CRISIL S Union Budget Analysis 2011 12

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Union Budget
Contents
Foreword Economy 1
Highlights Detailed economic analysis

Industry
4 5
Overall sectoral impact Overall company impact Airports Infrastructure Auto components & Tyres Automobiles Banking and Finance Cement Construction Fertilisers Hotels Household appliances Housing Information technology Media and Entertainment Non-ferrous metals Oil and Gas Paper Petrochemicals Pharmaceuticals Ports Power Roads Steel Sugar Telecom Textile
11 18 22 24 27 30 32 34 36 38 40 42 44 46 48 51 54 56 59 61 63 65 67 70 73 75
Continued
CRISIL RESEARCH ANALYSIS, FEBRUARY 28, 2011
Union Budget
continued
Capital markets
Equity market Mutual funds
79 87
ii
Union Budget
Foreword
Positive, 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 takes some 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.
C R I SI L R E S E A R C H A N A LY SI S, F E B R U A R Y 2 8 , 2 0 1 1
Union Budget
Foreword
On 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
Union Budget
Economy Economy
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 o o o o Income upto Rs 1.8 lakh nil Income between Rs 1.8 lakh and Rs 5 lakh 10 per cent Income between Rs 5 lakh and Rs 8 lakh 20 per cent Income above Rs 8 lakh 30 per cent 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
Union Budget
Economy analysis
Outlook 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
2011-12 (Pre- Budget) 8.3 2.7 7.9 9.9 8.1 9.1 8.1 2011-12 (Post- Budget) 8.3 2.7 7.9 9.9 8.1 9.1 8.1
Table 2: Assessment of Key Macro Risks (2011-12 Vs 2010-11)
(y-o-y, % growth) GDP (factor cost) Supply-side Agriculture Industry Services Demand-side Private final consumption expenditure Government final consumption expenditure Gross fixed capital formation
External financing Exports Economic reforms Fiscal position Domestic credit availability Rupee appreciation High interest Rates Increase in oil Price
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
Union Budget
Economy analysis
Investment activity is likely to dip marginally, with gross fixed capital formation growing at 8.1 per cent in 201112 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 yearon-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 has retreated 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.
Union Budget
Economy analysis
Fiscal 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 201112, 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 higherthan-budgeted tax revenues buoyed by expanding economic activity and part reversal of indirect tax/duty cuts, the 20.3 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 201011. 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
(% of GDP) 8.0 Gross fiscal deficit 6.0 4.6 4.0 3.4 4.1 Revenue deficit
Table 3: Market borrowings

Fiscal deficit Fiscal deficit Fiscal deficit 6.4% of GDP 5.1% of GDP 4.6% of GDP Rs. Crores Fiscal deficit % financed through market loans
2.7
FY10 (A) 4,176 95 4,510 526 3,984
FY11 (RE) 4,010 84 4,470 1,116 3,354
FY12 (BE) 4,128 83 4,166 736 3,430
Gross market borrow ings Less: Redemptions Net market borrow ings
2.0
0.0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 RE BE F F
Note (Fig 1):RE revised estimate, BE budget estimate, F forecast. Source: Budget documents
Union Budget
Economy analysis
Plan 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
Tax Heads % Share % Growth 10-11 RE/ 2009-10 RE 09-10 Actual Gross Tax Revenue Excise Corporate Customs Income Tax Service Other Taxes Net tax revenue (Centre) 100.0 16.5 39.2 13.3 19.6 9.4 1.8 73.1 26.0 33.3 21.1 58.2 15.7 18.8 -22.6 23.5 11-12 BE/ 10-11 BE 18.5 19.2 21.5 15.1
2011-12 (BE) 2010-11 (RE) 2010-11 (RE) 2009-10 (A) 2009-10 (A)
Fig 2: Incremental Expenditure

(Rs billion) 1,419 1,180 916 435 225 (23)
2011-12 (BE) 2011-12 (BE) 2010-11 (RE) 2010-11 (RE) 2009-10 (A) 2009-10 (A)
1,124
1,005
502 282
465 (54)
2011-12 (BE)
16.2 18.2 1.5 17.9
Rev enue expenditure
Capital expendi ture
Plan ex penditure
Non-plan expenditure
Source: Budget documents
Note: A= Actual, RE = Revised Estimates, BE = Budget Estimates
Union Budget
Economy analysis
Infrastructure: 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 governmentestablished 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
200 150 100 50 0 -2.3 -50
Mi nis try of Power Ministry of Shipping Ministry of Road Minis try of Urban Development Transport and Highways Railway s
Fig 4: Growth in central plan outlay, yoy

60 50 FY11 (RE over actual) 55.7 FY12 (BE over RE)
FY11 (RE over actual) 156.2
FY12 (BE over RE)
75.5 45.4 15.1 4.9 11.7 3.5 -5.5 40.7
40 30 20 10 0 -10 25.9
33.7 22.3 22.0 14.5 21.9 24.4 20.4
-2.0 Higher Edu School Edu & Women & Health & Rural Dvlpmnt Literacy Child Dvlpmnt Family Welfare
Source: Budget documents
Union Budget
Economy analysis
IV Inclusiveness Indias rural economy has been the focus of increased government attention in recent budgets, with rising allocation of funds for programmes involving rural job guarantee, rural housing and infrastructure. In a break from this trend, this years Budget allocation of Rs 741 billion to the Department of Rural Development is nearly 3 per cent lower over the revised estimate for 2010-11. The allocation to the governments flagship rural social safety net programme MGNREGA is Rs 400 billion, Rs 1 billion lower than the previous years allocation in spite of indexing wages under the scheme to inflation. While the Pradhan Mantri Gram Sadak Yojana, a programme that aims to connect every village with a motorable road, has seen a 20 per cent decline in allocation in this Budget compared with 2010-11and also a decline in its share in total government expenditure, the Indira Awaas Yojana, the rural housing project, has received nearly 3.6 per cent less money. Among numerous rural development programmes, the MGNREGA programme has been receiving the largest allocation. While the scheme has been successful in enhancing the livelihood of rural India, the minimum wage floor under it has been increased and is, thereby, likely to have reduced incentives for private employers to create job opportunities in rural India. In 2009-10, out of 172 million rural households in India, 52.6 million or around 30 per cent of rural households availed of employment under the scheme, earning around Rs 25.6 billion or Rs 4,900 per household, boosting private consumption in rural areas by an equivalent amount. Based on NSSO data on the consumption pattern of rural households, the MGNREGA scheme is likely to have increased rural consumption on cereals, clothing, beverages and edible oil by around Rs 4.2 billion, Rs 1.6 billion, Rs 1.1 billion, and Rs 1.0 billion respectively in 2009-10. The MGNREGA scheme has the potential to regenerate the rural economy only if its focus is shifted towards creation of productive assets rather than mere provision of wages. In 2009-10, only 48 per cent of projects that were taken up under the scheme were completed. Among the states, while the effectiveness of asset creation was the highest in Gujarat with a completion rate of around 88 per cent, Orissa was the worst performer with a completion rate of just 12 per cent. While the allocation to the scheme has not been increased this year, its implementation record can be improved significantly to create productive assets in the rural economy.
Fig 5: Resource allocation to Department of rural development
Rs billion 800 7.0 6.0 5.0 600 4.0 3.0 2.0 1.0 0.0 FY07 0 FY07 FY08 FY09 FY10 FY11 FY12B FY08 FY09 FY10 MGNREG PMGSY FY11 FY12B
Fig 6:% of total government expenditure
400
200
Total Funds to Dept of Rural dev Rural housing other prog
Source: Budget documents, CRISIL estimates
Source: Budget documents, NREGA reports
10
Union Budget
Overall sectoral impact

