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Contours of Budget
Budget 2011-12 is more of a balanced Budget contrary to expectations of a
populist one. The fiscal deficit target of 4.6% for 2011-12 vs. the FRBM
target of 4.5% seems pretty encouraging given the high commodity prices
and the anticipated slowdown ahead. Accompanying a better-than-expected
fiscal deficit target came in the low net borrowing figure of | 3.43 trillion (Idirect estimate of | 3.8 trillion). This will indeed address the liquidity issues
in the system and concerns over the crowding out effect on the private
sector. The positive element from the Budget also stems from the fact that
the government seems to be more focused on resolving the supply side
issues in the economy to avoid the event of a perennial demand-supply
mismatch. This gets reflected in the incremental allocation of | 2000 crore in
the rural infra development fund to | 18000 crore (dedicated for creating
warehousing facilities) coupled with granting infrastructure status to cold
storage projects. Also, the fertiliser sector got its fair share of focus as capex
for the fertiliser sector was encouraged (capex for fertiliser awarded infra
projects). A rise in agri-credit from | 3.75 trillion to | 4.75 trillion also
deserves a mention as it will provide an impetus to agri growth.
The government is clearly banking on robust underlying growth in the
economy (the government expects GDP to grow by 14% in nominal terms in
FY12E) to drive its revenue basket as it has budgeted for total revenue
receipts of | 7.9 trillion. Also, to ensure all-round growth in revenues, the
government has widened its net for various products and services, thereby
increasing the revenue visibility by | 11300 crore. On the other hand, it has
managed to support the consumption growth in the economy as there were
no roll backs in excise duty or service tax rates and there was an increase in
individual exemption limit and reduction in surcharge on corporate tax rate
by 250 bps.
The GDP growth rate of 8.75-9.25% has built in an inflation target of 5.25-
4.75% for FY12E, assuming a 14% growth in nominal GDP estimated by the
government. Also, our calculations suggest that the government has built in
a crude price of around $76 per barrel so as to reach the fiscal target of
4.6%, thereby leaving no margin of safety if crude remains at elevated
levels. This has the potential to inflate the fiscal deficit by 40 bps to 5%.
We believe the Budget is a bit ambitious in growth and fiscal deficit targets.
The government is banking on buoyancy in economic growth to contain
problems on the fiscal deficit front. The Budget is anchored on lesser
tinkering with tax rates, under providing for subsidies and rectifying supply
side issues to help sustain the growth and fiscal balance.
Other key flagship programmes:
a. Sarva Shiksha Abhiyan has been allocated | 21,000 crore in
Budget 2011-12
b. National programme for mid-day meals in schools has been
allocated | 10380 crore
c. Rajiv Gandhi Grameen Vidyutikaran Yojna has been
allocated | 6000 crore
d. National Highway Development Programme has been
allocated | 10343 crore
Key tax reforms
Exhibit 14: Tweaking in individual, corporate tax rates
Direct tax
Personal tax
80 yrs and above individuals tax exempt upto | 500,000
I-T exemption for senior citizens | 250,000
Senior citizen tax limit now for 60 year olds
Up tax exemption to | 180,000 FY12 from | 160,000 in FY11
Tax sop for | 20,000 investment in infra bond extended for 1 year
Corporate tax
Special Economic Zones to come under MAT
MAT raised to 18.5% from 18%
Cut surcharge on domestic cos to 5% from 7.5%
Low withholding tax of 5% for notified infra funds
I-T deduction for infra bond invest extended by 1 year
Foreign dividend tax rate cut to 15% for Indian cos
Source: Budget Documents, ICICIdirect.com Research
Exhibit 15: Excise duty surprises, others see minimal tweaking
Indirect tax
Customs duty
Peak rate for customs duty unchanged in FY12
Cut basic customs duty on farm machinery to 2.5% from 5%
Levies 20% ad valorem export duty on iron ore
Customs duty on micro irrigation equipment cut to 5% from 7.4% in FY11
Customs on tunnel-boring machines for highways scrapped
Customs duty on petroleum coke cut to 2.5% from 5%
Custom duty on specified gems, jewellery machine cut to 5%
Service tax
Service tax raised on international, local air travel by | 250 and | 50, respectively
FY12 service tax standard rate unchanged at 10%
Service tax to be levied by insurance companies on total premium paid
To levy service tax on hotel stay costing over |1,000/day
To levy services tax on some air-conditioned hospitals
Excise duty
Base rate on excise duty raised to 5% from 4%
To replace excise with ad valorem duties for cement FY12
Central excise duty rate unchanged at 10%
No excise duty on equipment for ultra mega power plants
Basic food, fuel to be exempted from Central excise duty
Excise duty on kits to convert to hybrid vehicle cut to 5%
1% central excise duty on 130 new items
Excise on local power equipment to be in line with customs
10% duty plus | 200 /tn on cement bags from clinkers
Concessional 10% excise duty on factory built ambulances
Source: Budget Documents, ICICIdirect.com Research
Borrowings: Surprises on the upside
The Budget 2011-12 has accounted for | 417000 crore of gross market
borrowings and | 343000 crore of net market borrowings. This will be a
relief for bond yields in the near term as the anticipated figure was better
than market expectations. By pegging a lower borrowing target, the Budget
will solve liquidity concerns in the short to medium term, given the macro
variables do not take a turn for the worse (high commodity prices and
borrowing costs). Also, this would lead to a subsiding of fear of the private
sector getting crowded out to a large extent.
