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Union Budget 2007-08

Post Budget Impact Analysis

February 28, 2007

The union budget 2007-08 focuses on agriculture which had an estimated average growth rate during the tenth five year plan of 2.3%, much below the desired level of 4% pa. It emphasizes agriculture to be at the top of agenda and has given initiatives for agriculture growth.

Key Positives

Fiscal deficit under control and on course to meet FRBM targets.

Infrastructure spending increased across the board.

Reduction in peak customs duty from 12.5% to 10%

Increase in spending on education and healthcare.

Extended TUF scheme for textile companies.

Key Negatives

Efforts to manage cement prices.

Removal of 80IA benefits for construction companies.

Partial removal of tax exemptions for several sectors-IT, pharmaceuticals.

Dividend distribution tax increased from 12.5% to 15%

Market Outlook

The market was surprised negatively with the budget changes which hit immediate profitability of companies. However, we feel the long term direction for growth has been maintained. The key sectors which have taken a beating are construction, IT and cement sectors. The global factors have also accentuated the fall.

Going ahead, we feel the market is attractively priced at current levels and we do not see major downside to the markets. Sectors like construction, cement, power equipment and IT offer growth at attractive valuations.

OUR TOP PICKS

Large Caps

Mid Caps

Bank of India

Bharat Bijlee

Bharti Airtel

Gayatri Projects

Nagarjuna Construction

Dishman Pharma

Satyam Computers

Kesoram Industries

Shree Cements

D S Kulkarni

Sun Pharma

Opto Circuits

Key Highlights

Agriculture

Union Budget 2007-08

Post Budget Impact Analysis

Farm credit likely to reach Rs1.9trn as against targeted Rs1.8trn by 2007.

Irrigation outlay for 2007-08 increased to Rs110bn, an increase of 54% yoy.

Fertilizer subsidies for 2007 likely to be Rs225bn against budgeted Rs173bn.

NABARD provided with rural bonds up to Rs50bn for refinance.

Budget Estimates

Revenue deficit for 2006-07 expected at 2.0% (against BE of 2.1%) and fiscal deficit at 3.7% (against BE of

3.8%).

Plan expenditure for 2007-08 seen at Rs2.05trn or 32% of total expenditure (net of the SBI share acquisition)

Non-Plan expenditure in 2007-08 (net of SBI share acquisition) is estimated at Rs4.4trn, an increase of 6.5% over

2006-07.

Defence expenditure increased to Rs960bn which includes Rs419bn for capital expenditure.

Budget Estimates for Total expenditure for 2007-08 is estimated at Rs6.8trn (including Rs400bn for SBI acquisition)

Total revenue receipts are projected at Rs4.9trn and revenue expenditure to be Rs5.6trn

Revenue deficit is estimated at 1.5% of GDP while fiscal deficit is estimated at 3.3%

Tax Proposals

Indirect Taxes

Peak custom rates for non-agricultural products reduced from 12.5% to 10.0%.

Ad-valorem component of excise duty on petrol and diesel reduced from 8% to 6%.

Excise duty on cement reduced to Rs350/ton from Rs400/ton on cement which is sold in retail at not more than Rs190/bag. On higher MRP, excise duty would be Rs600/ton.

Service tax net extended to:

Rent on immovable commercial property. Development and supply of content for use in telecom and advertising purposes Services outsourced for mining of mineral, oil or gas. Asset management services provided by individuals. Design services

Direct Taxes

Union Budget 2007-08

Post Budget Impact Analysis

Threshold limit for all tax payers increased by Rs10,000 to Rs110,000, while for women it would be Rs145,000 and senior citizens Rs195,000.

Surcharge on income tax removed for all firms with taxable income of Rs10mn or less.

Dividend distribution tax raised to 15% from 12.5%: negative for all dividend paying companies

Dividends distributed by money market mutual funds and liquid mutual funds will now be paying dividend distribution tax at 25%.

Additional cess of 1% on all taxes to fund secondary education and higher education.

Sectoral Impact

Union Budget 2007-08

Post Budget Impact Analysis

Banking and Finance Cement FMCG Healthcare IT/Software Infrastructure & Construction Oil and Gas, Petrochemicals Pipes Power Real Estate Steel Telecom

Union Budget 2007-08

Post Budget Impact Analysis

Banking and Finance

Union Budget 2007-08 Post Budget Impact Analysis Banking and Finance No mention of lowering the 5

No mention of lowering the 5 year maturity ceiling on tax free Bank deposits

Impact– Neutral

The budget has no mention on lowering maturity from the existing 5 years ceiling on tax free bank deposits. The said

lowering in maturity would have made Bank deposits more attractive leading to higher deposit mobilization and thereby improving liquidity situation.

