Budget 2013-14

Copyright: Birla Sun Life Asset Management Company Ltd. 2008

Birla Sun Life Asset Management Company Ltd.1

FY 2013-14

Union Budget


Birla Sun Life Asset Management Company Ltd.

Economic Overview FY2012-13 GDP growth estimated to be between 5% (CSO) and 5.5% (RBI) Fiscal deficit at 5.2 % of GDP marginally below 5.3% target The greatest worry continues to be the Current Account Deficit (CAD)

because of excessive dependence on Oil, Coal and Gold importsBudget FY2013-14 Budget estimate based on nominal GDP growth of 13.4% (Real GDP

growth forecast at 6.1% – 6.7% as per economic survey) Fiscal deficit projected at 4.8 % of GDP Planned expenditure growth of 29% Net market borrowing to be higher by 4% to Rs. 4.84 lakh crores Tax proposals are estimated to yield Rs 18,000 crores

Key Budget Highlights

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Direct Taxes (Individuals)

Tax relief of Rs 2,000 for every person with total income up to Rs 5 Lakh

1% TDS on transfer of immovable property above Rs 50 lakh (excluding agriculture land)

Surcharge of 10% on persons (other than companies) whose taxable income exceeds Rs 1 crore. Additional surcharges to be in force for only one year

Additional deduction of interest up to Rs 1 lakh for a person taking first housing loan during FY14

Key Tax Proposals

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Direct Taxes (Companies)

Investment allowance at 15% to manufacturing companies that invest more than Rs 100 crore in plant and machinery during period 2013-15

Increase in surcharge from 5% to 10% on domestic companies whose taxable income exceed Rs 10 crore

Surcharge on Dividend Distribution Tax or Tax on distributed income increased from 5% to 10%

80IA benefits to power sector extended from 31 March 2013 to 31 March 2014 Tax on royalty and technical services to non-resident increased from 10% to 25% STT on Equity Futures, MF/ETF redemptions and MF/ETF Purchase reduced to

0.001%. CTT introduced on non agricultural futures contract at 0.01% Tax on royalty/fees for technical service to foreign parent increased from 10% to

25%. However, the applicable rate will be the rate of tax stipulated in the Double tax avoidance treaty (DTAA).

Direct Tax proposals estimated to yield Rs 13,300 crores

Key Tax Proposals

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Indirect Taxes Standard rate of excise duty and service tax maintained at 12% Peak rate of customs duty maintained at 10% (for non-agricultural products) Duty free gold limit increased to Rs 50,000 and Rs 1,00,000 for male and female

passengers respectively Customs duty increased on coal, leather machinery, set top boxes, raw silk, luxury

goods such as motor vehicles, motorcycles etc Excise duty increased on cigarettes, SUVs, marble, silver (manufactured from

smelting zinc or lead), mobile phones etc One time voluntary compliance encouragement scheme to be introduced for

service tax assessees Dividend received from foreign subsidiary of Indian company will continued to be

taxed at 15% for one more year

Indirect Tax Proposals estimated to yield Rs 4,700 crores

Key Tax Proposals

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FY13: Fiscal Deficit on expected lines

The fiscal deficit for FY13 pegged at 5.2% of GDP, slightly better than budget estimates of 5.3%.

The fiscal deficit is lower largely due to expenditure compression (plan expenditure growth at 4.1% vs estimate of 22.7%)

Budget Math and Our View: FY 13

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Revenues Growth in gross tax collections

estimated at 19.1%- Excise Duty 14.9%,- Customs Duty 13.6%,- Service Tax 35.8%, - Corporate and Income Tax 18.8%,

Budget Math and Our View: FY 14

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Expenses Expenditures to rise by 16.4%

- Plan expenditure 29.4%- Non-plan expenditure 10.8%- Contraction in the subsidy bill by

10.3%

Are FY14 numbers credible? FY14 fiscal deficit pegged at 4.8% of the GDP Tax collection growth estimate of 19% looks optimistic given growth slowdown

and no significant change in tax rates Further, overall revenue targets are dependent on a) Rs 55,800 crores

disinvestment target and b) Rs 40,000 crores telecom revenues which are dependent on market conditions

Like FY13, plan expenditure could once again get axed if government is to adhere to its fiscal targets, especially if it misses its revenue estimates



Market view



Capital Markets

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Budget Impact: NeutralProposal Impact

Tax Residency Certificate is necessary but not sufficient to avail the DTAA benefits.

