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Budget: What experts expect
BS Smart Investor Team | February 27, 2006
Here is ready reckoner on what the equity analysts on Dalal Street are expecting from the Finance Minister.
Over the years, the Budget has lost some of the prominence it had in the pre-reforms era. Today, as the direction of Indian economy is increasingly being controlled by private enterprise, the government is being seen more as a facilitator and less as an active participant in the evolution of the Indian economy.
Most of the expectations and recommendations by brokerages this year reflect this change, as most have to do with continuation of policies already put in place by previous regimes. The highest impact, as far as government allocation and spending goes, is in the infrastructure and capital goods sector where it still holds the keys to progress.
As far as other sectors are concerned, besides rationalization of the Fringe Benefit Tax and continued lowering of excise duties, the analysts also expect relaxations in import duties, especially where most of the raw material has to be sourced from abroad. The net impact, though not expected to as significant as in earlier years, is expected to be positive for all major sectors.
FMCG: For the FMCG sector, which is experiencing improved margins and volume growth, the indirect tax changes in the Budget would augur well. VAT is expected to benefit the organised players.
Agro-based products may get full exemption in excise duty, a positive for companies like HLL, Nestle and Britannia. Excise duty on other FMCG products may go down from 16 per cent to eight per cent. A special purpose tea fund is expected. Increase in excise duty on cigarettes is likely in the upcoming Budget.
Special excise duty on most FMCG products may become cenvatable. It would help products like shampoos, ice creams and cosmetics. Parity should be brought in duties levied on domestic and imported products in other segments, according to an ILFS Investsmart report.
Metals: Continued focus on infrastructure in the Budget will help steel and aluminium. Budget may increase customs duty on steel from five per cent to eight per cent, which is good for Indian companies. But, it would impact the cost structure of secondary steel producers.
A reduction in custom duty on zinc from 10 per cent to five per cent would reduce the cost of galvanised producers like JSW Steel. But the same would be adverse for companies like Hindustan Zinc. The import duty of five per cent on non-coking coal may be removed, which would reduce the cost for players who import, like Sail. No change is expected in the custom duty on copper.
Reduction in customs duty to five per cent is expected in aluminium, according to Khandwala Research. The excise duty structure for both, ferrous and non-ferrous metals is expected to remain the same.
Paper: While Kotak Securities expects the import duty to remain unchanged, ENAM Securities expects it to be cut to 10 per cent from the current 15 per cent. But both of them expect excise duty to be cut from 16 per cent to 8 per cent.
Media: Some good news is expected for some sections of the media. Customs duty on broadcasting equipment like set top boxes is expected to be reduced to 5 per cent and excise duty is expected to be made nil. This would bring broadcasting equipment on par with rates applicable on telecom equipment and provide a fillip to platforms like DTH that use set top boxes.
Currently, broadcasters are subject to a service tax of 10.2 per cent from which the print media is exempt. "We expect a parity to be established on the issue. Such a move would help in increasing the ad spends actually accruing to the broadcaster and boost their revenues", says the Kotak Securities pre-Budget report.
KRC expects FDI limits to be raised in DTH and FM radio from the current 20 per cent limit. It expects the limit in DTH to be raised to 74 per cent and that in FM radio to be 26 per cent.
Automobiles: Auto Sector is one of the most heavily taxed sectors in India. Indian manufacturing sector suffers from a manufacturing cost disadvantage of 12-17 per cent vis-à-vis other ASEAN countries due to embedded costs. The disadvantage has to be removed to make Indian industry competitive.
Excise duty on passenger cars and utility vehicles is expected to be reduced from 24 per cent to 16 per cent and special excise duty (SED) is expected to be cut from 8 per cent to nil. The lower excise duty would boost domestic demand and increase affordability to customers.
The rate of depreciation for private passenger vehicles is expected to be increased from 15 per cent to 30 per cent. The depreciation on commercial vehicles is expected to be fully allowed in the first year of purchase.
Textiles: Analysts expect the customs duty on fibre intermediates like PTA, MEG etc to come down from 15 to 10% and excise duty on end products like Polyester filament yarn (PFY), polyester staple fibre (PSF) etc from 16 to 8%.
In order to boost capital investments and encourage players to expand, customs duty on specific textile machinery are expected to come down from current 10-15 per cent to 5 per cent.
Analyst expect the politically sensitive labour laws to be relaxed in order to improve productivity and contract labour to be allowed. Also 10 per cent capital subsidy applicable to processing sector should be extended to apparel sector to boost investments. There are unlikely to be major changes for the cotton textile industry.
