Some sectors that hold promise, with excise cuts in this fiscal budget making them more profitable
Post-budget, some sectors look good from an investment perspective. This is by virtue of the exceptional budget allocations and provisions shown towards these sectors. The focus of the budget has been to boost consumption coupled with keeping inflation under control. The reduction in excise duty for several sectors/products will give a boost to consumption.
The sectors which will benefit include education, healthcare, hotels and pharma. However, long-term investment decisions need not be a hasty reaction to the budget recommendations. The investment approach should be proactive rather than being reactive. Investors can wait for markets to stabilize before investing.
Pharma
This will be a sector to watch out for, as it is already a beaten down sector and there is no reason for a further downfall in this sector. Also, the budget is favorable to this sector as the FM has cut the customs duty on life-saving drugs from 10 to five percent.
The budget has given in to demands of the pharma sector related to excise and customs duties, which could reduce the cost of drugs. Lower duties might spur an increased off-take of formulations, which is a positive for the pharma sector as a whole.
Excise duty on all drug formulations has been reduced to eight percent, from an earlier 16 percent. Companies that have no presence in excise-exempt zones and, thus, had to shell out excise duty, will now have some relief on this expense. Smaller players as well as local units of multinational companies may benefit from this. A cut in excise duty would reduce healthcare costs rather than the tax outgo of medical equipment/accessory companies.
Research organizations
Any sum paid to an approved scientific research association, approved university, college/institution (outsourced R&D work) by a company will benefit the latter by way of a weighted deduction to the extent of 125 percent of the outlay. This could lead to more linkages between public and private stakeholders in research.
Smaller R&D-focused companies, which are handicapped in making sizeable investments for building in house scientific facilities, would benefit more from this proposal.
Power
Another sector to watch out for is power. The Finance Minister announced a Transmission and Distribution Reform Fund and setting up of a coal regulator. General project import duty has been reduced from 7.5 to five percent. However, for power projects, other than mega projects, withdrawal of exemption from additional customs duty of four percent and additional customs duty introduced on goods for high voltage transmission and sub-transmission and distribution projects will increase the project cost.
The FM also announced a special countervailing duty on power imports, in addition to this he has allocated Rs 800 crores for accelerated power reforms programme. The FM mentioned that considerable improvement is needed in the power and coal sectors to sustain economic growth.
The power budget also clearly indicates the Government would be pushing for at least five more ultra mega power projects (UMPPs), which is a positive sign for the economy, going by the results of the three UMPPs already awarded. The creation of the T&D fund and the development measures for the secondary debt market, which will make long-term debt available for the power sector, would be huge during the 11th plan.
FMCG and Auto
These companies can be another option. The excise cut for packaging materials is also seen as a positive for certain food processing players in the FMCG sector. The budget has proposed a reduction in excise for packaging for food processors by half to eight percent.
The domestic auto industry got a major boost with the four percentage point reduction in excise duty on two wheelers, three wheelers, passenger cars, buses and chassis to 12 percent from the current 16 percent. The Government reduced excise duty on two wheelers to help the segment revive after witnessing months of declining sales due to high interest rates. The Government also extended a similar reduction in the excise duty of small cars to make India a hub for small cars.
In February 2006, the Government had reduced the duty on small cars from 24 to 16 percent. It was at that time that specifications for small cars had been laid out in terms of length and engine size. As per these guidelines, cars with a length less than 4,000 mm and a petrol engine of 1.2 litres or less and a diesel engine of 1.5 litres would qualify for the small car benefits.
The budget has offered an excise duty reduction on hybrid cars from 24 to 14 percent. This helps the domestic companies. The Government has also removed excise duty on electric cars (from eight percent to nil).
AUTOMOBILE
STATE OF THE INDUSTRY
The total market size (including exports) of automobiles is expected to touch Rs 129,000 crore in 2007-08 — a growth of 4.3% over ’06-07. Tighter credit disbursement and increased interest rates have resulted in lower two-wheeler and tractor sales. Commercial vehicles have seen a mixed trend with medium and heavy commercial vehicles (MHCVs) showing a decline but light commercial vehicles (LCVs) reporting a strong growth. Growth continues to be healthy for cars and utility vehicles (UVs). In ’08-09, automobile sales are expected to grow around 12% in value terms, mainly driven by favorable demographic trends, anticipated growth recovery in commercial vehicles and robust export growth.
BUDGET IMPACT
The cut in excise duty will benefit automobile manufacturers, as it is expected to be passed on to the consumer, thus resulting in increased demand.
