Analysts' corner

No further headwinds to earnings, ray of hope on reforms

No news is good news. The Budget resisted any major changes to taxation except for minor tweaks on MAT and imposition of the same on SEZs. With investors’ concerns on likely imposition of higher indirect taxes on some segments being belied, we believe the Budget does not create any additional headwinds (inflation, interest rates, commodity prices) to corporate earnings. Impact of government expenditure compression on GDP growth needs to be watched though.

Fiscal deficit target is optimistic. The primary assumptions have been tax revenue growth of 18 per cent in FY12 and expenditure growth of 3.3 per cent. It will be difficult to meet the expenditure growth targets; with reasonable inflation assumption for FY12 at 6-7 per cent, the government is actually planning to reduce expenditure in real terms.

With the inclusive growth agenda still in focus, there is a risk of additional spending over the course of the year pushing up the final fiscal deficit to GDP ratio closer to our estimate of 5.1 per cent.

Attempt to kick-start reforms, though expectations are low due to the higher borrowing and FII limits for infrastructure bonds, widening of the service tax net and phased implementation of cash subsidy on LPG/kerosene/fertiliser are some of the key steps announced apart from the pending financial sector reforms. Though actual delivery will depend upon external factors and the election calendar, expectations are running low thus reducing the chances of a disappointment.

Top picks: Maruti Suzuki, Bajaj Auto, M&M, ACC, ITC, Asian Paints, Titan, Infosys, HCL Tech, SAIL, ONGC, GAIL, Bharti Airtel, Idea Cellular

— Standard Chartered Research

A fiscal promise to keep and miles to go before it succeeds

In the Union Budget for FY12, the government announced a reduction in the fiscal deficit to 4.6 per cent of GDP from an estimated 5.1 per cent in FY11, ahead of market expectations.

The deficit reduction is based on revenue buoyancy and keeping expenditures essentially flat in nominal terms, which leads to a lower net market borrowing of Rs 3.4 trillion, lower than market expectations.

However, it will be difficult for the deficit targets to be met as expenditures have been under-budgeted and revenues have been over-budgeted. There are no new taxes or increases in tax rates. The expenditure targets are ambitious, especially on subsidies. Oil subsidies in FY12 are 40 per cent lower than the oil subsidies in FY11.

On reform, budget was more positive especially on opening up the capital account and on firm road maps for the implementation of the direct tax code and direct cash transfers of subsidies.

Overall the budget is an incremental positive for the INR due to the capital account easing measures, and neutral for bonds and equities given that there is sufficient uncertainty on the government meeting its fiscal targets.

The budget is positive for cement, infrastructure, autos, and mildly positive for financials; and negative for iron ore exporters, oil marketing and IT companies.

— Goldman Sachs