Budget Ups & Downs - Sectors that got a boost… ::Business Line

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Stocks in the power generation sector have jumped 43 per cent this year on expectations of committed supply of coal from Coal India. The market was also expecting a revival package for State Electricity Boards in the current Budget. This did not happen but the outlay for strengthening the distribution sector through Accelerated Power Development and Reform Programme has been increased by 42 per cent.

Additionally, power generation companies walked away with plenty of other goodies from the taxman on Budget day. Come next fiscal, they will enjoy an extended tax holiday, benefit from accelerated depreciation and enjoy better access to relatively low cost external commercial borrowings. They might also get some respite from the galloping cost of imported coal, with the Budget gifting the sector with a nil customs duty on coal.

The cut in customs duty and countervailing duty can be expected to provide some relief in terms of recovery of costs as it would roughly translate into 15-16 paise of savings in variable costs for the generation companies. Adani Power, JSW Energy and Tata Power are some of the beneficiaries.

That there has been no rise in import duty on power equipment also means that players can keep their cost of generation at bay even if coal prices rise. Companies such as Lanco Infratech, Adani Power and Reliance Power, which have placed orders with Chinese equipment makers, would have suffered from any such hike.

CIGARETTE PRODUCERS

After a searing run last year, the stock prices of cigarette makers ITC and VST Industries lost steam in the months leading to the Budget, expecting steep excise hikes. But actual hikes turned out to be manageable. The Budget imposed a new 10 per cent duty on half the retail price of a pack of cigarettes. This will be in addition to current fixed excise charge of between Re 1 and Rs 2.1 per cigarette. The charge will add 20-25 per cent to the excise outgo. So why did the markets send cigarette producers such as ITC and VST Industries soaring? Pricing power.

In the six months leading up to the Budget, ITC undertook price hikes of 10-15 per cent on its various cigarette products. This means that it will be able to hold on to margins after the newly imposed excise without any need to take further increases.

In the nine months ended December 2011, ITC's tobacco segment operating profits grew by 20- per cent, outpacing the 12.5 per cent increase in revenues.

Cigarette makers, in fact, have almost doubled sales between 2006 and 2011 despite sedate volume growth.

While customers may go easy on purchases of their favourite brand for a bit following a price hike, they are back puffing a more expensive pack in no time. The government knows this and investors have rewarded this.

GREEN SIGNAL FOR AUTO

Auto stocks have been slow movers recently on fears of an additional duty or disincentive to diesel vehicles, which are a fast growing segment. However, this has not materialised. Therefore, despite the excise duty hikes, the auto sector has been a big gainer.

Now that this is behind us, the overall excise duty hikes becomes easier to handle for these companies. This is because of the pricing power that the sector holds. The last nine months are an example, where despite a moderation in growth, companies raised prices periodically to pass on input price increases. Many have already announced price increases after the Budget and the rest can expected to follow suit. Although this may impact demand in the short-term, profit margins should hold. The pick-up in volumes in the last two months along with a stabilisation in raw material prices, plus an expected reduction in interest rates, will be just what the doctor ordered for the industry in 2012-13. Mahindra and Mahindra could be the biggest beneficiary from the Budget, what with utility vehicles already showing double-digit volume growth so far in 2011-12.

Maruti Suzuki is also expected to proceed with its plans to set up a new diesel engine plant to cater to the increasing demand for its diesel vehicles. They currently bring in 28 per cent of the company's revenues.