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2G auction and disinvestment to aid fiscal consolidation in FY13
•
The government will be presenting the Union Budget 2012-2013 on 16 March 2012. We expect the government to announce measures to garner higher tax revenue; expenditure will continue to grow—developmental along with non-developmental. FY13 and “The 2012-2013 Union Budget” will be the time when the government can announce reformist measures to marginally erase the poor performance of the previous few years. Yet, we would be positively surprised if the Finance Minister (FM) announces any strong reforms/steps in the forthcoming Budget. Higher revenue is expected to be generated from raising excise duty, import duty (some items), more services under the tax purview. Marginal contraction in fuel/fertilizer subsidy is likely by increasing prices. Focus is expected to remain on social and infrastructure spending. 2G auction and disinvestment will be the key bonus for the government to raise expenditure, yet show fiscal consolidation.
•
We expect FY12 fiscal deficit to come in at 6.1%, and FY13 at 5.3%. Fiscal deficit for FY12 can be lower than our estimate, if a portion of fuel/fertiliser subsidy is deferred to FY13. Fiscal deficit–GDP for FY13 can be higher if the economic growth is higher than our assumption of 15.6% nominal GDP growth. Net government borrowing (Centre+States) is estimated at Rs 5444bn. We do not see any stress on funding of the government borrowing. Thus, yields are expected to remain at the current level, along with a downward bias.
•
The Finance Minister has been showing strong consideration to the rising subsidy bill. Apart from raising fuel and fertiliser prices, we do not expect significant reforms to reduce the subsidy bill, ahead of the Union Elections in 2014. In addition, the implementation of the Food Security Act (FSA) will keep the food subsidy bill elevated to rising, depending on the domestic monsoon and foodgrain output.
Fiscal consolidation to comfort RBI’s monetary policy easing
•
Expected quantum of fiscal consolidation would give comfort to the RBI in order to ease monetary policy. Q4FY12 GDP growth of 6.1% will play an important role in determining RBI’s future outlook. Thus, RBI’s stance is expected to remain tilted towards boosting economic growth and managing inflationary expectations. We have been expecting the RBI to reduce interest rates by 150-200bps in 2012. A CRR cut of 50bps has been announced, 50bps CRR cut is expected in the 15 March Monetary policy, and Repo rate cut of 100bps should come in the rest of 2012. Considering the highest-ever liquidity deficit, we will not be surprised if the CRR cut is advanced before the scheduled policy.
Key Expectations
Positives for Market
Probability
Comment
Reduction in subsidies on petroleum products
Very Likely
Long pending price hike in petroleum products should ease the subsidy burden.
No increase in allocation to MGNREGS
Very Likely
Expect no increase in MGNREGS for second year in a row and thereby, social spending will be kept under check.
Stimulating investments and capital formation
Increase in the rate of depreciation
Likely
A form of stimulus to boost gross block formation.
Acceleration in infrastructure spending, especially power
Likely
Recent meeting of industry leaders and the government likely to result in sops for power.
Stimulating consumption
Increase in personal tax exemption limit
Likely
Widening of tax slabs; Re‐introduce the surcharge on the highest tax bracket to compensate for this
Increase market participation
Cut in Securities Transaction Tax
Likely
Broaden base of investors through retail participation in continuation with government efforts to encourage foreign individual investor [is this institutional or individual?]
Increase tax exemption for mutual fund Investment
Probably
Steps to boost the stressed Mutual fund Industry
Hard‐hitting reforms
FDI in multi‐brand retail
Unlikely
Remains a contentious issue for the government.
Introduction of Uniform Goods & Service Tax (GST)
Unlikely
Deferred to FY14.
Introduction of Direct Tax Code (DTC)
Unlikely
Deferred to FY14.
Negatives for Market
Probability
Comment
Extension of service tax to all services with negative list
Very Likely
Widening the indirect tax net is an effective tool to increase receipts.
Increase of excise duty
Very Likely
Likely to impact Auto and Consumer durable demand.
Food Subsidy‐Food Security Bill
Very Likely
A populist measure before general elections in FY14.
Raising of Minimum Alternative Tax
Likely
The budget may further raise the MAT rate to 20% (from 18.5%).
