY2015E	FY2016E
Axis Bank	Buy	581	686	31.3	37.1	18.6	15.7	3.1	2.7
Canara Bank	Buy	417	482	61.8	76.1	6.7	5.5	0.8	0.7
SBI	Accumulate	307	345	18.2	24.0	16.9	12.8	1.9	1.7
Yes Bank	Buy	835	1,031	48.8	60.7	17.1	13.8	3.0	2.5

 

Capital Goods

Expected Impact: Positive

The Capital goods industry has been suffering due to lack of investment across various sectors, thus resulting in slowing industrial growth. The macro environment too has been challenging. However, with the launch of the ‘Make in India’ campaign and related structural announcements, we expect the government to pave way for private sector capex revival.

In order to encourage investment cycle, the government has increased FDI limits (1) across most of the rail infrastructure sub-segments to 100%, and (2) to 49% in the defense sectors from 26% earlier.

The government recently passed the land acquisition ordinance and is working on setting-up single-window clearance for all infrastructure projects. With the government focusing on addressing land acquisition and clearance related issues, we are of the view that a favorable ecosystem for the ‘Make in India’ campaign is emerging.

Additionally, fund allocation to various programs including the R-APDRP and RGGVY would continue to provide a fillip to the transmission line players. We also expect more funding towards water treatment, railways, and the defense segment.

Favorable announcements towards manufacturing and a conducive Infra policy would also lead to revival

in demand for capital good players.

Overall, we expect the Budget to be Positive for the Capital Goods sector.

Budget Expectations

	Head	Current Status		Expected Change		Potential Impact
	Fund Allocation for	Funds are being allocated for Fund allocation expected to				It will be positive for various transmission line players, as it
	T & D.	various programs including		continue.		provides a continuing business opportunity. This will be
		the APDRP and RGGVY.				positive for stocks like KEC, Kalpataru Power, Jyoti Structure,
						and Alstom T&D.
	Improving the	-		Improve rail connectivity,		It will be positive for various rail infra players, as it provides a
	infrastructure of			electrify the existing rail		continuing business opportunity.
	Railways			network, modernize tracks,
				fund new wagon purchase and
				improve safety.
	Promote Domestic	-		Exemptions and incentives for		It will be positive for capital goods companies manufacturing
	Defense manufacturing			domestic defense		defense equipment like Bharat Electricals and Bharat Forge.
				manufacturing.
	Fund allocation for	One of the most important		We expect fund allocation to		It will be positive for companies who are into water
	water resources and	projects of this ruling		increase for this NAMAMI		desalination, and waste & sewage water treatment segment.
	cleaning of Ganga	government. In the last		Ganga project.		Among the companies to benefit on this account would be VA
		budget, the government				Tech Wabag.
		allotted `2,047cr for this
		project.

Top Picks

Company	Reco	CMP	Target Price	EPS (`)		PE (x)		P/ABV (x)
		(`)	(`)	FY2015E	FY2016E	FY2015E	FY2016E	FY2015E	FY2016E
Crompton Greaves	Buy	174	220	6.7	10.3	26.8	17.3	15.0	11.0

Cement

Expected Impact: Positive


The Cement industry is expected to grow at the rate of 6-8% during FY2015 though on a lower base of the previous year as cement demand grew by just 3% during FY2014. The price increase taken by cement manufacturers during 1HFY2015 could not be sustained due to lack of demand. We expect cost pressure to remain benign due to fall in the prices of key commodities, ie. of coal and crude oil. This would stabilize the profitability of cement manufacturers.

The large savings accrued by the government on account of lower subsidy burden due to fall in crude prices could be used for infrastructure development. The cement sector expects fund allocation to increase towards infrastructure projects such as roads, freight corridor, 100 smart cities, and housing for all etc, which would boost cement demand. The housing construction segment constitutes 65-67% of the total

cement demand; hence allocating funds for schemes like 100 smart cities and housing for all will provide the much need boost to the cement demand.

Overall we expect the Budget to be Positive for the Cement sector.