Scheduled Co-Operative Banks allowed deduction on provision for bad debts

Impact- Positive (In line with what Scheduled commercial banks avail)

Co-Operative Banks now would be able to avail deduction under Sec 36 (1) (viia) for provision made for bad and doubtful debts up to 7.5% of their total income and 10% of the advances made by rural branches of these Banks. The

government has proposed to amend this Act to include Co-Operative Banks under this Act. This has corrected the situation for Co-Operative Banks who are liable to pay tax on profits after the withdrawal of deduction under Sec 80P.

Service tax levy on asset management and portfolio management companies promoted other than a Bank or Financial Institution

Impact- Negative

Asset management and Portfolio management business has been a thriving business for many NBFCs engaged in providing capital market services. Service tax levy on AMC fees provided by these companies is not likely to impact their business as it would be passed on to the customers, though the incidence of service tax on profits shared would

have to be borne by the AMC as the customer would not be willing to pay for.

Only limited sector specific venture capital funds/ companies to avail 100% tax exemption

Impact- Negative

Currently under the existing provisions of Clause (23FB) of Sec 10, any venture capital company is exempt from Tax. The union budget has amended this section to include only those Venture capital funds/ Companies which earn profits from investment in selected businesses like nanotechnology, information technology relating to hardware and software development, seed research and development, bio-technology, research and development of new chemical entities in the pharmaceutical sector, production of bio-fuels, or building and operating composite hotel-cum- convention centre with seating capacity of more than 3000, or engaged in the dairy industry or poultry industry. The amendment will take effect from 1st April, 2008 and will apply in relation to the assessment year 2008-09 and subsequent years.

Company level Impact- Banks like ICICI Bank, IDBI Bank has Venture capital financing subsidiaries. However, we estimate very little impact on parent company valuations as these contribute a very small proportion to consolidated values. (ICICI Venture Fund contributes mere Rs3 to the consolidated Value. IDBI Bank- Not rated)

Union Budget 2007-08

Post Budget Impact Analysis

 

EPS FY08E

Impact change

Target Price

Revision

Rating

State Bank of India

 
  • 97.6 NIL

1250

NIL

HOLD

   
  • 65.2 NIL

 

NIL

  • 545 BUY

Punjab National Bank Bank of Baroda

 
  • 37.9 NIL

 

NIL

  • 326 BUY

Canara Bank

 
  • 36.2 NIL

 

NIL

  • 240 HOLD

Bank of India

 
  • 22.2 NIL

 

NIL

  • 235 BUY

Union Bank of India

 
  • 19.2 NIL

 

NIL

  • 122 BUY

Andhra Bank

 
  • 13.0 NIL

 

NIL

  • 100 BUY

Corporation Bank

 
  • 42.5 NIL

 

NIL

  • 356 HOLD

ICICI Bank

 
  • 46.3 NIL

1200

NIL

BUY

HDFC Bank

 
  • 47.9 NIL

 

NIL

  • 921 SELL

UTI Bank

 
  • 29.1 NIL

 

NIL

  • 575 HOLD

Cement:

Union Budget 2007-08

Post Budget Impact Analysis

Cement: Union Budget 2007-08 Post Budget Impact Analysis Excise duty for cement has been increa sed

Excise duty for cement has been increased from Rs400 to Rs600 per ton for a bag of 50kg where the retail price is above Rs190 and for price below Rs190 excise duty has been reduced from Rs400 to Rs350.

This is against the expectation of the industry to reduce the excise duty across the table. Average cement price is below Rs190 in Andhra Pradesh, Orissa, Rajasthan and Madhya Pradesh and marginally above Rs190 in Gujarat and Tamil Nadu. As the price in other states is above Rs190 we expect higher excise duty would be applicable for sales in these states.

We expect the higher excise duty to be passed on, as the demand is high but the upside is limited for improvement in realization.

There are some positives like increase in allocation for Bharat Nirman by 31.6% to Rs246bn and increase in provision for National Highway Development Programme by 7.3% to Rs107bn

We have reduced our EPS estimates as we expect appreciation in cement prices to be muted going forward. We have reduced our 5% price improvement for FY08 to 3% which reflects the current realization for cement companies. We have also reduced our target PE estimates for all the companies to reflect the realization cap.

We find the recent fall (10-24% in one month) in cement company stocks has made these stocks attractive and with demand supply balance still favouring the producers for another 12-18 months the fall is overdone. We are upgrading our rating on India Cements from HOLD to BUY with a lower target. We are retaining our BUY rating on Kesoram Industries, Madras Cement and Shree Cement and retaining HOLD on ACC, Chettinad Cement Corporation and Ultratech Cement.