Increase in Corporate Tax
Unlikely
Talk of increasing surcharge on corporate taxes from 5% to 10%.
Automobiles—Negative
Budget Expectations
Likely Impact
Tax on diesel cars
Could lead to a shift towards petrol cars, but will also entail demand destruction. While we believe that a diesel tax is likely, the quantum of tax will be the key.
Hike in excise duties from 10% to 12%
Higher vehicle cost across the board could delay a demand recovery, particularly in the car market.
Increasing income tax exemption limits
Might improve discretionary consumption, particularly for two-wheelers.
Increased allocation to the Jawaharlal Nehru National Urban Renewal Mission
Could lead to a one-time spurt in demand for new buses from state transport units.
Capital Goods/Infrastructure—Positive
Budget Expectations
Likely Impact
Imposition of 19% import duty on imported power generation equipment
Increased cost of imported power equipment; beneficial to domestic power equipment manufacturers, such as BHEL, L&T, BGR Energy, Thermax.
Increase excise duty to 12% from 10%
Negative for all capital goods companies.
Increased spending on infrastructure schemes, such as JNNURM, roads, railways, ports, railways
Increased capex to benefit infrastructure companies, such as L&T, IRB Infra, ITNL,
Cement—Negative
Budget Expectations
Likely Impact
Increase in excise duty base rate from 10% to 12% vs. Industry’s request of removal of the specific component (as present in the current structure).
Although sentimentally negative, an additional burden on cement companies in the form of excise duty to be passed on to consumers, thereby increasing cement prices.
Import duty on coal to be reduced.
Positive for a majority of South Indian cement manufacturers.
Implementation of abatement structure for the industry. Abatement on excise duty has been pursued for long by the cement industry.
Very low likelihood that this will be passed, given the current fiscal situation of the government. However, should such a recommendation come through, it will be a major positive for the sector.
Duty/Cess being levied and collected on indigenous coal to be allowed as VAT or CENVAT credit.
Reduction in VAT rates for cement from 12.5% to 5%.
Credit for royalty paid on limestone as CENVAT/VAT credit .
Fertilisers—Positive
Budget Expectations
Likely Impact
Exemption of 5% import duty on LNG
Revenue Neutral for the government (lower subsidies to be set off against lower revenues from customs). To benefit urea companies that produce beyond cut-off limits like CHMB IN, TTCH IN.
Sufficient provisioning for subsidies (fertiliser subsidy estimated to be around ~Rs 800-Rs 850bn in FY13E).
Due to lower subsidy provisioning in FY12E; ~ Rs 250- Rs 300bn is likely to be carried over to FY13E. A higher subsidy provisioning would result in lower working capital requirement in H2FY13E.
Duty exemption for import of capital equipment for new investments
Urea capacity expansion of about ~5-6mmt is likely over the next few years; duty exemption on import of capital equipments would lower capital cost and improve overall IRR.
Decision on any new pricing scheme or NBS for existing urea capacities
Expect some announcement with regard to the new pricing scheme or NBS for existing urea units. It may be noted that NBS was approved by the GoM and it now awaits the CCEA approval. Urea price decontrol with a cap on likely increase in retail price will be a major positive. However, given political compulsions, we expect the government to retain the price control and increases to retail price (by about ~10%-20%) would partly reduce subsidies and partly increase realisation for the industry.
Decision on new investment policy of urea
Expect some mentioning/timeline for approval by the CCEA.
Financials—Positive
Budget Expectations
Likely Impact
Budgeted government borrowings flat at previous years levels at ~Rs 5.4trn
Lower G-Sec yields; and no crowding out effect on private investments; positive for banks’ investment portfolio.
Higher budgetary allocation towards recapitalisation of PSU banks
Positive for PSU banks as this will augment the bank’s Tier-I capital to comply with Basel III requirements.
Tax relief on housing loans could be extended beyond the current level of Rs 0.15mn
Could possibly lead to an increased demand for home loans; positive for HDFC, SBI, ICICI Bank, LIC Housing Finance.
Creation of credit guarantee schemes for small and marginal farmers
Positive for PSU banks as this will enable them to contain their NPAs.