Industry Airport infrastructure 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 Effect 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-wheeler and tractor sales. The extension of tax slabs for individual tax payers from Rs 1.6 lakh to Rs 1.8 lakh will aid twowheeler 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 in accomplishing 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
11
Union Budget

continued
Industry Cement
Effect 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-based subsidy 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
12
Union Budget

continued
Industry Hotels
Effect 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 Positive
Increase 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 rural housing 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
13
Union Budget

continued
Industry Media and Entertainment
Effect 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 actual user 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
14
Union Budget

continued
Industry Petrochemicals
Effect 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 more foreign 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
15
Union Budget

continued
Industry Roads & highways
Effect 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 loan disbursal 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 Iron ore export duty hike a step towards conservation Overall, 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 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.
16
Union Budget

continued
Industry Telecom
Effect 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 and accessories 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.
17
Union Budget
Overall company impact

Company ABG Infralogistics ACC Adani Power Ltd Aditya Birla Nuvo Ltd Alok Industries Ltd Amtek Auto Ltd Andhra Pradesh Paper Mills Ltd Apollo Tyres Ltd Arvind Mills Ltd Ashok Leyland Ltd Aurobindo Pharma Ltd Bajaj Auto Ltd Bajaj Hindusthan Ltd Balaji Telefilms Ltd Ballarpur Industries Ltd Balrampur Chini Mills Ltd Bannari Amman Sugars Ltd Bharat Forge Ltd Bharat Heavy Electricals Ltd Bharat Petroleum Corporation Ltd Bharti Airtel Bhushan Steel Ltd Bosch Ltd Cairn India Ltd Ceat Ltd Chambal Fertilisers & Chemicals Ltd Chemplast Sanmar Ltd Chennai Petroleum Corporation Ltd Cipla Ltd Coromandel International Ltd Dhampur Sugar Mills Ltd Dish TV DLF Ltd Dr Reddy's Laboratories Ltd EID Parry Ltd EIH Associated Hotels Ltd EIH Ltd Essar Oil Ltd Exide Industries Ltd Finolex Industries Ltd Firstsource Solutions Ltd Impact Industry Ports Cement Power Textiles Textiles Auto Components & Tyres Paper Auto Components & Tyres Textiles Automobiles Pharma Automobiles Sugar Media & Entertainment Paper Sugar Sugar Auto Components & Tyres Power Oil & Gas Telecom Steel Auto Components & Tyres Oil & Gas Auto Components & Tyres Fertiliser Petrochemicals Oil & Gas Pharma Fertiliser Sugar Media & Entertainment Housing Pharma Sugar Hotels Hotels Oil & Gas Auto Components & Tyres Petrochemicals Information technology
Continued
18
Union Budget

continued Company GAIL India Ltd Gammon India Ltd Gammon Infrastructure Projects Ltd Glenmark Pharmaceuticals Ltd GMR Infrastructure Ltd Gokaldas Exports Ltd Goodyear India Ltd Grasim Industries Ltd Gujarat Ambuja Cement Ltd Gujarat Gas Co Ltd Gujarat Narmada Valley Fertilizers Company Ltd Gujarat Pipavav Port Ltd Gujarat State Fertilizers Company Ltd GVK Power and Infrastructure Ltd Haldia Petrochemicals Ltd HDFC Bank HDFC Ltd HDIL Ltd Hero Honda Motors Ltd Hindalco Industries Ltd Hindustan Construction Corporation Ltd Hindustan Copper Ltd Hindustan Organic Chemicals Ltd Hindustan Petroleum Corporation Ltd Hindustan Zinc Ltd Hotel Leelaventure Ltd HT Media Ltd ICICI Bank Idea Cellular IG Petrochemicals Ltd IL&FS Transportation Network Ltd India Cement Ltd Indian Hotels Company Ltd Indian Oil Corporation Ltd Indo Rama Synthetics (India) Ltd Infosys Technologies Ltd IRB Infrastructure Developers Ltd ITI IVRCL Infrastructures & Projects Ltd Impact Industry Oil & Gas Construction Roads Pharma Airport Infrastructure Textiles Auto Components & Tyres Diversified Cement Oil & Gas Fertiliser Ports Fertiliser Airport Infrastructure Petrochemicals Banking Banking Housing Automobiles Non-Ferrous Metals Construction Non-Ferrous Metals Petrochemicals Oil & Gas Non-Ferrous Metals Hotels Media & Entertainment Banking Telecom Petrochemicals Roads Cement Hotels Oil & Gas Textiles Information technology Roads Telecom Construction continued
19
Union Budget

