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Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
Budget analysis 2013 14
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  • 1. March 2013CRISIL BudgetAnalysis Responsible for now Need to watch expenditure as election nears
  • 2. CRISIL BudgetAnalysisAbout CRISIL LimitedCRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are Indias leadingratings agency. We are also the foremost provider of high-end research to the worlds largest banks and leading corporations.About CRISIL ResearchCRISIL Research is Indias largest independent and integrated research house. We provide insights, opinions, and analysis on theIndian economy, industries, capital markets and companies. We are Indias most credible provider of economy and industryresearch. Our industry research covers 70 sectors and is known for its rich insights and perspectives. Our analysis is supported byinputs from our network of more than 4,500 primary sources, including industry experts, industry associations, and trade channels.We play a key role in Indias fixed income markets. We are Indias largest provider of valuations of fixed income securities, serving themutual fund, insurance, and banking industries. We are the sole provider of debt and hybrid indices to Indias mutual fund and lifeinsurance industries. We pioneered independent equity research in India, and are today Indias largest independent equity researchhouse. Our defining trait is the ability to convert information and data into expert judgements and forecasts with complete objectivity.We leverage our deep understanding of the macroeconomy and our extensive sector coverage to provide unique insights on micro-macro and cross-sectoral linkages. We deliver our research through an innovative web-based research platform. Our talent poolcomprises economists, sector experts, company analysts, and information management specialists.CRISIL PrivacyCRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfill your request and service youraccount and to provide you with additional information from CRISIL and other parts of The McGraw-Hill Companies, Inc. you may find of interest.For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/privacy. You canview McGraw-Hills Customer Privacy Policy at http://www.mcgrawhill.com/site/tools/privacy/privacy_english.Last updated: April 30, 2012DisclaimerCRISIL Research, a division of CRISIL Limited (CRISIL), has taken due care and caution in preparing this Report based on the information obtainedby CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data/ Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not arecommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability whatsoever to thesubscribers / users / transmitters / distributors of this Report. CRISIL Research operates independently of, and does not have access to informationobtained by CRISIL’s Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtaininformation of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL’s Ratings Division / CRIS. Nopart of this Report may be published / reproduced in any form without CRISIL’s prior written approval.
  • 3. ContentsForeword 1Economy Highlights 4 Detailed economic analysis 5Industry Overall sectoral impact 14 Overall company impact 21 Airports Infrastructure 25 Auto components & Tyres 27 Automobiles 30 Banking and Finance 33 Cement 36 Construction 38 Fertilisers 40 Hotels 43 Household appliances 45 Housing 48 Information technology 50 Media and Entertainment 53 Non-ferrous metals 55 Oil and Gas 58 Paper 61 Petrochemicals 63 Pharmaceuticals 66 Ports 68 Power 70 Roads 72 Steel 74 Sugar 77 Telecom 80 Textile 82 Continued… I
  • 4. CRISIL BudgetAnalysis Contents …continued Capital markets Equity market 88 Mutual funds 94II
  • 5. ForewordResponsible, for nowBudget 2013-14 has taken forward the fiscal consolidation programme which began in the current fiscal year. It targetsfiscal deficit at 4.8 per cent of GDP in 2013-14 as against the revised estimate of 5.2 per cent for this year. While fiscalconsolidation can hurt growth in the short run, it does create an environment in which the Reserve Bank of India (RBI)can cut interest rates and provide some support to growth. These steps will also encourage domestic savings, boost theconfidence and expectations of domestic and foreign investors. As budgetary proposals are broadly in line with ourexpectations, we retain our pre-budget forecast of 6.4 per cent GDP for 2013-14, which is the midpoint of the GDPgrowth range (6.1 to 6.7 per cent) that the budget has assumed.In the budget, the finance minister has broad-based the thrust areas of infrastructure beyond ports and roads; he hasfocused on coal, industrial corridors, national waterways, and rural road construction (PMGSY-II). In addition, urbaninfrastructure will receive a boost through the allocation of Rs 14,873 crore for the JNNURM scheme. Other positivemeasures for infrastructure include the constitution of a regulatory authority for the road sector and the promise to award3,000 km of road projects in five states in the first six months of 2013-14. Housing and textiles stand to benefit fromconcessions and continuation of the Technology Upgradation Funds Scheme respectively.The revival of private investment is a key to raise India’s GDP growth, which is estimated to have reached a decadal lowof 5.0 per cent in 2012-13. In order to improve the investment climate, the government has announced an investmentallowance of upto 15.0 per cent of the total investments over Rs 100 crore in plant and machinery during the two yearsending March 2015. But a substantial and sustainable boost to investment sentiment will come only when issues such asmining rights, land acquisition, environmental clearances are satisfactorily resolved. For sustenance of revenue growthand ensuring feasibility of medium-term fiscal targets, a sustained lift in GDP growth will be needed as some of therevenue gains through hike in surcharges will not last beyond 2013-14.How credible is the fiscal arithmetic and medium-term consolidation programme?We expect fiscal deficit to settle at 5.0 per cent of GDP against the budget target of 4.8 per cent. We believe thegovernment is likely to miss the revenue growth target of 23.4 per cent in 2013-14 as disinvestment and spectrum saletargets are too ambitious.In the recent past, while both expenditure overshooting and revenue underperformance have been responsible forhigher-than-budgeted fiscal deficits, the latter has contributed more to the fiscal slippage. This year too, the budget islikely to miss the revenue growth target due to a possible slippage on the disinvestment and spectrum auction targets.Shocks from unanticipated changes in growth can throw the budgeted revenue estimates out of gear. However, in thepast few years, irrespective of whether growth was higher or lower than expected, the government has consistentlymissed the tax revenue targets. This shows poor revenue marksmanship. Some overshooting on the expenditure fronttoo is likely, particularly on food subsidies if the Food Security Bill is implemented during 2013-14. 1
  • 6. CRISIL BudgetAnalysis Foreword The medium-term target of trimming the fiscal deficit to 3 per cent of GDP by 2016-17 relies on healthy growth and a reduction in the subsidy bill by at least 1 percentage point of GDP. The subsidy roadmap outlined in the budget aims to cut subsidies to 1.6 per cent of GDP by 2015-16 from 2.6 per cent in 2012-13. As raising agricultural productivity will take time and concerted effort, the hike in food subsidy may result in upward pressure on food inflation in the near term. Food inflation was already high at 11.9 per cent in January 2013. It has averaged 9.3 per cent in the past seven years as compared to 4.3 per cent in the preceding decade. Sadly, despite certain sporadic efforts, agriculture has not received the attention it deserves in previous budgets and this budget is no exception. Overall, while the budget has taken a step towards fiscal discipline as well as announced steps to promote corporate investment and infrastructure, lasting fiscal discipline will depend on the ability to raise the projected revenue and to stick to the budgeted expenditure - an arduous task when growth is weak and elections are near. Dharmakirti Joshi Chief Economist, CRISIL2
  • 7. Economy 3
  • 8. CRISIL BudgetAnalysis Highlights • Fiscal deficit for 2012-13 pegged at 5.2 per cent of GDP and estimated at 4.8 per cent for 2013-14. • Revenue deficit for the current year at 3.9 per cent and for 2013-14 at 3.3 per cent. • Fiscal deficit to be brought down to 3 per cent, revenue deficit to 1.5 per cent and effective revenue deficit to zero per cent by 2016-17. • Plan expenditure in 2013-14 will be 29.4 per cent more than the Revised Estimate of 2012-13. Infrastructure • To mobilise funds for investment in infrastructure, the following measures will be taken: o Encourage Infrastructure Debt Fund (IDF) o Allow some institutions to raise tax-free bonds up to 50,000 crore (100 per cent more than the current year) o India Infrastructure Finance Corporation (IIFC), in partnership with ADB, to help infrastructure companies to access the bond market to tap long-term funds • States which have completed Pradhan Mantri Gramin Sadak Yojana will be eligible for PMGSY-II, others will continue with PMGSY-I. • Rs 14,873 crore allocated to Jawaharlal Nehru Urban Renewal Mission (JNNURM) in budget estimate 2013-14 as against revised estimate of Rs 7,383 crore. • Constitute a regulatory authority for the roads sector. Investment • 15 per cent investment deduction allowance apart from depreciation for companies investing Rs 100 crore or more in plant and machinery in April1, 2013 to March 31, 2015. Savings • To incentivise greater savings, Rajiv Gandhi Equity Savings Scheme to be liberalised. • Proposal to launch inflation indexed bonds or inflation indexed national security certificates to protect savings from inflation. Financial Sector • Rs 14,000 crore will be provided to public sector banks for capital infusion in 2013-14. • Foreign institutional investors will be allowed to participate in exchange-traded currency derivatives. • FIIs, will be permitted to use their investments in corporate bonds and government securities as collateral to meet their margin requirements. Tax proposals • Slabs and rate for personal income tax unchanged. • Tax credit of Rs 2,000 to every person with total income up to Rs 5 lakh. • 10 per cent surcharge on persons (other than complanies) with taxable income exceeding Rs 1 crore. • Increase in surcharge from 5 to 10 per cent on domestic companies whose taxable income exceeds Rs 10 crores. • Duty-free limit on gold raised to Rs 50,000 in case of males and Rs 100,000 in case of females. • Specific excise duty on cigarettes and SUVs increased. • Proposal for service tax on all air conditioned restaurants. Subsidies • Rs 10,000 crore of additional allocation to the Food Security Bill. • Petroleum subsidies, at Rs 65000 crore, have been adequately provisioned for.4
  • 9. Economy analysisKey messages• CRISIL Research estimates fiscal deficit at 5 per cent of GDP in 2013-14 as against the budget estimate of 4.8 per cent. We expect a revenue shortfall since the government’s disinvestment and spectrum auction targets are ambitious given the past experience.• To revive infrastructure investments, the budget announced an investment allowance of 15.0 per cent on plant and machinery and setting up of two new industrial corridors, among other measures. However, fast-tracking procedural approvals and removing administrative hurdles hold the key.• The budget relies on one- time increase in tax revenue via surcharges to finance higher expenditure. Since these one-off gains might not continue beyond 2013-14, the medium term fiscal consolidation looks difficult unless growth picks up sharply.Budget – Realistic on growthFigure 1: Real GDP growth • CRISIL Research retains its pre-budget outlook Agriculture Industry Services 3.5% F 5.1% F 7.7% F for India’s GDP at 6.4 per cent in 2013-14. Our forecast is broadly in line with the budget’s growth y-o-y% FY14F 6.4 estimate (6.1 – 6.7 per cent). FY13AE 5.0 • Drivers of growth as per the budget 2013-14 are FY 12 6.2 similar to that assumed by us: (i) normal FY 11 9.3 monsoons, (ii) continued efforts to maintain fiscal FY 10 8.6 discipline, (iii) removal of bottlenecks in the FY 09 6.7 mining sector and (iv) recovery in exports. While the budget has announced steps to raise FY 08 9.3 corporate and infrastructure investment, speedy FY 07 9.6 implementation of these policies will be critical toAE: Advance estimate, F: CRISIL Forecast improve the growth outlook.Source: Central Statistical Organisation (CSO), CRISILResearch 5
  • 10. CRISIL BudgetAnalysis Economy analysis Figure 2: Extra budgetary measures needed to turn around private sector investment % of GDP • The budget seeks to promote private corporate 17.3 investment by (i) speeding up project clearance through the Cabinet Committee on Investment, (ii) 13.4 12.1 development of new industrial cities and corridors 11.3 10.6 and (iii) the provision for deduction of investment allowance. • Private corporate sector investment has fallen from a high of 17.3 per cent of GDP in 2007-08 to 10.6 per cent during 2011-12. Policy FY08 FY09 FY10 FY11RE FY12RE announcements in the budget will have to be RE: Revised estimate complemented with the removal of procedural and Source:CSO, CRISIL Research administrative hurdles to boost private investment. Figure 3: Boost to infrastructure investment y-o-y% FY 13 (RE over actual) FY 14 (BE over RE) • The budget announced some measures to revive 39.1 investment in infrastructure such as raising the 29.6 limit for issuance of tax-free infrastructure bonds 27.5 18.7 19.9 21.7 up to Rs.50,000 crore and encouraging 8.5 7.6 8.9 infrastructure debt funds. • The government proposes to award 3000 km of roads during the first six months of 2013-14. -10.3 States which have successfully completed Ministry of Ministry of Ministry of Ministry of Railways PMGSY-I will now be eligible for PMGSY-II. Power Shipping Road transport Urban and highways development Setting up of a regulator for the road sector is Note:Based on Central Plan Outlay expected to expedite the projects. Source:Budget documents, CRISIL Research • Allowing additional deduction of Rs 1 lakh on interest on housing loan of Rs 25 lakh is expected to spur affordable housing demand in the economy.6
  • 11. Economy analysisInflation expected at 6.5 per centFigure 4: WPI Inflation (average) y-o-y % • In line with the budget, CRISIL Research expects 12.0 inflation to decline during 2013-14. We expect 10.0 WPI inflation to average 6.5 per cent during 2013-14 due to (i) lower international crude 8.0 prices, (ii) strengthening of the rupee against the 6.5 6.0 dollar and (iii) lower core inflation. However, 4.0 upside risks to inflation could stem from the Food 2.0 Security Bill if implemented. 0.0 • The budget proposes to conatin food inflation FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY13F FY14F through investments in agricultural supply chainF: CRISIL Forecasts and research and development. The budgetSource: Office of Economic Advisor, CRISIL Research allocated Rs. 27049 crore to the Ministry of Agriculture, an increase of 22 per cent over the previous year.Marginal slippage on the fiscal frontFigure 5: Missing the deficit target % of GDP Budgeted Fiscal Deficit Actual Fiscal Deficit • We believe that the fiscal deficit would slip to 5.0 8.0 per cent of GDP as against 4.8 per cent forecast 7.0 6.4 6.0 5.8 in the budget. This will be largely due to revenue 6.0 5.1 5.2 5.0 F shortfall since we believe that the budget’s target 5.0 of a 23.4 per cent revenue growth is difficut to 4.0 achieve. 3.0 • Given the government’s poor track record of 2.0 2.6 1.0 meeting disinvestment and non-tax revenue 0.0 targets, the budget estimates for 2013-14 appear FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 RE FY14 BE ambitious.RE: Revised Estimate, BE: Budget Estimate,F: CRISIL ForecastsSource: Budget Documents, CRISIL Research 7
  • 12. CRISIL BudgetAnalysis Economy analysis Mild downside to bond yields Figure 6: Interest Rates (March-end) % 10-year G-Sec yield Repo rate • The budget estimates net market borrowings to 10.0 be Rs. 4,84,000 crore in 2013-14, up from Rs 9.0 4,67,000 crore during 2012-13, which will create 7.7-7.8 an upside pressure on 10-year G-sec yields. 8.0 However, we expect a lowering of the repo rate 7.0 by 50-75 bps during the rest of 2013-14, due to 6.0 lower inflation. This will lower the floor for the G- 5.0 sec rate and soften yields to around 7.7-7.8 per 4.0 cent by March-end 2014. Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 F Mar-14 F • Lower yields will help reduce lending rates and F: CRISIL Forecasts thereby increase credit growth to around 17.0 per Source: RBI, CRISIL Research cent during 2013-14. Policy measures to strengthen foreign inflows Figure 7: Exchange Rate (March-end) INR/USD • Given India’s high current account deficit, the 54.0 53.0 outlook for the rupee will depend on robust 51-52 capital inflows in 2013-14. Clarity over 52.0 51.0 51.2 implementation of GAAR provisions, 50.0 government’s commitment to maintain fiscal 48.0 discipline and improved policy communication should boost investor confidence and attract 46.0 45.1 44.7 foreign investments. 44.0 • Allowing FIIs to use their investments in FY09 FY10 FY11 FY12 FY13 F FY14 F corporate and government bonds as collateral to F: CRISIL Forecasts meet their margin requirements will help in Source: RBI, CRISIL Research bringing foreign inflows into the economy. • With the capital inflows providing sufficient cover to the current account deficit (estimated at 3.5 per cent of GDP in 2013-14), we expect the rupee to settle around 51-52 by March-end 2014.8
  • 13. Economy analysisTable 1: Outlook 2013-14 (y-o-y, % growth) 2012-13 F 2013-14 F GDP (factor cost) 1.8* 3.5 Agriculture 3.1* 5.1 Industry 6.6* 7.7 Services 5.0* 6.4 Other macroeconomic variables WPI inflation (average) 7.4 6.5 Interest rate (10-year G-sec March-end) 8.0 7.7-7.8 Exchange rate (Rs-$ March end) 53 51-52 Fiscal deficit (% of GDP) 5.2** 5.0 Note: * CSO Advance Estimates, ** Revised Estimate, F- CRISIL forecast Source: CSO, CRISIL ResearchFiscal Arithmetic?Figure 8: Share of revenue and expenditure in GDP % Expenditure Revenue • Revenue shortfall will push the fiscal deficit to 5.0 18.0 per cent of GDP. In recent years, most of the 15.0 fiscal slippage has been more an effect of revenue shrinking - with actual revenues lower 12.0 than budgeted in the past four out of five years 9.0 (Table 2). Irrespective of the phase of growth, tax revenues, which form around 80 per cent of total 6.0 2013-14 BE 2012-13 RE 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 revenues, have underperformed. • Some of the revenue gains through hike in surcharges will not last beyond 2013-14. ThusNote: RE: Revised Estimate, BE: Budget Estimate achieving the medium term fiscal targets looksSource: Budget Documents, CRISIL Research difficult. 9
  • 14. CRISIL BudgetAnalysis Economy analysis Table 2 Origins of fiscal slippage % of GDP FY 09 FY 10 FY 11 FY 12 FY 13 RE 1. Budgeted Fiscal Deficit 2.5 6.8 5.5 4.6 5.1 2. Effect of revenue shrinking (a+b+c+d) 1.9 1.2 -0.1 0.6 0.6 a) Tax revenue 1.6 1.0 0.4 0.4 0.3 b) Non tax revenue 0.1 0.6 -0.7 0.0 0.3 c) Disinvestment 0.1 -0.4 0.3 0.3 0.1 d) Other non debt receipts 0.0 0.0 -0.1 -0.1 0.0 3. Effect of expenditure overshooting (i+ii) 1.6 -1.5 -0.6 0.5 -0.5 4. Actual Fiscal Deficit (1+2+3) 6.0 6.5 4.8 5.7 5.2 RE: Revised Estimates Source: Budget documents, CRISIL Research Revenues: High targets, low achievement Table 3 : Growth in revenue (y-o-y %) 2009-10 2010-11 2011-12 A 2012-13 RE 2013-14 BE • In 2013-14, we expect revenue growth to be Direct tax 15.0 19.2 12.7 14.6 18.1 lower (Table 3) due to lower proceeds from Indirect tax -10.0 38.1 11.5 19.5 20.2 disinvestment and spectrum sale. Non-tax 19.9 88.0 -44.3 6.6 32.8 revenue Total 10.8 35.9 -4.3 15.4 23.4 Receipts * (net of borrow ings) Note: Total receipts excluding borrow ings and other liabilities RE: Revised Estimates, BE: Budget Estimates Source: Budget docum ents, CRISIL Research Figure 9: Disinvestments consistenly fall short of targets % of total revenue BE Actual • With its inability to raise tax revenue (Table 2), 6.0 the government has been increasing its 5.0 dependence on sources other than tax revenue, 4.0 such as disinvestment. • This year’s disinvestment target of Rs 400 billion 3.0 seems difficult to achieve since revival in growth 2.0 is not expected to be as much and likely to hurt 1.0 investor sentiments. In order to achieve the 0.0 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 target, the government might need to start the RE BE process of disinvesting early in the fiscal. Note: RE – Revised Estimate, BE- Budget Estimate Source: Budget documents, CRISIL Research10
