49789919 CRISIL s Union Budget Analysis 2011 12

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iCRISIL RESEARCH ANALYSIS, FEBRUARY 28, 2011

Union Budget

Contents

Foreword 1

Economy

Highlights 4

Detailed economic analysis 5

Industry

Overall sectoral impact 11

Overall company impact 18

Airports Infrastructure 22

Auto components & Tyres 24

Automobiles 27

Banking and Finance 30

Cement 32

Construction 34

Fertilisers 36Hotels 38

Household appliances 40

Housing 42

Information technology 44

Media and Entertainment 46

Non-ferrous metals 48

Oil and Gas 51

Paper 54

Petrochemicals 56

Pharmaceuticals 59

Ports 61

Power 63

Roads 65

Steel 67

Sugar 70

Telecom 73

Textile 75

Continued


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CRISIL RESEARCH ANALYSIS, FEBRUARY 28, 2011ii

Union Budget

continued

Capital markets

Equity market 79

Mutual funds 87


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CRISIL RESEARCH ANALYSIS, FEBRUARY 28, 2011

Union Budget

1

ForewordPositive, but thinly spread

The three key macroeconomic concerns before Union Budget 2011-12 were high inflation, high current account deficit

(CAD), and fiscal consolidation. Additionally, there was an expectation that the government would restart the reform

process. The Budget has made an attempt to address all these issues, albeit through small steps. Despite the strong

performance of the economy in 2010-11, the outlook for 2011-12 is clouded by stubborn and persistently high inflation,

and rising external risks. The Budget factors in a GDP growth target of 9 per cent, which is on the optimistic side.

CRISIL expects GDP growth to moderate to 8.3 per cent in 2011-12.

By lowering the fiscal deficit target to 4.6 per cent in 2011-12 from 5.1 per cent achieved in 2010-11, the Budget

reiterates its commitment towards medium-term fiscal consolidation. As it sets a lower deficit, the Budget is not

expansionary, and does not conflict with the Reserve Bank of Indias measures to tame inflation, at least in intent. The

issue is how realistic the target is. We believe that the fiscal deficit will settle at around 5 per cent of GDP in 2011-12

a slippage of 40 basis points as we expect lower growth, lower tax buoyancy, and absence of one-off gains. There is

also the risk of slippages on subsidy expenditure on oil and fertilisers, the Budget estimates are conservative. Some

bold steps towards expenditure reforms were missing, and will have to be initiated through the year to keep a lid on the

subsidy bill and maintain the fiscal space for increased spending on physical and social infrastructure.

The underperformance of agriculture has left the country vulnerable to frequent bouts of food inflation. And, as the key

trigger to the recent spike in inflation was food items, initiating agricultural reforms was critical. The Budget takessome baby steps in this direction. However, more could have been done on the agriculture front by raising allocations

and initiating decisive marketing reforms to curb retail margins.

An additional concern is the rising current account deficit (CAD), which touched 4.1 per cent of GDP in the second

quarter of this fiscal. The rise in CAD would also be due to a decline in foreign direct investment and the increasing

contribution of volatile short-term flows in financing it. The dominance of volatile inflows in conjunction with a high

CAD exposes India to currency fluctuations in the event of a capital flight. In view of this, raising the limit on foreign

participation in the corporate bond market by US$20 billion is a very positive move. Encouraging long-term foreign

funds into the bond market will improve the composition of foreign inflows (from volatile short term to long term) in

addition to attracting money into the infrastructure sector. Additional steps towards removal of procedural bottlenecks

and uncertainties, which delay investment decisions, would have gone a long way in improving the investment climate.


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Union Budget

ForewordOn the inclusiveness front, the Budget has inflation-indexed its flagship MGNREGA scheme to ensure stability in real

wages. Its usefulness could have been multiplied if the scheme had been dovetailed with activities that create durable

infrastructure and raise productivity in agriculture. Moreover, improved monitoring of the scheme to check leakages

would have made these programmes more credible and effective.

Dharmakirti Joshi

Chief Economist, CRISIL


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Union Budget

Highlights

Fiscal deficit pegged at 4.6 per cent of GDP for 2011-12 Fiscal deficit projected at 4.1 per cent and 3.5 per cent for 2012-13 and 2013-14, respectively

Revenue deficit for 2011-12 pegged at 3.4 per cent

Revenue deficit for 2010-11 revised downwards to 3.4 per cent from the budgeted estimate of 4.0 per cent

Net market borrowings for 2011-12 budgeted at Rs 3,430 billion, 2.3 per cent higher than in 2010-11

Total expenditure for 2011-12 to increase by 3.4 per cent over 2010-11

Capital expenditure to be 1.4 per cent lower than in 2010-11; revenue expenditure to rise by 4.1 per cent

Change in personal income tax slabs following increase in exemption limit:

o Income upto Rs 1.8 lakh nil

o Income between Rs 1.8 lakh and Rs 5 lakh 10 per cent

o Income between Rs 5 lakh and Rs 8 lakh 20 per cent

o Income above Rs 8 lakh 30 per cent

o Incomes up to Rs 2.5 lakh of senior citizens between 60 and 80 years of age to be exempted from tax; for those

above 80 years, exemption limit is Rs 5 lakh

Standard rate of excise duty on all non-petroleum products to be maintained at 10 per cent

Minimum Alternate Tax rate to be increased from 18.0 per cent to 18.5 per cent

Rate of service tax retained at 10 per cent, but coverage extended

Disinvestment receipts for 2011-12 estimated at Rs 400 billion

Government to move towards direct transfer of cash subsidy for kerosene and fertilisers

Foreign investors who meet Know Your Customers (KYC) norms to be allowed to invest in Indian equity mutual

funds

FII limit for investment in corporate bond with residual maturity of over five years issued by companies in

infrastructure sector raised by US$20 billion to US$ 25 billion

Rs 60 billion allotted to public sector banks to maintain a Tier 1 CRAR of 8 per cent during 2011-12

Direct Tax Code to be implemented from April 1, 2012

Allocation to infrastructure at Rs 2,140 billion for 2011-12, 23.2 per cent higher over previous year


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Union Budget

5

Economy analysisOutlook 2011-12

India not only emerged relatively unscathed from the global financial crisis of 2008, but has returned to its trend

growth rate in 2010-11. Driven by the inherent strength of its domestic demand, which was suitably complemented

by the Reserve Bank of India's monetary management and the Central government's fiscal stimulus, Indias GDP is

expected to grow by 8.6 per cent in 2010-11 as per the CSO Advanced Estimate. This will again make India one of

the fastest growing economies in the world.

The expansionary fiscal stance that began in 2008-09 continued through 2009-10 and was reversed in 2010-11.

With growth now becoming more balanced due to revival in both private consumption and investment, it is time to

return to fiscal consolidation, which was deferred due to the global financial crisis. The Budget of 2010-11 took the

right step by reducing the fiscal deficit to 5.5 per cent of GDP, which, as per the revised estimate, is now 5.1 per

cent mainly due to the unexpected non-tax revenue garnered from 3G/broadband auction. Taking the fiscal

consolidation process forward, the fiscal deficit for 2011-12 has been pegged at 4.6 per cent of GDP.

In view of rising food prices, the Budget for 2011-12 announced numerous initiatives for the agricultural sector,

such as ushering in the green revolution to the eastern region, promotion of palm oil, initiatives on vegetable

clusters, national mission for protein supplements, enhanced agricultural credit, mega food parks, augmentation of

storage and cold chains etc. The target for agricultural credit for 2011-12 has been raised by 27 per cent.

Based on the measures announced in the Budget, and also taking into account the global macroeconomic scenario,

we expect the economy to grow by 8.3 per cent at factor cost in 2011-12. Growth in the services sector, which

accounts for nearly 57 per cent of the GDP, is expected to move up from 9.6 per cent in 2010-11 to 9.9 per cent in

2011-12 due to higher growth in hotels, transport, communications, finance, and real estate. However, industrial

growth is expected to moderate from 2010-11 levels due to the impact of RBIs monetary tightening measures

undertaken in 2010-11. In the event of a normal monsoon, agriculture is expected to grow at a lower rate than last

year because of the high base of 2010-11.

Table 1:Indian Economy Outlook 2011-12 Table 2: Assessment of Key Macro Risks

(2011-12 Vs 2010-11)

(y-o-y, % growth)2011-12

(Pre- Budget)

2011-12

(Post- Budget)

GDP (factor cost) 8.3 8.3Supply-side

Agriculture 2.7 2.7

Industry 7.9 7.9

Services 9.9 9.9

Demand-side

Private final consumption expenditure 8.1 8.1

Government final consumption expenditure 9.1 9.1

Gross fixed capital formation 8.1 8.1

Other macroeconomic variables

WPI inflation (average) 5.8-6.0 5.8-6.0

Interest rate (10-year G-sec March-end) 7.9-8.2 7.9-8.2

Exchange rate (Rs-$ March end) 42.5-43.0 43.0-44.0

Fiscal deficit 5.5 5.0

Note: Industry includes mining and quarrying, manufacturing, electricity, gas

and water supply, construction

Source: CRISIL Estimate

External financing

Exports

Economic reforms

Fiscal position

Domestic credit availability

Rupee appreciation

High interest Rates

Increase in oil Price


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Union Budget

Economy analysis Investment activity is likely to dip marginally, with gross fixed capital formation growing at 8.1 per cent in 2011-

12 as compared to 8.4 per cent in 2010-11 due to higher interest rates that have had an adverse impact on investor

sentiment. Although corporate profits are at healthy levels now, it is likely to come under pressure during 2011-12

mainly on account of rising wage and input cost. However, supply of funds is unlikely to present any roadblocks to

investment growth, unless government borrowing programmes go beyond the budgeted numbers and crowd out

private demand. Private consumption growth would remain flat at 8.1 per cent in 2011-12 as compared to 8.2 per

cent in 2010-11 due to high level of inflation and rising cost of retail credit.