Besides, increased exemption limit for income tax will lead to higher disposable income among the salaried class. This, in turn, will benefit two wheeler and car demand. The impact of loan waiver for small and marginal farmers will have a neutral effect on tractor sales.
Positive for:
Tata Motors
M & M
Maruti
Bajaj Auto
Hero Honda
BANKING & FINANCE
STATE OF THE INDUSTRY
The moderating credit growth (22-23%) is comforting for the Reserve Bank of India. There is a visible deceleration in demand from interest-rate sensitive sectors, including housing and other retail credit. The possibility of easier interest rates, thus, remains strong.
Interest rates have probably peaked and are likely to move southward after the busy season ending March 2008. This is evident from the recent rate cuts by many nationalized banks.
In balance, we expect nonfood credit to grow 23-25% in ’07-08, while aggregate deposits are seen rising 21-23%.
BUDGET IMPACT
The emphasis is on agricultural banking. With the debt waiver scheme’s implementation by the first quarter of ’08-09, banks would have to bear a one-time write-off charge. This may negatively affect their bottom-line. However, the manner of reimbursement will determine the extent to which this impact is mitigated. The cut in growth target (17%) for farm credit will help banks consolidate their origination systems for farm loans.
Positive for:
SBI
PNB
ICICI
HDFC Bank
LIC Housing
CEMENT
STATE OF THE INDUSTRY
Strong demand from end-user segments has contributed to a 9.8% year-on-year growth in cement demand during the April-November 2007 period. Over the next four years, demand for cement is expected to increase at a compound annual growth rate (CAGR) of 9%. However, large capacity additions are likely to be commissioned during the fourth quarter of ’08-09, which will result in softer prices.
BUDGET IMPACT
The excise duty on bulk cement has been revised from Rs 400 per tonne in ’07-08 to Rs 400 per tone or 14% ad valorem, whichever is higher.
This proposal is expected to increase the cost of bulk cement for consumers, like ready-mix concrete producers, infrastructure companies and large builders, who account for an estimated 10-15% of the total cement consumption. The impact on the industry will be neutral, as producers will be able to pass on this increase to customers.
Further, excise duty on clinker has been hiked from Rs 350 to Rs 450 per tonne.
This will also have a neutral impact, as players possess pricing flexibility to pass on the increase to end consumers.
Positive for:
ACC
Gujarath Ambuja
India Cement
Shree Cement
Ultratach
NON-FERROUS METALS
STATE OF THE INDUSTRY
While global prices of aluminum and zinc fell during April 2007-January 2008, lead and copper rose over the corresponding period of the previous year. In 2008, aluminium prices are expected to remain steady at current levels ($2,450-2,650 per tonne) due to a balanced global market. However, copper and zinc are likely to soften due to expected surplus. Domestic aluminium players’ profitability is likely to remain stable while it will be under pressure for copper smelters.
BUDGET IMPACT
The reduction in central value-added tax (Cenvat) rate on all goods, from 16% to 14% will result in a fall of around Rs 2,000 per tonne in aluminium and zinc prices, and around Rs 5,000 per tonne in copper, notwithstanding the future trend in international prices. However, it will not have a significant impact as these items are sold to industrial buyers. Excise duty on these items is MODVAT-able. Thus the buyer industry’s cost remains unchanged. Lowering of customs duty on aluminium scrap to nil is unlikely to have much impact given the low share of recycled aluminium.
Positive for:
Hindalco
Hindustan Copper
Hindustan Zinc
National Alliminium
Sterilite Industries
CONSUMER DURABLES
STATE OF THE INDUSTRY
Sales of major appliances are expected to grow 9-11% in value terms to Rs 20,900 crore in 2007-08.
Growing urban demand and the free distribution of color televisions by the Tamil Nadu government aided volume growth. But falling prices led to lower value growth. The consumer durables industry is expected to grow 12-14% in value terms in ’08-09. Although volume growth is expected to be lower for all product categories, continued shift towards higher value segments and the marginal increase in prices will support value growth.
BUDGET IMPACT
Alteration in income-tax slabs will result in an increase in disposable income for the salaried class, inducing higher demand. Reduction of basic excise duty from 16% to 14% is unlikely to benefit the household appliances industry, as a significant part of the production of the major manufacturers comes from excise free zones. The resultant reduction in countervailing duty will have a negligible impact due to unique product specifications and competitiveness of the domestic industry.
