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Budget 2012

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Budget Preview 2012-13
Difficult to deliver the perfect balance of growth and fiscal rectitude

Emkay Global Financial Services Ltd.
Dhananjay Sinha
Co – Head, Institutional Research
Economist and Strategist
+91 22 6624 2435 dhananjay.sinha@emkayglobal.com 7 March, 2012

1

Difficult to deliver the perfect balance of growth and fiscal rectitude
§

Challenging backdrop: The backdrop for FY13 budget is challenging given the context of slowing growth, lack of investment momentum and a difficult fiscal scenario of subdued tax and non-tax revenue generation even while various subsidy burden are ballooning. Toping these is a much weaker Central government after recent state elections debacle of Congress party, which weaken its ability to take critical reform measures

§

Multiple priorities amid rising structural imbalances: Fiscal imbalances and falling domestic savings pose significant structural challenges. We will look for a credible commitment towards fiscal consolidation, ways to raise tax revenue (200bp hike in excise duty or expanding the tax base by including more services), reduction in subsidy burden by raising prices of public utilities and services, ways to address the recurring deficits across multiple public sector undertaking and departments and most importantly providing the focus on capital spending and infra sectors. While implementation of GST is most ideally suited in the current context we think it is unlikely to happen in this budget. Broadly, there can be some progress towards meeting the recommendation of direct tax code (DTC)

§

Enablers more important than budget itself: While we expect some progress, expecting lot of reforms from the budget may be optimistic. Given that the government has failed to deliver on the promised fiscal consolidation in FY12, measures taken out of the budget to enable budget promises will be more critical

§

Fiscal deficit unlikely to come below 5%: Overall, we expect total allocation to increased by 10% to Rs
14,661bn in FY13E translating into a fiscal deficit of Rs 5,423bn and net borrowings of around Rs 5,000bn (Rs
5,900 bn inclusive of redemptions). Hence, we expect FY13 fiscal deficit of around 5.4% of GDP. Gross tax revenue is expected to growth by 13.7% in FY13E vs 10.8% in FY12. We incorporate an optimistic assumption of higher capital spending (primarily Plan expenditure) growth at 27% or 17% of total spending
2

Key Expected measures and Sectoral outcomes
§

Fiscal consolidation, YES but PARTIAL: Expect roll back of Cenvat rates to 12% (pre-2008 level), inclusion of more services in services tax net, put 50% probability to increase in service tax (which align it more towards
GST), put nearly 100% probability to increase in the auto fuel prices. Yet we believe it will be difficult to cut fiscal deficit lower than 5.0%. While the budget may project a target of 5% for FY13, there is a reasonable probability of it remaining around 5.5%, somewhat lower than FY12E at 5.8%

§

Investments, more ENABLER and some PUSH: Change in the take-out financing norms for IIFCL allowing it to take over under construction projects too vs. only commissioned currently. Announcements on power sector reforms like credit guarantee fund or interest subvention fund. Share of capital outlay rising to 17%

§

Less pro-consumption but pro-savings: The pro-consumption (esp non-plan discretionary) policies adopted by the govt over last three years have also fueled the inflation to large extent. Increase in auto fuel prices will hurt consumption to an extent but we believe this could be partially counter balanced by (1) increase in tax slabs and (2) pro-savings policies like expanding scope of S/80C, tax exemptions for bank deposits above three years §

Sectoral Winners and losers: Expectations from our analysts are mixed. But by and large our analysts expect several positive measures from the budget (Please see Slide 7 & 8 for a Summary of sector specific Budget Expectations). Notably expectations are positive for sectors such as Engineering and cap goods, Construction (positive to neutral), Pharma and Banking. On the negative to neutral side are sectors like Cement, Consumers & Oil and Gas

3

Possible market reaction: Will it be a populist or a reformist budget?
§

We hope that the budget will be far less populist than the past. Given that the next Union election is in
2014 there is a possibility tighter budget for FY13 followed by more populism in FY14.