Budget Expectations

	Head	Current Status	Expectation				Potential Impact
	Infrastructure	Government aims to increase spending	Announcement		of	major	Announcement on new infrastructure projects would be
	spending	on infrastructure to revive econommic	infra	projects	related  to		positive as it would boost cement demand.
		growth	highways,  freight  corridors
			100 smart cities, housing for
			all, and irrigation
	Excise  duty  on	As per the current duty structure, excise	No change				Status quo with respect to excise duty on cement will be
	cement	duty on cement plants is 12%, along					a positive for the sector.
		with  additional  charge  of  `120/ton.
		The duty will be charged on the retail
		selling price with an abatement of 30%.
	Rail Fare	Freight fares were hiked by 6.5% in the	Expect	price	to	remain	Neutral for cement industry.
		last budget (highest rise in the last 15	unchanged due to sharp fall
		years)	in crude prices

Top Picks

Company	Reco	CMP	Target Price	EPS (`)		P/E (x)		EV/EBITDA (x)
		(`)	(`)	FY2015E	FY2016E	FY2015E	FY2016E	FY2015E	FY2016E
JK Lakshmi Cement	Buy	384	443	14.6	18.3	26.1	20.9	13.2	9.1
Mangalam Cement	Buy	283	361	9.6	20.5	30.6	14.4	10.4	7.1

 










FMCG

Expected Impact: Neutral

A significant amount of revenue of the FMCG industry comes from the rural market. Rural markets have undergone a slowdown in the past few quarters due to lower income of rural households. This has been owing to lower crop output due to deficient monsoon and due to lower hike in MSP which has impacted rural discretionary spending. In the upcoming budget, the FMCG sector would be hoping for announcements that would boost demand such as lowering of personal taxes, etc which would boost disposable incomes in the hands of consumers. Apart from this, the industry is expecting a clear roadmap with regards GST implementation. However, based on the recent government spending pattern, lower allocation towards social schemes could restrict rural spending. This could affect the growth prospects of FMCG companies which are highly dependent on rural markets.

Overall, we expect the Budget to be Neutral for the FMCG sector.

Budget Expectations

Head	Current Status			Expectation	Potential Impact
Reduction in rural	Higher allocation to social			lower yoy allocation towards	Negative for the entire sector as rural spending pattern
spending	schemes like NREGS, Indira			social schemes	would be under pressure. FMCG companies with higher
	Gandhi Vikas Yojana				dependency on rural markets including Dabur, Marico,
					Godrej Consumer, HUL, Emami, etc would be impacted
					the most.
Excise duty on cigarettes	Duty varies as per the length			Hike expected to be marginal	Every year government is taking excise duty hike on
	of the cigarette sticks				cigarettes and we expect a marginal hike in excise duty
					in the forthcoming budget as well. The same is not likely
					to impact ITC as it would pass on the hike to the
					customer.
GST Implementation	Multiple taxes such as excise			Concrete announcement	Implementation of GST would result in uniform taxation
	duty  charged	by	Union	regarding GST	for products and services across the country and also do
	Government	and	Value		away with the cascading effect of tax. GST would also
	Added Tax (VAT) charged by				result in reducing the overall tax burden on products
	state governments				and services, thereby propelling demand.

 





Infrastructure

Expected Impact: Positive


In the last few years, the entire Infra sector had been impacted due to slow-down in capex cycle, leading to a decline in order books. The sector faced delays in getting requisite clearances (resulting in time and cost over-runs), policy paralysis, higher interest rates, and stretched balance sheets. As a result, the bottom-line shrunk for most of the Infra companies. After the new government came into power at the centre in 2014, Infra stocks witnessed a strong run-up, with some of them outperforming the broader markets. This run-up was on expectation of major reforms and favorable policy changes.