Disinvestment: As per expectations
Disinvestments, on the other hand, have been budgeted at | 40,000 crore
for FY12BE. On the other hand, the revised estimates for disinvestments for
FY11RE stand at | 22744 crore vs. the earlier provisions of | 40000 crore.
However, the completion of the ONGC FPO by March 2011 will add another
| 12,000 crore to the government kitty. We expect these proceeds to spill
over to FY12BE.
Sectoral Impact
Budget 2011 was balanced with lower-than-expected populist measures
while focusing on sustainable growth. In line with the growth agenda, the
focus was on rural development, improving supply chain infrastructure and
increasing affordability. The Budget was positive for sectors like
automobiles (unchanged excise duty and incentive for hybrid vehicles),
banks (recapitalisation of PSUs), logistics (thrust on warehousing facilities),
power (extension of 80IA), FMCG (focus on agri products and increase in
subsidy for farmers), cement (reduction in duty on petcoke and gypsum)
and construction (increased allocation to infra and thrust on higher
investment).
However, the Budget appeared to be negative for sectors like textiles
(mandatory duty on branded garments), metals (higher export duty on iron
ore), hospital, hotels and aviation (widening service tax and hike in excise
duty). The Budget remained a non event for certain sectors like IT, telecom,
capital goods and sugar while it remained neutral on sectors like media,
retail and pharma.
Auto and auto ancillary
Announcement Impact Our View
Central excise duty
remains unchanged at
10%
Positive Leaving the excise duty unchanged is a good
move towards maintaining the demand
momentum and would help retain the degree
of cushion among OEMs for a further price
hike in case input prices remain firm in FY12
Reduction in excise duty
and exemption in customs
duty for hybrid vehicles
Positive The reduction in duties would provide a
positive impetus for investments in green
technology and push towards greater
economies of scale and higher value
engineering across the sector. It would
immediately benefit M&M with the recently
acquired Reva in its stable
Oil and Gas
Announcement Impact Our View
There has been no
clarification on income tax
benefit under Section 80IB
on natural gas production
Negative This would result in uncertainty on tax
liability for exploration companies under
NELP I-VII blocks. This would have a
marginally negative impact on Reliance
Industries, ONGC, Oil India and Cairn India
No income tax benefit
under Section 80IB for oil
and gas blocks awarded
after March 31, 2011
Neutral to
Negative
This may result in a muted response for
future NELP auction rounds and may affect
future investments in the sector
No change in customs
duty on petroleum
products
Neutral to
Negative
Markets expected the decrease of underrecoveries by reduction of customs duty.
However, there was no change on the
customs duty front. Negative for oil
marketing companies
Logistics
Announcement Impact Our View
GST roll out is in
advanced stages and the
bill is expected to be
presented in the current
session of Parliament
Neutral In general, GST roll out is a good
development for the logistics sector, as a
whole. However, the impact on companies is
expected to be neutral as there was no clarity
with regard to the time line for the same
Full exemption from
excise duty on airconditioning equipment
and refrigeration panels
for cold chain
infrastructure and also on
equipment used in cold
storages and warehouses.
Furthermore Infrastructure
sub-sector status has
been given to cold chains
and post harvest storage
Positive This is expected to benefit companies with a
presence or that are expanding their
presence in the cold storage segment. It is
beneficial for companies like Gateway
Distriparks, etc
In FY12, the corpus of the
Rural Infrastructure
Development Fund (RIDF)
has been raised by | 2,000
crore to | 18,000 crore.
