a bagful of goodies--budget proposal vs impact on indian stock market

A bagful of goodies
S I Team / Mumbai March 3, 2008
While many may term Budget 2008-09 as populist, the finance minister's proposals should positively impact all sections of the society, including industry and the common man.
 
The proposals to waive off loans would benefit four crore farmers, while the increase in the income tax slab rates would benefit another one crore individuals. Although there are no significant proposals for India Inc, they don't have a big reason to be unhappy about either. Although the demand for cut in corporate tax rate (or removal of surcharge) among many others has not been heeded, the Budget has not increased the burden in any manner.
 
Moreover, it has proposed a reduction in the peak excise duty from 16 per cent to 14 per cent and in central sales tax (CST) from 3 per cent to 2 per cent, while leaving import duties unchanged (read: no reduction).
 
That apart, there are proposals for specific sectors including auto, steel and pharmaceuticals among others aimed at providing protection or growth stimulus to Indian industry. Besides, higher allocation towards infrastructure, power, irrigation and defence sectors are also a step in the right direction.
 
All this put together and the fact that there is more money in the hands of individuals, the Budget aims to provide a boost to consumption and simultaneously, curb inflationary pressure. To give an example, for a salaried individual earning Rs 5 lakh a year, the income tax proposals mean a saving of about Rs 45,000 per annum, which is equivalent to a month's salary.
 
In either case, whether the additional cash-flow contributes by way of higher consumption or higher savings or a mix of both, it should ultimately trickle down and aid economic growth. And, this is precisely what seems to be the need of the hour. With global and domestic economies showing signs of deceleration in growth rates, these measures should hopefully help the country sustain high GDP growth rates and, help India Inc record healthy earnings growth.
 
On the flip side, issues like maintaining fiscal discipline and achieving targets with respect to social sectors like education and healthcare need to be watched. Read on to find out what the various proposals are and how they impact the individual sectors and companies. 
 
