Big Story

Big Story: What India Inc needs from Budget 2020-21

As Nirmala Sitharaman gets ready to present Budget FY2021, expectations are running high.We take stock of the current state of key sectors and look at measures that can give a boost

Infrastructure & Power - Removal of roadblocks in project execution

With infrastructure being among the focus areas of the Modi government, adequate budgetary allocation, coupled with the availability of sufficient bank credit, helped companies in this space in the initial years.

While their order books grew manifold, the conversion of the same into revenues slowed gradually.

In FY18, the aggregate revenues of the listed majors in this space grew a tepid 3 per cent y-o-y. This was due to persistent delays — due to issues in land acquisition and clearances as well as unfavourable law-and- order situations — in the ground-level execution of the projects. That apart, mounting debt on their balance-sheets prevented these companies from accepting fresh orders. Since revenue visibility was hampered and their balance-sheets were overly leveraged, reverting to bank loans was not an option any more.

Move to HAM contracts

The companies instead reverted to Hybrid Annuity Model (HAM) contracts from FY18 onwards, which not only helped them with 60 per cent off their unding requirements, but also shifted the burden of land acquisition to the Centre. Consequently, revenues improved — recording 18 per cent y-o-y growth in FY19.

But the Centre’s kitty soon dried up and, with that, the awarding of orders came to a standstill in FY20. For instance, 147 contracts were awarded by the National Highways Authority of India (NHAI) in FY18 for the construction of 7,394 km. This slowed to 77 contracts (2,263 km) in FY19 and further to 15 contracts (515 km) so far in FY20.

In the recently announced National Infrastructure Pipeline (NIP), the Centre has laid down a clear roadmap for infrastructure projects worth ₹102-lakh crore over the next five years. The NIP also demarcated the division of funds between the Centre (39 per cent), the States (39 per cent) and private players (22 per cent). That apart, it laid down the budgetary allocation for FY21 at ₹1.86-lakh crore, 22 per cent higher than in FY20.

Non-budgetary support

While increased budgetary allocation is imperative, any measures to speed up land acquisitions, clearances and pending litigations in the upcoming Budget would help the companies.

Also, in its last Budget, the Centre had proposed deepening of the bond markets, setting up of a credit guarantee corporation and other measures to improve infrastructure financing. However, no move has been taken in this direction. Hence, further clarity on easing infrastructure financing would be a monitorable aspect in the upcoming Budget. These measures could benefit various debt-ridden companies in the space, such as Ashoka Buildcon and PNC Infratech.

That apart, infrastructure companies have been facing increased working capital requirements in recent times. This is mostly due to the pending receivables from Centre- or State-run agencies and departments. Measures that could speed up recoveries from government departments could ease the pain of companies such as NCC and VA Tech Wabag.

Lack of power

Most power stocks — power generators and power transmission companies — have been weighed down by overdue amounts from State power distribution companies (discoms). The overdue bills of power-generating companies had surged to over ₹81,000 crore at the end of November 2019 despite reforms meant to clean up discoms’ loss-laden books through the UDAY scheme in 2015. To ring-fence the payments issue, the Power Ministry pushed discoms to buy power only against letters of credit, from August 2019.

Finance Minister Nirmala Sitharaman did mention in her July 2019 Budget speech that there is the possibility of a rejuvenated UDAY scheme to push discoms to become more operationally viable, and to raise tariffs for end-consumers.

However, this hasn’t come to pass yet.

Efficiency in distribution

Reforms relating to the privatisation of the distribution leg of the power business could help power producers and transmission companies such as NTPC, Power Grid Corporation, Tata Power and Adani Power.

This could lead to increased efficiency in distribution — the weakest link of the power business. Other reforms to help discoms, such as a rejuvenated UDAY schemeand a new tariff policy, have been discussed.

A roadmap on when the industry could see some of these reforms being implemented will help power-generating and transmission companies improve their cash position. It will also help in building in some predictability in their debt costs.

Automobiles: Measures to rev up sales

Auto sales have been in a downturn for over a year now. After growing at 10.07 per cent y-o-y in the first half of FY19, new vehicle sales slowed down in the second half , ending FY19 with only a 5.15 per cent growth. The slowdown has become more entrenched in FY20, with sales volumes dropping 15.73 per cent so far.

A fall in rural demand, problems in the availability of finance, and higher upfront cost of vehicles have been taking a toll on car and bike sales.

Truck sales have also been affected by lower freight availability because of the general economic slowdown, quicker turnaround time for trucks after GST and the permit to carry higher loads in existing vehicles (the revised axle load norms).

The aggregate net sales of auto companies dropped 11.1 per cent in the first half of FY20 over first half of FY19 Although raw material costs remained flat to a certain extent, the lack of operating leverage due to poor volumes, as well as discounts and price cuts to boost sales, took a toll at the operating level.