  • 15. Economy analysisSubsidies adequately budgetedTable 4: Growth in expenditure (y-o-y %) • CRISIL Research expects government 2009-10 2010-11 2011-12 A 2012-13 RE 2013-14 BE expenditure to grow at around 16.4 per cent inRevenue 14.9 14.1 10.1 10.2 13.7 2013-14, in line with budgetary estimates. UnlikeExpenditure previous years, petroleum subsidies have beenCapital 25.0 39.0 1.3 5.8 36.6Expenditure adequately budgeted for. The budget alsoPlan 10.2 24.9 8.8 4.1 29.4 accounts for petroleum under-recoveries carriedExpenditure forward to 2013-14 from the previous year.Non-Plan 18.5 13.5 9.0 12.3 10.8 • However, an unforeseen increase in globalExpenditureTotal 15.9 16.9 8.9 9.7 16.4 crude oil prices or a discontinuation of phasedExpenditure deregulation in diesel prices during 2013-14RE: Revised Estimates, BE: Budget Estimates could raise petroleum subsidies above budgetedSource: Budget docum ents, CRISIL Research levels. The additional allocation of Rs 10,000 crore for food subsidies under the budget may not be sufficient if there is an all-India implementation of the Food Security Bill in 2013-14.Switching expenditures from revenue to capital account • The quality of government expenditure asFigure 10: Ratio of capital to revenue expenditures measured by the ratio of capital to revenue Actual Cap Exp/ Rev Exp Budgeted Cap Exp/Rev Exp 0.25 expenditure has suffered in the recent years, and 0.20 is still well below the pre-crisis levels. During 0.20 0.16 2012-13, while revenue expenditure was almost 0.15 0.13 at budgeted levels, the government reduced 0.10 capital expenditure by 18 per cent from its 0.11 0.05 budgeted levels in order to contain the rising fiscal deficit. 0.00 2004-05 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 • The budget corrects for this partially by raising to 2007- RE BE 08 growth in capital expenditures to 36.6 per cent from only 5.8 per cent in 2012-13. However, it isNote: A - Actuals, RE – Revised Estimate, BE- Budget critical that the government does not slash capitalEstimateF – CRISIL Forecast expenditure during the year if revenues fall shortSource: CSO, Budget Documents, CRISIL Research of budgeted levels. • The government has increased allocation towards health and family welfare, higher education and school education & literacy in 2013-14 budget. A continuation of such investments is necessary for sustainable growth. 11
  • 16. CRISIL BudgetAnalysis This page is intentionally left blank
  • 17. Industry 13
  • 18. CRISIL BudgetAnalysis Overall sectoral impact In the sector level analysis we have not incorporated proposals that are not sector specific such as increase in surcharge on corporate tax, proposals on dividend distribution tax and investment allowance. Industry Effect Airport infrastructure Neutral Budget 2013-14 offers further concessions to Indian aircraft maintenance providers The Indian aircraft manufacture, repair and overhaul (MRO) industry is in its nascency. The domestic MRO service providers usually have a revenue sharing arrangement with airport developers. In order to give a fillip to the industry, a full exemption from customs duty and countervailing duty for aircraft spares, tyres and testing equipment was proposed for Indian MRO service providers in the last budget. In Union Budget 2013-14, further concessions for aircraft maintenance facilities have been proposed. The move is expected to help Indian MROs to become viable and also aid carriers to reduce aircraft maintenance costs. Auto components & tyres Neutral No impact on auto components and tyres With no change in basic customs duty & excise duty, we do not expect any significant impact on the auto components and tyres industries. Doubling of SIDBI’s re-financing capabilities will benefit a large number of Tier II and III vendors. Duty concessions on parts of electric & hybrid vehicles have been extended but its impact will be insignficant, given the low population of these vehicles in India. Royalty payments to foreign companies will now be taxed at a higher rate, but will be subject to direct tax avoidance treaties that are already in place. The overall impact of these measures will be ltd. Automobiles Neutral Marginally negative for utility vehicles; neutral for other segments With excise duty being hiked to 30 per cent from 27 per cent, demand for non-taxi sports utility vehicles with engine capacity above 1500 cc (and more than 4,000 mm long; ground clearance of over 170 mm), will be marginally impacted. Demand for luxury cars (priced over $40,000 and/or engine capacity exceeding 3000 cc for petrol cars and 2500 cc for diesel cars) will be hit, with basic customs duty being hiked to 100 per cent from 75 per cent. An increase in basic custom duty to 75 per cent from 60 per cent will impact sales of motorcycles with engine capacity of 800 cc or more. However, these high-end vehicles constitute a miniscule portion of the overall sales for the industry. The purchase of 10,000 buses under the JNNURM and a reduction in excise duty on truck chassis to 13 per cent will benefit commercial vehicle sales. Banking Positive Recapitalisation of PSBs and boost to housing finance The Union Budget proposes to provide Rs 140 billion as capital support to all public sector banks (PSBs) in 2013-14. The government also stated its intent to help PSBs comply with Basel III regulations.For 2013-14, banks have been directed to lend Rs 7,000 billion to the agri sector – an increase of 21.7 per cent over the target for 2012-13. Farmers who avail of farm loans from PSBs and repay in a timely manner get loans at subsidised rates. They will now be able to access this credit facility from private banks as well. We believe this move will help private banks increase lending to this segment. The clear focus on giving a boost to the housing market is also positive for financiers. An additional tax deduction of Rs 100,000 on interest paid towards home loans up to Rs 25 lakh availed in 2013-14 for first home buyers (over and above the existing Rs 1,50,000 deduction) has been introduced for 2013-14, to give a boost to the affordable housing segment. This additional deduction can be claimed over a period of 2 years. In addition, an amount of Rs 20 billion has been allocated towards a proposed Urban Housing Fund to be set up by the NHB. Continued…14
  • 19. Overall sectoral impact…continuedIndustry EffectCement NeutralHike in freight costs to offset the benefits arising from the boost to housing and infrastructureThe Union Budget 2013-14 has proposed many schemes to boost infrastructure and housing segments. This is expectedto prop up cement demand. However, this upside is likely to be offset by the increase in freight costs for cement iscompanies, due to the proposed hike in railway freight. The Railway Budget 2013 14 has proposed a fuel adjustment 2013-component linked revision of freight rates.Construction PositiveMeasures to boost investments in roads, urban infrastructure 2013-Issue of tax-free bonds raised by government agencies for infrastructure sectors has once again been allowed in 201314 up to a total limit of Rs 500 billion. This will provide additional funds to various infrastructure sectors such as roads,ports and power.In the roads sector, the budget proposes to set up an independent regulatory authority. In the medium term, this couldhelp in reducing delays and fast-tracking the implementation of road projects. Further, the Pradhan Mantri Gram SadakYojana (PMGSY) II has been announced, which could boost investments in rural roads.Allocation towards the JNNURM programme (Jawahar Lal Nehru National Urban Renewal Mission) has been doubled in2013-14 over the previous year. This will boost spending on ongoing and upcoming urban infrastructure projects. Inaddition, allocation to the Ministry of Drinking Water and Sanitation has been increased by 17 per cent in 2013-14,driving investment, particularly in water supply and sanitation.Fertilisers Neutral y-o-yFertiliser subsidy for 2013-14 to remain unchanged yIn 2013-14, the government’s fertiliser subsidy is expected to stay constant at last year’s level of Rs 659 billion, althoughthe demand for complex fertilisers is likely to improve. This is because nutrient-based subsidy (NBS) on complexfertilisers is likely to be reduced, as international prices soften. The increase in budgeted subsidy of Rs 10 billion onindigenous urea for 2013-14 implies that the government is not expected to hike retail urea prices during the year. government high-cost naphtha/fuel oilFurther, unavailability of incremental domestic natural gas will force plants converting from highfeedstock to import gas at relatively higher spot prices. continued… 15
  • 20. CRISIL BudgetAnalysis Overall sectoral impact …continued Industry Effect Hotels Neutral Neutral impact on hotel industry Impact of the Budget on the premium segment hotel industry is neutral. As of July 2012, only air-conditioned restaurants that served liquor were levied a service tax at 12.36 per cent, with an abatement of 60 per cent (net service tax of 4.95 per cent). In the Union Budget of 2013-14, it has been proposed to include all air-conditioned restaurants, including those which do not serve liquor, under the service tax net. This proposal is not expected to impact demand as the service tax will be passed on to consumers. Household appliances Neutral No impact on household appliances industry The Budget had no specific proposal pertaining to the household appliances industry. A tax credit of Rs 2,000 for a person with income upto Rs 5 lakh per annum, introduced in the Union Budget 2013-14, will result in higher disposable income in the hands of people in the lowest tax bracket. But, this is unlikely to translate into any meaningful impact on the industry. Housing Positive Measures to tackle housing shortage First-time home buyers taking a loan of up to Rs 25 lakh in 2013-14 can avail of an additional interest deduction of Rs 1 lakh in the first year, over and above the existing Rs 1.5 lakh benefit. This is likely to boost new home sales. Allocation towards Rural Housing Fund has been increased by 50 per cent to Rs 6,000 crore for 2013-14. A Rs 2,000- crore Urban Housing Fund by the National Housing Bank is also being proposed. These steps will boost fund availability and address the overall housing shortage. However, service tax abatement for premium apartments (with a carpet area of 2,000 sq ft or above and/or valued at Rs 1 crore or more) has been reduced to 70 per cent from 75 per cent. While this would result in an increase of 0.6 per cent in the effective service tax rate, the impact on demand is expected to be negligible. Information technology Neutral No significant impact on the IT sector The Budget does not have any specific proposals for the IT sector. Focus on education and skill development is a structurally long-term positive for the sector. The increase in surcharge from 5 per cent to 10 per cent for companies with taxable income higher than Rs 100 million will increase the effective MAT levied to 21 per cent, from the current 20 per cent. The additional surcharge will be applicable only for the financial year 2013-14. continued…16
  • 21. Overall sectoral impact…continuedIndustry EffectMedia & entertainment NeutralBudget to not impact sector significantly set-topThe Budget impact on the media & entertainment sector would be neutral. The increase in customs duty on setboxes (STBs) to 10 per cent from 5 per cent would increase subscriber acquisition costs of direct -to-home operators andmulti-system operators in the short term, as most STBs are still imported and the entire cost increase may not be passed areon to subscribers. At a sector level, this is not expected to have a significant impact. Meanwhile, the government statedits intent to auction 839 FM stations in 294 more cities in 2013-14, thereby covering all cities with a population of morethan 0.1 million with private FM radio services.Non-ferrous metals NeutralNegligible impactThe 10 per cent export duty levied on bauxite will help improve its domestic availability. However, the impact will benegligible as India exports less than 5 per cent of its production. In 2011, 0.4 mn tonnes of bauxite (2 per cent ofproduction) were exported.Excise duty of 4 per cent has been levied on silver obtained from smelting zinc or lead, to bring the rate on par with theduty levied on silver obtained from copper ores and concentrates. As the sale of by products such as silver typically by-accounts for a mere 5-10 per cent of a zinc manufacturer’s revenues, the impact of the increase in excise duty isexpected to be negligible.Oil and gas PositiveChange in exploration policy to be marginally positiveThe proposed change in the exploration policy to revenue sharing from profit sharing for exploration and development policycontracts is marginally positive for upstream companies, as this is expected to remove any ambiguity related to theascertaining of costs related to exploration and development, and will avoid delays in approvals from the regulatoryauthority. This policy will be applicable for the blocks that will be awarded henceforth, and the benefits will accrue overthe long term. Furthermore, clearances will be provided to awarded but stalled NELP blocks. The government also NELP incentivisedeclared a review of the current natural gas pricing policy, which is positive for the sector, as it is expected to incentiviexploration investments. Additionally, a shale gas policy is expected to be announced in 2013 -14. However, this wouldimprove domestic natural gas production only over the long term.Paper NeutralIncrease in education spending to help sustain demand for Writing & Printing paperThe government has proposed a 19 per cent increase in spending on education in 2013 education 2013-14. This will help sustaindemand for Creamwove paper, which is primarily used in the manufacture of textbooks, notebooks and other educationstationery. Creamwove paper accounts for 17 per cent of paper and paperboard demand. continued… 17
  • 22. CRISIL BudgetAnalysis Overall sectoral impact …continued Industry Effect Petrochemicals Neutral No impact on the industry The overall impact on the domestic petrochemicals industry is neutral as no major changes have been announced and excise duty and customs duties remain unchanged. Companies that have expansion plans or invest above Rs 1 billion over the next two financial years may benefit from the introduction of 15 per cent investment allowance for plant and machinery. Pharmaceuticals Neutral No dosage prescribed The overall impact on the Indian pharmaceuticals industry is neutral with no changes announced in the excise or customs duties on formulations or bulk drugs. Ports Neutral Announcement of new ports in a period of overcapacity The proposal to develop a new major port each in Sagar, West Bengal, and in Andhra Pradesh will add 100 million tonnes of capacity. Further, a new outer harbour in the V.O. Chidambaranar port in Tamil Nadu through PPP will add another 42 million tonnes of capacity. Both these measures will lead to an increase in port capacities in a phased manner over a period of 5-6 years. There are limited benefits for private players as traffic at ports continue to register moderate growth and overall capacity utilisation rates are expected to decline. Allocation of funds in the form of tax-free infrastructure bonds and low-cost infrastructure debt funds is expected to marginally benefit the sector by facilitating availability of funds for port projects. Power Positive Sunset clause extension and incentives for renewable energy to benefit power sector Extension of the sunset clause by one year, to avail the 10-year tax holiday, would benefit 18-20 GW of capacities expected to be commissioned in 2013-14. Funding availability for the sector will improve with issuance of tax-free bonds of Rs 500 billion and credit enhancement through IIFCL. Additionally, the proposal to adopt a PPP framework for coal production will improve domestic coal supply in the long term. Customs duty on imported coal, which was previously exempt, has been increased to 2 per cent, while CVD has been increased by 1 per cent. Further, as per the Railway Budget 2013-14, freight rates have been hiked by 5.8 per cent. Consequently, generation costs would increase by 2-3 paise per unit for domestic coal-based power projects. However, for imported coal-based power projects, generation costs are expected to increase by 5-6 paise per unit. Investments in wind energy, which nearly halved in 2012-13 due to withdrawal of benefits, are expected to increase significantly due to reinstatement of generation-based incentive (GBI), with an outlay of Rs 8 billion. Further, capacity additions in solar power are expected to increase, with interest subvention for a period of five years by IREDA, through the National Clean Energy Fund. continued…18
  • 23. Overall sectoral impact…continuedIndustry EffectRoads & highways PositiveBudget addresses funding concerns and delays 2013-14 up to aThe government has allowed the issue of tax-free bonds to fund infrastructure sectors once again in 2013total limit of Rs 50,000 crore. This is expected to provide additional funds to the National Highways Authority of India(NHAI) for executing national highway projects. We believe that it will allow NHAI to award contracts o n EPC basis.Another positive for the roads sector is the proposal to set up an independent regulatory authority. In the medium term,this could help in reducing delays and fastracking the implementation of road projects.After the substantial completion of the Pradhan Mantri Gram Sadak Yojana (PMGSY), the PMGSY – II has beenintroduced, which will provide a boost to rural road development. This is expected to benefit the small local roadcontractors.Steel NeutralNeutral impact for the steel industryThere are no major announcements for the steel industry. Hence, the overall impact on the sector is neutral. Theproposed schemes providing a boost to the infrastructure and housing segments are likely to give a fillip to demand forsteel in the long run.Sugar NeutralNo impact on industryThere is no impact of the Budget on the domestic sugar industry. continued… 19
  • 24. CRISIL BudgetAnalysis Overall sectoral impact …continued Industry Effect Telecom Neutral Neutral impact on the sector The Budget would have a neutral impact on the telecom sector. The excise duty on mobile phones, with retail price greater than Rs 2,000, has been hiked to 6 per cent, from 1 per cent. This will not significantly impact domestic manufacturers since most of their phones sold are basic feature phones priced below this level. A large proportion of high-end smartphones are imported. Textiles Positive TUFS extension, removal of excise duty on readymade garments beneficial The Budget is positive for the sector as the Technology Upgradation Fund Scheme (TUFS) has been extended and the excise duty on readymade garments has been abolished. TUFS, which is essential to attract investments into the sector, has been extended for the 12th Five-Year Plan, with an investment target of Rs 1,510 billion as compared to Rs 1,506 billion under the 11th Five-Year Plan. For 2013-14, budgetary allocation under the TUFS has been increased to Rs 24 billion from Rs 22 billion in 2012-13. Additionally, the excise duty of 3.6 per cent (12 per cent of 30 per cent of the maximum retail price) on readymade garments, which was mandatory last year, has been removed. Garment manufacturers are expected to see an improvement in margins despite partially passing on the benefit to end-users.20
  • 25. Overall company impactCompany Impact IndustryACC Ltd. CementAdani Power Ltd. PowerAditya Birla Nuvo Ltd. TextilesAlok Industries Ltd. TextilesAmbuja Cements Ltd. CementAmtek Auto Ltd. Auto Components & TyresAndhra Pradesh Paper Mills Ltd PaperArvind Mills Ltd. TextilesAshok Leyland Ltd. AutomobilesBajaj Auto Ltd. AutomobilesBajaj Hindustan Ltd. SugarBalaji Telefilms Ltd . Media & EntertainmentBallarpur Industries Ltd. PaperBalrampur Chini Mills Ltd. SugarBannari Amman Sugars Ltd. SugarBharat Forge Ltd. Auto Components & TyresBharti Airtel Ltd. TelecomBhushan Steel Ltd. SteelBosch Ltd. Auto Components & TyresCairn India Ltd. Oil & GasChambal Fertilisers & Chemicals Ltd. FertiliserChemplast Sanmar Ltd. PetrochemicalsCipla Ltd. PharmaceuticalsCoromandel Fertilisers Ltd. FertiliserDish TV India Ltd. Media & EntertainmentDLF Ltd. HousingDr Reddys Laboratories Ltd. PharmaceuticalsEID Parry Ltd. SugarEIH Ltd. HotelsEntertainment Network India Ltd. Media & EntertainmentEssar Steel Ltd . SteelExide Industries Ltd. Auto Components & TyresFinolex Industries Ltd. PetrochemicalsFirstsource Solutions Ltd. Information technology Continued… 21
  • 26. CRISIL BudgetAnalysis Overall company impact …continued Company Impact Industry Gammon India Ltd. Roads/Construction Glenmark Pharmaceuticals Ltd. Pharmaceuticals GMR Infrastructure Ltd. Airports Gokaldas Exports Ltd. Textiles Grasim Industries Ltd. Textiles Gujarat Pipavav Ltd. Ports Gujarat State Fertilisers Company Ltd. Fertiliser GVK Power and Infrastructure Ltd. Airports Hathway Cable & Datacom Ltd. Media & Entertainment HCL Technologies Ltd. Information technology HDFC Bank Ltd. Banking Housing Development and Infrastructure Ltd. Housing Hero Motocorp Ltd. Automobiles Hindalco Industries Ltd. Non-Ferrous Metals Hindustan Construction Co Ltd. Roads/Construction Hindustan Copper Ltd. Non-Ferrous Metals Hindustan Organic Chemicals Ltd. Commodity Chemicals Hindustan Zinc Ltd. Non-Ferrous Metals Hotel Leelaventure Ltd. Hotels HT Media Ltd. Media & Entertainment ICICI Bank Ltd. Banking Idea Cellular Ltd. Telecom IG Petrochemicals Ltd. Commodity Chemicals India Cements Ltd. Cement Indian Hotels Company Ltd. Hotels Indo Rama Synthetics (India) Ltd. Textiles Infosys Ltd. Information technology IRB Infrastructure Developers Ltd. Roads/Construction IL&FS Transportation Networks (India) Ltd Roads/Construction IVRCL Infrastructures & Projects Ltd. Roads/Construction JBF Industries Ltd. Textiles JK Paper Ltd. Paper JSW Energy Ltd. Power JSW Steel Ltd. Steel Larsen & Toubro Ltd. Roads/Construction Mahindra & Mahindra Ltd. Automobiles continued…22