The key concerns of rising inflation and interest rates however remain.

Company

 

Old EPS

 

Revised EPS

   

Change (%)

 

FY08P

FY09P

FY08P

 

FY09P

 

FY08P

 

FY09P

ACC*

76.6

 

71.8

 

73.5

 

68.6

 

(4.0)

 

(4.5)

Chettinad Cement Corp

51.6

 

49.5

 

48.3

 

45.9

 

(6.4)

 

(7.3)

India Cements

25.5

 

22.6

 

23.8

 

20.8

 

(6.7)

 

(8.0)

Kesoram Industries

66.7

 

71.4

 

64.0

 

67.2

 

(4.0)

 

(5.9)

Madras Cement

340.5

355.9

321.1

 

330.6

 

(5.7)

 

(7.1)

Shree Cement

143.8

160.1

136.5

 

150.3

 

(5.1)

 

(6.1)

Ultratech Cement

86.6

 

90.1

 

81.2

 

78.3

 

(6.2)

 

(13.1)

* For ACC CY07 and CY08

 

Target

   

Change

 

PE

CMP

 

Company

Old

 

Revised

 

(%)

 

Old

Revised

(Rs)

Rating

ACC*

1077

 

960

 

(10.8)

 

15

 
  • 14.0 HOLD

900

 
   

482

  • 584 (17.5)

 

11.8

 
  • 10.5 HOLD

438

 

Chettinad Cement Corp India Cements

 

218

  • 271 (19.4)

   
  • 12 179

    • 10.5 BUY

 

Kesoram Industries

 

538

  • 668 (19.5)

 

8.0

  • 10 BUY

400

 

Madras Cement

 

3637

  • 4270 (14.8)

 
  • 12 11.0

 
  • 2875 BUY

Shree Cement

 

1503

  • 1726 (12.9)

 
  • 12 10.0

 
  • 1147 BUY

Ultratech Cement

 

1018

  • 1212 (16.0)

 

13.0

  • 14 HOLD

891

 

FMCG Industry

Key announcements

Union Budget 2007-08

Post Budget Impact Analysis

FMCG Industry Key announcements Union Budget 2007-08 Post Budget Impact Analysis Packed biscuits of maximum retail

Packed biscuits of maximum retail sale price (MRP) not exceeding Rs50 per kg fully exempted from excise duty.

Excise duty on food mixes (including instant food mixes) fully exempt from excise duty.

Customs duty on food processing machinery has been reduced from 7.5% to 5%.

Crude as well as refined edible oils exempt from the additional CV duty of 4%.

Customs duty on crude sunflower oil has been reduced from 65% to 50% and on refined sunflower oil from 75% to 60%.

A Special Purpose Tea Fund launched for re-plantation and rejuvenation of tea. Similar financial mechanisms to be announced for coffee.

Excise duty on parts of footwear reduced from 16% to 8%.

Impact

Positive for Marico, Bata, organized biscuit manufacturers like Britannia, ITC and food-processing companies like ITC, Nestle, HLL, Dabur, MTR Foods.

Cigarette industry

Key announcements

Union Budget 2007-08

Post Budget Impact Analysis

Specific excise duty on cigarettes increased by 5%. No change in AED.

 

Excise duty per thousand sticks on man-made bidis increased from Rs7 to Rs11 while, duty on machine made bidis increased from Rs17 to Rs24.

To reduce the understatement of production of bidis by manufacturers in order to avail duty exemption (2mn bidis per year currently fully exempt from excise), there will be an increased audit.

Pan masala containing tobacco will continue to bear an excise duty of 66%. However, in the case of pan masala not containing tobacco, the duty will be reduced from 66% to 45%.

Exemption from excise duty on pan masala containing tobacco and other tobacco products manufactured by specified units in the North-East region has been withdrawn.

Impact

 

Given the sustained strong volume growth in cigarettes, ITC can easily pass on the increased excise duty burden through price hikes. Also, the increase in excise duty on bidis augurs well for ITC.

Duty structure

 

Sr. No.

Description

 

Excise duty (Rs per ‘000 sticks)

   
 

Cigarettes

 

2006

 

2007

 

Non-filter Cigarettes

   
 

1

Not exceeding 60 mm in length

   

160

 

168

 

2

     

520

 

546

 

Exceeding 60 mm but not exceeding 70mm Filter cigarettes

     
 

3

Not exceeding 70 mm in length

   

780

 

819

 

4

Exceeding 70 mm but not exceeding 75mm

   

1,260

 

1,323

 

5

Exceeding 75 mm but not exceeding 85mm

   

1,675

 

1,759

 

6

Other cigarettes

 

2,060

 

2,163

 

7

Cigarettes of tobacco substitutes

   

1,150

 

1,208

We maintain our BUY recommendation on ITC and Marico and HOLD on Nestle.