Proposals Impact
Agriculture
Loan waiver for small farmers. Agri credit target at Rs 2.8 lakh cr Increase in agri-production and yield improvement
Budgets for micro irrigation (Rs 500 cr) horticulture Rs 1,100 cr  
Cut in customs duty on phosphoric acid at 5% and sulphur at 2%  Input costs for fertiliser companies comes down
Companies: Jain Irrigation, Aries Agro, Monsanto India, Kavery Seeds
Auto and auto ancillaries 
Excise cut on buses, small cars and 2-3 wheelers from 16 to 12% Lower cost, boost volumes 
Reduction in CENVAT from 16% to 14% Will bring commercial vehicles (other than buses) in the lower tax bracket
Increase in exemption limits of personal income tax  Will benefit consumption driven sectors such as automobiles
Hybrid cars from 24% to the general revised rate of 14% Lower fuel emissions
Excise duty cut on tyres from 16% to 14%   Tyre manufacturers to benefit as they have pricing power
Positive for: Apollo Tyres, Amtek Auto, Hero Honda, Tata Motors, Maruti Suzuki and Eicher Motors 
Banking
Agricultural loan waiver of Rs 60,000 crore to be reimbursed One time clean up act in balance sheet; To be shown as loan loss recovery in P&L
Higher target in agriculture credit to Rs 2.8 lakh cr in FY09 Higher credit growth
Double digit growth in mfg targeted; Excise cut on auto Higher credit growth
DDT rationalisation SBI, ICICI Bank having subsidiaries benefit
PSU banks asked to open atleast 250 rural accounts every year To increase cost of operating the account for PSBs
Cautiously positive: Large PSU banks like SBI, PNB, Canara, Bank of Baroda and ICICI Bank 
Capital goods
Allocation to defence, power and construction sectors hiked Equipment demand to go up as these sectors form a large part of revenue
Peak excise cut to 14%;  select refrigeration equipment duty cut Help companies to absorb the input cost
Customs duty cut to 5% on project imports, 4% CVD withdrawn Neutral for the sector
Companies: Positive for Voltas, Blue Star, BEML, BEL, L&T, ABB, Alstom, Crompton, BHEL
Cement
Excise duty introduced for bulk cement @ Rs 400 a tonne, clinkers @ Rs 450 a tonne Will add to the already high cement prices; companies to pass on higher costs to customers
Customs duty reduction in project imports Companies with ongoing expansion to benefit
Negative for: end consumers, neutral for companies 
Consumer Durables/Retail
Hike in the individual income tax slab, loan waiver to farmer Higher disposable income
Reduction in CENVAT and CST Lower finished goods prices will lead to higher demand
Positive for Pantaloon, Vishal Retail, Shoppers Stop, Trent and Reliance Industries (retail business), Videocon, Voltas, Blue Star
Education
SSA budget hiked by 23% Educational content and technology service providers to schools will benefit
Excise duty reduction on printing and writing paper Will help educational publishers
Positive for educational software cos like Educomp, Everonn Systems, Core Projects. NIIT and educational publishers like Navneet Publications
Financial Services
RGGVY to continue To-be-listed REC to benefit
Corpus for RIDF and other infrastructure-related schemes raised Infrastructure finance companies like IDFC to gain
Subsidies offered to rural housing  To benefit housing finance companies present in lower income groups
Positive for: REC, IDFC, GIC Housing, Dewan Housing
FMCG
Loan waiver given to farmers, hike in IT exemption limit May lead to higher disposable income and consumption
CENVAT cut from 16% to 14%; CST from 3% to 2% Reduction in prices of finished products and boost consumption
Excise duty from 16 % to zero on tea and coffee mixes, These products to be become cheaper
Excise halved to 8 % on water purification devices and cereals  
Excise duty on packing paper down from 12% to 8% To bring down the cost of packaging- a key cost element
Excise duty halved to 8% on specified packaging   
Parity in taxation for both filter and non-filter cigarettes Neutral to positive for cigarette manufacturers
Positive for: HUL, Marico, ITC, Nestle, Godrej Consumer and Dabur
Healthcare 
Excise duty on all pharma products reduced from 16% to 8% Companies with a higher contribution from the domestic segment will benefit
Customs duty on life saving drugs to be reduced from 10% to 5%  Cost for companies (MNCs) which import life saving drugs will come down
Tax holiday for hospitals being set up in smaller cities and towns Will help recover investments faster in case of greenfield facilities
125% deduction on R&D outsourcing expenditure Improve competitiveness of Indian players
Additional deduction of Rs 15,000 on medical insurance premium Expands medical insurance coverage 
Health sector allocation increased by 15% to Rs 16,534 crore Improved medical infrastructure, benefits all pharma companies
Positive for: FDC, Apollo Hospitals, Fortis, Emcure Pharma, GSK, Nicholas Piramal, Pfizer, Aventis Cadila, Sun Pharma and Cipla
Information Technology
Packaged software to attract a higher excise @ 12% Product companies to shell out more in taxes
Higher defense budget Benefits for a few IT firms providing services to defense
Positive for Allied Digital, Tulip IT Services, Rolta India,  Negative for product companies like Subex, 3i-Infotech, i-Flex, Ramco Systems
Infrastructure
Higher allocation for Bharat Nirman, roads, water, etc Positive for construction sector
Positive for: IVRCL Infra, Patel Engineering, Nagarjuna Construction, Pratibha Industries
Metals
Cut in customs duty on steel melting & aluminium scrap to nil Benefit steel companies manufacturing long products
Emphasis on drinking water, sanitation, irrigation and construction Better prospects for pipe manufacturers
Positive for: Usha Martin, Jindal Stainless, Bhushan Steel, Welspun Gujarat
Oil and Gas
Ad valorem duty on unbranded petrol and diesel abolished No impact on retail prices
Duty of Rs 14.35 per litre and Rs 4.60 on unbranded petrol/diesel  
CST reduced from 3% to 2%. Less under recoveries on LPG and kerosene
5% customs duty on naphtha Naphtha to cost more
Positive for: HPCL, BPCL, ONGC, GAIL, Aban, Great offshore, Shiv Vani Oil, Alphageo;  Marginally negative for Reliance Industries
Power
11th Plan target 78,577 MW for power generation  More projects will be announced, power utilities benefit
Five new UMPP and fourth UMPP at Tilaiya to be awarded shortly  
RGGVY allocation of Rs 5,500 cr, Rs 800 cr for reforms in FY09 Faster implementation of rural electrification projects 
Positive for: NTPC, Tata Power, Lanco Infratech, KEC International, Kalpataru Power and Jyoti Structure
Real Estate
DDT rationalised  To help real estate developers with project-specific SPVs and REITs
5-year tax holiday for hospitals under Section 80-IB To help companies with integrated townships in Tier II and Tier III cities 
Positive for: DLF, HDIL, Indiabulls Real Estate, Parsvnath Developers, Unitech
Telecom
Excise duty cut on wireless data card from 16% to nil  Effective rate at 4% due to special addition duty, facilitate wireless penetration
1% National Contingent Calamity Duty on handsets  Marginal increase in handset prices 
1 lakh broadband enabled centres in rural areas and SWAN  Increase broadband services penetration
Halving of customs and excise to 5% and 8% on convergence units Cheaper VoIP services
Internet telecommunication services brought under service tax net Marginal cost increase
Neutral for: All telecom service providers
Textiles
20% rise in allocation for TUF to Rs 1,090 crore Additional financial support for capex in the industry
Schemes for Integrated Textile Parks maintained at Rs 450 crore Increase in set up of new textile parks
NCCD of 1 % removed on polyester filament yarn PFY to get cheaper by 1 %
 