Extension of tax relief for investments in infrastructure bonds beyond current level of Rs 20,000; enable PSU banks to raise funds through such instruments
Positive for Infra Finance NBFCs like IDFC, PFC, REC, enabling them to raise more funds at a lower fixed rate, also helps in their asset-liability matching.
FMCG—Neutral
Budget Expectations
Likely Impact
Excise duty hike in Cigarettes
We estimate an excise duty hike of >10% in Cigarettes. If the hike is in the range of 10%–15%, we expect ITC to be well-placed to face the impact. The company has already hiked Cigarette prices in anticipation of the hike. However, if the hike is sharper than expectation, there will be a short-term negative sentiment. Concern regarding impact on volume growth will be primary.
Announcement of GST implementation timeline
If the government highlights a definite roadmap to the implementation of GST, it will be viewed favourably by the consumer industry.
Expenditure on Social Security Schemes
Similar to FY12, the government may maintain the current outlay on the NREGA scheme and not significantly step up its expenditure. Hence, we do not expect any positive material impact for the FMCG sector.
Token allocation to the Food Security Bill
The Food Security Bill from a long-term perspective is positive for the FMCG sector due to the increase in disposable income levels. However, a token allocation in the present budget will have a marginal positive impact in the near term.
Changes in income tax slab
Any positive changes in the Income tax slab is certainly a positive for the consumer sector due to better spending ability. The greater positive impact will hold for the urban FMCG players.
Hike in CENVAT on consumer products
There exists a probability of the government hiking the CENVAT on certain consumer products as was exercised in the previous budget. The impacted FMCG categories would be Branded Foods, Beverages, which is a negative for HUL, Nestle, Dabur, ITC. The companies will have to undertake price hikes to mitigate the impact
IT Services—Neutral
Budget Expectations
Likely Impact
Exemption of MAT on profits from SEZs. Last year, MAT on profit from SEZs was raised to 20%. Industry is hoping for a reversal.
We do not expect MAT on SEZ profits to be reversed. If the tax is reversed, it is positive for IT companies.
Media—Mildly Positive
Budget Expectations
Likely Impact
Import duty waiver on set-top boxes
Expected to come due to an impetus on digitisation—Positive for Direct-to-home (DTH)/Digital cable providers/Multi System Operators (MSO)
Infrastructure status for MSOs and increase in FDI limit
The MSO industry needs Rs 180-Rs 200bn for digitisation. Currently, the MSO space is fragmented and under-funded; we feel that for digitisation to be implemented, MSOs will need assistance by way of: (1) permitting higher FDI investments (up to 74% from 49% right now), and (2) access to cheaper capital by grant of Infrastructure status to the industry. Note that the increase in FDI limit is likely to benefit DTH players too.
Metals—Positive
Budget Expectations
Likely Impact
Increase in import duty on Hot Rolled Coils (currently, it is at 5%)
Positive for domestic flat steel producers, like JSW Steel , SAIL, Tata Steel, Bhushan Steel, etc.
Removal of 5% import duty on imported thermal coal
Positive for Aluminium and sponge iron producers meeting partial needs from the imported markets. Also positive for Sesa Sterlite which meets part of the requirement through imports.
Removal of 2.5% import duty on iron ore lumps, fines and pellets
Positive for JSW Steel and other non-integrated steel manufacturers.
Oil & Gas—Neutral
Budget Expectations
Likely Impact
Declared goods status to natural gas and LNG, so that it could attract an uniform sales tax of 5%, instead of the current system of varied taxes, ranging from 12.5% to 20 % in different states
Lower sales tax duty will further improve competitiveness of CGD entities vis-à-vis competitive fuels. Will favourably impact the CNG/PNG demand and thus, GAIL, IGL
Scrapping of 5% customs duty on LNG, in order to treat LNG at par with crude oil
NIL custom duty will further improve competitiveness of CGD entities vis-à-vis competitive fuels. Will favourably impact the CNG/PNG demand and thus, GAIL, IGL
Customs and excise duty on petroleum products to remain unchanged
Despite the cut in custom duties and excise duties, which were announced in June 2011, the tax component in retail price still remains high (> 40% in petrol and ~25% in diesel). Rationalisation of these duties is always likely; however, given the tight fiscal situation, this does not seem to be a huge probability at the moment.
