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Detailed Analysis of Budget 2021 and Sector Impact

02 Feb 2021 Nikita Bhoota

Summary:
The FY22 Union Budget is refreshingly aggressive in taking aim at spending in the high multiplier areas of the economy – capex was up 25%, with emphasis on road, infra and railways, and can give a significant growth impetus to the economy when most needed. It is also conservative in revenue projections (e.g. corporate tax / GDP down by 30bps relative to FY20), and rightly so. Personal and corporate taxes have not been raised. Recent protectionist trends on customs duty continue. Water and Sanitation gets an outsized Rs750bn boost. Cyclicals will do well on the back of this budget.

Roads, railways in spotlight: Roads and railways see 44%/53% increase to Rs1.2/Rs1.1trn respectively, with overall capex up 25% to Rs5.54trn for FY22. A bad bank proposal to rescue PSU banks (and credit growth in the economy) looks promising. Also, Rs350bn set aside for vaccination should cover 1/3rd of the population.

Fiscal deficit reasonable: Fertilizer and food subsidy backlog clearance has been included in Rs34.5trn FY21 expenditure but for which the expenditure growth would have been 9% in the context of -4.5% NGDP growth. Again adjusted for this, FY22 growth would be 9% in the context of 15% NGDP growth, and with a 6.8% fiscal deficit. Thus, the deficit % is more accurate, and the govt. has exerted a stabilizing impact on the economy. Disinvestment revenue assumption of Rs1.75trn is the main risk, as in recent year.

No new taxes: The government has done well to resist the temptation of raising tax burden. Higher taxes could have hurt consumer spending at a time when demand is gradually normalizing. Affordable Housing saw reiteration of some previous announcements.

Key policy initiatives:

    1. The turnover threshold for tax audit further raised to Rs100mn from Rs50mn earlier, if 95% of transactions are digital.
    2. The central government will launch a scheme with an outlay of ~Rs3tn over five years for easing the financial stress of DISCOMs. However, earlier attempts of government to reform state DISCOMs have not been successful.
    3. The government has proposed setting up a Bad Bank (BB) to remove stressed loans from PSU Banks’ balance sheets. The government has proposed to set up Development Financial Institution with initial capital of Rs200bn with the intent of lending Rs5tn over the next three years.
    4. The government has eased direct tax compliance with steps like
      (i) Senior citizens (aged above 75 yrs) are exempted from filing IT returns if the income is only from pension and interest income,
      (ii) Time limit for re-opening assessment has been reduced to 3 yrs from 6 yrs earlier (except if there is evidence of concealment of income of more than Rs5mn in a year),
      (iii) Faceless Dispute Resolution Committee for taxable income up to Rs5mn and disputed income upto Rs1mn.
    5. The government has proposed to consolidate SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and Government Securities Act, 2007 into a rationalized single Securities Markets Code. Proposed rationalization of custom duty on Gold and Silver (to be brought down to 7.5%).
    6. Raised customs duty on cotton from 0% to 10%, on raw silk and silk yarn from 10% to 15%.
    7. Reduced customs duty uniformly to 7.5% on semi, flat and long products of non-alloy, alloy and stainless steel products.
    8. Exempted duty on steel scrap till March 2022.
Key tax proposals
    1. Some of the key changes of indirect tax proposals include
      (a) Customs duty on various steel products and copper scrap has been cut by 2.5ppt,
      (b) Imposed custom duty (5%) and agriculture cess (5%) on cotton,
      (c) Increased custom duty on prawns/fish feed to 15% from 5% earlier.
      (d) Increased custom duty on carbon black to 7.5% from 5% and imposed 7.5% duty on phenol import
      (e) Increased customs duty on solar inverters to 20% (from 5% earlier) and solar lamps/lanterns would attract 15% customs duty instead of 5% earlier.
    2. The government has also proposed to review 400 custom exemptions and announce a revised custom duty structure by October 01, 2021.
    3. 100% tax exemption for developers under section 80IBA for affordable housing extended by one year to March 2022. Additional deduction of interest expense of Rs150,000 for Affordable Housing also extended by one year.
    4. TDS on dividend announced by SPV to REIT is eliminated to simplify compliance.

Sector Summary:

Sector

Impact

Key Measures

Stock Impact

Positive

Negative

ACS

Negative

Increase in import duties on compressors for refrigerators and air conditioners from 12.5% to 15%.

 

Bluestar, Havells

Auto

Positive

Announcement of voluntary scrapping policy to phase out old vehicles. Deployment of PPP models for city bus service, focus on higher infra and road construction and Increase in customs duty on few auto parts which is unlikely to have a material impact.

