July 7, 2009 | Mutual Fund

MF Review: Budget 2009-10

Nothing to rejoice on FMs silence
Post the Budget session, the benchmark indices tanked 5%, as the markets did not like the revised estimate of the fiscal deficit from 6.2% in the Interim Budget to 6.8% in the current Budget. The bond market also witnessed a sharp sell off especially at the longer end of the curve. The yield on 6.05% 10-year benchmark G-Sec breached 7% to end the day at 7.03% as against 6.81% on Friday. Further adding to the woes of the market was the stance of the Finance Minister on the disinvestment agenda as allocated receipts from the same were pegged at a meagre Rs 1120 crore. This is one of the lowest proceeds in the last five years. However, at the same time, the government has done reasonably well to meet the expectations of the infrastructure sector, the social sector and the common man to keep the engine of Inclusive growth rolling. We believe that by keeping mum on various important issues the Finance Minister has kept us all guessing as to how the government will achieve the 9% GDP growth in the long run and simultaneously manage public finances. However, we believe the market will not digest this silence well in the near term. Still, the government will initiate gradual and disciplined policy actions to return to a higher growth trajectory. The following opening remarks of the Finance Minister in his speech are a clear indication of the fact that many policy reforms will follow gradually. What spooked the markets? - 6.8% fiscal deficit Vs interim budget Estimate of 6.2% No clear action plan on the disinvestment side No talk on FDI in various sectors like insurance, retail, etc

While we are determined to convert our words into deeds, members would appreciate that a single Budget speech cannot solve all our problems, nor is the Union Budget the only instrument to do so - Pranab Mukherjee (Budget Speech) Exhibit 1: Key highlights of the Budget
Thumbs Up Thumbs Down Increase in revised estimate for fiscal deficit to 6.8% for 2009-10 Rs 1120 crore estimated as receipts from disinvestment, which is way below market expectations Increase in MAT from 10% to 15%

Increased outlay on infrastructure spending Increased focus on social spending, for instance 144% hike in allocaton to NREGS and 45% hike in allocation to Bharat Nirman Elimination of FBT and CTT Increase in slabs on the personal income tax
Source: Budget documents, ICICIdirect.com Research

Implication of Budget on debt funds

Debt category view The Budget has indicated a fiscal deficit of 6.8%, higher than the market expectation of 6.2%. As a result of this, the bond market witnessed a sharp sell off especially at the longer end of the curve. Yield on the 10-year benchmark G-Sec breached 7% to end the day at 7.02% as against 6.81% on Friday. The FM has indicated the revised borrowing amount at Rs 3.98 lakh crore, an increase of Rs 40000 crore, which disappointed the debt market Disinvestment was one of the key sources to finance the deficit. The market was expecting some specific announcements on disinvestment. Since no announcement came, therefore the debt market was disappointed The higher market borrowing and lack of announcement of source of revenue is negative for the market and may continue to put yields under pressure especially the longer duration. We maintain our cautious view on the longer term debt category
Yield(%)

Fund Category Liquid funds Floating rate funds Short-term debt funds Long-term debt funds Gilt funds
7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5

View Neutral Positive Positive Negative Negative

21 6.46 5.74 25 7.02 20 15 10 5 Change in Yield(bps)

18 13

4.06 3.05

0 -5

-5 10 Yr 1 Yr 3 Yr 5 Yr

-10

3 Mnth

Mov. over previous day(bps)

6-Jul-09(LHS)

Apart from higher deficit, market borrowing as a percentage of total expenditure is also on the rise because of lower revenue receipt indicating more pressure on yields in the near future Exhibit 2: Fiscal deficit and market borrowings
8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 5.65 6.19 5.91 4.48 3.99 4.09 3.5 2.7 6.2 6.8 50.00 40.00 20.00 10.00 0.00
(Rs crores) 900953

Exhibit 3: Government expenditure on the rise

1100000 953231 FY10 IBE 1020838 FY10 BE

30.00

600000 FY01 325592 FY02 362310 413248 471203 498252 505738 583387 FY07

FY03

FY04

FY05

FY06

FY08

Market Borrowing as % of Total Exp.