Extension of commissioning date of new refineries constructed, in order to avail the seven-year tax holiday
Project IRRs to improve. HPCL (Bhatinda), IOCL (Paradeep)
Modest price increases likely in Diesel (Rs 2/lt) and LPG (Rs 50/cyl) post election results this month; unlikely to be a part of the Budget.
Pharmaceuticals—Neutral
Budget Expectations
Likely Impact
Extend weighted deductions for research activities undertaken with overseas affiliates and by third parties
Currently, the 200% deduction of R&D is applicable for research undertaken in India only. Including the same benefit for R&D undertaken by subsidiaries outside, will benefit companies like Sun Pharma, Ranbaxy, Dr Reddy’s that operate facilities outside India. Companies engaged in novel drug R&D will also benefit by outsourcing a portion of their research activities.
Weighted deduction for expenditure in rural and semi-urban markets
To benefit all leading domestic companies that have, over the recent past, expanded their field force to tap the under-penetrated rural market.
Excise duty on active pharmaceutical ingredients (API) to be lowered to 5%, along with formulations
No significant impact expected. Benefits to be passed to customers, Can make local production of API more competitive to Chinese counterparts.
Higher budget allocation towards the healthcare sector
The Government has consistently increased budget allocation towards the healthcare sector (last year, by 20% to Rs 268bn. Any increase in allocation would benefit all companies in the domestic space, like Cipla, Ranbaxy, GSK Pharma, etc.
Eliminate 30% duty on imported equipments for a period of 5-10 years
Will especially benefit companies engaged in setting large facilities to tap the global biosimilar market, like Biocon , Dr Reddy’s and Cipla.
Real Estate—Positive
Budget Expectations
Likely Impact
Formation of a Real Estate Regulatory Authority
It will provide much-needed transparency to the sector and further, it will be helpful in co-ordinating efforts to develop the real estate sector—a step towards industry status for the sector. With the formation of the real estate regulatory body, issues pertaining to real estate transactions will be resolved to an extent and business in property deals will be done with good practices, thus increasing institutional participation.
Income tax rebate under Section 24(b) up to Rs 0.3mn from the current Rs 0.15mn on interest component
It will encourage home buyers to avail home loans and take the tax benefit up to Rs 0.3mn of interest repayment. Also, there is a principal component repayment, which will reduce the overall cost.
Extension of the interest subsidy for property up to Rs 2.5mn—the one per cent interest subvention scheme of the housing sector to be extended by one year till 2013
Extension of the interest subsidy by another one year will be beneficial for developers present in low- cost/affordable housing present in Tier 2 and 3 cities.
Retail—Marginally Positive
Budget Expectations
Likely Impact
Roll-back of excise duty on Apparel
Weak demand has resulted in a 17% drop in sales over FY12 as higher (25%) price points have resulted in a drop in volumes—roll-back, along with lower input cost, will accentuate demand. Positive for Shoppers Stop, Pantaloon ,Trent, Raymond, Arvind.
Hike in tax slabs for exempt income
The exempt income slab is likely to be raised to Rs 0.3mn from Rs 0.18mn, thereby increasing higher disposable income in the hands of the consumers.
Implementation of nationwide GST
Simplifying the entire tax structure, thereby cutting business costs and helping to generate more revenues at lower costs. Positive for the sector as a whole.
Hike excise duty on branded jewellery
With the government changing the levy of customs duty from a fixed rate to an ad-valorem one, thereby increasing it, there is a possibility that it may also hike the excise duty on branded jewellery to 2% from 1%. Marginally negative for Titan.
Cut-back in service tax on rent
Currently, service tax on rentals is levied at 10.3% and the same is paid by retailers. Cut-back on the service tax on rentals will be positive as it accounts for nearly 0.5%-1.5% of sales (depending on the format). Positive for the sector.
Telecom—Mildly Positive
Budget Expectations
Likely Impact
Clarity on 2G auctions
The financial impact of the 2G auctions can be gauged, once the terms of the auctions are known.
