Budget 2015: Earnings set to get a boost spurred by savings, says Ridham Desai

By Ridham Desai
The Budget lends greater conviction to our out-of-consensus earnings forecasts for the next two years. Despite a slight increase in corporate tax rate for FY16, a medium-term plan to simplify tax laws and reduce corporate tax rate, a boost to the investment rate by about 90 bps, higher-than-expected fiscal deficit implying more overall spending and a boost to financial savings by discouraging physical gold savings augur well for earnings.

The Budget also addresses several small but crucial bugbears in tax laws besides taking a step forward towards ease of doing business in India. We estimate a 24% CAGR in Sensex earnings in two years against 17% estimated by the bottom-up consensus. W

e are bullish on Indian equities with our key overweight positions being private sector banks, industrials, discretionary consumption and technology. The fiscal deficit is estimated to be lower by 20 bps compared to FY15 and to that extent will negatively impact growth and earnings. However, the 30% year-on-year boost to capital spending both outside and inside the Budget with slightly more than half of the total amount in infrastructure is great news for earnings.

The creation of a social security net and proposals to monetise gold savings, including a sovereign gold bond, will likely increase the demand for financial assets, a part of which should flow into equities.

A rise in the share of financial savings in total household savings will also be good for earnings since it helps fund firms and the credit cycle. We were hoping that the Budget would outline a medium-term vision for India’s direct taxes, ie, lower tax rates with a simplified code and fewer exemptions. The Budget surprised us by doing this, though we await the details.

While individual tax payers have received some sops that are good for consumption, it is offset by rise in service tax. The slight drag on FY16 earnings is the rise in corporate tax rate to 34.61% from 33.99%.

What are the risks to the market? The lack of plan for SOE banks’ recap is a risk factor for growth though a step in the direction of PSU banking sector reform has been taken via creation of a bank board bureau. An appreciating currency is also a risk.