§

Reformist construct could imply “Win some lose some” outcome

§

Three key measures to fiscal consolidation – raise excise duty, add more services and reduce subsidies; these could be negative for the demand side

§
§
§
§

Enabling measures to infrastructure space
Higher allocation under capital expenditure heads; Supply chain in agri sector could be a focus
Market reactions should be positive to these

Populist and pro-non-plan discretionary consumption

§
§
§
§
§

No changes in subsidies and no increase in fuel prices. No changes in tax structure
Loan waivers and other cosmetic measures to help weak agricultural productivity
These will further deteriorate imbalances in inflation, interest rates and supply side responses
These will also make RBI’s job tougher in managing interest rates and liquidity
Should be negative for the market

4

Government accounts FY13E
Budget aggregates
1

1 Revenue Receipts
2 Tax Revenue Net to centre)
3 Non-tax Revenue
4 Capital Receipts (5+6+7)$
5 Recoveries of Loans
6 Other Receipts (disinvestments)
7 Borrowings and other Liabilities
Net market borrowings
8 Total Receipts (1+4)$
9 Non-plan Expenditure
10 Non Plan Revenue
11 Interest Payments
12 Non-Plan Capital
13 Plan Expenditure
14 Plan Revenue
15 Plan capital
16 Total Expenditure
17 Revenue Expenditure (10+14)
% of total spending
18 Capital Expenditure (12+15)
% of total spending
19 Revenue Deficit (17-1)
% of GDP mp
20 Fiscal Deficit {16-(1+5+6)}
% of GDP mp
21 Primary Deficit (20-11)
% of GDP mp

FY11RE
(Feb 2011)
7838
5637
2201
4327
90
227
4010
3454
12166
8216
7267
2408
948
3950
3269
681
12166
10537
87
1629
13
2698
(3.4)
4010
(5.1)
1602
(2.0)

Rs bn
3

2
4
FY11RE
(Reported by
FY12 (YTD
CGA) FY12BE
Jan 12)
7943
7899
5491
5728
6645
4586
2215
1254
906
4046
4678
4529
128
150
152
228
400
27
3690
4128
4349
3270
3580
4740
11989 12577
10020
8216
8162
7081
7268
7336
6350
2408
2680
2050
948
826
731
3774
4415
2940
3124
3636
2485
650
779
454
11989 12577
10020
10391
87
1598
13
2449
(3.2)
3690
(4.8)
1343
(1.8)

10972
87
1606
13
3073
(3.4)
4128
(4.6)
1448
(1.6)

5

6

FY12E
Emkay
7631
6432
1199
5698
150
147
5200
4770
13328
9244
7995
2929
1249
4084
3369
715
13328

FY13E
Emkay
8638
7316
1322
6023
150
250
5423
5043
14661
9614
8207
3222
1407
5047
3955
1092
14661

Growth (%)
7=5/2 8=6/5

§ Budget

FY13 expected to increase

spending by 10%, with higher allocation

8835 11364 12162
88
85
83
1185
1964
2499
12
15
17
3344
3734
3524
(4.7)
(4.2)
(3.5)
4349
5200
5423
(6.2)
(5.8)
(5.4)
2299
2271
2201
(3.3)
(2.5)
(2.2)

FY12E FY13E
Emkay Emkay
(3.9)
13.2
12.3
13.7
(45.9)
10.3
40.8
5.7

for capital spending afforded also by some rationalization in subsidy

§ Gross tax revenue expected to grow at
13.7% (10.8%FY12E), assuming 200bp increase in Cenvat and strong growth in services tax revenue. Non tax revenue

40.9

4.3

11.2
12.5
10.0
21.7
31.8
8.2
7.9
10.0
11.2

10.0
4.0
2.7
10.0
12.6
23.6
17.4
52.8
10.0

9.4

7.0

22.9

27.2

52.5

(5.6)

40.9

§ Nominal

GDP growth assumption of

4.3

69.1

can be boosted by reaction of 2G

(3.1)

12.5-13% FY13E with inflation at 66.5%. Key thing for tax collection number will be industrial growth

