Infrastructure & Power: Realise big dreams
In December 2019, the Centre laid out an ambitious plan for infrastructure projects in the country — National Infrastructure Pipeline (NIP). Apart from laying down a clear roadmap for the completion of projects worth ₹102-lakh crore over the next five years (FY20-25), the government also carved out its funding plan.
The NIP demarcated the division of funds between the Centre (39 per cent), the States (39 per cent) and private players (22 per cent). But the expected shortfall in budgetary allocation (versus what was envisaged in the NIP) is estimated at 25-30 per cent for FY21. Hence, the budgetary allocation for FY22 is expected to be higher, to make good for the shortfall of earlier years (both FY20 and FY21).
Another key monitorable in the Budget would be the IEBR (Internal and Extra Budgetary Resources) funding. This is crucial given that the existing private players in the infrastructure space are already saddled with debt. While the Centre had infused capital into institutions such as India Infrastructure Finance Company Ltd (IIFCL) and an NIIF (National Investment and Infrastructure Fund) subsidiary in its last Budget, creation of a more dedicated financing institution — a Development Finance Institution (DFI) — would help the Centre better cope with the aftermath of Covid-induced economic disruptions and plan for development imperatives.
Opening new funding avenues could aid in healthy order inflows for infra companies such as Larsen & Toubro, PNC Infratech, Dilip Buildcon and KNR Constructions.
Project delays long ignored
The last Budget also introduced various tax sops in a bid to lure funds from foreign sovereign investors into the infrastructure space.
But the infrastructure space has seen failed attempts of both the Centre and private players.
While the National Highways Authority of India’s (NHAI) TOT (toll-operate-transfer) bundles saw few takers (fearing lower-than-estimated toll revenue), Ashoka Buildcon’s inability to pay a required return to its PE investor (SBI Macquarie) is another tell-tale sign. While the introduction of FASTag is expected to ease the trouble for road contracts, execution delays in other infrastructure projects continue to hamper the interests of investors — both domestic and foreign.
Out of the 1,687 projects monitored by the Infrastructure and Project Monitoring Division of the Ministry of Statistics and Programme Implementation (these are Central Sector Infrastructure projects worth ₹150 crore or more), 558 projects are delayed as of December 2020. Of these, about 125 projects have seen a delay of more than five years.
While delays in land acquisition and other litigations led to perennial delays in infrastructure projects, the pandemic-induced lockdown further interrupted project execution with manpower shortage and supply-chain disruption.
Post-lockdown, private players also faced executional delays that led to lower revenues in the initial months of the financial year. In the 6,500 projects compiled in the NIP, any such additional delays may act as a dampener, even as the Centre continues to lure foreign investors.
Pending State dues
Another important area which needs the Centre’s intervention would be the long-pending dues and receivables from States. From management commentaries on quarterly earnings of listed players, we understand that the Centre has ensured to expedite payments and bill clearances to infrastructure companies, post the pandemic. But lack of similar mandates to the States has resulted in stretched working capital cycles for several infrastructure companies.
Any measure in this direction could help companies such as VA Tech Wabag and NCC that are awaiting huge receivables from certain States.
Reforming State discoms
With the government’s past efforts at reviving the ailing State power distribution utilities (Discoms) falling short of the desired reformation, hopes are pinned on the Budget for a revival package. Any plan to improve the operational performance of the Discoms and clear their pending dues should aid power producers such as NTPC, Adani Power, Tata Power and NHPC in improving their cash flows. The cash-strapped Discoms, which came under further stress after the national lockdown, had outstanding dues of ₹1.26-lakh crore as of November-end 2020.
Demands from the renewable energy sector include incentives for promoting domestic solar manufacturing, putting on hold the imposition of basic customs duty on solar equipment imports and allocation for creating a robust transmission infrastructure.
Healthcare: Tax sops and more
The coronavirus pandemic has brought home the importance of a strong public healthcare infrastructure. Expectations are, therefore, running high for a ramp-up in India’s healthcare spending (Centre and States combined) from the existing 1.6 per cent of the country’s GDP.
Among the key demands of pharmaceutical companies is one for an increase in the weighted tax deduction for in-house research and development (R&D) from the existing 100 per cent to 200 per cent.
Under Section 35 of the Income Tax Act, companies can deduct the expenditure incurred on R&D from their taxable income. A hike in the allowed deduction can benefit many pharma players, especially those with large R&D spends such as Lupin (10.3 per cent of sales in FY20), Dr Reddy’s Laboratories (8.8 per cent), Cipla (7 per cent) and Sun Pharmaceutical Industries (6.1 per cent).
