CURRENT BUDGETS EFFECT ON POWER AND INFRASTRUCTURE

PRESENTED BY: Hiren Patel Binit Kumar Das Shashank Jain Ankur Anand Sourabh Kumar Krishna Kulkarni Sweta Bhatkoti Rajat Negi Abhishek Pratap Singh Rahul Sherawat Prateek Bhargava

BUDGET FOR POWER SECTOR

PRE BUDGET EXPECTATIONS OF POWER SECTOR

The issues that are grappling the sector are many. Private power producers have bid aggressively in ultra mega power projects and are slowly getting unviable, coal supply has not improved much in the last two years and fuel imports are expensive. The health of the state electricity boards Expectation: Giving SEB pricing. The budget sops come at a time when 52 power projects, being developed at a cost of about Rs 3.42 lakh crore, could face the risk of default on fuel shortages and environmental hurdles. India is expected to see a capacity addition of 80,000 mw in the 12th Five-Year Plan (2012-17) and a significant chunk would be from private players.

PRE BUDGET EXPECTATIONS OF POWER SECTOR

1. Waiver on import duty on coal. 2. Doing away with customs duty on power equipments. 3. Reduction of customs duty on coal handling and transportation equipment. 4. Greater focus on the Restructured Accelerated Power Development and Reform Programme (R-APDRP). 5. Setting up of the National Electricity Fund.

POST BUDGET ANALYSIS

1. Tax incentives: Extension of sunset clause for tax holiday for power sector
It is proposed to amend section 80-IA (4) (iv) to extent the terminal date for a future period of one year, i.e., up to 31st March, 2012. This amendment will take effect from 1st April, 2012 and will, accordingly, apply in relation to assessmen t year 2012-13 and subsequent years.

POST BUDGET CONT

2. Waiver of Import duty on fuel
Full exemption on basic customs duty for Natural gas / Liquefied Natural Gas imported for power generation; uranium concentrate, sintered natural uranium dioxide, sintered uranium dioxide pellets for nuclear power generation and Steam coal (only up to 31/3/2014) is to make imported fuel cheaper for power plants. CVD (Counter Vailing Duty) on steam coal is also being reduced from 5% to 1% on such coal till March 2014. customs duty exemption for coal mining projects. Power utilities such as TATA power, NTPC ltd, Adani power and Reliance power are likely to benefit after the budget proposed a 2-year exemption on import duty for companies importing thermal coal.

POST BUDGET CONT

3. Reduction of Import duty on Equipment
Subject to end use condition the basic customs duty on boiler quality tubes and pipes for manufacture of boilers reduced from 10% to 7.5%. Almost 30% of the projects awarded during the 11th Five Year Plan that ends in March were bagged by Chinese companies. Power generators, such as Reliance Power, Lanco Infratech, and Adani Power have sourced majority of their core power equipment from foreign manufacturers. The Chinese power generation equipment manufacturers have advantage due to low interest rates and an undervalued currency in the country. In the Budget there is also no mention about development of the transmission sector and reform in the distribution sector. The reduction in customs duty will be more beneficial to foreign MNCs operating in India.

POST BUDGET CONT

4. Coal India to sign fuel supply agreements with power projects The Budget has also directed Coal India to sign fuel supply agreements with power projects to give a boost to energy generation for a period of 20 years. For power plants that have been commissioned up to 31 December 2011, FSAs will be signed before 31 March 2012. If the supply is below 80 percent, then Coal India would be penalized, whereas in case the supply is above 90 percent, the company would be provided an incentive. In case Coal India is unable to meet the obligations, the company would have to arrange for fuel through imports or other arrangements. The PMO had also noted that these arrangements would provide relief to power plants with an estimated capacity of more than 50,000 mw.

POST BUDGET CONT

5. Increasing the quantum of tax-free bonds limit
The minister has also permitted power companies to avail of external commercial borrowings (ECBs) to part finance their rupee debt besides increasing the quantum of tax-free bonds limit for the sector to Rs 10,000 crore from Rs 5,000 crore.

POST BUDGET CONT

6. External Commercial Borrowings (ECBs)
"The decision to allow ECBs and cutting the withholding tax on ECBs to 5 per cent from 20 for power sector are welcome moves. The budget allowed power projects to retire part of their rupee debt and replace it with foreign borrowing, which is much cheaper even after hedging costs. This would also increase the ability of domestic banks to lend to the sector without exceeding their exposure limits.

