INFRASTRUCTURE- POSITIVE

The development of world level Infrastructure remains the key focal area in the Union Budget 2011-12, with budgeted spending in infrastructure estimated at Rs2,14,000cr an hike of over 23% from Rs 1,73,000cr during 2010-11, providing 48.5% of the plan allocation.

The budget has proposed to provide the much needed foreign investment in Indian infrastructure by mountaineering their venturing limit to $40bn from $20bn earlier.

The total disbursement target for India Infrastructure Finance Company Limited (IIFCL) has been hiked to Rs 25000cr from Rs20000cr. However, there is a marginal increase in allocation to rural infra fund to Rs 18000cr from Rs 16000cr.

The budget widens the classification of Infrastructure by including ‘Cold Storage facilities’ and ‘capital investment in Fertilizers’ as sub section of Infrastructure. With the higher allocation in to Infrastructure coupled with GoI’s intentions to provide much needed long term money into infrastructure, via, creating infrastructure debt fund, through tax free bonds worth Rs 30000cr and by extending deduction of Rs 20000 in Tax liability by investing in long term infrastructure bond, this will clear the much longer debate to speed up Infrastructure development and will act as highly positive for the Industry.

However, no allocation has been made to ramp up the Transmission and Distribution capacity of power in the country, which stands at 13.7% of the country’s power generation capacity at 21000 MW.

STEEL INDUSTRY- POSITIVE

Overall the union budget has been POSITIVE for the Steel sector considering our expectations. The budget provided for enhancing infrastructure spending to Rs 2, 14,000cr which will boost the demand for steel products. However, hike in Iron Ore export duty to 20% came in as a surprise, which will provide the much needed respite to domestic producers, as their margins were under pressure on grounds of high raw material prices. Hike in Iron ore export duty will dent the margins of Sesa Goa and NMDC.

With increased focus of Government of India to build sound infrastructure, the domestic steel industry is expected to grow at a CAGR of 10% in next five years against the average annual growth of 8% achieved between 1991-2010.

Going forward we expect steel prices to remain firm on account of strong demand lead by domestic markets coupled recovering global economies. We believe this scenario would be positive for steel companies.

No clear regulatory framework from Government of India with regards to environmental policies and land acquisition policies still leaves ambiguity to foreign investment.

IT INDUSTRY-NEGATIVE

The Finance Minister announced some unexpected moves which will hurt the IT companies in the form of higher taxes after the proposed higher Minimum Alternate Tax (MAT) rate of 18.5% for units operating in Special Economic Zones (SEZ) and on developers of the SEZs. IT companies have been migrating to special economic zones as tax breaks under the Software Technology Parks of Indian (STPI) scheme will come to end this year under which companies operating in these units had been given a 10-year tax break that was to end in 2010. In the FY 10 Budget, however, this was extended to March 31, 2011. The IT industry had been asking for an extension of one more year until the Direct Tax Code is implemented in 2012.

OIL & GAS INDUSTRY -NEGATIVE

The union budget provided no respite to the mounting under recovery for the Oil Marketing Companies (OMC’s). We expected a decline in the import duty on grounds of rising crude oil prices and losses pertaining to the industry mainly due to the subsidy sharing aspect. But with only consideration to the LPG and Kerosene, which would be provided as a direct cash subsidy to people under poverty line and no concern for the rising Crude Oil prices, the budget is NEGATIVE for the entire sector including companies HPCL, BPCL and IOC.

As we expected the issue of Diesel Deregulation was not taken in the budget and no proposal was provided to deregulate it on the backing of rising inflation.

TEXTILES-NEUTRAL

Union Budget 2011-12 has been positive for the Textile Sector. The Finance Minister has proposed to provide Rs. 3,000 crore to NABARD, which will benefit 15,000 cooperative societies and about 3 lakh handloom weavers. The optional levy of duty on garment and made-ups industry has been converted into mandatory duty of 10%.