§ Slower

revenue spending at 7% in

FY13E with potentially higher allocation under capital spending heads, primarily driven by better plan out lay

§ Outlay on subsidy is likely to see a fall of about 9% at Rs1915bn aided by some decline under fertilizer and fuel subsidies. Food subsidy is likely to rise on account of pilot launch of food security bill

Overall fiscal deficit for FY13E expected at Rs5,400bn or 5.4% of GDP vs 5.8% in FY12E;
Net market borrowing around Rs 5,000bn and gross at 5,900bn

5

Non plan expenditure: Expect some reduction in subsidy and modest rise for government services
Rs bn

Budget aggregates

% growth
FY12E

FY13E

FY112E

FY13E

FY11RE

FY12BE

Emkay

Emkay

Emkay

Emkay

Interest payments

2,408

2,680

2,929

3,222

21.7

10.0

Subsidy

1,642

1,436

2,122

1,915

29.3

(9.8)

Food

606

606

651

700

7.4

7.5

Fertilizer

550

500

950

800

72.8

(15.8)

Petroleum

384

236

500

300

30.3

(40.0)

Defense

907

952

917

963

1.1

5.0

2,379

1,282

2,027

2,107

(14.8)

4.0

Key nonplan revenue expenditure

Other non plan revenue exp.

Note: Other non-plan revenue expenditure includes general, social & economic services which captures 20% of non-plan exp.

Central govt. net tax Tax revenue collections
FY11 (CGA)

Gross tax

Corporate

Custom

Excise

revenue

revenue

Income tax

tax

duties

duties

5728

7951

1391

2994

1361

1384

FY12BE

6645

9324

1720

3600

1517

1641

FY12E Emkay

6432

8811

1626

3160

1534

1478

FY13E

7316

10022

1894

3476

1655

1582

Growths (%)
FY11 (CGA)

24.7

26.8

13.8

22.4

61.5

32.2

FY12BE

16.0

17.3

23.6

20.2

11.5

18.6

FY12E Emkay

§

12.3

10.8

16.8

5.5

12.8

6.8

FY13E Emkay

13.7

13.7

16.5

10.0

7.9

7.0

Tax collections projections are based on estimated sensitivity of respective tax heads to economic growth and sensitivity of changes in tax rates. Long term correlation of tax collections with industrial GDP (both real and nominal) is the highest, followed by non-Agri GDP.

§

Given our projection of industrial GDP of 6.0-6.5% for FY13E and assuming 200bp increase in CENVAT we project growth tax revenue of
13.7% in FY13E. Assuming unchanged share of the Centre net tax revenue is also assumed to grow at 13.7%

6

Summary of sector specific expectations
§
§

Automobiles: Increase in excise duty across segments; do not rule additional tax on diesel vehicles
Banking and financial services: Recapitalisation funds available for PSU banks ; Interest subvention fund for power sector; Credit guarantee fund for agriculture loans; Changes in IIFCL norms to enable it to take out finance for construction projects

§

Cement: Diesel prices to be increased; Status quo on basic customs duty on Coal petcoke & gypsum; Maximum limit for interest rate subventions on hosing loan can increased to Rs 20-30lakhs

§

Construction and Infrastructure: Newer services within the tax net – several services offered by infrastructure which will include airport developers, port developers & other construction companies; Do not expect any alteration in the effective MAT rate; Incremental allocation to sectors like roads and rail to remain muted

§

Consumers: Hike in excise on Cigarette; Overhaul of tax structure of tobacco products; Measures to discourage gold imports and demand; Increase in personal income tax slabs

§

Engineering & Capital Goods: Total allocation to infrastructure sector (on flagship schemes, JNNURM,
APDRP, NHDP, AIBP and renewable energy resources, etc) to increase by 10%; Selectively raise import barriers for capital equipment, especially power equipment;
» Enabling policies to expedite roll-out of infrastructure projects:
• Addressing coal availability issues facing power sector
• Extension of tax benefits U/s 80IA, 80IB by one more year
• Easing ECB norms especially for infrastructure projects– to attract debt funds into the sector
7