The pharma industry is also expecting more incentives to be added under the Production-Linked Incentive (PLI) scheme, launched in March 2020, for promotion of domestic manufacturing of active pharmaceutical ingredients (APIs) and key starting materials. With an outlay of ₹6,940 crore, the scheme will provide sales-related incentives on 41 select drugs (using 53 APIs) manufactured by shortlisted pharma companies, up to a few years.
Recently, Aurobindo Pharma and a few unlisted companies was selected in the first approved list of beneficiaries. More applications are expected to be approved. The scheme was tweaked in October 2020 to address pharma industry concerns and may not possibly see further changes in the Budget.
Recovering from the Covid-19 impact, pharmaceutical companies in India posted net sales and net profit growth of 9 per cent and 25 per cent, respectively, in the September 2020 quarter compared with a year ago. Impacted by fewer patient visits to doctors and reduced priority to non-corona treatments, net sales grew only 3.5 per cent and net profit fell 2.5 per cent, year-on-year in the June 2020 quarter.
Affected by reduced patient (non-corona) visits, the hospital sector reported 20.5 per cent year-on-year decline in net sales and net loss to the tune of ₹461 crore in the June 2020 quarter. This improved to under 1 per cent and 11.6 per cent year-on-year growth in net sales and net profit, respectively, in the September 2020 quarter.
The hospital segment is hoping for extension of tax benefit (100 per cent deduction of capital expenditure) under Section 35AD of the I-T Act to hospitals with below 100-bed capacity in smaller towns and cities. This can encourage private hospital chains to expand their presence in tier II and II towns.
A wider population coverage under the government’s insurance scheme, Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (PM-JAY), if approved, can bump up demand for services at hospitals empanelled under the scheme.
‘Corona cess’ — a cess to cover the cost of vaccinating people — too, is anticipated in the Budget. There are also calls for higher allocation to, and inclusion of more people under, PM-JAY.
PSUs: Transformation ahead
Once upon a time, PSU stocks were a must-have in every investors’ portfolio thanks to their generous dividends, strong balance sheets and sovereign ownership. But, “the times they are a changin.”
PSU stocks as a universe have bucked the trend when it comes to the new-found buoyancy in stock markets. In just the last one year, the Sensex has steamed past records to gain 13 per cent, but in the same period the BSE PSU benchmark has tanked nearly 15 per cent.
Investors’ concerns relate to governance, performance and outlook.
The contrast is clear when you look at 34 times trailing earnings valuation multiple of the Sensex compared with the PSU index at 12 times trailing earnings.
All that could change in 2021 when Finance Minister Nirmala Sitharaman promises to deliver a Budget “never seen in 100 years”.
A glimpse of what’s in store is evident from the Cabinet Committee of Economic Affairs clearing the public sector enterprises (PSE) policy on January 27, days ahead of the Budget.
The Centre first mooted an overhauled PSE policy in the Aatmanirbhar Bharat Abhiyan mid last year, which envisioned not more than four central PSEs in each strategic sector, while opening up all other sectors for privatisation.
The Modi government is said to have identified over a dozen strategic sectors for disinvestment purposes, while some have been labelled as critical sectors requiring large presence of PSUs.
In the rest, the government will eventually move out clearing roads for private participation that could bring top-level professional management.
Private ownership will stop the unhealthy trends of ad hoc interventions from government (promoter) on buybacks, dividend payouts and takeovers, while creating value for shareholders.
Right now, the cloud of small stake sales looms large over all PSU stocks, which hurts investor appetite since they think the government will offload shares at a discount in future.
The regular supply of PSU stocks has also de-rated valuations. A clear blueprint on strategic sales can change this narrative.
New lease of life
PSU stocks could find new attention from market participants if the government-owned firms are pushed to perform in a market-like manner. The Economic Survey for 2020-21 has also called upon the government to do so. This could be done by giving their managers more freedom, and linking incentives with better financial targets such as faster growth, which would improve their stock performance and valuations.
Though Covid-19 hit FY21 disinvestment plans, the chasm between promise and delivery has been stark — just ₹15,220 crore was raised for the first nine months of this fiscal compared with the March-end target of ₹2.1-lakh crore.
Expect the FY22 disinvestment target to be higher as all the existing ones, such as LIC IPO, strategic sale of Air India, Bharat Petroleum Corporation Ltd (BPCL), Shipping Corporation of India (SCI), BEML and Container Corporation of India (Concor), get rolled over.
Apart from the new PSU policy, expect the Budget to lay out some sort of an exit map for PSU banks.