 

Company

 

EPS FY08E

Target Price

Target PE

CMP

Upside %

 

Rating

 

ITC

8.6

202

 

20.0

172

 
  • 17.5 BUY

Marico

 

2.8

85

 

21.8

61

 
  • 38.9 BUY

Nestle - F12/07E

44.9

1,123

 

21.6

970

 
  • 15.8 HOLD

Union Budget 2007-08

Post Budget Impact Analysis

Healthcare:

 
Healthcare:

The government has proposed taxation of EOU units under MAT. This will impact companies who are currently under MAT (Dishman Pharma, Sun Pharma, Biocon and Shasun Chemicals). Cadila Healthcare would be impacted as intermediate supply for Pantoprazole to Altana is from an EOU. Cipla will also be affected negatively with significant portion of production from EOU. Companies not under MAT – full tax paying (Ranbaxy, Dr. Reddy’s, Jubilant Organosys and Nicholas Piramal) are unlikely to witness significant change in their effective tax rates.

     

% change

     

Company

Old EPS

New EPS

in EPS

Revised Target Price

Recommendation

Cadila Healthcare

 
  • 22.1 (1)

21.9

 

394

Maintain BUY

Dishman Pharma

 
  • 16.8 (5.4)

15.9

 

270

Maintain BUY

Divi’s Labs

128.2

124.7

(2.7)

2,744

HOLD

Jubilant Organosys

16

16

-

275

HOLD

Nicholas Piramal

 
  • 14.8 14.8

-

266

Upgrade to BUY

Indoco Remedies

 
  • 51.5 51.5

-

391

Maintain BUY

Ranbaxy Labs

 
  • 22.2 22.2

-

444

Upgrade to BUY

Sun Pharma

 
  • 45.2 (2.4)

44.1

 

1,105

Maintain BUY

Dr. Reddy’s Labs

 
  • 36.6 36.6

-

893

Maintain BUY

* FY08 estimates

150% weighted average tax deduction for R&D expenses extended for 5 years is a positive for research driven pharma companies-Ranbaxy, DRRL, Sun Pharma, Cadila Healthcare, Biocon, Glenmark.

The budget has proposed to increase healthcare allocation by 21.9% to Rs152.9bn, a positive for Apollo Group and Max India.

HIV eradication to gain momentum a positive for MNC companies, Cipla, Wockhardt and Ranbaxy.

 

Medical insurance deduction u/s 80D increased to Rs15,000, a positive for Apollo Group, Max India as more population would be covered by medical insurance.

The reduction of peak customs duty from 12.5% to 7.5% is likely to impact API manufacturing companies positively.

Union Budget 2007-08

Post Budget Impact Analysis

IT/Software:

Policy Initiatives

Union Budget 2007-08 Post Budget Impact Analysis IT/Software: Policy Initiatives Non-extension of STP benefits beyond 2009

Non-extension of STP benefits beyond 2009 - Negative especially for all smaller & medium sized IT companies which will be forced to find relief under the SEZ scheme now.

MAT @ 11.2% on adjusted book profits extended to income u/s 10A & 10B – Negative for all the players as effective tax rate would increase (with MAT applicable on STP units) but impact could be severe for medium & smaller players having all or majority units under STP scheme.

Effective Tax Rate (ETR) to go up for almost all companies as STP units u/s 10A & 10B would be taxed at 11.2% now for FY08 & FY09 (till the sunset clause gets over in 2009). Beyond FY09 these units will come out of the tax holiday and would pay normal tax (full tax) on profits. MAT paid over the next two years would be allowed to be set-off post FY09 thereby lowering ETRs of those years to that extent.

Inclusion of ESOPs under the FBT net (rate & method of calculation not disclosed) - Negative for all players.

Higher education allocation by 34.2% to Rs32,352cr - Positive for IT education companies like Educomp Solutions (Not Rated), NIIT (Not Rated), Aptech (Not Rated), etc.

Almost doubling of e-Governance outlays both at the Centre and State level – Positive for companies like Vakrangee Software (Not Rated).

Impact – Negative

“Double Whammy!!!” – EPS estimates of FY08 and FY09 to be worst hit by combination of taxability on STP units and FBT on ESOPs.