…Summary of sector specific expectations
§

Fertiliser & Chemicals: Lower allocation for fertiliser subsidy (Rs700-800bn); Clear subsidy dues of ~Rs200bn for FY12E; Bring Urea under NBS and clear new investment policy on urea; Increase urea retail prices by 20%;
Elimination of custom duty on inputs like LNG, Naphtha, Alcohol, Propylene etc

§

Metals & Mining: Import duty on HR coil and export duty on Iron fines & lumps to remain unchanged; Customs duty on non-coking coal to be decreased to 0 (Zero)

§

Oil and gas: Extension of seven-year tax holiday for the commissioning date of new refineries; Exemption from payment of withholding tax of 40% to facilitate Indian refiners to start using a newly agreed mechanism of paying in Indian rupee for the crude oil they buy from Iran

§

Pharmaceuticals: Healthcare sector be given infrastructure status; R&D expenses relating to overseas trials, preparations of dossiers, consulting & legal fees, ANDAs eligible for weighted deduction; Higher allocation for primary healthcare

§

Power: Incentives/measures (Shunglu/BK Chaturvedi committee’s recos, National Electricity Fund for interest subsidy etc) for SEBs reforms with preconditions; Introduction/increase of import duty on power equipments at/to
19% for mega/small power plants; 10% Import duty on imported coal could be withdrawn or reduced ; Withdrawal of customs duty and excise duty on mining; Coal Regulator – to take care of pricing, excess coal diversion etc.

8

Automobiles
§
§
§
§
§

We expect 200 bps increase in excise duty across segments. We do not rule out the possibility of additional tax on diesel vehicles. However, we expect positive surprises with respect to quantum of increase.
An additional tax of upto 5% will not have a significant impact on demand (similar to cost increases due to emission norms) especially in case of UVs given the buyer profile and lack of alternative options
We expect companies to pass on the duty hikes to consumers by increasing prices. So impact on margins should be limited
MSIL to be impacted the most in case of additional tax on diesel vehicles (coupled with imminent petrol price hike). However, current favorable exchange rates and hedging policy should offset the impact.
M&M to be impacted marginally as diesel UVs for personal use constitutes ~28% of total volumes. Also, the impact would be limited due to lack of alternate option

Current Status

Expected

Impact

Excise duty on two wheelers, small cars and

Increase by 200bps, Additional tax on diesel

Negative

commercial vehicles -10%

vehicles

Excise duty on large cars and UVs - 22% + Rs

Increase by 200bps, Additional tax on diesel

Negative. Extent of additional tax is important.

15,000

vehicles

Upto 5% increase will not have major impact

9

Banking and financial services
§
§
§
§
§
§

Expect comments on Banking Regulation Act amendment to clear decks for new banking licenses
Expect tax exemption of deposits with maturity of 3-5 years to boost savings though probability may be low
Explicit mention on the amount of recapitalisation funds available for PSU banks
Interest subvention fund for power sector
Credit guarantee fund for agriculture loans
Changes in IIFCL norms to enable it to take out even under construction projects

Current Status

Expected

Impact

Banking Regulation Act doesn’t allow
>10% voting rights, >5% individual holding Comments on way forward in the same as the same is prerequisite for new banking licenses as desired by govt

Positive for new/old smaller private banks

Tax deduction U/S80C available for deposits with maturity >5 years

Make deductions available for deposits with maturity between 3-5 years

Positive for all banks but highly unlikely given the maturity of small savings schemes are much longer

IIFCL can take out loans for projects which have commissioned

Allow it to take over even projects under construction Positive for banks with high infra nad power exposure like Dena
Bank, Bank of Maha., Canara Bank, OBC, Allahabad Bank,
Andhra Bank, UCO Bank, United Bank of India

Recapitalisation amount not spelt out clearly in budget

Do budgetary provisions for the same while presenting budget itself

Positive for Union Bank of India, State Bank of India, Indian
Overseas Bank, Bank of India, Oriental Bank of Commerce,
Central Bank of India, IDBI Bank

