avendus budget analysis

8/2/2019 Avendus Budget Analysis

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Private & Confidential

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India Budget Preview FY13

March 2012


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Summary

Overallassessment:Severalsectorswouldlikeafiscalstimulustoboostdemandorprofitability.

Maybetoughtomeetexpectationsgiventheuphilltaskofcuttingsubsidiesorraisingadditionalrevenues.

Anyexceptionallylargeriseindevelopmentspendingcouldbeviewedasanindicatorofearlyelections.

Sectorsandimpact:Automobilecompaniesarelikelytobenegativelyimpactedifthe excisedutyisraised.Cementcompaniesarelikelytooutperformiftheimportdutyonthermalcoal,petcokeandgypsumisabolished.

Constructionandengineeringcompaniesmayoutperformonsopsto arrestthefallinginvestmentrate,althoughanincreaseinbudgetaryallocationsmaybeconstrainedbyfiscallimitations.

Whilecapitalinfusionmaybeapositive,theassetqualitytrendislikelytostaythekeydeterminantoftheperformanceofpublicsectorbanks.

PositiveannouncementstoaddressissuesfacedbythepowersectormaydrivetheneartermoutperformanceofNBFCIFCs. ITcompaniesarelikelytobenefit,iftheMATrateisreduced/withdrawnforSEZunits.

Steelcompaniesarelikelytooutperform,ifthereisahikeinimportdutyonHotRolledCoils.

Oilandgascompaniesarelikelytobenefitfromtaxbreaks,throughtheextensionoftherefinerycommissioningdeadlineandfromgrantof'InfrastructureStatus'toexplorationandrefiningactivities.

Thedomesticpharmaceuticalindustrywouldremainrelativelyimmunetobudgetaryallocations;policychanges(suchasNELM)aremorerelevantforthesector.

Telecomstocksmaycontinuetounderperforminthenearterm,if budgetproposalsindicatehighcashinflowfrom2Gand4Gspectrumauctions.

Potentialremovalofleviesonimportedcoal,extensionoftaxbenefitsandnoimportdutyonpowerequipmentarelikelytobepositivefortheutilitiessector.


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Automobiles

Budgetexpectations:Higherexcisedutyondieselpassengervehicles.

Rollbackofstimulusfortwowheelers,threewheelersandbelow1,500ccpassengervehicles,leadingto2%hikeinexciseduty.

Incentivestoboostmanufacturingofelectricandhybridvehicles.

Increaseinpersonalincometaxexemptionlimit.

Likelihoodofdemandsbeingmet:Excisedutyondieselpassengervehiclesmaybehikedtodiscouragebuyersfromshiftingtowardsthesevehicles.

Incentivesforelectricandhybridvehiclesarelikelytobeannouncedtoencouragefurtherinvestmentsbyautocompaniesinthesesegments.

Impactonthesector/companies:Higherexcisedutyondieselpassengervehicleslikelytobepassedontoconsumers,negativelyimpactingsalesvolumesofpassengervehicle

companies.

Intheeventofarollbackinthestimuluspackage(cutinexcisedutyannouncedinDec08),salesvolumesoftwowheelerandpassengervehiclecompaniesmaybenegativelyimpacted.

Anincreaseinthepersonalincometaxexemptionlimitislikely toboostsalesvolumesfortwowheelerandpassengervehiclecompanies.

SriRaghunandanNL; [email protected]


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Cement

Budgetexpectations:Simplificationoftheexcisedutystructurefromthecurrentthreestagestructuretoauniformrateofexcisedutypertonneoron advalorem

basis.

Abolitionof5%importdutyonthermalcoal.

Abolitionof2.5%importdutyonpetcokeandgypsum.

IncreasedallocationtovariousinfrastructuredevelopmentschemessuchasBharatNirman,JawaharlalNehruNationalUrbanRenewalMission(JNNURM),RestructuredAcceleratedPowerDevelopment,ReformProgramme(RAPDRP)andRajivGandhiGrameenVidyutikaranYojana

(RGGVY).