The main threat to growth arises from sustained inflation, particularly food inflation. Throughout 2010-11, food

inflation remained a policy challenge and RBI had to resort to monetary tightening at a faster pace. Although year-

on-year inflation is expected to slow down during 2011-12 due to the high base of 2010-11 and the moderation in

food prices, the recent spurt in oil and commodity prices, if it continues, can pose an upside risk to inflation.

Assuming an average crude oil price of around US$ 85 per barrel in 2011-12, and normal monsoon, we expect

average WPI inflation to be around 5.8-6.0 per cent in 2011-12. As for 10-year government securities, the interest

rate would largely be dictated by the governments demand for funds to finance its deficit. We expect the interest

on G-secs to settle down around 7.9-8.2 per cent by the end of March 2012.

In recent months, the rupee has moved both ways largely dictated by capital inflows/outflows and rising current

account deficit. At the moment, it is hovering around 45.1 to 45.4 per dollar mark. Although foreign investment hasretreated of late, it is likely to return in view of the sustained growth outlook and some positive announcements

made in the Budget such as allowing foreign investment in mutual funds and letting foreign institutional investors

invest up to US$40 billion in corporate bonds. However, the pace would remain uneven and a bit lower than what

was witnessed during 2010-11. Therefore, we expect the rupee to stabilise in the range of Rs 43.0 to 44.0 per dollar

by March 2012. The margin of error for the exchange rate forecast remains high in view of the asymmetrical

growth prospects in the global economy and the sovereign debt crisis in some EU countries.

On the fiscal front, tax receipts are expected to increase by 17.9 per cent (over RE 2010-11). Moreover, the

government intends to generate Rs 400 billion from disinvestment despite missing the target in 2010-11. Although

the Budget has pegged the fiscal deficit at 4.6 per cent of GDP for 2011-12, we feel that in view of the

governments track record on the disinvestment front, and also the likely increase in subsidies on oil and fertilisers

not to forget, the impact of Food Security Bill our view is that the fiscal deficit will be higher than the budgeted

figure. We expect it to be 5.0 of GDP in 2011-12.

The CRISIL macroeconomic forecasts presented here are firmly based on our view of the fundamentals as we see

them now. However, we do recognise that any unanticipated developments either at the domestic and/or global

level would make revisions to our outlook necessary as 2011-12 progresses.


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Union Budget

7

Economy analysisFiscal Scenario

The Centre has budgeted a fiscal deficit of 4.6 per cent for 2011-12, against a downward-revised estimate of 5.1 per

cent for 2010-11. However, CRISIL expects fiscal deficit to be 5.0 per cent higher than the budget estimate in

2011-12 because, in addition to an overtly ambitious disinvestment target and upside risks to expenditure due to

likely slippages arising from higher oil and fertiliser subsidies, we believe real GDP growth during the fiscal will

be 8.3 per cent (lower than what the budget has factored in). Despite marginally higher market borrowings in 2011-

12, encouragement to higher foreign capital inflows could weigh down pressures on the 10 year G-sec yield.

During 2010-11, in addition to windfall gains from non-tax revenue (3G/BWA spectrum auctions), and higher-

than-budgeted tax revenues buoyed by expanding economic activity and part reversal of indirect tax/duty cuts, the20.3 per cent growth in nominal GDP helped the government tighten its belt on fiscal consolidation. The Centres

estimate for lower fiscal deficit ratio for 2011-12 is largely on the back of its higher 9 per cent (+/- 0.25 per cent)

estimate of real GDP growth and slower expenditure growth vis--vis previous year.

Consequent to a higher fiscal deficit, despite availability of cash balances with RBI and lower redemptions during

the year, the Centres net market borrowings for 2011-12 are pegged marginally higher at Rs 3.43 trillion,

compared to Rs 3.35 trillion in 2010-11.

Meanwhile, the revenue deficit, which shrank from 5.2 per cent in 2009-10 to 3.4 per cent in 2010-11, is budgeted

to remain unchanged in 2011-12. The 13th Finance Commissions (TFC) revised roadmap recommends elimination

of the Centres revenue deficit by 2014-15, and attainment of fiscal deficit of 3.0 per cent. On the debt front, much

ahead of the target year, the Centres debt to GDP ratio has already fallen to 44.2 per cent in 2011-12 and is lower

than TFCs stipulated target of 45 per cent.

The Centres expenditure growth is budgeted to be lower at 3.4 per cent in 2011-12, versus 18.7 per cent in 2010-

11. Much of this deceleration is due to ironing out of additional (stimulus-led) Plan allocations made in 2009-10

and 2010-11, lower allocation for subsidies and significantly lower commitments on agriculture debt waiver and

debt relief facilities.

Fig 1: Deficit indicators of the Centre Table 3: Market borrowings

4.64.1

3.42.7

0.0

2.0

4.0

6.0

8.0

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

RE BE F F

(% of GDP)

Gross fiscal deficit Revenue deficit

Fiscal deficit

6.4% of GDP

Fiscal deficit

5.1% of GDP

Fiscal deficit

4.6% of GDP

Rs. Crores FY10 (A) FY11 (RE) FY12 (BE)

Fiscal deficit 4,176 4,010 4,128

% financed through market loans 95 84 83

Gross market borrow ings 4,510 4,470 4,166

Less: Redemptions 526 1,116 736

Net market borrow ings 3,984 3,354 3,430

Note (Fig 1):RE revised estimate, BE budget estimate, F

forecast.

Source: Budget documents


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Union Budget

Economy analysisPlan expenditure is budgeted to rise by 11.8 per cent in the absence of major announcements of increased outlay on

schemes, whereas non-Plan expenditure is expected to fall marginally. However, ratio of Plan expenditure to GDP

has been maintained at 2010-11 levels, while the ratio of non-Plan expenditure to GDP is budgeted lower.

While the Budget proposes a relatively low expenditure increase, it has not managed to augment revenue

significantly. For 2011-12, while retaining the standard rate of service tax at 10 per cent, the service tax net has

been somewhat widened. Within direct taxes, major measures include hike in exemption limit in personal income

tax for individual taxpayers, and raising Minimum Alternate Tax rate paid by corporates, to 18.5 per cent. Within

indirect taxes, measures proposed are largely to align tax/duty rates with those that would be applicable once Goods

and Services tax (GST) is adopted.

Growth in gross tax receipts is budgeted to be lower in 2011-12, at 18.5 per cent, due to slower growth in excise

and customs duty collections. During the previous year, part reversal of tax/duty reductions on customs and excise

had lifted revenue collections. In contrast, collections from corporate tax, income tax and service tax are expected

to remain buoyant. The Centres gross tax to GDP ratio is, therefore, expected to rise marginally to 10.4 per cent in

2011-12, from 10 per cent in 2010-11. Based on the budgeted incremental gross tax revenue and incremental

nominal GDP, overall tax buoyancy is likely to be lower at 1.55 in 2011-12 versus 2.17 the previous year.

The government expects higher proceeds of Rs 400 billion (same as was budgeted in the previous year) from

disinvestment in public sector units (PSU) to offset the slowdown in revenue growth. However, there are some

concerns over actual accruals, given the limited investor appetite in PSU disinvestment. Out of the budgeted

amount in 2010-11, the government raised Rs 221 billion from divesting stakes in SCI, MOIL, Coal India, SJVNL,

PGCIL, and EIL. Although disinvestment receipts will boost the Centres revenues, this source of revenue is

unsustainable over the long term. Instead, the government should actively focus on increasing its tax revenue via

better reforms for widening the tax base, and improving its administration and compliance. Not accounting for the

one-off gains from 3G spectrum sales, the Centres non-tax revenue growth remains poor at about 6 per cent.

Improving receipts from dividends and profits of PSUs could provide a fillip to revenue buoyancy.

