Indian Budget 2011-12

Do you have a stake in the stock market, either directly through ownership of shares, or via mutual funds that invest for you? The Budget can impact bottomlines of industries and companies through changes in excise, customs, corporate taxes and other proposals. It's always a good idea, at Budget time, to take a fresh look at these changes and how they could impact your portfolio of stocks and mutual funds. TOI presents a detailed analysis of the impact of the Budget on various crucial sectors by CRISIL, India's leading ratings, research, risk and policy advisory company. Automobile State of the Industry The Rs 175,600-crore automobile industry has shown signs of recovery across segments, thanks to the stimulus package and a low consumer base. The industry is expected to grow 12-13% in 2010-11 in value terms, led by commercial vehicle and passenger car sales. Commercial vehicle volumes are estimated to rise 15-17% in 2010-11 due to sustained economic growth. Exports will grow 13-14%. Budget Impact Budget announcements are unlikely to have a major impact. The overall impact on passenger cars, two-wheelers and tractors, though, is positive while that on commercial vehicles will be marginally negative. The reduction in direct taxes for individuals is expected to lead to increased demand for passenger cars. Rise in disposable income will also offset the expected hike in the prices of cars. A typical compact car, for instance, is expected to be costlier by Rs 6,000-7,000, in line with the hike in excise duty. Commercial vehicle prices will rise as well. Operating expenses are expected to increase by around 2%, thus negatively affecting transporter profitability. Continued focus on rural development will marginally benefit two-wheeler and tractor sales. Banking & finance State of the Industry Credit growth in 2009-10 is estimated at 16% year-on-year against 10% as on November 9, 2009, owing to a strong industrial recovery and increase in retail credit, particularly housing and auto loans. In 2010-11, credit growth is likely to improve to around 19% with expectations of higher economic growth, revival in exports and continued thrust on infrastructure. Consequently, banks could hike deposit rates in to meet credit demand, leading to a 20% growth in deposits. Budget Impact The government has proposed aRs 16,500-crore Tier-I capital infusion in 2010-11, which is significantly higher than Rs 1,200 crore provided in 2009-10. This would preserve the government's holding in public sector banks as well as provide an opportunity to raise other resources for credit expansion while maintaining a healthy capital-to-risk weighted asset ratio. The extension of loan waiver to farmers would postpone recognition of NPAs in banks' agriculture portfolio in March 2010. The overall impact is neutral. Cement State of the Industry Demand rose 10.9% year-on-year during April-December 2009, owing to revival in housing and increased demand from infrastructure activities. This restricted fall in operating rates to 84% compared with 85% during the previous year's corresponding period. Average retail prices rose 3.9% year-on-year during April-December 2009. The trend, though, has been mixed across regions. While prices in the central and eastern regions rose 13% and 12%,

respectively, prices in the south fell 7% and remained almost flat in the north and the west. Average prices are expected to fall 4-5% in 2010-11 due to lower operating rates owing to significant capacity addition. Consequently, operating margins are expected to fall by 550-700 basis points. Budget Impact The Budget is expected to have an overall negative impact due to a 2% hike in excise duty. Companies are not expected to pass on this increase to consumers due to falling operating rates following significant capacity addition. Measures to spur housing and infrastructure investments, though, will have a marginally positive impact on demand. Infrastructure State of the Industry Between 2009-10 and 2013-14, investments to the tune of Rs 600,000 croreare expected towards the development of roads, ports and airports. Investment in roads will account for the lion's share of close to 84%. Private sector participation is expected to drive investments in the airports and ports sectors and road projects of NHDP. Total port traffic is expected to grow 5.6% in 2009-10 due to rise in thermal coal and iron ore traffic. In airports, domestic passenger traffic is expected to grow 16.8% in 2009-10 driven by sustained revival in the economy and low ticket prices. Budget Impact Higher allocation towards infrastructure sectors and continued takeout financing and refinancing plans of IIFCL will have a positive impact. Additional deduction available for investment in long-term infrastructure bonds for individuals will improve fund availability. Additionally, concession on import duty for monorail projects would reduce capital cost for players. Hike in minimum alternate tax rate to 18% of book profits, though, will negatively impact financials of operational BOT projects. Consumer Durables State of the Industry The first six months of 2009-10 saw moderate growth. The third quarter, though, saw demand for colour televisions and refrigerators pick up sharply by 19% and 45%, respectively, compared with a negative growth of 9% and 2% in the corresponding period of the previous year. Over the past few years, demand for high-value products has been on the rise. LCD televisions, for instance, now account for a quarter of television sales in value terms. The sales clocked a growth of 50% year-on-year in April-December 2009. Household appliance sales are expected to see robust growth in 2010-11. Prices are expected to rise moderately on the back of higher commodity prices. Budget Impact The change in income-tax slabs will lead to a significant reduction in tax liability for the salaried class. The resultant increase in disposable income is expected to boost demand. The hike in excise duty to 10% from 8% is unlikely to have a major impact, as a significant portion of the production takes place in excise-free zones. Oil & Gas State of the Industry Average prices for Brent crude oil stood at $68.4 a barrel in April-January 2010 compared with $92.6 in the corresponding period of the previous year. Reflecting the revival in global demand, gross

refining margins (GRMs) averaged $6.6 a barrel

a year-on-year growth of 21.8%.