  • 27. Overall company impact…continuedCompany Impact IndustryMaruti Suzuki Ltd. AutomobilesMIRC Electronics Ltd. Household appliancesMahanagar Telephone Nigam Ltd. TelecomMundra Airport and SEZ Ltd. PortsNagarjuna International Ltd. FertiliserNational Aluminium Company Ltd. Non-Ferrous MetalsNational Fertilisers Ltd. FertiliserNational Thermal Power Corporation Ltd. PowerOil and Natural Gas Corporation Ltd. Oil & GasOil India Ltd. Oil & GasOrient Green Power Ltd. PowerOriental Hotels Ltd. HotelsParsvnath Developers Ltd. HousingPhillips Carbon Black Ltd. Commodity ChemicalsPunjab National Bank Ltd. BankingPVR Ltd. Media & EntertainmentRanbaxy Laboratories Ltd. PharmaceuticalsRashtriya Chemicals and Fertilisers Ltd. FertiliserRaymond Ltd. TextilesReliance Communications Ltd. TelecomReliance Industries Ltd. Oil & GasReliance Power Ltd. PowerSeshasayee Paper and Boards Ltd. PaperShree Cement Ltd. CementShree Renuka Sugars Ltd. SugarSobha Developers Ltd. HousingSona Koyo Steering Systems Ltd. Auto Components & TyresState Bank of India Ltd. BankingSteel Authority of India Ltd SteelSterlite Industries (India) Ltd Non-Ferrous MetalsSun Pharmaceutical Industries Ltd PharmaceuticalsSun TV Ltd Media & EntertainmentSundaram Fasteners Ltd. Auto Components & Tyres continued… 23
  • 28. CRISIL BudgetAnalysis Overall company impact …continued Company Impact Industry Supreme Petrochem Ltd. Petrochemicals Suzlon Energy Ltd. Power Taj GVK Hotels & Resorts Ltd. Hotels Tamil Nadu Newsprint and Papers Ltd. Paper Tamil Nadu Petroproducts Ltd. Commodity Chemicals Tata Communications Ltd. Telecom Tata Motors Ltd. Automobiles Tata Power Company Ltd. Power Tata Steel Ltd. Steel Tata Consultancy Services Ltd. Information technology Thirumalai Chemicals Ltd. Commodity Chemicals UltraTech Cement Ltd. Cement Unitech Ltd. Housing Vardhaman Textiles Ltd. Textiles Videocon Industries Ltd. Household appliances Welspun India Ltd. Textiles Whirlpool of India Ltd. Household appliances Wipro Ltd. Information technology Zee Entertainment Enterprises Ltd. Media & Entertainment Zuari Industries Ltd. Fertiliser24
  • 29. Airport InfrastructureIndian airports: Negative passenger and freight traffic growth India`s domestic air passenger traffic is estimated to have declined by about 6 per cent y-o-y during April-November 2012. This is in sharp contrast to the almost double-digit growth recorded in domestic traffic since the advent of low cost carriers five years ago. Kingfisher Airlines’ exit due to financial turmoil and subsequent consolidation in the industry has led to lower competiton and a steep increase in ticket prices in 2012-13. Higher ticket prices in turn impacted demand growth, aggravated by the slowdown in the economy. We expect domestic passenger traffic to grow at a muted 3-5 per cent y-o-y in 2013-14. Indias international passenger traffic however, grew by a mere 2.8 per cent y-o-y during April-November 2012 as Indian carriers are still in a position to add capacities unlike international carriers who have more or less exhausted seat quotas available to them under bilateral treaties. We expect international passenger traffic in India to grow at a muted 3-4 per cent y-o-y in 2013-14. Due to the slowdown in the global and domestic economies, domestic and international freight traffic fell by 4.7 per cent and 1.6 per cent y-o-y, respectively during April-November 2012. Freight traffic is expected to grow marginally during 2013-14. In 2012-13, CRISIL Research estimates investments of Rs 50-60 billion to flow into the sector, majority of which would be accounted for by the completion of the Mumbai and Bengaluru international airports. CRISIL Research expects investments of Rs 290-310 billion to materialise between 2012-13 and 2016-17. The Airports Economic Regulatory Authority recently mitigated the uncertainty on regulatory issues, approving methodology for determining aeronautical tariffs and its measure of allowing a significant hike in the aeronautical tariff charged by DIAL and MIAL. With these, the financials of these airports are expected to improve. 25
  • 30. CRISIL BudgetAnalysis Airport Infrastructure Aircraft maintenance to get concessions Company Impact Impact factors GMR Infrastructure Ltd A GVK Infrastructure Ltd A Note: 1) GMR Infrastructure Ltd’s subsidiary companies, Delhi International Airport Ltd (DIAL) and GMR Hyderabad International Airport Limited (GHIAL), operate airports in Delhi and Hyderabad, respectively. Revenues from the airports business contributed 52 per cent of its consolidated income in 2011-12. 2) GVK Power and Infrastructure Ltd has its subsidiary companies, Mumbai International Airport Ltd (MIAL) and Bengaluru International Airport Ltd (BIAL), operating in Mumbai and Bengaluru, respectively. Revenues from the airport business contributed 86 per cent of its consolidated income in 2011-12. 3) The above impact applies to the airports business of these two companies. Source: CRISIL Research Impact factors A. The Indian aircraft manufacture, repair and overhaul (MRO) industry is at a nascent stage. More than 90 per cent of the estimated $700 million that Indian carriers annually spend on MRO is spent outside the country (South East Asia, Middle East or Europe). Therefore, in order to give a fillip to the industry, in the last budget, a full exemption from customs duty and countervailing duty for aircraft spares, tyres and testing equipment was proposed for the Indian MRO service providers. In the Union Budget 2013-14, further concessions for aircraft maintenance facilities have been proposed. They are: • At present, basic customs duty exemption is available to parts and testing equipments for maintenance, repair and overhaul of aircrafts. This exemption is now being further extended to include more parts. • Time period for consumption/installation of parts and testing equipments imported for MRO of aircrafts by units engaged in such activities is being extended from 3 months to 1 year. • The move is expected to help carriers reduce aircraft maintenance costs and help MRO units in India (GMR Infrastructure Ltd, which runs a facility in Hyderabad, and Air India Ltd, which has such units in Mumbai and Delhi) become viable.26
  • 31. Auto components & tyresAuto components: Modest recovery in growth; margin pressure to abate in 2013-14 Auto component production is estimated to grow by 5-7 per cent y-o-y in 2012-13 vis-à-vis a 14 per cent growth in 2011-12 due to slowing vehicle production growth across segments, particularly medium and heavy commercial vehicles (30 per cent of overall demand), and slower exports. In 2013-14, auto component production is expected to improve in line with OEM prospects, particularly within the CV segment. OEM demand is expected to grow by 9-11 per cent during the year. Growth in replacement production will remain stable at 6-8 per cent. Growth in exports would remain capped at 7-9 per cent owing to uncertainties over EU destination markets (30-35 per cent of exports) even as prospects for the US market (20-25 per cent of exports) seem healthy. While basic raw material costs (accounting for 60-65 per cent of total raw material cost) have remained flat y-o-y during April-December 2012, lower utilisation levels and higher conversion costs of labour and power have kept operating margins under pressure. Operating margins are estimated to fall by 120-170 bps y-o-y to 12.3-12.8 per cent for 2012-13. While input prices are expected to remain flat in 2013-14 along with an improvement in utilisation levels, margin improvement is likely to be constrained at under 50 bps given the continued weak pricing environment during the first half of 2013-14. Industry RoCE is estimated to decline by 400-500 bps in 2012-13 owing to pressure on operating margins. RoCE is expected to remain at current levels of 13-14 per cent in 2013-14, even as margins improve slightly with commissioning of incremental capacities.Tyres: Operating margins to remain flat in 2013-14 The tyre industry’s revenues are estimated to grow by 9-11 per cent y-o-y in 2012-13, led by an increase in tyre prices during 2011-12. Domestic demand is expected to grow by 0-3 per cent due to lower freight availability and tepid growth in vehicle sales. In 2013-14, we forecast revenues to grow by 6-8 per cent in line with a growth in sales. Operating margins are estimated to improve by 200 bps in 2012-13 due to easing input cost and growth in realisations. Margins are likely to stay flat in 2013-14, as input prices continue to remain stable. Prices of natural rubber (35-40 per cent of the raw material cost) are projected to decline by 12-15 per cent in 2012- 13 after growing by 80 per cent between 2009-10 and 2011-12. We expect natural rubber prices to remain flat or decline marginally in 2013-14. In 2012-13, industry RoCE is estimated to improve by 300-400 bps, led by improvement in profitability and lower capital investments. In 2013-14, we expect RoCE to improve marginally due to lower capital investments. 27
  • 32. CRISIL BudgetAnalysis Auto components & tyres Auto parts: Tariffs (per cent) Customs Excise 2012-13 2013-14 2012-13 2013-14 Engine and engine parts 7.7 7.7 12.4 12.4 Drive transmission, steering, suspension, braking 10.3 10.3 12.4 12.4 parts,silencer, exhaust pipes and radiators 1 Electrical parts 7.7 7.7 12.4 12.4 Raw materials for auto components 7.7 7.7 12.4 12.4 1 Customs duty for air conditioner machine parts is at 10.3% Notes 1) Raw materials for auto components include galvanised plate (GP)/galvanised coil (GC) steel, hot rolled (HR) steel, aluminium, copper and lead. 2) Duty-free imports from Thailand are allowed for engine parts, helical springs, ball bearings, lighting equipment and gear boxes under the Free Trade Agreement. Source: CRISIL Research Tyres: Tariffs, prices and landed costs Tariffs (per cent) Prices (Feb 2013) Landed costs (Rs/tonne) Customs Excise Domestic International Pre- Post- 2012-13 2013-14 2012-13 2013-14 (Rs/tonne) ($/tonne) budget budget New tyres 10.3 10.3 10.3 10.3 - - - - Used/retreaded tyres Truck and bus 10.3 10.3 10.3 10.3 - - - - Car cross ply/ 10.3 10.3 10.3 10.3 - - - - Radials Raw materials for tyres Natural rubber 20.0 20.0 (Note 1) (Note 1) 156,974 3,246 223,760 223,760 SBR (1502) 10.3 10.3 10.3 10.3 n.a. 2,300 136,363 136,363 PBR (1220) 10.3 10.3 10.3 10.3 155,000 2,550 153,732 153,732 NTC fabric 10.3 10.3 10.3 10.3 n.a. n.a. n.a. n.a. Carbon black 5.2 5.2 10.3 10.3 n.a. n.a. n.a. n.a. (N330) NTC: Nylon tyre cord; PBR: Polybutadiene rubber; SBR: Styrene butadiene rubber n.a.: Not available Notes 1) For natural rubber, there is a cess of Rs 2 per kg in lieu of excise duty with effect from September 1, 2011. 2) Customs duty on natural rubber will be charged at 20% or Rs 20 per kg, whichever is lower, from April 2011. 3) China and South Korea enjoy a preferential customs duty of 8.6% on tyres under the Asia-Pacific Trade Agreement. 4) New tyres include the following categories: Truck and bus, light truck, car (cross ply and radial), tractor front, tractor rear, tractor trailor, moped, scooter and motorcycle. 5) An additional countervailing duty of 4% is levied on raw materials except for NTCF 6) Prices and landed cost are average rates for February 2013. Source: CRISIL Research28
  • 33. Auto components & tyresBudget 2013 to have neutral impact on auto component and tyre manufacturers Auto components: Company impact Company Impact Impact factors Bharat Forge Ltd - Bosch Ltd A Amtek Auto Ltd - Sona Koyo Steering Systems Ltd A Sundaram Fasteners Ltd - Exide Industries Ltd A Source: CRISIL ResearchImpact factorsA. Tax on royalty payments to foreign companies has been increased. But this is unlikely to have a significant impact as Indian auto component and tyre manufacturers generally pay under 2 per cent royalty to companies based in countries with favourable treatment under Double Tax Avoidance Agreements.B. SIDBI’s re-financing capabilities have been doubled to Rs 100 billion per annum. This will help SMEs which make up the majority of auto component manufacturers. 29
  • 34. CRISIL BudgetAnalysis Automobiles Demand growth to recover, margins to be improve slightly in 2013-14 Lower freight availability and a rise in fuel cost impacted transporters’ profitability in 2012-13. We therefore expect MHCV truck sales to decline by about 25 per cent in 2012-13. LCV sales growth is also likely to be limited to 15-17 per cent (over a 30 per cent growth in 2011-12), as private consumption growth slows the most in a decade. Overall, we expect CV sales to marginally decline in 2012-13. Slower growth in incomes, fuel price hikes and high interest rates continued to impact car sales in 2012-13. We therefore expect growth in car sales to remain flat during the year despite a tepid growth of 2 per cent recorded in 2011-12. However, utility vehicle (UV) sales are likely to continue growing by 38-40 per cent, led by new model launches and increased preference for diesel vehicles. Overall, passenger vehicle sales are estimated to grow by 8- 10 per cent in 2012-13. Growth in two-wheeler sales is expected to moderate to 3-5 per cent in 2012-13, following two years of healthy growth. Slower growth in farm incomes and higher fuel prices have impacted motorcycle sales during the fiscal. However, scooter sales are estimated to grow by 15-17 per cent, aided by new model launches and expansion of capacity by leading manufacturers which addressed pent up demand. In 2013-14, with GDP growth expected to be higher, concerns over income growth are also likely to ease. Moreover, an expected decline of 8-10 per cent in in petrol prices will drive a recovery in small car sales, which in turn will aid a 9-11 per cent growth in passenger vehicle sales. Higher rural incomes owing to normal monsoons will also drive up two-wheeler sales by 9-11 per cent. However, MHCV sales growth is expected to lag GDP growth and remain weak at 5-7 per cent (despite a low base), until transporters’ utilisation levels improve. LCV sales will however continue to grow by 14-16 per cent. Operating margins of automobile manufacturers are estimated to decline sharply in 2012-13 due to lower capacity utilisation and firm input cost. However, in 2013-14, margins are likely to slightly improve as prices of raw materials like steel decline and sales volumes recover.30
  • 35. AutomobilesAutomobiles: Tariffs(per cent) Customs Excise 2012-13 2013-14 2012-13 2013-14 1New cars #-Completely knocked down units (CKD) 10.3 10.3 - --Semi-knocked down units (SKD) 61.8 61.8 - --Completely built units (CBU) 61.8 61.8^^ - - 2-Specified small cars - - 12.4 12.4 3-Other than specified small cars - - 24.7* 24.7*Utility vehicles 61.8 61.8 24.7 24.7** ^Two-wheelers 61.8 61.8 12.4 12.4 @ @Trucks (LCVs and MHCVs) 10.3 10.3 12.4 12.4 @ @Buses (LCVs and MHCVs) 10.3 10.3 12.4 12.4Tractors 10.3 10.3 - -Steel items 7.7 7.7 12.4 12.4Pig iron 5.2 5.2 12.4 12.4Engine and engine parts- Four-wheelers 7.7 7.7 12.4 12.4- Two-wheelers 7.7 7.7 12.4 12.4Drive transmission, steering, suspension, brakingparts,silencer, exhaust pipes and radiators- Four-wheelers 10.3 10.3 12.4 12.4- Two-wheelers 10.3 10.3 12.4 12.4 4Electrical parts 7.7 7.7 12.4 12.4LCV: Light commercial vehicles; MHCV: Medium and heavy commercial vehicles1 All Hybrid cars and cars based on fuel cell or Hydrogen cell technologies enjoyconcessional excise duty of 4 per cent2 Specified small cars include cars with length not exceeding 4,000 mm and enginecapacity not exceeding 1,200 cc for petrol cars and 1,500 cc for diesel cars.3 Others will include cars with length exceeding 4,000 mm andengine capacity not exceeding 1,200 cc for petrol cars and 1,500 cc for diesel cars.4 Customs duty for air conditioner machine parts is at 10.3 per cent@Tax of 13.4 per cent or 25.8 per cent is applicable on transactions where only commercial vehicleschassis is sold* Additional duty of 3 per cent will be charged on cars and utility vehicles exceeding length of 4000 mm and which are of 1500 cc and above**Duty for utility vehicles with engine capacity exceeding 1500 cc length exceeding 4000 mm andhaving ground clearance of 170 mm is 30.9 per cent# CKD for vehicles with pre assembled engine and transmission parts is 30 per cent^Customs duty on motorcycles with engine capacity of 800 cc or morehas been increased from 61.8 per cent to 77.3 per cent^^Customs duty on CBUs priced (CIF) over $40,000, with engine capacity exceeding3000cc for petrol-run vehicles, 2500 cc for diesel-run vehicles, is 103 per centSource: CRISIL Research 31
  • 36. CRISIL BudgetAnalysis Automobiles Budget marginally negative for utility vehicles; neutral for other segments Company Impact Impact factors Maruti Suzuki Ltd - Tata Motors Ltd A, B, C, D Ashok Leyland Ltd B,D Bajaj Auto Ltd E Hero Motocorp Ltd E Mahindra & Mahindra Ltd B, E Note: Company list is classified as per sector classification Source: CRISIL Research Impact factors A. Demand for high-end imported luxury cars (with CIF value exceeding $40,000 and an engine capacity of over 3000 cc for petrol-run vehicles and 2500 cc for diesel-run vehicles) will be impacted as the basic customs duty has been raised to 100 per cent from 75 per cent. Similarly, sales of motorcycles (with an engine capacity of 800 cc or more) will be impacted by an increase in the basic customs duty to 75 per cent from 60 per cent. However, these high-end vehicles constitute a miniscule portion of the industry’s overall sales. B. The excise duty on cars, two-wheelers and commercial vehicles remains unchanged at 12 per cent. Demand for non-taxi sports utility vehicles (defined as a motor vehicle of length exceeding 4,000 mm and having a ground clearance of 170 mm and above) with an engine capacity above 1500 cc, will be marginally affected by the increase in excise duty to 30 per cent from 27 per cent. Sales of such vehicles, which account for 10-12 per cent of total domestic passenger vehicle sales, grew by about 16 per cent during April 2012 to January 2013. A reduction in excise duty on truck chassis to 13 per cent from 15 per cent will marginally benefit commercial vehicle sales. C. Surcharge of 10 per cent on annual incomes exceeding Rs 1 crore could marginally impact demand for luxury vehicles. Currently, these vehicles account for less than 3-4 per cent of industry sales. D. An increase in allocation under JNNURM will aid purchase of 10,000 buses and will benefit bus manufacturers. E. Extension of interest rate subvention to farmers, focus on rural development schemes like the Mahatma Gandhi National Rural Employment Gurantee Act (MGNREGA), Pradhan Mantri Gram Sadak Yojana (PMGSY) and Indira Awaas Yojana (IAY), coupled with a 22 per cent increase in agri-credit allocation to Rs 7,000 billion is expected to have a marginally positive impact on sales of tractors and two-wheelers.32
  • 37. BankingBanking sector to witness marginal improvement in credit offtake in 2013-14 Sluggish growth in the economy, shelving of capital expenditure plans by companies, and risk aversion by banks led to the overall deceleration in credit growth in 2012-13. Aggregate bank credit had grown by 16.4 per cent y-o-y as on February 08, 2013, compared with 17.1 per cent as on March 23, 2012. With GDP growth forecast to increase to 6.4 per cent from an estimated 5.0 per cent in 2012-13 and softening interest rates, we expect 2013-14 to be marginally better for the banking industry as compared to 2012-13. Aggregate bank credit is expected to grow by 17-18 per cent y-o-y, driven by improvement in agriculture growth, consumption-led recovery in the economy and pre-election welfare spending by the government. Deposits grew at a tepid pace of 13.3 per cent y-o-y as of February 08, 2013, owing to contraction of demand deposits as well as slower growth of savings bank deposits. •In 2013-14 as well, mobilising deposits will remain a challenge for banks. While inflation is expected to moderate, term deposit rates are also likely to decline with the reduction in policy rates. We expect bank deposits to grow by 14-15 per cent y-o-y in 2013-14. Net interest margins will come under pressure in 2012-13 and are expected to decline by 10-15 bps due to competitive pressure on yields and high cost of deposits. Aggregate GNPAs of all public sector banks (PSBs) rose to 3.9 per cent as of December 2012 from 3.0 per cent as of December 2011. During the same period, private banks’ GNPA improved by ~18 bps to 1.9 per cent. CRISIL Research estimates the banking sector’s GNPA will remain between 3.4-3.6 per cent by March 2014. GNPA is likely to peak in the first half of 2013-14 and ease off thereafter as corporate cashflows start to improve owing to demand growth and moderating commodity prices. The rise in GNPAs will also be restricted by the improvement in loan recovery ratio, sale of assets to asset reconstruction companies and debt restructuring to be undertaken by banks. 33