Agriculture
 
Aiming for higher growth, the budget announced several measures including doubling of outlay for accelerated irrigation, waiver of loan, higher agriculture credit and development of water bodies. Emphasis on micro irrigation will help in increasing yield, quality of produce and effective utilisation of water and inputs like seeds and fertiliser.
 
Automobiles and auto ancillaries
 
For a sector riddled with high input costs and interest rates, the excise duty cuts are timely. With auto manufacturers announcing price cuts soon after the budget, lower prices should boost volumes of existing as well as forthcoming models such as the Nano.
 
The excise and CENVAT cut will also help auto ancillary segments such as tyres, which derive a large share from the replacement market. The increase in exemption limit for individuals will be the biggest booster for this consumption driven sector. The tax relief offered to farmers might spur the demand for farming equipment and benefit tractor makers.

Banking & Financial services
 
The impact of proposal to waive loans given to small farmers is not fully known. While the move should help improve the asset quality of banks, which have partly provided for these bad loans, the cautious outlook for PSBs is on account of the uncertainty over the timing and amount to be released from the government. With more money in the hands of individuals, banks could benefit from higher deposit growth.
 
Also, higher growth in agriculture credit, double-digit growth for manufacturing sector and excise duty cuts in automobiles could boost overall credit growth. Banks like SBI and ICICI Bank, which have various subsidiaries, will gain from the set-off of dividends received from subsidiaries.
 
The continuation of funding support to RGGVY and infrastructure sectors is expected to benefit Rural Electrification Corporation and IDFC, respectively. Housing finance companies catering to lower income groups in rural and semi-urban areas will gain from the sharp hike in subsidies for new houses.
 
Capital goods
 
The sector would benefit from increased investments in the power sector and creation of national fund for T&D. While on the cost front, the budget has provided relief by way of cut in peak excise duty on equipment. However, cut in custom duty on project imports is marginally negative as it will impact the competitiveness of equipment manufacturers.
 
Cement
 
In a bid to bring parity in the excise duty structure of packaged and bulk cement, excise for the latter has been hiked. Cement clinkers, too, will attract an excise duty of Rs 450 a tonne. Since bulk cement is priced around 10-15 per cent lower as compared to packaged cement, the hike is likely to be passed on to the end consumer, making cement expensive by Rs 160-200 a tonne.
 
Cement manufacturers are attempting to reduce their output of clinkers, as it yields lower margins compared to cement, which means the move is likely to impact the industry only marginally. A reduction in customs duty on project imports from 7.5 per cent to 5 per cent will help cement-makers undergoing capacity expansion.
 