Revised EPS Forecast & Rating

Company

EPS FY08E

Target Price

Target P/E

CMP

Upside %

Rating

 

Earlier

Revised

         

Infosys

 

81.9

  • 87.1 2,457

 
  • 30 18.2

2,078

 

BUY

TCS

 
  • 54.2 ~50.9*

1,477

 
  • 29 24.4

1,188

 

BUY

Wipro

 
  • 25.4 ~23.9*

692

 
  • 29 23.4

  • 561 BUY

 

Satyam

 
  • 25.8 ~24.3*

558

 
  • 23 35.1

  • 413 BUY

 

HCL Tech

 
  • 41.3 ~38.8*

815

 
  • 21 36.8

  • 596 BUY

 

Infotech

 

21.8

  • 23.2 392

 
  • 18 10.5

  • 355 SELL

 

Allsec

 

23.1

  • 25.9 370

 
  • 16 18.8

  • 311 HOLD

 

* Still to be finalized

Outlook

We believe the post Budget battering of 5-10% for most of the sector stocks has opened up attractive buying

opportunities into the large cap IT space. Though revising our 12-month target price downwards in line with reduction in EPS forecast, we remain buyers for the Top 5 companies considering reasonable to significant upside potential from current prices. Amongst other stocks, we downgrade Infotech to SELL in the light of limited medium term price appreciation potential while we maintain HOLD on Allsec.

Union Budget 2007-08

Post Budget Impact Analysis

Infrastructure & Construction

Near term:

Union Budget 2007-08 Post Budget Impact Analysis Infrastructure & Construction Near term: Long term: 80IA benefits

Long term:

Union Budget 2007-08 Post Budget Impact Analysis Infrastructure & Construction Near term: Long term: 80IA benefits

80IA benefits withdrawn for pure contractors: The biggest negative for the ones claiming it

Our interpretation of the fine print suggests that section 80IA benefits will no longer apply to cash contracts. It is also

not applicable to a contractor, who has been sub-contracted work for building a BOT/infrastructure asset belonging to another company or SPV. The amendment is with retrospective effect from April 2000.

Estimated one time tax outgo on withdrawal of 80IA

400 HCC NCC Patel IVRCL Gammon (Rs mn) 100 200 300 583 500 600 700 -
400
HCC
NCC
Patel
IVRCL
Gammon
(Rs mn)
100
200
300
583
500
600
700
-
335
419
485
493

HCC’s reserves include claims recoverable from IT department. to the tune of Rs420mn – impact may be a non cash one

Source: India Infoline Research

Negative for: Gammon, HCC, NCC, IVRCL, Patel, Madhucon

No impact for: L&T, JPA, Simplex, Valecha, Gayatri (These have not availed of section 80IA)

Infrastructure thrust maintained

The thrust on infrastructure development was continued. The Finance Minister stated that the Golden Quadrilateral is nearly complete, the targeted completion for NSEW is 2009 and NHDP phase-III, V and VI are in advanced stages.

key positives

National Highway allocation increased to Rs126bn from Rs99.55bn

Allocated Rs40bn for rural roads

Additional 2.4mn hectares of irrigated area to be created by FY08

Outlay for accelerated irrigation benefit programme at Rs110bn

Scheme to use forex reserves for infrastructure development

Mutual Funds allowed to launch dedicated infrastructure funds

Union Budget 2007-08

Post Budget Impact Analysis

Revised EPS estimates and targets

Company

 

Old EPS (Rs)

 

Revised EPS (Rs)

 

Change (%)

   

FY07E

 

FY08E

 

FY07E

FY08E

FY07E

FY08E

Gammon

 

12.3

 

18.0

 

9.7

14.6

(21.2)

(19.1)

HCC

 

3.6

 

4.5

 

3.3

 

3.7

(7.3)

(17.4)

NCC

 

8.1

 

11.6

 

6.9

10.2

(14.1)

(12.3)

IVRCL

 

10.5

 

15.1

 

8.8

13.8

(16.2)

(8.4)

Patel

 

18.6

 

25.0

 

15.1

20.5

(18.5)

(18.1)

Simplex

 

11.7

 

15.2

 

11.7

15.2

 

-

-

Gayatri

 

29.5

 

51.5

 

24.5

41.7

(17.1)

(18.9)

 
 

CMP

P/E (x)*

Revised target

 

Upside

 

Company

(Rs)

FY08E

price (Rs)

(%)

 

Rating

Gammon

318

16.2

 

365.7

 

15.0

 

BUY

HCC

103

19.9

 

107.2

 

4.6

 

SELL

NCC

156

11.2

 

246.6

 