Positive for:
Samtel
LG
Samsung
Whirlpool
MIRC Electronics
INFORMATION TECHNOLOGY
STATE OF THE INDUSTRY
The Indian IT services industry is expected to see a healthy 27% annual growth to touch $22.8 billion in 2007-08. Similarly, the ITeS segment is also expected to grow 24% to touch $10 billion by March ’08.
IT players have resorted to measures such as diversifying their geographical mix and increasing utilization of employees to face the rising rupee and double-digit wage inflation.
The Indian hardware industry touched $7.9 billion in ’06-07 — an annual growth of 21.3%.
BUDGET IMPACT
The focus on building the talent pool, considering the IT sector is a major recipient of knowledge resources, is expected to benefit in the long run.
However, the hike in excise duty from 8% to 12% on packaged software and the addition of customized software in the service tax net is expected to negatively affect application development players in the domestic software industry.
Maintenance service providers will not be impacted.
With no comment on extension of the IT tax exemption (sections 10A and 10B), the overall impact is expected to be marginally negative.
Positive for:
Infosys
TCS
HCL Tech
Moser Baer
Zenith Computers
OIL & GAS
STATE OF THE INDUSTRY
An appreciating rupee and higher refining profits due to tighter global product markets have helped the industry enhance its operating profits in ’07-08. The government’s loss-sharing mechanism, in the form of upstream assistance and oil bonds, also contributed to it. In ’08-09, crude oil prices are likely to average higher in dollar terms, whereas refining margins are expected to be lower, due to easing product markets. The subsidy under-recovery on auto and cooking fuels would continue to be dependent on the government’s stand on aligning the domestic retail prices with international prices, as well as the extent of support.
BUDGET IMPACT
The imposition of the 5% custom duty on naphtha for the manufacture of polymers is expected to marginally improve refining profits by Rs 700 crore to Rs 800 crore. Further, the 2.5% reduction in customs duty on project imports is likely to reduce the capital costs of players. The replacement of ad valorem portion of the excise duty (6.2%) on unbranded petrol and diesel by an equivalent specific duty of Rs 1.35 per litre will be revenue neutral. The overall impact is marginally positive.
Positive for:
ONGC
GAIL
Indian Oil
BPCL
HPCL
POWER
STATE OF THE INDUSTRY
Demand is expected to grow 6-7% over the medium term. Capacity additions of around 50 GW are expected in the 11th Plan (60% of government targets). Addressal of key issues such as fuel supply, land availability, environmental clearances and equipment supply are key to success.
BUDGET IMPACT
There were no major announcements impacting the sector. The basic customs duty on project imports has been reduced from 7.5 to 5%.
However, the exemption on additional duty of 4% has been withdrawn for non-mega power projects. Thus, the overall impact of duty changes on power sector project imports is neutral. The budgetary allocation for Accelerated Power Development and Reforms Programme (APDRP) has been maintained at Rs 800 crore in ’08-09. The government has proposed to set up a National Transmission and Distribution Fund to address higher losses at the transmission and distribution level and for the sector’s development as well. The overall impact on the sector is neutral.
Positive for:
NTPC
Power Grid
Reliance Energy
Tata Power
Suzlon
STEEL
STATE OF THE INDUSTRY
Margins remained stable during the first nine months of ’07-08 due to the parallel increase in the prices of raw materials and products. Domestic consumption rose 11%, driven by increased demand from the construction and infrastructure segments.
Rising global operating rates along with a substantial increase in the prices of coke and iron ore will push global steel prices northward. However, domestic prices could be influenced by government intervention.
BUDGET IMPACT
Reduction in the central value added tax (CENVAT) rate from 16% to 14% is likely to result in lower steel prices by around Rs 500 per tonne, notwithstanding the future trend in international prices. However, the impact of the same on the industry is neutral, as the excise duty on most of the steel sold is MODVAT-able, except where the output is directly used by the retail buyer. Thus, the cost to the industrial buyer remains unchanged.
Reduction in customs duty on melting scrap from 5% to nil is unlikely to have a significant impact on the industry, given the low share of imported melting scrap in the raw material mix of the industry.
Positive for:
Essar Steel
Ispat Industries
JSW Steel
SAIL
Tata Steel
TELECOM
STATE OF THE INDUSTRY
At end-January ’08, the wireless subscriber base stood at 242.4 million, making India the third-largest wireless market in the world after China and the US. The total telecom subscriber base stood at 281.6 million, indicating an overall teledensity of 24.63%. The wireless subscriber base is expected to touch 490 million by March-end ’12. The growth is expected to be driven by opportunities arising out of low penetration, rising incomes, ever falling handset costs and local tariffs. Currently, around seven players operate in each circle. The entry of new players is expected to intensify the already tight competition, resulting in declining tariffs and cost of subscription to subscribers.