Likelihoodofdemandsbeingmet: Inordertoboostdomesticpowergeneration,theimportdutyonthermalcoalislikelytobeabolished.

Thegovernmentisunlikelytosimplifytheexcisedutystructureorreducetheexcisedutyforcement.

Importdutyonpetcokeandgypsumlikelytobechanged.

Impactonthesector/companies:Abolitionof5.0%importdutyonthermalcoaland2.5%onpetcokeandgypsumlikelytobenefitcementplayers.

KeybeneficiariesarelikelytobeSouthIndiabasedcementplayersandcoastalplants.

Increasedbudgetaryallocationtoinfrastructuredevelopmentschemeslikelytoboostcementdemandto8%10%inFY13f(fromc6%inFY12f).

JimeshSanghvi; [email protected]


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Construction and Engineering

Budgetexpectations: Impositionofimportdutyof19%24%onpowerequipment.

IncreaseinexemptionlimitforinvestmentininfrastructurebondsfromthecurrentINR20,000underSec80CCF.

IncreasethelongtermfundavailabilitybyraisingtheannualINR300bndomestictaxfreeborrowinglimitandUSD30bnECBlimit.

ExtensionofeligibilitynormsfortaxholidayincentivesforpowergenerationcompaniestoanothercoupleofyearsunderSec80IA.

Increaseindepreciationratesforconstructionequipmentfromthecurrent15%to30%50%.Removethecascadingeffectofintercorporatedividenddistributiontaxbyprovidingtaxcreditatmultiplelevels.

ImportdutyexemptiononColdRolledGrainOrientedelectricalsteelusedinmanufacturingoftransformers.

AllowprovisionsforbaddebtsaspermissibledeductionsincalculatingbookprofitsandMATliability.

ServiceTaxRateonWorksContractService,payableundertheCompositionScheme,bereducedfrom4%to3%.

Measurestostreamlinestatutoryclearancesforinfrastructureprojectsandimprovetheexecutionofprojects.Likelihoodofdemandsbeingmet:

Impositionofimportdutyof14%24%onpowerequipment.

Increaseinoverseasborrowinglimit,budgetaryallocationforinfrastructureschemesanddepreciationsopstoarrestthefallinginvestmentrate.

Impactonthesector/companies:Anincreaseinexcisedutiestoimpactengineeringcompaniessellingproducts,whilebeingapassthroughforprojectandEPCcompanies.Highercustomsdutyonimportofpowerequipmentlikelytobepositivefordomesticpowerequipmentmanufacturers.

Increaseindepreciationratetobenefitconstructionequipmentmanufacturers.

Higherbudgetaryallocationsandfundavailabilitytobenefitconstructioncompaniesandinfrastructuredevelopers.

DevangPatel; [email protected]


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Financials

Budgetexpectations: RecapitalizationofpublicsectorbanksthroughsubscriptiontoTierIcapital.

Banksmaybepermittedtoraisefundsthroughinfrastructurebonds.

Reductionofthetenoroftermdepositsfrom5yearsto3years.

Increaseintaxlimitontaxsavinginfrastructure bondsofInfrastructure Financecompanies(NBFCIFCs).

Provisionsfor

NPLs

by

NBFCs

to

be

eligible

for

tax

deduction.

FiscalpackagetoaddressthefinancialhealthofStateElectricityBoards(SEBs).

Likelihoodofdemandsbeingmet: Recapitalizationispositiveforpublicsectorbankswherethegovernmentholdsnearly51%andtheTierIratioislikelytofallbelow8%.

Banksmayaskfortaxdeductiononinfrastructurebondstomakethemattractiveand,thereby,raiselongtermresources.

Anincrease

in

the

tax

limit

on

infrastructure

bonds

likely

to

provide

afunding

boost

to

the

infrastructure

sector.

Thedemandof taxdeductiononprovisions forNPLsbyNBFCs couldgainmoreweight this year,since it founda mention in theUshaThorat

committeerecommendations.

Impactonthesector/companies: Wehaveaneutralviewonthesectorintheneartomediumtermwithnegativebiasforpublicsectorbanks.