58.2

 

BUY

IVRCL

291

17.1

 

331.1

 

13.9

 

HOLD

Patel

348

12.0

 

489.1

 

40.7

 

BUY

Simplex

338

22.2

 

301.9

 

(10.7)

 

SELL

Gayatri

282

4.8

 

517.0

 

83.3

 

BUY

* P/E adjusted for value of investments and BOTs EPS excluding extraordinary items Source: India Infoline Research

Our view and recommendation

We spoke to 6-7 construction managements post the budget. While the verdict on section 80IA is seen as a negative, all reiterated their bullish outlook for the industry for the long term. Rise in cement prices too, at worst would affect margins by 20bps as many have escalations in place. EPS impact on account of withdrawal of section 80IA tax benefits for some construction majors is in the region of 7-22% during FY07E and FY08E. While the sentiment seems affected in the near term, we believe that most of the bad news is factored in the price as many construction counters declined by 10-20% on budget day-more than the reduction in profitability of the companies due to the tax issue. Taxation benefits for the construction industry was a hanging sword and the worst seems over. The amount of one time outgo of tax for previous years seems manageable given the current sizes of these companies. With enhanced budget allocation, we strongly recommend NCC, Patel and Gammon among the bigger players and Gayatri Projects among the mid caps.

Union Budget 2007-08

Post Budget Impact Analysis

Oil and Gas, Petrochemicals

Reduction in excise duty on Petrol and Diesel

Union Budget 2007-08 Post Budget Impact Analysis Oil and Gas, Petrochemicals Reduction in excise duty on

The finance minister with an objective to partly offset the reduction in petrol and diesel prices earlier in the month decreased the ad valorem excise duty on the two fuels from 8% earlier to 6%. The gains will however reduce with additional 1% education cess and effective benefit would be 25paise per litre for petrol and 37paise per litre for

diesel. We anticipate a total benefit of around Rs25bn for the entire industry.

This would be EPS accretive for Oil Marketing Companies IOC, BPCL and HPCL. However, we continue to have an “Avoid” rating to the companies as uncertainty for future continues to persist. The petroleum ministry, post the budget announcement, has also indicated that as against earlier estimates of Rs283bn bond issue, only Rs245.6bn worth of bonds will be issued to these companies. So, on a net basis, the under recovery estimates could be higher by Rs13.2bn considering excise benefits, lowering of bonds issue and other things being equal.

A 1% reduction in the central sales tax to 3% would mean reduced under-recovery on LPG and SKO of Rs2.50 per cylinder and Rs0.08 per litre, respectively. Current under recoveries on the two products are Rs150/cylinder for LPG and Rs8/litre for Kerosene. This would translate into a miniscule reduction in under recoveries of OMCs.

Impact on Under recoveries

 

Volumes FY07 E

Savings from Excise

 

Net

(‘000 tons)

Cuts(Rs mn)

FY07E Bonds Issue (Rs mn)

Impact

 

Petrol

Diesel

Petrol

Diesel

Earlier

Revised

Impact

(Rs mn)

HPCL

2,536

11,598

 
  • 856 (8,976)

5,107

67,920

58,944

 

(3,013)

BPCL

2,591

11,850

 
  • 875 (9,724)

5,218

73,580

63,856

 

(3,632)

IOCL

5,183

23,700

1,749

10,435

141,500

122,800

(18,700)

(6,516)

Total

10,310

47,149

3,480

20,760

283,000

245,600

(37,400)

(13,161)

Infrastructure status to cross-country gas pipeline projects has been provided for distribution of gas, which means a 10 year tax holiday for companies such as GAIL and Reliance Industries Ltd. Apart from income tax holiday, project costs would also be reduced. There is opaqueness as to whether the status is extended to distribution companies such as Gujarat Gas Company Ltd, Indraprastha Gas Ltd and Gujarat State Petronet Ltd. If extended, these companies would benefit in a similar fashion.

Petrochemicals

Custom duties on plastics reduced to 7.5%

Custom duties on PSF reduced from 10% to 7.5%

Custom duty of polyester filament yarn reduced from 10% to 7.5%

Customs duty on DMT, PTA and MEG also reduced from 10% to 7.5%.

Impact: Marginally negative for Reliance Industries

Union Budget 2007-08

Post Budget Impact Analysis

Pipes and pumps segment

Union Budget 2007-08 Post Budget Impact Analysis Pipes and pumps segment 35 more projects are to

35 more projects are to be completed during FY07 leading to an additional irrigation potential of 900,000 hectares to be created. The government increased the outlay to Rs110bn from the earlier Rs71.2bn, including grant component of Rs35.8bn to state government up from Rs23.5bn.