Rationalisation of VAT on mobile handsets
This will likely lead to improvement in handset ecosystem and improve 3G proliferation—benefiting incumbent telcos
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
2G auction and disinvestment to aid fiscal consolidation in FY13
•
The government will be presenting the Union Budget 2012-2013 on 16 March 2012. We expect the government to announce measures to garner higher tax revenue; expenditure will continue to grow—developmental along with non-developmental. FY13 and “The 2012-2013 Union Budget” will be the time when the government can announce reformist measures to marginally erase the poor performance of the previous few years. Yet, we would be positively surprised if the Finance Minister (FM) announces any strong reforms/steps in the forthcoming Budget. Higher revenue is expected to be generated from raising excise duty, import duty (some items), more services under the tax purview. Marginal contraction in fuel/fertilizer subsidy is likely by increasing prices. Focus is expected to remain on social and infrastructure spending. 2G auction and disinvestment will be the key bonus for the government to raise expenditure, yet show fiscal consolidation.
•
We expect FY12 fiscal deficit to come in at 6.1%, and FY13 at 5.3%. Fiscal deficit for FY12 can be lower than our estimate, if a portion of fuel/fertiliser subsidy is deferred to FY13. Fiscal deficit–GDP for FY13 can be higher if the economic growth is higher than our assumption of 15.6% nominal GDP growth. Net government borrowing (Centre+States) is estimated at Rs 5444bn. We do not see any stress on funding of the government borrowing. Thus, yields are expected to remain at the current level, along with a downward bias.
•
The Finance Minister has been showing strong consideration to the rising subsidy bill. Apart from raising fuel and fertiliser prices, we do not expect significant reforms to reduce the subsidy bill, ahead of the Union Elections in 2014. In addition, the implementation of the Food Security Act (FSA) will keep the food subsidy bill elevated to rising, depending on the domestic monsoon and foodgrain output.
Fiscal consolidation to comfort RBI’s monetary policy easing
•
Expected quantum of fiscal consolidation would give comfort to the RBI in order to ease monetary policy. Q4FY12 GDP growth of 6.1% will play an important role in determining RBI’s future outlook. Thus, RBI’s stance is expected to remain tilted towards boosting economic growth and managing inflationary expectations. We have been expecting the RBI to reduce interest rates by 150-200bps in 2012. A CRR cut of 50bps has been announced, 50bps CRR cut is expected in the 15 March Monetary policy, and Repo rate cut of 100bps should come in the rest of 2012. Considering the highest-ever liquidity deficit, we will not be surprised if the CRR cut is advanced before the scheduled policy.
Key Expectations
Positives for Market
Probability
Comment
Reduction in subsidies on petroleum products
Very Likely
Long pending price hike in petroleum products should ease the subsidy burden.
No increase in allocation to MGNREGS
Very Likely
Expect no increase in MGNREGS for second year in a row and thereby, social spending will be kept under check.
Stimulating investments and capital formation
Increase in the rate of depreciation
Likely
A form of stimulus to boost gross block formation.
Acceleration in infrastructure spending, especially power
Likely
Recent meeting of industry leaders and the government likely to result in sops for power.
Stimulating consumption
Increase in personal tax exemption limit
Likely
Widening of tax slabs; Re‐introduce the surcharge on the highest tax bracket to compensate for this
Increase market participation
Cut in Securities Transaction Tax
Likely
Broaden base of investors through retail participation in continuation with government efforts to encourage foreign individual investor [is this institutional or individual?]
Increase tax exemption for mutual fund Investment
Probably
Steps to boost the stressed Mutual fund Industry
Hard‐hitting reforms
FDI in multi‐brand retail
Unlikely
Remains a contentious issue for the government.
Introduction of Uniform Goods & Service Tax (GST)
Unlikely
Deferred to FY14.
Introduction of Direct Tax Code (DTC)
Unlikely
Deferred to FY14.
Negatives for Market
Probability
Comment
Extension of service tax to all services with negative list
Very Likely
Widening the indirect tax net is an effective tool to increase receipts.
Increase of excise duty
Very Likely
Likely to impact Auto and Consumer durable demand.
Food Subsidy‐Food Security Bill
Very Likely
A populist measure before general elections in FY14.
Raising of Minimum Alternative Tax
Likely
The budget may further raise the MAT rate to 20% (from 18.5%).