POST BUDGET CONT

7. Incentives for promotion
The budget also announced incentives to promote the use of energy-efficient appliances and lightemitting diodes (LEDs) I propose to fully exempt a coating chemical used for compact fluorescent lamps from basic customs duty. Excise duty on LED lamps is also being reduced to 6%, Mukherjee proposed.

POST BUDGET CONT

8. Agreement To Compute Additional Depreciation for the New Assets
The finance minister has agreed to compute additional depreciation for the new assets purchased by power companies and extended the sunset clause for the power sector by one more year.

BUDGET DISAPPOINTMENTS
1. Disappointment for non conventional and renewable energy
There is nothing supportive for the wind and solar energy sectors in particular," "The indigenous solar cells and module manufacturers are suffering because of cheap imports. By not addressing this issue, the Budget has left domestic industry to suffer and fail. Thus, the non-conventional power producers, however, have expressed disappointment over duty exemption on imported coal.

BUDGET DISAPPOINTMENTS CONT

2. Disappointment for Indian power equipment makers,
Indian power equipment makers, who were demanding imposition of customs duty on imported power gear above 1,000 mw, are left high and dry by the finance minister as there was no mention of this demand in the budget. Thus, Union Budget 2012-13 has been a great disappointment for the Power Plant Equipment makers who were drumming up for imposition of import duty of 14%-19% on mega/UMPP projects, which currently allows concession duty imports. Non-introduction of duty on import of power gears was criticized by Domestic Equipment Manufacturers Association. "This is a major setback for manufacturers who have made big investments to build power equipment capacity," The basic customs duty on boiler quality tubes and pipes for manufacture of boilers reduced from 10% to 7.5%.

BUDGET DISAPPOINTMENTS CONT

"Companies may scale down investment and jobs would be lost unless government intervenes, Companies impacted by the decision include Bharat Heavy Electricals, Doosan Heavy Industries and Construction, Larsen & Toubro-Mitsubishi Heavy Industries joint venture, JSW Energy-Toshiba Corporation JV, BGR Energy-Hitachi Power Europe JV, Gammon IndiaAnsaldo Caldaie SpA JV and Bharat Forge-Alstom SA venture.

BUDGET DISAPPOINTMENTS CONT

3. Hike in service tax and excise duty rates
The hike in service tax and excise duty rates, will further impact the top-line and the bottom-line of electrical equipment manufacturers. Thus, were saddled further with 2% hike in excise duty and service tax

BUDGET DISAPPOINTMENTS CONT

4. Sharp Increase in the Cess on Domestic Crude Oil
The government also sharply raised the cess on domestic crude oil. Oil explorers such as ONGC, Oil India and Cairn India will be hit after the budget proposed to raise cess on crude oil to Rs 4,500 per tonne from Rs 2,500 per tonne.

BUDGET DISAPPOINTMENTS CONT

5. No attempt made to address the structural problems
No attempt has been made to address the structural problems facing the sector, namely fuel scarcity and distribution sector reforms. No concrete measures were announced on resolving issues such as environment and mining clearances. Thats perhaps why the power index on the Bombay Stock Exchange lost more than the benchmark SENSEX on Friday, and stocks such as GVK Power Ltd and NTPC Ltd lost far more.

BUDGET DISAPPOINTMENTS CONT

6. Reduced Overall Budget Allocation
The total budget allocation to MoP actually fell 6% from Rs 66,382 crore in 2011-12 to Rs 62,424 crore for the upcoming fiscal. The plan outlay for central public sector units in the power sector has decreased from Rs 57,640 crore in 2011-12 to Rs 53,296 crore for 2012-13. The Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY) scheme now stands to receive Rs 4,410 crore, against the budget estimate of Rs 5,326 crore for the previous fiscal.

EFFECTS ON POWER SECTOR

Only 320 mt of coal is to be supplied to the power sector by Coal India against the committed 347 mt in the fiscal year ending 31 March. The state-owned firm mined only 431 mt in 2010-11 against a target of 461.5 mt because of stalled projects. Its overall target in the current fiscal is 452 mt. Scrapped taxes on coal imported by power companies wont be enough to boost purchases much beyond the 70-80 million tonnes for 2012-13. But the gap between domestic and international coal prices is still wide. Power producers cannot pass on any increase in fuel prices to consumers.