The additional allocation
would be dedicated to
creation of warehousing
facilities
Positive This is expected to benefit companies like
Transport Corporation of India (TCI)
Power
Announcement Impact Our View
Extension of 80IA (tax
holiday for companies
engaged in infra
development & operation)
beyond March 2011
Positive Will benefit utility players whose capacities
will be commissioned in FY12E. Positive to
neutral for all utility companies (NTPC, Tata
Power)
Increase in MAT from
18% to 18.5% coupled
with 2.5% cut in
surcharge
Neutral With no significant change in tax rate, a
minor increase in MAT rate will be neutral for
utility companies
Metals
Announcement Impact Our View
Increase in export duty on
iron ore (fines & lumps) to
20%
Negative This move is negative for iron ore mining
companies like Sesa Goa and NMDC. Sesa
Goa exports 80% of its ore to China. Hence,
the increase in the export duty will lead to a
decline in the FY12E EPS by 21%
Aviation
Announcement Impact Our View
Hike in service tax for
domestic and
international travel by | 50
and | 250, respectively
Neutral to
Negative
The government has proposed to raise the
service tax for domestic and international
travelling, respectively. The tax on economy
class of domestic travel will increase to | 150
from the current | 100 and | 750 as against |
500, for international travel. Considering the
amount, we expect the players to pass the
burden easily to travellers
FMCG
Announcement Impact Our View
Allocation of | 300 crore
to bring 60,000 ha under
oil palm plantations.
Allocation of | 400 crore
to improve rice based
cropping system in the
eastern region and | 300
crore to promote 60,000
pulses villages in rain-fed
areas
Positive Higher palm oil production is positive for
Marico and Dabur. HUL, ITC and Nestle
would be the main beneficiaries of the higher
food production, thereby lowering input
costs. Positive for Ruchi Soya and other
edible oil companies. The industry will be
benefited by an additional yield of about 3
lakh metric tonnes of palm oil annually in five
years
Exemption of custom duty
on crude palm oil used in
soap manufacturing
Positive Positive for HUL, P&G, ITC and Godrej
Consumer that have a significant presence in
the soaps segment
Excise duty on cigarettes
unchanged; basic excise
duty maintained at 10%;
basic food exempted from
central excise; increase in
MAT to 18.5%, reduction
in corporate surcharge
Positive
for ITC;
Neutral for
Marico &
Dabur
Positive for ITC as there has been no price
increase in cigarettes. Hence, volume growth
will be maintained. Tax expense of
companies to remain at same levels
Increase in agricultural
credit provisioning by | 1
lakh crore and under
Rashtriya Krishi Vikas
Yojna to | 7860 crore.
Also, increase in interest
subsidy for farmers to 3%
Positive Higher income for farmers to boost rural
demand; contributing to the volume growth
for companies
Media
Announcement Impact Our View
Waiver on excise duty on
jumbo rolls for
cinematographic films
Positive Positive for movie producing companies like
UTV Software, Eros International and PVR
Pictures
Textiles
Announcement Impact Our View
Conversion of optional
excise duty levy to a
mandatory 10% levy on
branded garments or
made-ups. However,
export of these items
would not attract any duty
Negative Negative for branded garment players like
Raymond, Zodiac, Arvind, Kewal Kiran,
Provogue, SKNL, etc. However, we believe
the burden will be shared by the company,
channel partners and consumers collectively
Reduction of basic
customs duty on raw silk
from 30% to 5%
Negative Negative for Himatsingka Seide as ~20% of
its revenues come from the silk fabrics and
silk yarn
Reduction of basic
customs duty from 5% to
2.5% on certain textile
intermediates
Negative We will have to wait for clarity on the list of
intermediates, which are included to gauge
the company specific impact
Reduction of basic
customs duty on certain
specified inputs for
manufacture of certain
technical fibre and yarn
from 7.5% to 5%
Neutral Prices of both Indian cotton and synthetic
yarn are 5-10% lower than those prevailing in
international markets. Hence, a 250 bps
reduction in customs duty will not hurt
domestic players
Technology Upgradation
Fund Scheme (TUFS)
allocation increased from
| 2,400 crore in the
previous Budget to |
3,100 crore
Neutral While an allocation of | 3,100 crore will give
textile companies access to cheaper funds
for their expansion it will weigh on the
balance sheet of textile companies, which are
already highly leveraged
Retail
Announcement Impact Our View
No announcement on
liberalisation of FDI norms
across various formats
Neutral While no announcement on the same has
been made, the FM has indicated that
discussions to further liberalise the FDI policy
are under way
Real Estate
Announcement Impact Our View
Levy MAT on developers
of SEZ
Negative It will be negative for SEZ developers such as
Mundhra Port, Mahindra Lifespace, etc. as
higher tax outgo would stretch their cash
flow from FY13
Shipping
Announcement Impact Our View
Extension of subsidy
scheme to shipyards
Negative The Shipping Ministry has proposed the
extension of the subsidy scheme but this has
been ignored by the Finance Ministry. This
would prolong the recovery process for
Indian shipyards
Banks and NBFCs
Announcement Impact Our View
Recapitalisation of PSU
banks of | 6000 crore in
FY12
Positive
for banks
with lower
Tier I
capital
This will enhance the CAR of banks and
support balance sheet growth. Banks with
Tier I capital of less than 8% and government
holding of 51% will be the key beneficiary.
From the I-direct coverage universe, key
beneficiaries would be Union Bank of India,
Syndicate Bank and Dena Bank
Ticket size for housing
loans for priority sector
raised to | 25 lakh
Positive
for HFC
This will enable HFCs to sell more of their
portfolio to banks under priority lending.