continued Company JBF Industries Ltd Jindal Steel and Power Ltd JK Industries Ltd JK Paper Ltd JSW Steel Ltd Larsen & Toubro Ltd LG India LIC Housing Finance Ltd Mahindra & Mahindra Ltd Mangalore Chemicals & Fertilizers Ltd Mangalore Refinery & Petrochemicals Ltd Maruti Suzuki Ltd MIRC Electronics Ltd MRF Ltd MTNL Mundra Port and Special Economic Zone Ltd Nagarjuna Construction Company Ltd Nagarjuna Fertilizers & Chemicals Ltd National Aluminium Company Ltd National Thermal Power Corp Ltd Oil and Natural Gas Corporation Ltd Oil India Ltd Oriental Hotels Ltd Parsvnath Developers Ltd Petronet LNG Ltd Phillips Carbon Black Ltd Piramal Healthcare Ltd Polaris Software Lab Ltd Power Grid Corporation of India Ltd Punjab National Bank PVR Ltd Ranbaxy Laboratories Ltd Rashtriya Chemicals and Fertilizers Ltd Raymond Ltd Reliance Communication Reliance Industries Ltd Reliance Power Ltd Impact Industry Textiles Steel Auto Components & Tyres Paper Steel Construction Household appliances Banking Automobiles Fertiliser Oil & Gas Automobiles Household appliances Auto Components & Tyres Telecom Ports Roads Fertiliser Non-Ferrous Metals Power Oil & Gas Oil & Gas Hotels Housing Oil & Gas Petrochemicals Pharma Information technology Power Banking Media & Entertainment Pharma Fertiliser Textiles Telecom Oil & Gas Power
continued
20
Union Budget

continued Company Samsung India Samtel Colour Ltd Seshasayee Paper and Boards Ltd Shree Cement Ltd Sobha Developers Ltd Sona Koyo Steering Systems Ltd State Bank of India Steel Authority of India Ltd Sterlite Industries (India) Ltd Sun Pharmaceuticals Industries Ltd Sun TV Ltd Sundaram Fasteners Ltd Supreme Petrochem Ltd Suzlon Energy Ltd Taj GVK Ltd Tamil Nadu Newsprint and Papers Ltd Tamil Nadu Petroproducts Ltd Tata Communication Tata Consultancy Services Ltd Tata Motors Ltd Tata Power Company Ltd Tata Steel Ltd Thirumalai Chemicals Ltd UltraTech Cement Ltd Unitech Ltd Vardhaman Textiles Ltd Welspun India Ltd West Coast Paper Mills Ltd Whirlpool of India Ltd Wipro Ltd Zee Entertainment Enterprises Ltd Zenith Computers Ltd Zuari Industries Ltd Impact Industry Household appliances Household appliances Paper Cement Housing Auto Components & Tyres Banking Steel Non-Ferrous Metals Pharma Media & Entertainment Auto Components & Tyres Petrochemicals Power Hotels Paper Petrochemicals Telecom Information technology Automobiles Power Steel Petrochemicals Cement Housing Textiles Textiles Paper Household appliances Information technology Media & Entertainment Information technology Fertiliser
21
Union Budget
Airports Infrastructure
Indian 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.
22
Union Budget
Airports Infrastructure
Neutral impact on airport infrastructure
Com pany GMR Infrastructure Ltd GVK Pow er and Infrastructure Ltd Note: 1) The budget impact is only for the airports business. 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 f rom these airports contribute 40 per cent of the consolidated income in 2009-10. 3) GVK Pow er and Inf rastructure Ltd has its subsidiary companies, Mumbai International Airport Ltd (MIAL) and Bengaluru International Airport Ltd (BIAL), operating in Mumbai and Bengaluru, respectively. Revenue from these airports contributes 84 per cent of the consolidated income in 2009-10. Source: CRISIL Research Impact Impact factors A A
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.
23
Union Budget
Auto Components & Tyres

Healthy growth in domestic automobile production, recovery in exports drive auto component players 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 manufacturers hiked 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.
24
Union Budget

Auto parts: Tariffs
(per cent) Customs 2010-11 Engine and engine parts Drive transmission, steering, suspension, braking parts,silencer, exhaust pipes and radiators Electrical parts
1
Excise 2010-11 10.3 10.3 2011-12 10.3 10.3
2011-12 7.7 10.3
7.7 10.3
7.7 5.2
7.7 5.2
10.3 10.3
10.3 10.3
Raw materials for auto components

1
Customs 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. Source: CRISIL Research
Tyres: Tariffs, prices and landed costs

Tariffs (per cent) Customs 2010-11 2011-12 New tyres Used/retreaded tyres Truck and bus Car cross ply/ Radials Raw materials for tyres Natural rubber SBR (1502) PBR (1220) NTC fabric Carbon black (N330)
2
Prices (Jan 2011) Domestic (Rs/tonne) International ($/tonne) -
Landed costs (Rs/tonne) Pre-budget Post-budget
Excise 2010-11 2011-12 10.3 10.3
10.3
10.3
10.3 10.3
10.3 10.3
10.3 10.3
10.3 10.3
7.7 10.3 10.3 10.3 5.2
20.0 10.3 10.3 10.3 5.2
10.3 10.3 10.3 10.3
10.3 10.3 10.3 10.3
220,750 n.a. 187,000 n.a. n.a.
5,520 3,300 3,600 4,700 n.a.
286,000 165,411 183,225 252,000 n.a.
287,000 165,411 183,225 252,000 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 Source: CRISIL Research
25
Union Budget

Budget measures have neutral impact on auto components and tyres industries
Company Bharat Forge Ltd Bosch Ltd Amtek Auto Ltd Sona Koyo Steering Systems Ltd Sundaram Fasteners Ltd Exide Industries Ltd Source: CRISIL Research Impact Impact factors A,B A,B A,B A,B A,B A,B
Company Apollo Tyres Ltd Ceat Ltd Goodyear India Ltd JK Industries Ltd MRF Ltd Source: CRISIL Research
Impact
Impact factors C,D C,D C,D C,D C,D
Impact factors A. 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 201112. However, this too will not have a significant impact on demand for auto components, given the low population of 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.
26
Union Budget
Automobiles
Demand growth to moderate in 2011-12 over a high base; rising input costs to exert pressure on margins 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 given the 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 category Cars and utility vehicles Volume 2010-11 (E) Volume 2011-12 (F)
growth % Growth drivers 22-24% Higher disposable incomes, new model launches especially in the small car segment, increasing player focus on the underpenetrated rural market and a low base
growth % Growth drivers 14-16% Continued focus on rural markets, easing supply to sustain double digit growth
Two-wheelers
26-28%
Rising rural incomes, strong demand for scooters,improving rural finance penetration and recovery in the export markets
12-14%
New launches, continuing growth in rural finance penetration, improving supply in the scooters segment
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) Source: CRISIL Research
27
Union Budget
Automobiles
Automobiles: Tariffs
(per cent) Customs 2010-11 New cars
2
Excise 2010-11 2011-12
2011-12
-Completely knocked down units (CKD) -Semi-knocked down units (SKD) -Specified small cars -others Second-hand cars Utility vehicles Two-wheelers Trucks (LCVs and MHCVs) Buses (LCVs and MHCVs) Tractors Steel items Pig iron Engine and engine parts - Four-wheelers - Two-wheelers Drive transmission, steering, suspension, braking parts,silencer, exhaust pipes and radiators - Four-wheelers - Two-wheelers Electrical parts
3 1
10.3 61.8 61.8 61.8 103.0 10.3 61.8 10.3 10.3 10.3 5.2 5.2
10.3 61.8 61.8 61.8 103.0 10.3 61.8 10.3 10.3 10.3 5.2 5.2
10.3 22.7* 22.7* 22.7* 10.3 10.3 10.3 10.3 10.3
10.3 22.7* 22.7* 22.7* 10.3 10.3 10.3 10.3 10.3
7.7 7.7
7.7 7.7
10.3 10.3
10.3 10.3
10.3 10.3 7.7
10.3 10.3 7.7
10.3 10.3 10.3
10.3 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
1
Specified 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.
2
All Hybrid cars and cars based on fuel cell and Hydrogen cell technologies enjoy concessional
excise duty of 10 per cent