New project launches were muted in 2014, owing to delays in getting clearances and impending structural issues surrounding the respective sub-sectors. Sensing urgency to address key issues, the new government went ahead with an ordinance amending the Land Acquisition Act, and is now working on setting-up a single window for granting clearances. These two initiatives depict the government’s inclination to address

the two big challenges, land acquisition and getting EC, which are currently coming in way of take-off of large Infra projects.
The recent crash in oil prices, upcoming spectrum auction, and ongoing PSU divestment, pave way for the

government to initiate higher Infra spending. Hence, the government would focus on higher allocation towards flagship programs of Bharat Nirman, JNNURM, APDRP, AIBP and NHDP. Besides higher allocation towards the sector, to encourage higher investor participation, the budget could announce tax breaks for Infra Investment Trusts (InvITs). Further, some tax breaks and incentives could be announced for the Construction companies as well.

Overall, we expect the Budget to be Positive for the Infrastructure Sector.

Budget Expectations

Head	Current Status	Wish List	Potential Impact
E&C cos to get incentives	N.A.		This could encourage higher participation by E&C
for construction of group			segment towards Group & Rural Housing
housing & rural homes
Extend Sec 80-IA benefits	N.A.		This could lead to private sector capex revival and help
to upgrade/ extend any			E&C players grow their Order Books
existing Infra facility
MAT on Infra players	Currently levied @20%	Abolish it	Infra players would save on tax outgo, and would lead
			to betterment of their financial health. Projects would get
			attractive. Also, this would encourage Infra capex
			revival.
Exempt Income by way of	No exemption available	Restoration of exemption	Would open-up one more avenue for lower cost of
Dividends (other than		under section 10 (23G)	capital, helpful in fund raising.
dividends u/s 115-O)/
interest/ long-term CG of
Infra Cap Fund/ Infra
Capital Co. across
approved eligible
businesses
Increased allocation to	Current infra spend is ~5-	Take Infra spending to	Will lead to capex revival and help Indian economy
the sector	6.0% of GDP, much below	8-9% of GDP	achieve 8+%-plus growth
	the requirement

Top Picks

Company	Reco	CMP	Target Price	EPS (`)		P/E (x)		EV/EBITDA (x)
		(`)	(`)	FY2015E	FY2016E	FY2015E	FY2016E	FY2015E	FY2016E
L&T	Accumulate	1,662	1,855	50.6	56.7	32.8	29.3	25.6	22.7
MBL Infra	Buy	427	561	40.9	48.5	10.4	8.8	7.4	6.7

 


IT

Expected Impact: Positive

Union Budget 2015-16 is likely to be positive for the Indian IT sector. Some of the expectations are as follows-

a)    GST: Clarity on place of supply rules- While the government has floated a bill for common Goods and Service Tax (GST) across the country last month, contemplations appear with respect to various aspects of GST design, including price and threshold exemptions. Since the rules are yet to be released in the public, the industry is also unclear whether the tax is to be levied based on the state where a company branch is located or where its headquarters are based.

b)    Relief from double taxation on software-The government in its previous budget failed to provide any relief from multiple levels of taxes: sales tax/VAT, CVD/excise duty and service tax on procurement of new software. This comes as a major hindrance for organizations in the country to buy original software. It is expected that the upcoming budget must ensure a simplified tax regime to relieve the burden of exorbitant taxes on this account.

Overall, we expect the Budget to be positive for the IT Sector.

Budget Expectations

Head	Current Status	Wish List	Potential Impact
GST	Yet to be implemented	Clarity on- location of levy of	Will be positive for the sector
		taxes, GST design including
		price and threshold exemptions
Relief from double	Multiple levels of taxes-	Relief from multiple levels of	Positive for the sector
taxation on software	sales tax/VAT, CVD/excise	taxes
	duty and service tax on
	procurement of new
	software.

 

Top Picks

Company

Reco

CMP

Target Price

EPS (`)

P/E (x)

EV/EBITDA (x)

Infosys	Accumulate	82	113	10.9	10.1	7.5	8.1	4.8	4.4
TCS	Buy	996	1,110	95.8	110.7	10.4	9.0	9.4	8.6

 
Media

Expected Impact: Positve



According to FICCI, the Indian media and entertainment sector is expected to post a strong CAGR of 14.2% through CY2012-18 to `1,78,600cr on the back of growth in regional markets, digitization push and strength in the film sector, and fast increasing new media businesses. Going forward, we believe that radio would be a high growth segment for the industry owing to the upcoming Phase 3 Radio auction which has already been approved by the cabinet (~839 radio stations expected across 227 new cities). In the upcoming budget, the media industry is hoping for announcements with regards exemption of import

duty on setup boxes and on capital equipment for Radio broadcasting, tax holiday of 5 years for new capital investment in Phase III, and uniformity in taxation under the GST.