BANKING INDUSTRY-POSITIVE

Union budget 2011-12 is positive for public sector bank in term of recapitalization. The Finance Minister proposed to provide capital infusion of Rs. 6000cr in public sector banks (PSBs) to maintain Tier-I capital to CRAR at 8%. The finance minister proposed to raise the target of credit flow to farmers to Rs. 475000cr in FY2011-12 as against of Rs. 375000cr in FY2010-11. This move will be increase the NPAs of the PSBs. The FM proposed to bring suitable legislative amendments in the regards of more banking license to private player and NBFCs for the FY 2011-12. RBI is planning to issue the guidelines for banking licences for the financial year 2011-12. The FM proposed to enhance the additional subvention to 3% in 2011-12. It would be negative for PSB in term of net interest margin.

PHARMA INDUSTRY-NEUTRAL

In Budget 2011-12, Government didn’t focus to reduce healthcare cost as they made no proposals on reducing excise duty, tax holiday on healthcare infrastructure and weighted deduction for expenses incurred outside R&D facility like overseas trials, preparations of dossiers, consulting & legal fees on healthcare and pharmaceutical sector. It also not extended the list of life saving drugs. However, FM proposed to step up the plan allocations for Healthcare in 2011-12 by 20% to Rs. 26,760 crore as against Rs 22,300 crore in 2010-11. Further, by considering the need of the industry for Innovation, it enhanced the weighted deduction on payments made to National Laboratories, universities and Institutes of technology, for scientific research, from 175% to 200%.

Increase in the rate of MAT to 18.5% from the current 18% and inclusion of units operating in SEZs under MAT would negatively impact companies which presently have or are planning to set up manufacturing units in SEZs. There were also no indications on the extension of the EOU benefit which is available only till FY2011, which could be a negative for the sector.

FERTILIZERS INDUSTRY-POSITIVE

Fertilizer remains a prominent sector in Budget 2011-12. Government proposed to include capital investment in fertilizer production as an infrastructure sub-sector as the sector requires higher capital. Also, to ensure greater efficiency, cost effectiveness and better delivery for fertilizers, the Government proposes that it will take move towards direct transfer of cash subsidy to people living below poverty line in a phased manner.

Urea is the key focus in the industry, which represents around 50% of all fertilizer products consumed in the country with an annual consumption of 27mt of a total fertilizer consumption of 55mt. During the year 2010-11, the Nutrient Based Subsidy(NBS) policy was successfully implemented for all fertilizers except urea. Thus, government proposes active consideration of the Urea under the extension of the NBS regime. This is a positive move by the government and will benefit both farmers and companies in the industry.

AVIATION INDUSTRY-NEGATIVE

Overall the Union budget has been NEGATIVE for the aviation industry as the domestic air travel will cost more from the next financial year with the government raising service tax on it by Rs 50 and Rs 250 for domestic and international journeys respectively. We expected a decline in the prices of ATF (Aviation Turbine Fuel) by bringing it under the regime of GST and making it uniform across the country. Proposal of fog prone equipment was also not considered in the proposed budget. However, there was relief to the Air India as the Finance Minister made a budgetary support of Rs 1,200 crore to the ailing national carrier as additional equity infusion. This would be the third tranche of equity for Air India, which received Rs 800 crore and Rs 1,200 crore respectively in the 2009-10 and 2010-11 budgets.

HOSPITALITY INDUSTRY-NEGATIVE

The Hospitality industry contributes more than 8.6% to our country’s GDP, despite that our Finance Minister did not came out with any positives for the sector, instead there was an added service tax which was levied on hotel accommodation , liquor and healthcare and making it costlier.

We expected that the hotel industry would be given higher depreciation allowances as the industry has to make heavy investments in renovation and up-gradation and demands for massive capital investment but there was no such grants were given to the concerned sector.

AUTOMOBILE INDUSTRY-POSITIVE

India’s automotive sector has some positive to take from the budget because Finance Minister proposed many encouraging moves for the promotion of green technology, as per our expectation. FM announced to set up a National Mission, apart from several incentives in the form of deduction in excise and custom duty, for Hybrid and Electric Vehicles to encourage manufacturing and selling of alternative fuel-based vehicles. At present EV sales are just accounted at less than 1% of the petrol two wheelers sold in the country, so this all proposed steps will help the industry to clock more numbers in this segment.

Another welcome move to benefit carmakers and auto component suppliers is the reduction of custom duty on raw steel which in turn will help to strengthening margins besides the excise duty remain intact on vehicles. Moreover, broader

measures like increased focus on rural and infrastructure spending would support long term growth of the sector.