Budget 2016 & CapMkt

1. 2016 Budget Analysis with impact on
Capital Markets
By
Shri Deven R. Choksey

2. Themes Measures Period
Consumption
Orientation
Stimulus driven 2008-2014
Capital
Orientation
Infrastructure spending led allocation
a model followed by NDA Government
1999-2003
Socialistic
Orientation
A model followed by UPA government 2009-2014
Introduction to Budget themes
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

3. QE Amount Effect on
QE1 $1650bn Crude 115%
Commodity 87.76
Bullion 47.31%
QE2 $600bn
QE3 $645bn
Consumer orientation : How it impacts?
Stimulus in US of $2895bn during 2008-2014 led to rise in commodity
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

4. Impact of Capital orientation
Thrust on infra spending in 1999-2004 has led to GDP rise from 3.97% to 7.9%
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

5. MGNREGA
$2.89trn spend ; Employed 68.26trn workers.
Actual benefit didn’t reach rural labourer, detractor claim
Farmer loan waiver
Irregularity & tampering resulted in Rs 65000cr welfare
project
Education loan interest waiver
Provision of Rs2600crs under non plan scheme; till 2012-13
aggregate interest subsidy of Rs 3913crs incurred
Impact of Socialistic Orientation 2009-2014
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team
Thrust on socialist orientation failed to stimulate growth

6. Making of
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

7. 2014
Interim Budget
•Outlined fiscal consolidation by
setting 4.1% fiscal deficit target
•increase in FDI in insurance and
defense sector to 49%
2015
Full Budget
•Complete frame work for growth
under $1trn program covering
•- Railways
•- Defense
•- Infrastructure
•Various Programs under Make In
India
•Clean India
•Digital India
•Skill India
• Smart India
•Proposal to reduce corporate tax
from 30% to 25% over the next
4yrs.
2016
Full Budget
•Consumption oriented
•Agriculture & Rural Economic
Thrust
•Fiscal oriented
•Fiscal Deficit @ 3.5% of GDP
•Growth oriented
•Credit @ Rs. 9 trn
•Infra Spending @2.21 trn
Budget: A Powerful Framework of Transforming India’s Economy
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

8. Consumption orientation
1. Agriculture and Farmers’ Welfare
2. Rural Sector
3. Social Sector including Healthcare
4. Education, Skills and Job Creation
Fiscal Orientation
5. Fiscal Discipline – Fiscal Deficit pegged @ 3.5% of GDP
6. Financial Sector Reforms
7. Tax Reforms
Growth Orientation
8. Infrastructure and Investment
9. Governance and Ease of Doing Business
2016 Budget: A meticulous program of monetization of efforts under
9 Pillars of Growth :
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

9. AUTO:
Measures : Government imposed infrastructure cess ( 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity, and 4% on
other higher engine capacity vehicles and SUVs) on all vehicles;
Impact: Passenger vehicle prices across the board will go up from 1% to 4%.
Measures : Government brought vehicles priced above Rs1 mn under 1% TDS (Tax to be deducted at source).
Impact: This is a marginal negative for buyers of SUVs et al.
REAL ESTATE:
Measures :First time home buyers will get deduction under Clause 37 & 43- for additional interest of Rs50k pa (over normal annual deduction of
Rs200k) for loans up to Rs3.5 mln sanctioned in F17 where house cost is not exceeding Rs5 mln.
Impact: This should improve the affordability by 3-4%, we estimate. However, listed companies will not be benefited as they have a higher ticket
size (~Rs5- 400 mln).
Measures : Government is providing 100% deduction of profits (MAT applicable) to companies for providing affordable housing having flats up to
30 sqmt in four metro cities and 60 sqmt in other cities which are approved during June 2016 to March 2019 and completed in three years.
Impact: Listed companies would have minimal benefit.
Policy & Sector impact
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