Maruti Suzuki’s operating margins, for instance, contracted by over 5 percentage points in the first half of FY20. The aggregate adjusted net profit for the sector dropped 33 per cent during the same period.

Call for GST rate cut

To mend the situation, the auto industry is demanding a GST rate cut, from 28 per cent to 18 per cent, and is seeking some recommendation for relief to the GST Council in the Budget. Excise duty cuts have always been resorted to in past Budgets during slowdown years.

Given the tight fiscal situation, the government may not agree to a blanket reduction. But if it comes through — even temporarily, until demand stabilises — major listed players, such as Maruti Suzuki, Mahindra & Mahindra, Hero MotoCorp, TVS Motor Company and Bajaj Auto, will be the beneficiaries.

Scrappage policy

Secondly, apart from the general economic slowdown, commercial vehicle (CV) sales have been bogged down by the structural issues mentioned above. Hence, expectations of a scrappage policy for old CVs — which would boost new CV sales — run high.

Originally conceived in May 2016 as the Voluntary Vehicle Fleet Modernisation Programme, it was decided that vehicles (predominantly trucks) older than 10 years, or those below the BS-IV emission standards, would be eligible for incentives if they were scrapped and replaced with new ones. A 50 per cent waiver on excise duty on the new vehicle and discounts from auto manufacturers, in addition to the scrap value of the vehicle, were the incentives.

Following this, in March 2018, the age of vehicles to be scrapped was increased to 20 years and the implementation deadline was set to 2020. In this context, an announcement on the contours of the scheme in the Budget seems likely. It is pertinent to note that the Centre, last October, put out the draft guidelines for setting up authorised scrapping centres. Ashok Leyland, Tata Motors and Eicher Motors will benefit if a scrappage scheme is announced.

Thirdly, measures to boost the adoption of electric vehicles (EVs) is expected.

Lower import duties or other local taxes for critical parts or charging infrastructure are among the demands.

Agriculture: More incentives for farmers

The year that went by was not great for companies in the agriculture space. Despite bountiful rain, the demand for agro-chemicals and fertilisers did not increase materially.

The country experienced above-normal rainfall of 110 per cent of the long period average (LPA) during the South-West monsoon in 2019. But the onset of monsoon was delayed and there was a phase of unexpected heavy rain towards the end. The damage to standing crops hit supply of pulses and horticulture crops, and as a result, prices rallied.

Consumer food price inflation started inching up from June and hit a high of 14.1 per cent in December.

This was due to higher prices of vegetables, pulses, oil seeds and milk.

The agri GDP in nominal terms, which takes into account the price inflation in commodities, shows farm income having increased. In the first half of 2019-20, the reported growth in agri GDP was 7.7 per cent, higher than the 5.6 per cent recorded in the same period in 2018-19.

The revival in farm income, however, didn’t help agri input companies which were waiting on the edge to take advantage of any improvement in sentiment.

One reason behind the absence of widespread demand growth for agro-chemicals last year was the late onset of monsoon which saw many farmers go for short-duration crops that demand fewer nutrients.

Also, pest infestation was overall lower.

That said, players with widespread distribution networks and those who launched new products did see double-digit growth in the first half of 2019-20. This includes Chambal Fertilisers, PI Industries, UPL, Insecticides India and Bayer CropScience.

Q3 and Q4 of 2019-20, however, are likely to be better for most agri input companies, given the good rabi sowing, increase in the water levels in reservoirs, and the pick-up in demand for urea and DAP (diammonium phosphate) in September and October.

Profitability is also likely to be better with the drop in input prices.

In the upcoming Budget, the sector is looking for positive news. While PM-KISAN — the direct income support scheme announced in the previous Budget — did bring some cheer, it was a disappointment, given that the dole was only ₹ 6,000/year per farmer. If this dole is increased, as expected, the spending on agri inputs by farmers could increase.

If there is a policy push to fast-track the completion of irrigation projects (under the Accelerated Irrigation Benefit Programme), and build warehouses and supply chain infrastructure, it would help players including Rallis India, Coromandel International, Dhanuka Agritech, UPL and PI Industries.

Policy/funding support for farmer-producer companies (FPCs) and eNAM (electronic National Agriculture Market) can help farmers realise higher income, which can revive demand for farm input companies.

That said, if the government continues to make a pitch for Zero Budget Natural Farming (ZBNF) in this Budget, too, it will be a negative for agri-chemical and fertiliser companies.

Real estate: Regulatory moves to spur demand

The real-estate sector has been plagued by lack of demand and high supply, weak consumer sentiment, high prices and delayed project deliveries in the last few years. The overall consumption slowdown in the economy last year has also taken its toll.

