Budget.as an Investor

8/9/2019 Budget.as an Investor

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Do you have a stake in the stock market, either directly through ownership of shares, or viamutual 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 alwaysa 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 policyadvisory company.

Automobile

State of the Industry

The Rs 175,600-crore automobile industry has shown signs of recovery across segments, thanksto the stimulus package and a low consumer base. The industry is expected to grow 12-13% in2010-11 in value terms, led by commercial vehicle and passenger car sales. Commercial vehiclevolumes are estimated to rise 15-17% in 2010-11 due to sustained economic growth. Exportswill grow 13-14%.

Budget ImpactBudget announcements are unlikely to have a major impact. The overall impact on passengercars, two-wheelers and tractors, though, is positive while that on commercial vehicles will bemarginally negative. The reduction in direct taxes for individuals is expected to lead to increaseddemand for passenger cars. Rise in disposable income will also offset the expected hike in theprices 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 byaround 2%, thus negatively affecting transporter profitability. Continued focus on ruraldevelopment will marginally benefit two-wheeler and tractor sales.

Banking & finance


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 andauto loans. In 2010-11, credit growth is likely to improve to around 19% with expectations ofhigher 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 ImpactThe government has proposed a Rs 16,500-crore Tier-I capital infusion in 2010-11, which issignificantly higher than Rs 1,200 crore provided in 2009-10. This would preserve thegovernment's holding in public sector banks as well as provide an opportunity to raise otherresources 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



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Demand rose 10.9% year-on-year during April-December 2009, owing to revival in housing andincreased 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 tosignificant capacity addition. Consequently, operating margins are expected to fall by 550-700basis points.

Budget ImpactThe 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 ratesfollowing significant capacity addition. Measures to spur housing and infrastructure investments,though, will have a marginally positive impact on demand.

InfrastructureState of the Industry

Between 2009-10 and 2013-14, investments to the tune of Rs 600,000 crore are expected towardsthe development of roads, ports and airports. Investment in roads will account for the lion's shareof close to 84%. Private sector participation is expected to drive investments in the airports andports 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 oretraffic. In airports, domestic passenger traffic is expected to grow 16.8% in 2009-10 driven bysustained revival in the economy and low ticket prices.

Budget Impact

Higher allocation towards infrastructure sectors and continued takeout financing and refinancingplans of IIFCL will have a positive impact. Additional deduction available for investment inlong-term infrastructure bonds for individuals will improve fund availability. Additionally,concession on import duty for monorail projects would reduce capital cost for players. Hike inminimum alternate tax rate to 18% of book profits, though, will negatively impact financials ofoperational BOT projects.

Consumer durables

State of the IndustryThe first six months of 2009-10 saw moderate growth. The third quarter, though, saw demand forcolour televisions and refrigerators pick up sharply by 19% and 45%, respectively, comparedwith 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 agrowth 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


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rise moderately on the back of higher commodity prices.

Budget ImpactThe change in income-tax slabs will lead to a significant reduction in tax liability for the salariedclass. 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 theproduction takes place in excise-free zones.

Oil & gas


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 ImpactSubsidy 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 customsduty across crude oil and petroleum products would translate in higher duty protection forrefiners. The resultant increase in refinery gate prices for retail auto and cooking fuels, ifabsorbed 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 litreeach, if passed on to the end consumer, would have no implication on the profits of OMCs.Retail selling prices would rise Rs 1.25 a litre. However, if retail prices are adjusted to reflect thehike in customs duties, the required hike in petrol and diesel retail prices would be to the tune ofRs 2.4-2.6 a litre.

Power


During the Eleventh Plan, the estimated capacity addition is seen at about 46.5 GW comparedwith the government's target of 78.7 GW. During this period, demand for electricity is expectedto grow 7-8%. Private companies are putting in place generation capacities and have also beenawarded transmission projects and distribution circles under the franchisee route. In 2009, pricesfor short-term power (merchant power) were volatile. Prices were very high during the first halfof the year, but have fallen since.

Budget Impact

The budgetary allocation for the sector, excluding Rajiv Gandhi Grameen Vidyutikaran Yojana(RGGVY), has been raised to Rs 5,130 crore from Rs 2,230 crore. The hike in minimumalternate tax to 18% would have a neutral impact, as it would be passed on to end-users. A cleanenergy cess of Rs 50 per tonne will be levied on domestic and imported coal. As fuel costs arepassed on to consumers, power tariffs are expected to rise by 2-3 paise a kwh. There will be amarginal pressure, though, on companies which sell power in the open market.

Steel

State of the IndustryThe industry has experienced a faster-than-expected recovery from the global economic


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slowdown. Domestic demand, which had fallen 1.2% year-on-year in 2008-09, rose 6.5% inApril-September 2009.

Driven by strong growth in infrastructure and automobiles, domestic demand is expected toregister 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 materialcontract prices. In 2010-11, profitability is likely to remain stable as any rise in raw material costis 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 bepassed on to consumers, thereby pushing up prices by Rs 500-750 a tonne. The expected rise inthe cost of manufacturing due to the levy of cess on coal (Rs 50 a tonne) is also likely to bepassed on. The focus on increasing infrastructure investments in railway, urban infrastructureand housing is likely to lend support to steel demand.

TelecomState of the Industry

Following the addition of a record 130 million mobile phone subscribers in 2008-09, the pace ofaddition accelerated further in 2009-10. In the first nine months, the industry added 133 millionsubscribers, led by a sharp decline in tariffs and the growing use of multiple SIM cards, takingthe total subscriber base to 525 million. Growth in subscriber base is expected to continue in thenear term and may touch approximately 700 million by 2010-11.

Budget ImpactThe increase in minimum alternate tax to 18% from 15% will negatively impact the profitabilityof telecom service providers. Exemption from basic, countervailing duty and special additionalduty on components and accessories of mobile handsets has been extended to include batterychargers and head phones. The government has also extended the exemption of special additionalduty to mobile phones not imported in the pre-packaged form. These measures will cause mobilehandset prices to fall further. The impact, though, is expected to be marginal as handsets andaccessories are already affordable.

Textile

State of the IndustryAlthough the domestic market has shown some recovery, 2009-10 continues to be a challengingyear due to the ongoing slump in exports. Domestic demand is expected to grow 6-7% annuallyin 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 underpressure 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 fibresand yarns will increase polyester prices by Rs 1.50 to Rs 2 a kg, but the manufacturers will beable to pass the hike, as polyester continues to be cheaper than cotton.


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Also, the government announced a one-time grant of Rs 200 crore to Tamil Nadu for theinstallation of a zero-discharge system to reduce environmental pollution at the Tirupur cluster.This will help knitwear exporters in the long term.

Budget.as an Investor

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