24January 2020 India Daily
Total Page:16
File Type:pdf, Size:1020Kb
INDIA DAILY January 24, 2020 India 23-Jan 1-day 1-mo 3-mo Sensex 41,386 0.7 (0.2) 6.1 Nifty 12,180 0.6 (0.3) 5.2 Contents Global/Regional indices Dow Jones 29,160 (0.1) 2.3 8.8 Special Reports Nasdaq Composite 9,402 0.2 5.0 14.9 Strategy FTSE 7,508 (0.8) (1.6) 2.4 Strategy: FY2021 union budget - what the government can, will and should Nikkei 23,808 0.1 (0.1) 4.6 do Hang Seng 27,803 (0.4) (0.2) 3.8 High fiscal deficit and low economic growth - cloudy backdrop to FY2021 KOSPI 2,246 (0.9) 2.6 7.7 union budget Value traded – India What the government can do - not much given a challenging fiscal Cash (NSE+BSE) 459 296 102 10,30 Derivatives (NSE) 34,505 10,144 situation 0 What the government will likely do - let the fiscal deficit rise further Deri. open interest 4,459 3,659 3,490 What the government should do - a long-term plan to grow revenues, contain expenditure Forex/money market Daily Alerts Change, basis points Results 23-Jan 1-day 1-mo 3-mo Rs/US$ 71.2 1 1 29 HDFC Life Insurance: Stable and balanced 10yr govt bond, % 7.0 (1) (2) 2 The 'balance of par' Net investment (US$ mn) Retain positive stance 22-Jan MTD CYTD AU Small Finance Bank: Racing along FIIs 4 (75) 14,234 MFs (59) 1,006 7,439 Trends hold up in all operating metrics; a solid performance overall Top movers – 3mo basis Asset quality improves and growth holds up impressively despite all Change, % challenges Best performers 23-Jan 1-day 1-mo 3-mo Maintain SELL: current valuations adequately factor this improvement IHFL IN Equity 312 5.3 0.7 55.8 Cholamandalam: Weak performance TTMT IN Equity 188 1.5 7.4 41.1 BHARTI IN Equity 524 1.8 14.5 40.6 Core PBT up 11% yoy TGBL IN Equity 393 2.1 24.7 39.9 Asset quality issues surface RBK IN Equity 339 0.1 1.6 34.9 Cut estimates; ADD stays Worst performers HPCL IN Equity 247 0.7 (6.0) (17.5) Tata Communications: Steady quarter ONGC IN Equity 118 1.2 (6.5) (16.3) Decent performance in a seasonally weak quarter IOCL IN Equity 118 4.1 (7.1) (16.2) Metrics trending well; Street waiting inflection point in innovation services MRCO IN Equity 333 (0.4) (0.1) (15.5) Risks - R-Jio's likely aggression in the enterprise segment and AGR dues BHEL IN Equity 43 0.0 (0.1) (15.3) PVR: A mixed bag 3QFY20 - same store footfalls down on weak regional (south) content; profitability improves A lot to like but the stock is fairly valued; await better entry price CEAT: Muted quarter 3QFY20 results: Standalone EBITDA 4% below our estimates We expect the company to gain market share in the PV segment Lower our FY2020-21E EPS estimates by 2-7%; maintain REDUCE with a revised FV of Rs960 [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. Company Report Strategy INDIA INDIA January 23, 2020 BSE-30: 41,386 FY2021 union budget—what the government can, will and should do. The government’s twin tasks of (1) providing fiscal stimulus to the economy and (2) prudential fiscal management in the budget will be even harder than usual given the (1) sharp slowdown in the economy and (2) meaningful deterioration in its fiscal position. We believe the government will provide some fiscal stimulus through increased government spending and attempt to keep central GFD/GDP below 4% in FY2021. High fiscal deficit and low economic growth—cloudy backdrop to FY2021 union budget INSIDE Likely weak economic growth in FY2021 and a high central fiscal deficit will compound the FY2021E central government’s twin challenges of (1) providing fiscal stimulus to the economy and (2) prudential GFD/GDP at 3.7%, fiscal management. We expect FY2021 central GFD/GDP at 3.7% helped by generous assumptions FY2020E at 3.8% on divestment revenues and model FY2020 GFD/GDP at 3.8% aided by lower government spending. .................. pg04 The government may want to boost market sentiment through a review of certain taxes (LTCG) as it will likely need the support of FDI and FPI flows to overcome the prevailing economic slowdown. FY2021E divestment What the government can do—not much given a challenging fiscal situation revenues at Rs1.1 tn .................. pg15 In our view, the government has limited scope to provide meaningful stimulus in the context of sluggish tax revenues and a