Table 4: Tax revenues of the Central government Fig 2: Incremental ExpenditureTax Heads % Share % Growth

2009-10 RE

10-11 RE/

09-10 Actual

11-12 BE/

10-11 BE

Gross Tax Revenue 100.0 26.0 18.5

Excise 16.5 33.3 19.2

Corporate 39.2 21.1 21.5

Customs 13.3 58.2 15.1

Income Tax 19.6 15.7 16.2

Service 9.4 18.8 18.2

Other Taxes 1.8 -22.6 1.5

Net tax revenue (Centre) 73.1 23.5 17.9

1,180

1,419

435

225

502

(23)

282

916

465

1,1241,005

(54)

2009-10

(A)

2010-11(RE)

2011-12

(BE)

2009-10

(A)

2010-11(RE)

2011-12

(BE)

2009-10

(A)

2010-11(RE)

2011-12

(BE)

2009-10

(A)

2010-11(RE)

2011-12

(BE)

Revenue expendi ture Capi tal expendi ture Plan expenditure Non-plan expendi ture

(Rs billion)

Source: Budget documents Note: A= Actual, RE = Revised Estimates, BE = Budget Estimates


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Union Budget

9

Economy analysisInfrastructure: Physical and Social

Infrastructure development is critical for sustaining Indias robust growth trajectory in the years to come. Hence,

like in the previous Budget, physical infrastructure was again accorded prime importance in Budget 2011-12. An

allocation of Rs 2,140 billion has been provided for infrastructural development, which is 23.3 per cent higher than

in 2010-11 and amounts to 48.5 per cent of the gross budgetary support to Plan expenditure. Allocation to major

infrastructure sectors including power, road transport, shipping, urban infrastructure, and railways together has

been increased by 29.7 per cent in fiscal 2011-12 as compared to 2010-11 (RE)

To remove the funding constraints for the infrastructure sector, the disbursement target of the government-

established India Infrastructure Finance Company Limited (IIFCL) has been raised by Rs 50 billion to Rs 250

billion by March 31, 2012, along with issuance of tax free bonds worth Rs 300 billion by various government

undertakings. In addition, the FII limit for investment in corporate bonds, with residual maturity of over five years

issued by infrastructure companies has been raised by US$20 billion, taking the additional limit to US$25 billion.

In order to facilitate the funding of rural infrastructure, the corpus of the Rural Infrastructure Fund (RIDF) has been

increased by Rs 20 billion to Rs 180 billion for 2011-12. The infrastructure sector is likely to benefit from the host

of measures announced in the budget for easing the flow of funds to the sector.

Social sector spending too remains one of the top priorities of the government. However, refraining from

announcing any new schemes, the Budget has laid stress on providing reasonable allocation to the existing

schemes, in order to curb fiscal deficit and provide room for the committed Right to Food Act. An allocation of Rs

1,914 billion has been provided to social services and rural development, which is 43.3 per cent of the total Plan

outlay in 2011-12. However, y-o-y growth of total budget support, together with internal and extra budgetary

resources (IEBR), stands at 7.8 per cent in 2011-12 as compared to 27.4 per cent in 2010-11.

Among the various social sector heads, the allocation to higher education has been budgeted to be 33.7 per cent

higher in 2011-12 against 25.9 per cent in 2010-11. Similarly, allocation has been increased in Health and Family

welfare. On the other hand, budgetary support to rural as well as urban development has been budgeted to decrease

by 2.0 per cent and 5.5 per cent respectively in 2011-12.

Fig 3: Growth in central plan outlay, yoy Fig 4: Growth in central plan outlay, yoy

15.1

156.2

75.5

11.73.5

45.4

-2.3

4.9

-5.5

40.7

-50

0

50

100

150

200

Ministry of

Power

Ministry of

Shipping

Ministry of Road

Transport andHighways

Ministry of Urban

Development

Railways

FY11 (RE over ac tual ) FY12 (BE over RE)

25.9

55.7

22.3 21.9 20.4

33.7

14.5

22.024.4

-2.0-10

0

10

20

30

40

50

60

Higher Edu School Edu &Literacy

Women &Child Dvlpmnt

Health &Family Welfare

Rural Dvlpmnt

FY11 (RE over actual) FY12 (BE over RE)

Source: Budget documents


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Union Budget

11

Overall sectoral impactIndustry Effect

Airport infrastructure Neutral

Neutral impact on airport infrastructure

The Union Budget 2011-12 proposal to attract more foreign funds to the infrastructure sector will not result in any

significantly increase in funds for airport infrastructure companies.

Auto components & Tyres Neutral

Budget to have neutral impact

The Union Budget 2011-12 is not likely to have any significant impact on the Indian auto components and tyres

industry. The exemption on customs duty on spare batteries for electric vehicles (cars and two-wheelers) and

concessional excise duty of 4 per cent on these batteries will reduce the maintenance cost of these vehicles. However,

this is not expected to have any significant impact on demand for auto components, given the low population of electric

vehicles in India. Natural rubber (NR) will attract customs duty of 20 per cent or Rs 20 per kg (whichever is lower),

with effect from April 2011. This will not have any significant impact on the landed cost of NR at current price levels.

Automobiles Neutral

Budget to have no significant impact on automobile industry

The Union Budget 2011-12 is not likely to have any significant impact on the Indian automobile industry. The

extension and enhancement of interest subvention on crop loans from 2 to 3 per cent, revision of wage rates under the

NREGA scheme and continued focus on rural development will have a marginally positive impact on rural two-wheelerand tractor sales. The extension of tax slabs for individual tax payers from Rs 1.6 lakh to Rs 1.8 lakh will aid two-

wheeler sales. The overall impact on passenger cars and commercial vehicles segment will be largely neutral. The

launch of a National Mission for Hybrid and Electric Vehicles and various excise and customs duty benefits proposed

for hybrid, electric, fuel cell and hydrogen cell technology-based vehicles or their parts is unlikely to have any

immediate impact, though it will aid alternate fuel vehicle sales over the longer term.

Banking and Finance Positive

Rise in priority sector home loan limit to benefit banks

Rs 2.5 million. Also, the limit for interest rate subvention of 1 per cent on home loans would be increased from Rs 1.0

million to Rs 1.5 million, for houses priced below Rs 2.5 million. These measures are expected to assist banks inaccomplishing their priority sector lending targets as also lower lending rates for borrowers.

The hike in interest rate subvention for agriculture loans from 2 per cent to 3 per cent and increased target for credit

flow to farmers would facilitate availability of funds at cheaper rates.

Public sector banks will be provided Rs 60 billion in 2011-12 (in addition to the Rs 232 billion provided in the last 3

years) to maintain a minimum tier-I capital adequacy ratio of 8 per cent, thus improving their ability to pursue loan

growth more aggressively.

Continued


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Union Budget

Overall sectoral impactcontinued

Industry Effect

Cement Negative

Increase in excise duty negative

The Union Budget 2011-12 has proposed the replacement of existing excise duty rates with a 10 per cent ad valorem

rate and an additional Rs 160 per tonne of cement. This results in an effective 2-4 per cent increase in the excise duty

for the cement industry. In the current operating environment, cement players will not be able to pass on the increase in

duty to customers. Further, the Union Budget has proposed a reduction in custom duties for gypsum and pet coke from

5.0 per cent to 2.5 per cent. Gypsum accounts for a mere 2-3 per cent of the total cost of sales for cement players.Moreover, pet coke is used as raw material by a select few companies only. Hence, the reduction in custom duties is

insignificant for the cement industry.

Construction Neutral

FII limit on corporate infrastructure bonds raised; tax-free bonds permitted

An increase in the foreign institutional investment (FII) limit by $20 billion for investment in corporate infrastructure

bonds will help mop up bond issues. Further, select government undertakings like Indian Railway Finance Corporation

have been allowed to issue tax-free bonds totalling Rs 300 billion. Also, the allocation for Bharat Nirman has been

increased by 20 per cent in 2011-12. IIFCLs loan disbursal target has been set higher as well at Rs 250 billion for

2011-12 from an estimated Rs 200 billion in 2010-11. The additional tax exemption of Rs 20,000, provided in 2010-11,on investment in long-term infrastructure bonds has been extended to 2011-12. These proposals are expected to address

the funding needs of the infrastructure segment, and could lead to a faster take-off of infrastructure projects. However,

these may not push up the bottomlines of construction companies. Hence, CRISIL Research believes that the impact of

the budget on the construction sector is neutral.

Fertilisers Marginally positive

Urea to be included in NBS gradually

Budgetary allocations towards the agricultural sector in the form of higher agricultural credit, subvention of interest

on timely repayment of farm loans and a continued emphasis on expansion of the Green Revolution in eastern states

are expected to increase fertiliser demand. The government plans to gradually include urea under the nutrient-basedsubsidy policy and is developing a model for the same. With a view to encourage capacity expansions, government has

provided tax benefits similar to infrastructure sub-sectors to fertilisers. Companies will also enjoy investment-linked

deductions on their tax liabilities. The government has also said that it intends to directly transfer the cash subsidy to

farmers living below the poverty line. A task force has been constituted to work out the modalities for the same and the

system is expected to be in place by March 2012. When this happens, players will benefit in terms of lower working

capital requirement.

continued


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Union Budget

13


Industry Effect

Hotels Negative

Service tax on rooms and restaurants to impact the hotels industry negatively

The levy of a 5 per cent service tax on room accommodation and 3 per cent service tax on restaurants will negatively

impact players in the industry. Competition is intense in the current operating environment; hence, the ability of hotel

players to pass on levy of service tax by way of higher charges is limited.