Negative for FII sentiment, pending clarification from Finance Ministry

STT on Equity Futures, MF/ETF redemptions and MF/ETF Purchase reduced to 0.001%.

Positive for equity markets, ETFs and Mutual Funds

CTT introduced on non agricultural futures contract at 0.01%.Trading in commodity derivatives will not be considered as a ‘speculative transaction’ and CTT shall be allowed as deduction from business income.

Neutral for commodity exchanges

Surcharge on Dividend Distribution Tax or Tax on distributed income increased from 5% to 10%

Negative for companies and investors

Rajiv Gandhi Equity Savings Scheme liberalised – Investment can be made in three successive years and income limit raised to Rs 12 lakhs

Positive for equity markets and mutual funds



Equity Outlook

The Budget does a difficult balancing act of sustaining consumption growth and stimulating investments. It is neither austere nor populist as was feared. However, it fails to live up to elevated expectations that were built up in the run-up to the Budget.

Provides a thrust to industrial capex and infrastructure.

Supportive to the financial sector through measures like reduction in STT, extension of RGESS by 2 years, special package for insurance sector.

The FM emphasized the importance of attracting foreign flows to fund the large Current Account Deficit. While there were steps to simplify the process for FIIs investing in capital markets, there were no other major steps to make markets more attractive to foreigners and FII/FDI flows.

With rupee under pressure and policy measures to boost exports (expected in the exim policy), export oriented companies will benefit.

The budget failed to provide cues to the market and investor focus likely to shift to actual progress on the ground of various measures like coal pooling, project clearances, decisions by the Cabinet Committee on Investments etc. and RBI’s decision on rates and global risk appetite.

The slowdown in the economy has accelerated and it is likely to bottom in Q4FY13. Recovery in FY14 is likely to be gradual but steady. Corporate earnings downgrade cycle has bottomed out and we see little risk to our FY14 EPS growth of 14%.

The market is trading at long term average valuations and returns would track earnings growth.



Sectoral Impact



Agri

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Budget Impact: Neutral

Proposal Impact

Fertilizer subsidy for FY14 at Rs 65,000 crore with carry forward of Rs 35,000 crore from FY13

Negative for fertilizer companies

No roadmap for urea price deregulation. Negative for all new urea plants Negative for phosphatic fertilizers due to non-competitive pricing.

Agri credit hiked by Rs 125,000 crore to Rs 7,00,000 crore for FY14. Interest rate subvention has remained unchanged with effective interest rates at 4%.

Positive for the sector.



Automobiles & Auto Ancillaries

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Budget Impact: NegativeProposal Impact

Excise duty increased from 27% to 30% on all Utility Vehicles except the ones registered as Taxis.

Negative. Expect OEMs to pass through the increase in excise duty to customers.

Customs duty on luxury cars hiked from 75% to 100% completely built units and on imported bikes (800cc and above) from 60% to 75%.

Negative.

Purchase of upto 10,000 buses under JNNURM, especially by hilly states.

Positive for all the commercial vehicles manufacturers.



Banking & Financial ServicesBudget Impact: NeutralProposal Impact

Fiscal deficit targeted at 4.8% of FY14 GDP. Net market borrowing of Rs 4.84 trillion is higher than expected.

This will most likely to push up g-sec yields at the longer end (keep them range bound despite expected interest rate cuts by RBI)

Capital infusion in government banks of Rs 14,000 crore (Rs 12,517 crore allocated in FY13)

Positive for PSU banks as capital infusion would help them to meet higher capital adequacy for meeting Basel-III requirements and maintain credit growth.

Agriculture Credit: a) Interest subvention on farm loans on timely repayment has been extended to private banks (earlier only PSU Banks, RRBs and cooperative Banks got this benefit).

b) Higher agriculture lending target of Rs 7 trillion (up 22% YoY)

a) Positive for private banks in the long-term, as they can now offer lower rates for their direct agri-borrowers and reach priority lending targets.

b) Negative for PSU banks.