No credit guarantee fund for agriculture loans

Set up one on lines of Credit Guarantee
Fund Trust for Micro and Small
Enterprises

Positive for banks with significant presence/NPLs in agriculture like Allahabad Bank, OBC, United Bank of India. Vijaya Bank,
SBI, Karnataka Bank
10

Cement
§
§

Expect Ad-valorem excise duty rates to increase by 200bps to 12%
Expect Diesel prices to be increased by Rs4/ltr & Petrol prices to be increased by similar extent. Expect status quo on basic customs duty on Coal petcoke & gypsum

§

Interest rate subventions on hosing loan up to Rs 15 lakhs can be extended to Rs 20-30lakhs which will be positive for demand

Current Status

Expected

Impact

Excise duty on cement with MRP above Rs190 @ - 10% ad valorem +
Rs8/bag or Rs160/ton

Increase in ad valorem rates by 200 bps to 12% - Status quo on specific rates Negative – Duty to go up by Rs4-5/bag. Though cement price could be hiked, the duty increase to eat into the season price hike. Without price hike earnings to be impacted by 11%-30%

Excise duty on cement with MRP below Rs190 - 10% ad valorem +
Rs4/bag or Rs80/ton

Increase in ad valorem rates by 200 bps to 12% - Status quo on specific rates Neutral as negligible proportion of cement sold below MRP of
Rs190/bag

Excise Duty on clinker - 10% ad valorem + Rs200/ton

Increase in ad valorem rates by 200 bps to 12% - Status quo on specific rates Marginally Negative for Ultratech

Custom duty–Coal @5% & Gypsum
& petcoke @ 2.5%

Status quo

NEUTRAL

EPS

Current Estimates

Post Expected Proposal

change

ACC

74.5

64.7

-13.2%

9.6

8.4

-12.5%

Ultratech Cement

80.8

69.4

-14.2%

Shree Cement

95.9

66.2

-31.0%

India Cement

7.4

5.0

-33.0%

13.6

11.3

-17.0%

Ambuja Cement

Madras Cement

11

Construction and Infrastructure
§

Enhancing the scope of service tax by introducing negative list which will bring newer services within the tax net
– several services offered by infrastructure which will include airport developers, port developers & other construction companies – Such widening will impact the demand growth rather than the profitability as this is an indirect tax which will be further passed on to consumer

§

We don’t expect any alteration in the effective MAT rate which stands at 20% offering sigh of relief to infrastructure companies

§

Incremental allocation to infrastructure sectors - roads, rail to remain muted as fiscal deficit offers little room for increasing the spend.

Current Status

Expected

Impact

No service tax is imposed on collection of toll

Negative list excludes this service

Neutral – Status quo as no service tax is to be collected on toll collection. Marginally negative for IL&FS transportation

MAT @ 20%

No change in MAT rate

Neutral – Status quo

Infrastructure bond u/s 80CCF coming for a sunset in March 12

We believe an extension of this clause by another year and the exemption limit raised from Rs 20,000 to Rs 40,000

Positive – L&T, GMR Infra, IRB Infra, IL&FS transportation,
Jaiprakash Associates etc.

Exemptions under Sec 80IA & 80IB are applicable till March 31, 2012

Extension by another year

Positive – L&T, IRB Infra, Ashoka Buildcon, IL&FS transportation, GMR Infra, GVK Power, Jaiprakash Associates,
IVRCL Infra, NCC, HCC, Sadbhav engineering.

