July 01, 2009 | Mutual Fund

Budget 2009-10: Preview

Budget 2009-10: Expectations a mirage or reality…
After sweeping the General Elections convincingly, the time has come for the new
government to deliver for what it was elected. On July 6, the Finance Minister will present the
Budget for 2009-10. This will be indicative of the action plan of the newly elected government.
We believe the Budget 2009-10 will be a reform-oriented one with major focus on improving
GDP growth. However, it will be unrealistic to assume that the Budget will deliver everything.
Rather, it will set the tone for the impetus to growth.

This year’s Budget will be different for the following reasons:

• Execution will be smooth since the Congress is the largest party in the coalition. This
will lead to efficient execution of policy decisions. Also, the Congress is in charge of
most of the important ministries
• Growth will be the main prerogative of the government. The growth will be more
inclusive in nature targeting social development with a focus on employment
generation, thrust on education and rural development
• Maintenance of fiscal prudence

Key expectations from the Budget:

• Improvement in fiscal management/public finances via disinvestments
• Increased focus on infrastructure spending especially power and road/highways
• Thrust on agriculture, rural development & employment generation
• Financial sector reforms like increasing FDI in retail and insurance sector
• Increased focus on education and healthcare
• Providing ample liquidity to corporates and individuals at affordable rates

Exhibit 1: Trend in GDP growth Exhibit 2: Market returns pre and post-Budget

12.0 15
9.5
10.0 9.7 10
9.0
.

8.0 8.5
.

7.5 7.1 5
6.0 5.5 5.6
0
4.0 3.8
(%)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2.0 -5
(%)

0.0 -10
2009-10BE
2008-09RE
2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

-15

Pre-Budget Post Budget

Source: Ministry of Finance, [Link] Research Source: Bloomberg, [Link] Research

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Impact of Budget on Debt Markets

§ The debt market will closely watch the fiscal deficit and market
borrowing figures in the current Budget Category view

Fund Category View

§ We believe this Budget will focus on prudent management of public
finances. The government will very carefully lay down its expenditure Liquid funds Neutral
plans (social welfare, education and subsidies) in the current fiscal Floating Rate funds Neutral
when the income sources are weak Short term debt funds Positive
Long term debt funds Negative
§ Disinvestment is one route the government may use to manage the Gilt funds Negative
fiscal deficit of the country. This time around, as the Congress is the
single largest party it should not find it difficult to initiate the
disinvestment process in the current fiscal year itself

§ Adjusting for the expected revenue from 3G (Rs 20,000-30,000 crore)

and disinvestments (Rs 15,000-25,000 crore) and the increase in plan G-Sec Yield movement in June 09
expenditure (to 1% of GDP), the estimate for the FY10 deficit is likely 35.5
40 7.5
to be in the range 5.7-6.2% 31
6.891 7.017.0
30 6.492 6.5
6.0
§ This implies an additional borrowing requirement of not more than Rs 20 5.858
5.426 5.5
40,000 crore (out of which Rs 18000 crore has already happened over 8.4
10 5.3 5.0
the last six auctions) 3
4.5
4.253 0.2
0 4.0
1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr
§ Since the market is expecting a slightly higher number, we can have a
brief rally post the Budget. The rally could be short-lived given the
Change in Yield(bps) 30-Jun
outlook on inflation, monetary policy, and the uncertainty regarding
monsoon Source: Bloomberg, [Link] Research

Exhibit 3: Government borrowings till date

No. Period of Auction Planned Borrowing Actual Borrowing
1 2-Apr-09 12,000 12,000
2 9-Apr-09 12,000 12,000
3 17-Apr-09 12,000 12,000
4 24-Apr-09 12,000 12,000
5 8-May-09 12,000 12,000
6 14-May-09 12,000 12,000
7 22-May-09 12,000 15,000
8 28-May-09 12,000 15,000
9 5-Jun-09 12,000 15,000
10 11-Jun-09 12,000 15,000
11 19-Jun-09 12,000 15,000
12 26-Jun-09 12,000 15,000
Total 144,000 162,000
Incremental 18,000

Source: Bloomberg, [Link] Research

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 Exhibit 4: Composition of government revenues Exhibit 5: Government expenditure on the rise
2009-
2008-09RE 1100000 30
2007-08

.
25

.
2006-07
2005-06 20
2004-05

(Rs crores)
2003-04 600000 15
2002-03 10
2001-02
2000-01 ` 5

(%)
100000 0
0 100000 200000 300000 400000 500000 600000 700000

FY10BE
FY09RE
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
Rs Crores .