BUDGET IMPACT
The excise duty cut on wireless data card from 16% to nil is marginally positive, as the effective duty would reduce from 21.7% to 4%. This will help raise the penetration of wireless internet services. With an average handset priced at Rs 2,500, the 1% National Calamity Contingent duty would have a negligible impact. Cellular services’ penetration will thus not be affected.
Positive for:
Bharthi Airtel
BSNL
Vodaphone - Essar
RCom
TEXTILES
STATE OF THE INDUSTRY
While the domestic market for garments and made-ups continues to show a robust growth, the rupee’s appreciation has affected exports. The industry continues to be characterized by a high level of fragmentation and a weak weaving and processing sector. Although the Technology Upgradation Fund (TUF) scheme has encouraged investments, there has been a skew towards spinning.
Investments in weaving and processing must improve for better competitiveness as a global supplier. Exporters should move towards high-value products and focus on EU, which offers considerable opportunities.
BUDGET IMPACT
The measures are largely positive. The budget has maintained the provision for integrated textile parks (SITP) scheme at Rs 450 crore and increased the allocation of funds under TUFs to Rs 1,090 crore. This will continue to provide incentives for investment. Removal of the 1% National Calamity Contingent (NCC) duty on polyester filament yarn is expected to be passed on. The initiative on cluster development is also positive.
Positive for:
Gokuldas Exports
Vardhaman Textiles
Welspun India
Indo Rama Synthetic
Arvind Mills
PHARMACEUTICALS
STATE OF THE INDUSTRY
The domestic formulations market and pharmaceutical exports (bulk drugs and formulation), estimated at $6.2 billion and $7 billion respectively in ’06-07 grew at a CAGR of 14% and 33% in ’04-05 and ’06-07, respectively.
Pharmaceutical exports are expected to be twice the size of the domestic formulations’ market by ’11-12, driven by rising contract manufacturing and research opportunities, and the rising share of Indian players in the regulated generics market. The domestic formulations market and pharmaceutical exports are expected to reach $11.4 billion and $22.2 billion, respectively, by ’11-12, growing at a CAGR of 13% and 26%, respectively.
BUDGET IMPACT
The reduction in excise duty on pharmaceutical products from 16% to 8% will only be marginally positive, as most large and mid-sized players are already in excise-free zones.
The 125% deduction on research and development (R&D) outsourcing expenditure will increase the competitiveness of domestic research players.
The reduction in customs duty on select life-saving bulk drugs from 10% to 5% will be marginally positive.
Positive for:
Dr Reddy's Lab
Glaxo
Nicholas Piramal
Pfizer
Ranbaxy
No bad news is good news for foreign investors’ money
The status quo is largely to remain for foreign funds who had last year pumped in over $17 billion into Indian equities. Although the finance minister proposed a hike in short term capital gains tax on stocks, most foreign institutional investors (FIIs) would be unaffected even if they sell stocks within a year of purchasing.
This is because most of the FIIs here operate through places like Mauritius, Singapore and countries covered under the double tax avoidance treaty, institutional dealers and foreign brokerage house officials said.
However, there could be some additional outflows from the Indian market in case the FIIs who are not from tax-friendly places decide to sell now to avoid higher short-term capital gains tax that will be applicable soon, a top broking house official pointed out.
‘‘Also it would be important to note when this change in tax rate would be effective. Will it be applicable from April 1, the start of the new financial year or after the budget proposals are passed by the parliament, which could probably be end of April or early may. ‘In case it is applicable from April 1, those FIIs have one month to sell.
FIIs also heaved a sigh of relief at the lack of changes in rules governing these investors. There was talk that FM might propose some tax on inflows from places like Mauritius and other so called ‘tax friendly’ places for FIIs.
Against the general apprehension of taxing FIIs routing through Mauritius route, the finance minister has maintained the status quo, which is a great relief to market sentiment. As per Sebi data, foreign funds have already taken nearly $2.7 billion out of the Indian equity market so far.
With the budget being largely a non-event for the FII segment, they did not react strongly and responded by offloading Indian equities worth Rs 334 crore according to provisional NSE data. The NSE data show gross buying of Rs 3,712 crore and gross sales Rs 4,047 crore.