Allowing FDI in textiles sector and substitution of DEPB scheme are the other items in the wishlist.
Banks: In order to bridge the asset-liability mismatch, analyst expect interest on long term deposits to be treated at par with small savings schemes like PPF, NSC etc and be eligible for deduction under 80C of the Income tax act. Changes in limits of 5 per cent and 25 per cent in CRR (Cash reserve ratio) and (Statutory Liquidity Ratio) respectively is also expected.
Issuance of innovative instruments like preference shares and perpetual bonds to raise Tier I capital is expected to be allowed as government holding in most PSU banks have reached the minimum 51 per cent level. Government's support for the consolidation of the banking industry and a probable lifting of FII/FDI limit over 20 per cent is expected to trigger higher interest in banking stocks.
IT: Unlike other sectors, IT is one where status quo figures at the top of the list of analysts hopes, though extending of discounted FBT rates to BPOs and further discounts for IT hardware also figure prominently.
Khandwala goes a step further, pointing to the likelihood that the government would "take proactive steps" to increase the penetration of IT products and services in India including uniformization of excise duty of at 8 per cent on all IT products and VAT at 4 per cent.
Telecom: Another sector that is not likely to be impacted much by the Budget is Telecom, with most brokerages maintaining a neutral outlook for the impact of the Budget on this sector. Though some of them do recommend extension of tax holidays and reduction of license fees, there is no consensus except on the point of reducing customs duties on network equipment imported by operators.
Aviation: Analysts held out mixed expectations for the sector, with most seeing a possibility of airline companies being able to hedge their exposure to price-fluctuations of AT fuel as well as relaxation of excise duty and sales tax on the same.
Sales tax on ATF is as high as 30 per cent in some States. Any relief in sales tax will reduce the operational cost of airlines considerably and can lead to reduction in airfares and thus increase air traffic says Kotak Securities in its Budget outlook
"ATF accounts for nearly 35 per cent of the operating expenses of the airlines. It the airlines are allowed to hedge their fuel requirements it can safeguard the airlines from the vagaries of the price fluctuations of crude oil," points out Kotak Securities. Analysts expect airport charges to be brought down to levels comparable with neighboring South East Asian and Gulf countries points out SSKI Securities.
Shipping: Analysts expect exemption from customs duty of 5 per cent on import of some categories of vessels This would help to be competitive and reduce the cost of acquisition of the vessels and thereby offer lower rates and increase business for the shipping companies says Kotak Securities in its Budget outlook.
Analysts also expect service tax for services received and consumed outside India to be withdrawn and the withholding tax to be aligned with that for the airline industry.
They also expect that the profit/loss arising on sale of ships, being part of core income, to be compulsorily transferred to Tonnage Tax reserves also interest on funds deployed from unutilised amounts to buy ships be treated as core income and transferred to TT reserves. The industry has asked for exemption from the FBT net, as is the practice in other major maritime nations.
Oil & Gas: Most analysts expect a shift from a mix of ad valorem and specific excise duty to completely specific duty on MS and HSD to abate cascading effect. Reduction in both excise and custom duty for crude oil as well as other products is expected in order to ease pressure on the oil marketing companies.
Analysts expect the cess on crude oil to be increased from Rs 180/MT to Rs 5,000/MT. This will adversely impact ONGC's earnings but at the same time it is recommended that ONGC be eliminated from the subsidy sharing, which would result in a net positive impact on the company's earnings points out Enam Securities in its Budget outlook.
The analysts expect the service tax on exploration of oil & gas to be eliminated and the E&P (Exploration & production) business, LNG import projects and cross country pipelines be given infrastructure status.
Capital goods: Most brokerage houses feel that the Budget will hold positive news for the engineering and capital goods sector. Custom duty on capital goods may be reduced from 15 per cent to 10 per cent.
A cut in peak custom duty rate will bring down duty on machine tools and general machinery. Custom duty on raw materials like aluminium may be reduced from 10 per cent to 5 per cent while that on steel and copper is likely to remain at the current levels. Excise duty on raw materials and finished goods will remain unchanged at 16 per cent.
"The government may increase allocation to rural electrification projects in order to benefit transmission and distribution equipment manufacturers." points out Merrill Lynch report.
Power equipments and utilities: Analysts think power equipment companies will benefit from power capex through higher order flow. "Given the acute shortage of power the government may bring out schemes to improve power infrastructure to benefit power equipment manufacturers," says an IL&FS Investsmart report.