Household Appliances Marginally PositiveIncrease in disposable income to boost demand for household appliances

An increase in the income tax exemption limit from Rs 160,000 to Rs 180,000 for general category taxpayers will

reduce the annual tax liability by Rs 2,000 and result in higher disposable income in the hands of the salaried class. This

is expected to have a marginally positive impact on the household appliances industry.

Housing Positive

Increased focus on affordable housing

The interest rate subvention of 1 per cent has been extended for housing loans up to Rs 1.5 million (for houses costing

less than Rs 2.5 million) from Rs 1.0 million earlier (for houses costing less than Rs 2 million). Further, priority sector

lending limit for housing loans provided by banks has been enhanced from Rs 2.0 million to Rs 2.5 million. The ruralhousing fund has been enhanced to Rs 30 billion from Rs 20 billion while HUDCO has been allowed the issue of tax

free bonds up to Rs 50 billion. These measures will provide a boost to affordable housing. The budget has also proposed

investment linked tax deduction for affordable housing projects. This will lead to higher investments in affordable

housing projects.

Note: The proposal to levy 18.5 per cent minimum alternate tax on developers of special economic zone will have a

negative impact on real estate companies with a SEZ focus. This could negate the positive impact of the residential

segment thus, making the impact neutral for the overall real estate segment.

Information Technology Negative

MAT levy on SEZ and non-extension of STPI benefits to impact player profitability

The proposal to bring SEZ units under the purview of the Minimum Alternative Tax (MAT) and the non-extension of

tax benefits for STPI units is expected to adversely impact the profitability of IT players. Mid-sized players would be

more affected as a larger proportion of their revenues accrue from STPI units vis--vis tier-I players. MAT has been

raised from 18 per cent to 18.5 per cent, whereas surcharge has been reduced from 7.5 per cent to 5 per cent, keeping

the effective MAT rate at the same level.

Domestic IT services, which constitute about 20 per cent of the IT services revenues, are expected to get a shot in the

arm from the planned government expenditures aimed at improving IT infrastructure and delivery mechanisms.

continued


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Union Budget


Industry Effect

Media and Entertainment Neutral

Overall impact on the Media & Entertainment sector is neutral

The impact of the Union Budget 2011-12 on the Media & Entertainment sector is neutral. Colour, unexposed jumbo

rolls of 400 and 1,000 feet are fully exempt from excise duty. Mailroom equipment would also benefit from the

concessional basic customs duty of 5 per cent and countervailing duty (CVD) of 5 per cent, available to for high speed

newspaper printing presses. A concessional import duty structure of 5 per cent CVD and nil special addition duty

(SAD) has been prescribed on parts for manufacture of DVD writers, combo drives and CD drives, subject to actualuser condition. The mentioned proposals are not likely to have any significant impact on the overall sector.

Non-ferrous Metals Neutral

Neutral impact on non-ferrous metals industry

The reduction in basic customs duty on calcined petroleum coke (raw material used in manufacturing aluminium) to 2.5

per cent from 5.0 per cent will have a negligible effect on the aluminium industry. Consequently, the impact of the

budget on the non-ferrous metals industry is neutral.

Oil and Gas Neutral

No major impact on oil & gas sector

The Union Budget (2011-12) will have no major impact on the oil & gas sector. However, the government has indicated

that it would gradually move towards direct transfer of cash subsidies on LPG and kerosene to people living below the

poverty line. This will reduce under-recoveries for oil marketing companies in the future. The government has provided

for Rs 237 billion as its share in under-recoveries for 2011-12. This is significantly lower than the revised estimates of

Rs 386 billion for 2010-11. However, we believe that if under-recoveries increase significantly, the government will

increase its contribution towards the same.

Paper Positive

Positive impact of changes in customs and excise duty

The impact of Union Budget 2011-12 on the domestic paper industry is positive. The increase in basic excise duty on

W&P paper and industrial paper to 5 per cent from 4 per cent is expected to be passed on given healthy operating rates

in the industry. Reduction in customs duty on wastepaper to 2.5 per cent from 5.0 per cent is likely to lower raw

material costs and offset the introduction of 1 per cent excise duty on wood pulp. Introduction of 1 per cent excise duty

on W&P paper, used specifically for educational purposes, and on certain types of specialty paper is expected to be

passed on. Enhanced allocation for education is expected to benefit W&P players.

continued


19/96


Union Budget

15


Industry Effect

Petrochemicals Neutral

No significant impact on petrochemicals industry

The overall impact of Union Budget 2011-12 on the domestic petrochemicals industry is neutral with no changes

announced in excise and customs duties. The customs duty on carbon black feedstock (CBFS) has been reduced from 5

per cent to 2.5 per cent. As CBFS is the largest component of input costs for carbon black manufacturers, a reduction in

its customs duty will lower the raw material costs.

Pharmaceuticals Neutral

Neutral impact of the budget on the Pharmaceutical sector

The impact of the Union Budget 2011-12 on the Pharmaceuticals industry is neutral. The increase in excise duty on

formulations from 4 per cent to 5 per cent will have negligible impact on the industry.

Ports infrastructure Neutral

Funds availability for port projects to improve

Increase in allocation of funds for infrastructure and enhanced limit up to Rs 50 billion, of tax free bonds for the ports

sector, will facilitate improved fund availability for the development of port projects. The proposal to create special

purpose vehicles in the form of notified infrastructure debt funds and tax exemption on their income will attract moreforeign funds to the ports sector.

Power Neutral

Limited impact of budget on power sector

There were no major announcements addressing the power sector in the Union Budget 2011-12. Sunset date for tax

holiday under section 80IA for the sector has been extended by another year to March 31, 2012, which will encourage

investments. The enhanced limit of USD 40 billion for Foreign Institution Investors (FIIs) investing in corporate bonds

issued by infrastructure companies and the creation of infrastructure debt funds with tax benefits will improve

availability of funds to the sector.

Domestic equipment manufacturers for Mega Power Projects (MPPs) and Ultra Mega Power Projects (UMPPs) have

been exempted from central excise duty to bring them on an even platform with foreign suppliers who have a cost

advantage and also enjoy a concessional custom duty. However, this will have a marginally positive impact on domestic

equipment manufacturers.

continued


20/96


Union Budget


Industry Effect

Roads & highways Positive

Measures aimed at improving fund availability

There have been a slew of measures announced in the Union Budget aimed at improving fund availability for the

infrastructure sector. A large portion of these funds is expected to flow into the roads sector. The National Highway

Authority of India has been allowed to issue tax-free bonds totalling Rs 100 billion as against the earlier Section 54EC

capital gain bonds. Also, the foreign institutional investment limit for investment in corporate infrastructure bonds has

been raised by $20 billion, which is expected to lead to a better mopping up of bond issues. Further, IIFCLs loandisbursal target has been set at Rs 250 billion for 2011-12 from an estimated Rs 200 billion in 2010-11. Also, the

additional tax exemption of Rs 20,000, provided in 2010-11, on investment in long-term infrastructure bonds has been

extended to 2011-12.

The additional fund availability will result in more projects being awarded, and quicker financial closure. Meanwhile,

an increase in the Minimum Alternate Tax is expected to be offset by a reduction in surcharge. Hence, the overall

impact on the roads sector is positive.

Steel Neutral

Iron ore export duty hike a step towards conservationOverall, the Union Budget will have a neutral impact on the steel industry. The export duty on iron ore fines and lumps

has been hiked to 20 per cent each from 5 per cent and 15 per cent, respectively. This will benefit the steel industry in

the long term as the increased thrust on conservation will help India to continue to be self-reliant in terms of iron ore

requirements.

Sugar Neutral

No impact on the industry

Impact of Union Budget 2011-12 on the sugar sector is neutral. The basic customs duty for sugarcane harvesters, which

was reduced from 7.5 per cent to 5.0 per cent in the previous budget, has been reduced further to 2.5 per cent. This is

expected to result in moderate cost savings for farmers.


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Union Budget

17


Industry Effect

Telecom Neutral

Neutral impact on telecom services sector

The government has marginally increased the Minimum Alternate Tax (MAT) from 18 per cent to 18.5 per cent. At the

same time, it has reduced the surcharge levied from 7.5 per cent to 5 per cent. The cut in the surcharge rate neutralises

the impact of the increase in MAT by keeping the effective rate of MAT unchanged.

The exemption from basic, countervailing duty (CVD) and special additional duty (SAD) on components andaccessories of mobile handsets has been extended for the next financial year and a few more items have now been

included in its ambit. The extension of duty exemptions would help in sustaining the current low prices of mobile

handsets.

Textiles Negative

Mandatory excise on branded garments negative for textiles

The impact of the Union Budget 2011-12 is negative for the textiles sector. A mandatory excise duty of 10 per cent is

being imposed on branded readymade garments (RMG) and textile made-ups. Since it is under Cenvat Credit, yarn and

fabric manufacturers may have to pay an increased excise duty at 5 per cent vis--vis an optional and concessional 4 per

cent duty paid earlier. This will exert further pressure on the margins of RMG and made-ups manufacturers who are

already struggling with an unprecedented rise in input costs. However, the reduction in customs duty on Acrylonitrile

and rayon grade wood pulp, from 5 per cent to 2.5 per cent each, will benefit acrylic and viscose fibre manufacturers

respectively by reducing their raw material costs. As a result, the cost competitiveness of viscose and acrylic will

improve vis--vis cotton and polyester. Higher budgetary allocation under Technology Upgradation Fund Scheme

(TUFS) to Rs 29.8 billion from Rs 22.7 billion is a positive for the sector.