We expect the Budget to be positive for the Media Sector.

Budget Expectations

Head	Current Status	Expectation	Potential Impact
Phase III of Digitization:	-	Initial years of business are not	Beneficial for all the Radio broadcasting companies
Provide tax holiday of 5		profitable. So hoping for some tax	like ENIL and companies like HT Media, DB Corp
years for new capital		benefit from the government.	etc who have radio subsidiaries.
investment in Phase III
Custom Duty: Reduce	-	Expected to reduce upto 4%.	Beneficial for all the Radio broadcasting companies
customs duty on capital			like ENIL and companies like HT Media, DB Corp
equipment for Radio			etc who have radio subsidiaries.
broadcasting
Import duty on set top	The set top boxes are	Removal of import duty	Removal of import duty on set up boxes would
boxes	subject to a import duty of		reduce cost burden on DTH and cable companies,
	5%		facilitating rapid digitization. Positive for DTH and
			cable industry
Uniformity in taxation	Entertainment tax levied	Roadmap for implementation of	Positive for multiplexes a uniformity is created in the
under GST	by various states at	GST	tax structure instead of multiple taxes
	different rates

Top Picks

Company

Reco

CMP

Target Price

EPS (`)

P/E (x)

EV/EBITDA (x)

Jagran Prakashan	Buy	136	156	7.7	8.3	17.8	16.3	9.1	8.2
HMVL	Buy	225	292	17.8	19.2	12.7	11.7	7.6	6.7

Metals & Mining

Expected Impact: Positive



We expect the government to likely increase import duty on steel, in view of the increasing steel imports from China and Russia. Total steel imports in India during 9MFY2015 have increased 57.5% yoy, led by a slowdown in the Chinese economy, steep depreciation in Russian Rouble and free trade agreement with Korea. The Steel Ministry is also seeking a waiver of the 2.5% import duty on all its raw materials such as iron ore, coking coal, limestone, dolomite and scrap. We do not believe this is likely.

The government may however look to reduce the export duty on low grade (<58% fe) iron ore fines, as Indian steel-makers do not use these low-grade iron ore fines for making steel. We believe based on the recommendation of the Mines And Steel Minister, the government may give a differential treatment to the export of low grade iron ore fines.

We believe a thrust to the infrastructure sector and steps to revive the investment cycle would in general be positive for the metals/mining sector.

Overall, we expect the Budget to be Positive for Metal companies.

Budget Expectations

Head	Current Status	Expected change	Potential Impact
Import duty on steel	7.5% on flat products, 5%	Increase to 10%	Positive for domestic steel players such as JSW Steel,
	on long products		Tata Steel, Sail
Export duty on iron ore	30% duty on lumps	Decrease in duty for	Positive for iron ore exporters such as Sesa Sterlite.
	and fines	low-grade fines
Waiver of import duty on	2.5% on iron ore, coking	No change	Neutral for metal/mining companies.
raw materials	coal, limestone and scrap

Top Picks

Company

Reco

CMP

Target Price

EPS (`)

P/E (x)

EV/EBITDA (x)

JSW Steel	Buy	990	1165	81.3	72.2	12.2	13.7	6.3	6.3
Tata Steel	Buy	367	458	31.4	37.3	11.7	9.8	6.9	6.3

 
Oil & Gas

Expected Impact: Positive



Falling crude prices have resulted in lower under-recoveries and working capital requirements for oil marketing companies (OMC). However, it has affected the profitability of upstream companies such as ONGC and OIL.