Budget Impact Subsidy on petroleum products will be disbursed as cash to oil marketing companies (OMCs). We believe this would significantly reduce working capital stress on OMCs. Increase in customs duty across crude oil and petroleum products would translate in higher duty protection for refiners. The resultant increase in refinery gate prices for retail auto and cooking fuels, if absorbed by OMCs, would translate in a rise of almost Rs 11,000-14,000 crore in under-recoveries in 2010-11P. Further, additional central excise on petrol and diesel of Re 1 per litre each, if passed on to the end consumer, would have no implication on the profits of OMCs. Retail selling prices would riseRs 1.25 a litre. However, if retail prices are adjusted to reflect the hike in customs duties, the required hike in petrol and diesel retail prices would be to the tune of Rs 2.4-2.6 a litre. Power State of the Industry During the Eleventh Plan, the estimated capacity addition is seen at about 46.5 GW compared with the government's target of 78.7 GW. During this period, demand for electricity is expected to grow 7-8%. Private companies are putting in place generation capacities and have also been awarded transmission projects and distribution circles under the franchisee route. In 2009, prices for shortterm power (merchant power) were volatile. Prices were very high during the first half of the year, but have fallen since. Budget Impact The budgetary allocation for the sector, excluding Rajiv Gandhi GrameenVidyutikaranYojana (RGGVY), has been raised to Rs 5,130 crore from Rs 2,230 crore. The hike in minimum alternate tax to 18% would have a neutral impact, as it would be passed on to end-users. A clean energy cess of Rs 50 per tonne will be levied on domestic and imported coal. As fuel costs are passed on to consumers, power tariffs are expected to rise by 2-3 paise a kwh. There will be a marginal pressure, though, on companies which sell power in the open market. Steel State of the Industry The industry has experienced a faster-than-expected recovery from the global economic slowdown. Domestic demand, which had fallen 1.2% year-on-year in 2008-09, rose 6.5% in April-September 2009. Driven by strong growth in infrastructure and automobiles, domestic demand is expected to register a compounded annual growth rate of 10-11% from 2008-09 to 2010-11. Profitability of companies is expected to rebound in 2009-10 owing to improved prices and lower raw material contract prices. In 2010-11, profitability is likely to remain stable as any rise in raw material cost is expected to be passed on to consumers, owing to an improved demand-supply scenario. Budget Impact The Budget impact is expected to be neutral. The 2% hike in central excise duty is expected to be passed on to consumers, thereby pushing up prices by Rs 500-750 a tonne. The expected rise in the cost of manufacturing due to the levy of cess on coal (Rs 50 a tonne) is also likely to be passed on. The focus on increasing infrastructure investments in railway, urban infrastructure and housing is likely to lend support to steel demand. Telecom State of the Industry

Following the addition of a record 130 million mobile phone subscribers in 2008-09, the pace of addition accelerated further in 2009-10. In the first nine months, the industry added 133 million subscribers, led by a sharp decline in tariffs and the growing use of multiple SIM cards, taking the total subscriber base to 525 million. Growth in subscriber base is expected to continue in the near term and may touch approximately 700 million by 2010-11. Budget Impact The increase in minimum alternate tax to 18% from 15% will negatively impact the profitability of telecom service providers. Exemption from basic, countervailing duty and special additional duty on components and accessories of mobile handsets has been extended to include battery chargers and head phones. The government has also extended the exemption of special additional duty to mob ile phones not imported in the pre-packaged form. These measures will cause mobile handset prices to fall further. The impact, though, is expected to be marginal as handsets and accessories are already affordable. Textile State of the Industry Although the domestic market has shown some recovery, 2009-10 continues to be a challenging year due to the ongoing slump in exports. Domestic demand is expected to grow 6-7% annually in 2009-10 and 2010-11. While there are incipient signs of recovery in the US and EU markets, revival in exports would be slow. Across different segments, margins continue to remain under pressure owing to overcapacity and competition. Budget Impact The extension of 2% interest subvention on pre- and post-shipment export credit till March 31, 2011, will help small exporters reduce interest costs. The hike in excise duty on man-made fibres and yarns will increase polyester prices by Rs 1.50 to Rs 2 a kg, but the manufacturers will be able to pass the hike, as polyester continues to be cheaper than cotton. Also, the government announced a one-time grant of Rs 200 crore to Tamil Nadu for the installation of a zero-discharge system to reduce environmental pollution at the Tirupur cluster. This will help knitwear exporters in the long term.