Post-budget, some sectors look good from an investment perspective. This is by virtue of the exceptional budget allocations and provisions shown towards these sectors. The focus of the budget has been to boost consumption coupled with keeping inflation under control. The reduction in excise duty for several sectors/products will give a boost to consumption.
The sectors which will benefit include education, healthcare, hotels and pharma. However, long-term investment decisions need not be a hasty reaction to the budget recommendations. The investment approach should be proactive rather than being reactive. Investors can wait for markets to stabilize before investing.
Pharma
This will be a sector to watch out for, as it is already a beaten down sector and there is no reason for a further downfall in this sector. Also, the budget is favorable to this sector as the FM has cut the customs duty on life-saving drugs from 10 to five percent.
The budget has given in to demands of the pharma sector related to excise and customs duties, which could reduce the cost of drugs. Lower duties might spur an increased off-take of formulations, which is a positive for the pharma sector as a whole.
Excise duty on all drug formulations has been reduced to eight percent, from an earlier 16 percent. Companies that have no presence in excise-exempt zones and, thus, had to shell out excise duty, will now have some relief on this expense. Smaller players as well as local units of multinational companies may benefit from this. A cut in excise duty would reduce healthcare costs rather than the tax outgo of medical equipment/accessory companies.
Research organizations
Any sum paid to an approved scientific research association, approved university, college/institution (outsourced R&D work) by a company will benefit the latter by way of a weighted deduction to the extent of 125 percent of the outlay. This could lead to more linkages between public and private stakeholders in research.
Smaller R&D-focused companies, which are handicapped in making sizeable investments for building in house scientific facilities, would benefit more from this proposal.
Power
Another sector to watch out for is power. The Finance Minister announced a Transmission and Distribution Reform Fund and setting up of a coal regulator. General project import duty has been reduced from 7.5 to five percent. However, for power projects, other than mega projects, withdrawal of exemption from additional customs duty of four percent and additional customs duty introduced on goods for high voltage transmission and sub-transmission and distribution projects will increase the project cost.
The FM also announced a special countervailing duty on power imports, in addition to this he has allocated Rs 800 crores for accelerated power reforms programme. The FM mentioned that considerable improvement is needed in the power and coal sectors to sustain economic growth.
The power budget also clearly indicates the Government would be pushing for at least five more ultra mega power projects (UMPPs), which is a positive sign for the economy, going by the results of the three UMPPs already awarded. The creation of the T&D fund and the development measures for the secondary debt market, which will make long-term debt available for the power sector, would be huge during the 11th plan.
FMCG and Auto
These companies can be another option. The excise cut for packaging materials is also seen as a positive for certain food processing players in the FMCG sector. The budget has proposed a reduction in excise for packaging for food processors by half to eight percent.
The domestic auto industry got a major boost with the four percentage point reduction in excise duty on two wheelers, three wheelers, passenger cars, buses and chassis to 12 percent from the current 16 percent. The Government reduced excise duty on two wheelers to help the segment revive after witnessing months of declining sales due to high interest rates. The Government also extended a similar reduction in the excise duty of small cars to make India a hub for small cars.
In February 2006, the Government had reduced the duty on small cars from 24 to 16 percent. It was at that time that specifications for small cars had been laid out in terms of length and engine size. As per these guidelines, cars with a length less than 4,000 mm and a petrol engine of 1.2 litres or less and a diesel engine of 1.5 litres would qualify for the small car benefits.
The budget has offered an excise duty reduction on hybrid cars from 24 to 14 percent. This helps the domestic companies. The Government has also removed excise duty on electric cars (from eight percent to nil).
AUTOMOBILE
STATE OF THE INDUSTRY
The total market size (including exports) of automobiles is expected to touch Rs 129,000 crore in 2007-08 — a growth of 4.3% over ’06-07. Tighter credit disbursement and increased interest rates have resulted in lower two-wheeler and tractor sales. Commercial vehicles have seen a mixed trend with medium and heavy commercial vehicles (MHCVs) showing a decline but light commercial vehicles (LCVs) reporting a strong growth. Growth continues to be healthy for cars and utility vehicles (UVs). In ’08-09, automobile sales are expected to grow around 12% in value terms, mainly driven by favorable demographic trends, anticipated growth recovery in commercial vehicles and robust export growth.
BUDGET IMPACT
The cut in excise duty will benefit automobile manufacturers, as it is expected to be passed on to the consumer, thus resulting in increased demand.