  • 38. CRISIL BudgetAnalysis Banking Recapitalisation of PSBs and boost to housing finance Company Impact Impact factors State Bank of India Ltd A, B, C, D, E Punjab National Bank Ltd A, B, C, D, E ICICI Bank Ltd B, C, D, E HDFC Bank Ltd B, C, D, E Source: CRISIL Research Impact factors A. Capital support to PSBs • The Budget proposed to provide Rs 140 billion as capital support to all PSBs in 2013-14. The government also intends to help PSBs comply with Basel III regulations. Capital support will be critical for PSBs to continue to pursue growth opportunities. B. Home loans • The clear focus on giving a boost to the housing market is also positive for financiers. An additional tax deduction of Rs 100,000 on interest paid towards home loans upto Rs 25 lakh availed in 2013-14 by first-time home buyers (over and above the existing Rs 150,000 deduction) has been introduced to give a boost to the affordable housing segment. This additional deduction can be claimed over a period of 2 years. • In addition, an amount of Rs 20 billion has been allocated towards a proposed Urban Housing Fund to be set up by the National Housing Bank (NHB). Such a fund is likely to assist the NHB in providing refinance and will mitigate the shortage of houses in urban areas. C. Farm credit • For 2013-14, banks have been directed to lend Rs 7,000 billion to the agriculture sector, 21.7 per cent higher than the target for 2012-13. • Farmers who avail of farm loans from PSBs and repay in a timely manner, get loans at subsidised rates. They will now be able to access this credit facility from private banks as well, thereby helping private banks increase lending to this segment. D. Improving insurance penetration • Banks have also been permitted to sell insurance products of multiple companies to increase insurance penetration. The move will supplement the fee income for such banks. • Additionally, banking correspondents have also been allowed to sell micro-insurance products.34
  • 39. BankingE. Post offices to contribute towards financial inclusion • With an investment of Rs 49 billion (of which Rs 5.3 billion has be allocated in 2013-14) to modernise the postal network, post offices will become part of the core banking solution and offer realtime banking services. • Post offices are envisaged to contribute to financial inclusion in India.F. Infrastructure Debt Funds (IDFs) • In order to mobilise funds for an estimated Rs 55 trillion worth of investments in the infrastructure sector during the Twelfth Five-Year Plan, the Union Budget encourages setting up of more IDFs. Currently, there are four IDFs registered with SEBI. • The IDFs will offer take-out finance, credit enhancements and other innovative means to provide long-term low- cost debt for infrastructure projects.G. Inflation-indexed bonds • In order to increase household financial savings so that they can be used productively to boost the economy, the Budget proposes to introduce instruments that will protect savings from inflation, like inflation-indexed bonds or inflation-indexed national security certificates. 35
  • 40. CRISIL BudgetAnalysis Cement Growth in cement demand to improve in 2013-14 CRISIL Research foresees growth in cement demand to be muted at around 5 per cent on a year-on-year (y-o-y) basis in 2012-13 and reach around 236 million tonnes, due to subdued uptake in construction activity across realty and infrastructure segments. However, with a revival in housing and infrastructure spending by the government in 2013-14, cement demand is expected to gain traction and grow at around 7 per cent y-o-y during the year. CRISIL Research expects industry operating rates to bottom out at around 71 per cent in 2012-13 due to muted growth in cement demand and overcapacity in the industry. However, from 2013-14 onwards, we foresee a gradual revival in the cement operating rates due to improvement in demand and cement industry approaching the end of its investment cycle. CRISIL Research expects average cement price across India to rise sharply by around 15 per cent in 2012-13, largely led by the steep price rise in the eastern region due to supply constraints on account of unavailability of railway wagons. Going forward, with the industry poised for a revival, cement prices are estimated to rise by a moderate 4-5 per cent in 2013-14. CRISIL Research believes that in 2012-13, the sharp rise in cement prices will more-than-offset the pressure exerted by rising input costs, especially freight. Freight costs are likely to rise due to a hike in freight rates as well as an increase in lead distances.Consequently, industry operating margin is estimated to improve by 300 bps to 23-24 per cent during the year. However, in 2013-14, as escalation in input costs is likely to more-than-offset increase in realisatons, we estimate industry operating margin to marginally decline by 100 bps. Cement: Tariffs (Per cent) Customs Excise Abatement rate 2012-13 2013-14 2012-13 2013-14 2012-13 2013-14 Portland cement 0 0 12.4 +Rs120/tonne 12.4 +Rs120/tonne 0 0 White cement 10.3 10.3 12.4 12.4 30 30 Cement clinker 10.3 10.3 12.4 12.4 0 0 Limestone 5.2 5.2 0 0 0 0 Gypsum 2.6 2.6 0 0 0 0 Pet coke 0 0 15.1 15.1 0 0 Source: CRISIL Research36
  • 41. CementHike in freight costs to offset benefits arising from boost to housing and infrastructure Company Impact Impact factors ACC Ltd A,B Ambuja Cements Ltd A,B India Cements Ltd A,B Shree Cement Ltd A,B UltraTech Cement Ltd A,B Source: CRISIL ResearchImpact factorsA. The Union Budget has proposed many schemes to boost the infrastructure (especially roads) and housing segments. This is expected to aid cement demand.B. However, this upside is likely to be offset by the increase in freight costs for cement companies, due to the proposed hike in railway freight. The Railway Budget 2013-14 has proposed fuel adjustment component linked revision for freight rates. 37
  • 42. CRISIL BudgetAnalysis Construction Slow revenue growth; declining profitability The order book position of major construction companies has declined during the April-December 2012 period due to weak order inflows. Slowdown in awarding projects in sectors such as roads, power and irrigation has been the key reason for lower order inflows. Revenue growth has also been subdued due to the delays in execution, financial stress of companies and the weak macroeconomic environment. Further, profitability has declined with the rising share of low-margin segments in the overall business, and sustained pressure on contract pricing - especially in road projects. The financial flexibility of most construction companies is currently stressed owing to increased leverage and reduced ability to repay borrowings. Increase in long-term debt can be primarily attributed to the loans taken for BOT projects, while the short-term loans have increased considerably due to higher working capital requirement of these companies. In the near term, we foresee single-digit revenue growth with expected execution delays, particularly in power and irrigation. Profitability is expected to decline on account of the muted revenue growth and competitive pressures. However, the decline will be offset, to some extent, by the softening of material prices. Over the long term (next 5 years), CRISIL Research expects growth to pick up gradually and estimates the total construction opportunity to be around Rs 19.2 trillion between 2012-13 and 2016-17. Over 85 per cent of the total opportunity is likely to come from infrastructure spending, specifically the roads, irrigation and urban infrastructure sectors. In the industrial segment, the opportunity is expected to be low on account of sluggish expansion plans in the large contributors such as oil and gas, metals and automobiles. Roads will account for the lions share of construction opportunity over the next 5 years. The Central governments programmes including the National Highway Development Programme (NHDP), Pradhan Mantri Gram Sadak Yojana (PMGSY), and road development programmes of the various state governments will support growth in road investments.38
  • 43. ConstructionMeasures to boost investments in roads, urban infrastructure Company Impact Impact factors Larsen & Toubro Ltd A,B,C Hindustan Construction Co Ltd A,B,C IVRCL Infrastructures & Projects Ltd A,B,C IRB Infrastructure Developers Ltd A,B Gammon India Ltd A,B,C Source: CRISIL ResearchImpact factorsA. Government agencies (including NHAI and HUDCO) have once again been permitted to issue tax-free infrastructure bonds in 2013-14 totalling up to Rs 500 billion. This will provide additional funds to various infrastructure sectors such as roads, ports and power.B. In the roads sector, the budget proposes to set up an independent regulatory authority. In the medium term, this could help faster implementation of road projects. After the substantial completion of the Pradhan Mantri Gram Sadak Yojana (PMGSY), the PMGSY – II has been introduced to support rural road development. This is expected to benefit the small local road contractors.C. Allocation towards the JNNURM programme (Jawahar Lal Nehru National Urban Renewal Mission) has been doubled in 2013-14 from the previous year. This will boost spending on ongoing and upcoming urban infrastructure projects. In addition, allocation to the Ministry of Drinking Water and Sanitation has been increased by 17 per cent in 2013-14, driving investment, particularly in water supply and sanitation. 39
  • 44. CRISIL BudgetAnalysis Fertilisers Higher international prices and inadequate monsoon impacts non-urea fertiliser consumption Domestic fertiliser demand is estimated to fall by 12 per cent y-o-y to 52.9 million tonnes (in product terms) in 2012- 13, because of a steep rise in non-urea fertiliser prices and delayed monsoons. While demand for urea is likely to increase by 1 per cent to 29.9 million tonnes, sales of non-urea fertilisers are expected to decline by 24 per cent. In 2012-13, anticipating a decline in international fertiliser prices, the government cut subsidy rates on non-urea fertilisers by 10-12 per cent for N and K nutrients, and by 32 per cent for the P nutrient. While international fertiliser prices declined, a weakening rupee offset the benefits of same. Consequently, fetiliser manufacturers were forced to increase non-urea fertiliser prices (by an average of 25-30 per cent y-o-y), which affected demand. Besides high prices, delayed monsoons impacted Kharif sowing, thereby further impacting fertiliser consumption. The decline in demand has been more severe in southern and western regions as compared to North and East, due to inadequate monsoons and water shortage. In 2013-14, overall fertiliser demand is expected to improve, assuming normal monsoons and an expected decline in retail prices of non-urea fertilisers (by Rs 1,300-1,500 per tonne) owing to a decline in international prices. While demand for non-urea fertilisers is expected to rise by 12 per cent to 25.9 million tonnes, demand for urea is expected to grow by 4.1 per cent to 31.1 million tonnes. More urea plants will be set up, aided by a favourable investment policy approved by the government in December 2012. These capacity additions are likely to reduce dependence on imports over the long term.40
  • 45. FertilisersFertilisers: Tariffs, prices and landed costs Landed costs Tariffs (per cent) Prices (Jan 2013) (Rs/tonne) Customs Excise Domestic International Pre- Post- 2012-13 2013-14 2012-13 2013-14 (Rs/tonne) ($/tonne) budget budgetUrea 5.2 5.2 12.4 12.4 5,360 421 25,595 25,595DAP 5.0 5.0 12.4 12.4 24,000 470 30,538 30,538MOP 5.0 5.0 12.4 12.4 17,000 453 28,394 28,394Ammonia 5.2 5.2 12.4 12.4 n.a. 585 41,653 41,653Phosphoric acid 5.2 5.2 - - NT 813 47,333 47,333Sulphur 2.1 2.1 - - n.a. 166 9,386 9,386Rock phosphate 5.2 5.2 - - NT 140 9,321 9,321Naphtha - - - - 59,520 971 54,534 54,534Fuel oil - - - - 39,400 643 36,300 36,300 2Contracted LNG 5.0 5.0 - - - - 24,268 24,268DAP: Di-ammonium phosphate; LNG: Liquified natural gasMOP: Muriate of potash; NT: Not traded; n.a.: Not available"-" indicates not applicableNotes:1) There is no excise and customs duty on naphtha and fuel oil used for production of fertilisers.2) International prices are FOB prices.Source: CRISIL Research 41
  • 46. CRISIL BudgetAnalysis Fertilisers Fertiliser subsidy for 2013-14 to remain unchanged y-o-y Company Impact Impact factors Nagarjuna International Ltd B Chambal Fertilisers & Chemicals Ltd A,B Coromandel Fertilisers Ltd A Gujarat State Fertilisers Company Ltd A,B National Fertilisers Ltd B Rashtriya Chemicals and Fertilisers Ltd A,B Zuari Industries Ltd A,B Source: CRISIL Research Impact factors In 2013-14, fertiliser subsidy is expected to stay constant at last year’s level of Rs 659 billion - A. Subisidy on non-urea fertilisers is budgeted to decline by Rs 10 billion, despite higher demand, as nutrient-based subsidy (NBS) rates are expected to be reduced due to a fall in international prices. B. The increase in budgeted subsidy of Rs 10 billion on indigenous urea for 2013-14 implies that the government is not expected to hike retail urea prices during the year. Further, unavailability of incremental domestic natural gas will force plants converting from high cost naphtha/fuel oil feedstock to import gas at relatively higher spot prices, thus keeping subsidy burden high.42
  • 47. HotelsRoom additions to impact RevPARs During April-December 2012, growth in room demand remained subdued at around 4 per cent for 12 key business and leisure destinations in India, due to an uncertain macroeconomic environment. However, room additions continued to grow at a faster rate of 10 per cent. As a result, occupancy rates (ORs) declined by 200 basis points on a year-on-year (y-o-y) basis to 60 per cent. Intense competition resulted in average room rates ( ARRs) declining by 3 per cent and consequently, revenue per available room (RevPARs) declined by 5 per cent y-o-y during this period. In 2013-14, growth in room supply is expected to outpace the growth in room demand in 12 key cities of India. While room demand is expected to increase by a modest 8 per cent, room supply is likely to rise by 14 per cent. This demand–supply mismatch will lead to a 200-300 basis point decline in occupancy rates (ORs), which could reach decadal lows of 58 per cent in 2013-14. Further, intensifying competiton, arising from supply additions, will cause ARRs to decline by 4-5 per cent y-o-y to Rs 7,000 per day in 2013-14, from Rs 7,400 per day in 2012-13. As a result, RevPARs are expected to dip by 8-9 per cent to Rs 4,050 in 2013-14, from Rs 4,450 in 2012-13. All business destinations are expected to witness a drop in RevPARs. Premium segment hotels in cities like Chennai, Bengaluru and Ahmedabad will witness RevPARs declining by over 15 per cent (y-o-y) in 2013-14. RevPARs in NCR and Kolkata are expected to decline by around 10 per cent. On the other hand, RevPARs in Mumbai, Pune and Hyderabad will decline at a relatively moderate pace of 2-5 per cent (y-o-y) in 2013-14, as supply additions are expected to be relatively slow. Among leisure destinations, RevPARS in premium hotels in Kochi and Jaipur will decline by around 15 per cent y-o- y in 2013-14. RevPARs in Goa and Agra will increase by 5-7 per cent y-o-y on account of limited supply additions. 43
  • 48. CRISIL BudgetAnalysis Hotels Union Budget 2013-14 - neutral impact on hotel industry Company Impact Impact factors Hotel Leelaventure Ltd A EIH Ltd A Oriental Hotels Ltd A Taj GVK Hotels & Resorts Ltd A Indian Hotels Company Ltd A Source: CRISIL Research Impact factors A. As of July 2012, only air-conditioned restaurants that served liquor were levied a service tax at 12.36 per cent, with an abatement of 60 per cent (net service tax of 4.95 per cent). In the Union Budget of 2013-14, it has been proposed to include all air-conditioned restaurants, including those which do not serve liquor, under the service tax net. This proposal is not expected to impact demand as the service tax will be passed on to consumers.44
  • 49. Household AppliancesDemand for household appliances to improve in 2013-14 The household appliance industry is estimated to grow by 10 per cent in 2012-13 to Rs 384 billion. The growth will largely be supported by an increase in realisations as players have partially passed on the rise in raw material cost. CRISIL Research expects volume growth to be a mere 3 per cent, marginally higher as compared to 2011-12 due to weak consumer sentiment given the slow economic growth, high inflation, rising interest rates and rise in the prices of most appliances. In 2013-14, we expect better growth prospects with improvement in economic scenario - relatively lower inflation, stable product prices and decline in interest rates. Volume growth is expected to more than double to 7-8 per cent in 2013-14. Along with healthy volume growth, realisations would also increase due to a shift in favour of high-value products like LCD TVs, split ACs and fully automatic washing machines. We project overall revenue of the industry to grow at 11 per cent to Rs 426 billion. The different segments in the industry are expected to perform as follows: a) Television sales are likely to rise by 5 per cent in volume terms during 2013-14 driven by a robust demand growth in the LCD segment. b) Refrigerator volumes are estimated to grow at 9-10 per cent with healthy demand in both frost-free and direct cool segments. c) Washing machine segment is expected to register a volume growth of 8-9 per cent in 2013-14. d) Air conditioners (highly seasonal product), which recorded a marginal volume growth during 2012-13 due to a relatively cooler summer and high product prices, are expected to clock double-digit volume growth assuming favourable weather conditions. Prices of major raw materials used in household appliances are expected to come down in 2013-14 as steel prices trend lower. As a result, player operating margins are expected to improve by 40-50 basis points. In the long term, demand growth will be largely driven by favourable demographics, rising disposable incomes, shift in consumer preferences, low penetration (especially in rural areas) and competitive prices. 45
  • 50. CRISIL BudgetAnalysis Household Appliances Household appliances: Tariffs (Per cent) Customs Excise Abatement rate 2012-13 2013-14 2012-13 2013-14 2012-13 2013-14 B/W TVs 10.3 10.3 12.4 12.4 - - Colour TVs (CRT, LCD) 10.3 10.3 12.4 12.4 30 30 Refrigerators 10.3 10.3 12.4 12.4 35 35 Room ACs 10.3 10.3 12.4 12.4 25 25 Washing machines 10.3 10.3 12.4 12.4 35 35 CPT and glass parts 10.3 10.3 12.4 12.4 - - LCD panel 0.0 0.0 12.4 12.4 - - Compressors, thermostat and tubes 7.7 7.7 12.4 12.4 - - Steel 5.2 5.2 12.4 12.4 - - Polymers 5.2 5.2 12.4 12.4 - - CRT: Cathode ray tube, LCD: Liquid crystal display, CPT: Colour picture tube Source: CRISIL Research46
  • 51. Household AppliancesNo impact on household appliance industry Company Impact Impact factors Videocon Industries Ltd - Whirlpool of India Ltd - MIRC Electronics Ltd - Source: CRISIL ResearchImpact factorA. The Budget had no specific proposal pertaining to the household appliance industry. A tax credit of Rs 2,000 for a person with income upto Rs 5 lakh per annum, introduced in the Union Budget 2013-14, will result in higher disposable income in the hands of people coming in the lowest tax bracket. But, this is unlikely to translate into any meaningful impact on the demand. 47
  • 52. CRISIL BudgetAnalysis Housing Poor demand, high interest rates weigh on housing companies Revenues of residential real estate developers remained almost flat y-o-y during April-December 2012, owing to weak demand. High interest rates and slow economic growth resulted in tepid housing sales. Average capital values have increased by about 5 per cent across the 10 major cities tracked by CRISIL Research. Profitability of developers has declined owing to an increase in input prices, cost overruns in some projects and higher interest cost. Thus, financials of real estate companies have significantly deteriorated in the past 2-3 years. Some players therefore are looking to sell non-core assets. Over the next 2 years, CRISIL Research expects residential real estate demand to pick up, led by an improvement in economic growth and softening of interest rates. As demand improves, capital values are also expected to increase. However, these factors are not expected to significantly improve developers’ financial profile over the medium term.48
  • 53. HousingMeasures to tackle housing shortage Company Impact Impact factors DLF Ltd A,C Housing Development and Infrastructure Ltd A,C Parsvnath Developers Ltd A,C Sobha Developers Ltd A,C Unitech Ltd A,C Source: CRISIL ResearchImpact factorsA. First-time home buyers taking a loan of up to Rs 25 lakh in 2013-14 can avail of an additional interest deduction of Rs 1 lakh in the first year, over and above the existing Rs 1.5 lakh benefit. This is likely to boost new home sales.B. Allocation towards the Rural Housing Fund has been increased by 50 per cent to Rs 60 billion for 2013-14. In line with the Rural Housing Fund, an Urban Housing Fund is proposed to be established by National Housing Bank. The fund has been allocated Rs 20 billion for 2013-14. These steps are aimed at boosting fund availability and addressing the overall housing shortage.C. For premium apartments (with a carpet area of 2,000 sq ft or above and/or valued at Rs 1 crore or more), abatement in service tax has been reduced to 70 per cent from 75 per cent. While this would result in an increase of 0.6 per cent in the effective service tax rate, the impact on demand is expected to be negligible. 49