Increase in Corporate Tax
Unlikely
Talk of increasing surcharge on corporate taxes from 5% to 10%.
Automobiles—Negative
Budget Expectations
Likely Impact
Tax on diesel cars
Could lead to a shift towards petrol cars, but will also entail demand destruction. While we believe that a diesel tax is likely, the quantum of tax will be the key.
Hike in excise duties from 10% to 12%
Higher vehicle cost across the board could delay a demand recovery, particularly in the car market.
Increasing income tax exemption limits
Might improve discretionary consumption, particularly for two-wheelers.
Increased allocation to the Jawaharlal Nehru National Urban Renewal Mission
Could lead to a one-time spurt in demand for new buses from state transport units.
Capital Goods/Infrastructure—Positive
Budget Expectations
Likely Impact
Imposition of 19% import duty on imported power generation equipment
Increased cost of imported power equipment; beneficial to domestic power equipment manufacturers, such as BHEL, L&T, BGR Energy, Thermax.
Increase excise duty to 12% from 10%
Negative for all capital goods companies.
Increased spending on infrastructure schemes, such as JNNURM, roads, railways, ports, railways
Increased capex to benefit infrastructure companies, such as L&T, IRB Infra, ITNL,
Cement—Negative
Budget Expectations
Likely Impact
Increase in excise duty base rate from 10% to 12% vs. Industry’s request of removal of the specific component (as present in the current structure).
Although sentimentally negative, an additional burden on cement companies in the form of excise duty to be passed on to consumers, thereby increasing cement prices.
Import duty on coal to be reduced.
Positive for a majority of South Indian cement manufacturers.
Implementation of abatement structure for the industry. Abatement on excise duty has been pursued for long by the cement industry.
Very low likelihood that this will be passed, given the current fiscal situation of the government. However, should such a recommendation come through, it will be a major positive for the sector.
Duty/Cess being levied and collected on indigenous coal to be allowed as VAT or CENVAT credit.
Reduction in VAT rates for cement from 12.5% to 5%.
Credit for royalty paid on limestone as CENVAT/VAT credit .
Fertilisers—Positive
Budget Expectations
Likely Impact
Exemption of 5% import duty on LNG
Revenue Neutral for the government (lower subsidies to be set off against lower revenues from customs). To benefit urea companies that produce beyond cut-off limits like CHMB IN, TTCH IN.
Sufficient provisioning for subsidies (fertiliser subsidy estimated to be around ~Rs 800-Rs 850bn in FY13E).
Due to lower subsidy provisioning in FY12E; ~ Rs 250- Rs 300bn is likely to be carried over to FY13E. A higher subsidy provisioning would result in lower working capital requirement in H2FY13E.
Duty exemption for import of capital equipment for new investments
Urea capacity expansion of about ~5-6mmt is likely over the next few years; duty exemption on import of capital equipments would lower capital cost and improve overall IRR.
Decision on any new pricing scheme or NBS for existing urea capacities
Expect some announcement with regard to the new pricing scheme or NBS for existing urea units. It may be noted that NBS was approved by the GoM and it now awaits the CCEA approval. Urea price decontrol with a cap on likely increase in retail price will be a major positive. However, given political compulsions, we expect the government to retain the price control and increases to retail price (by about ~10%-20%) would partly reduce subsidies and partly increase realisation for the industry.
Decision on new investment policy of urea
Expect some mentioning/timeline for approval by the CCEA.
Financials—Positive
Budget Expectations
Likely Impact
Budgeted government borrowings flat at previous years levels at ~Rs 5.4trn
Lower G-Sec yields; and no crowding out effect on private investments; positive for banks’ investment portfolio.
Higher budgetary allocation towards recapitalisation of PSU banks
Positive for PSU banks as this will augment the bank’s Tier-I capital to comply with Basel III requirements.
Tax relief on housing loans could be extended beyond the current level of Rs 0.15mn
Could possibly lead to an increased demand for home loans; positive for HDFC, SBI, ICICI Bank, LIC Housing Finance.
Creation of credit guarantee schemes for small and marginal farmers
Positive for PSU banks as this will enable them to contain their NPAs.