Besides, increased exemption limit for income tax will lead to higher disposable income among the salaried class. This, in turn, will benefit two wheeler and car demand. The impact of loan waiver for small and marginal farmers will have a neutral effect on tractor sales.
Positive for:
Tata Motors
M & M
Maruti
Bajaj Auto
Hero Honda
BANKING & FINANCE
STATE OF THE INDUSTRY
The moderating credit growth (22-23%) is comforting for the Reserve Bank of India. There is a visible deceleration in demand from interest-rate sensitive sectors, including housing and other retail credit. The possibility of easier interest rates, thus, remains strong.
Interest rates have probably peaked and are likely to move southward after the busy season ending March 2008. This is evident from the recent rate cuts by many nationalized banks.
In balance, we expect nonfood credit to grow 23-25% in ’07-08, while aggregate deposits are seen rising 21-23%.
BUDGET IMPACT
The emphasis is on agricultural banking. With the debt waiver scheme’s implementation by the first quarter of ’08-09, banks would have to bear a one-time write-off charge. This may negatively affect their bottom-line. However, the manner of reimbursement will determine the extent to which this impact is mitigated. The cut in growth target (17%) for farm credit will help banks consolidate their origination systems for farm loans.
Positive for:
SBI
PNB
ICICI
HDFC Bank
LIC Housing
CEMENT
STATE OF THE INDUSTRY
Strong demand from end-user segments has contributed to a 9.8% year-on-year growth in cement demand during the April-November 2007 period. Over the next four years, demand for cement is expected to increase at a compound annual growth rate (CAGR) of 9%. However, large capacity additions are likely to be commissioned during the fourth quarter of ’08-09, which will result in softer prices.
BUDGET IMPACT
The excise duty on bulk cement has been revised from Rs 400 per tonne in ’07-08 to Rs 400 per tone or 14% ad valorem, whichever is higher.
This proposal is expected to increase the cost of bulk cement for consumers, like ready-mix concrete producers, infrastructure companies and large builders, who account for an estimated 10-15% of the total cement consumption. The impact on the industry will be neutral, as producers will be able to pass on this increase to customers.
Further, excise duty on clinker has been hiked from Rs 350 to Rs 450 per tonne.
This will also have a neutral impact, as players possess pricing flexibility to pass on the increase to end consumers.
Positive for:
ACC
Gujarath Ambuja
India Cement
Shree Cement
Ultratach
NON-FERROUS METALS
STATE OF THE INDUSTRY
While global prices of aluminum and zinc fell during April 2007-January 2008, lead and copper rose over the corresponding period of the previous year. In 2008, aluminium prices are expected to remain steady at current levels ($2,450-2,650 per tonne) due to a balanced global market. However, copper and zinc are likely to soften due to expected surplus. Domestic aluminium players’ profitability is likely to remain stable while it will be under pressure for copper smelters.
BUDGET IMPACT
The reduction in central value-added tax (Cenvat) rate on all goods, from 16% to 14% will result in a fall of around Rs 2,000 per tonne in aluminium and zinc prices, and around Rs 5,000 per tonne in copper, notwithstanding the future trend in international prices. However, it will not have a significant impact as these items are sold to industrial buyers. Excise duty on these items is MODVAT-able. Thus the buyer industry’s cost remains unchanged. Lowering of customs duty on aluminium scrap to nil is unlikely to have much impact given the low share of recycled aluminium.
Positive for:
Hindalco
Hindustan Copper
Hindustan Zinc
National Alliminium
Sterilite Industries
CONSUMER DURABLES
STATE OF THE INDUSTRY
Sales of major appliances are expected to grow 9-11% in value terms to Rs 20,900 crore in 2007-08.
Growing urban demand and the free distribution of color televisions by the Tamil Nadu government aided volume growth. But falling prices led to lower value growth. The consumer durables industry is expected to grow 12-14% in value terms in ’08-09. Although volume growth is expected to be lower for all product categories, continued shift towards higher value segments and the marginal increase in prices will support value growth.
BUDGET IMPACT
Alteration in income-tax slabs will result in an increase in disposable income for the salaried class, inducing higher demand. Reduction of basic excise duty from 16% to 14% is unlikely to benefit the household appliances industry, as a significant part of the production of the major manufacturers comes from excise free zones. The resultant reduction in countervailing duty will have a negligible impact due to unique product specifications and competitiveness of the domestic industry.