3
Customs duty for air conditioner machine parts is at 10.3 per cent
Source: CRISIL Research
28
Union Budget
Automobiles
Budget to have neutral impact on the automobile industry
Company Maruti Suzuki Ltd Tata Motors Ltd Ashok Leyland Ltd Bajaj Auto Ltd Hero Honda Motors Ltd Mahindra & Mahindra Ltd Note: Company list is classified as per sector classification Source: CRISIL Research Impact Impact factors A,B A,B C,D C,D A,B,D
Impact factors A. The Union Budget 2011-12 has proposed to extend the excise duty refund available to taxis having a seating capacity of less than 7 to vehicles having a seating capacity of up to 13 passengers. This is expected to marginally aid the sales of utility vehicles in the specified category. Also, the concessional excise duty of 10 per cent has been extended to vehicles based on fuel cell and hydrogen cell technology, which will improve the long term growth prospects of these vehicles. B. Specified parts of hybrid vehicles have been exempted from basic customs duty and special CVD in the budget. In addition, excise duty on these parts has been reduced to 5 per cent from 10 per cent earlier, in order to incentivise domestic production and reduce import dependence. These factors are expected to aid the sales of hybrid vehicles and have a marginally positive impact on the passenger cars industry over the longer term. C. The increase in exemption limits of tax slabs for individual tax payers from Rs 1.6 lakh to Rs 1.8 lakh is likely to lead to increase disposable incomes of addressable households, and thus aid two-wheeler sales. D. Enhancement of interest subvention on crop loans from 2 to 3 per cent, revision of wage rates under the NREGA scheme and increased allocation towards rural development projects like Rashtriya Krishi Vikas Yojana are expected to have a marginally positive impact on two-wheeler and tractor sales. Moreover, announcement of the launch of the National Mission for hybrid and electric vehicles is expected to benefit sales of hybrid and electric vehicles over the longer term.
29
Union Budget
Banking and Finance

Credit 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 nonperforming assets, especially in the SME and corporate portfolios. Extension of interest rate subvention scheme to benefit banks and HFCs
Com pany State Bank of India Punjab National Bank ICICI Bank HDFC Bank HDFC Ltd LIC Housing Finance Ltd Source: CRISIL Research Impact Impact factors A,B,D A,B,D A,B,D A,B,D A A
30
Union Budget
Banking and Finance