  • 54. CRISIL BudgetAnalysis Information Technology Growth prospects to improve in 2013-14 The Indian information technology (IT) industry primarily consists of four segments – IT services, IT enabled services, IT software and hardware. The slow economic growth in the US and European markets has adversely impacted Indian IT services exports growth in 2012-13. As a result, exports are expected to grow only by 10 per cent in USD terms in 2012-13, down from the 19 per cent growth seen in 2011-12. Growth is being led by volumes as billing rates are under pressure. Blended billing rates fell by 1-2 per cent with a slowdown in the billing of BFSI clients, who account for 41 per cent of total revenues, and the increasing proportion of lower value services in IT revenues. According to CRISIL Research estimates, in 2013-14, IT services exports will grow at a relatively faster pace of 13-15 per cent y-o-y to reach $50 billion. Although we expect the IT budget of clients to remain flat in 2013, increase in the share of offshoring will enable a higher growth in the coming year. According to NASSCOM, Indian ITeS exports grew by 12 per cent y-o-y in 2012-13. Although India is facing stiff competition in the customer relationship management (CRM) space, higher-value knowledge-based services will continue to drive growth in the ITeS industry. An inherent need to reduce costs will ensure continued offshoring by clients, thereby supporting growth. CRISIL Research expects ITeS industry export revenues to grow by 11-13 per cent y-o-y in 2013-14, driven by growth in transaction and knowledge based services. The domestic information technology (excluding IT hardware) is expected to grow by 14.1 per cent in rupee terms in 2012-13. Factors such as rapid advancement in technology infrastructure, enhanced focus by the government on e- governance projects and emergence of business models that help provide IT to new customer segments are driving technology adoption in India. During 2013-14, the Indian IT hardware Industry is expected to witness double-digit growth in rupee terms. In 2012-13, the operating margins of IT services exports players are likely to improve on account of benefit arising out of rupee depreciation. However, CRISIL Research expects this trend to reverse in 2013-14 as rupee is expected to appreciate against the dollar while the billing rates remain more or less flat.50
  • 55. Information TechnologyIT: Hardware and software tariffs 1 Tariff (per cent) Customs Excise 2012-13 2013-14 2012-13 2013-14Packaged software 0.0 0.0 0.0 0.0Personal computers 0.0 0.0 12.4 12.4Monitor 0.0 0.0 12.4 12.4Keyboard 0.0 0.0 12.4 12.4Mouse 0.0 0.0 12.4 12.4Printer 0.0 0.0 12.4 12.4 2FDD, HDD, CD-ROM drive and other storage drives 0.0 0.0 6.2 6.2Motherboards 0.0 0.0 12.4 12.4 3Microprocessors 0.0 0.0 6.2 6.2Routers 0.0 0.0 12.4 12.4Modems 0.0 0.0 12.4 12.41 Tax rate is inclusive of education cess.2FDD: Floppy disk drive; HDD: Hard disk drive; CD-ROM: Compact disk-read only memory.3Microprocessors meant for fitment inside the CPU housing/laptop body.Source: CRISIL Research 51
  • 56. CRISIL BudgetAnalysis Information Technology No significant impact on the IT sector Company Impact Impact factors Infosys Technologies Ltd A,B Tata Consultancy Services Ltd A,B Wipro Ltd A,B Polaris Software Lab Ltd A,B Firstsource Solutions Ltd A,B Zenith Computers Ltd A,B Source: CRISIL Research Impact factors A. The increase in surcharge from 5 per cent to 10 per cent for companies with taxable income higher than Rs 100 million will increase the effective MAT levied to 21 per cent, from the current 20 per cent. The additional surcharge will be applicable only for the financial year 2013-14. B. Focus on education and skill development is a structurally long term positive for the sector.52
  • 57. Media and EntertainmentMuted growth in advertising spends due to subdued macroeconomic environment Advertising spends, which had slowed in 2011-12, have been further impacted in 2012-13 due to a weak macro- economic environment. The overall growth in advertising spends is expected to be only 7-9 per cent in 2012-13, as compared with 9-10 per cent in 2011-12. Growth is expected to remain muted in the first half of 2013-14, with a rebound likely in the latter half of the year owing to a revival in economic activity. A slowing pace of growth in advertising spends would impact the topline of media companies, particularly broadcasters and newspaper publishers, where advertising constitutes more than 70 per cent of total revenues. Growth in advertising spends in mobile & digital media and radio is expected to be higher as compared to traditional media such as television and newspapers. This would be on account of advertisers allocating an increasing share of spends towards digital & mobile media, given its growing reach. The implementation of FM Phase III coupled with increased traction from local advertisers is expected to drive growth in the radio segment. Growth in subscription revenue in 2012-13 is expected to be higher at around 12 per cent y-o-y, primarily owing to impressive box office collections of films aided by a strong movie pipeline, increase in the number of multiplexes and a rise in the average ticket price. While subscription revenue growth for television is being driven by migration of subscribers to digital viewing platforms, for print, it is being driven by growth in circulation numbers. Growth in subscription is expected to remain steady at 9-11 per cent in 2013-14. Overall media revenues are, thus, expected to increase by 10-12 per cent in 2013-14. The proportion of digital television subscribers is on the rise, as the deadline for digitisation has passed in all the metro cities and the Phase II deadline nears (April 2013) for 38 more cities. As a result, the digital television subscriber base, as a proportion of cable and satellite subscribers, is expected to rise to over 65 per cent by 2013- 14 from 50 per cent in 2011-12. Digitisation would also ensure a higher proportion of subscription revenues being received to broadcasters, direct-to-home operators and multi-system operators.Media and entertainment: Tariffs(per cent) Customs Excise 2012-13 2013-14 2012-13 2013-14Digital cinema equipment 7.7 7.7 12.4 12.4Broadcast equipment 10.3 10.3 12.4 12.4Set-top boxes 5.2 10.3 12.4 12.4Source: CRISIL Research 53
  • 58. CRISIL BudgetAnalysis Media and Entertainment Overall impact neutral; negative for DTH operators and MSOs Company Impact Impact factors Balaji Telefilms Ltd - Dish TV India Ltd A Entertainment Network India Ltd B Hathway Cable & Datacom Ltd A HT Media Ltd B PVR Ltd - Sun TV Ltd - Zee Entertainment Enterprises Ltd - Source: CRISIL Research Impact factors A. The hike in customs duty on set-top boxes (STBs) to 10 per cent from 5 per cent would increase the subscriber acquisition costs of direct-to-home operators and multi-system operators in the short term, as most STBs are still imported. B. 839 FM channels in 294 cities are intended to be auctioned in 2013-14. While FM channels are expected to witness a healthy uptake in bigger cities, we expect that their demand would be subdued in smaller cities, owing to weak revenue earning potential.54
  • 59. Non-ferrous metalsAluminium: Input costs to remain firm; prices to increase Domestic demand for aluminium is expected to rise by 6-8 per cent y-o-y in 2013-14, led by steady growth in the power (the largest consumer) and consumer durables sectors. Further, a recovery in automobile demand during the year is also expected to support growth. Global aluminium prices are expected to fall by 14 per cent (y-o-y) to average $1990 in 2012-13. In spite of a decline in international prices, domestic prices are expected to increase by about 7 per cent (y-o-y) led by a weak rupee, and will average Rs 141,500 per tonne. International prices are likely to increase in 2013-14 and range between $2,100-2,300 per tonne in 2013-14. In 2013-14, operating profitability of domestic aluminium players will remain stable as increase in realisations is expected to be offset by higher power costs.Copper In 2012-13, domestic prices are expected to be 7-8 per cent higher (y-o-y) as the landed cost of copper increased on account of a weak rupee. During the year, global copper prices are however expected to decline by 7-8 per cent on account of lower demand from the European Union, Japan and China. Operating margins of fully-integrated players are likely to improve, benefitting from higher realisations. However, margins of custom smelter players, treatment charges/refining charges (TC/RC) will remain under pressure because of a global shortage of copper concentrate.Zinc Domestic demand for zinc is estimated to increase by 4-6 per cent in 2012-13, because of slow growth in demand from the domestic galvanised steel products sector, which is the largest consumer. Global demand declined by 3 per cent in 2012 following a decline in demand from China and Europe. Average international zinc prices are expected to decline by about 7 per cent in 2012-13, owing to increased supply and weak demand in global markets, whereas rupee depreciation will push up average domestic prices by about 6-7 per cent during the year.Lead In 2012, global demand for lead fell by 1.5- 2.0 per cent on account of lower demand from China and the European Union. However, domestic production increased by 10.6 per cent during the year. Average international lead prices are expected to be 7-8 per cent lower in 2012-13. However, depreciation in the rupee value will push up average domestic prices by 7-8 per cent over the same period. 55
  • 60. CRISIL BudgetAnalysis Non-ferrous metals Non-ferrous metals:Tariffs, prices and landed costs 1 Tariff (per cent) Prices (February 2013) Landed cost (Rs/tonne) 2 3 Customs Excise Domestic International Pre-budget Post-budget 2012-13 2013-14 2012-13 2013-14 (Rs/tonne) ($/tonne) Aluminium ingots 5.2 5.2 12.4 12.4 145,000 2,078 137,764 137,764 Aluminium products - Flat-rolled products 5.2 5.2 12.4 12.4 - - - - - Foils 5.2 5.2 12.4 12.4 - - - - Aluminium scrap 5.2 5.2 12.4 12.4 - - - - Non-coking coal 0.0 2.1 0.0 0.0 - - - - Caustic soda 7.7 7.7 12.4 12.4 - - - - Calcined 2.6 2.6 12.4 12.4 - - - - petroleum coke Copper 5.2 5.2 12.4 12.4 525,333 8,173 539,006 539,006 Copper scrap 5.2 5.2 12.4 12.4 - - - - Copper ore and 2.6 2.6 4.1 4.1 - - - - 4 concentrates Lead 5.2 5.2 12.4 12.4 130,000 2,407 159,453 159,453 Lead ore and 2.6 2.6 4.1 4.1 - - - - concentrates Zinc 5.2 5.2 12.4 12.4 149,333 2,151 142,578 142,578 Zinc ore and 2.6 2.6 4.1 4.1 - - - - concentrates Note: Duties also include cess Source: CRISIL Research56
  • 61. Non-ferrous metalsNo significant impact for the industry Company Impact Impact factors Hindalco Industries Ltd B Hindustan Copper Ltd Hindustan Zinc Ltd A National Aluminium Company Ltd B Sterlite Industries (India) Ltd B Source: CRISIL ResearchImpact factorsA. Excise duty has been levied at 4 per cent on silver obtained from smelting zinc or lead, to bring the rate on par with the duty levied on silver obtained from copper ores and concentrates. As the sale of by-products such as silver typically account for a mere 5-10 per cent of a zinc manufacturer’s revenues, the impact of the increase in excise duty is expected to be negligible.B. Export duty levy of 10 per cent will help improve domestic availability of bauxite. However the impact will be negligible as India exported only around 0.4 mn tonnes of bauxite (2 per cent of production) in 2011.C. The Railway Budget for 2013-14 has proposed a hike of 5.8 per cent in the freight rate. This would translate into an estimated increase of Rs 500-700 per tonne in logistics costs for aluminium facilities located away from the coal mines. 57
  • 62. CRISIL BudgetAnalysis Oil and Gas Under-recoveries to surge to record levels in 2012-13 despite price revisions After averaging $114.4 per barrel in 2011-12, crude oil prices have remained high, averaging at $110 per barrel in 2012-13 (April 2012 to January 2013), due to sanctions imposed on Iran by the US and the EU, and political tensions in some of the countries in the MENA (Middle East and North Africa) region. CRISIL Research expects crude oil prices to average $112 per barrel in 2012-13. Crude oil demand rose by 5.3 per cent y-o-y to 160 million tonnes during April-December 2012. Imports also increased by 6.8 per cent y-o-y to 134.2 million tonnes as domestic production did not keep pace with demand. Due to inadequate revision in prices of regulated fuels, high crude oil prices and a weak rupee vis-a-vis the US dollar, the under-recoveries of oil marketing companies (OMCs) are expected to touch an all-time high of Rs 1,600 billion in 2012-13. The mounting under-recoveries have pushed OMCs into the red, as shrinking profits from their refining business have not been able to offset the marketing losses. However, the government affected a Rs 5 per litre increase in diesel prices in September 2012, and has allowed small revisions in diesel prices since January 2013 to gradually align the domestic prices to international prices. This will lead to a decline in under-recoveries in 2013-14. Gross refining margins (GRMs) remained flat at $5.2 per barrel during April-December 2012 as compared to the same period last year. Due to technical issues in the KG-D6 basin, India’s gas production declined to 115 mmscmd during April-November 2012 from 133 mmscmd in the same period last year. This impacted the profitability of gas production and transmission companies. Further, the higher usage of LNG affected the profitability of gas marketing companies.58
  • 63. Oil and GasOil and gas: Tariffs, prices and landed costs Tariffs Prices Landed costs (per cent) (February 2013) (Rs/tonne) Pre- Post- Customs Excise Domestic International Budget Budget 2012-13 2013-14 2012-13 2013-14 (Rs/tonne) ($/tonne)Motor spirit (MS) 2.6 2.6 Rs 9.476/ltr Rs 9.476/ltr 102,608 1,109 63,602 63,602Aviation turbine fuel 8.2 8.2 8.2 8.2 86,633 1,036 62,915 62,915(ATF)Naphtha 19.6 19.6 14.4 14.4 59,520 971 65,206 65,206Superior keroseneoil (SKO)- Industrial use 5.0 5.0 14.4 14.4 59,268 1,016 59,861 59,861- Domestic use 0.0 0.0 0.0 0.0 15,236 1,036 58,125 58,125High-speed diesel 2.6 2.6 Rs 3.563/ltr Rs 3.563/ltr 64,672 986 56,600 56,600(HSD)Fuel oil 5.0 5.0 14.4 14.4 39,400 643 38,115 38,115Liquefied petroleumgas (LPG)- Domestic use 0.0 0.0 0.0 0.0 30,880 1,043 59,648 59,648Bitumen 5.0 5.0 14.4 14.4 n.a. 643 38,500 38,500 1Crude oil 0.0 0.0 0.0 0.0 n.a. 864 - - 2Natural gas- APM 0.0 0.0 14.0 14.0 9,000 - - -- Non-APM 0.0 0.0 14.0 14.0 11,250 - - - 3LNG 5.0 5.0 14.0 14.0 - 428 24,268 24,268- indicates not applicablen.a.: Not available1 Cess on crude oil (in lieu of excise) is Rs 4,500 per tonne2 Price per 000 scm3 Prices are for contracted LNG (landed cost) in Rs per 000 scm as per estimatesNotes1) International prices are FoB Arab Gulf prices.2) Domestic price of petroleum products are ex-storage point prices.3) Priority sectors for natural gas include power and fertiliser.4) Domestic natural gas prices represent landfall prices for each category.5) Customs duty and excise duty on naphtha used for fertiliser is nil.6) Customs duty and excise duty on fuel oil used in fertiliser is nil.Source: CRISIL Research 59
  • 64. CRISIL BudgetAnalysis Oil and Gas Change in exploration policy and review of current natural gas pricing policy to be positive The proposed change in the exploration policy to revenue sharing from profit sharing for exploration and development contracts is marginally positive for upstream companies, as this is expected to remove any ambiguity related to the ascertaining of costs related to exploration and development, and will avoid delays in approvals from the regulatory authority. This policy will be applicable for the blocks that will be awarded henceforth, and the benefits will accrue over the long term. Furthermore, faster clearances will be provided to awarded but stalled NELP blocks. The government also declared a review of the current natural gas pricing policy, which is positive for the sector as it is expected to incentivise exploration investments. Additionally, a shale gas policy is expected to be announced in 2013-14. However, this would improve domestic natural gas production only over the long term. Company Impact Impact factors Oil and Natural Gas Corporation Ltd A, B, C Reliance Industries Ltd A, B, C Cairn India Ltd A, B, C Oil India Ltd A, C Source: CRISIL Research Impact factors A. Proposed change in the exploration policy B. Clearances of stalled NELP blocks C. Review of the current natural gas pricing policy60
  • 65. PaperOperating margins are expected to increase in 2013-14 after three continuous years of decline Recent capacity additions coupled with weak domestic demand for paper (due to a slowdown in the macroeconomic environment) has pulled down operating rates from 78.5 per cent in 2010-11 to 76 per cent in 2012-13. In 2013-14, due to the recovery in the economy, demand growth is expected to improve from 5.9 per cent in 2012-13 to 6.4 per cent in 2013-14. This is expected to push up operating rates marginally to 77 per cent in 2013-14. Global pulp and wastepaper prices have fallen by 15 per cent and 18 per cent in 2012 over 2011 levels. However, domestic paper prices have not fallen in tandem, as the prices of domestic hardwood, which most of the large players use, have risen steeply. In 2013-14,CRISIL Research expects paper prices to increase on the back of improved demand and better pricing flexibility of players to pass on increases in raw material costs. Operating margins of players are expected to decline by 200 basis points in 2012-13 on account of subdued demand and players’ inability to pass on steep increases in raw material costs. In 2013-14, operating margins are expected to improve following improved demand, higher paper prices and decline in fuel costs. Despite global newsprint prices falling by 10 per cent in 2012, domestic newsprint prices have remained stable because of depreciation of the rupee vis-a-vis the US dollar. Increase in global newsprint prices following the shut down of capacitites in North America will support an increase in domestic newsprint prices in 2013-14. Margins of domestic newsprint players are expected to improve following an increase in domestic newsprint prices and a fall in global wastepaper prices.Tariffs(per cent) Tariff (per cent) Prices (February 2013) Landed cost (Rs/tonne) Customs Excise Domestic International Pre-budget Post-budget 2012-13 2013-14 2012-13 2013-14 (Rs/tonne) ($/tonne)Newsprint 0.0 0.0 0.0 0.0 33,500 630 33,877 33,877 1Maplitho 10.3 10.3 6.2 6.2 58,000 n.a. - - 1Duplex board 10.3 10.3 6.2 6.2 31,840 n.a. - - 1Art board 10.3 10.3 6.2 6.2 59,000 n.a. - -Wood pulp 5.2 5.2 2.1 2.1 NT 650 37,510 37,510(hard)Wood pulp 5.2 5.2 2.1 2.1 NT 645 37,222 37,222(soft)Waste paper 0.0 0.0 6.2 6.2 11,300 245 13,989 13,989(OCC)n.a. - Not availableNT: Not traded1 Prices are delivered prices excluding VAT (delivered: basic+excise+octroi+avg freight prices)Source: CRISIL Research 61
  • 66. CRISIL BudgetAnalysis Paper Increase in education spending to help sustain demand for Writing & Printing paper Company Impact Impact factors Andhra Pradesh Paper Mills Ltd A Ballarpur Industries Ltd A JK Paper Ltd A Seshasayee Paper and Boards Ltd A Tamil Nadu Newsprint and Papers Ltd A Source: CRISIL Research Impact factors A. Budgetary allocation for education has been increased by 19 per cent, which is expected to maintain demand for creamwove variety of Writing & Printing paper. This variety, primarily used in the manufacture of textbooks, notebooks and other stationery for education, accounts for 17 per cent of paper and paperboard demand.62
  • 67. PetrochemicalsPetrochemical and polymer demand to improve gradually in 2013-14, resulting in an uptick in crackermargins In calendar year 2012, cracker margins fell to average $168 per tonne of ethylene produced from $234 per tonne in 2011 due to weak demand from the downstream segments amidst high economic uncertainty in the EU and the US. Despite better realisations of by-products including olefins and aromatics, a sharp decline in butadiene prices led to a drop in cracker margins. CRISIL Research forecasts cracker margins to improve y-o-y in 2013 to $170-210 per tonne, as feedstock prices are expected to decrease. Additionally, improved demand from downstream segments will bring some respite and pricing flexibility for players. Domestic prices are likely to follow the global price trend in the medium term. Domestic demand for petrochemicals is estimated to grow by 4-7 per cent y-o-y in 2012-13 on account of weak demand from end-user sectors. However, demand growth is forecast to improve moderately at 6-9 per cent (y-o-y) in 2013-14, primarily driven by a recovery in demand in key end-use markets such as automotives, construction, woven sacks, household appliances, and packaging material industries.Demand for commodity chemicals to grow at 6-9 per cent in 2013-14 Recovery in the growth rate of automotive and construction industries will be the key growth driver of domestic demand in the commodity chemicals sector, which is estimated to grow at 6-9 per cent annually in 2013-14. A large proportion of domestic demand will be met through imports. Capacity constraints in phenol and Linear Alkyl Benzene (LAB) and inadequate supply of feedstock (natural gas) for methanol will lead to an increase in imports. Prices of all commodity chemicals have increased in calendar year 2012 in line with the increase in crude oil and feedstock prices. However, due to slowdown in demand globally, commodity chemical manufacturers were unable to pass on the total increase in prices. This led to a decline in tolling margins for all the chemicals, except Phthalic Anhydride (PAN), which recovered from the lowest decadal margins recorded in 2011. In 2013-14, tolling margins for most commodity chemicals are expected to improve with a recovery in demand. However, we expect margin pressure for PAN with relatively weak demand and higher feedstock prices. 63
