A mixed bag for corporate India

Tue, Mar 2 02:45 PM Though the markets reacted positively to the budget on Friday, it did not bring good news for all companies and sectors. Here's an analysis of how it will impact different industries. The stock markets gave a rousing welcome to the budget on Friday, mostly due to what was 'not' announced than what was. The main reason for the optimism was that there were no unpleasant surprises and some of the negative announcements had already been factored in before the budget. Auto stocks, for instance, extended gains as the market had already factored in the rise in excise duty on large cars and sports utility vehicles. On the other hand, a lower fiscal deficit (which will result in lower government borrowing) soothed the stock market's nerves and an overhauled personal tax structure was a pleasant surprise that promises to boost consumption and bring in the much-needed feel-good factor for retail investors. The government continued incentives for some industries like real estate, infrastructure and agriculture while it cushioned the impact of duty hikes on other sectors by keeping them to the minimum. Though the markets have got something to cheer, after the consolidation over the past few weeks, factors like weak global cues could spoil the party in the future. Giving a word of caution, Sunil Godhwani, MD & CEO, Religare Enterprises says, ''The market rallied on very low expectations from the budget and will fall in line with the real issues ahead which include corporate earnings growth visibility, growth in domestic consumption and global headwinds.'' The budget has also been positive for the hotel industry. Irrespective of the location, two-star or above hotel categories have been allowed 100 per cent deduction on capital expenses. Currently, only specified categories of the hotels in the national capital region enjoy incentives. These sops will benefit Indian Hotels and Hotel Leela. ''The budget strikes a balance between growth and fiscal discipline. The direct tax reductions will stimulate demand driven growth while the increase in indirect taxes will help meet the deficit target of 5.5 per cent,'' says Rugved Dhumale, assistant V-P, Risk Management Solutions, Mecklai Financial Services. Broadly, the budget is a balanced one with the finance minister laying down a road map to fiscal consolidation and increased spending on infrastructure. In the coming years, the finance minister aims to bring down fiscal deficit to 5.5 per cent in 2010-11, 4.8 per cent in 2011-12, and 4.1 per cent of the GDP in 2012-13. The budget also allows an additional deduction of Rs 20,000 for investment in long-term infrastructure bonds over and above the existing deduction limit of Rs 1 lakh on tax savings. This will not only help tax payers but also help in financing infrastructural development. Here is an analysis of how specific sectors (and stocks) are likely to be impacted by the measures announced in the budget.

SATELLITE TOWNSHIPS AND CITIES TO GET A BOOST DUE TO HIGHER ALLOCATION TO RAIL, ROAD AND PORTS Interest rate subvention of 1 per cent for property loans extended Higher allocation for housing and urban poverty alleviation Increase in allocation for Rajiv Awas Yojana (RAY) for slum dwellers and urban poor Pending projects given another year for claiming deduction on profits under Section 80IB (10) The continuation of one per cent interest rate subvention will help improve volumes in the affordable housing segment. The higher fund allocation for Rajiv Awas Yojana and Indira Awas Yojana should benefit residential segments in both urban and rural centres. The increase in allocation for slum redevelopment to Rs 1,270 crore should give a boost to companies involved in the rehabilitation business. The permission to use external commercial borrowing money for cold storages will give a boost to industrial and logistics parks. The higher allocation to rail, road and port infrastructure and impetus to special economic zones (SEZs) will have a cascading impact on real estates it will lead to the development of satellite townships and cities. Impact: Should benefit HDIL, Indiabulls Real Estate, Unitech, DLF, Orbit Corporation and DB Realty. PSU BANKS TO GET A MUCH REQUIRED EQUITY INFUSION THAT WILL ENHANCE THEIR GROWTH Net market borrowings to be lower New branch licenses to be issued to private players and NBFCs Increase in allocated amount for capital infusion in PSBs The finance minister announced that the RBI might give additional banking licenses to private sector players. This step can change the landscape of the banking industry as a host of Indian corporates like Tatas, Birla group, and some of the older NBFCs have shown interest in the banking business. Also, the government has announced a provision of Rs 16,500 crore to augment Tier I capital of PSU banks, which is a positive trigger. The government’s estimated borrowing is expected to come down from Rs 3.97 lakh crore in 2009-10, to Rs 3.45 lakh crore in 2010-11. This substantially lowers the concerns of crowding out of private investment. Impact: IFCI, Reliance Capital and IDFC might apply for banking licenses. The capital infusion measures may help Dena Bank, Vijaya Bank, IDBI and Bank of Maharashtra to increase their tier-I capital. The six-month extension for repaying loans under the agri-debt relief scheme should benefit Bank of Baroda, PNB and Oriental Bank of Commerce.