Impact 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..
31
Union Budget
Cement
Cement 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 201112 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 2010-11 Portland cement 0.0 2011-12 0.0 2010-11 10.3 Excise 2011-12 10.3 +Rs160/tonne Abatement rate 2010-11 0.0 2011-12 0.0
White cement Cement clinker Limestone Gypsum Non-coking coal Pet coke Note:
10.3 10.3 5.2 5.2 5.2 5.2
10.3 10.3 5.2 2.6 5.2 2.6
16.5
16.5
30.0 0.0 0.0 0.0 0.0 0.0
30.0 0.0 0.0 0.0 0.0 0.0
10.3 10.3+ Rs.200/tonne 0.0 0.0 0.0 15.5 0.0 0.0 0.0 15.1
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 Source: CRISIL Research
32
Union Budget
Cement
Increase in excise duty negative for cement sector
Company ACC Gujarat Ambuja Cement Ltd India Cement Ltd Shree Cement Ltd UltraTech Cement Ltd Source: CRISIL Research Impact Impact factors A,B A,B A,B A,B,C 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.
33
Union Budget
Construction
Construction 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 200506 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).
34
Union Budget
Construction
FII limit on corporate infrastructure bonds raised; tax-free bonds permitted
Com pany Larsen & Toubro Ltd Hindustan Construction Co Ltd IVRCL Infrastructures & Projects Ltd Nagarjuna Construction Co Ltd Gammon India Ltd Source: CRISIL Research Impact Impact factors A A A A 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.
35
Union Budget
Fertilisers
Introduction 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) Customs 2010-11 Urea DAP MOP Ammonia Phosphoric acid Sulphur Rock phosphate Naphtha Fuel oil Contracted LNG
2
Prices (Jan 2011) Excise Domestic (Rs/tonne) 5,310 10,700 4,455 NA NT NA NT 44,953 20,677 International ($/tonne) 400.0 600.0 400.0 500.0 830.0 197.0 160.0 835.0 524.0 -
(Rs/tonne) Prebudget 20,497 31,744 22,396 24,343 40,410 9,309 8,764 39,126 27,198 11,212 Postbudget 20,497 31,744 22,396 24,343 40,410 9,309 8,764 39,126 27,198 11,212
2011-12 5.2 5.2 5.2 5.2 5.2 2.1 5.2 -
201011 -
2011-12 -
5.2 5.2 5.2 5.2 5.2 2.1 5.2 -
5.0 5.0 DAP: Di-ammonium phosphate; LNG: Liquified natural gas MOP: Muriate of potash; NT: Not traded; NA: Not available "-" indicates not applicable Notes:
1
Price per thousand scm
There is no Excise and Customs duty on Naphtha and Fuel oil used for production of fertilisers Source: CRISIL Research
36
Union Budget
Fertilisers
Marginally positive impact on fertiliser sector
Com pany Nagarjuna Fertilizers & Chemicals Ltd Chambal Fertilisers & Chemicals Ltd Coromandel International Ltd Gujarat State Fertilizers Company Ltd Rashtriya Chemicals and Fertilizers Ltd Zuari Industries Ltd Gujarat Narmada Valley Fertilizers Company Ltd Mangalore Chemicals & Fertilizers Ltd Source: CRISIL Research Im pact Impact factors A,B,C A,B,C A,B A,B,C A,B,C A,B,C A,B,C 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.
37
Union Budget
Hotels
Growth 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.
38
Union Budget
Hotels
Neutral impact on performance of premium segment hotels
Com pany Indian Hotels Company Ltd EIH Ltd EIH Associated Hotels Ltd Oriental Hotels Ltd Hotel Leelaventure Ltd Taj GVK Ltd Source: CRISIL Research Impact Impact factors A A A A A 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
39
Union Budget
Household appliances
Household 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 semiurban 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.
Household appliances: Tariffs
(Per cent) B/W TVs Colour TVs (CRT, LCD) Ref rigerators Room ACs Washing machines CPT and glass parts LCD panel Compressors, thermostat and tubes Steel Polymers Source: CRISIL Research Custom s 2010-11 10.3 10.3 10.3 10.3 10.3 10.3 5.2 7.7 5.2 5.2 2011-12 10.3 10.3 10.3 10.3 10.3 10.3 5.2 7.7 5.2 5.2 Excise 2010-11 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 2011-12 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 Abatement rate 2010-11 30 35 25 35 2011-12 30 35 25 35 -
CRT: Cathode ray tube, LCD: Liquid crystal display, CPT: Colour picture tube
40
Union Budget
Household appliances
Increase in disposable income will improve demand for household appliances
Com pany Samtel Colour Ltd LG India MIRC Electronics Ltd Samsung India Whirlpool of India Ltd Source: CRISIL Research Impact Impact factors A A A A 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.
41
Union Budget
Housing
Rising 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 affect affordability and slow down demand. Across 88 residential areas in ten major cities tracked by CRISIL Research, capital values in 48 areas have surpassed their peak levels as of the first half of 2008. Residential capital values are expected to remain stable across the major cities, whereas capital values could fall in areas with huge upcoming supplies. Developers would face liquidity pressure. The recent scams involving housing finance and real estate companies have slowed the sanctioning of fresh loans and disbursement of loans already sanctioned. Moreover, several loans restructured after the 2008 economic slowdown will be due for repayment by March 2011. In the long-term, demand for residential housing is likely to remain strong led by buoyant economic growth resulting in better job prospects, job security and enhanced affordability.
42
Union Budget
Housing
Increased focus on affordable housing
Company DLF Ltd HDIL Ltd Parsvnath Developers Ltd Sobha Developers Ltd Unitech Ltd Source: CRISIL Research Impact Impact factors A, B A, B A, B A, B A, B
Impact factors A. 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. These measures will help reduce borrowers cost of funds. B. The budget has also proposed investment linked tax deduction for affordable housing projects. While the modalities have not been announced, this proposal would help increase investments in affordable housing. C. The rural housing fund has been enhanced to Rs 30 billion from Rs 20 billion and HUDCO has been allowed to issue tax free bonds up to Rs 50 billion. These measures will further boost the affordable housing segment. Note: The proposal to levy 18.5 per cent minimum alternate tax on developers of special economic zones (SEZs) could negate the positive impact of the budget proposals on the residential segment. Players with greater exposure in the SEZ space would be adversely affected.
43
Union Budget
Information technology
Volume growth in key verticals to drive recovery The Indian information technology (IT) industry primarily consists of three segments IT services, IT enabled services (commonly referred to as BPO/KPO services) and hardware. The first 9 months of 2010-11 saw revenues rebounding for IT services export players. During this time, tier-I IT service providers grew by 20-23 per cent y-o-y backed by a sharp increase in volumes. Discretionary spending revived during the period, indicating higher spending in the near term. CRISIL Research expects this volume driven growth to propel IT services exports to a 20-22 per cent growth y-o-y to reach $32-34 billion in 2010-11 and continue growing at 17-19 per cent in 2011-12 driven by discretionary spends in key verticals like banking, insurance and manufacturing. Indian ITeS exports are expected to grow at 12-13 per cent to $14 billion in 2010-11 as compared to a mere 6 per cent in 2009-10. Although Indias competitive position has taken a hit in the customer relationship management (CRM) space, an inherent need to reduce costs will ensure continued off-shoring by clients; also, a shift in the service mix towards higher value transaction services will continue to drive growth in the ITeS industry. Indian ITeS vendors have also moved up the value chain to be more involved in client processes and provide higher value services. In 2011-12, ITeS exports are expected to grow at 11-12 per cent. Spurt in growth has caused companies to hire in large numbers across the board. Close to 62,000 net employee additions were made by tier-I players between April and December 2010 as against about 23,000 during the same period in 2009. Increased poaching of skilled employees has led to high attrition rates, and consequently wage hikes. Combined with an adverse movement in the rupee/dollar rates, these factors are expected to continue to pressurise operating margins for tier-I IT players by 150-200 bps in 2011-12. Domestic market The domestic IT and BPO market is expected to grow from an estimated $9.0-9.5 billion in 2009-10 to $13.5-14.0 billion in 2011-12 a CAGR of 19 per cent. This growth will be led by increased IT deployment by the government, expanding BFSI and telecom reach and growth of IT adoption in sectors like retail and education. Revenues of the hardware industry revived in 2010-11 and are expected to grow at 19.5 per cent to $12 billion as compared to a meagre 7 per cent in 2009-10. Demand is expected to be driven by increasing spends by banks and government organisations investing to upgrade their infrastructure. The increasing utilisation of PCs, availability of affordable finance schemes and growing distribution channels of technology vendors are also expected to boost growth.
44
Union Budget
Information technology
MAT levy on SEZ units and non-extension of STPI benefits to impact profitability
Com pany Inf osys Technologies Ltd Tata Consultancy Services Ltd Wipro Ltd Polaris Sof tw are Lab Ltd Firstsource Solutions Ltd Zenith Computers Ltd Source: CRISIL Research Im pact Impact factors A A A B A,B -
Impact factors A. The levy of minimum alternative tax (MAT) on units in SEZs is expected to increase the effective tax rate, impacting the profitability of IT companies across the board. B. The non-extension of STPI benefits beyond March 2011 is expected to increase tax rates, thereby affecting the cash flows of IT companies, especially mid-tier players. C. The marginal increase in MAT, from 18 per cent to 18.5 per cent, is expected to be offset by a decrease in the surcharge from 7.5 per cent to 5.0 per cent, keeping the effective MAT rate at the same level.
45
Union Budget
Media and entertainment