Banking & Financial ServicesBudget Impact: NeutralProposal Impact

For Infrastructure sector – to boost financing: a) Infrastructure Debt Funds (IDF) to be encouraged,b) IIFCL to offer credit enhancement,c) Infrastructure tax-free bond of Rs 50,000 crore in FY14

Positive for infrastructure finance companies and overall credit to this sector.

For Housing: Additional Interest deduction of Rs1 Lac over & above Rs 1.5 lakh under sec 24 on first housing loan below Rs 25 lakh. However, if the increased limit is not fully utilized, then the balance can be carried-forward for one more year i.e. till AY2015-16.

Positive for banks and housing finance companies

For Insurance Sector: a) Government proposes to open-up the platform for banks to act as brokers to multiple insurance companies (versus single relationship bancassurance model now). b) Number of proposals finalized, in consultation with IRDA such as empowering insurance companies to open branches in Tier-II cities and below without prior approval of IRDA, KYC of banks to be sufficient to acquire insurance policies.

a) Positive for overall revival / growth of Insurance sector.

b) Positive for banks to operate as brokers and generate fee income, though will be negative for large insurance companies who have agency tie-up with banks and are well ring-fenced.



Capital Goods

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Budget Impact: PositiveBudget announcement Impact

Investment allowance of 15% for Investments in Plant & Machinery above Rs 100 crore during the period 1st April 2013 to 31st March 2015

Positive for companies which has short cycle equipment business.

Defense Capital expenditure increased by 9% to Rs 86,700 crore vs Rs 80,000 crore

Positive for companies which supply defense equipments

Higher allocation to JNNURM (101% increase to Rs 14,900 crore)

Positive for companies in Water business.



Cement

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Basic customs duty on steam coal is being increased from Nil to 2% and CVD from 1% to 2%

Marginally negative

Rural and semi-urban housing spends, boost to infra spend, Road sector, New Cities Planned on Delhi Mumbai Industrial Corridor(DMIC) etc

Positive for Demand



Construction Sector

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Budget Impact : PositiveProposal Impact

Estimate outlay of Rs 2.2 trillion in infra related sectors Positive

For Infrastructure sector – to boost financing: a)Infrastructure Debt Funds (IDF) to be encouraged,b)IIFCL to offer credit enhancement,c)Infrastructure tax-free bond of Rs 50,000 crore in FY14

Positive for infrastructure finance companies and overall credit to this sector.

Targeted incremental road project awards of 3,000 km in 1HFY14 across five states. Plans to constitute a Regulatory Authority for the road sector

Positive for road construction companies



FMCGBudget Impact: NegativeProposals Impact

Excise duty on cigarettes, cigars and cigarillos increased by 18% on all except cigarettes of length not exceeding 65 mm.

Negative for cigarette manufacturers. Hike likely to be passed on to consumers.



Metals

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Levy of 4% excise duty on silver extracted from smelting of zinc, lead and copper

Negative for silver manufacturers from smelting of base metals

Levy of 10% export duty on bauxite Positive for Aluminium companies



Oil & Gas

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Budget Impact: PositiveProposal Impact

Oil & gas exploration policy will be reviewed to move from profit sharing to revenue sharing contracts

It would remove ambiguities and reduce time required for approvals in the subsequent rounds

Policy to encourage exploration and production of shale gas will be announced. NELP blocks that were awarded but are stalled will be cleared.

Positive

The natural gas pricing policy will be reviewed and uncertainties regarding pricing will be removed

Key beneficiaries would be upstream companies, while downstream companies will be negatively affected



Power Utilities

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Budget Impact: PositiveProposal Impact

Ten year tax holiday under 80IA extended till FY14 for power generation companies.

Positive for all IPPs.