Extension of tax relief for investments in infrastructure bonds beyond current level of Rs 20,000; enable PSU banks to raise funds through such instruments
Positive for Infra Finance NBFCs like IDFC, PFC, REC, enabling them to raise more funds at a lower fixed rate, also helps in their asset-liability matching.
FMCG—Neutral
Budget Expectations
Likely Impact
Excise duty hike in Cigarettes
We estimate an excise duty hike of >10% in Cigarettes. If the hike is in the range of 10%–15%, we expect ITC to be well-placed to face the impact. The company has already hiked Cigarette prices in anticipation of the hike. However, if the hike is sharper than expectation, there will be a short-term negative sentiment. Concern regarding impact on volume growth will be primary.
Announcement of GST implementation timeline
If the government highlights a definite roadmap to the implementation of GST, it will be viewed favourably by the consumer industry.
Expenditure on Social Security Schemes
Similar to FY12, the government may maintain the current outlay on the NREGA scheme and not significantly step up its expenditure. Hence, we do not expect any positive material impact for the FMCG sector.
Token allocation to the Food Security Bill
The Food Security Bill from a long-term perspective is positive for the FMCG sector due to the increase in disposable income levels. However, a token allocation in the present budget will have a marginal positive impact in the near term.
Changes in income tax slab
Any positive changes in the Income tax slab is certainly a positive for the consumer sector due to better spending ability. The greater positive impact will hold for the urban FMCG players.
Hike in CENVAT on consumer products
There exists a probability of the government hiking the CENVAT on certain consumer products as was exercised in the previous budget. The impacted FMCG categories would be Branded Foods, Beverages, which is a negative for HUL, Nestle, Dabur, ITC. The companies will have to undertake price hikes to mitigate the impact
IT Services—Neutral
Budget Expectations
Likely Impact
Exemption of MAT on profits from SEZs. Last year, MAT on profit from SEZs was raised to 20%. Industry is hoping for a reversal.
We do not expect MAT on SEZ profits to be reversed. If the tax is reversed, it is positive for IT companies.
Media—Mildly Positive
Budget Expectations
Likely Impact
Import duty waiver on set-top boxes
Expected to come due to an impetus on digitisation—Positive for Direct-to-home (DTH)/Digital cable providers/Multi System Operators (MSO)
Infrastructure status for MSOs and increase in FDI limit
The MSO industry needs Rs 180-Rs 200bn for digitisation. Currently, the MSO space is fragmented and under-funded; we feel that for digitisation to be implemented, MSOs will need assistance by way of: (1) permitting higher FDI investments (up to 74% from 49% right now), and (2) access to cheaper capital by grant of Infrastructure status to the industry. Note that the increase in FDI limit is likely to benefit DTH players too.
Metals—Positive
Budget Expectations
Likely Impact
Increase in import duty on Hot Rolled Coils (currently, it is at 5%)
Positive for domestic flat steel producers, like JSW Steel , SAIL, Tata Steel, Bhushan Steel, etc.
Removal of 5% import duty on imported thermal coal
Positive for Aluminium and sponge iron producers meeting partial needs from the imported markets. Also positive for Sesa Sterlite which meets part of the requirement through imports.
Removal of 2.5% import duty on iron ore lumps, fines and pellets
Positive for JSW Steel and other non-integrated steel manufacturers.
Oil & Gas—Neutral
Budget Expectations
Likely Impact
Declared goods status to natural gas and LNG, so that it could attract an uniform sales tax of 5%, instead of the current system of varied taxes, ranging from 12.5% to 20 % in different states
Lower sales tax duty will further improve competitiveness of CGD entities vis-à-vis competitive fuels. Will favourably impact the CNG/PNG demand and thus, GAIL, IGL
Scrapping of 5% customs duty on LNG, in order to treat LNG at par with crude oil
NIL custom duty will further improve competitiveness of CGD entities vis-à-vis competitive fuels. Will favourably impact the CNG/PNG demand and thus, GAIL, IGL
Customs and excise duty on petroleum products to remain unchanged
Despite the cut in custom duties and excise duties, which were announced in June 2011, the tax component in retail price still remains high (> 40% in petrol and ~25% in diesel). Rationalisation of these duties is always likely; however, given the tight fiscal situation, this does not seem to be a huge probability at the moment.