12

Consumers
§
§
§
§
§

Expect Ad-valorem excise duty rates to increase by 200bps from 10% to 12%
Expect excise on Cigarette to be hiked by 12-15%; Likelihood of overhaul of tax structure for tobacco products
Measures to discourage gold imports and demand – further increase in import duties
Increase in fuel prices i.e. diesel and petrol, which is applicable for other sectors as well
Widening of personal income tax slabs; Increase the disposable income for consumers

Current Status

Expected

Impact

Ad valorem excise duty rates of 10% on consumer products

Increase in ad valorem rates by 200 bps from 10% to 12%

Neutral, Since consumer companies can increase product prices. Also, Companies likes Marico, Dabur, etc have plants in excise free locations

Current excise ranges from
Rs0.69/Stick (59 mm filters) to
Rs2/Stick (KFST)

Hike excise duty by 12-15% i.e.
Rs0.07/Stick to Rs0.20/Stick

Neutral, Since cigarette companies have already taken 4-10% price hike

EPS
Asian Paints
Berger Paints

Current Estimates

Post Expected Proposal

Change

113.4

113.4

0%

6.2

6.2

0%

Colgate Palmolive

34.1

34.1

0%

Glaxo Consumer

101.1

101.1

0%

Godrej Consumers

22.8

22.8

0%

Hindustan Unilever

13.8

13.8

0%

Jubilant Foodworks

25.8

25.8

0%

Marico

7.5

7.5

0%

Nestle

121.8

121.8

0%

8.2

8.2

0%

Titan

13

Engineering & Capital Goods
§

Expect total allocation to infrastructure sector (on flagship schemes, JNNURM, APDRP, NHDP, AIBP and renewable energy resources, etc) to increase by 10% to Rs2360 bn

§

Expect enactment of enabling policies to expedite roll-out of infrastructure projects

§
§
§
§
§

New mining policy to expedite investments in mining industry
Addressing coal availability issues facing power sector à easing import barriers, clearing captive blocks
Extension of tax benefits U/s 80IA, 80IB by one more year
Easing ECB norms especially for infrastructure projects– to attract debt funds into the sector

Selectively raise import barriers for capital equipment, especially power equipment – to facilitate domestic players Current Status

Expected

Impact

Total budgetary allocation on infrastructure at Rs2140 tn

Increase by 10% to Rs2360 tn

Positive for all companies

Nil import duty on power equipments imports Levy of 10-12% import duty

Positive for BHEL, L&T, Thermax, BGR Energy, etc.

14

Fertiliser & Chemicals
§

In fertiliser, expect budgetary allocation for fertiliser subsidy of Rs700-800bn (vs current year subsidy est of ~Rs
900bn). Government also needs to clear subsidy dues of ~Rs200bn for current year

§
§
§
§

Lowering of interest rate on crop loans to 3% for those farmers who pay in time, from the existing 4%
To bring Urea under NBS and also clear the new investment policy on urea
Increase urea retail prices by minimum 20% to reduce the gap between complex fertiliser and urea prices
Chemicals industry expects custom duty on various inputs like LNG, Naphtha, Alcohol, Propylene etc to be eliminated from current rates of 5%.

Current Status

Expected

Impact

Current year subsidy est of Rs 900 bn Expect budgetary allocation for FY1213 of Rs 700bn. Additional allocation of
Rs 200 bn for current year dues

Positive - Adequate subsidy provisioning and clearance of current dues will help the industry to reduce working capital

Existing interest rates at 4% for the farmers paying on time

Reduce it to 3%

Positive – since it will enhance the farmers’ affordability and boost farm credit

Urea retail price at Rs 5350 / mt against DAP at Rs 18,500/mt

Increase Urea prices by min 20%

Positive – As it will boost the demand for complex fertiliser and will also improve the working capital for urea players

Custom duty at 5% on various chemicals inputs

Bring it down to Zero

Positive – since companies will able to retain some benefit

15

IT Services & Telecom
Information technology

§
§

We expect the Union Budget to be neutral to the IT services sector
After an increase in MAT rate over the past 2 Union budgets, we does not expect any other increases on this front Telecom

§

We think the budget could be a non-event this year as the National Telecom Policy (NTP 2012) is expected to be announced in next fiscal.

§

Supreme court’s judgment on cancellation of 122 licenses has freed up close to 448MHz of spectrum, which is likely to be auctioned in near future. As per the current spectrum pricing government can raise upto Rs340bn by auctioning of spectrum. However, government is working on the new pricing which would give the exact amount it can raise.