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Union Budget

Overall company impactCompany Impact Industry

ABG Infralogistics Ports

ACC Cement

Adani Power Ltd Power

Aditya Birla Nuvo Ltd Textiles

Alok Industries Ltd Textiles

Amtek Auto Ltd Auto Components & Tyres

Andhra Pradesh Paper Mills Ltd Paper

Apollo Tyres Ltd Auto Components & Tyres

Arvind Mills Ltd Textiles

Ashok Leyland Ltd AutomobilesAurobindo Pharma Ltd Pharma

Bajaj Auto Ltd Automobiles

Bajaj Hindusthan Ltd Sugar

Balaji Telefilms Ltd Media & Entertainment

Ballarpur Industries Ltd Paper

Balrampur Chini Mills Ltd Sugar

Bannari Amman Sugars Ltd Sugar

Bharat Forge Ltd Auto Components & Tyres

Bharat Heavy Electricals Ltd Power

Bharat Petroleum Corporation Ltd Oil & Gas

Bharti Airtel Telecom

Bhushan Steel Ltd Steel

Bosch Ltd Auto Components & Tyres

Cairn India Ltd Oil & Gas

Ceat Ltd Auto Components & Tyres

Chambal Fertilisers & Chemicals Ltd Fertiliser

Chemplast Sanmar Ltd Petrochemicals

Chennai Petroleum Corporation Ltd Oil & Gas

Cipla Ltd Pharma

Coromandel International Ltd Fertiliser

Dhampur Sugar Mills Ltd SugarDish TV Media & Entertainment

DLF Ltd Housing

Dr Reddy's Laboratories Ltd Pharma

EID Parry Ltd Sugar

EIH Associated Hotels Ltd Hotels

EIH Ltd Hotels

Essar Oil Ltd Oil & Gas

Exide Industries Ltd Auto Components & Tyres

Finolex Industries Ltd Petrochemicals

Firstsource Solutions Ltd Information technology

Continued


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Union Budget

19

Overall company impactcontinued

Company Impact Industry

GAIL India Ltd Oil & Gas

Gammon India Ltd Construction

Gammon Infrastructure Projects Ltd Roads

Glenmark Pharmaceuticals Ltd Pharma

GMR Infrastructure Ltd Airport Infrastructure

Gokaldas Exports Ltd Textiles

Goodyear India Ltd Auto Components & Tyres

Grasim Industries Ltd Diversified

Gujarat Ambuja Cement Ltd Cement

Gujarat Gas Co Ltd Oil & Gas

Gujarat Narmada Valley Fertilizers Company Ltd Fertiliser

Gujarat Pipavav Port Ltd Ports

Gujarat State Fertilizers Company Ltd Fertiliser

GVK Power and Infrastructure Ltd Airport Infrastructure

Haldia Petrochemicals Ltd Petrochemicals

HDFC Bank Banking

HDFC Ltd Banking

HDIL Ltd Housing

Hero Honda Motors Ltd AutomobilesHindalco Industries Ltd Non-Ferrous Metals

Hindustan Construction Corporation Ltd Construction

Hindustan Copper Ltd Non-Ferrous Metals

Hindustan Organic Chemicals Ltd Petrochemicals

Hindustan Petroleum Corporation Ltd Oil & Gas

Hindustan Zinc Ltd Non-Ferrous Metals

Hotel Leelaventure Ltd Hotels

HT Media Ltd Media & Entertainment

ICICI Bank Banking

Idea Cellular Telecom

IG Petrochemicals Ltd Petrochemicals

IL&FS Transportation Network Ltd Roads

India Cement Ltd Cement

Indian Hotels Company Ltd Hotels

Indian Oil Corporation Ltd Oil & Gas

Indo Rama Synthetics (India) Ltd Textiles

Infosys Technologies Ltd Information technology

IRB Infrastructure Developers Ltd Roads

ITI Telecom

IVRCL Infrastructures & Projects Ltd Construction

continued


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Union Budget



JBF Industries Ltd Textiles

Jindal Steel and Power Ltd Steel

JK Industries Ltd Auto Components & Tyres

JK Paper Ltd Paper

JSW Steel Ltd Steel

Larsen & Toubro Ltd Construction

LG India Household appliances

LIC Housing Finance Ltd Banking

Mahindra & Mahindra Ltd Automobiles

Mangalore Chemicals & Fertilizers Ltd Fertiliser

Mangalore Refinery & Petrochemicals Ltd Oil & Gas

Maruti Suzuki Ltd Automobiles

MIRC Electronics Ltd Household appliances

MRF Ltd Auto Components & Tyres

MTNL Telecom

Mundra Port and Special Economic Zone Ltd Ports

Nagarjuna Construction Company Ltd Roads

Nagarjuna Fertilizers & Chemicals Ltd Fertiliser

National Aluminium Company Ltd Non-Ferrous Metals

National Thermal Power Corp Ltd Power

Oil and Natural Gas Corporation Ltd Oil & Gas

Oil India Ltd Oil & Gas

Oriental Hotels Ltd Hotels

Parsvnath Developers Ltd Housing

Petronet LNG Ltd Oil & Gas

Phillips Carbon Black Ltd Petrochemicals

Piramal Healthcare Ltd Pharma

Polaris Software Lab Ltd Information technology

Power Grid Corporation of India Ltd Power

Punjab National Bank BankingPVR Ltd Media & Entertainment

Ranbaxy Laboratories Ltd Pharma

Rashtriya Chemicals and Fertilizers Ltd Fertiliser

Raymond Ltd Textiles

Reliance Communication Telecom

Reliance Industries Ltd Oil & Gas

Reliance Power Ltd Power

continued


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Union Budget

21



Samsung India Household appliances

Samtel Colour Ltd Household appliances

Seshasayee Paper and Boards Ltd Paper

Shree Cement Ltd Cement

Sobha Developers Ltd Housing

Sona Koyo Steering Systems Ltd Auto Components & Tyres

State Bank of India Banking

Steel Authority of India Ltd

SteelSterlite Industries (India) Ltd Non-Ferrous Metals

Sun Pharmaceuticals Industries Ltd Pharma

Sun TV Ltd Media & Entertainment

Sundaram Fasteners Ltd Auto Components & Tyres

Supreme Petrochem Ltd Petrochemicals

Suzlon Energy Ltd Power

Taj GVK Ltd Hotels

Tamil Nadu Newsprint and Papers Ltd Paper

Tamil Nadu Petroproducts Ltd Petrochemicals

Tata Communication Telecom

Tata Consultancy Services Ltd Information technology

Tata Motors Ltd Automobiles

Tata Power Company Ltd Power

Tata Steel Ltd Steel

Thirumalai Chemicals Ltd Petrochemicals

UltraTech Cement Ltd Cement

Unitech Ltd Housing

Vardhaman Textiles Ltd Textiles

Welspun India Ltd Textiles

West Coast Paper Mills Ltd Paper

Whirlpool of India Ltd Household appliances

Wipro Ltd Information technology

Zee Entertainment Enterprises Ltd Media & Entertainment

Zenith Computers Ltd Information technology

Zuari Industries Ltd Fertiliser


26/96


Union Budget

Airports InfrastructureIndian airports: Strong passenger and freight traffic growth to continue

During April-December 2010, domestic and international passenger traffic grew by 16.8 per cent and 10.9 per cent

y-o-y. Domestic and international freight at Indian airports grew by 26.9 per cent and 20.9 per cent y-o-y, owing to

increased domestic and overseas trade movement in bulk cargo.

CRISIL Research estimates total passenger traffic to increase by 12-14 per cent in 2011-12 driven by strong

demand from business and leisure travellers. Freight traffic is also estimated to increase by 12-14 per cent given

increased transhipment of cargo to and from India.

CRISIL Research estimates capital investments of Rs 70-75 billion in 2011-12, with PPP (public-private

partnership) airports accounting for 70 per cent of these investments.


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Union Budget

23

Airports InfrastructureNeutral impact on airport infrastructure

Com pany Im pact Im pact factors

GMR Infrastructure Ltd A

GVK Pow er and Infrastructure Ltd A

Note:

1) The budget impact is only for the airports business.

Source: CRISIL Research

2) GMR Infrastructure Ltds subsidiary companies, Delhi International Airport Ltd (DIAL) and

GMR Hyderabad International Airport Limited (GHIAL), operate airports in Delhi and Hyderabad,

respectively. Revenues fromthese airports contribute 40 per cent of the consolidated income in

2009-10.

3) GVK Power and Infrastructure Ltd has its subsidiary companies, Mumbai International AirportLtd (MIAL) and Bengaluru International Airport Ltd (BIAL), operating in Mumbai and Bengaluru,

respectively. Revenue from these airports contr ibutes 84 per cent of the consolidated

income in 2009-10.

Impact factors

A. The proposal to attract foreign funds to the infrastructure sector is positive. However, the need for funds in the

airport infrastructure sector is minimal amongst various infrastructure segments.