We expect budgetary measures to be focused on providing clarity on the subsidy sharing formula for oil companies. The oil ministry has proposed a new subsidy sharing proposal by which upstream companies would not make any contributions towards subsidy burden if crude prices are at or below $60 per barrel, would bear 85% subsidy burden when crude oil prices exceed $60 a barrel and is less than or equal to $100 a barrel, and would bear 90% subsidy burden if crude oil price exceeds $100 per barrel. A concrete subsidy sharing formula would provide visibility over earnings of upstream oil companies and hence, it would be positive for them (ONGC, Oil India and GAIL).

The government is also likely to re-introduce 2.5-5% customs duty on import of crude oil, which will be positive for Cairn India and negative for private refiners and OMCs.

We expect the budget to be Positive for the upstream companies and negative for OMCs.

Budget Expectations

Head	Current Status	Expected Change	Potential Impact
Subsidy sharing by	Lack of clarity over	Subsidy burden for oil companies	Positive for ONGC, OIL, GAIL
upstream companies and	subsidy sharing	may be reduced as crude prices are
OMCs	mechanism by OMCs,	expected to remain low and the
	upstream companies,	government is looking to divest
	and government	stakes in upstream PSUs.
Customs duty on crude oil	No customs duty	Introduction of 2.5-5% customs duty	Positive for Cairn India. Negative for OMCs and
	currently	on crude oil	private refiners (Reliance)

Top Picks

 

Company

Reco

CMP

Target Price

EPS (`)

P/E (x)

EV/EBITDA (x)

RIL

Buy

917

1,034

75.5

81.5

12.2

11.2

9.5

8.3

Pharmaceuticals

Expected Impact: Positive



The Union Budget 2015-16 is likely to be positive for the pharmaceutical sector. Apart from continued increased allocation towards healthcare, other demands by the sector are:

a)    Weighted deduction under Section 35(2AB) for computing book profits: Presently, while computing the 'book profit' under Section 115JB, the amount of weighted deduction under Section 35(2AB) is not deducted. In order to promote in-house R&D in India, the amount of weighted deduction under section 35(2AB) of the Act should be deducted while computing book profit for the purpose of MAT.

b)    Clinical Trials - Weighted deduction u/s 35(2AB): Weighted Deduction u/s 35(2AB) should be enhanced from the existing 200% to 250% for a period of next 10 years, ie up to 31st March, 2024. The current provisions for deduction u/s 35(2AB) cover only expenditure incidental to research carried on at the in-house R&D facility. As clinical trials are specialized and expensive most, R&D facilities outsource these trials. Hence, in order to successfully launch any new drug, the innovator has to get the clinical trial done outside approved facilities within India and abroad.

Overall, we expect the Budget to be Positive for the Pharmaceutical Sector.

Budget Expectations

Head	Current Status	Expectation	Potential Impact
Weighted deduction	Presently, while computing	In order to promote in-house	Positive for all pharma companies.
under Section 35(2AB)	the 'book profit' under	R&D in India, the amount of
for computing book	Section 115JB, the amount	weighted deduction under
profits	of weighted deduction	section 35(2AB) of the Act
	under Section 35(2AB) is not	should be deducted while
	deducted.	computing book profit for the
		purpose of MAT.
R&D expenditure tax	Currently 200%.	Weighted Deduction u/s	Positive for all pharma companies.
deductions		35(2AB) should be enhanced
		from the existing 200% to 250%
		for a period of next 10 years, ie
		up to 31st March, 2024.

Top Picks

Company	Reco	CMP	Target Price	EPS (`)		P/E (x)		EV/EBITDA (x)
IPCA Labs		(`)	(`)	FY2015E	FY2016E	FY2015E	FY2016E	FY2015E	FY2016E
	Buy	681	817	24.1	44.7	28.2	15.3	18.3	10.5
Dr Reddy’s Labs	Buy	3,336	3,878	149.0	184.7	22.4	18.1	16.3	13.3

 
Power

Expected Impact: Positive



The government has set an ambitious target of 100GW of solar power and 60GW of wind energy by 2022, with an estimated investment of $200bn. In line with these targets, we expect the government to promote the renewable energy sector by extending various tax incentives.

