Budget analysis 2013 14

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Budget analysis 2013 14

  1. 1. March 2013CRISIL BudgetAnalysis Responsible for now Need to watch expenditure as election nears
  2. 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. 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. 4. CRISIL BudgetAnalysis Contents …continued Capital markets Equity market 88 Mutual funds 94II
  5. 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. 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. 7. Economy 3
  8. 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. 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. 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. 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. 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. 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. 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. 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
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  17. 17. Industry 13
  18. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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