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Union Budget

Auto Components & TyresHealthy growth in domestic automobile production, recovery in exports drive auto componentplayers revenues in 2010-11

Auto component production is estimated to grow by 21-23 per cent in 2010-11, led by strong demand from OEMs

on the back of buoyant sales of commercial vehicles, cars, tractors and two-wheelers. Exports are estimated to

grow by 16-18 per cent with revival of automobile production in key global export markets. Growth of the

automobiles segment is likely to moderate in 2011-12 from the high growth rates seen earlier due to rise in cost of

ownership and high interest rates. Consequently, growth in production of auto components will moderate to 15-17

per cent in 2011-12. The OEM segment is expected to record a growth of 16-18 per cent. Exports are likely to

grow by 19-21 per cent, while the replacement segment will grow by 7-9 per cent.

Raw material cost for auto components has risen by 21 per cent from April-December 2010, leading to a pressure

on margins. Operating margins are estimated to fall by 150-200 bps (y-o-y) to 12.2-12.8 per cent in 2010-11. In

2011-12, operating margins are likely to drop further by 90-120 bps due to a continuous increase in the raw

material cost and the limited pricing flexibility of auto component players.

Operating margins of tyre manufacturers to remain under pressure

The tyre industrys revenues are estimated to grow by 26-30 per cent in 2010-11, aided by a 14-16 per cent growth

in volumes (tonnage) and a 12-14 per cent increase in tyre prices. In 2011-12, growth (in tonnage terms) is

projected to be 13-15 per cent, while tyre prices will rise by 12-14 per cent on account of higher input cost.

The raw material cost rose sharply by 50-52 per cent in the first 9 months of 2010-11. Although tyre manufacturershiked prices by 10-12 per cent across auto segments, they were unable to fully offset the increase in raw material

cost, resulting in a significant decline of 6-7 per cent in operating margins. The industrys margins are expected to

be under pressure at 7-9 per cent for 2010-11.

Raw material prices are likely to remain firm in 2011-12 and will keep margins under pressure.


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Union Budget

25

Auto Components & TyresAuto parts: Tariffs

(per cent) Customs Excise

2010-11 2011-12 2010-11 2011-12

Engine and engine parts 7.7 7.7 10.3 10.3

Drive transmission, steering, suspension, braking parts,silencer,

exhaust pipes and radiators

10.3 10.3 10.3 10.3

Electrical parts1

7.7 7.7 10.3 10.3

Raw materials for auto components 5.2 5.2 10.3 10.3

1Customs duty for air conditioner machine parts is at 10.3 per cent

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.


Tyres: Tariffs, prices and landed costs

Tariffs (per cent) Prices (Jan 2011) Landed costs (Rs/tonne)

Customs Excise Domestic International Pre-budget Post-budget

2010-11 2011-12 2010-11 2011-12 (Rs/tonne) ($/tonne)

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/ Radials 10.3 10.3 10.3 10.3 - - - -

Raw materials for tyres

Natural rubber2

7.7 20.0 - - 220,750 5,520 286,000 287,000

SBR (1502) 10.3 10.3 10.3 10.3 n.a. 3,300 165,411 165,411

PBR (1220) 10.3 10.3 10.3 10.3 187,000 3,600 183,225 183,225

NTC fabric 10.3 10.3 10.3 10.3 n.a. 4,700 252,000 252,000

Carbon black (N330) 5.2 5.2 10.3 10.3 n.a. n.a. n.a. n.a.

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 1.50 per kg in lieu of excise duty.

2) Customs duty on natural rubber was slashed in December 2010 from 20 per cent to 7.5 per cent up to 40,000 tonnes until March

2011. For 2011-12, the customs duty on natural rubber will be 20 per cent or Rs 20 per kg, whichever is lower.

3) China and South Korea enjoy a preferential customs duty of 8.8 per cent 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

trailer, moped, scooter and motorcycle.

5) An additional countervailing duty of 4 per cent is levied.

6) Prices and landed cost are average rates for January 2011



30/96


Union Budget

Auto Components & TyresBudget measures have neutral impact on auto components and tyres industries

Company Impact Impact factors

Bharat Forge Ltd A,B

Bosch Ltd A,B

Amtek Auto Ltd A,B

Sona Koyo Steering Systems Ltd A,B

Sundaram Fasteners Ltd A,B

Exide Industries Ltd A,B



Apollo Tyres Ltd C,D

Ceat Ltd C,D

Goodyear India Ltd C,D

JK Industries Ltd C,D

MRF Ltd C,D


Impact factorsA. There is no change in customs duty on the auto components industry, other than the following specific changes.

Certain specified parts of electrical vehicles were fully exempted from basic customs duty on actual-user basis in

Budget 2010-11. This concession has been extended to batteries imported by vehicle manufacturers for the

replacement markets. The reduction in customs duty will bring down the maintenance cost of these vehicles.

However, this will not have a significant impact on demand for auto components, given the low population of

electric vehicles in India.

B. There is no change in excise duty other than the following specific change. Concessional central excise duty of 4

per cent has been levied on batteries imported by vehicle manufacturers for replacement markets, in Budget 2011-

12. However, this too will not have a significant impact on demand for auto components, given the low populationof electric vehicles in India.

C. In December 2010, the government had reduced the basic customs duty on natural rubber (upto the limit of 40,000

tonnes) to 7.5 per cent from 20 per cent for January-March 2011. This customs duty will be revised to 20 per cent

or Rs 20 per kg, whichever is lower, effective from April 2011. This will not change the landed cost of NR

significantly from the current price levels, thus having no significant impact on the tyre industry.

D. The customs duty on Carbon Black Feedstock (which is used to manufacture carbon black) has been reduced to 2.5

per cent from 5 per cent and customs duty on caprolactum, which is used to produced Nylon Tyre Cord (NTC), has

been reduced to 7.5 per cent from 10 per cent, resulting in a marginally lower input cost.


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Union Budget

27

AutomobilesDemand growth to moderate in 2011-12 over a high base; rising input costs to exert pressure onmargins

The domestic automobiles industry is estimated to grow by 30 per cent (in value terms) in 2010-11. Growth is

expected to be driven primarily by a strong volume growth in passenger cars and utility vehicles (30 per cent),

commercial vehicles (CV), tractors and two wheelers (26 per cent).

Strong growth in industrial production and healthy agricultural production has translated into buoyant freight

availability for transporters in 2010-11. This, along with favourable financing environment, has led to healthy

growth in sales of CVs. Two-wheeler and passenger car volumes have been driven by higher disposable incomes,

launch of new models and increasing rural penetration.

In 2011-12, the domestic automobile industry is expected to grow at a relatively lower rate of 17-18 per cent giventhe increasing cost of ownership caused by hardening interest rates and rising vehicle and fuel prices. Revival in

key export markets will enable a 19- 21 per cent growth in 2011-12.

Higher demand and tight supplies of key inputs like steel and tyres have led to an increase in raw material costs,

which in turn resulted in a 3-8 per cent increase in vehicle prices in 2010-11. However, manufacturers have not

been able to pass on the entire increase in input costs, which has exerted pressure on operating margins.

Operating margins are expected to decline marginally in 2011-12 with a sustained increase in prices of raw

materials like steel and tyres, given the limited flexibility of automobile manufacturers to pass on the price increase

to their consumers.

Product Volume 2010-11 (E) Volume 2011-12 (F)

category growth Growth drivers growth % Growth drivers

Cars and 22-24% Higher disposable incomes, new model 14-16% Continued focus on rural markets,

utility vehicles launches especially in the small car easing supply to sustain double digit growth

segment, increasing player focus on the

underpenetrated rural market and a low base

Two-wheelers 26-28% Rising rural incomes, strong demand for 12-14% New launches,

scooters,improving rural finance continuing growth in rural finance penetration,

penetration and recovery in the improving supply in the scooters segment

export markets

Commercial

vehicles

26-28 % Healthy freight availability, improvement in

transporter profitability, vehicle deliveries

under JNNURM scheme and lower base of the

previous year

15-17 % Continued growth in economy, increase in EXIM

traffic, new model launches to support growth

Tractors 23-25% Credit disbursements by public sector banks,

buoyant recovery in exports, healthy rural

income and good crop output

7-9% After high growth in 2010-11, tractor sales growth

to stabilise at long-term average in 2011-12.