Source: Ministry of Finance, ICICIdirect.com Research

Source: Ministry of Finance, ICICIdirect.com Research

FY09RE

Fiscal Deficit(%)

100000

712732

Silence w.r.t. public finances coupled with a higher fiscal deficit:

From a 6.2% fiscal deficit target in the interim Budget the target for fiscal deficit has been further revised to 6.8% in 2009-10. The primary reason for the upward revision has been increase in the expenditure from Rs 953231 crore in the interim Budget to Rs 1020838 crore, implying a revision of 7.1%. The main disappointment on the receipts side was the estimates of other capital receipts, which has been pegged at Rs 1120 crore (disinvestment proceeds) and increase in government borrowings from Rs 332835 crore to Rs 397957 crore. The spike in borrowings is worrisome, as it will lead to huge supply of government paper in the bonds markets, implying a pressure on the bond prices and upward pressure on yields. Exhibit 4: Revenue and expenditure trend of the government
2008-2009 Budget Estimates 1. Revenue receipts 2. Tax revenue 3. Non-tax revenue 4. 5. 6. 7. Capital receipts (5+6+7) Recoveries of loans Other receipts Borrowings and other liab 602935 507150 95785 147949 4497 10165 133287 750884 507498 448352 190807 59146 243386 209767 33619 750884 658119 92765 55184 -1 133287 -57520 2008-2009 Revised Estimates 562173 465970 96203 338780 9698 2567 326512 900953 617996 561790 192694 56206 282957 241656 41301 900953 803446 97507 241273 -4.4 326515 133821 2009-2010 Interim Budget Estimates 609551 497596 111955 343680 9725 1120 332835 953231 668082 599736 225511 68346 285149 248349 36800 953231 848085 105146 238534 -4 332835 107324

(Rs Crore)
2009-2010 Budget Estimates 614497 474218 140279 406341 4225 1120 397957 1020838 695689 618834 225511 76855 325149 278398 46751 1020838 897232 123606 282735 400996 175485

8. Total receipts (1+4) 9. 10. 11. 12. Non-plan expenditure On revenue account of which, Interest payments On capital account

13. Plan expenditure 14. On revenue account 15. On capital account 16. Total expenditure (9+13) 17. Revenue expenditure (10+14) 18. Capital expenditure (12+15) 19. Revenue deficit (17-1) 20. Fiscal deficit {16-(1+5+6)} 21. Primary deficit (20-11)

Source: Government of India, ICICIdirect.com Research

Implication of Budget on equity funds

The steep 5.84%fall in equity markets on the broader indices was owing to the fact that a lot of expectations of the Street were dashed Stock prices were already reflecting the fulfilment of expectations like a clear-cut agenda on disinvestment, FDI in financial services and other sectors, plan on recapitalisation of PSU banks, better action plan on reducing the fiscal deficit and announcement on the mortgage/housing finance The market witnessed a rally in the range of 50% to 500% pre-Budget leading to stocks without robust fundamentals overshooting on the valuations front. Therefore, a significant decline may happen in these pockets as markets will again focus on stocks that have healthy business models backed by robust balance sheets As far as levels are concerned we believe the markets will oscillate between the 12000 and 14500 levels until we have clear direction in terms of earnings visibility for companies We also believe that after the Budget the markets will realign itself with events happening in the global marketplace and the pace of earnings recovery that takes place in Corporate India We believe that for the near term the funds in focus will be on those with portfolios overweight on sectors related to the domestic consumption theme like FMCG, sugar, consumer durable. In the longer term, funds with exposure to sectors will benefit from the revival in investment/capex led theme like banking, infrastructure and engineering
Sector Automobiles Banking Cement FMCG Hotels IT Logistics Media Oil & Gas Power Pharma Retail Steel Sugar Telecom Textiles View Neutral Neutral Neutral Positive Neutral Neutral Neutral Neutral Neutral Positive Positive Neutral Neutral Positive Neutral Neutral

...after considering June 2009 portfolios investors may consider diversified funds with overweight on sector with positive view..

The shedding of expectations built into stock prices was the main reason for the market to correct. We believe the declines in markets would provide investors an opportunity to buy for the medium to long terms and cash in on the opportunity that they had missed during the election rally. Exhibit 5: Market returns pre and post-Budget.
15 10 . 5 0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (%) -5 -10 -15 Pre-Budget Post Budget 2008-09

Exhibit 6: Institutional activity

800 600 400 200 0 -200 -400 -600 -800 568 229 303

402 164

-166 -207 -588 Net FII Investment Net MF Investment

01-Jul

02-Jul

03-Jul

06-Jul

Source: Bloomberg, ICICIdirect.com Research

Source: SEBI, ICICIdirect.com Research

Mutual Fund Research Desk, ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka Andheri (East), Mumbai 400 093

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