Tax Revenue Non-Tax Revenue Total Expenditure Total Expenditure as % of GDP (RHS)

Source: Ministry of Finance, [Link] Research Source: Ministry of Finance, [Link] Research

Exhibit 6: Burden of subsidy likely to become lighter, going forward

140000 4.5
120000 4.0
3.5
.

100000
3.0
80000 2.5
(Rs crores)

60000 2.0
1.5
40000
(%)

1.0
20000 0.5
0 0.0
FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09RE

FY10BE

Subsidies Subsidies as % of GDP

Source: Ministry of Finance, [Link] Research

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Impact of Budget on equity markets
Equity category view
§ Equity markets are likely to be highly sensitive to the action plan of
the government on the management of fiscal deficit. Any surprises
(postitive/negative) will significantly impact the markets Sectors View
§ Sectors like infrastructure and the financial services space are Automobile Neutral
likely to hog the limelight in the ensuing Budget. We expect any Banking Positive
move in the direction of encouraging more private participation to Cement Neutral
be highly positive for the infrastructure sector as a whole. On the FMCG Positive
other hand, liberalisation in the financial services space (increase
Hotels Neutral
in FDI limit in the insurance sector and raising the investment limit
IT Neutral
of FII in PSBs) is likely to attract long-term capital into the country
Logistic Neutral
§ A concrete action plan on disinvestment in order to counter the Media Positive
deficit will again generate interest in the PSU sector as a whole as Oil and Gas Neutral
it will attract inflows into the country Power Positive
§ Abolition/tweaking of the securities transaction tax will help to Pharma Neutral
sustain a high level of turnover on the bourses. This, in turn, will Retail Neutral
be beneficial for the Indian broking sector Steel Neutral
§ Any increase in exemption limit/concessions in the personal Sugar Positive
income tax front will lead to higher disposable income and, Telecom Neutral
thereby, keep the consumption/investment story ticking Textile Positive
§ We believe the rally post elections results has also discounted the
Budget expectation in stock prices. We believe the positives from
the Budget will help the index float on the premium valuation
territory. On the other hand, negative surprises/disappointments
will lead to some amount of shedding of the premium valuation
multiple for the indices

Exhibit 7: Marginal disinvestment receipt during UPA regime Exhibit 8: Infrastructure investment to be key, going forward

Disinvestme 9.3 10
Investment in Rs Billion

18000 6000 8.2

16000 nt recepits 7.3 5959.1
8

as a % of GDP
14000 during UPA 6.0 6.5
.

5000
12000 4791.2 6
10000 4000 4
(Rs crores)

8000 3892.7
6000 3000 3215.8 2
4000 2702.7
2000 2000 0
FY08

FY09

FY10

FY11

FY12

0
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08

Investment in infrastructure (Rs Crore) (LHS)

Investment as % of GDP (RHS)

Source: Department of Disinvestment ,[Link] Research Source: Department of Disinvestment ,[Link] Research

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Banking and financial services
View: Positive

Key expectations:

§ The thrust on infrastructure will be highly beneficial for the

banking sector as a whole as well as on NBFCs having high
exposure to the sector and will help augment the credit offtake

§ Increase in the limit for deduction of interest on housing loans

from Rs 1.5 lakh to Rs 2.5 lakh will increase the business visibility
for banks and specialised housing finance companies as the
demand for housing loans will go up

§ Increasing the FDI limit in the insurance sector will be highly

beneficial for banks and companies that have the insurance
vertical imbibed in them

§ Increasing the FII investment limit in PSBs from the existing 20%
will be highly beneficial for PSU banks

§ Any positive surprise in terms of abolishing/tweaking of the STT

will be positive for the entire Indian broking sector

Exhibit 9: Funds with higher allocation to banking and financial sector:

Funds % Holding
JM Financial Services Sector Fund 89.80
Reliance Banking Fund 89.75
ICICI Pru Banking & Financial Services 76.77
Principal Services Industries Fund 42.81
Kotak Lifestyle Fund 32.91
Morgan Stanley Growth Fund 31.37
Principal Dividend Yield Fund 30.26
Principal Junior Cap Fund 29.63
HDFC Top 200 Fund 29.22
HDFC Equity Fund 28.74

Source: NAV India, [Link] Research

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FMCG
View: Positive

Key expectations:

§ Continued focus on the NREGA and rural infrastructure

development is likely to boost rural incomes. This, in turn, will
drive the rural FMCG spend that has been outpacing that of the
urban markets in recent times

§ Implementation of GST would replace all other indirect taxes and

introduce a greater degree of transparency within the system

§ Imposition of higher excise duty on cigarettes could have a

negative impact on ITC

Exhibit 10: Funds with higher allocation to FMCG sector:

Funds % Holding
Franklin FMCG Fund 96.21
Magnum SFU - FMCG Fund 95.64
ICICI Pru FMCG Fund 51.10
Birla Sun Life India GenNext Fund 37.33
Kotak MNC 23.25
Birla Sun Life Buy India Fund 19.22
Kotak Lifestyle Fund 18.27
Kotak Midcap 16.79
IDFC Premier Equity Fund - Plan A 16.59
Birla Sun Life Advantage Fund 16.27

Logistics
View: Positive
Key Expectations:

§ The Union Budget may earmark higher funds for building roads,
ports and other utilities. We expect this to bring infrastructure
development, build higher capacity and improve the efficiency of
logistic players

Exhibit 11: Funds with higher allocation to logistic sector:

Funds % Holding
JM Small & Mid-Cap Fund 8.88
AIG Infrastructure & Economic Reform 6.21
IDFC Premier Equity Fund - Plan A 6.11
JM Contra Fund 5.59
Canara Robeco Infrastructure 5.40
HDFC Premier Multi-Cap Fund 5.28
Quantum Long-Term Equity Fund 5.10

Source: NAV India, [Link] Research

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 Sugar View: Positive

Key expectations:

§ De-control of the sugar sector by eradicating the monthly release

mechanism and the levy quota system would benefit the sector
especially during the supply glut scenario

§ Incentives for alternate sources of energy and mandating 10%

ethanol blending with petrol would encourage ethanol production,
which, in turn, will benefit the industry

Exhibit 12: Funds with higher allocation to sugar sector:

Funds % Holding
Escorts Leading Sectors Fund 5.20
Escorts High Yield Equity Plan 4.87

Source: NAV India, [Link] Research

Power View: Positive

Key expectations:

§ Extension of Section 80IA (tax holiday to generation, transmission

and distribution companies for 10 years) beyond March 2010 will
provide additional incentives to make investments within the
sector. This will be positive for the generation, distribution and
transmission space

§ Announcement on the divestment front. * Divestment candidates

— Bhel and Neyveli Lignite, * follow on public offering (FPO)-
NTPC and PowerGrid, * IPO – NHPC

§ Increase in budgetary allocation, initiation of coal import by July

31, 2009 by states who have not taken action so far, withdrawal of
condition for 5% charge on profit of generation companies for
local area development — positive for the generation space

§ With the anticipated shortfall of power, SEBs are likely to bid and
power trading companies will benefit. This will be positive for the
generation space and trading companies

§ Designation of nodal agency for integrated planning will expedite

the process of getting approval from several departments

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Exhibit 13: Funds with higher allocation to power sector:
Funds % Holding
Reliance Diversified Power Sector 79.76
Birla Sun Life Infrastructure Fund - Plan A 18.34
JM Basic Fund 18.09
JM Multi Strategy Fund 17.47
ING Nifty Plus 16.82
Birla Sun Life Basic Industries Fund 16.23
JM Equity Fund 15.89
DBS Chola Hedged Equity Fund 14.28
Principal Services Industries Fund 11.67
Principal Index Fund 11.46

Source: NAV India, [Link] Research

Media View: Positive

Key expectations:

§ Increase in FDI limits for DTH operators, print companies, news

broadcasters and radio companies would be beneficial

§ Reduction in import duty on set top boxes used in DTH and digital
cable would reduce the cost of digitisation