Healthy rural incomes and recovery in export

markets to support growth

E: Estimated growth; F: Forecast

Note: Forecast represents growth in total volumes (domestic + exports)



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Union Budget

AutomobilesAutomobiles: Tariffs

(per cent) Customs Excise

2010-11 2011-12 2010-11 2011-12

New cars2

-Completely knocked down units (CKD) 10.3 10.3 - -

-Semi-knocked down units (SKD) 61.8 61.8 - -

-Specified small cars1

61.8 61.8 10.3 10.3

-others 61.8 61.8 22.7* 22.7*

Second-hand cars 103.0 103.0 22.7* 22.7*

Utility vehicles 10.3 10.3 22.7* 22.7*

Two-wheelers 61.8 61.8 10.3 10.3

Trucks (LCVs and MHCVs) 10.3 10.3 10.3 10.3

Buses (LCVs and MHCVs) 10.3 10.3 10.3 10.3

Tractors 10.3 10.3 - -

Steel items 5.2 5.2 10.3 10.3

Pig iron 5.2 5.2 10.3 10.3

Engine and engine parts

- Four-wheelers 7.7 7.7 10.3 10.3

- Two-wheelers 7.7 7.7 10.3 10.3

Drive transmission, steering, suspension, braking

parts,silencer, exhaust pipes and radiators

- Four-wheelers 10.3 10.3 10.3 10.3

- Two-wheelers 10.3 10.3 10.3 10.3

Electrical parts3

7.7 7.7 10.3 10.3

LCV: Light commercial vehicles; MHCV: Medium and heavy commercial vehicles

* Specific additional duty is charged since July 2008 of Rs 15,000 per unit on cars and utility vehicles

which are of 1500 cc and above

1Specified small cars include cars with length not exceeding 4,000 mm and

engine capacity not exceeding 1,200 cc for petrol cars and 1,500 cc for diesel cars.

2All Hybrid cars and cars based on fuel cell and Hydrogen cell technologies enjoy concessional

excise duty of 10 per cent

3Customs duty for air conditioner machine parts is at 10.3 per cent



33/96


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Union Budget

Banking and FinanceCredit growth to moderate in 2011-12

Aggregate y-o-y bank credit growth accelerated to 23.3 per cent as on January 28, 2011 from 14.9 per cent on

January 29, 2010. This was on account of robust credit flow to industries like cement and cement products, food

processing, basic metals and metal products, engineering and infrastructure sector apart from retail loans, which

made credit growth more broad-based across industries.

On an aggregate basis, growth in deposits declined marginally to 16 per cent y-o-y as on January 28, 2011, from 17

per cent y-o-y as on January 29, 2010, as investors opted for alternative savings options in light of negative real

interest rates on bank deposits for most part of the year. Given rising demand for credit and tightening liquidity,

several banks hiked deposit rates by 100-200 bps during the period between October 2010 and January 2011.

A strong credit offtake and relatively slower growth in deposits caused incremental credit-deposit ratio to rise to

102.6 per cent as on January 28, 2011 from 62.7 per cent as on January 29, 2010. Incremental credit-deposit ratio

has remained over 100 per cent from the second half of 2010-11 till date, as the gap between credit and deposit

growth widened.

CRISIL Research expects the pace of credit growth to moderate to 20-21 per cent by March 2011 due to a steady

increase in bank lending rates and high base of the fourth quarter of 2009-10. In 2011-12, credit growth is likely to

moderate to 18-19 per cent owing to a steady increase in lending rates.

Going forward, CRISIL Research expects banks to further hike deposit rates by 25-50 bps across maturities, since

deposit growth continues to lag credit growth. Consequently, deposit growth rate is expected to remain at 16-18

per cent until March 2011.

Incremental credit-deposit ratio is expected to decline to 87 per cent by the end of 2010-11, on account of a likely

moderation in credit growth and better mobilisation of resources to enhance deposit growth.

Net interest margins will slightly come under pressure in 2011-12 due to increase in deposit rates and

comparatively lower increase in lending rates.

CRISIL Research estimates the GNPA of the banking system to increase from 2.4 per cent in 2009-10 to 2.9 per

cent in 2010-11. This increase would largely be the result of previously restructured assets turning into non-

performing assets, especially in the SME and corporate portfolios.

Extension of interest rate subvention scheme to benefit banks and HFCs

Com pany Im pact Im pact factors

State Bank of India A,B,D

Punjab National Bank A,B,D

ICICI Bank A,B,D

HDFC Bank A,B,D

HDFC Ltd A

LIC Housing Finance Ltd A



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Union Budget

31

Banking and FinanceImpact factors

A. Home loans

The government has proposed to enhance the housing loan limit under priority sector from Rs 2 million to Rs 2.5

million.

Loans upto Rs 1.5 million (earlier limit was Rs 1 million) availed for financing homes up to Rs 2.5 million (earlier

limit was Rs 2 million) will now get interest subvention of 1 per cent.

These measures will enable banks to achieve their priority sector lending targets and also lower interest rates for

borrowers.

B. Farm credit

For 2011-12, banks have been directed to lend Rs 4,750 billion to the farm sector an increase of 26.7 per cent

from the targeted lending of Rs 3,750 billion in 2010-11.

The increase in interest rate subvention for agriculture loans from 2 per cent to 3 per cent and increased target for

credit flow to farmers would facilitate flow of funds at cheaper rates.

C. Capital support to public sector banks (PSBs)

Public sector banks will be provided Rs 60 billion in 2011-12 (in addition to the Rs 232 billion provided in the past

3 years) to maintain a minimum tier-I capital adequacy ratio of 8 per cent.

This would preserve the governments majority holding in public sector banks (PSBs), while enhancing the banks

ability to pursue loan growth more aggressively and fund expansion plans.

D. Development of take out financing

Under the take out financing scheme of India Infrastructure Finance Company Ltd, Rs 15 billion has been

sanctioned till date and an additional Rs 50 billion is expected to be sanctioned during 2011-12.

Greater adoption of take out financing will help banks manage asset liability concerns in the infrastructure sector,

which primarily stems from the long gestation period of such projects..


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Union Budget

CementCement prices and profitability to remain under pressure in the near term

Owing to prolonged monsoons and subdued pick up in construction activity, demand for cement witnessed

lacklustre growth of 4-5 per cent, on a year-on-year (y-o-y) basis, between April and December 2010. However,

CRISIL Research expects cement demand to gain traction in the next 3 months and post a y-o-y growth of 8-9 per

cent, to around 215 million tonnes in 2010-11.

CRISIL Research is of the opinion that muted demand growth in cement, coupled with an overcapacity scenario

will lead industry operating rates for 2010-11 to decline to around 82 per cent from 85 per cent in 2009-10.

Average cement prices (on an all India basis) fell by around 2 per cent in the April-December 2010 period. This

pressure on realisations combined with rising input costs is expected to lead the industry operating profitability to

decline to 23 per cent in 2010-11 from 29 per cent in 2009-10.

For 2011-12, CRISIL Research estimates cement demand to post a y-o-y growth of 9-10 per cent. Despite robust

demand growth, capacity additions of 34 million tonnes during the year are expected to further pull down industry

operating rates to 78 per cent in 2011-12. However, cement prices are expected to recover by 3-4 per cent in 2011-

12 on the back of expected recovery of operating environment beginning from the second half of the year. While

cement prices are expected to increase by 3-4 per cent, the increase in coal prices by Coal India Ltd will result in

industry profitability declining by around 500 bps to 18 per cent in 2011-12.

Cement: Tariffs

(Per cent) Customs Excise Abatement rate

2010-11 2011-12 2010-11 2011-12 2010-11 2011-12

Portland cement 0.0 0.0 10.3 10.3 +Rs160/tonne 0.0 0.0

White cement 10.3 10.3 16.5 16.5 30.0 30.0

Cement clinker 10.3 10.3 10.3 10.3+ Rs.200/tonne 0.0 0.0

Limestone 5.2 5.2 0.0 0.0 0.0 0.0

Gypsum 5.2 2.6 0.0 0.0 0.0 0.0

Non-coking coal 5.2 5.2 0.0 0.0 0.0 0.0

Pet coke 5.2 2.6 15.5 15.1 0.0 0.0Note:

Excise duty for portland cement and cement clinker is in rupees/tonne

An education cess of 3 per cent will be applicable in all cases



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Union Budget

33

CementIncrease in excise duty negative for cement sector


ACC A,B

Gujarat Ambuja Cement Ltd A,B

India Cement Ltd A,B

Shree Cement Ltd A,B,C

UltraTech Cement Ltd A,B


Impact factors

A. The Union Budget 2011-12 has proposed the replacement of existing excise duty rates with a 10 per cent ad

valorem rate and an additional Rs 160 per tonne of cement. This results in an effective 2-4 per cent increase in the

excise duty for the cement industry. In the current operating environment, we believe the cement players will not be

able to pass on the increase in duty to customers.

B. The Union Budget has proposed a reduction in custom duties for gypsum from 5.0 per cent to 2.5 per cent.

However, gypsum accounts for a mere 2-3 per cent of the total cost of sales for cement players.

C. The Union Budget has proposed a reduction in custom duties for pet coke from 5.0 per cent to 2.5 per cent.

However, pet coke is used as raw material by a select few companies only.


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Union Budget

ConstructionConstruction expenditure to nearly double; margins to remain under pressure over the medium term

CRISIL Research estimates overall construction expenditure to nearly double over 2010-11 to 2014-15 to Rs

16,809 billion from Rs 8,895 billion between 2005-06 and 2009-10. This growth will be spurred by continuing

government spending on infrastructure. The infrastructure segment is likely to comprise 85 per cent of total

construction investment, driven primarily by the power, roads, irrigation and urban infrastructure sectors.

During 2010-11 to 2014-15, construction investment in the industrial segment is expected to touch Rs 2,505 billion

with the oil and gas sector being the principal driver. This investment is 1.2 times the total investment during 2005-

06 to 2009-10.