Theunderperformance

of

public

sector

banks

over

the

past

two

weeks

likely

to

sustain

in

the

near

term.

IncreaseintaxlimitandaddressingofissuesregardingthefinancialhealthofSEBslikelytobenefitNBFCIFCs.

PositiveannouncementstoaddressissuesfacedbythepowersectormaydriveneartermoutperformanceofNBFCIFCs.

ChandanaJha; [email protected] JayneeShah; [email protected]


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IT Services

Budgetexpectations:ExtensionoftaxbenefitsundertheSoftwareandTechnologyParksofIndia(STPI)Act.

WithdrawalofMATforSEZunits madeapplicableduringthe20112012Budget.

Clarificationonapplicabilityoftaxbenefitsononsite revenuesofITcompanies.

ClarityonallowingweighteddeductionoftwicetheexpenditureforInformationTechnology R&Dwork.

Increaseinoutlayfortheeducationsectorandfocusonegovernance.Likelihoodofdemandsbeingmet:

ExtensionoftaxbenefitsundertheSTPIActunlikelyasthesamewasunmetduringthe20112012Budgetaswell

WithdrawalofMATforSEZunitsunlikely.

LikelytoclarifytheapplicabilityoftaxesononsiterevenuesofITServicesproviders.

LikelytoprovideclarityontheweighteddeductionprovisionforsoftwareR&Dexpenditure. Increaseinallocationtotheeducationsectorlikely.

Impactonthesector/companies: IfbenefitsundertheSTPIActareextended,ITServicesproviders,particularlyTierIIcompanies,arelikelytobenefit.

AnyreductioninMATlikelytobenefitallsoftwareexportersoperatingfromSEZunits.

AllowingtaxbenefitsforonsiterevenuesispositiveforITcompanies;acontrarydecisionisnegative. InclusionofInformationTechnology R&Dinweighteddeductionispositive.

PriyaSunder; [email protected]


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Metals and Mining

Budgetexpectations:Reductioninexportdutyonironorefinesandlumpsfrom30%to 20%.

IncreaseinimportdutyonHotRolledCoilsfromexisting5%to10%.

Abolitionof5%importdutyonimportedthermalcoal.

Abolitionof2.5%importdutyonironorelumps,finesandpellets.

Increaseinallocationtovariousinfrastructuredevelopmentschemes.Likelihoodofdemandsbeingmet:

Inordertoboostdomesticpowergeneration,theimportdutyonthermalcoalislikelytobeabolished.

Exportdutyonironoreunlikelytobechanged.

WeexpectstatusquotobemaintainedonimportdutyforHotRolledCoils,ferroalloysandironore.

Impactonthesector/companies:Abolitionofimportdutyonthermalcoallikelytobenefitspongeironbasedsteelcompanies.

Increaseinspendingonvariousinfrastructuredevelopmentschemestoboostdemandforflatandlongsteelproducts.

JimeshSanghvi; [email protected]


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Oil & Gas

Budgetexpectations:ExtensionofdeadlinefromMar12toMar17forcommissioningofrefineriesthatcanclaimthe7yeartaxholiday.

ExtensionofInfrastructureStatus toexplorationandrefiningactivitiesforthepurposeofthe10yeartaxexemption.

MinimumAlternateTax(MAT)exemptionforthenewrefineriesenjoyingthe7yeartaxholiday.

RemovalofNationalCalamityContingentDuty(NCCD)oncrudeoil.

Likelihoodofdemandsbeingmet:Extensionofdeadlineforcommissioningtoclaimthetaxholiday islikely,whichmayboostconstructionofnewrefineries.

MATexemptionisunlikelyfortherefineriescurrentlyenjoyingtaxexemption.

Impactonthesector/companies:Extensionofdeadlineforrefinerycommissioningtohelpprofitabilityofnewrefiningprojectsunderconstruction.

GrantofInfrastructureStatus toexplorationandrefiningactivitiescouldboostthesectorsignificantlyasprojectswouldbeeligibleforataxholidayfor10consecutiveyearsoutof15years,beginningwith theyearinwhichproductionstarts.