10. Real Estate Investment Trusts (REITs):
Measures : Provide tax pass through for REITs, the government has exempted Dividend Distribution Tax (DDT) w.r.t. distribution made
out of income of SPV (after specified date and shareholding) to the REITs and INVITs .
Impact: With this announcement, the government has cleared most of tax pass through requirements (spread over last three budgets),
and is getting closer to REIT formation. A few issues still remain (stamp duty, 3 years for long term capital gains calculation in the hands
of unit holder etc). We believe that REIT formation may still be 12-18 months away, partly also because of valuation gap between sellers
and buyers.
BANKS:
Measures : FM favored consolidation of banks, which will see capital infusion of INR 25,000 crores next fiscal, once their balance sheet
are strengthened.
Impact: Over the long run the government will bring down stake in PSU to 52%. The Bank Board Bureau will be operational during
2016-17 and roadmap of consolidation of PSU will be spelt out. Our back of the envelope calculations suggest that PSBs are likely to get
benefit of ~INR400b (INR290b+ due to Revaluation reserve, ~INR85b due to FCTR and rest due to DTA) - ~25% of the required capital
of INR1.5T by FY18. DTA relaxation will help ICICIBC and AXSB to release ~30bp of CET1 capital. Banks with sizable foreign operation
will see a release of 25-40bp of CET1 release. Immediate capital release for PSBs along with the GOI stated capital infusion of INR300b
(INR50b in March 2016 and INR250b in FY17) will take care of medium term capital requirement of PSBs in our view.
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

11. Market Outlook 2016 – 17
Corporate Earnings Set to Grow
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

12. Sensex earning performance for last 10 yrs
Sensex 20873 @ Peak Valuation of 25.07 PE on 8th Jan 2008
Sensex 8451 @ Collapsed Valuation of 10.3 PE on 20th November 2008
As on 5th March 2016, Sensex trades at discount to its historical average
valuation of 18.4x by 21%
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

13. Banks Tech Auto
Capital Goods
& Infra
Oil & Gas Diversified
Metals &
Minings
Cement Power Telecom Pharma Media
Weighted Returns -7.47% -3.02% -2.10% -2.06% -1.54% -1.24% -0.95% -0.71% -0.57% -0.37% -0.03% 0.06%
-7.47%
-3.02%
-2.10% -2.06%
-1.54%
-1.24%
-0.95%
-0.71%
-0.57%
-0.37%
-0.03%
0.06%
-8.00%
-7.00%
-6.00%
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
AxisTitle
Sector leading market fall : Sensex
20% of the fall in Sensex came out of Banking Sector
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

14. Source: Capitaline
Q3FY16 numbers have not shown any negative surprise
Earnings momentum expected to turnaround.
Earnings Momentum :
(Rs. in Bn)
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

15. Expect the earnings downgrade cycle to reverse from Q3FY16 and upgrade cycle to start from
Q4FY16 onwards
Market volatility should be considered as an buying opportunity with a 2-3 years
investment horizon.
Source: Bloomberg
EARNING UPGRADE Started
Sensex Trades @ 14.5X , a 20% discount of its historical PE of 18.4
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

16. Source: Bloomberg
Less than $2.5 bn investments been sold under short selling
position in F&O has resulted in 11.9% fall in last 2 months
Liquidity Crisis : Reasons for recent sell off in markets – Despite Good Earnings?
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

17. Low FII inflows have historically been followed up with strong market performance trend
Source: Bloomberg,NSDL
MARKET DRIVER : Why FIIs Inflows could rise?
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team
Muted FII inflows in CY15 in comparison to last 3 years may lead to strong performance going forward

18. The Valuation gap between Large Cap and Midcap Indices remain high
MARKET DRIVER : VALUATION IS ATTRACTIVE
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team
Large Cap valuations are more attractive to midcap valuations

19. KRChoksey Universe Expected Returns
Auto 42.2%
Banks 41.0%
Capital Goods & Infra 39.2%
Cement 19.2%
Media 23.8%
Oil & Gas 35.8%
Pharma 38.1%
Telecom 16.9%
Projected Sensex Return 19.3% | Expected outperformance by 7-10%
Sector outlook & Expected Returns
Projected : Outlook for 24 months
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

20. Period Total Investment CAGR ROI @ 10% CAGR ROI @ 20% CAGR ROI @ 30%
2 Year 24.00 26.55 29.19 31.92
3 Year 36.00 41.84 48.29 55.36
5 Year 60.00 77.17 98.71 125.46
10 Year 120.00 201.54 344.61 592.00
(Rs in lacs)
KRChoksey Equity Advisory : Systematic Approach by KRChoksey Advisory
• Invest Regularly
• Measure Risk
• Project Returns
Example of Systematic Monthly investment of Rs1lac
2016 Budget Analysis with impact on capital markets for WIRC of ICAI- Think Tank Team

21. Thank You
Contact us - 022 66965555
Or
Email us - pas@krchoksey.com
Team Contribution: Mrs. Vaishali Pitale |Mr. Vikash Khemka | Mr. Naveen Naik

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