In the budget the government has assigned infrastructure status to cross country pipeline projects, which could be a major booster for pipe manufacturing companies as they could witness improvement in order flows.

We expect PSL (NOT RATED) to be a major beneficiary as it will not only benefit from the above but also from exemption on excise duty to pipes with outer diameter exceeding 20cm, as they form an integral part of the water supply project.

The other companies in the sector viz. Man Industries (NOT RATED), Jindal Saw (NOT RATED), Welspun Gujarat Stahl Rohren (NOT RATED) and Kirloskar Brothers Ltd (NOT RATED) should also benefit.

Power:

Power:

The government aims to award two more Ultra Mega Power Projects by July 2007, in addition to the two, Sasan and Mundra, which were awarded recently.

Allocation of coal blocks to government companies and approved end users will enable faster execution of new power generation plants.

With infrastructure status being awarded to natural gas cross-country pipelines, gas-based power plants lying idle could be revived over a period of time.

Other initiatives include facilitating setting up of merchant power plants by private developers and also private participation in transmission projects.

APDRP is restructured to cover all districts and town (with population above 50,000) coupled with increase in budgetary support to Rs8bn from Rs6.5bn.

The government has also increased the allocation under Rajiv Gandhi Grameen Vidyutikaran Yojana to Rs39.8bn from Rs30bn.

This will add to the robustness of the sector and players in transmission and distribution and transformers will stand to benefit.

There is no revision in EPS estimates for our coverage companies. We reiterate BUY on Indo Tech Transformers, EMCO, RPG Transmission and Apar Industries. We revise our recommendation for Genus Overseas to HOLD from BUY. We upgrade our recommendation for Bharat Bijlee and Voltamp to BUY from HOLD.

Union Budget 2007-08

Post Budget Impact Analysis

Players in the capital goods space viz. BHEL, ABB and Alstom Projects India Ltd could also benefit with thrust being laid on Ultra Mega Power Projects

       

Target

 

Price

Upside

 

EPS (Rs)

   

P/E (x)

 

Reco

(Rs)

(%)

 

FY06

FY07P

FY08P

FY09P

FY06

FY07P

FY08P

FY09P

     

Indo Tech

10.4

19.6

 
  • 24.1 26.5

37.5

   
  • 14.1 BUY

11.4

7.4

 

375

36.1

EMCO

25

41.1

 
  • 62.8 32.2

88.9

   
  • 19.6 BUY

12.8

9

 

1,067

32.6

Bharat Bijlee

59.6

75.1

 
  • 94.7 17.5

124.4

   
  • 13.9 BUY

11.1

8.3

 

1,661

35.8

Voltamp

22.7

36.4

 
  • 51.5 25.6

68

 

16

11.3

8.6

BUY

816

40.3

RPG

Transmission

6.4

13.1

 
  • 17.8 29.3

21.9

   
  • 14.4 BUY

10.6

8.6

 

231

23.2

Genus

                     

Overseas

  • 14.7 -

19.6

  • 28.9 18.1

  • 13.5 9.1

  • - HOLD

318

20.3

Apar Industries

 
  • 20.1 -

14.9

 
  • 19.7 7.4

7.3

9.8

   
  • - BUY

197

34.8

Source: India Infoline Research

Real Estate

Union Budget 2007-08

Post Budget Impact Analysis

Real Estate Union Budget 2007-08 Post Budget Impact Analysis Impact of change in Sec 80 IA

Impact of change in Sec 80 IA only on construction companies and not on real estate developers

Impact- Neutral

The government has amended the long debated 100% tax deduction under Sec80 IA for developers of infrastructure

facility, Industrial park and Special Economic Zones. However, most construction companies to whom the construction work has been sub contracted were claiming the deduction as well. The government has removed ambiguity in the Act by excluding construction companies executing the sub contracted works on such projects.

No Change in Sec 80 (IB) 10 phase out

Impact- Neutral

Only those projects valid under this segment*, which have received approval from the local authority before March 2007 can avail 100% tax deduction provided the project is completed within 4 years. Eligible projects approved post March 2007, will not receive any tax deduction under this section.

Removal of this section would bring most of the real estate developers in the industry tax bracket of around 30% from the existing 12-15%.

*1:- Minimum developable area of 1 acre and 2:- 1000sq ft built up area within Mumbai and Delhi or within 25kms from the municipal limits of these cities, while 1500sq ft area in all other areas. 2000 sq ft built up area or maximum 5% of aggregate built up area for shops and commercial developments included in the housing projects.