Ashok Leyland, Tata Motors, Apollo Tyres

 

Infrastructure

Positive

Overall capital outlay under the budget increased by 26% YoY to Rs5.54trn for FY22. Capital outlay for highways increased by 18% to Rs1.08trn (Including borrowings by NHAI), allocation up 10% vs FY21RE. Targeting highway awards of 8500km in FY22. Railways allocation including borrowings up 33% vs FY21BE but down 11% vs FY21RE due to shortfall loan under covid. Three new DFC projects under consideration. 100% electrification target by Dec-23 vs 76% currently. Boost to private industrial capex under PLI scheme for 13 sectors along with setting up seven textile megaparks to generated order inflows for EPC players. Rs2.87trn allocated over 5 years for the Jal Jeevan Mission (Urban) to provide water supply in all 4,378 Urban Local Bodies with 2.86 crores household tap connections, as well as liquid waste management in 500 AMRUT cities. Easing legislations to enable debt financing of InVITs and REITs by FPIs. New technologies such as “MetroLite” and “metroNeo” to be deployed to provide metro rail services at much lesser costs in Tier 2 cities and peripheral areas of Tier 1 cities. Setup of professionally managed Development financial institution with capital of Rs200bn and lending portfolio of atleast Rs5trn over next three years. 100% Tax exemptions for developers for affordable housing have been extended by 1 year. Also rental housing projects (notified by Govt.) also would be eligible for this deduction.

NCC, Capacite Infra, Ashoka Buildcon, KNR Constructions, Dilip Buildcon, HG Infra, PNC Infratech & Sadbhav Engineering

 

Cement

Positive

Focus on higher infrastructure spending and push for affordable housing augurs well for cement consumption. Note that housing segment accounts for 65-70% of cement consumption, while infrastructure segment offtake 18-20% and balance is industrial & commercial segment. Focus on project execution would aid cement volume growth.

All Companies

 

Capital Goods

Positive

Contrary to expectations, despite the pandemic FY21 capex in defence, roads & highways and rail & metro is pegged to be 18/12/55% higher than initial budgets. This implies strong room for execution ramp up in 4QFY21

L&T, KEC, Cummins & ABB

 

Metals

Neutral to negative

Customs duty on semis, flats and long products of alloy, non alloy and stainless steels have been reduced from 10%/12.5% to 7.5%. Anti-dumping duties and Countervailing duties on certain steel products have also been revoked.

 

Tata Steel, SAIL, JSPL and JSW Steel

Oil & Gas

Neutral

Agriculture Infrastructure and Development cess of Rs2.5/l imposed for petrol and Rs4/l diesel. An equivalent reduction has been carried out from the Basic Excise Duty and Special Additional Excise duty for auto fuels. Hence, this measure will be neutral for margin as well as retail selling price of petrol and diesel.Asset monetization to be carried out for product and crude pipelines of GAIL, IOCL and HPCL via InvIT. CGDs to be set up in 100 new districts. Customs duty for naphtha reduced to 2.5% from 4%.

GAIL, IOCL, HPCL

 

Power

Positive

A reform-based result-linked scheme with Capital Outlay of Rs3tn over next 5 years to be launched to assist DISCOMS for various infrastructure creation like up gradation of systems, prepaid smart metering, feeder separation etc. Proposal to end up DISCOM monopolies by setting up framework which will provide alternatives to consumers for choosing distributor from more than one distribution company. Proposal of infusing capital of Rs10bn in SECI and Rs15bn in IREDA.To boost up domestic production, import duties on solar inverters and solar Lanterns increased from 5% to 20% and 15% respectively.

Tata Power & Torrent power

 

NBFCs/SFBs/HFCs

Positive

For NBFCs with minimum asset size of Rs1bn and above, the minimum size of loans which can be addressed through SARFAESI has been brought down from Rs5mn to Rs2mn. Interest deduction of Rs0.15mn on loans taken for purchase of affordable housing units extended by one more year till FY22. Developers will continue to get tax holiday on Affordable housing projects till FY22 (extension of a year). Tax Neutrality of conversion of Urban Cooperative Bank (UCB) into a Small Finance Bank (SFB). The UCB shall not be required to pay capital gains for the assets transferred to the SFBs.

Aavas, Canfin Homes & smaller NBFCs

 

Large Private Banks

Positive

After the IWG report in November 2020, it was widely anticipated that Tax Neutrality clause required for conversion of Large Bank Groups into the NOFHC structure would be announced in this Budget. That announcement is absent.

