Budget 2011 Preview

Mumbai, Feb (EPC News): Amidst the rampant increase of inflation, Angel broking hold the view that Indian economy will stage a performance of 8% GDP growth, despite the potential being around 10% GDP growth.

The economical problem will be sorted out through policy reforms and fiscal actions and only monetary action will not deliver desired results. The other aspects to be considered are saving rate which is currently lower than expected, the looming fiscal deficit coupled with rising supply side inflation.

Angel broking has warned on sliding demand which has been sensed through moderate IIP growth despite the removal of base effect and low level of manufacturing price increases which is major factor in tightening the profit for quite a few companies.

As per the AB the core sectors to have considerable focus in Budget for positive reforms are mining, infrastructure and agriculture. AB expects infrastructure investments to be increased from current 6 – 7% to near about 9 – 10% and also FDI in retail to allowed up to 100%. AB also assumes the government to deliver positively on Fiscal deficit front with the back drop of nearly Rs1 lakh crore generation through 3G auction.

The UPA-II is expected to fasten the process of disinvestment especially for the companies like SAIL and Hindustan Coppers among other companies.

Sector specific view

Capital goods:

With the continuous capacity expansion, the government is expected to continue with the zero import duty on import of equipments for mega power projects (1,000MW and above for thermal) and 5% duty on import for smaller projects. The import duty is levied to encourage the domestic manufacturing and avoid influx of inexpensive Chinese equipments, which are been benefitted through low interest rates and undervalued Chinese currency.

Also the additional fund allocation to the various programs including the APDRP and RGGVY would continue to provide a boost to the transmission line players. AB expects a positive reform for capital goods sector in Budget 2011.

Cement:

The cement sector is having tough times since past one year and half especially due to declining utilisation level resulted from fading demand and simultaneous capacity expansion. The companies are expected to continue in feeling the pressure of thin profit margin due to increase in cost of raw material such as coal, limestone and fly ash.

Any announcement regarding new schemes in regards to infrastructure investments will provide a positive push to the cement sector. The cement sector is expecting that its demand in regards to the rationalisation of duty be considered in this budget. The NCAER has recommended 55% abatement on excise duty as against current Excise duty charged at 10% on cement price above Rs190 per bag; and Rs250 per tonne for cement price below Rs190 per bag.

The reduction of VAT on cement from 12.5% to 4% along with elimination of current 5.1% import duty of the raw materials like coal, pet coke and gypsum, will definitely have a positive impact on the sector. The overall impact is expected to be passed on to the end customer. AB holds neutral view on Cement sector.

Infrastructure

The sector has not been performed positively in the past year. There are various reasons for the non performance of the sectors which include delays in financial closure, environment clearance, reduction in order inflow coupled with the problem relating to land acquisition, inflationary prices, rising interest rates. However, the infrastructure sector is of core importance for economic development.

The Budget-2011 is expected to provide additional allocation to the key infrastructure programmes like Bharat Nirman, JNNURM, APDRP, AIBP and NHDP. The Budget is also expected to roll out policies which would enable to sort out Land acquisition and environment clearance, two major bottle-necks hampering timely execution of projects.

Also, government shall look at more avenues of long-term financing for the sector including creation of corporate debt market, dedicated infrastructure debt fund and attracting foreign investment, which would solve the current asset-liability mismatch problem faced by the banks. However, creation of these funds would require regulatory changes.

The market is expecting that the Tax benefit on investments made in infrastructure bonds be increased to Rs50,000. Reduction of the MAT rate from current 18% will also be beneficial to all the developers. Infrastructure to remain positive as per AB.

Metal & Mining

The budget 2011 will provide mixed bag to metal & mining sector. The ferrous alloys producers by increasing the import duty along with increase in export duty on iron ore which would be a boost to the steel companies. However such moves will have a negative impact on mining companies. AB is xpecting the import duty of ferroalloy to increase from current 5% to 7.5%.

The levying of mining tax of 26% on profit before tax (PBT) would be negative for mining companies as well as for steel companies having captive mines. The excise duty and customs duties on metal products are expected to remain at current levels of 10% and 5%, respectively. The disinvestment policy will continue even in this year which is a positive booster. Metal & Minig sectors outlook is neutral as per AB.

Oil & Gas

The consistent increase in the international crude price has resulted into under recovery of the Oil Marketing Companies up to Rs70,000 crore in 2011. This loss is slated to increase even in 2012 and if the crude prices stabilises at the current level, then OMC will see more red. The oil & gas sector expects the budgetary measures to be focused on reducing these burdens by reducing duties on crude oil and petro products and allocating higher amount of cash compensation.
However, the above said measure shall have very limited positive impact as these would assist in only reducing the losses.

The government needs to clarify over tax holiday provided to the natural gas producers who were awarded blocks during the NELP I-VII rounds. Oil & Gas to have neutral impact.

Power

The country continues to face power deficit due to delay in the commissioning of new capacities, fuel shortage in existing plants and deficiencies in the T&D system. The current situation prevails despite the power being one of the core focus sectors for the government. The sector expects the availability of tax deduction under 80-IA to be beyond 2011.

The deduction under Section 80-IA provides 100% deduction of the profits for 10 years during 15 years of operations, which will of tremendous assistance to the power companies. Also, Abolition of the import duty on power equipment from current 5% will result in to the reduction in the power cost and will be another positive impact for the sector.

For the companies dependent on imported coal any reduction on the import duty on coal from current 5% will be welcomed. AB expects positive impact on Power sector.

Real Estate

Real estate sector has been facing a tough market situation for past couple of years, which is mainly market driven along with the recent banking circulars and cautious watch towards the real estate sectors. In this budget real estate sector hopes that tax holiday under section 80-IB (10) be continues for current projects and also extend the provisions for 2012.

The section 80-IB (10) states that tax-free profit earned by developers and builders earned from housing projects which are below 1,000 sq ft, and have started on or before 31st march 2007 and completed within four years. The continuation of 80-IB (10) is expected to improve the cash availability to the developers and there by the shortage of approx 24mn houses shall also be covered.

The increase of exemption under section 80 C from current Rs1 lakh to approx Rs2 – 3 Lakh will be a boost to the buying fraternity. The increase under section 80 C will improve the affordability of the buyers and thereby positive impact to the sector. Similarly the increase in exemption limit on Interest loan paid for home loan from current Rs1.5 lakh under section 24 to Rs2 lakh will assist the buyers and thereby help the sector.

The sector seeks the recognition of townships as infrastructure development so as to attract the similar tax deductions. As per AB, Real estate not to attract any huge positives or negatives.

EPC News Bureau