RemovalofNCCDoncrudeoilcouldreducetheannualunderrecoveryonsensitiveoilproductsbycINR5bn,0.5%ofFY13funderrecoveries.

SaurabhBharat; [email protected]


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Pharmaceuticals

Budgetexpectations:WeightedaveragedeductiononoutsourcedR&Dtobemaintainedat 200%.

ExcisedutyonformulationsandAPIslikelytobemaintainedatthecurrentlevelsof5%and10%,respectively.

Likelihoodofdemandsbeingmet:ContinuedsupportthroughweighteddeductioninR&Dlikelytoactasanincentiveforinvestmentinresearch.

Impactonthesector/companies:Thedomesticformulationsindustryislikelytoremainrelativelyimmunetobudgetaryallocations.

NeartermfocuslikelytoshifttotheNLEMPolicy,whichcouldhaveanimpactondrugpricing.

MonicaJoshi; [email protected]


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Telecom

Budgetexpectations: Indicativerevenuesforthegovernmentfromauctionof2Gspectrumand4Gspectrum.

Clarityononetimefeeonexcessspectrum.

Taxdeductionforentireexpenditureon3Gand4Gspectruminthesameyeartheauctionisheld.

InfrastructureStatus fortelecomsector.

Abolishmentof

service

tax

on

internet

and

broadband

services.

RationalizationofVATformobilephonesat4%.

Extensionof80IAbenefitstooperationscommencedbeforeMar10(currentlyMar05).

Likelihoodofdemandbeingmet: TheBudgetmayprovideindicativerevenuesforthegovernmentfrom2G,4Gspectrumandonetimefeeonexcessspectrum.However,clarityon

thetimelineandtheapplicablerateforonetimefeeislikelytoemergeinNationalTelecomPolicy,2012.

Taxdeductionforexpenditureon3Gand4Gspectruminthesameyearofauctionisunlikely.

Extensionof80IAbenefitstooperationscommencedbeforeMar10isunlikely.

Impactonthesector/companies: Auction of 2Gand4Gspectrum implies cashoutgo for telecom service providers (TSPs), thus leading to higher interest costs and amortization

expense.

Extensionofdatefor80IAbenefitsto31Mar10wouldbenefitnewplayers.

RationalizationofVATonmobilephonesmayleadtoincreasedpenetrationofsmartphonesinthecountryand,thus,leadtobetterrevenuesfor

TSPsfrom3Gservices.

AbhayMoghe [email protected]


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Utilities

Budgetexpectations:Extensionof80IAbenefitstopowerplantscommencingoperationsbeforeMar17(currentlyMar11).

IncreaseinallocationtoRAPDRPandRGGVYschemes.

Impositionofimportdutyonpowerequipmentforprojectsabove1,000MW.

ExemptionofsalestaxandVATonsuppliesforconstructionofmegapowerprojects.

Abolishmentofimportdutyoncoalforpowerplants.

Likelihoodofdemandsbeingmet:Extensionof80IAbenefitstooperationscommencedafterMar11islikely.However,itisunlikelytobeextendedtillMar17.

AllocationtotheRAPDRPandRGGVYschemesislikelytoincrease.

Importdutyoncoalforpowerplantsisunlikelytobeabolished.

Impactonthesector/companies:Extensionof80IAbenefitstopowerplantscommencingoperationsbeyondMar11likelytobeapositive.

IncreaseinallocationtotheRAPDRPandRGGVYschemeslikelytobenefitTransmission&Distributioncompanies.RAPDRPismeanttoreduceT&Dlossesand,thus,wouldbenefitthepowersectoroverthelongterm.

Ifimportdutyisimposedonpowerequipment,whilesalestaxandVATonsuppliesforconstructionofmegapowerprojectsisnot exempted,itwouldbenegativefortheprofitabilityofupcomingpowerprojects.

Abolishmentof dutyonimportedcoalforpowerplantswouldbebeneficialforprojectssourcingcoalfromoutsideIndia.

AbhayMoghe [email protected]


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avendus budget analysis

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