Custom duty on imported power equipment to come down by 5 per cent to 10 percent. Government may not remove custom duty concessions for power equipment due to focus on promoting power capex.
Excise duty reduction from 16 per cent to 8 per cent will benefit domestic and power related engineering companies. Import duty on coal may be abolished from current 5 per cent to reduce cost of power marginally.
Power Utilities are expected to benefit from lower cost of fuel for power generation as per reports of some brokerage houses.
Zero custom duty on imported equipment for ultra mega projects. Duty cuts on fuels such as naphtha, furnace oil and non-coking coal are also expected. "Tax sops under section 80IA are likely to be extended till 2012 and may also be offered to ultra mega power projects. Exemption from MAT during tax holiday period may also be announced." points out Refco Securities report.
Pharma: There was no major announcement in the previous Budget on the pharma industry. Now, with the introduction of the product patent regime in India in January 2005, the industry dynamics have undergone rapid changes.
"Currently, a company engaged in the business of bio-technology, pharmaceutical or chemical, is allowed a weighted deduction of 150 per cent of the expenditure incurred on Research and development. This could come down to 100 per cent. The IPA has also sought to include in this scheme capital expenditure on land and buildings for R&D initiatives, expenditure on clinical trials, on obtaining product registration from foreign authorities like the US FDA etc," says BRICS Securities in its pre-Budget review.
To obtain a rational tax structure and maintain equality among the states, the excise duty needs to be brought down from 16 per cent to 8, it says.
The industry also expects foreign exchange income earned with respect to Intellectual Property Rights on par with export income, thus making it exempt from income tax for 10 years.
Fertilizers: "We expect the Budget to be focussed on agri Budget and also food processing. Increased infrastructure spend in rural India. Higher investment in irrigation and agri infrastructure space. Tax sops for Agro and food processing industries are anticipated," says SSKI in its pre-Budget review.
In the Budget 2005-06 the FM (finance minister) had pledged under the Bharat Nirman initiative to bring an additional one crore hectares under assured irrigation by 2009. If the on-going projects are completed, another 14 million hectares would come under irrigation. Fertiliser subsidy bill estimated for 2005-06 was Rs 162.5 billion while the food subsidy stood at Rs 262 billion.
Sugar: Impact of the Budget on sugar-industry is expected to be positive. There was general consensus that sugar companies are likely to be included in the priority sector. Extension of depreciation benefit is expected for ethanol producing equipments and dehydrating plants and a reduction in excise duty on molasses is on the cards.
"Companies having distilleries will benefit from reduction in excise duties on ethanol doped petrol to 30p/lithe which would accelerate production of ethanol and early off take from oil companies," said IL& FS.
Khandwala Securities Limited believes that the government will levy excise duty of 8 per cent or Rs. 170 a tonne on molasses and reduce custom duty on capital goods for sugar mills wanting to set up co-generation plants. All sugar companies will get subsidies on the fertilizers with phosphorus and sulphur content. "(However,) 80 per cent depreciation benefit on flex fuel vehicle is not likely to have any impact," said IL & FS.
Cement: The impact is likely to be positive, according the analysts. The continued thrust on infrastructure sector that would help increase the cement consumption in the country. Among specifics, a reduction in excise duty is widely expected and so is a cut in central sales tax.
"Also a lower duty on coal would encourage use of alternate fuels and reduce production costs for companies using pet coke in kilns and for CPPs which would prove beneficial for Shree Cement and Grasim," says IL & FS.
According to Khandwala a reduction in royalty on limestone is expected from Rs 45 to RS 35 while Merrill Lynch expects freight rates to stay flat. "With the increasing demand the cement prices are likely to rise" said the firm. SSKI expects duty on non-coking coal to be cut from 5 per cent to zero.
Construction: Infrastructure is one sector where the Budget this year is expected to add considerable momentum to the industry growth. Most analysts expect this year's Budget to concretize the Private-Public partnership model projected by the government of late. "There would be increased thrust on infrastructure," IF&FS says, "extension of benefits of section 80IA from only BOT projects to roads, ports etc. is expected and we expect the Budget to keep the PPP model in focus," it added.
"We expect incentives to be provided to India Infrastructure Finance Company (SPV -- floated to finance infrastructure projects) and Viability Gap Funding to facilitate infrastructure projects," Merrill Lynch said. According to SSKI, there is likely to be increased focus on urban infrastructure, irrigation projects and drinking water.
They also expect exemption from service tax for the sector to continue.