Tax holiday on for building, owning and operating hotels and convention centres in the NCR region under new Sec 80 ID

Impact- Positive

Many NCR based real estate developers are in the process of developing 3-4-5 star hotels over the next 2-3 years. The

government has provided a 5 year tax holiday for companies developing 2-3-4 star hotels and convention centres with minimum sitting capacity of 3000 persons and constructed and operational between 1 April 2007 and 31 st March 2010 in the NCR region. The amendment will be effective from 1 st April 2008 and apply to assessment year 2008-09.

Company level impact- Positive for Anant Raj Industries (not rated)

Service tax on commercial space rentals

Impact- Negative more from a demand perspective

The Union Budget has among other services included rentals paid by commercial property user’s like Retail,

Multiplexes, Advertisers etc under the Service Tax net. We do not foresee a direct impact on real estate developers for two reasons:

Developers would be able to pass on the service tax to the end users.

Most developers of commercial property keep commercial property on their books for 18-24 months and sell out once demand picks up.

However, this is likely to hurt demand for commercial property which has already grown by 20-25% over the past one year and are currently at life time highs. Eg. Many commercial properties in Metros like Mumbai and Delhi quote commercial rentals of Rs300-350 per sq ft per month.

Union Budget 2007-08

Post Budget Impact Analysis

Company level impact- Negative for all real estate developers as most have around 10-20% commercial component in their projects

SEZ tax exemptions applicable for only new units- Provisions simplified

Impact- Positive and on expected lines improving clarity in policy

Considering the fact that the special economic zones are intended to promote new industry and new investment and not to facilitate migration of existing industries to avail of tax concessions, the Union Budget has proposed to substitute sub-section (4) of section 10AA so as to provide that section 10AA is applicable to any undertaking, being the unit, which fulfils all the following conditions, namely:-

It has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone;

It is not formed by splitting up, or reconstruction of business already in existence except for companies where Sec33B is applicable

It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

The rush for SEZ approvals were on the rise before the government stopped further approvals as it feared that there could be business migration from existing locations. The clarification was in line with our expectations and would help improve clarity on the SEZ policy.

Company level impact- Real estate developers would not be hampered by this provision.

 

EPS FY08E

Impact change

NAV

Revision

Rating

Ansal API

 
  • 51.8 NIL

 
  • 817 BUY

NIL

 

Ansal Housing

 
  • 38.3 NIL

 
  • 344 BUY

NIL

 

Arihant Foundation

 
  • 52.6 NIL

 
  • 570 BUY

NIL

 

DS Kulkarni Developers

 
  • 45.1 NIL

 
  • 519 BUY

NIL

 

Prajay Engineering

 
  • 35.7 NIL

 
  • 304 BUY

NIL

 

Steel

Policy Initiatives

Union Budget 2007-08

Post Budget Impact Analysis

Steel Policy Initiatives Union Budget 2007-08 Post Budget Impact Analysis Custom duty unchanged at 5% on

Custom duty unchanged at 5% on prime steel - On expected lines

Custom duty on second and defective steel reduced from 20% to 10%

Custom duty fully exempt on all coking coal imports irrespective of the ash content – No impact for steel manufacturers as almost all of them import coking coal of <12% ash content with respect to which the import duty was already 0%.

Imposition of export duty of Rs300/MT on iron ore – Negative for Sesa Goa (Not Rated) but Positive for non- integrated steel manufacturers.

Imposition of export duty of Rs2000/MT on chrome ore – Negative for Rohit Ferro (Not Rated) but positive for stainless steel manufacturers.

Impact – Neutral for steel makers but Negative for miners

Outlook – Remain cautious on the sector, we maintain our by rating on JSW Steel.

Telecom:

Steel Policy Initiatives Union Budget 2007-08 Post Budget Impact Analysis Custom duty unchanged at 5% on

The finance minister has asked the department of telecom to constitute a committee to study the present structure of levies on telecom industry. We believe the committee will work towards uniformity of licensee fee to 6% from the current range of 6-10%. We believe this will be a positive for the entire telecom sector. We maintain BUY on Bharti Airtel with a target price of Rs983.

Bharti and Airtel Financials

Period to

FY04

FY05

FY06

FY07P

FY08P

FY09P

(Rs Mn)

(12)

(12)

(12)

(12)

(12)

(12)

EPS (Rs)

3.1

6.5

10.7

21.6

 
  • 30.3 39.7

P/E (x)

231.6

110.5

67.1

33.3

 
  • 23.7 18.1

Union Budget 2007-08

Post Budget Impact Analysis

Published in February 2007. © India Infoline Ltd 2006-7.

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