  • 68. CRISIL BudgetAnalysis Petrochemicals Chemicals: Tariffs, domestic prices and landed costs (per cent) Tariff (per cent) Prices (Jan 2013) Landed cost (Rs/tonne) Pre- Post- Customs Excise Domestic International budget budget 2012-13 2013-14 2012-13 2013-14 (Rs/tonne) ($/tonne) Polymers 1 3 hdPE (IM) 5.2 5.2 12.4 12.4 99,317 1,458 99,259 99,259 1 3 ldPE 5.2 5.2 12.4 12.4 100,079 1,424 96,945 96,945 1 3 lldPE 5.2 5.2 12.4 12.4 99,766 1,444 98,306 98,306 1 3 PPHP (IM) 5.2 5.2 12.4 12.4 102,023 1,438 97,898 97,898 1 3 PVC 5.2 5.2 12.4 12.4 70,558 995 67,739 67,739 1 3 PS (GP) 5.2 5.2 12.4 12.4 124,764 1,881 128,057 128,057 3 ABS 5.2 5.2 12.4 12.4 130,970 2,024 137,792 137,792 3 SBR (1502) 10.3 10.3 12.4 12.4 160,000 2,250 160,680 160,680 3 PBR (1220) 10.3 10.3 12.4 12.4 157,000 2,500 178,534 178,534 Basic petrochemicals and intermediates 3 EDC 2.6 2.6 12.4 12.4 n.a. 361 23,535 23,535 3 VCM 2.6 2.6 12.4 12.4 n.a. 846 54,073 54,073 2 Styrene 2.6 2.6 12.4 12.4 n.a. 1,714 115,655 115,655 2 Ethylene 5.2 5.2 12.4 12.4 n.a. 1,293 89,754 89,754 2 Propylene 5.2 5.2 12.4 12.4 n.a. 1,280 88,885 88,885 2 Butadiene 5.2 5.2 12.4 12.4 105,000 1,764 121,321 121,321 2 Benzene 5.2 5.2 12.4 12.4 89,500 1,430 99,578 99,578 2 Toluene 5.2 5.2 12.4 12.4 84,000 1,325 91,893 91,893 4 Naphtha 5.2 5.2 14.4 14.4 52,395 959 66,485 66,485 Commodity chemicals 5 LAB 7.7 7.7 12.4 12.4 119,100 2,000 120,034 120,034 2 PAN 7.7 7.7 12.4 12.4 99,000 1,560 92,708 92,708 Methanol 7.7 7.7 12.4 12.4 24,500 325 19,507 19,507 Phenol 7.7 7.7 12.4 12.4 101,000 1,590 89,725 89,725 Orthoxylene 5.2 5.2 12.4 12.4 94,000 1,590 93,028 93,028 1 2 3 4 5 Market prices, Fob prices, C&F Far-East Asia, C&F Japan, Excludes trade discounts LAB: Linear alkyl benzene; PAN : Phthalic anhydride n.a - not available Notes Education cess of 3 per cent has been included in the customs duty and excise duty. Additional CVD of 4 per cent has been levied on polymers and basic petrochemicals and intermediates. Landed cost also includes handling charges. Source: CRISIL Research64
  • 69. PetrochemicalsNeutral impact for the industryThe overall impact on the chemicals industry is neutral with no sector-specific announcements. Company Impact Impact factors Basic petrochemicals and intermediates Reliance Industries Ltd - Supreme Petrochem Ltd - Finolex Industries Ltd - Chemplast Sanmar Ltd - Commodity chemicals Phillips Carbon Black Ltd - Tamil Nadu Petroproducts Ltd - IG Petrochemicals Ltd - Thirumalai Chemicals Ltd - Hindustan Organic Chemicals Ltd - Note The impact specified is only for the petrochemicals business of the companies listed above. Source: CRISIL Research 65
  • 70. CRISIL BudgetAnalysis Pharmaceuticals Industry on strong footing; healthy growth to continue The Indian pharmaceuticals industry is estimated to grow by a robust 16-17 per cent y-o-y (constant exchange rate) to $33-34 billion in 2012-13. Exports (both bulk drugs and formulations) are estimated to grow by about 17 per cent y-o-y during the year, driven primarily by formulation exports to regulated markets, especially the US. The domestic formulations market is set to grow by an estimated 14-15 per cent y-o-y in 2012-13 with strong double-digit growth in drugs catering to chronic and lifestyle-related ailments such as anti-diabetic, cardiovascular and neuro/central nervous system. In 2013-14, CRISIL Research expects the industry to continue to expand at a healthy rate of 13-14 per cent y-o-y, reaching $36-37 billion. Export growth of formulations as well as bulk drugs is expected to moderate due to lower opportunity from drugs going off-patent in the global market in 2013-14 coupled with a high base in the previous year. Formulation exports and bulk drugs exports are both expected to grow by 12-13 per cent. The domestic formulations market is expected to maintain its growth momentum, expanding at a steady 14-15 per cent y-o-y to $13 billion in 2013-14. Growth will be driven by the chronic and lifestyle segments. The National Pricing Pharmaceutical Policy is expected to marginally bring down this growth rate post implementation. Pharmaceuticals: Tariffs 1,2 1 (per cent) Customs Excise 2012-13 2013-14 2012-13 2013-14 Bulk drugs 7.7 7.7 12.4 12.4 Formulations 12.4 12.4 6.2 6.2 1 Tax rates include education cess of 3 per cent 2 Customs duty on select life saving drugs and bulk drugs used to manufacture them such as treating life-saving diseases like breast cancer, hepatitis, rheumatic arthritis, etc is 5 per cent. Source: CRISIL Research66
  • 71. PharmaceuticalsNo dosage prescribedThe overall impact on the Indian pharmaceuticals industry is neutral with no sector-specific announcements. Company Impact Impact factors Sun Pharmaceutical Industries Ltd - Cipla Ltd - Dr Reddys Laboratories Ltd - Ranbaxy Laboratories Ltd - Glenmark Pharmaceuticals Ltd - Source: CRISIL Research 67
  • 72. CRISIL BudgetAnalysis Ports Traffic at Indian ports to remain flat, pressure on utilisation rates to continue Total traffic at ports is expected to remain flat at about 906 million tonnes in 2012-13 as compared to 908 million tonnes in 2011-12. On the other hand, cargo handling capacity is likely to grow by 3 per cent to 1,353 million tonnes in 2012-13. Consequently, capacity utilisation levels are expected to decline to 65 per cent in 2012-13 from 77 per cent in 2011-12. In 2013-14, we expect port traffic to revive and grow by 5 per cent due to better growth in container trade and coal imports. With capacity additions being moderate, utilisation rates are expected to witness marginal improvement in 2013-14. The share of non-major ports in total traffic is expected to increase to 40 per cent in 2012-13 from 38 per cent in 2011-12. Going forward, non-major ports are expected to grow faster than major ports, due to higher operational efficiency and lesser congestion. CRISIL Research expects the ports sector to attract investments of about Rs 160 billion in 2012-13 and a total of Rs 1 trillion over the next five years. Of the expected investments over the next five years, about 42 per cent would be directed towards major ports and the rest towards non-major ports. The private sector is expected to contribute more than 80 per cent of the expected investments. Announcement of new ports in a period of overcapacity The proposal to develop a new major port each in Sagar, West Bengal and in Andhra Pradesh will add 100 million tonnes of capacity. Further, a new outer harbour in the V.O. Chidambaranar port in Tamil Nadu through PPP will add another 42 million tonnes of capacity. Both these measures will lead to an increase in port capacities in a phased manner over a period of 5 -6 years. Private players will derive limited benefits from these measures as traffic at ports continue to register moderate growth and overall capacity utilisation rates are expected to remain subdued. Allocation of funds in the form of tax-free infrastructure bonds upto Rs 500 billion in 2013-14 is expected to marginally benefit the sector by facilitating availability of funds for port projects.68
  • 73. PortsBudget has a neutral impact on port companiesCompany Impact Impact factorsMundra Airport and SEZ Ltd -Gujarat Pipavav Port Ltd -Source: CRISIL Research 69
  • 74. CRISIL BudgetAnalysis Power Favourable policy developments to result in improved fuel availability and stronger offtake from discoms Demand for electricity in India is expected to grow by around 7.5-8.5 per cent over the medium term. CRISIL Research estimates capacity additions of around 80.5 GW in the Twelfth Five-Year Plan (2012-13 and 2016-17), led by the private sector. This is significantly higher than the 56 GW of capacity added during the Eleventh Five-Year Plan. New capacities are facing significant fuel constraints due to slow ramp-up of coal production by Coal India Ltd (CIL) and falling KG-D6 basin gas output. To resolve the fuel availability issue, CIL has been mandated to sign Fuel Supply Agreements (FSAs) with power project developers. Coal requirement for FSAs will be fulfilled through a mix of domestic and imported coal. In addition, coal price pooling is expected to improve coal supply to the power sector. However, an increase in notified coal prices will also raise power tariffs by 6 to 8 paise per unit. PLFs of coal-based plants are expected to remain weak at 71 per cent in 2012-13. However, with improved coal supply, PLFs would gradually improve to 81 per cent by 2016-17. Weak financials of the power distribution sector also pose a major challenge. Accumulated losses of state distribution utilties are estimated at around Rs 2.4 trillion in 2011-12, due to lack of tariff hikes, high aggregate technical and commercial (AT&C) losses and delays in disbursal of state government subsidies. To improve the financial health of discoms, the Cabinet Committee of Economic Affairs has cleared a financial restructuring programme for state-owned distribution companies. However, support from states, in ensuring timely tariff revisions and operational discipline, in terms of reduction in AT&C losses, are key to successful execution of this plan.70
  • 75. PowerSunset clause extension and incentives for renewable energy to benefit power sectorExtension of the sunset clause by one year, to avail the 10-year tax holiday, would benefit 18-20 GW of capacities,expected to commission in 2013-14. Funding availability for the sector will improve with issuance of tax free infrastructurebonds of Rs. 500 billion and credit enhancement through IIFCL. Additionally, the proposal to adopt a PPP framework forcoal production will improve domestic coal supply in the long term.Customs duty on imported steam coal, which was previously exempt, has been increased to 2 per cent, while CVD hasbeen increased by 1 per cent. Further, as per Railway Budget 2013-14, freight rates have been hiked by 5.8 per cent.Consequently, generation costs would increase marginally by 2-3 paise per unit for domestic coal-based projectsassuming blending of 10-12 per cent and inland transportation distance of 350 to 400 kms. On the other hand, importedcoal-based projects will see a much higher increase of 5-6 paise per unit.Investments in wind energy, which nearly halved in 2012-13 due to withdrawal of accelerated depreciation andgeneration basd incentive (GBI) benefits, are expected to increase significantly due to reinstatement of GBI, with anoutlay of Rs. 8 billion. Further, capacity additions in solar power are expected to increase, with interest subvention for aperiod of five years by IREDA, through the National Clean Energy Fund. Company Impact Impact factors National Thermal Power Corporation Ltd B, C, D Reliance Power Ltd B, C, D Tata Power Company Ltd A, B, C Adani Power Ltd A, B, C, D JSW Energy Ltd A, B, C Orient Green Power Ltd E Suzlon Energy Ltd E Source: CRISIL ResearchImpact factorsA. Increase in customs duty by 2 per cent and CVD by 1 per cent, on imported steam coal for power sector; hike in railway freight rate by 5.8 per centB. Extension of sunset clause by one year to avail the 10-year tax holiday for power projectsC. Issuance of tax-free bonds of Rs. 500 billion and credit enhancement through IIFCLD. Proposal to adopt a PPP framework for coal productionE. Reinstatement of generation-based incentive (GBI) for wind power, with an outlay of Rs. 8 billion 71
  • 76. CRISIL BudgetAnalysis Roads EPC model expected to revive bidder interest in national highways In 2012-13, awarding under the NHDP has been extremely slow, with only 880 km being awarded till January 2013. Many BOT (Build Operate Transfer) projects have not been able to attract private participation, given the highly leveraged financial profile of developers and concerns over funding. Developers have been facing issues in achieving financial closure as many of the banks are approaching their sectoral exposure limit for roads and are being more cautious while lending to the sector. Since bidder interest for BOT projects remains lacklusture, NHAI (National Highways Authority of India) plans to award a higher proportion of projects on the EPC model, as many low traffic density stretches are expected to be bid. While there are concerns on awarding, execution under NHDP has been progressing at a steady pace in the last 2-3 years owing to a healthy pipeline of awarded projects. In 2011-12, 7,406 km of national highway projects were awarded, whose implementation would start in 2012-13, as the typical lag is for 9-12 months. According to CRISIL Research estimates, investments of Rs 6.3 trillion are expected to flow into roads and highways during the period, 2012-13 to 2016-17. Nearly 53 per cent of the investments will go into state roads, 32 per cent into national highways and the rest into rural roads. State road projects and rural roads are largely government funded, while national highways have a significant share of private participation.72
  • 77. RoadsBudget addresses funding concerns and delays Company Impact Impact factors Larsen & Toubro Ltd A,B Hindustan Construction Co Ltd A,B IVRCL Infrastructures & Projects Ltd A,B IRB Infrastructure Developers Ltd A,B Gammon India Ltd A,B IL&FS Transportation Networks (India) Ltd A,B Source: CRISIL ResearchImpact factorsA. Issue of tax-free bonds raised by government agencies (including NHAI and HUDCO) for infrastructure, have once again been allowed in 2013-14 up to a total limit of Rs 50,000 crore. In the context of the roads sector, this is expected to provide additional funds to the NHAI (National Highways Authority of India) for executing national highway projects. We believe that it will allow NHAI to award contracts on EPC basis.B. Another positive for the roads sector is the proposal to set up an independent regulatory authority. In the medium term, this could help in reducing delays and fastracking the implementation of road projects.C. In order to support rural road development, the Pradhan Mantri Gram Sadak Yojana (PMGSY) – II has been introduced, after the substantial completion of PMGSY. This is expected to benefit the small local road contractors. 73
  • 78. CRISIL BudgetAnalysis Steel Muted demand, high domestic ore prices to hit margins Domestic demand for steel has been hit by a subdued investment climate in the infrastructure and industrial sectors during 2012-13. Demand has also been hit by a slowdown in end-user industries, such as automobiles and consumer durables. Consequently, domestic demand is expected to rise by a mere 3-5 per cent y-o-y in 2012-13. Hence, growth in demand will be significantly lower, compared to the robust growth rate of 8.4 per cent, recorded over the past five years. Muted demand, coupled with huge capacities coming on-stream over the next two years, will exert pressure on operating rates. During 2012-13 (April-January), global steel prices (based on HR, FoB CIS Black Sea) declined by about 14 per cent y-o-y to $578 per tonne, amid weak global demand and macroeconomic uncertainties in Europe and the US. However, domestic flat steel prices, which move in line with landed costs of imports, have remained flat between Rs 39,000-40,000 per tonne during this period. This is on account of a weak rupee, which has averaged at 54.5 to the dollar in 2012-13 (April-January) vis-a-vis 47.5 to the dollar, during the corresponding period in 2011-12. Meanwhile, domestic long steel prices have risen marginally, owing to tight supply in the domestic raw material market. The ban on Indian iron ore production in Karnataka, coupled with the governments drive to close illegal mining in Odisha, has resulted in domestic iron ore prices remaining firm in 2012-13. Iron and steel companies have been facing an acute shortage of iron ore in 2012-13. Many are resorting to closure of operations, while others are experiencing low utilisation levels. CRISIL Research expects domestic steel demand to gather pace only from the second half of 2013-14, with an expected pick-up in demand from key end-user sectors, such as construction, infrastructure and automobiles. Global steel prices are expected to fall further by 6 per cent y-o-y on account of muted demand and lower contract prices of iron ore and coking coal. Domestic steel prices too are expected to be on a downward slope during 2013-14. Owing to the weak demand environment, commissioning of huge capacities and firm domestic input costs, the profitability of Indian steel players is expected to decline in 2012-13 and remain under pressure in 2013-14.74
  • 79. SteelSteel: Tariffs, prices and landed costs 1 Tariff (per cent) Prices Landed cost (Rs/tonne) Customs Excise Domestic International Pre-budget Post-budget 2012-13 2013-14 2012-13 2013-14 (Rs/tonne) ($/tonne)GP/GC 7.7 7.7 12.4 12.4 48,300 715 46,293 46,293CR coils 7.7 7.7 12.4 12.4 43,500 670 43,477 43,477HR coils 7.7 7.7 12.4 12.4 39,000 580 37,847 37,847Bars and rods 5.2 5.2 12.4 12.4 40,000 608 38,637 38,637Alloy steel 5.2 5.2 12.4 12.4 - - - -Billets/slabs 5.2 5.2 12.4 12.4 38,000 545 34,792 34,792Pig iron 5.2 5.2 12.4 12.4 27,000 398 25,819 25,819HBI/sponge iron - - 12.4 12.4 19,300 - - -Ferro alloys - - 12.4 12.4 - - - -Steel melting - - 12.4 12.4 28,433 387 23,896 23,896scrapIron ore 2.1 2.1 12.4 12.4 - - - -Coking coal (< 12% - - - - - - - -ash content)Coking coal (> 12% - - - - - - - -ash content)Metallurgical coke - - - - - - - -1 Tariff rates are inclusive of 3 per cent education cess.Notes1) HBI: Hot Briquetted Iron2) International prices are on FOB (CIS Black Sea) basis for February 20133) Domestic prices are average prices for February 2013Source: Metal Bulletin, CRISIL Research 75
  • 80. CRISIL BudgetAnalysis Steel Neutral impact for the steel industry Company impact Company name Impact Impact factors Steel Authority of India Ltd A, B, C Tata Steel Ltd A, B, C JSW Steel Ltd A, B, C Essar Steel Ltd A, B, C Bhushan Steel Ltd A, B, C Source: CRISIL Research Impact factors A. The export duty on certain galvanised steel sheets has been brought down to nil, from 7.5 per cent earlier with ‘full exemption from export duty’ being provided, with effect from March 1, 2011, retrospectively. This move will benefit Indian galvanised steel exporters such as JSW Steel, Bhushan Steel, Essar Seel etc. B. The proposed schemes, providing a boost to the infrastructure (especially roads) and housing segments, are likely to give a fillip to overall demand for steel in the long run. C. The Railway Budget for 2013-14 has proposed a hike of 5.8 per cent in the freight rate for coal, iron ore and steel. This would translate into an estimated increase in logistics costs, by Rs 300-500 per tonne, for steel manufacturers. We believe that steel players will pass on the hike in railway freight to end-users.76
  • 81. SugarProfitability of north- and south-based mills to move in opposite directions Sugar production in the country will range between 23.5-23.8 million tonnes in Sugar Season (SS) 2012-13 (SS: October 2012 to September 2013), a decline of 8-10 per cent as compared to the production in SS 2011-12. The fall in sugar production will largely be due to lower acreage in key sugar-growing states of Maharashtra and Karnataka, deficient rainfall, low reservoir levels and diversion of cane towards fodder in Maharashtra. As domestic consumption is expected to be around 23.7 million tonnes, India will not have surplus sugar during the season. With demand being slightly higher than supply, closing stock as months consumption will decline marginally to around 2 months in SS 2012-13. Domestic sugar prices (Mumbai S-30 variety) will average Rs 34.5-35 per kg in SS 2012-13, 12-13 per cent higher than the average price of Rs 30.8 per kg in SS 2011-12, mainly on account of the decline in domestic sugar production and increase in regulated cane procurement prices (SAP - State Advised Price, and F&RP - Fair and Remunerative Price), especially in the state of Uttar Pradesh (UP). SAP in UP has risen to Rs 280 per quintal in SS 2012-13, a rise of 17 per cent from Rs 240 per quintal in SS 2011- 12. SAP in Tamil Nadu has increased to Rs 235-240 per quintal from Rs 215 per quintal, while F&RP, which is applicable in most of the other regions in the country, rose to Rs 170 per quintal from Rs 145 per quintal over the same period. In order to encourage sugarcane planting, the government has announced an increase of 23.5 per cent in F&RP to Rs 210 per quintal for SS 2013-14. While the SAP for north-based mills has risen by Rs 40 per quintal, sugarcane procurement costs for south-based mills have increased by Rs 25 per quintal for SS 2012-13. Consequently, EBIDTA margins of UP-based mills are expected to decline by 50-100 basis points, whereas that of south-based mills will improve by 100-130 basis points in SS 2012-13. 77