HDFC Twins, ICICI Bank & Kotak Bank

 

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Detailed Analysis of Budget 2021 and Sector Impact

02 Feb 2021 Nikita Bhoota

Summary:
The FY22 Union Budget is refreshingly aggressive in taking aim at spending in the high multiplier areas of the economy – capex was up 25%, with emphasis on road, infra and railways, and can give a significant growth impetus to the economy when most needed. It is also conservative in revenue projections (e.g. corporate tax / GDP down by 30bps relative to FY20), and rightly so. Personal and corporate taxes have not been raised. Recent protectionist trends on customs duty continue. Water and Sanitation gets an outsized Rs750bn boost. Cyclicals will do well on the back of this budget.

Roads, railways in spotlight: Roads and railways see 44%/53% increase to Rs1.2/Rs1.1trn respectively, with overall capex up 25% to Rs5.54trn for FY22. A bad bank proposal to rescue PSU banks (and credit growth in the economy) looks promising. Also, Rs350bn set aside for vaccination should cover 1/3rd of the population.

Fiscal deficit reasonable: Fertilizer and food subsidy backlog clearance has been included in Rs34.5trn FY21 expenditure but for which the expenditure growth would have been 9% in the context of -4.5% NGDP growth. Again adjusted for this, FY22 growth would be 9% in the context of 15% NGDP growth, and with a 6.8% fiscal deficit. Thus, the deficit % is more accurate, and the govt. has exerted a stabilizing impact on the economy. Disinvestment revenue assumption of Rs1.75trn is the main risk, as in recent year.

No new taxes: The government has done well to resist the temptation of raising tax burden. Higher taxes could have hurt consumer spending at a time when demand is gradually normalizing. Affordable Housing saw reiteration of some previous announcements.

Key policy initiatives:

    1. The turnover threshold for tax audit further raised to Rs100mn from Rs50mn earlier, if 95% of transactions are digital.
    2. The central government will launch a scheme with an outlay of ~Rs3tn over five years for easing the financial stress of DISCOMs. However, earlier attempts of government to reform state DISCOMs have not been successful.
    3. The government has proposed setting up a Bad Bank (BB) to remove stressed loans from PSU Banks’ balance sheets. The government has proposed to set up Development Financial Institution with initial capital of Rs200bn with the intent of lending Rs5tn over the next three years.
    4. The government has eased direct tax compliance with steps like
      (i) Senior citizens (aged above 75 yrs) are exempted from filing IT returns if the income is only from pension and interest income,
      (ii) Time limit for re-opening assessment has been reduced to 3 yrs from 6 yrs earlier (except if there is evidence of concealment of income of more than Rs5mn in a year),
      (iii) Faceless Dispute Resolution Committee for taxable income up to Rs5mn and disputed income upto Rs1mn.
    5. The government has proposed to consolidate SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and Government Securities Act, 2007 into a rationalized single Securities Markets Code. Proposed rationalization of custom duty on Gold and Silver (to be brought down to 7.5%).
    6. Raised customs duty on cotton from 0% to 10%, on raw silk and silk yarn from 10% to 15%.
    7. Reduced customs duty uniformly to 7.5% on semi, flat and long products of non-alloy, alloy and stainless steel products.
    8. Exempted duty on steel scrap till March 2022.
Key tax proposals
    1. Some of the key changes of indirect tax proposals include
      (a) Customs duty on various steel products and copper scrap has been cut by 2.5ppt,
      (b) Imposed custom duty (5%) and agriculture cess (5%) on cotton,
      (c) Increased custom duty on prawns/fish feed to 15% from 5% earlier.
      (d) Increased custom duty on carbon black to 7.5% from 5% and imposed 7.5% duty on phenol import
      (e) Increased customs duty on solar inverters to 20% (from 5% earlier) and solar lamps/lanterns would attract 15% customs duty instead of 5% earlier.
    2. The government has also proposed to review 400 custom exemptions and announce a revised custom duty structure by October 01, 2021.
    3. 100% tax exemption for developers under section 80IBA for affordable housing extended by one year to March 2022. Additional deduction of interest expense of Rs150,000 for Affordable Housing also extended by one year.
    4. TDS on dividend announced by SPV to REIT is eliminated to simplify compliance.

Sector Summary:

Sector

Impact

Key Measures

Stock Impact

Positive

Negative

ACS

Negative

Increase in import duties on compressors for refrigerators and air conditioners from 12.5% to 15%.

 

Bluestar, Havells

Auto

Positive

Announcement of voluntary scrapping policy to phase out old vehicles. Deployment of PPP models for city bus service, focus on higher infra and road construction and Increase in customs duty on few auto parts which is unlikely to have a material impact.