Growth returns on the back of improved macroeconomic environment Advertising spends registered a robust growth of 15 per cent in 2010-11, driven by improved macroeconomic environment. Going forward, growth is expected to remain strong on the back of increased business confidence across the industry. Sectors such as FMCG, BFSI, telecom and autos are likely to be the key demand drivers with high advertising intensity. Aided by events like the cricket World Cup and Indian Premier League (IPL), we expect overall advertisement spends to grow by 16 per cent in 2011-12. Growth in subscription revenue remained buoyant in 2010-11, at about 15 per cent. While subscription revenue growth for television is being driven by increase in the number of pay-TV DTH subscribers, the same for print is being driven by growth in circulation figures. We expect subscription revenues for the industry to grow by 10 per cent and overall media revenues to grow by 13 per cent in 2011-12. We expect radio, outdoor and digital media to grow at a much faster pace of about 20-25 per cent, albeit over a smaller base. An increase in the number of radio stations coupled with increased traction from local advertisers is expected to drive growth in this segment. Further penetration of digital media is expected to eat into print mediums share. Increase in aesthetic display space due to improvement in infrastructure and transportation networks and outdoor measurement tools will drive growth in outdoor industry.
Media and Entertainment: Tariffs

(Per cent) Digital cinema equipment Broadcast equipment Set-top boxes Source: CRISIL Research Customs* 2010-11 7.7 10.3 5.2 2011-12 7.7 10.3 5.2 Excise 2010-11 10.3 10.3 10.3 2011-12 10.3 10.3 10.3
* Customs duty is inclusive of education cess of 3 per cent and exclusive of special duty of 4 per cent
46
Union Budget
Media and entertainment

Neutral impact on the Media & Entertainment sector
Com pany Dish TV Balaji Telef ilms Ltd HT Media Ltd PVR Ltd Sun TV Ltd Zee Entertainment Enterprises Ltd Source: CRISIL Research Impact Impact factors A B -
Impact factors A. Colour, unexposed cinematographic films in jumbo rolls of 400 and 1,000 feet are being fully exempt from excise duty. B. Mailroom equipment compatible with printing machinery will also have a concessional basic customs duty of 5 per cent and countervailing duty (CVD) of 5 per cent, available to newspaper establishments for high speed printing machinery. C. 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.
47
Union Budget
Non-ferrous metals
Prices rise with improvement in demand Aluminium CRISIL Research expects domestic demand to grow by 9-10 per cent (y-o-y) in 2011-12, on account of steady growth in the power sector (the major consumer of aluminium in India) coupled with strong growth in automobiles and consumer durables. Global aluminium prices in 2011-12 are expected to be $2,200-2,400 per tonne, while landed cost is likely to range Rs 120,000-130,000 per tonne. During the first 9 months of 2010-11, international prices of aluminium rose by 23 per cent (y-o-y) to average $2,177 per tonne, whereas domestic prices increased by around 19 per cent to average Rs 118,000 per tonne. Profitability of Indian aluminium players is expected to improve (y-o-y) in 2011-12 with an expected increase in realisations and no major increase in input costs. Copper During the first 9 months of 2010-11, domestic and global copper prices increased by 33 per cent (y-o-y) on account of a revival in demand. Operating margins are likely to improve for integrated players (Hindustan Copper) owing to higher realisations. For custom smelter players, though, pressure on the prevailing treatment charges/refining charges (TC/RC) margins will continue due to short supply of copper concentrate in the global market. Zinc Domestic demand for zinc is likely to register a y-o-y growth of 9-11 per cent in 2011-12 as production of galvanised sheets (the key end-user sector) is expected to increase with improved demand from construction and infrastructure. Zinc prices are expected to increase marginally in 2011, in line with rising demand. In the first 9 months of 201011, average domestic and international prices rose by around 14 per cent and 16 per cent. Lead In 2010, global demand for lead increased by 6 per cent (y-o-y), driven by double-digit growth in China. During the first 9 months of 2010-11, average domestic and international lead prices rose by around 16 per cent and 11 per cent (y-o-y).
48
Union Budget
Non-ferrous metals
Non-ferrous metals: Tariffs, prices and landed costs
Tariff (per cent) 1 Customs 2010-11 Aluminium ingots Aluminium products Flat-rolled products Foils Aluminium scrap Non-coking coal Caustic soda Calcined petroleum coke Copper Copper scrap Copper ore and concentrates Lead Lead ore and concentrates Zinc Zinc ore and concentrates
1 2 3
Prices (February 2011) 2011-12 (Rs/tonne) 10.3 10.3 10.3 10.3 0.0 10.3 10.3 135,000 ($/tonne) 2,510 -
Landed cost (Rs/tonne)
Excise 2010-11 10.3 10.3 10.3 10.3 10.3 10.3 10.3
Domestic2 International3 Pre-budget Post-budget 139,562 139,562 -
2011-12 5.2 7.7 7.7 5.2 5.2 7.7 2.6
5.2 7.7 7.7 5.2 5.2 7.7 5.2
5.2 5.2 2.1 5.2 2.1 5.2 2.1
5.2 5.2 2.1 5.2 2.1 5.2 2.1
10.3 10.3 10.3 10.3 10.3 10.3 10.3
10.3 10.3 10.3 10.3 10.3 10.3 10.3
499,000 118,500 134,000 -
9,986 2,602 2,453 -
550,439 144,614 136,476 -
550,439 144,614 136,476 -
Tax rate is inclusive of education cess - 3 per cent Domestic prices are average Mumbai market prices International prices are average LME cash prices
Note Customs duty on the value of gold and silver contained in copper concentrate has been exempted in Union Budget 2011-12. Source: CRISIL Research
49
Union Budget
Non-ferrous metals
Negligible impact on non-ferrous metal companies
Com pany Hindalco Industries Ltd Hindustan Copper Ltd Hindustan Zinc Ltd National Aluminium Company Ltd Sterlite Industries (India) Ltd Source: CRISIL Research Impact Impact factors A, B A A, B
Impact factors A. Customs duty on calcined petroleum coke, one of the raw materials used for processing aluminium, has been reduced to 2.5 per cent from 5.0 per cent. This reduction will have a negligible impact on aluminium manufacturers, as calcined petroleum coke forms a small component of aluminium smelting cost. B. The value of gold and silver contained in copper concentrate is exempt from customs duty. As gold and silver are found in minute quantities in copper concentrates, CRISIL Research believes the impact of this duty exemption will be insignificant.
50
Union Budget
Oil and Gas