  • 82. CRISIL BudgetAnalysis Sugar Sugar: Tariffs Tariff Prices (January 2012) Landed cost (Rs/tonne) Customs Excise Domestic International Pre- Post- (per cent) (Rs per tonne) (Rs/tonne) ($/tonne) budget budget 2012-13 2013-14 2012-13 2013-14 Domestically produced sugar Free sale n.a. n.a. 978.5 978.5 33,309 - - - Levy n.a. n.a. 638.6 638.6 19,048 - - - Imported white sugar 10.3 10.3 n.a. n.a. - 505 33,075 33,075 Imported raw sugar 10.3 10.3 n.a. n.a. - 417 27,799 27,799 Molasses 10.3 10.3 772.5 772.5 - - - - n.a.: Not applicable Notes 1) Domestic and international prices are the average for February 2012. 2) Excise duty includes basic duty, additional duty and education cess. 3) Landed cost includes the duties, freight, port handling and transport costs. Source: CRISIL Research78
  • 83. SugarNo impact on industry Impact Company Impact factors Bajaj Hindustan Ltd - Balrampur Chini Mills Ltd - Bannari Amman Sugars Ltd - EID Parry Ltd - Shree Renuka Sugars Ltd - Source: CRISIL ResearchImpact factorsThere is no impact of the Budget on the domestic sugar industry. 79
  • 84. CRISIL BudgetAnalysis Telecom Competitive intensity on the decline Operators are undertaking a large-scale clean-up of inactive subscribers from their network, due to which the wireless subscriber base is expected to drop in 2012-13. It has already declined by 54 million (to 865 million) till December 2012, as compared to additions of 108 million in 2011-12. This has boosted the proportion of active subscribers to 81 per cent. Such clean-up of the inactive subscriber base, along with the increased use of value- added services, would help industry ARPUs increase in 2013-14. Some moderation in competitive intensity would aid a 9 per cent growth in wireless revenues in 2012-13; steady increase in ARPUs would ensure that revenue growth remains around 8-10 per cent in 2013-14. Operating margins for 2012-13 (up to December 2012) have declined from 2011-12 levels, owing to an increase in network operating costs, as operators expanded their coverage. However, an expected moderation in these costs and subscriber acquisition costs would lead to a 150-200 bps rise in EBITDA margins for the wireless industry, over the next two years. The wireline segment recorded a drop of 1.4 million subscribers in the first nine months of 2012-13, which shrunk the total subscriber base to 30.8 million, as of December 2012. Currently, even as BSNL and MTNL account for over 70 per cent of the wireline subscriber base, there has been a decline in their subscriber share. In 2013-14 too, we expect wireline subscribers to dwindle, as additions by private operators will not be able to cushion the fall in BSNL and MTNL’s subscriber base. Recent announcements on spectrum refarming (replacing spectrum in the 900 MHz frequency with the less-efficient 1800 MHz) would adversely impact large operators. In all, 36 licences, which constitute a substantial 45 per cent of industry revenues, shall be due for renewal by April 2016. Such refarming (on licence renewal) would entail a substantial outgo for operators, on account of both, higher capital costs and payouts for spectrum at the time of licence renewal. In addition, any one-time payments on existing spectrum, if required to be paid, would further strain the cash flow position of operators. Telecom: Tariffs (per cent) Customs Excise 2012-13 2013-14 2012-13 2013-14 Cellular phones (price <= Rs 2000) 0.0 0.0 1.0 1.0 Cellular phones (price > Rs 2000) 0.0 0.0 1.0 6.2 Telecom networking equipment 0.0 0.0 12.4 12.4 Base stations 0.0 0.0 12.4 12.4 Wireless internet data card 0.0 0.0 0.0 0.0 HDSL 0.0 0.0 12.4 12.4 HDSL: High bit-rate digital subscriber line Source: CRISIL Research80
  • 85. TelecomNeutral impact on the sector Company Impact Impact factors Bharti Airtel Ltd - Idea Cellular Ltd - Mahanagar Telephone Nigam Ltd - Reliance Communications Ltd - Tata Communications Ltd - Source: CRISIL ResearchImpact factorsA. Excise duty on mobile phones, with a retail price exceeding Rs 2,000, has been hiked to 6 per cent from 1 per cent. This will not significantly impact domestic manufacturers, since most of their phones sold are basic feature handsets, priced below this level.Conversely, a large proportion of high-end smartphones are imported.B. Receipts of Rs 408 billion have been estimated from ‘other communication services’, which includes spectrum auctions, one-time spectrum charges, licence fees and spectrum usage charges. Going by the muted response to spectrum auctions in 2012-13, we believe that the government may find it difficult to achieve the budgeted receipt target in 2013-14. 81
  • 86. CRISIL BudgetAnalysis Textiles Demand to improve in domestic and international markets across the value chain Growth in apparel sales have been sluggish in 2012-13 due to the economic slowdown and negative consumer sentiment. A decline in exports caused by a fall in demand from the US and EU has also added to manufacturers’ woes. The spinning industry however, recovered from its 2011-12 lows as exports grew strongly. High yarn prices and low cotton prices helped spinners’ margins improve in 2012-13. In 2013-14, we expect growth in apparel sales to improve marginally on account of better consumer sentiment. Consequently, sales volumes are expected to improve across the textile chain. Readymade garments In calendar year 2012, the domestic economic slowdown limited revenue growth to about 3 per cent, with volumes growing dismally. Export revenues declined by 6 per cent, because of a demand slump in the US & EU. An improvement in domestic economic growth is expected to drive demand for garments, leading to moderate growth in sales volumes. Exports are also expected to increase marginally as global economic growth recovers. Cotton yarn spinners In 2012-13, cotton yarn sales volumes increased significantly, led by strong exports (mainly to China). Lower raw material (cotton) and high finished product (yarn) prices also helped spinners earn higher margins. Increased domestic and export demand for textiles will boost cotton yarn demand in 2013-14. Healthy demand and an increase in cotton prices are expected to keep operating margins stable in 2013-14. Man-made fibres (MMF) In 2012-13, modest MMF demand, due to subdued demand for blended and non-cotton yarn, led to a expansion of 160 bps in players’ margins. In 2013-14, demand is likely to improve, primarily driven by increased substitution of cotton by MMF, on the back of higher cotton prices.82
  • 87. TextilesApparels and fabrics: Tariffs Tariff (per cent) Customs Excise 1 2012-13 2013-14 2012-13 2013-14 *Cotton-based apparels 10.3 10.3 6.18/12.36 6.18/12.36**Non-cotton-based apparels 10.3 10.3 12.4 12.4Cotton woven fabrics 10.3 10.3 6.2 6.2Non-cotton woven fabrics 10.3 10.3 12.4 12.4Cotton knitted fabrics 10.3 10.3 6.2 6.2Non-cotton knitted fabrics 10.3 10.3 12.4 12.41 Excise duty on cotton fabrics was concessional and optional* Excise duty on readymade garments was made mandatory at 12.36 per cent on 30 per cent of the MRPin 2012-13** Excise duty on readymade garments has been made optional, thus effectively bringing it down to zero in2013-14 Education cess of 3 per cent on basic customs and excise dutySource: CRISIL ResearchCotton and cotton yarn: Tariffs, prices and landed costs 4 Tariff (per cent) Prices Landed cost (February 2013) 2 3 Customs Excise DomesticInter-national Pre-budget Post-budget 2012-13 2013-14 2012-13 2013-14 (Rs/tonne) ($/tonne) (Rs/tonne) (Rs/tonne)Cotton yarn (40s) 10.3 10.3 6.2 6.2 197,667 3,700 223,961 223,961 1Cotton 0.0 0.0 0.0 0.0 97,662 1,977 108,472 108,4721 Domestic price of S-6 variety and international cotton price of a comparable variety2 Concessional and optional excise duty3 FOB prices4 Landed cost includes handling charges of 2 per centSource: CRISIL Research 83
  • 88. CRISIL BudgetAnalysis Textiles Man-made fibres and intermediates: Tariffs, prices and landed costs 2 Tariff (per cent) Prices Landed cost (January 2013) 1 Customs Excise Domestic Inter-national Pre-budget Post-budget 2012-13 2013-14 2012-13 2013-14 (Rs/tonne) ($/tonne) (Rs/tonne) (Rs/tonne) PSF 1.5d 5.2 5.2 12.4 12.4 100,250 1,831 124,653 124,653 VSF 1.4d 5.2 5.2 12.4 12.4 142,000 2,593 176,529 176,529 POY 150d 5.2 5.2 12.4 12.4 108,000 1,972 134,252 134,252 VFY 150d 5.2 5.2 12.4 12.4 350,000 6,392 435,162 435,162 PV 30s (70:30) 10.3 10.3 12.4 12.4 150,000 n.a. n.a. n.a. PTA 5.2 5.2 12.4 12.4 78,821 1,194 75,127 75,127 MEG 5.2 5.2 12.4 12.4 78,427 1,193 72,284 72,284 Paraxylene 0.0 0.0 12.4 12.4 n.a. 1,645 94,789 94,789 PSF: Polyester staple fibre; VSF: Viscose staple fibre; POY: Partially oriented yarn; VFY: Viscose filament yarn; PV: Polyester viscose; PTA: Purified terephthalic acid; MEG: Mono-ethylene glycol n.a.: Not available 1 FOB prices 2 Landed cost includes handling charges of 2 per cent Source: CRISIL Research84
  • 89. TextilesExtension of TUFS and excise duty removal positive for industry Company Impact Impact factors Alok Industries Ltd B Gokaldas Exports Ltd B Indo Rama Synthetics (India) Ltd Vardhaman Textiles Ltd B Welspun India Ltd B JBF Industries Ltd Arvind Mills Ltd A,B Raymond Ltd B Grasim Industries Ltd B Aditya Birla Nuvo Ltd A,B Source: CRISIL ResearchImpact factorsA. Excise duty of 3.6 per cent on readymade garments, which was made mandatory last year, has been removed. Garment manufacturers are expected to see an improvement in margins despite partially passing on the benefit to end-users.B. The Technology Upgradation Fund Scheme(TUFS) has been extended for the 12th Five-Year Plan, with an investment target of Rs 1,510 billion as compared to Rs 1,506 billion under the 11th Five-Year Plan. Budgetary allocation under the TUFS has been increased to Rs 24 billion in 2013-14 from Rs 22 billion in 2012-13.NotesA. Customs duty on textile machinery and parts has been reduced to 5 per cent from 7.5 per cent, making it more affordable for Indian manufacturers.B. Other initiatives like incentives like additional funds for establishing apparel parks under the Scheme of Integrated Textile Parks and interest subventions for handloom sector have been announced to support the textile industry. 85
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  • 91. Capital markets 87
  • 92. CRISIL BudgetAnalysis Equity market Lacks punch despite positives The Union budget proposal for 2013-14 lacks punch but holds out a few positives for the Indian equity market and sectors such as infrastructure, financial services and housing. The budget has also focused on rationalising the fiscal deficit at 4.8 per cent in FY14 compared to 5.2 per cent in FY13, which is a positive. The proposal to allow an additional 15 per cent tax deduction for investments in plant and machinery will provide fillip to the flagging investment climate. However, policy bottlenecks need to be removed to make this proposal effective. The deduction will be allowed on new assets acquired and installed, totalling investment of Rs 1 bn or more made during FY14 and FY15. The infrastructure sector will benefit from this and a few other proposals such as one-year extension of Section 80IA of Income Tax Act allowing tax deduction, re-introduction of generation-based incentive for the wind power sector, introduction of a regulator for the road sector, and issuance of tax-free bonds of Rs 500 bn. The textile sector is expected to benefit from the continuation of the Technology Upgradation Funds Scheme in the 12th plan. Further, by permitting banks to act as insurance brokers and allowing insurance companies to open branches in tier II cites without prior approval will help increase penetration of insurance products. The budget has also focussed on rural development and has increased allocation to rural development by 46 per cent to Rs 802 bn. Additional deduction on interest of up to Rs 1 lakh on home loans of up to Rs 25 lakh, will encourage the low-cost housing segment. We believe the focus on start-ups and small companies is also positive over the long term. Small and medium enterprises (SMEs) will now be allowed to list on the SME exchanges without an IPO; as the issue will be restricted to informed investors, it will ease the listing process for SMEs. Also, SMEs will continue to enjoy non-tax related benefits and preference for up to three years even after these SMEs graduate to the higher category. Some of the positive proposals for the equity market are a) reduction in Securities Transaction Tax (STT), b) extension of Rajiv Gandhi Equity Savings Scheme (RGESS), and c) a few foreign-investor friendly proposals. The budget seeks to reduce the STT on equity futures from 0.017 per cent to 0.01 per cent, on mutual funds/exchange-traded funds to 0.001 per cent (from 0.25 per cent for redemptions at fund counter and 0.1 per cent for sale on exchanges). The retail participation in the equity market could increase on account of extension of RGESS, which will now allow 50 per cent tax deduction for investment in mutual funds and listed shares for three successive years. Further, the first-time investor’s income limit for this scheme has been increased from Rs 10 lakh to Rs 12 lakh. A few proposals such as deferment of implementation of modified General Anti Avoidance Rule (GAAR) to April 2016, and allowing FIIs to participate in exchange-traded currency derivative segment and to use their investment in corporate bonds/G-secs for margin requirement are expected to increase FII inflows in the markets. Further, pension funds and provident funds will now be allowed to invest in exchange-traded funds, debt mutual funds and asset backed securities. This will provide more investment options to pension schemes and at the same time boost liquidity in the approved securities. The budget’s proposals to raise income tax surcharge will adversely affect the corporate sector and high networth individuals. Increase in income tax surcharge for corporates from 5 per cent to 10 per cent, surcharge on dividend distribution tax from 5 per cent to 10 per cent, and increase in rate of tax on royalty and fees for technical services to non-residents from 10 per cent to 25 per cent will adversely affect corporate profitability. However, for companies undertaking capital expenditure over the next two years, the negative impact of surcharge will be mitigated by the tax deduction allowed on investment in plant and machinery. The budget has also proposed to levy 10 per cent surcharge on individuals having income greater than Rs 10 mn.88
  • 93. Equity marketNifty may deliver 11-14 per cent returns in FY14Improvement in economic scenario and liquidity inflows may take Nifty to 6300-6500 by FY14-endCRISIL Research has arrived at a fair value range of 6300-6500 for Nifty by FY14-end. This is based on ourexpectations of fair value of 50 index companies. We expect Nifty EPS of Rs 379 in FY13, Rs 440 in FY14 and Rs 493in FY15, representing a 14 per cent CAGR over FY13-15. The implied P/E multiples for our range are 14.3x-14.8xFY14E and 12.8x-13.2x FY15E earnings. Earnings growth will be driven by sectors such as financials, pharma, FMCGand information technology. However, sectors such as capital goods, metals and mining are expected to lag due toweak capex cycle and lower volumes. Though the tax incentives announced in the budget for large investments is apositive, a revival in the investment pipeline can be expected only in the second half of FY14.CRISIL Research expects India’s GDP to grow by 6.4 per cent in FY14 as against 5 per cent projected for FY13. Ourforecast is based on expectation of normal monsoons and industrial growth. We expect revival in demand during theyear, which should lead to improved capacity utilisation. Further, the service sector is expected to clock a healthygrowth rate of 7.7 per cent in FY14. We expect only marginal improvement in corporate investment in FY14, hencepolicy actions are a monitorable. Some of the key proposed legislations may be put to vote in the Parliament, whilesome others - that were decided earlier - may be implemented.For companies with a global exposure, the scenario is also expected to improve, albeit marginally, in 2013. The USGDP is likely to grow at 2.7 per cent (as against 2.2 per cent in 2012). In the US, continued tax cuts for middle-incomehouseholds and extension of unemployment benefits will help the economy to avert a recession. The euro zone isexpected to recover, although it will continue be in recession; 0.1 per cent contraction compared to 0.5 per centcontraction in GDP in 2012. In the euro zone, fiscal deficits have reduced and few countries are now running primarybudget surpluses (fiscal deficit excluding interest payments). The slowdown in China also appears to have bottomed outbut Japan has slipped back into a recession with the positive impact from post-Tsunami reconstruction activities fadingaway.From a valuation perspective, the year is expected to remain range-bound. The global liquidity situation improvedsubstantially in 2012 and we expect it to sustain through the year. The resultant flows into emerging markets, especiallyIndia, should reduce the downside risk to valuation multiples. During 2012, India attracted US$24.5 bn FII inflows,marginally lower than Japan’s US$27.7 bn and far higher than that of countries such as South Korea, Taiwan, ThePhilippines, Thailand and Indonesia. At the same time, valuation multiples may not expand much until economic growthrate improves and investment cycle revival is visible. Volatility in equity markets due to global socio-political factors mayalso remain high, as was experienced with the recent political stalemate after the elections in Italy. We reiterate our fairvalue range for Nifty at 6300-6500 by the end of FY14. 89
  • 94. 90 Impact of budget on companies under CRISIL Equity Research coverage Fundamental Fair EPS EPS EPS P/E P/E P/E Budget Short Name grade value CMP FY13 FY14 FY15 FY13 FY14 FY15 Impact Details of Impact Investment allowance of 15 per cent on investment (more than Alok Industries Ltd 2/5 18.0 8.5 3.4 5.6 7.3 2.5 1.5 1.2 Rs 1,000 mn between FY14-FY15) Apollo Hospitals Enterprise Ltd 5/5 982.0 826.9 22.9 27.8 34.6 36.1 29.7 23.9 Additional deduction of interest of Rs 1 lakh for loans upto Rs Ashiana Housing Ltd 4/5 303.0 232.5 23.2 26.2 53.3 10.0 8.9 4.4 25 lakh to increase demand in mid-income housing segment Increase in defence capital expenditure by 9 per cent to Astra Microwave Products Ltd 4/5 55.0 38.9 3.2 5.5 - 12.2 7.1 – benefit companies directly involved in the defence projects Bhartiya International Ltd 3/5 247.0 175.9 12.1 16.1 17.2 14.5 10.9 10.2 Butterfly Gandhimathi Appliances Ltd 3/5 412.0 276.2 19.1 26.3 33.0 14.5 10.5 8.4 Continued focus on MGNREGA program The additional deduction of interest of upto Rs 1 lakh on the CRISIL BudgetAnalysis first home loan of less than or equal to Rs 2.5 mn will promote Century Plyboards (India) Ltd 3/5 58.0 54.0 6.0 8.1 - 9.0 6.7 – house ownership and hence will provide fillip to the cement and plywood industry Positives are (i) Additional deduction of interest of Rs 1 lakh for loans upto Rs 25 lakh to increase demand in lower-to-mid Dewan Housing Finance Corporation Ltd 4/5 284.0 167.3 32.0 37.0 42.0 5.2 4.5 4.0 income housing segment (ii) Rural housing fund allocation of Rs 60 bn Continued support to agriculture through higher allocation to Dhanuka Agritech Ltd 4/5 117.0 122.6 13.0 13.8 0.0 9.4 8.9 – ministry of rural development and ministry agriculture as well as retention of attractive rates for short term crop loans Dhunseri Petrochem and Tea Ltd 3/5 163.0 98.6 17.2 38.5 - 5.7 2.6 – Dolphin Offshore Enterprises (India) Ltd 2/5 100.0 110.0 13.3 - - 8.3 – – Electrosteel Castings Ltd 3/5 45.0 19.9 2.4 4.5 8.0 8.3 4.4 2.5 Emmbi Polyarns 2/5 20.0 11.2 1.6 2.7 - 6.9 4.2 – Everest Kanto Cylinder Ltd 2/5 33.0 22.4 -2.3 0.8 - -9.7 27.9 – Fortis Healthcare Ltd 3/5 125.0 97.1 -2.6 0.9 1.9 -37.3 107.8 51.1 Gitanjali Gems Ltd 3/5 540.0 581.8 62.5 66.5 - 9.3 8.7 – Helios & Matheson Information 2/5 80.0 48.3 12.3 17.2 20.1 3.9 2.8 2.4 Technology Ltd Notes:Pls note that all companies will be impacted negatively due to increase in surchage on income tax and dividend distribution tax Source: CRISIL Research