EFFECTS ON POWER SECTOR CONT

Global coal prices are about 40% more than domestic price, which accounts for about 80% of the countrys output. Indonesia spot coal prices are currently around $65 per tonne while average domestic coal prices are `1,6001,700 ($31.76-33.74) per tonne. Here we are talking about a 5% cut in duties -- so its an incentive but this will not necessarily make importers go for foreign coal in a big way. Using current benchmark Newcastle coal prices at $110 per tonne, and CFR prices around $120 per tonne, the impact of removing the duty is a benefit close to $6 per tonne

EFFECT ON STOCK MARKET

Shares of power sector firms on Friday rallied for the second consecutive day, as the government direction to Coal India for fuel supply to power utilities continued to boost the sentiments. Shares of Lanco Infra zoomed 11.58% to close at Rs 22.65 on the BSE. Adani Power gained 4.23%to close at Rs 85. Tata Power soared 4.6% JSW Energy gained 8.28 per cent. PFC and REC gained 3.30% and 2.86%, respectively. Neyveli Lignite shares declined by 3.12% Reliance Infra stock dipped by 2.27%.

BUDGET FOR INFRASTRUCTURE

 For the year 2011-12, tax-free bonds for Rs 30,000 crore were announced for financing infrastructure projects. Finance Minister Pranab mukharjee has propose to double it to raise Rs 60,000 crore in 2012-13. This includes Rs 10,000 crore for NHAI Rs 10,000 crore for IRFC Rs 10,000 crore for IIFCL Rs 5,000 crore for HUDCO Rs 5,000 crore for National Housing Bank Rs 5,000 crore for SIDBI Rs 5,000 crore for ports and Rs 10,000 crore for power sector

 Infrastructure finance companies such as Infrastructure Development Finance Co, L&T Finance and Rural Electrification Corp will benefit after the budget proposed to double the issue of tax-free bonds for financing infrastructure projects to Rs 60,000 crores. The steps taken on the infrastructure side is positive for the sector. Although, there has been some doubts about the performance of infrastructure sector and availability of ECB financing. All those things will help infrastructure much better so that stress which was coming on to the banking sector will also kind of get reduced.

PERFORMANCE EXPECTATION OF INFRASTRUCTURE SECTOR

It is possible that infrastructure sector might outperform FMCG and consumption oriented space atleast in the short run as far as the stock market is concerned. It might outperform because they have been beaten down out of shape and consumer stocks are at almost like an all-time high.

HOW INDIA CAN SUSTAIN GDP GROWTH OF 9% ?

 The government has stated that one of the foremost challenges in the coming few years will be to meet the country's energy requirements. The 12th Five Year Plan projections made by the Planning Commission indicate that for a GDP growth rate of 9 per cent per year, energy supply has to grow at around 6.5 per cent per year. Specifically, according to the commission's estimations, this will require an achievement of following targets : -

406.78 MToE of coal 204.80 MToE of oil 87.22 MToE of LNG and natural gas 14.85 MToE of hydro power during 2016-17. The actual generation from coal, oil, gas, and hydro in 2010-11 was 272.86 MToE, 164.32 MToE and 57.99 MToE and 10.31 MToE respectively. In addition, significant imports will be required to sustain the country's energy requirements in 2016-17. Of the projected coal requirement of 406.78 MToE in 2016-17, 90 MToE alone would need to imported.

 Similarly, 164.8 MToE will be the import requirement for oil 24.8 MToE for gas. It is opined that the ability to meet the (huge) energy requirements will depend upon our ability to expand domestic production in the critical sub-sectors such as Petroleum natural gas Coal.

COAL BOTTLENECK ISSUE

In view of the fast growing coal shortages and other delays related to coal projects, the government has to introduce competition in the coal sector and also suggested that state-owned Coal India should adopt a pricing policy which is transparent, credible, and based on global norms. The gap between demand for coal and domestic availability, according to the survey, is widening at a fast pace and it is important that this gap not be allowed to get out of hand. One of the reasons for this gap, the survey observes, is CIL's near monopoly in the coal sector and the hazy pricing mechanism employed by it.

 CIL's monopolistic position, it is noted, has often resulted in supply bottlenecks, delays in development of new coal fields and inadequate emphasis on cost reductions at operational levels.

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