Custom duty on coal increased to 2% from NIL and CVD on coal increased to 2% from 1%

Negative for power companies operating on imported coal and which do not have fuel pass through in power tariffs

Coal price pooling is envisaged in current fiscal. Positive for IPPs where projects are stuck due to lack of coal supply



Real EstateBudget Impact: Positive

Proposals Impact

Deduction of interest up to Rs 1 lakh in addition to Rs 1.5 lakh deduction on interest rate for a person taking housing loan up to Rs 25 lakhs for buying first house during FY14.

Positive

Rate of abatement reduced from 75 percent to 70 percent for homes and flats with a carpet area of 2,000 sq.ft. or more or of a value of Rs 1 crore or more

Negative for premium housing. Increase in cost for buyers.

1% TDS on transfer of immovable property above Rs 50 lakh (excludes farmland)

Negative



Retail & TextilesBudget Impact: Neutral

Proposals Impact

Excise duty on garments like cotton & yarn fabrics reduced to 0% Positive for branded garments manufacturers

Proposed to levy service tax on all air-conditioned restaurant Negative



Internal views, estimates, opinions of BSLAMC expressed herein may or may not materialize. These views, estimates, opinions alone are not sufficient and should not be used for the development or implementation of an investment strategy. The portfolio of the scheme is subject to changes within the provisions of the Scheme Information Document(SID) of the scheme. Please refer to the SID for asset allocation, investment strategy and scheme specific risk factors. Forward looking statements are based on internal views and assumptions and subject to known and unknown risks and uncertainties which could materially impact or differ the actual results or performance from those expressed or implied under those statements.

This document is strictly confidential and meant for private circulation only and should not at any point of time be construed to be an invitation to the public for subscribing to the units of Birla Sun Life Mutual Fund. Please note that this is not an advertisement. The document is solely for the information and understanding of intended recipients only. If you are not the intended recipient, you are hereby notified that any use, distribution, reproduction or any action taken or omitted to be taken in reliance upon the same is prohibited and may be unlawful. Views expressed herein should not be construed as investment advice to any party and are not necessarily those of Birla Sun Life Asset Management Company Ltd.(BSLAMC) or any of their officers, employees, personnel, directors and BSLAMC and its officers, employees, personnel, directors do not accept responsibility for the editorial content. Wherever possible, all the figures and data given are dated, and the same may or may not be relevant at a future date. Further the opinions expressed and facts referred to in this document are subject to change without notice and BSLAMC is under no obligation to update the same. While utmost care has been exercised, BSLAMC or any of its officers, employees, personnel, directors make no representation or warranty, express or implied, as to the accuracy, completeness or reliability of the content and hereby disclaim any liability with regard to the same.

Recipients of this material should exercise due care and read the scheme information document (including if necessary, obtaining the advice of tax/legal/accounting/financial/other professional(s) prior to taking of any decision, acting or omitting to act. Further, the recipient shall not copy/circulate contents of this document, in part or in whole, or in any other manner whatsoever without prior and explicit approval of BSLAMC.

Disclaimers

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Statutory Details: Constitution: Birla Sun Life Mutual Fund (BSLMF) has been set up as a Trust under the Indian Trusts Act, 1882. Sponsors: Aditya Birla Financial Services Private Limited and Sun Life (India) AMC Investments Inc. (liability restricted to seed corpus of 1 Lac). Trustee: Birla Sun Life Trustee Company Pvt. Ltd. Investment Manager: Birla Sun Life Asset Management Company Ltd.

Risk Factors: Mutual Funds and securities investments are subject to market risks and there can be no assurance or guarantee that the objectives of the Scheme will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme may go up or down depending on the various factors and forces affecting capital markets and money markets. Past performance of the Sponsor / Investment Manager / Mutual Fund does not indicate the future performance of the Schemes and may not necessarily provide a basis of comparison with other investments. The names of the Schemes do not, in any manner, indicate either the quality of the Schemes or their future prospects or returns. Unitholders in the schemes are not being offered any guaranteed/assured returns. Investors should read the Statement of Additional Information / Scheme Information Document/ Key Information Memorandum available at Investor Service Centers and with distributors carefully before investing.The Material provided in this communication cannot be reproduced or quoted anywhere without express permission from Birla Sun Life Asset Management Company Ltd.

Statutory Details & Risk Factors

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