Positive for LICHF, HDFC and GIC Housing
Finance
Banking license guidelines
to be finalised by the RBI
before close of the
financial year
Neutral This could be a positive trigger for
corporates and NBFCs seeking banking
license
Agriculture lending target
increased to | 4,75,000
crore
Slight
negative
for PSB
We believe enforcement of such targets will
pressurise PSBs more compared to private
banks. Interest subvention on such lending
would lead to delayed cash flows, thus
impacting PSBs negatively
Government borrowing
programme net seen at |
3.43 trillion
Positive
for banks
This will keep a check on the steep rise in
bond yields. Impact on the AFS portfolio of
larger banks like SBI, PNB, BoB and HDFC
Bank will subside. This will not be a drag on
bottomline growth
Construction
Announcement Impact Our View
Proposal to facilitate
setting up of an
infrastructure debt fund
Neutral Although the announcement was made on
the proposal to facilitate setting up of an
infrastructure debt fund, no indication was
given on the size and modalities for the same
FII limit in infrastructure
companies' corporate
bonds raised by $20
billion to $25 billion
Positive It would be positive for large infrastructure
conglomerate such as L&T, GMR Infra, GVK
Power, etc. Their cost of debt would come
down
Allocation to
infrastructure sector at |
2,14,000 crore (48.5% of
the total budget allocation
vs. 46% in FY10-11)
Positive Although it is per se positive for the
infrastructure sector, focus is still required on
the execution
Tax free bonds worth |
30,000 crore to be issued
by various government
agencies such as NHAI,
HUDCO, Railway Finance
Corporation
Positive This would act as a boost to infrastructure
development in railways, roads, ports, etc
Cement
Announcement Impact Our View
If the retail price of
cement exceeds | 190 per
50 kg bag, the excise duty
will be levied as 10% ad
valorem + | 160 per
tonne. However, if the
retail price is less than |
190 per 50 kg bag, the
excise duty will be levied
as 10% ad valorem + | 80
per tonne
Neutral The excise duty increase will be in the range
of | 1-3 per 50 kg bag for our cement
coverage universe. Despite that the duty will
be levied on ex-factory price as compared to
the retail price previously as there is an extra
burden of | 160 per tonne if the retail price is
more than | 190 per bag. We believe the
excise burden will be passed on to
consumers
Reduction in custom duty
on petcoke and gypsum
to 2.5% from 5%
Positive Reduction in customs duty on petcoke will be
positive for players that use petcoke as a fuel
for the kiln and power plant operations. This
will save | 20-30 per tonne in power and fuel
cost for Shree Cement, JK Cement and JK
Lakshmi from our coverage universe
Pharma
Announcement Impact Our View
Excise duty on
formulation has increased
from 4% to 5%
Neutral The increase in the excise duty will not have
much of an impact on the pharma industry as
this will be passed on to customers
The MAT rate has been
increased to 18.5% from
18% while surcharge has
been reduced from 7.5%
to 5%
Neutral The increase in the MAT rate will not have a
major impact on earnings
Players operating in SEZs
will be brought under
MAT from April 1, 2012
Negative This will increase the tax liability for Cadila
Healthcare and Biocon for FY13. However,
the impact will be marginally negative
Hospitals
Announcement Impact Our View
Inclusion of private
hospitals with minimum
25 beds and central airconditioning under the
service tax bracket
Neutral to
Negative
The government will now impose 5% service
tax (considering an abatement of 50%) on all
services provided by private hospitals with
minimum 25 beds and central airconditioning including diagnostic tests.
However, considering the nature of the
sector, we expect players to pass on the
extra burden to patients. Hence, it would not
have much of a negative impact on their
financials
Hike in excise duty on
medical equipment by 1%
to 5%
Negative Negative for private players, as it would raise
the burden on their capital expenditure
Hotels
Announcement Impact Our View
Increase in MAT From
18% to 18.5%
Neutral to
Negative
Neutral to negative for companies like Kamat
Hotels and Viceroy Hotels which we expect
will pay tax as per MAT provision
Inclusion of hotel
accomodation in excess
of | 1000/day under
service tax
Negative Currently, hotel accommodation is covered
under luxury tax net, which varies from state
to state. Now, with the inclusion of this
service under the service tax net, the stay in
hotel with room rent of over | 1000 a day
would become further costilier by 5% (after
considering an abatement of 50% under the
service tax bracket). This is negative for the
sector
Inclusion of restaurants
with liquor licenses and
air conditioning facility
under service tax
Negative Under the current tax structure, restaurants
are being taxed at 12.5% under VAT. The
same has now also been brought under the
service tax net. In our view, it will have a net
negative impact of 3% on consumers
(considering 70% abatment)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Contours of Budget
Budget 2011-12 is more of a balanced Budget contrary to expectations of a
populist one. The fiscal deficit target of 4.6% for 2011-12 vs. the FRBM
target of 4.5% seems pretty encouraging given the high commodity prices
and the anticipated slowdown ahead. Accompanying a better-than-expected
fiscal deficit target came in the low net borrowing figure of | 3.43 trillion (Idirect estimate of | 3.8 trillion). This will indeed address the liquidity issues
in the system and concerns over the crowding out effect on the private
sector. The positive element from the Budget also stems from the fact that
the government seems to be more focused on resolving the supply side
issues in the economy to avoid the event of a perennial demand-supply
mismatch. This gets reflected in the incremental allocation of | 2000 crore in
the rural infra development fund to | 18000 crore (dedicated for creating
warehousing facilities) coupled with granting infrastructure status to cold
storage projects. Also, the fertiliser sector got its fair share of focus as capex
for the fertiliser sector was encouraged (capex for fertiliser awarded infra
projects). A rise in agri-credit from | 3.75 trillion to | 4.75 trillion also
deserves a mention as it will provide an impetus to agri growth.
