Budget...sector that did not get boost ::Business Line

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Fertiliser stocks have been upbeat since the beginning of this year, with key ones such as Coromandel International, Zuari Industries and Deepak Fertilisers gaining 8 to 20 per cent.

But despite the many references the sector earned in the Budget, reform measures critical to the sector's prospects are not part of the exercise.

Measures that could have made a material difference to the sector — a sharp and long-pending hike in urea prices, specifics of the new urea investment policy, a statement on gas allocations — are missing.

In fact, the lower fertiliser subsidy budgeted for 2012-13 and the decision to steadily prune subsidy allocations over three years, don't augur well for the sector.

By not hiking urea prices, the Budget deals a particularly unkind cut to makers of phosphatic fertilisers such as Coromandel Fertilisers, RCF and Zuari Industries.

The per tonne subsidy on phosphatic fertilisers has recently been cut by a third. With players forced to hold their price lines, despite prices ruling at 2-3 times that of urea, offtake may suffer.

Urea makers who undertake expansion projects (Tata Chemicals, Zuari) may be the only beneficiaries of the Budget.

But even for them, clarity on gas allocations or feedstock costs would have been welcome.

DURABLES IN HOT WATER

Stocks of durable makers have been cold-shouldered by markets in recent months and the Budget may do little to reverse this.

The two percentage point hike in excise duty may hit profit margins of listed players in home appliances such as air-conditioners and refrigerators. Players may have to absorb the impost given weak demand.

In October-December 2011, production of air-conditioners and refrigerators dropped by 11 per cent and 7 per cent, respectively.

Whirlpool of India, whose sales are mainly from the above products, saw a 1.5 per cent drop in sales for the December-2011 quarter.

Hitachi Home & Life Solutions saw a 14 per cent drop in sales. Some players such as Voltas and Blue Star managed to grow sales by entering into new markets.

Operating profit margins have also been under pressure. The rally in metal prices (copper, steel and aluminium) magnified by the falling rupee, increasing costs for players.

While Whirlpool's margins slipped, air-conditioner makers have also seen an over three percentage point drop in operating profit margins in the past quarter; with margins at around 4 per cent now.

Absorbing the excise hike will now mean thinner margins. Increasing end-product prices may not be easy with faltering demand.

An improved demand scenario for refrigerators and air-conditioners in the current summer will be a pre-condition for these stocks to comeback to limelight.

SLIPPERY FOR OIL

There were hopes that the Budget would address the pressing need to control the burgeoning subsidy burden in the oil sector.

The Finance Minister's statement regarding capping overall subsidies to 2 per cent of GDP may be a hint towards a rise in price of controlled fuels and/or diesel deregulation in the future.

But with no concrete proposals in the Budget, for now, it remains a business-as-usual scenario on this front.

Instead of meaningful goodies, the Budget delivered a ‘crude' shock to the country's oil producers.

It raised the cess levied under the Oil Industries Development Act on crude oil produced in India by 80 per cent from Rs 2,500 per tonne to Rs 4,500 per tonne.

The cess is levied on crude oil produced from blocks other than those awarded under NELP schemes. The sharp rise in the cess rate is expected to negatively impact the major oil producers — ONGC, Oil India and Cairn India — which produce from pre-NELP fields.

According to reports, ONGC and Oil India will have to pay an extra Rs 4,000 crore and Rs 800 crore annually due to the increased cess rate.

The increased burden on Cairn India is said to be around Rs 1,000 crore at peak production at its Rajasthan block.

If the hammering taken by the upstream stocks on Friday after the Budget announcement is any indication, there may be more pain to come.

Already, the subsidy burden on the PSU upstream companies for FY-12 has been increased from around one-third to 38 per cent, dampening their realisations.

Though buoyant markets and crude oil prices saw both the ONGC and Oil India stocks run up over the last quarter, the latest setback on cess payment could put the brakes.

Also, the Cairn India stock, which has had a solid run since last September on crude oil price buoyancy and expectation of production increase, may come under pressure.