While the level of unsold inventories continues to be high, at 4.45 lakh, according to a report by real-estate consultant Knight Frank, project launches have improved, particularly that of low-ticket housing. Home buyers’ preference for these projects and quality developers have helped improve demand marginally, about 1 per cent y-o-y, in 2019.

Stock rally

Against this backdrop, the stocks of realty companies with a presence in the mid-income and affordable housing segments rallied nearly 25 per cent, on an average, in the past one year. Sobha, a Bengaluru-based realty player, registered new sales (volume) growth of 9 per cent y-o-y during the nine monthsended December 2019. However, new sales (value) declined marginally, about 1 per cent, during the same period, which could be attributed to the rise in the share of mid-income projects.

Similarly, Brigade Enterprises, another Bengaluru-based player, registered strong new sales volume growth of 73 per cent y-o-y for H1FY20.

On the other hand, Sunteck Realty, a Mumbai-based company, saw slow demand during the first half of FY20 due to a stagnant luxury market. The company has over 60 per cent of its projects in the luxury and premium residential segments. Though almost 70 per cent of its inventory is sold, it will take another year for the balance to be sold.

The company reported a y-o-y decline in revenue and profit of 21 per cent and 48 per cent, respectively, for H1 FY20.

Oberoi Realty, another Mumbai-based player, also reported a decline in revenue and profit due to weak demand in the Mumbai market.

Reforms and policy changes

While the Real Estate (Regulation and Development) Act, 2016 (RERA) has made firm progress in restoring buyers’ confidence to an extent, it still needs improvement. Also, the Centre’s various reforms and policy changes — including the announcement of an alternative investment fund (AIF) to provide last-mile funding — are yet to make a meaningful impact.

To stimulate demand in residential realty, the Centre could take additional initiativessuch as enhancing the eligibility criteria for the Credit Linked Subsidy Scheme (CLSS), re-introducing ITC (input tax credit) for a lowered GST rate of 5 per cent for under-construction projects (1 per cent for affordable housing), single-window clearance and infrastructure status for the sector.

Additionally, an increase in the income-tax deduction for interest on housing loan, from ₹2 lakh to ₹5 lakh, could encourage more people to buy.

Banking: PSB overhaul, lending revival

The banking sector has taken a big beating over the past five years, under the BJP-led government’s first term. While it is true that most of the bad-loan turmoil has been on account of excessive lending between 2009 and 2013 (UPA-II regime), the massive clean-up of banks’ balance-sheets has cost the sector and the economy dearly. Risk-aversion by bankers, apart from the sharp slowdown in the economy, has impacted lending. The current report card on banks’ performance hardly lends comfort. For listed private sector banks, while loans have grown at 16 per cent CAGR (between FY14 and FY19), profits have shrunk 4 per cent, owing to a 30-40 per cent annual rise in bad loans.

For PSU banks (PSBs), the modest growth in loans (6 per cent CAGR) and over 30 per cent rise in delinquencies have hit earnings. The performance of banks this fiscal has been equally dismal. While optically, growth in bad loans has fallen considerably in the first half of the fiscal, it has been on account of a high base (bad loans had galloped last year). Bank credit growth, which had climbed to 12 per cent in March 2019, slipped to about 7 per cent as of December. So, where do we go from here?

Reviving lending

Apart from restoring the confidence of depositors — possibly by increasing the deposit insurance cover and addressing specific bank issues such as that of YES Bank, the government has an uphill task in reviving lending activity. Structural reforms and big government spending that can kick-start investments will be imperative.

Addressing PSBs’ capital and governance issues will be critical, if they are to get ready for the next leg of lending. The Centre has pumped close to ₹2.7-lakh crore into PSBs between FY18 and FY20, which has achieved little by way of boosting credit growth, as much of it has been sucked into bad-loan losses. The Centre announced the long-awaited consolidation move last year, reducing the total number of PSBs to 12 from 18. But the merger of these mammoth banks — importantly, the terribly weak ones — will be no walk in the park.

PSB governance overhaul

Hence, what runs high on the Budget wish-list is a significant overhaul in the governance structure of PSBs. In the 2015-16 Budget, while the Centre had proposed the constitution of the Banks Board Bureau (BBB) to usher in an independent selection process for top bank officials, it has proved a damp squib. Laying down the roadmap for government stake dilution and granting more autonomy to bank boards will hence will be critical in the upcoming Budget. A thrust on investments and reforms in key sectors such as infra, power and realty will augur well for banks such as SBI, HDFC Bank, ICICI Bank and Axis Bank, which have strong capital bases. For PSBs, governance reforms will benefit in the long run, but near-term capital challenges will persist.

Published on January 18, 2020

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