Power producers are forced to import coal, as domestic supply is insufficient to meet their requirement. They have therefore sought exemption of Basic Customs Duty (BCD) and Countervailing Duty (CVD) of 2% each. They also seek exemption of customs duty on fly ash for a power plant set up in a SEZ. We believe any reduction in duties would be positive for power producers.

We expect the budget to be Positive for the Power Sector.

Budget Expectations

Head	Current Status	Expected	Potential Impact
Reduction in Basic	Coal imports attract 2% BCD	Possible exemption of BCD and	Positive for domestic power producers
Customs Duty (BCD) and	and CVD each.	CVD on imported coal.
Countervailing Duty
(CVD) on coal imports

Real Estate

Expected Impact: Neutral



The Real Estate sector has faced a slump in the past one year period, as volume absorption (reflecting demand) in India’s top seven cities has either been flat or declined on a yoy basis. Muted growth in bank lending towards the sector has also led to the slowdown, creating liquidity crunch for many of the developers. After the new government came into power at the centre in 2014, real estate prices across top 7 cities have witnessed single digit gains. We are of the view that it is the absorption and not price appreciation which would drive the residential segment growth, going forward. Absorption of New

launches in recent times has not been up to expectations, despite developers launching the projects at 10-15% discount to the ongoing market rates; due to higher interest rates and a weak demand cycle. Further, barring a few pockets, higher inventory continues to hamper recovery in commercial real estate markets. We expect rental trends to remain in the northward direction for the next 12-15 months.

For the upcoming Union Budget, we expect the government to increase the tax limit under Sec 80c from

`1lakh to `3lakhs, which will lend a boost to the housing segment. Re-introduction of tax holiday for housing projects under Sec 80-IB and relaxation of end-use restrictions on the use of External Commercial Borrowings (ECBs) is on the developers’ wish list. Further, tax benefits or appropriate subsidies for promoting green projects also appear in their wish list.

Overall, we do not expect these measures to have a significant near-term impact on our estimates. Hence, we expect the Budget to be Neutral for the Real Estate Sector.

Budget Expectations

Head	Current Status	Expected	Potential Impact
Tax clarity on Dividend	No clarity	Abolish DDT on distribution of	This could make REITs attractive. Developers like
Distribution Tax (DDT)		dividends by SPVs to REITs	DLF, PML, Parsvnath, will be key beneficiaries.
with respect to REITs.
Income Tax Deduction	Income tax exemption on home	Increase exemption limit to	Improved affordability will induce property buyers,
under Sec 80-C	loan principal	`3.0lakhs	thereby benefitting residential housing segment.
	re-payment up to `1.5 lakh		Developers like DLF, Oberoi, Ashiana, Unitech,
			Sobha will be the key beneficiaries.
MAT & DDT exemption	Currently MAT charged at 20%;	Reduce MAT to 7.5% and	This would make SEZ investments attractive.
on SEZs		remove DDT
Infra status to large	No provision	Give Infra status to large	This would encourage higher participation of Real
townships		townships	Estate Developers, as they could claim benefits
			under sec-80-IA.

Telecom

Expected Impact: Neutral



The telecom sector is currently facing a number of challenges on the regulatory front, relating to spectrum allocation, license fee, spectrum charges, tariffs and M&As. We expect Budget 2015-16 to be a non-event for the telecom sector as the National Telecom Policy would be announced soon this year, which will address most of the above mentioned issues. The budget could pencil in the expected revenue to be generated from the upcoming auction of 2G and 3G spectrum, licensing fees, spectrum usage charges and other receipts

(the latest estimates stand at `45,471cr). In FY 2013-2014, the government was able to raise `40,847cr, meeting the target it had set.

The telecom sector is among the heavily taxed sectors in India, attracting various levies such as license fees and spectrum charges. A uniform tax structure would help reduce operational costs, in turn increasing profitability, which is highly important right now for telecom companies, which are facing high interest costs and amortization charges. However, the probability of some announcement in this regard is highly unlikely in this budget.