Crude oil prices, under-recoveries to increase significantly Crude oil demand rose by 2.9 per cent y-o-y to 143.2 million tonnes during April-December 2010. However, imports declined by 1.1 per cent y-o-y to 115.1 million tonnes on increased production from Cairn Indias Rajasthan blocks. After averaging $78 per barrel in the first half of 2010-11, crude oil prices have risen significantly since October 2010, due to strong demand on account of a severe winter in most countries and geopolitical tensions in the Middle East and North Africa (MENA) region. Currently trading at $115 per barrel, Brent crude oil averaged $82 per barrel during April 2010-January 2011 as against $68 per barrel in the same period last year. CRISIL Research expects crude prices to average $84-87 per barrel in 2010-11 and $85-90 per barrel in 2011-12, driven by global demand recovery. Gross refining margins (GRMs) rose to $5.9 per barrel during April-December 2010 from $4.9 per barrel in the same period last year, on account of a revival in global demand for petroleum products and inventory gains. Overall, GRMs are likely to average higher at $6.3 per barrel in 2010-11 from $4.9 per barrel in 2009-10. Despite deregulation of petrol prices and a hike in retail prices of diesel and cooking fuels in June 2010, oil marketing companies would continue to incur marketing losses as the price hike for these fuels is not in line with the rise in crude oil prices. Therefore, under-recoveries are expected to increase by more than 60 per cent y-o-y to more than Rs 750 billion in 2010-11. Gas producers profitability improved due to the revision in APM gas prices to $4.2 per mmBtu. Revenues of gas transmission and marketing firms also rose led by higher LNG volumes.
51
Union Budget
Oil and Gas

Oil and gas: Tariffs, prices and landed costs
Tariffs (per cent) Custom s 2010-11 2011-12 Motor spirit (MS) Aviation turbine fuel (ATF) Naphtha Superior kerosene oil (SKO) - Industrial use - Domestic use High-speed diesel (HSD) Fuel oil Liquefied petroleum gas (LPG) - Domestic use Bitumen Crude oil 1 Natural gas 2 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 0.0 0.0 0.0 14.0 0.0 0.0 0.0 14.0 6,880 9,460 11,212 11,212 - Priority sector - Non-priority sector LNG3 CNG '-' indicates not applicable n.a.: Not available
1 Cess 2 3
Prices (January 2011) Excise Dom estic International 2011-12 (Rs/tonne) Rs 14.35/ltr 8.0 14.0 14.0 0.0 Rs 4.6/ltr 14.0 0.0 14.0 0.0 44,187 41,700 44,953 43,305 13,906 33,298 29,642 20,461 n.a. n.a. ($/tonne) 952 867 835 867 867 806 524 822 524 706
Landed costs (Rs/tonne) Pre-Budget Post-Budget 47,017 44,461 40,906 44,461 40,419 39,835 27,081 39,281 47,017 44,461 40,906 44,461 40,419 39,835 27,081 39,281 -
2010-11 Rs 14.35/ltr 8.0 14.0 14.0 0.0 Rs 4.6/ltr 14.0 0.0 14.0 0.0
7.5 10.0 5.0 10.0 0.0 7.5 10.0 0.0 10.0 5.0
7.5 10.0 5.0 10.0 0.0 7.5 10.0 0.0 10.0 5.0
on crude oil (in lieu of excise) is Rs 2,500 per tonne
Price per '000 scm Prices are for contracted LNG (landed cost) in Rs per '000 scm as per estimates
Notes 1) International prices are FoB Arab Gulf prices. 2) Domestic price of petroleum products are ex-storage point prices. 3) Priority sectors for natural gas include pow er and fertiliser. 4) Domestic natural gas prices represent landfall prices for each category. 5) Customs duty and excise duty on naphtha used for fertiliser is nil. 6) Customs duty and excise duty on fuel oil used in fertiliser is nil. Source: CRISIL Research
52
Union Budget
Oil and Gas

No major impact on oil and gas sector
Com pany Oil and Natural Gas Corporation Ltd GAIL India Ltd Petronet LNG Ltd Gujarat Gas Co Ltd Chennai Petroleum Corporation Ltd Indian Oil Corporation Ltd Bharat Petroleum Corporation Ltd Hindustan Petroleum Corporation Ltd Reliance Industries Ltd Essar Oil Ltd Mangalore Refinery & Petrochemicals Ltd Cairn India Ltd Oil India Ltd n.a.: Not applicable Source: CRISIL Research Impact Impact factors n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Impact factors The Union Budget 2011-12 will have no major impact on the oil and gas sector. However, the government has indicated that it would gradually move towards directly transferring cash subsidies on LPG and kerosene to people living below the poverty line. This will reduce under-recoveries of oil marketing companies in 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.
53
Union Budget
Paper
Profitability of paper players to improve with healthy growth in demand In 2010-11, the domestic paper industry recorded a healthy demand growth of about 7 per cent as compared to 6.2 per cent in 2009-10. Paper prices increased by 15-20 per cent y-o-y across different varieties. Despite an estimated increase in raw material costs, players maintained margins in 2010-11 on the back of robust demand coupled with an increase in value-added products such as coated paper and copier paper in their portfolio. CRISIL Research expects paper and paperboard demand to grow by 7.5 per cent in 2011-12 to 9.4 million tonnes. Demand for W&P paper is likely to grow at 7.3 per cent in 2011-12, with increase in spend on education and faster growth in the office printing segment. Meanwhile, in the paperboard segment, the resurgence in packaging on the back of steady growth in industrial production and trade is expected to result in demand growth of 7.6 per cent y-oy. Newsprint demand is expected to clock a growth of 8.3 per cent over the same period with rise in circulation of vernacular newspapers. Pulp prices rose sharply by nearly 50 per cent in calendar year 2010 due to the earthquake in Chile, which resulted in a supply shortage globally, as the country accounts for nearly 10 per cent of global pulp trade. Although pulp prices corrected marginally towards the end of the year following a restoration in supplies, they continued to be higher than prices in 2009. Wastepaper prices, which move in line with pulp prices, also rose by nearly 50 per cent in calendar year 2010. Pulp and wastepaper prices have corrected from their peaks ($900 per tonne and $450 per tonne) in calendar year 2010 and are currently at $750 per tonne and $400 per tonne. We expect prices to remain firm at these levels in 2011, lower than average prices for calendar year 2010. Consequently, we expect operating margins of domestic players to improve in 2011-12. Larger players are likely to record better profitability given their higher proportion of value-added products in their portfolio as compared to smaller players.
Paper: Tariffs
(per cent) 2010-11 New sprint Maplitho Duplex board Art board Wood pulp (hard) Wood pulp (sof t) Waste paper (OCC) NT: Not traded
1
Tariff (per cent) Customs 2011-12 0.0 10.3 10.3 10.3 5.2 5.2 2.6 0.0 10.3 10.3 10.3 5.2 5.2 5.2 Excise 2010-11 0.0 4.1 4.1 4.1 0.0 0.0 0.0 2011-12 0.0 5.2 5.2 5.2 1.0 1.0 0.0
Prices (Jan 2011) Dom estic (Rs/tonne) 29,750 50,500