Education
 
The Sarva Shiksha Abhiyan (SSA) allocation has been revised upward by 23 per cent to Rs 13,100 crore, which means a larger number of schools will undergo a revamp. Companies which develop content for schools and provide technology services to upgrade schools covered under this scheme are likely to be the key beneficiaries. A reduction in excise duty on writing and printing paper will buck up the bottom lines of educational publishers. It remains to be seen how much of the cost reduction the publishers pass on to the consumers.
 
FMCG
 
The growth of the fast moving consumer goods (FMCG) sector is likely to be faster with a variety of duty cuts and sops, leading to lower product prices. The hike in the individual income tax slab, loan waiver given to small farmers and higher targeted agricultural loan growth will push the consumption in rural as well urban areas. Some products like breakfast cereals, water purification devices, tea and coffee mixes could become cheaper due to cut in excise duty. Cost of packaging – one of the key costs is expected to come down due to duty cuts.
 
Healthcare
 
A major push in improving health infrastructure comes in the form of a 15 per cent increase in sector allocation, health cover for workers in the unorganised sector and programmes for child development, AIDS, polio and seniors. These initiatives coupled with excise duty reduction on formulations will help expand medical infrastructure and reduce drug prices. Pharmaceutical MNCs located outside tax-free zones, will benefit.
 
Additional deduction of Rs 15,000 on medical insurance premium paid for the parent will lead to a demand for quality healthcare services and high-end care. The 125 per cent reduction in R&D outsourcing expenditure will encourage higher research spend and improve competitiveness of outsourcing players.
 
Hotels
 
This Budget provides a five year direct tax holiday for two, three and four-star hotels which commence operations during April 1, 2008 and March 31, 2013 at UNESCO-declared World Heritage Sites.
 
Although most hotel companies may choose to put up operations at important hub cities leading to these sites, there may be a few beneficiaries like resort companies with operations close to the National Parks and Sanctuaries.
 
Among the major players, none has any plans to develop hotels at any of the 27 such sites and only few players that can chart out such plans are likely to benefit.
 
Information Technology
 
Increase in excise duty on packaged software from 8 per cent to 12 per cent and application of service tax on customised software is negative. Narrowing the scope of fringe benefit tax (FBT) by allowing guest houses as deductible expense will help IT companies with in-house guest houses. In the long-term, higher investments in education will mean adding to the talent pool that is growing scarce as the IT industry grows.
 
Infrastructure
 
Higher investments and allocation for ongoing schemes, especially towards roads, irrigation, water, power, urban and rural infrastructure, is positive for construction companies operating in the space. The companies will also benefit by way of set off of dividend from subsidiaries, as most of the companies operate on SPV model.
 
Oil & Gas
 
The government's announcement that NELP VII is expected to attract investments of $3.5-8 billion indicates robust demand for services like rigs and seismic survey.
 
Gas companies will benefit marginally due to reduction of CST on LPG. The abolition of ad valorem duty on unbranded petrol and diesel and specific duty levied is a positive in a rising crude oil-based scenario. Polymer manufacturers like Reliance Industries are likely to be marginally impacted due to customs duty levied on naphtha (raw material).
 
Power
 
Emphasis on additional generation capacities of 10,000 mw in 2008-09 and UMPPs besides higher allocation for viability gap funding and T&D sector is positive. The proposal to set up a coal regulator will result in faster allocation and securing captive coal mines. Utilities, which also operate on the SPV model, will benefit on account of setoff of dividend received from subsidiaries.
 
Real estate
 
The revision of the DDT clause will reduce the tax outflow of real estate companies, which launch special purpose vehicles (SPVs) for their projects and the earnings from these SPVs are considered as dividends to the parent company.
 
Going by the new formula, the parent company will be able to set off the dividend received from its subsidiary company against the dividend that it distributes to calculate DDT. This will help a number of real estate majors, which have SPVs.
 
A five-year tax holiday for hospitals in tier-II and tier-III cities would mean that the benefits could trickle down to those real estate developers which are setting up integrated townships in these cities with an ownership interest in the hospitals that are being built.