Although there have been repeated promises on PSU banks’ privatisation from the Modi government, so far, the action has been limited to merger of smaller State-run banks with bigger ones.
It is expected that the FM will come with a plan to gradually transfer the majority ownership in PSU banks and leave them open for private participation That should also help deal with the nagging issue of recapitalising PSU banks.
Metals: Focus on import duties
Steel prices in India have gone up by more than 50 per cent — from ₹35,750 per tonne in June 2020 to ₹55,000 in January 2021 (as per SteelMint) — supported by the recovery of domestic demand as well as increased raw material costs. A recent report by India Ratings and Research pointed out that the cost of infrastructure projects are up 20-25 per cent over pre-Covid levels. To not upset the apple cart, measures to bring down steel prices are expected in the Budget.
The Federation of Indian Mineral Industries has suggested that the existing import duty on steel at the rate of 15 per cent — to protect Indian players from international competition — has to be withdrawn in order to make imports cheaper.
In April-October FY21, India imported 2.3 million tonnes of steel, which was about 5 per cent of the metal consumption during the period.
Any intervention on steel prices in the form of import duty withdrawal or reduction in the minimum import price may impact steel players such as Tata Steel, JSW Steel, JSPL and SAIL.
The Indian Steel Association argues that the rise in price of steel has been significantly due to the surge in raw material (iron ore) prices caused by the shortage of iron ore in the market. The lump iron-ore price of State-run iron-ore mining company, NMDC, has gone up by 132 per cent over July to December last year to stand at ₹5,700 per tonne.
Winners & losers
The association has, hence, demanded a ban on iron ore exports for a certain period, to bring down the input cost of the steel players. This could be a positive for steel companies with no captive iron-ore mines.
For example, JSW Steel, which has reportedly been keeping production low due to shortage of ore, will benefit. However, NMDC, which has reported significant increase in profits in the second quarter of the fiscal on the back of price hike, may take a backseat.
Further, like in other years, the steel industry is hoping for reduction of import duties on raw materials such as coking coal (for which domestic substitution is not available) and for an increase in the customs duty on finished/semi-finished steel imports.
Meanwhile, the aluminium industry, is hoping for a hike in the customs duty on aluminium and scrap imports, to counter the increasing threat from imports.
Any reduction of customs duty on copper-ore imports will aid the copper industry which is reeling underpoor margins.
Companies that will be impacted positively from these moves include Nalco, Hindalco and Vedanta.
Real estate: Affordable housing is key
With the re-opening of the economy, the real-estate sector — which had taken a hard hit in terms of revenues, project delivery and construction — has been witnessing a steady recovery in the residential segment, particularly in affordable housing.
This, along with various measures announced since March last year — including extension of credit-linked subsidy scheme (CLSS), and extension of existing deduction of ₹1.5 lakh available for housing loan repayment under Section 80EEA for affordable home buyers — (who don’t own any other property) — have helped bring back home buyers to the market.
However, the unsold inventory levels in the country are still high. Project launches by developers have seen improvement, but they are yet to reach pre-Covid levels.
To further stimulate demand in residential realty, the Centre is expected to dole out additional incentives.
This includes increasing the cap of house property value eligible under Section 80 EEA ( for interest deductions) from ₹45 lakh to ₹75 lakh. This will expand the benefit beyond the affordable housing segment to mid-income category house properties.
Also, as housing units are priced much higher in metro cities than in towns and non-metros, the ₹45-lakh ceiling for affordable housing could be increased to spur home buying.
Further, an increase in income-tax deduction for interest on housing loan (under Section 24) is also on the wish list.
Additional measures such as industry status for real-estate sector (which would help developers with easier access to credit and reduce the cost of borrowing), single-window clearance for projects, GST reduction/rebate and 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), could give a boost to both developers and home-buyers.
New measures to improve liquidity for developers, such as new financing schemes for timely completion of projects and need-based credit availability, would help improve the market sentiment.
With improvement in residential demand, particularly in affordable and mid-income category housing, the stocks of realty companies with presence in these segments have rallied nearly 68 per cent, on an average, in the past six months.
Measures including stamp duty reduction in some States and RERA project extension by six months have aided in their sales.
A further fillip to these segments in the Budget will benefit listed companies such as Sobha, Brigade Enterprises and Sunteck Realty that have higher exposure to affordable and mid-income housingprojects.
Additionally, companies in allied industries such as cement and building materials (ACC, UltraTech Cement, Kajaria Ceramics), paint, steel and ply wood (Greenply), too, could benefit.