The government is clearly banking on robust underlying growth in the
economy (the government expects GDP to grow by 14% in nominal terms in
FY12E) to drive its revenue basket as it has budgeted for total revenue
receipts of | 7.9 trillion. Also, to ensure all-round growth in revenues, the
government has widened its net for various products and services, thereby
increasing the revenue visibility by | 11300 crore. On the other hand, it has
managed to support the consumption growth in the economy as there were
no roll backs in excise duty or service tax rates and there was an increase in
individual exemption limit and reduction in surcharge on corporate tax rate
by 250 bps.
The GDP growth rate of 8.75-9.25% has built in an inflation target of 5.25-
4.75% for FY12E, assuming a 14% growth in nominal GDP estimated by the
government. Also, our calculations suggest that the government has built in
a crude price of around $76 per barrel so as to reach the fiscal target of
4.6%, thereby leaving no margin of safety if crude remains at elevated
levels. This has the potential to inflate the fiscal deficit by 40 bps to 5%.
We believe the Budget is a bit ambitious in growth and fiscal deficit targets.
The government is banking on buoyancy in economic growth to contain
problems on the fiscal deficit front. The Budget is anchored on lesser
tinkering with tax rates, under providing for subsidies and rectifying supply
side issues to help sustain the growth and fiscal balance.
Other key flagship programmes:
a. Sarva Shiksha Abhiyan has been allocated | 21,000 crore in
Budget 2011-12
b. National programme for mid-day meals in schools has been
allocated | 10380 crore
c. Rajiv Gandhi Grameen Vidyutikaran Yojna has been
allocated | 6000 crore
d. National Highway Development Programme has been
allocated | 10343 crore
Key tax reforms
Exhibit 14: Tweaking in individual, corporate tax rates
Direct tax
Personal tax
80 yrs and above individuals tax exempt upto | 500,000
I-T exemption for senior citizens | 250,000
Senior citizen tax limit now for 60 year olds
Up tax exemption to | 180,000 FY12 from | 160,000 in FY11
Tax sop for | 20,000 investment in infra bond extended for 1 year
Corporate tax
Special Economic Zones to come under MAT
MAT raised to 18.5% from 18%
Cut surcharge on domestic cos to 5% from 7.5%
Low withholding tax of 5% for notified infra funds
I-T deduction for infra bond invest extended by 1 year
Foreign dividend tax rate cut to 15% for Indian cos
Source: Budget Documents, ICICIdirect.com Research
Exhibit 15: Excise duty surprises, others see minimal tweaking
Indirect tax
Customs duty
Peak rate for customs duty unchanged in FY12
Cut basic customs duty on farm machinery to 2.5% from 5%
Levies 20% ad valorem export duty on iron ore
Customs duty on micro irrigation equipment cut to 5% from 7.4% in FY11
Customs on tunnel-boring machines for highways scrapped
Customs duty on petroleum coke cut to 2.5% from 5%
Custom duty on specified gems, jewellery machine cut to 5%
Service tax
Service tax raised on international, local air travel by | 250 and | 50, respectively
FY12 service tax standard rate unchanged at 10%
Service tax to be levied by insurance companies on total premium paid
To levy service tax on hotel stay costing over |1,000/day
To levy services tax on some air-conditioned hospitals
Excise duty
Base rate on excise duty raised to 5% from 4%
To replace excise with ad valorem duties for cement FY12
Central excise duty rate unchanged at 10%
No excise duty on equipment for ultra mega power plants
Basic food, fuel to be exempted from Central excise duty
Excise duty on kits to convert to hybrid vehicle cut to 5%
1% central excise duty on 130 new items
Excise on local power equipment to be in line with customs
10% duty plus | 200 /tn on cement bags from clinkers
Concessional 10% excise duty on factory built ambulances
Source: Budget Documents, ICICIdirect.com Research
Borrowings: Surprises on the upside
The Budget 2011-12 has accounted for | 417000 crore of gross market
borrowings and | 343000 crore of net market borrowings. This will be a
relief for bond yields in the near term as the anticipated figure was better
than market expectations. By pegging a lower borrowing target, the Budget
will solve liquidity concerns in the short to medium term, given the macro
variables do not take a turn for the worse (high commodity prices and
borrowing costs). Also, this would lead to a subsiding of fear of the private
sector getting crowded out to a large extent.