16

Metals & Mining
§
§
§
§

Expect ad valorem excise duty to be increased by 200 bps
Expect import duty on HR coil to remain at 5% although the industry wish-list includes a hike in this to 10%
Expect export duty on Iron fines and lumps to remain at 30%
Expect the customs duty on non-coking coal to be decreased from current 5% to 0 (Zero)

Current Status

Expected

Impact

Import duty on HR Coil at 5%

No change expected

Nil

Export duty on Iron Ore fines and lumps at 30%

No change expected

Nil

Excise duty

To be increased by 200 bps

Nil as the same is modvattable by end-users of metals

Customs duty on non-coking coal currently at 5%

To be decreased to 0 (Zero)

Positive – will lead to decrease in power costs (due to reduction in blended coal cost) for Sterlite, Hindalco and JSW Steel

EPS (Rs)

Current Estimates

Post Expected Proposal

change

HZL

15.8

15.8

0%

Tata Steel

68.8

68.8

0%

Sterlite Industries

17.6

17.8

0.9%

Hindalco

16.8

16.9

0.3%

Sesa Goa

42.6

42.6

0%

JSW Steel

63.3

64.2

1.4%

Bhushan Steel

45.4

45.4

0%

HEG

45.8

45.8

0%

GPIL

31.8

31.8

0%
17

Media
Increase in FDI limits from currently 49% in DTH and cable, 26% in news broadcasting & print media and 20% in radio sector

§
§

Possibility of reduction in import duty for set top boxes to 0% from currently 5%
Increase in service tax could have negative impact on demand, which is applicable for other sectors as well

Current Status

Expected

Impact

FDI limits- Currently 49% in DTH and cable, 26% in news broadcasting & print media and 20% in radio sector

Increase in the limit to 74% for DTH and Cable industry

Positive for DTH and cable companies like Dish TV, Hathaway,
Den Networks and Hinduja media ventures

5% import duty on the Set-top-boxes

Reduction in import duty for set top boxes to 0%

Positive for DTH and cable companies like Dish TV, Hathaway,
Den Networks and Hinduja media ventures

18

Oil & Gas
§

Despite the cut in custom duties to 5% on crude oil and Petrol/Diesel to NIL and 2.5% and excise duty cut on diesel by INR2.6/lit to INR2/lit, announced in June 2011, the taxation component remains high in consumer prices. We expect status quo on customs and excise duties in the oil & gas sector in light of the sustained high losses on sales of subsidized petroleum products at current retail selling price.

§

Expect extension of seven-year tax holiday for the commissioning date of new refineries. The current exemption is available for only those refineries which are commissioned by March 2012. This will benefit Indian
Oil Corporation (IOC) which is setting up a greenfield 15mmtpa refinery in Paradip, Orissa.

§

Exemption from payment of withholding tax of 40% to facilitate Indian refiners to start using a newly agreed mechanism of paying in Indian rupee for the crude oil they buy from Iran.

Current Status

Expected

Impact

Import duty Nil on Crude oil and 2.5% on Petrol And Diesel, as brought down in June 2011

No change - As any hike in duties would impact inflation

Neutral

Exemption is available for only those

Likely to announce extension of deadline Positive for IOCL, This would lead to seven years tax holiday for its greenfield expansion in paradip, Orissa.

refineries which are commissioned by March 2012.
EPS

Current Estimates

Post Expected Proposal

Change

IOCL

4.9

4.9

0%

BPCL

27.4

27.4

0%

HPCL

23.2

23.2

0%
19

Pharmaceuticals
§
§

Healthcare sector be given infrastructure status
Expenses incurred outside R&D facility like those on overseas trials, preparations of dossiers, consulting & legal fees, ANDAs should be eligible for weighted deduction

§
§

Higher allocation for primary healthcare as % of GDP in the budget
Allow deduction for free samples as sales promotion

Current Status

Expected

Impact

High capital cost deterrent for affordable healthcare services in the country Healthcare sector infrastructure status

given

Positive for healthcare companies– Grant of infrastructure status will reduce the cost of capital and will thus help in expansion of hospitals