weak economy. The government can increase spending to provide some impetus to growth while managing the weak fiscal situation—this can include (1) higher tax benefits FY2021E revenues to to housing to boost housing demand and supply and (2) additional spending on rural infrastructure. grow 11% and Housing is an important part of GDP (around 6.5% of GDP) and judicious fiscal stimulus to housing expenditure to grow 7% and infrastructure can boost both aggregate demand and supply. .................. pg24 What the government will likely do—let the fiscal deficit rise further We would assume that the government will let central GFD/GDP slip to exceed 3.5% in both FY2020 and FY2021. It has no choice in FY2020 given sluggish tax revenues and in fact, will have to curtail expenditure in 4QFY20 to keep central GFD/GDP below 4%. It will likely provide some fiscal stimulus to the economy in FY2021 through (1) personal income tax cut and/or (2) higher spending on certain parts of the economy although there are arguments for and against personal income tax cut to boost consumption demand. We are not sure if a small personal income tax will achieve much— Sanjeev Prasad tax cuts work in unintended ways and households may simply choose to save more rather than spend in the context of weak economic growth and high inflation. Suvodeep Rakshit What the government should do—a long-term plan to grow revenues, contain expenditure We believe the government should lay down a credible plan to achieve its medium-term growth and Anindya Bhowmik fiscal objectives. India’s central fiscal deficit has slipped too often in the past for investors to rely on the same. The government has used ad hoc funding from divestments and the RBI to meet the shortfall in revenues. The government may want to explore (1) medium-term fiscal forecasting for revenues and expenditure, (2) zero-based budgeting for expenditure, (3) review of its myriad social welfare programs and the need to replace the same with a simple income program and (4) outright privatization of PSUs given the limited scope to raise meaningful revenues without the privatization [email protected] of ‘strategic’ PSUs such as banks, defense entities and energy companies. Contact: +91 22 6218 6427 For Private Circulation Only. In the US, this document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933. This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. Strategy India FY2021 UNION BUDGET: WHAT THE GOVERNMENT CAN, WILL AND SHOULD DO We expect the government to (1) follow a judicious mix of tax rationalization and spending to support the economy, (2) reiterate its commitment to ongoing economic reforms (in particular, labor laws) and (3) make an aggressive push for divestment revenues through the privatization of PSUs in the FY2021 union budget scheduled to be announced on February 1, 2020. We believe the government should present a credible set of fiscal numbers while continuing with ongoing economic reforms. What the government can do? We believe the government may not be in a position to do much towards a meaningful fiscal stimulus to the economy. The government’s fiscal position is quite challenged. We expect the government’s FY2021 GFD/GDP at 3.7% (see Exhibit 1), which is on the higher side versus its stated medium-term target. The government has consistently overshot its fiscal deficit target of 3% of GDP in the past few years. More pertinently, India’s consolidated fiscal deficit (including fiscal deficit of states) is closer to 7% of GDP and the government’s overall market borrowing including market borrowings of government entities is over 8% of GDP. The government’s high borrowing distorts the interest rate environment in the country and blunts the RBI’s monetary stimulus. KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Strategy Exhibit 1: FY2021E GFD/GDP likely to be at 3.7% Major central government budgetary items, March fiscal year-ends, 2017-21E (Rs bn) Change (%) 2018/ 2019P/ 2020BE/ 2020E/ 2021E/ 2017 2018 2019P 2020BE 2020E 2021E 2017 2018 2019P 2019P 2020E Receipts 1. Revenue receipts (2d + 3) 13,742 14,352 15,632 19,628 18,185 18,822 4 9 26 16 4 2. Gross tax revenues (a + b ) 17,158 19,190 20,802 24,612 21,220 23,636 12 8 18 2 11 2.a.