Disinvestment: As per expectations
Disinvestments, on the other hand, have been budgeted at | 40,000 crore
for FY12BE. On the other hand, the revised estimates for disinvestments for
FY11RE stand at | 22744 crore vs. the earlier provisions of | 40000 crore.
However, the completion of the ONGC FPO by March 2011 will add another
| 12,000 crore to the government kitty. We expect these proceeds to spill
over to FY12BE.
Sectoral Impact
Budget 2011 was balanced with lower-than-expected populist measures
while focusing on sustainable growth. In line with the growth agenda, the
focus was on rural development, improving supply chain infrastructure and
increasing affordability. The Budget was positive for sectors like
automobiles (unchanged excise duty and incentive for hybrid vehicles),
banks (recapitalisation of PSUs), logistics (thrust on warehousing facilities),
power (extension of 80IA), FMCG (focus on agri products and increase in
subsidy for farmers), cement (reduction in duty on petcoke and gypsum)
and construction (increased allocation to infra and thrust on higher
investment).
However, the Budget appeared to be negative for sectors like textiles
(mandatory duty on branded garments), metals (higher export duty on iron
ore), hospital, hotels and aviation (widening service tax and hike in excise
duty). The Budget remained a non event for certain sectors like IT, telecom,
capital goods and sugar while it remained neutral on sectors like media,
retail and pharma.
Auto and auto ancillary
Announcement Impact Our View
Central excise duty
remains unchanged at
10%
Positive Leaving the excise duty unchanged is a good
move towards maintaining the demand
momentum and would help retain the degree
of cushion among OEMs for a further price
hike in case input prices remain firm in FY12
Reduction in excise duty
and exemption in customs
duty for hybrid vehicles
Positive The reduction in duties would provide a
positive impetus for investments in green
technology and push towards greater
economies of scale and higher value
engineering across the sector. It would
immediately benefit M&M with the recently
acquired Reva in its stable
Oil and Gas
Announcement Impact Our View
There has been no
clarification on income tax
benefit under Section 80IB
on natural gas production
Negative This would result in uncertainty on tax
liability for exploration companies under
NELP I-VII blocks. This would have a
marginally negative impact on Reliance
Industries, ONGC, Oil India and Cairn India
No income tax benefit
under Section 80IB for oil
and gas blocks awarded
after March 31, 2011
Neutral to
Negative
This may result in a muted response for
future NELP auction rounds and may affect
future investments in the sector
No change in customs
duty on petroleum
products
Neutral to
Negative
Markets expected the decrease of underrecoveries by reduction of customs duty.
However, there was no change on the
customs duty front. Negative for oil
marketing companies
Logistics
Announcement Impact Our View
GST roll out is in
advanced stages and the
bill is expected to be
presented in the current
session of Parliament
Neutral In general, GST roll out is a good
development for the logistics sector, as a
whole. However, the impact on companies is
expected to be neutral as there was no clarity
with regard to the time line for the same
Full exemption from
excise duty on airconditioning equipment
and refrigeration panels
for cold chain
infrastructure and also on
equipment used in cold
storages and warehouses.
Furthermore Infrastructure
sub-sector status has
been given to cold chains
and post harvest storage
Positive This is expected to benefit companies with a
presence or that are expanding their
presence in the cold storage segment. It is
beneficial for companies like Gateway
Distriparks, etc
In FY12, the corpus of the
Rural Infrastructure
Development Fund (RIDF)
has been raised by | 2,000
crore to | 18,000 crore.