Positive for:
Samtel
LG
Samsung
Whirlpool
MIRC Electronics
INFORMATION TECHNOLOGY
STATE OF THE INDUSTRY
The Indian IT services industry is expected to see a healthy 27% annual growth to touch $22.8 billion in 2007-08. Similarly, the ITeS segment is also expected to grow 24% to touch $10 billion by March ’08.
IT players have resorted to measures such as diversifying their geographical mix and increasing utilization of employees to face the rising rupee and double-digit wage inflation.
The Indian hardware industry touched $7.9 billion in ’06-07 — an annual growth of 21.3%.
BUDGET IMPACT
The focus on building the talent pool, considering the IT sector is a major recipient of knowledge resources, is expected to benefit in the long run.
However, the hike in excise duty from 8% to 12% on packaged software and the addition of customized software in the service tax net is expected to negatively affect application development players in the domestic software industry.
Maintenance service providers will not be impacted.
With no comment on extension of the IT tax exemption (sections 10A and 10B), the overall impact is expected to be marginally negative.
Positive for:
Infosys
TCS
HCL Tech
Moser Baer
Zenith Computers
OIL & GAS
STATE OF THE INDUSTRY
An appreciating rupee and higher refining profits due to tighter global product markets have helped the industry enhance its operating profits in ’07-08. The government’s loss-sharing mechanism, in the form of upstream assistance and oil bonds, also contributed to it. In ’08-09, crude oil prices are likely to average higher in dollar terms, whereas refining margins are expected to be lower, due to easing product markets. The subsidy under-recovery on auto and cooking fuels would continue to be dependent on the government’s stand on aligning the domestic retail prices with international prices, as well as the extent of support.
BUDGET IMPACT
The imposition of the 5% custom duty on naphtha for the manufacture of polymers is expected to marginally improve refining profits by Rs 700 crore to Rs 800 crore. Further, the 2.5% reduction in customs duty on project imports is likely to reduce the capital costs of players. The replacement of ad valorem portion of the excise duty (6.2%) on unbranded petrol and diesel by an equivalent specific duty of Rs 1.35 per litre will be revenue neutral. The overall impact is marginally positive.
Positive for:
ONGC
GAIL
Indian Oil
BPCL
HPCL
POWER
STATE OF THE INDUSTRY
Demand is expected to grow 6-7% over the medium term. Capacity additions of around 50 GW are expected in the 11th Plan (60% of government targets). Addressal of key issues such as fuel supply, land availability, environmental clearances and equipment supply are key to success.
BUDGET IMPACT
There were no major announcements impacting the sector. The basic customs duty on project imports has been reduced from 7.5 to 5%.
However, the exemption on additional duty of 4% has been withdrawn for non-mega power projects. Thus, the overall impact of duty changes on power sector project imports is neutral. The budgetary allocation for Accelerated Power Development and Reforms Programme (APDRP) has been maintained at Rs 800 crore in ’08-09. The government has proposed to set up a National Transmission and Distribution Fund to address higher losses at the transmission and distribution level and for the sector’s development as well. The overall impact on the sector is neutral.
Positive for:
NTPC
Power Grid
Reliance Energy
Tata Power
Suzlon
STEEL
STATE OF THE INDUSTRY
Margins remained stable during the first nine months of ’07-08 due to the parallel increase in the prices of raw materials and products. Domestic consumption rose 11%, driven by increased demand from the construction and infrastructure segments.
Rising global operating rates along with a substantial increase in the prices of coke and iron ore will push global steel prices northward. However, domestic prices could be influenced by government intervention.
BUDGET IMPACT
Reduction in the central value added tax (CENVAT) rate from 16% to 14% is likely to result in lower steel prices by around Rs 500 per tonne, notwithstanding the future trend in international prices. However, the impact of the same on the industry is neutral, as the excise duty on most of the steel sold is MODVAT-able, except where the output is directly used by the retail buyer. Thus, the cost to the industrial buyer remains unchanged.
Reduction in customs duty on melting scrap from 5% to nil is unlikely to have a significant impact on the industry, given the low share of imported melting scrap in the raw material mix of the industry.
Positive for:
Essar Steel
Ispat Industries
JSW Steel
SAIL
Tata Steel
TELECOM
STATE OF THE INDUSTRY
At end-January ’08, the wireless subscriber base stood at 242.4 million, making India the third-largest wireless market in the world after China and the US. The total telecom subscriber base stood at 281.6 million, indicating an overall teledensity of 24.63%. The wireless subscriber base is expected to touch 490 million by March-end ’12. The growth is expected to be driven by opportunities arising out of low penetration, rising incomes, ever falling handset costs and local tariffs. Currently, around seven players operate in each circle. The entry of new players is expected to intensify the already tight competition, resulting in declining tariffs and cost of subscription to subscribers.