PROPOSAL TO CREATE A COAL REGULATOR SHOULD MAKE THE PROCESS OF MINE ALLOCATION MORE FAIR Increase in planned allocation for power sector Key components of rotor blades exempt form excise duty Proposal to set up a coal regulator Clean energy cess on coal (both domestic and imported) The plan allocation for power sector has been increased by 130 per cent. Excluding RGGVY, the allocation has been increased from Rs 2,230 crore to Rs 5,130 crore, a positive for the power sector. The proposal to set up a coal regulator is also a good sign as delay in coal block allocation and lack of transparency in the mine allocation process is affecting expansion plans of companies. The 61 per cent increase in plan outlay for the ministry of new and renewable energy is seen as a positive development for equipment manufacturers. Impact: Increased power allocation may benefit companies like KEC, Jyoti, EMCO and Crompton Greaves. However, increase in the coal energy cess can have a marginally negative impact on coal importing companies like Tata Power, GVK, Lanco and Adani Power. Suzlon is expected to benefit from the exemption of excise duty on key components for manufacturing rotor blades for wind power THE CHANGE IN INCOME TAX SLABS SHOULD INCREASE DEMAND FOR CONSUMER GOODS Thrust on rural schemes Increase in peak excise duty Increase in excise for cigarettes and tobacco products The change in personal income tax slabs and the thrust on rural schemes is a positive for the fast moving consumer goods companies as it will put more money in the hands of consumers. Increase in the minimum alternate tax (MAT) rate from 15 per cent to 18 per cent is expected to have marginal impact. Increase in excise duty on cigarettes and tobacco products can lead to higher prices in the hands of consumers. The increase in peak excise from eight per cent to 10 per cent was expected and will have limited impact on the companies’ financials. Impact: Increase in peak excise duty and MAT will have limited impact on HUL, Nestle, Dabur, Godrej Consumer Products and Dabur. HIGHER ALLOCATION TO THIS SECTOR SHOULD COUNTER THE IMPACT OF THE INCREASE IN MAT

Higher budget allocation for infrastructure Increase in deduction under Section 80C of the IT Act Increase in IIFCL disbursement targets Higher budget allocation of Rs 1.73 lakh core for infrastructure segments like roads, railways and schemes like JNNURM is expected to benefit companies operating in this space. The allocation for roads has been increased by 13.5 per cent to Rs 19,894 from Rs 17,520 crore in 2009-10. While the allocation for railways has been increased by six per cent to Rs 16,752 crore, the outlay for urban development has been beefed up by 80 per cent to Rs 5,400 crore. Even though the increase in MAT is expected to have negative impact, the increased allocation for the infrastructure segment is expected to result in larger orders for road construction and engineering companies. Impact: Companies like IRB Infrastructure, Nagarjuna Construction, Gammon Infrastructure and Madhucon Projects involved in construction business. Increase in MAT is expected to have a slightly negative impact on the cash flows of GVK and GMR Infrastructure. THE HIKE IN CUSTOMS AND EXCISE DUTY TO CUT INTO THE PROFIT OF MANY REFINING COMPANIES Increase in MAT by three per cent Hike in custom duty on crude oil and other refined products A Re 1 hike in excise duty on petrol and diesel The rise in customs and excise duties is expected to have a negative impact on refineries. Underrecoveries for the refiners is expected to increase by Rs 13,200 crore in 2010-11 and Rs 14,100 crore in 2011-12 due to the rise in custom duty. The Re 1 rise in excise duty is expected to increase under-recoveries for refiners by Rs 10,600 crore in 2010-11 and Rs 11,400 crore in 2011-12. According to Religare Hichens, increase in minimum alternative tax is expected to negatively impact Reliance Industries’ earnings per share (EPS) by Rs 2 in 2010- 11 and Rs 3.8 in 2011-12. The EPS of Cairn India is expected to get negatively impacted by Re 1 in 201011 and Rs 1.4 in 2011-12. Impact: The hike in customs duty will have a negative impact on Reliance Industries and oil marketing companies like, Essar Oil, and MRPL, but it is positive for ONGC and Oil India. COMPANIES MAY PASS ON THE INCREASE IN COST DUE TO HIGHER EXCISE DUTY TO THE CONSUMER Higher weighted average R&D deduction Increased allocation to healthcare

Reduction in income tax surcharge The reduction in income tax surcharge is expected to benefit all companies. The hike in excise duty from four per cent to six per cent can have a negative impact on companies unless they pass on the increase in cost to consumers. However, higher weighted average research & development (R&D) deduction is expected to benefit companies conducting research. On the other hand, the rise in MAT is expected to have negative impact on most of the Indian pharmaceutical companies like Sun Pharma, Lupin, Cadila, Glenmark and Dishman Pharmaceuticals. Impact: The higher weighted reduction in research and development, from 150 per cent to 200 per cent, should benefit Ranbaxy Laboratories, Dr Reddy's, Glenmark Pharmaceuticals, Biocon, Cadila Healthcare, Lupin and Piramal Life. Reproduced From Mail Today. Copyright 2010. MTNPL. All rights reserved.

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