Extension of commissioning date of new refineries constructed, in order to avail the seven-year tax holiday
Project IRRs to improve. HPCL (Bhatinda), IOCL (Paradeep)
Modest price increases likely in Diesel (Rs 2/lt) and LPG (Rs 50/cyl) post election results this month; unlikely to be a part of the Budget.
Pharmaceuticals—Neutral
Budget Expectations
Likely Impact
Extend weighted deductions for research activities undertaken with overseas affiliates and by third parties
Currently, the 200% deduction of R&D is applicable for research undertaken in India only. Including the same benefit for R&D undertaken by subsidiaries outside, will benefit companies like Sun Pharma, Ranbaxy, Dr Reddy’s that operate facilities outside India. Companies engaged in novel drug R&D will also benefit by outsourcing a portion of their research activities.
Weighted deduction for expenditure in rural and semi-urban markets
To benefit all leading domestic companies that have, over the recent past, expanded their field force to tap the under-penetrated rural market.
Excise duty on active pharmaceutical ingredients (API) to be lowered to 5%, along with formulations
No significant impact expected. Benefits to be passed to customers, Can make local production of API more competitive to Chinese counterparts.
Higher budget allocation towards the healthcare sector
The Government has consistently increased budget allocation towards the healthcare sector (last year, by 20% to Rs 268bn. Any increase in allocation would benefit all companies in the domestic space, like Cipla, Ranbaxy, GSK Pharma, etc.
Eliminate 30% duty on imported equipments for a period of 5-10 years
Will especially benefit companies engaged in setting large facilities to tap the global biosimilar market, like Biocon , Dr Reddy’s and Cipla.
Real Estate—Positive
Budget Expectations
Likely Impact
Formation of a Real Estate Regulatory Authority
It will provide much-needed transparency to the sector and further, it will be helpful in co-ordinating efforts to develop the real estate sector—a step towards industry status for the sector. With the formation of the real estate regulatory body, issues pertaining to real estate transactions will be resolved to an extent and business in property deals will be done with good practices, thus increasing institutional participation.
Income tax rebate under Section 24(b) up to Rs 0.3mn from the current Rs 0.15mn on interest component
It will encourage home buyers to avail home loans and take the tax benefit up to Rs 0.3mn of interest repayment. Also, there is a principal component repayment, which will reduce the overall cost.
Extension of the interest subsidy for property up to Rs 2.5mn—the one per cent interest subvention scheme of the housing sector to be extended by one year till 2013
Extension of the interest subsidy by another one year will be beneficial for developers present in low- cost/affordable housing present in Tier 2 and 3 cities.
Retail—Marginally Positive
Budget Expectations
Likely Impact
Roll-back of excise duty on Apparel
Weak demand has resulted in a 17% drop in sales over FY12 as higher (25%) price points have resulted in a drop in volumes—roll-back, along with lower input cost, will accentuate demand. Positive for Shoppers Stop, Pantaloon ,Trent, Raymond, Arvind.
Hike in tax slabs for exempt income
The exempt income slab is likely to be raised to Rs 0.3mn from Rs 0.18mn, thereby increasing higher disposable income in the hands of the consumers.
Implementation of nationwide GST
Simplifying the entire tax structure, thereby cutting business costs and helping to generate more revenues at lower costs. Positive for the sector as a whole.
Hike excise duty on branded jewellery
With the government changing the levy of customs duty from a fixed rate to an ad-valorem one, thereby increasing it, there is a possibility that it may also hike the excise duty on branded jewellery to 2% from 1%. Marginally negative for Titan.
Cut-back in service tax on rent
Currently, service tax on rentals is levied at 10.3% and the same is paid by retailers. Cut-back on the service tax on rentals will be positive as it accounts for nearly 0.5%-1.5% of sales (depending on the format). Positive for the sector.
Telecom—Mildly Positive
Budget Expectations
Likely Impact
Clarity on 2G auctions
The financial impact of the 2G auctions can be gauged, once the terms of the auctions are known.
Rationalisation of VAT on mobile handsets
This will likely lead to improvement in handset ecosystem and improve 3G proliferation—benefiting incumbent telcos
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