The additional allocation
would be dedicated to
creation of warehousing
facilities
Positive This is expected to benefit companies like
Transport Corporation of India (TCI)
Power
Announcement Impact Our View
Extension of 80IA (tax
holiday for companies
engaged in infra
development & operation)
beyond March 2011
Positive Will benefit utility players whose capacities
will be commissioned in FY12E. Positive to
neutral for all utility companies (NTPC, Tata
Power)
Increase in MAT from
18% to 18.5% coupled
with 2.5% cut in
surcharge
Neutral With no significant change in tax rate, a
minor increase in MAT rate will be neutral for
utility companies
Metals
Announcement Impact Our View
Increase in export duty on
iron ore (fines & lumps) to
20%
Negative This move is negative for iron ore mining
companies like Sesa Goa and NMDC. Sesa
Goa exports 80% of its ore to China. Hence,
the increase in the export duty will lead to a
decline in the FY12E EPS by 21%
Aviation
Announcement Impact Our View
Hike in service tax for
domestic and
international travel by | 50
and | 250, respectively
Neutral to
Negative
The government has proposed to raise the
service tax for domestic and international
travelling, respectively. The tax on economy
class of domestic travel will increase to | 150
from the current | 100 and | 750 as against |
500, for international travel. Considering the
amount, we expect the players to pass the
burden easily to travellers
FMCG
Announcement Impact Our View
Allocation of | 300 crore
to bring 60,000 ha under
oil palm plantations.
Allocation of | 400 crore
to improve rice based
cropping system in the
eastern region and | 300
crore to promote 60,000
pulses villages in rain-fed
areas
Positive Higher palm oil production is positive for
Marico and Dabur. HUL, ITC and Nestle
would be the main beneficiaries of the higher
food production, thereby lowering input
costs. Positive for Ruchi Soya and other
edible oil companies. The industry will be
benefited by an additional yield of about 3
lakh metric tonnes of palm oil annually in five
years
Exemption of custom duty
on crude palm oil used in
soap manufacturing
Positive Positive for HUL, P&G, ITC and Godrej
Consumer that have a significant presence in
the soaps segment
Excise duty on cigarettes
unchanged; basic excise
duty maintained at 10%;
basic food exempted from
central excise; increase in
MAT to 18.5%, reduction
in corporate surcharge
Positive
for ITC;
Neutral for
Marico &
Dabur
Positive for ITC as there has been no price
increase in cigarettes. Hence, volume growth
will be maintained. Tax expense of
companies to remain at same levels
Increase in agricultural
credit provisioning by | 1
lakh crore and under
Rashtriya Krishi Vikas
Yojna to | 7860 crore.
Also, increase in interest
subsidy for farmers to 3%
Positive Higher income for farmers to boost rural
demand; contributing to the volume growth
for companies
Media
Announcement Impact Our View
Waiver on excise duty on
jumbo rolls for
cinematographic films
Positive Positive for movie producing companies like
UTV Software, Eros International and PVR
Pictures
Textiles
Announcement Impact Our View
Conversion of optional
excise duty levy to a
mandatory 10% levy on
branded garments or
made-ups. However,
export of these items
would not attract any duty
Negative Negative for branded garment players like
Raymond, Zodiac, Arvind, Kewal Kiran,
Provogue, SKNL, etc. However, we believe
the burden will be shared by the company,
channel partners and consumers collectively
Reduction of basic
customs duty on raw silk
from 30% to 5%
Negative Negative for Himatsingka Seide as ~20% of
its revenues come from the silk fabrics and
silk yarn
Reduction of basic
customs duty from 5% to
2.5% on certain textile
intermediates
Negative We will have to wait for clarity on the list of
intermediates, which are included to gauge
the company specific impact
Reduction of basic
customs duty on certain
specified inputs for
manufacture of certain
technical fibre and yarn
from 7.5% to 5%
Neutral Prices of both Indian cotton and synthetic
yarn are 5-10% lower than those prevailing in
international markets. Hence, a 250 bps
reduction in customs duty will not hurt
domestic players
Technology Upgradation
Fund Scheme (TUFS)
allocation increased from
| 2,400 crore in the
previous Budget to |
3,100 crore
Neutral While an allocation of | 3,100 crore will give
textile companies access to cheaper funds
for their expansion it will weigh on the
balance sheet of textile companies, which are
already highly leveraged
Retail
Announcement Impact Our View
No announcement on
liberalisation of FDI norms
across various formats
Neutral While no announcement on the same has
been made, the FM has indicated that
discussions to further liberalise the FDI policy
are under way
Real Estate
Announcement Impact Our View
Levy MAT on developers
of SEZ
Negative It will be negative for SEZ developers such as
Mundhra Port, Mahindra Lifespace, etc. as
higher tax outgo would stretch their cash
flow from FY13
Shipping
Announcement Impact Our View
Extension of subsidy
scheme to shipyards
Negative The Shipping Ministry has proposed the
extension of the subsidy scheme but this has
been ignored by the Finance Ministry. This
would prolong the recovery process for
Indian shipyards
Banks and NBFCs
Announcement Impact Our View
Recapitalisation of PSU
banks of | 6000 crore in
FY12
Positive
for banks
with lower
Tier I
capital
This will enhance the CAR of banks and
support balance sheet growth. Banks with
Tier I capital of less than 8% and government
holding of 51% will be the key beneficiary.
From the I-direct coverage universe, key
beneficiaries would be Union Bank of India,
Syndicate Bank and Dena Bank
Ticket size for housing
loans for priority sector
raised to | 25 lakh
Positive
for HFC
This will enable HFCs to sell more of their
portfolio to banks under priority lending.