BUDGET IMPACT
The excise duty cut on wireless data card from 16% to nil is marginally positive, as the effective duty would reduce from 21.7% to 4%. This will help raise the penetration of wireless internet services. With an average handset priced at Rs 2,500, the 1% National Calamity Contingent duty would have a negligible impact. Cellular services’ penetration will thus not be affected.
Positive for:
Bharthi Airtel
BSNL
Vodaphone - Essar
RCom
TEXTILES
STATE OF THE INDUSTRY
While the domestic market for garments and made-ups continues to show a robust growth, the rupee’s appreciation has affected exports. The industry continues to be characterized by a high level of fragmentation and a weak weaving and processing sector. Although the Technology Upgradation Fund (TUF) scheme has encouraged investments, there has been a skew towards spinning.
Investments in weaving and processing must improve for better competitiveness as a global supplier. Exporters should move towards high-value products and focus on EU, which offers considerable opportunities.
BUDGET IMPACT
The measures are largely positive. The budget has maintained the provision for integrated textile parks (SITP) scheme at Rs 450 crore and increased the allocation of funds under TUFs to Rs 1,090 crore. This will continue to provide incentives for investment. Removal of the 1% National Calamity Contingent (NCC) duty on polyester filament yarn is expected to be passed on. The initiative on cluster development is also positive.
Positive for:
Gokuldas Exports
Vardhaman Textiles
Welspun India
Indo Rama Synthetic
Arvind Mills
PHARMACEUTICALS
STATE OF THE INDUSTRY
The domestic formulations market and pharmaceutical exports (bulk drugs and formulation), estimated at $6.2 billion and $7 billion respectively in ’06-07 grew at a CAGR of 14% and 33% in ’04-05 and ’06-07, respectively.
Pharmaceutical exports are expected to be twice the size of the domestic formulations’ market by ’11-12, driven by rising contract manufacturing and research opportunities, and the rising share of Indian players in the regulated generics market. The domestic formulations market and pharmaceutical exports are expected to reach $11.4 billion and $22.2 billion, respectively, by ’11-12, growing at a CAGR of 13% and 26%, respectively.
BUDGET IMPACT
The reduction in excise duty on pharmaceutical products from 16% to 8% will only be marginally positive, as most large and mid-sized players are already in excise-free zones.
The 125% deduction on research and development (R&D) outsourcing expenditure will increase the competitiveness of domestic research players.
The reduction in customs duty on select life-saving bulk drugs from 10% to 5% will be marginally positive.
Positive for:
Dr Reddy's Lab
Glaxo
Nicholas Piramal
Pfizer
Ranbaxy
No bad news is good news for foreign investors’ money
The status quo is largely to remain for foreign funds who had last year pumped in over $17 billion into Indian equities. Although the finance minister proposed a hike in short term capital gains tax on stocks, most foreign institutional investors (FIIs) would be unaffected even if they sell stocks within a year of purchasing.
This is because most of the FIIs here operate through places like Mauritius, Singapore and countries covered under the double tax avoidance treaty, institutional dealers and foreign brokerage house officials said.
However, there could be some additional outflows from the Indian market in case the FIIs who are not from tax-friendly places decide to sell now to avoid higher short-term capital gains tax that will be applicable soon, a top broking house official pointed out.
‘‘Also it would be important to note when this change in tax rate would be effective. Will it be applicable from April 1, the start of the new financial year or after the budget proposals are passed by the parliament, which could probably be end of April or early may. ‘In case it is applicable from April 1, those FIIs have one month to sell.
FIIs also heaved a sigh of relief at the lack of changes in rules governing these investors. There was talk that FM might propose some tax on inflows from places like Mauritius and other so called ‘tax friendly’ places for FIIs.
Against the general apprehension of taxing FIIs routing through Mauritius route, the finance minister has maintained the status quo, which is a great relief to market sentiment. As per Sebi data, foreign funds have already taken nearly $2.7 billion out of the Indian equity market so far.
With the budget being largely a non-event for the FII segment, they did not react strongly and responded by offloading Indian equities worth Rs 334 crore according to provisional NSE data. The NSE data show gross buying of Rs 3,712 crore and gross sales Rs 4,047 crore.