§ Broadcasters are subject to levy of service tax @12.24% unlike

print media companies. It would be positive for broadcasters, if
the service tax is withdrawn

Exhibit 14: Funds with higher allocation to media sector:

Funds % Holding
Reliance Media & Entertainment Fund 74.20
Kotak Tech 14.52
HDFC Core & Satellite Fund 13.30
Birla Sun Life India GenNext Fund 11.68
HDFC Premier Multi-Cap Fund 11.57
Franklin India Prima Plus 11.52

Source: NAV India, [Link] Research

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 Textile View: Positive

Key expectations:

§ The government is likely to increase the allocation to the

technology upgradation fund scheme (TUFS) to Rs 2000 crore.
This will benefit stocks like Bombay Rayon Fashions, Vardhaman
Textiles and Indorama Synthetics

§ We expect the government to increase the duty drawback rate to

14% from the existing 9% and the interest subvention subsidy to
the earlier rate of 4% from the existing 2%. We expect both
initiatives to benefit exporters. Stocks to benefit: Exporting
companies like Bombay Rayon Fashions, Welspun India and
Vardhaman Textiles

Exhibit 15: Funds with higher allocation to textile sector:

Funds % Holding
ICICI Pru Discovery Fund 8.73
JM Small & Mid-Cap Fund 8.51
Principal Emerging Bluechip Fund 7.02
JM Contra Fund 6.98
JM Equity Fund 6.41
Bharti AXA Tax Advantage Fund - Eco 6.06
Bharti AXA Tax Advantage Fund 6.06
Kotak Lifestyle Fund 5.76
Source: NAV India, [Link] Research

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We have analysed the equity diversified funds category to find out
funds that have higher exposure to sectors on which we are
positive with respect to reforms that are likely to be announced in
the Budget. We expect the following funds to benefit the most if
our expectations from the Budget on these sectors are met:

Exhibit 16: Funds with cumulative higher allocation to sector with positive
view:

Fund % Holding
Magnum SFU - Emerging Businesses Fund 70.60
Principal Junior Cap Fund 68.72
Magnum Index Fund 67.76
Principal Emerging Bluechip Fund 65.70
DWS Alpha Equity Fund 64.19
JM Equity Fund 63.82
Morgan Stanley Growth Fund 63.69
Escorts Leading Sectors Fund 62.73
Birla Sun Life Midcap Fund 61.38
Kotak Midcap 61.17
Bharti AXA Equity Fund 61.14
DWS Investment Opportunity Fund 60.53
DBS Chola Midcap Fund 60.17
Magnum Multicap Fund 59.70
Birla Sun Life Advantage Fund 59.18
DBS Chola Multi-Cap Fund 58.36
Franklin India Bluechip Fund 57.57
JM Multi Strategy Fund 57.30
Franklin India Opportunities Fund 57.02
Magnum Multiplier Plus 93 56.34
Birla Sun Life Dividend Yield Plus 55.34
Birla Sun Life MNC Fund - B 55.32
HDFC Index Fund-Sensex Plus Plan 54.95
HDFC Top 200 Fund 54.82 …three of our core model portfolio
Franklin India High Growth Companies Fund 54.38 funds figure in the expected
JPMorgan India Equity Fund 54.30 beneficial funds list
Birla Sun Life Special Situations Fund 54.21
Franklin India Prima Plus 53.48
Principal Resurgent India Equity Fund 53.48
Magnum Global Fund 53.25
Franklin India Flexi Cap Fund 53.10
HDFC Equity Fund 53.03
Magnum Equity Fund 52.74
Magnum Midcap Fund 52.50
Birla Sun Life Equity Fund 52.47
HDFC Capital Builder 51.87
Kotak Opportunities 51.69
Birla Sun Life Frontline Equity Fund 50.92
HSBC Midcap Equity Fund 50.58
HDFC Index Fund-Sensex Plan 50.30
Baroda Pioneer Global Fund 50.29
Principal Dividend Yield Fund 50.18

Source: NAV India, [Link] Research

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 Mutual Fund Research Desk,

[Link] Research Desk,

ICICI Securities Limited,
7th Floor, Akruti Centre Point,
MIDC Main Road, Marol Naka
Andheri (East), Mumbai – 400 093

Disclaimer

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