  • 95. Fundamental Fair EPS EPS EPS P/E P/E P/E Budget Short Name grade value CMP FY13 FY14 FY15 FY13 FY14 FY15 Impact Details of Impact Increase in allocation to the rural development ministry would lead to higher sales from rural India. Increasing tax rate on Hero MotoCorp Ltd 5/5 1842.0 1667.5 108.1 119.6 150.2 15.4 13.9 11.1 payments by way of royalty from 10 per cent to 25 per cent is a negative Hitech Plast 3/5 73.0 50.1 6.3 9.3 14.4 8.0 5.4 3.5 HSIL Ltd 4/5 185.0 98.0 9.7 12.8 17.7 10.1 7.7 5.5 Infinite Computer Solutions (India) Ltd 3/5 180.0 94.8 32.5 35.2 - 2.9 2.7 – Innoventive Industries Ltd 4/5 215.0 128.7 16.2 22.6 28.8 7.9 5.7 4.5 Continued support to agriculture through higher allocation to Insecticides (India) Ltd 3/5 395.0 392.6 31.5 35.0 0.0 12.5 11.2 – ministry of rural development and ministry of agriculture as well as retention of attractive rates for short term crop loans ISMT Ltd 3/5 23.0 14.6 -2.1 4.5 - -6.9 3.2 – Investment allowance of 15per cent on investment (more than JBF Industries Ltd 3/5 194.0 106.5 31.5 54.3 3.4 2.0 – Rs 1,000 mn between FY14-FY15) (i) Lowering of STT on equity futures from 0.017per cent to JM Financial Ltd 4/5 36.0 16.4 2.3 3.3 - 7.1 5.0 – 0.01 per cent and (ii) liberalisation of Rajiv Gandhi Savings Scheme - to have hardly any positive impact Kewal Kiran Clothing Ltd 4/5 628.0 707.1 38.8 44.1 53.9 18.2 16.0 13.1 Benefit from removal of excise duty on garments ~3,000 km of road projects will be awarded in a few states in next six months; this is expected to increase order inflows. KNR Constructions Ltd 3/5 120.0 96.3 5.3 19.1 0.0 18.2 5.0 – Besides, the appointment of a road regulator might ease execution related bottlenecks but will be a key thing to watch for Duty withdrawn on de-oiled rice bran oil cake. Marginally positive as it contributes around 1 per cent to KRBLs revenues. Continued support to agriculture through higher KRBL Ltd 3/5 33.0 24.1 6.1 6.6 0.0 4.0 3.7 – allocation to ministry of rural development and ministry of agriculture as well as retention of attractive rates for short term crop loans KSE Ltd 3/5 220.0 210.1 12.1 30.6 - 17.4 6.9 – Higher allocation for rural development would lead higher Magma Fincorp Ltd 3/5 106.0 81.9 6.5 9.7 13.9 12.6 8.4 5.9 credit demand Notes:Pls note that all companies will be impacted negatively due to increase in surchage on income tax and dividend distribution tax Source: CRISIL Research91
  • 96. 92 Fundamental Fair EPS EPS EPS P/E P/E P/E Budget Short Name grade value CMP FY13 FY14 FY15 FY13 FY14 FY15 Impact Details of Impact Maharaja Shree Umaid Mills Ltd 2/5 280.0 118.0 18.8 16.1 - 6.3 7.3 – ~3,000 km of road projects will be awarded in a few states in next six months; this is expected to increase order inflows. MBL Infrastructure Ltd 3/5 304.0 165.5 37.3 40.2 - 4.4 4.1 – Besides, the appointment of a road regulator might ease execution related bottlenecks but will be a key thing to watch for MSP Steel & Power Ltd 2/5 39.0 20.8 5.1 11.3 0.0 4.1 1.8 – Navin Fluorine International Ltd 3/5 349.0 232.5 61.9 41.2 45.2 3.8 5.6 5.1 Reduction in abatement rate to 70 per cent from 75 per cent Nitesh Estates Ltd 2/5 25.0 12.7 -0.5 2.5 3.5 -25.4 5.1 3.6 for flats with carpet area of 2,000 sq ft and value of Rs 1 crore or more will have marginally negative impact CRISIL BudgetAnalysis NTPC Ltd 5/5 214.0 150.9 12.8 15.4 - 11.8 9.8 – Extension of 80IA benefit for one more year Investment allowance of 15 per cent on investment (more than Omkar Speciality Chemicals Ltd 3/5 130.0 126.5 11.9 17.9 22.3 10.6 7.1 5.7 Rs 1,000 mn between FY14-FY15) Omnitech Infosolutions Ltd 3/5 182.0 167.8 22.8 33.2 - 7.4 5.1 – Reduction in abatement rate to 70 per cent from 75 per cent Parsvnath Developers Ltd 2/5 54.0 43.2 1.7 2.0 2.4 25.4 21.6 18.0 for flats with carpet area of 2,000 sq ft or more and value of Rs 1 crore or more will have marginally negative impact Phillips Carbon Black Ltd 4/5 140.0 73.6 1.7 26.3 - 43.3 2.8 – Power Finance Corporation Ltd 4/5 229.0 201.5 32.1 39.3 - 6.3 5.1 – Quantum of tax free bonds positive Allocation of Rs 15,260 crore to the ministry of drinking water and sanitation and Rs 1,400 crore towards setting up water Pratibha Industries Ltd 3/5 66.0 40.3 8.3 9.3 0.0 4.8 4.3 – purification plants to benefit EPC players in the water supply and sanitation industry Investment allowance of 15 per cent on investment (more than Rainbow Papers Ltd 3/5 67.0 79.2 5.1 11.0 - 15.5 7.2 – Rs 1,000 mn between FY14-FY15) Responsive Industries Ltd 4/5 107.0 94.0 4.9 7.4 - 19.2 12.7 – Increase in excise duty on mobile phones above Rs 2,000 S Mobility Ltd 2/5 50.0 27.1 1.0 2.6 - 27.1 10.4 – from 1 per cent to 6 per cent would impact profitability for mobile handset and mobile retail business S. E. Investments Ltd 2/5 240.0 386.0 18.0 19.0 24.0 21.4 20.3 16.1 Notes:Pls note that all companies will be impacted negatively due to increase in surchage on income tax and dividend distribution tax Source: CRISIL Research
  • 97. Fundamental Fair EPS EPS EPS P/E P/E P/E Budget Short Name grade value CMP FY13 FY14 FY15 FY13 FY14 FY15 Impact Details of Impact Sangam (India) Ltd 3/5 73.0 39.3 14.0 12.2 14.5 2.8 3.2 2.7 Sanghvi Forging and Engineering Ltd 2/5 61.0 27.8 3.2 10.4 - 8.7 2.7 – Higher allocation for rural development would lead higher Shriram City Union Finance Ltd 3/5 803.0 1079.2 78.0 99.0 0.0 13.8 10.9 – credit demand Increase in excise duty on marble to Rs 60 from Rs 30 per sq Somany Ceramics Ltd 4/5 120.0 61.9 9.3 11.8 14.6 6.7 5.2 4.2 mt to have marginally positive impact on demand for tiles (substitute of marble) Sterlite Technologies Ltd 3/5 37.0 27.7 0.9 2.7 - 30.7 10.2 – ~3,000 km of road projects will be awarded in a few states in next six months; this is expected to increase order inflows. Supreme Infrastructure India Ltd 3/5 595.0 202.5 62.6 67.2 - 3.2 3.0 – Besides appointment of a road regulator might ease execution related bottlenecks but will be a key thing to watch for Technofab Engineering Ltd 3/5 168.0 125.1 28.7 29.9 33.6 4.4 4.2 3.7 Thangamayil Jewellery Ltd 3/5 301.0 254.8 39.0 43.9 46.3 6.5 5.8 5.5 Investment allowance of 15 per cent on investment (more than The Supreme Industries Ltd 4/5 291.0 316.7 20.7 27.7 - 15.3 11.4 – Rs 1,000 mn between FY14-FY15) Time Technoplast Ltd 4/5 63.0 40.8 5.2 6.8 8.3 7.8 6.0 4.9 TTK Prestige Ltd 5/5 3250.0 3305.9 109.8 143.0 227.4 30.1 23.1 14.5 Continued focus on MGNREGA programme Notes:Pls note that all companies will be impacted negatively due to increase in surchage on income tax and dividend distribution tax Source: CRISIL Research93
  • 98. CRISIL BudgetAnalysis Funds and Fixed Income Mutual Fund AUM at all time high in January 2013 • The Indian mutual fund industry’s assets under management (AUM) rose to an all-time high of Rs 8.26 trillion in January 2013 following a sharp rise in 2012 vis-a-vis flat growth in 2011. • Average AUM rose by 15 per cent in 2012 to Rs 7.87 trillion in December 2012, while the month-end AUM rose by over 24 per cent to Rs 7.60 trillion. • Asset growth in 2012 was led by inflows of Rs 613 billion into income funds (long-term debt funds, dynamic bond funds and ultra-short term debt funds) and gilt funds on expectations of fall in interest rates following slowing domestic growth and easing inflation. Bond prices (net asset values) and interest rates (yields) move in opposite directions owing to which these funds benefit from a fall in interest rates. • The Reserve Bank of India (RBI) lowered its key interest rate (repo rate) by 0.50 per cent (50 basis points or bps) in April 2012 and later by 25 bps in January 2013 to 7.75 per cent. • While the AUM of all debt funds (income, gilt and liquid funds) rose by over 26 per cent in 2012 to Rs 5.34 trillion, equity funds’ AUM rose by nearly 19 per cent to Rs 1.92 trillion as of December 2012. • Equity funds rose on account of mark to market gains as the benchmark CNX Nifty was up by 28 per cent in 2012 mainly on reform measures announced by the Indian government and inflows from foreign institutional investors (FIIs). • Equity market saw FII investments worth Rs 1.3 trillion (USD 31 billion) during 2012 as compared with withdrawal of Rs 34 billion in the previous year. The domestic equity market gained FII confidence following the government’s key reforms such as fuel price hike and raising of foreign direct investment (FDI) in varying levels in retail, airlines, trading exchanges and broadcast services. • Investors, however, booked profits in equity funds and the category witnessed net outflows of Rs 156 billion during 2012 as compared with inflows of Rs 77 billion in 2011. • Debt-oriented funds continued to corner a major share of mutual fund assets at 70 per cent in 2012, marginally up from 69 per cent in 2011. • The industry consisting of 44 fund houses continued to remain top heavy, with the share of assets of top 5 fund houses aggregating 54 per cent of AUM as of December 2012. The top 10 fund houses occupied a share of 77 per cent while the bottom 10 fund houses continued to occupy less than 1 per cent of the industry AUM.94
  • 99. Funds and Fixed IncomeChart 1 - Industry AUM and Net Flows AUM Net flows (Rs billion) Industry AUM (Rs trillion) Net flows (Rs trillion) (Rs billion) 8.3 1000 7.8 500 7.3 0 6.8 -500 6.3 5.8 -1000 May-12 Jul-12 Feb-12 Mar-12 Apr-12 Nov-12 Dec-12 Dec-11 Aug-12 Sep-12 Oct-12 Jan-13 Jan-12 Jun-12Source: Association of Mutual Funds in India (AMFI)The important regulations announced during the year included -• The Securities and Exchange Board of India (SEBI) has allowed asset management companies (AMCs) to charge additional expenses up to 30 bps proportionate to the inflows from locations beyond the top 15 cities so as to improve the geographical penetration of mutual funds. However, the expenses will need to be reversed if the inflows are redeemed within one year.• AMCs are allowed to have fungibility across various expense heads in total expense ratio (TER). This provides them increased flexibility to allocate costs.• To avoid differential treatment across investor classes, SEBI directed all AMCs to follow a single expense structure across plans from October 1, 2012 instead of plans based on the minimum investment amount. Further, a new plan called ‘Direct Plan’ was introduced w.e.f. January 1, 2013 through which investors can apply directly to the AMC instead of through distributors. Such plans will have a lower expense ratio as they will not charge distribution expenses.• SEBI issued final guidelines for the launch of the Rajiv Gandhi Equity Savings Scheme (RGESS) announced in the previous Union Budget. First-time equity investors with annual income less than or equal to Rs 1 million will be eligible for a 50 per cent tax deduction under Section 80CCG (new section) on investments up to Rs 50,000. Investments will be allowed only in stipulated stocks through direct equity, closed-ended mutual fund schemes and exchange traded funds (ETFs) besides public offerings from select government companies.• SEBI has allowed cash transactions in mutual fund schemes to the extent of Rs 20,000 to enhance the reach to small investors.• Fund houses launching fixed maturity plans (FMPs) will need to spell out the sectors they will not invest in.• Debt-oriented mutual funds have been allowed to take an additional exposure to housing finance companies (HFCs) within the financial services sector to the extent of 10 per cent of net assets of the scheme. This is over and above the existing 30 per cent limit for investment in a single sector by a mutual fund scheme. 95
  • 100. CRISIL BudgetAnalysis Funds and Fixed Income • Mutual funds have been allowed to participate in repos in corporate debt securities with some riders. • SEBI has stipulated a ceiling of 0.12 per cent for cash market transactions and 0.05 per cent for derivatives dealings with respect to brokerage and transaction costs to investors. • To energise the distribution system and to increase the feet-on-street in distribution, it has been decided to: o Simplify the distributors registration process and increase the base of mutual fund distributors by including postal agents, retired officials from government, banks, retired teachers, etc. for distribution of simple products. o Introduce varied levels of certification and registration depending on products and services offered. o Reduce fees for National Institute of Securities Market (NISM) certification and the Association of Mutual Funds in India (AMFI) registration. • As per the last suggestion by SEBI in the above regulation, AMF reduced the registration fees for mutual fund distributors w.e.f. November 1, 2012 to increase the penetration of mutual funds and incentivise distributors beyond the metros. • AMFI has waived off the Rs 3,000 registration fee for six months between February 1 and June 30 for first-time mutual fund distributors and independent financial advisors. • Further, AMFI has started issuing mutual fund common account statements (CAS) in an electronic form, called ‘eCAS’; it will replace paper statements.96
  • 101. Funds and Fixed IncomeBudgetary measures and their impact1. To provide uniform taxation for all types of funds, other than equity oriented funds, the budget has proposed to increase the rate of tax on distributed income from 12.5 per cent to 25 per cent in all cases where distribution is made to an individual or HUF. This amendment will take effect from June 1, 2013.ImpactThis will reduce the net income in the hands of the investor. It will also bring debt mutual funds at par with moneymarket and liquid funds. The tax arbitrage, between investing in bank fixed deposits and debt mutual funds, earlieravailable to investors in the highest tax bracket, has reduced significantly. This is likely to impact assets undermanagement (AUM) of ultra short term and short term debt funds. The tax implications are as followsExisting Structure Individual / HUF Domestic Company NRI 12.5 per cent tax (additional 5 per 30 per cent tax (additional 5 per 12.5 per cent tax (additional 5 perDebt schemes cent surcharge and 3 per cent cent surcharge and 3 per cent cent surcharge and 3 per cent cess) cess) cess)Effective tax rate 13.519 per cent 32.445 per cent 13.519 per cent 25 per cent tax (additional 5 per 30 per cent tax (additional 5 per 25 per cent tax (additional 5 perMoney market and cent surcharge and 3 per cent cent surcharge and 3 per cent cent surcharge and 3 per centliquid schemes cess) cess) cess)Effective tax rate 27.038 per cent 32.445 per cent 27.038 per centNew StructureEffective June 1,2013 Individual / HUF Domestic Company NRI 25 per cent tax (additional 10 per 30 per cent tax (additional 10 per 25 per cent tax (additional 10 perDebt schemes cent surcharge and 3 per cent cent surcharge and 3 per cent cent surcharge and 3 per cent cess) cess) cess)Effective tax rate 28.325 per cent 33.990 per cent 28.325 per cent 25 per cent tax (additional 10 per 30per cent tax (additional 10per 25 per cent tax (additional 10 perMoney market and cent surcharge and 3 per cent cent surcharge and 3 per cent cent surcharge and 3 per centLiquid schemes cess) cess) cess)Effective tax rate 28.325 per cent 33.990 per cent 28.325 per cent2. The Rajiv Gandhi Equity Savings Scheme (RGESS) has been modified with a view to improve participation from new retail equity investors. Accordingly, provisions of section 80CCG will now include listed units of RGESS compliant equity oriented funds (those having greater than 65 per cent equity holding) besides exchange traded funds, close-ended equity mutual funds and direct equities. Further, the deduction will be allowed for three consecutive financial years, starting from the year in which the first RGESS investment was made. The gross total income of the investor has been increased to Rs.1.2 million from Rs.1 million now.ImpactThis will help broaden the base of equity mutual funds as more first time investors are likely to be attracted to invest inthe scheme. For mutual funds, this will be a good source of stable AUM as RGESS has a one year fixed lock-in periodand two years of flexible lock-in. 97
  • 102. CRISIL BudgetAnalysis Funds and Fixed Income 3. Stock exchanges to have a dedicated debt trading segment. Insurance companies, provident funds and pension funds will be permitted to trade directly in the debt segment with the approval of the sectoral regulator. Impact As there has not been much action on this front, markets are bound to be cautiously optimistic and watch the roll out of the new segment. It will also depend on how the institutional investors make use of this new opportunity. This can help deepen debt markets and improve price discovery, if successfully implemented. Further, it will help reduce transaction cost of these institutional investors and may impact fixed income brokers in the long run. 4. Introduction of inflation indexed bonds and inflation indexed National Security Certificates. Impact This is an innovative product whose details will be announced in due course. These bonds are expected to help investors get higher inflation adjusted returns as well as divert some investments from gold. 5. The government had allowed many institutions to issue tax free infrastructure bonds which raised Rs.300 billion in 2011-12 and are expected to raise about Rs.250 billion in 2012-13. The budget proposed to allow some institutions to issue tax free bonds in 2013-14, strictly based on need and capacity to raise money in the market, upto a total sum of Rs.500 billion. Further, India Infrastructure Finance Corporation Ltd (IIFCL), in partnership with the Asian Development Bank, will offer credit enhancement to infrastructure companies that wish to access the bond market to tap long term funds. Impact This will help deepen bond markets besides encouraging retail participation in infrastructure bonds. 6. FII investments in corporate bonds and government securities permitted as collateral for margin requirements. Impact This has provided greater flexibility to FII investments in fixed income securities and is expected to attract greater foreign inflows into the debt segment as well as deepen these markets. The FII limits are also likely to be utilized more efficiently. 7. ETFs, debt mutual funds and asset backed securities allowed as investments for provident and pension funds. Impact This will broaden the investment options/avenues of provident and pension funds and at the same time help mutual funds attract more stable AUM over the long run from these long-term institutional investors.98
  • 103. Funds and Fixed Income8. Securities Transaction Tax (STT) has been reduced for equity futures and mutual funds/ ETF redemptions as follows. Further, only the seller of units will need to pay STT. This will be effective from June 1, 2013. Security Payable By Existing STT Rate Proposed STT Rate1. Delivery based purchase of units of an equity Purchaser 0.1 per cent Nil oriented funds entered into in a recognized stock exchange2. Delivery based sale of units of an equity oriented Seller 0.1 per cent 0.001 per cent fund entered into in a recognized stock exchange3. Sale of a futures in securities Seller 0.017 per cent 0.01 per cent4. Sale of a unit of an equity oriented fund to the Seller 0.25 per cent 0.001 per cent mutual fundImpactThis will help reduce overall transaction cost for investors and mutual funds (for equity futures) and thereby increasereturns proportionately. Further, the STT will be only one way, i.e. for the seller.9. Insurance companies will be empowered to open branches in tier II cities and below without prior approval of Insurance Regulatory and Development Authority (IRDA). Further, all Indian towns with a population of 10,000 or more will have an office of LIC and an office of at least one public sector general insurance company.ImpactThis will help improve penetration of insurance products10. Banks will be permitted to act as insurance brokers, know your customer (KYC) norms of banks will be sufficient to acquire insurance policies, Banking correspondents will be allowed to sell micro-insurance.ImpactThis will allow banks to distribute products of more than one insurance company. A common KYC will reduceoperational hassles with respect to purchase of insurance policies for retail investors. Further, penetration of insuranceis likely to be enhanced through the branch network of banks.11. The budget has proposed that a foreign investor having a stake of 10 per cent or less in a company will be treated as Foreign Institutional Investment (FII), and, where the foreign investor has a stake of more than 10 per cent, the investment will be treated as Foreign Direct Investment (FDI).ImpactThis imparts greater clarity with respect to FDI and FII investments and is as per international best practices. 99
  • 104. CRISIL BudgetAnalysis Funds and Fixed Income 12. Mutual fund distributors will be allowed to become members in the mutual fund segment of stock exchanges so that they can leverage the stock exchange’s network to improve their reach and distribution. Impact While the aim is to improve penetration of mutual funds across the length and breadth of the country through the stock exchange route, it needs to be seen whether distributors will be keen to avail this additional opportunity. 13. Introduction of a special taxation regime in respect of taxation of income of securitization entities, wherein no additional income-tax shall be payable, if the income distributed by the securitization trust is received by a person who is exempt from tax under the Income Tax Act. Impact This offers greater clarity on taxation of investments in securitized instruments for mutual funds and will also help deepen the structured finance market. 14. The budget has introduced parity in taxation between an IDF-Mutual Fund that distributes income and an IDF-NBFC that pays interest for payments made to a non-resident Indian (NRI). The rate of tax on such distributed income or interest will be 5 per cent. Earlier, the taxation for IDF-Mutual Fund was higher and in line with dividend distribution tax (DDT) of debt mutual funds Impact Earlier, the taxation for IDF-Mutual Fund vis-à-vis IDF-NBFC was higher and in line with dividend distribution tax (DDT) of debt mutual funds. The above has brought them at par.100
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