Overall, we expect Budget to be Neutral for the Telecom sector.

Budget Expectations

Head	Current Status	Wish List	Potential Impact
Rationalization of	Currently, the telecom industry	Rationalization of multiple	Favorable for the sector as it will reduce the cost of
multiple levies to put a	is subject to service tax, license	levies imposed on telecom	services. However, any announcement regarding this is
simple industry-friendly	fees and spectrum charges, all	sector	highly unlikely in the budget.
tax structure.	of which work out to ~35% of
	total revenue as against
	Malaysia, Sri Lanka and
	China, where it is < ~10%.
	Besides, the state levies
	additional taxes such as
	Octroi, VAT, stamp duty and
	entry tax on towers.

Tyres

Expected Impact: Positive


The tyre industry has been suffering from the inverted duty structure wherein customs duty on finished product (tyres) is lower (peak duty of 10%) while the customs duty on raw material (rubber) is at a higher rate of 20%. Also, natural rubber features in the negative list (implying rubber cannot be imported at lower rate under various free trade agreements) whereas tyres are being imported at even lower duty of 0% to 5% under several preferential trade agreements. This has created a double whammy for tyre manufacturers as lower duties have led to surge in imports and the industry cannot fully benefit from

falling international rubber prices. Imports currently constitute about 6% of the overall industry and are prevalent in the commercial vehicle industry.

We expect the government to correct this anomaly and raise peak import duty on tyres to at least 20% (in line with duty on rubber). We also expect tyres to be put in the negative list implying that tyres cannot be imported at lower rate.

Overall, we expect Budget to be positive for the Tyre sector.





Budget Expectations

Head	Item	Current Status	Expected Change	Potential Impact
Import Duty	Tyres	Charged at 10%	Raised to 20%	Increase in import duty would be
				positive for domestic tyre companies
Insertion in	Tyres	Exempt from negative list	Insertion in negative list	Addition of tyres in the negative list
negative list				would be positive for domestic tyre
				companies

 


Top Picks

Company	Reco	CMP	Target Price	EPS (`)		P/E (x)		EV/EBITDA (x)
		(`)	(`)	FY2013E	FY2014E	FY2013E	FY2014E	FY2013E	FY2014E
Ceat	Buy	718	897	81.6	89.1	8.8	8.1	5.2	4.9
JK Tyres	Accumulate	124	140	13.9	18.6	8.9	6.7	5.3	4.7

Miscellaneous

Budget Expectations
Sectors	Head	Current Status	Expected change	Potential Impact
Gold	Reduction in import	10% import duty as of	Considering falling crude oil	Duty cut on gold imports is expected to
	duty	now	prices and easing current account	favour the Jewellery industry, leading to
			deficit, we expect a reduction in	volume improvement.
			import duty by upto 2%
Plastic	Higher import duty	5% import duty as of	We expect an import duty hike to	Increase in duty on finished imported goods
	on Chinese products	now	upto 15%	would promote domestic manufacturing
				industry.
Fertilizer	Fertilizer subsidies	Currently fertilizer	Using Jan Dhan Yojna the	The key beneficiaries would be poor and
		companies get direct	government is expected to	marginal farmers, which would be good for
		subsidies from the	implement direct cash transfer	Indian agriculture.
		government	towards fertilizer subsidies to the
			needy farmers
Logistics	Higher fund	-	-	In India, logistics costs are higher due to
	allocation for roads,			poor infrastructure. An increase in
	rail, ports,			government spending on infrastructure would
	warehouse etc.			improve the operating efficiency of the
				logistics sector.
Textile	Reduction in excise	12% excise duty as of	Reduction in excise duty to upto	Any reduction in excise duty would boost the
	duty on man made	now	6%	growth of technical textiles which are major
	fibres (MMF) and			consumers of MMF.
	cotton/cotton fabric
Sanitaryware	Construction of 11cr	-	Higher fund allocation	Positive for sanitaryware companies such as
	toilets under the			Cera Sanitaryware, HSIL, etc
	‘Swachh Bharat
	Abhiyan’