Positive for LICHF, HDFC and GIC Housing
Finance
Banking license guidelines
to be finalised by the RBI
before close of the
financial year
Neutral This could be a positive trigger for
corporates and NBFCs seeking banking
license
Agriculture lending target
increased to | 4,75,000
crore
Slight
negative
for PSB
We believe enforcement of such targets will
pressurise PSBs more compared to private
banks. Interest subvention on such lending
would lead to delayed cash flows, thus
impacting PSBs negatively
Government borrowing
programme net seen at |
3.43 trillion
Positive
for banks
This will keep a check on the steep rise in
bond yields. Impact on the AFS portfolio of
larger banks like SBI, PNB, BoB and HDFC
Bank will subside. This will not be a drag on
bottomline growth
Construction
Announcement Impact Our View
Proposal to facilitate
setting up of an
infrastructure debt fund
Neutral Although the announcement was made on
the proposal to facilitate setting up of an
infrastructure debt fund, no indication was
given on the size and modalities for the same
FII limit in infrastructure
companies' corporate
bonds raised by $20
billion to $25 billion
Positive It would be positive for large infrastructure
conglomerate such as L&T, GMR Infra, GVK
Power, etc. Their cost of debt would come
down
Allocation to
infrastructure sector at |
2,14,000 crore (48.5% of
the total budget allocation
vs. 46% in FY10-11)
Positive Although it is per se positive for the
infrastructure sector, focus is still required on
the execution
Tax free bonds worth |
30,000 crore to be issued
by various government
agencies such as NHAI,
HUDCO, Railway Finance
Corporation
Positive This would act as a boost to infrastructure
development in railways, roads, ports, etc
Cement
Announcement Impact Our View
If the retail price of
cement exceeds | 190 per
50 kg bag, the excise duty
will be levied as 10% ad
valorem + | 160 per
tonne. However, if the
retail price is less than |
190 per 50 kg bag, the
excise duty will be levied
as 10% ad valorem + | 80
per tonne
Neutral The excise duty increase will be in the range
of | 1-3 per 50 kg bag for our cement
coverage universe. Despite that the duty will
be levied on ex-factory price as compared to
the retail price previously as there is an extra
burden of | 160 per tonne if the retail price is
more than | 190 per bag. We believe the
excise burden will be passed on to
consumers
Reduction in custom duty
on petcoke and gypsum
to 2.5% from 5%
Positive Reduction in customs duty on petcoke will be
positive for players that use petcoke as a fuel
for the kiln and power plant operations. This
will save | 20-30 per tonne in power and fuel
cost for Shree Cement, JK Cement and JK
Lakshmi from our coverage universe
Pharma
Announcement Impact Our View
Excise duty on
formulation has increased
from 4% to 5%
Neutral The increase in the excise duty will not have
much of an impact on the pharma industry as
this will be passed on to customers
The MAT rate has been
increased to 18.5% from
18% while surcharge has
been reduced from 7.5%
to 5%
Neutral The increase in the MAT rate will not have a
major impact on earnings
Players operating in SEZs
will be brought under
MAT from April 1, 2012
Negative This will increase the tax liability for Cadila
Healthcare and Biocon for FY13. However,
the impact will be marginally negative
Hospitals
Announcement Impact Our View
Inclusion of private
hospitals with minimum
25 beds and central airconditioning under the
service tax bracket
Neutral to
Negative
The government will now impose 5% service
tax (considering an abatement of 50%) on all
services provided by private hospitals with
minimum 25 beds and central airconditioning including diagnostic tests.
However, considering the nature of the
sector, we expect players to pass on the
extra burden to patients. Hence, it would not
have much of a negative impact on their
financials
Hike in excise duty on
medical equipment by 1%
to 5%
Negative Negative for private players, as it would raise
the burden on their capital expenditure
Hotels
Announcement Impact Our View
Increase in MAT From
18% to 18.5%
Neutral to
Negative
Neutral to negative for companies like Kamat
Hotels and Viceroy Hotels which we expect
will pay tax as per MAT provision
Inclusion of hotel
accomodation in excess
of | 1000/day under
service tax
Negative Currently, hotel accommodation is covered
under luxury tax net, which varies from state
to state. Now, with the inclusion of this
service under the service tax net, the stay in
hotel with room rent of over | 1000 a day
would become further costilier by 5% (after
considering an abatement of 50% under the
service tax bracket). This is negative for the
sector
Inclusion of restaurants
with liquor licenses and
air conditioning facility
under service tax
Negative Under the current tax structure, restaurants
are being taxed at 12.5% under VAT. The
same has now also been brought under the
service tax net. In our view, it will have a net
negative impact of 3% on consumers
(considering 70% abatment)
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