Ashok Leyland, Tata Motors, Apollo Tyres

 

Infrastructure

Positive

Overall capital outlay under the budget increased by 26% YoY to Rs5.54trn for FY22. Capital outlay for highways increased by 18% to Rs1.08trn (Including borrowings by NHAI), allocation up 10% vs FY21RE. Targeting highway awards of 8500km in FY22. Railways allocation including borrowings up 33% vs FY21BE but down 11% vs FY21RE due to shortfall loan under covid. Three new DFC projects under consideration. 100% electrification target by Dec-23 vs 76% currently. Boost to private industrial capex under PLI scheme for 13 sectors along with setting up seven textile megaparks to generated order inflows for EPC players. Rs2.87trn allocated over 5 years for the Jal Jeevan Mission (Urban) to provide water supply in all 4,378 Urban Local Bodies with 2.86 crores household tap connections, as well as liquid waste management in 500 AMRUT cities. Easing legislations to enable debt financing of InVITs and REITs by FPIs. New technologies such as “MetroLite” and “metroNeo” to be deployed to provide metro rail services at much lesser costs in Tier 2 cities and peripheral areas of Tier 1 cities. Setup of professionally managed Development financial institution with capital of Rs200bn and lending portfolio of atleast Rs5trn over next three years. 100% Tax exemptions for developers for affordable housing have been extended by 1 year. Also rental housing projects (notified by Govt.) also would be eligible for this deduction.

NCC, Capacite Infra, Ashoka Buildcon, KNR Constructions, Dilip Buildcon, HG Infra, PNC Infratech & Sadbhav Engineering

 

Cement

Positive

Focus on higher infrastructure spending and push for affordable housing augurs well for cement consumption. Note that housing segment accounts for 65-70% of cement consumption, while infrastructure segment offtake 18-20% and balance is industrial & commercial segment. Focus on project execution would aid cement volume growth.

All Companies

 

Capital Goods

Positive

Contrary to expectations, despite the pandemic FY21 capex in defence, roads & highways and rail & metro is pegged to be 18/12/55% higher than initial budgets. This implies strong room for execution ramp up in 4QFY21

L&T, KEC, Cummins & ABB

 

Metals

Neutral to negative

Customs duty on semis, flats and long products of alloy, non alloy and stainless steels have been reduced from 10%/12.5% to 7.5%. Anti-dumping duties and Countervailing duties on certain steel products have also been revoked.

 

Tata Steel, SAIL, JSPL and JSW Steel

Oil & Gas

Neutral

Agriculture Infrastructure and Development cess of Rs2.5/l imposed for petrol and Rs4/l diesel. An equivalent reduction has been carried out from the Basic Excise Duty and Special Additional Excise duty for auto fuels. Hence, this measure will be neutral for margin as well as retail selling price of petrol and diesel.Asset monetization to be carried out for product and crude pipelines of GAIL, IOCL and HPCL via InvIT. CGDs to be set up in 100 new districts. Customs duty for naphtha reduced to 2.5% from 4%.

GAIL, IOCL, HPCL

 

Power

Positive

A reform-based result-linked scheme with Capital Outlay of Rs3tn over next 5 years to be launched to assist DISCOMS for various infrastructure creation like up gradation of systems, prepaid smart metering, feeder separation etc. Proposal to end up DISCOM monopolies by setting up framework which will provide alternatives to consumers for choosing distributor from more than one distribution company. Proposal of infusing capital of Rs10bn in SECI and Rs15bn in IREDA.To boost up domestic production, import duties on solar inverters and solar Lanterns increased from 5% to 20% and 15% respectively.

Tata Power & Torrent power

 

NBFCs/SFBs/HFCs

Positive

For NBFCs with minimum asset size of Rs1bn and above, the minimum size of loans which can be addressed through SARFAESI has been brought down from Rs5mn to Rs2mn. Interest deduction of Rs0.15mn on loans taken for purchase of affordable housing units extended by one more year till FY22. Developers will continue to get tax holiday on Affordable housing projects till FY22 (extension of a year). Tax Neutrality of conversion of Urban Cooperative Bank (UCB) into a Small Finance Bank (SFB). The UCB shall not be required to pay capital gains for the assets transferred to the SFBs.

Aavas, Canfin Homes & smaller NBFCs

 

Large Private Banks

Positive

After the IWG report in November 2020, it was widely anticipated that Tax Neutrality clause required for conversion of Large Bank Groups into the NOFHC structure would be announced in this Budget. That announcement is absent.

HDFC Twins, ICICI Bank & Kotak Bank