The construction industrys operating margins are expected to remain under pressure on account of a continuing

rise in raw material prices and inability of construction companies to fully pass on the increase in input costs.

During the first 9 months of 2010-11, operating margins for the nine construction companies analysed by CRISIL

Research fell to 10.9 per cent due to an increase in raw material prices. During the same period, operating income

for the nine analysed companies grew at a modest rate of 11 per cent (y-o-y).


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Union Budget

35

ConstructionFII limit on corporate infrastructure bonds raised; tax-free bonds permitted

Com pany Im pact Impact factor s

Larsen & Toubro Ltd A

Hindustan Construction Co Ltd A

IVRCL Infrastructures & Projects Ltd A

Nagarjuna Construction Co Ltd A

Gammon India Ltd A


Impact factors

A. Increase in the Minimum Alternate Tax to 18.5 per cent is expected to be offset by a reduction in surcharge to 5 per

cent.

B. The foreign institutional investment limit has been increased by $20 billion for investment in corporate

infrastructure bonds. Further, tax-free bonds amounting to Rs 300 billion can be issued in the roads, ports, railways

and housing sectors. Also, allocation for Bharat Nirman has been raised by 20 per cent in 2011-12 from 2010-11.

These proposals are expected to address the funding needs of the infrastructure segment, and could lead to faster

implementation of infrastructure projects. However, these may not improve the bottomline of construction

companies.


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Union Budget

FertilisersIntroduction of NBS policy improves complex fertiliser consumption

Fertiliser consumption increased at a 4.2 per cent CAGR to an estimated 52.4 million tonnes in 2010-11 from 42.1

million tonnes in 2005-06, led by a 10 per cent rise in complex fertiliser consumption during the same period. The

increase in complex fertiliser consumption, especially in 2010-11, was due to the introduction of the nutrient-based

subsidy (NBS) policy, wherein subsidies are given on the basis of nutrients sold and not on the final products.

CRISIL Research expects the governments subsidy bill to increase to Rs 665-675 billion in 2010-11 from Rs 530

billion in 2009-10 due to the rise in domestic natural gas prices and higher fertiliser consumption.

From 2009-10 to 2015-16, CRISIL Research expects consumption of complex fertilisers (including DAP) to rise at

a 9.6 per cent CAGR to 44.8 million tonnes, while urea consumption is expected to increase at a CAGR of 4.4 per

cent to reach 34.5 million tonnes.

Fertilisers: Tariffs, prices and landed costs

Landed costs

Tariffs (per cent) Prices (Jan 2011) (Rs/tonne)

Customs Excise Domestic International Pre- Post-

2010-11 2011-122010-

112011-12 (Rs/tonne) ($/tonne) budget budget

Urea5.2 5.2

-- 5,310

400.020,497 20,497

DAP5.2 5.2

-- 10,700

600.031,744 31,744

MOP5.2 5.2

-- 4,455

400.022,396 22,396

Ammonia5.2 5.2

--

NA 500.024,343 24,343

Phosphoric acid5.2 5.2

--

NT 830.040,410 40,410

Sulphur2.1 2.1

--

NA 197.09,309 9,309

Rock phosphate5.2 5.2

--

NT 160.08,764 8,764

Naphtha - - -- 44,953

835.039,126 39,126

Fuel oil - - -- 20,677

524.027,198 27,198

Contracted LNG2

5.0 5.0-

-- -

11,212 11,212

DAP: Di-ammonium phosphate; LNG: Liquified natural gas

MOP: Muriate of potash; NT: Not traded; NA: Not available

"-" indicates not applicable

Notes:

1Price per thousand scm

There is no Excise and Customs duty on Naphtha and Fuel oil used for production of fertilisers



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Union Budget

37

FertilisersMarginally positive impact on fertiliser sector


Nagarjuna Fertilizers & Chemicals Ltd A,B,C

Chambal Fertilisers & Chemicals Ltd A,B,C

Coromandel International Ltd A,B

Gujarat State Fertilizers Company Ltd A,B,C

Rashtriya Chemicals and Fertilizers Ltd A,B,C

Zuari Industries Ltd A,B,C

Gujarat Narmada Valley Fertilizers Company Ltd A,B,C

Mangalore Chemicals & Fertilizers Ltd A,B,C


Impact factors

A. Increased budgetary allocations - towards higher agricultural credit, interest subvention on timely repayment of

loans and expansion of the Green Revolution to eastern states are expected to push up fertiliser offtake.

B. Recognition of fertiliser capital projects as infrastructure projects would provide fertiliser players tax benefits

similar to other infrastructure sub-sectors. Fertiliser companies can also claim investment-linked deductions from

tax liability.C. Urea would be gradually included in the nutrient-based subsidy policy, leading to urea manufacturers enjoying a

fixed subsidy and higher pricing ability.


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Union Budget

HotelsGrowth in room demand to boost ORs and ARRs

Significant improvement in corporate and leisure demand increased overall room demand by 8 per cent during

April-December 2010. During the period, occupancy rates (ORs) improved to 64 per cent from 61 per cent y-o-y

and average room rates (ARRs) grew by 3 per cent. As a result, revenues increased by 18 per cent y-o-y.

In 2011-12, room demand is expected to increase by 11-12 per cent whereas supply is likely to increase by 10 per

cent. While ORs are expected to cross 65 per cent, ARRs are likely to grow by 4-5 per cent. Consequently, hotel

revenues will increase by 15-17 per cent.


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Union Budget

39

HotelsNeutral impact on performance of premium segment hotels

Com pany Impact Im pact factors

Indian Hotels Company Ltd A

EIH Ltd A

EIH Associated Hotels Ltd A

Oriental Hotels Ltd A

Hotel Leelaventure Ltd A

Taj GVK Ltd A


Impact factors

A. The levy of 5 per cent service tax on room accommodation and 3 per cent service tax on restaurants will negatively

impact players. Competition is intense in the current operating environment; hence, the ability of hotel players to

pass on levy of service tax by way of higher charges is limited


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Union Budget

Household appliancesHousehold appliances sector to grow by 15 per cent to Rs 350 billion in 2011-12

The momentum of demand growth in the household appliances industry is expected to continue in 2011-12 and the

industry is poised to grow at 15 per cent to Rs 350 billion. This growth will be supported by healthy volume

growth and increased price realisations due to a shift in favour of high-value products and the ability of players to

partly pass on the rise in input costs.

Demand growth will be largely driven by favourable demographics, rising disposable incomes, shift in consumer

preference, low penetration (especially in rural areas) and competitive prices.

Television sales are likely to rise by 8-10 per cent in volume terms during 2011-12, driven by robust demand

growth in the LCD segment.

In refrigerators, volumes are estimated to grow at 11-13 per cent. While growth in the frost-free segment is likely to

be driven by a strong demand in urban areas, demand for the direct-cool segment will continue to grow in semi-

urban and rural areas.

Rising disposable income, changing lifestyles and increasing penetration are likely to boost demand for washing

machines and air conditioners which are expected to register a y-o-y volume growth of 10-12 per cent and 16-18

per cent in 2011-12.

Intense competition amongst players in the household appliances industry will hamper the ability of players to fully

pass on the rise in raw material prices to consumers. As a result, margins of players are expected to decline

marginally in 2011-12.

(Per cent)

2010-11 2011-12 2010-11 2011-12 2010-11 2011-12

B/W TVs 10.3 10.3 10.3 10.3 - -

Colour TVs (CRT, LCD) 10.3 10.3 10.3 10.3 30 30

Refrigerators 10.3 10.3 10.3 10.3 35 35

Room ACs 10.3 10.3 10.3 10.3 25 25

Washing machines 10.3 10.3 10.3 10.3 35 35

CPT and glass parts 10.3 10.3 10.3 10.3 - -

LCD panel 5.2 5.2 10.3 10.3 - -

Compressors, thermostat and tubes 7.7 7.7 10.3 10.3 - -

Steel 5.2 5.2 10.3 10.3 - -

Polymers 5.2 5.2 10.3 10.3 - -

CRT: Cathode ray tube, LCD: Liquid crystal display, CPT: Colour picture tube


Abatement rateExciseCustoms

Household appliances: Tariffs


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Union Budget

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Household appliancesIncrease in disposable income will improve demand for household appliances

Com pany Impact Im pact factors

Samtel Colour Ltd A

LG India A

MIRC Electronics Ltd A

Samsung India A

Whirlpool of India Ltd A


Impact factors

A. The increase in the income tax exemption limit for general category taxpayers from Rs 160,000 to Rs 180,000 will

reduce the annual tax liability by Rs 2,000 and increase the disposable income of the salaried class. This will have a

marginally positive impact on the household appliances industry.


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Union Budget

HousingRising interest rates and high capital values will subdue demand in the near term

Industry revenues increased by around 34 per cent y-o-y during April-December 2010-11. Revival in economic

growth, increased hiring, and pay hikes in the IT-ITeS sector were the key growth drivers.

However, in the short term, CRISIL Research expects rising interest rates and the prevailing high capital values to

af

49789919 CRISIL s Union Budget Analysis 2011 12

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Transcript of 49789919 CRISIL s Union Budget Analysis 2011 12