Weighted deduction allowed only on in-house R&D

Expect the weighted deduction to be applicable to outside R&D facility like those on overseas trials, preparations of dossiers, consulting & legal fees,
ANDAs should be eligible for weighted deduction Positive for generic companies – Large generic companies like
Sun, Ranbaxy, Dr. Reddy, Cipla, Lupin who have higher R&D expenditures for markets outside India will benefit the most

Healthcare spend currently pegged at
1.4% of the GDP

Increase the expenditure on primary healthcare as per the 12th five year plan
(target 2.5% of GDP)

Positive for all pharma and healthcare companies

be

20

Power
§

Most Important – Expect some incentives/measures (Shunglu/BK Chaturvedi committee’s recos, National
Electricity Fund for interest subsidy etc) for SEBs reforms with preconditions

§
§
§

Expect introduction/increase of import duty on power equipments at/to 19% for mega/small power plants
10% Import duty on imported coal could be withdrawn or reduced
Withdrawal of customs duty and excise duty on mining equipments - to bring policy in line with mega power project benefits

§

Announcement of appointment of Coal Regulator – to take care of pricing, excess coal diversion etc.

Current Status

Expected

Impact

Import of power equipments exempted from import duty for mega power plants while 5% duty for other power plants

Duty levy at 19% on import of equipments NEUTRAL to NEGATIVE – Neutral for Utilities with PPAs in place as the levy would be pass-through; Negative for merchant power utilities (like JSW Energy)

Abolishing/Reducing levy on imported coal : currently basic customs duty at 5% and countervailing duty at 5%

0% BCD and 0% CVD on import of non-coking coal

POSITIVE to NEUTRAL- Positive for imported coal based plants like Adani Power, JSW Energy etc to the extent of merchant exposure; Neutral for Utilities with PPAs

7.5% customs duty and 8% excise duty on mining equipments

Reduction in duty rates

POSITIVE for utilities with captive mines like Reliance Power,
Jaiprakash Power, KSK Energy, Coal India; Pass through for
Utilities with PPA; Positive for others

Sunset year of Sec 80-IA is FY12

Status-quo

NEUTRAL to NEGATIVE- Neutral for Utilities with PPAs;
Negative for the sector and Utlities with capacity not tied up or exposed to merchant
21

Printing and Writing Paper
§
§

Custom duty on paper to remain unchanged from current at 10%
Industry has accumulated significant CENVAT credit and expects some government to extend the benefit of the same to industry by some mechanisms other than excise duty rebate

§

With rising domestic coal prices and lower availability of coal through linkages, industry expects Import Duty on coal (current at 5%) should be waived off

Current Status

Expected

Impact

Custom duty on paper at 10%

to be maintained

Neutral tp positive – since it will keep the imported paper prices at higher level

Accumulated huge CENVAT credit which right now I adjustable against excise duty

Government to find some mechanism to distribute this accumulated credit sine companies are not benefiting much due to lower excise duty

Positive – Will improve financial health of the companies

Lower availability of coal under linkages, Import duty on coal at 5%

Exempt from import duty on coal

Neutral – Will not have much impact since imported coal prices are still significantly high than domestic prices

22

Thank You

Emkay Global Financial Services Ltd.
7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. India
Tel: +91 22 66121212 Fax: +91 22 66121299 Web: www.emkayglobal.com
DISCLAIMER: Emkay Global Financial Services Limited and its affiliates are a full-service, brokerage, investment banking, investment management, and financing group. We along with our affiliates are participants in virtually all securities trading markets in India. Our research professionals provide important input into our investment banking and other business selection processes. Investors may assume that Emkay Global Financial Services Limited and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Emkay Global Financial Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may be distributed in Canada or used by private customers in United Kingdom. All material presented in this report, unless specifically indicated otherwise, is under copyright to Emkay. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of Emkay. All trademarks, service marks and logos used in this report are trademarks or registered trademarks of Emkay or its Group Companies. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized.
Please ensure that you have read “Risk Disclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in
Indian Securities Market. In so far as this report includes current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

23

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