1
Landed cost (Rs/tonne) Pre-budget 31,333 49,791 32,469 39,631 14,086 Post-budget 31,333 50,283 32,803 40,039 13,741
International ($/tonne) 690 955 680 830 295
35,050 1 54,000 1 NT NT 9,750
Prices are delivered prices excluding VAT (delivered: basic+excise+octroi+avg f reight prices)
54
Union Budget
Paper
Impact of changes in customs and excise duty positive for the industry
Com pany Andhra Pradesh Paper Mills Ltd Ballarpur Industries Ltd JK Paper Ltd Seshasayee Paper and Boards Ltd Tamil Nadu New sprint and Papers Ltd West Coast Paper Mills Ltd Source: CRISIL Research Impact Impact factors A, B, C, D, E A, B, C, D, E A, B, C, D, E A, B, C, D, E A, B, C, D, E A, B, C, D, E
Impact factors A. Increase in basic Excise duty on paper to 5 per cent from 4 per cent. B. Reduction in Customs duty on wastepaper to 2.5 per cent from 5.0 per cent. C. Introduction of Excise duty of 1 per cent on wood pulp. D. Introduction of Excise duty of 1 per cent on W&P paper, used specifically for educational purposes, and certain varieties of specialty paper, which were earlier exempted from duties. E. Budgetary allocation of Rs 521 billion on education, an increase of around 24 per cent y-o-y. Other factors The impact of Union Budget 2011-12 on the domestic paper industry is positive. The increase in basic excise duty on W&P and industrial paper is expected to be passed on given the industrys healthy operating rates. Reduction in customs duty on wastepaper is likely to lower raw material costs and offset the introduction of excise duty on wood pulp. Introduction of excise duty on certain varieties of W&P paper, used specifically for education purposes, and specialty paper is expected to be passed on. Enhanced budgetary allocation for education will benefit players operating in the W&P segment.
55
Union Budget
Petrochemicals
Demand for petrochemicals to improve in 2011; cracker margins expected to be under pressure On an average, cracker margins were around $293 per tonne of ethylene produced in 2010 as compared to $133 per tonne in 2009. Margins improved y-o-y in 2010, reflecting tight ethylene supply, especially during the first half of the calendar year. CRISIL Research forecasts cracker margins to be under pressure in 2011 owing to significant global ethylene capacity additions in 2010. Domestic prices will continue to move in line with global prices in the medium term. Demand for petrochemicals is estimated to grow by 11-13 per cent y-o-y in 2010-11 and by 10-12 per cent y-o-y in 2011-12, driven by growth in demand for polyethylene and polypropylene from the automotive, household appliances and packaging material industries. Demand for commodity chemicals to grow at a CAGR of 9-10 per cent from 2010-11 to 2012-13 Growth in the automotive and construction industries will be the key driver for domestic demand in the commodity chemicals sector. The sector is likely to grow by 9-10 per cent y-o-y annually over 2010-11 to 2012-13. We expect domestic production to rise in the forecast period to meet the demand. Imports will also increase owing to capacity constraints in the domestic market and global oversupply. Prices of commodity chemicals are estimated to have increased in 2010-11 due to the rise in crude oil prices, and, in turn, feedstock prices. Moreover, a favourable demand-supply situation in chemicals such as carbon black, phenol and methanol also supported the price rise in these commodity chemicals. Except for carbon black, whose prices are expected to remain stable, CRISIL Research expects the prices of all commodity chemicals to rise on a y-o-y basis till 2012-13.
56
Union Budget
Petrochemicals
Petrochemicals: Tariffs, domestic prices and landed costs
Tariff (per cent) Custom s 2010-11 Polym ers hdPE (IM) ldPE lldPE PPHP (IM) PVC PS (GP) ABS SBR (1502) PBR (1220) EDC VCM Styrene Ethylene Propylene Butadiene Benzene Toluene Naphtha LAB PAN Methanol Phenol Orthoxylene
1
Prices (January 2011) Dom estic (Rs/tonne) 76,862 88,185 77,906 87,812 59,291 88,160 120,000 133,000 187,000 n.a. n.a. n.a. 60,950 51,500 96,000 52,200 45,500 n.a. 91,000 67,000 19,800 95,000 56,000
5 1 1 1 1 1 1 1 1
Landed cost (Rs/tonne) Pre-budget Post-budget
Excise 2010-11 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 14.4 10.3 10.3 10.3 10.3 10.3 2011-12 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 14.4 10.3 10.3 10.3 10.3 10.3
International ($/tonne) 1,311 1,690 1,403 1,504 1,016 1,425 2,195 3,100 3,600 487 905 1,385 1,233 1,310 2,126 1,106 961 871 1,720 1,350 350 1,770 1,213
2 2 3 3 3 3 3 3 3 3 3
2011-12 5.2 5.2 5.2 5.2 5.2 5.2 5.2 10.3 10.3 2.6 2.6 2.6 5.2 5.2 5.2 5.2 5.2 5.2 7.7 7.7 7.7 7.7 5.2
5.2 5.2 5.2 5.2 5.2 5.2 5.2 10.3 10.3 2.1 2.1 2.1 5.2 5.2 5.2 5.2 5.2 5.2 7.7 7.7 7.7 7.7 5.2
73,296 94,486 78,412 84,087 56,817 79,670 122,720 181,806 211,129 29,151 51,834 77,881 71,177 75,510 121,145 64,572 56,012 50,514 94,620 72,809 19,254 100,094 65,134
73,296 94,486 78,412 84,087 56,817 79,670 122,720 181,806 211,129 29,284 52,082 78,261 71,177 75,510 121,145 64,572 56,012 50,514 94,620 72,809 19,254 100,094 65,134
Basic petrochem icals and interm ediates

3 3 2 2 2 2 2 2 4
Com m odity chem icals
Market prices, 2 Fob prices, 3 C&F Far-East Asia, 4 C&F Japan, 5 Excludes trade discounts
LAB: Linear alkyl benzene; PAN : Phthalic anhydride n.a - not available Notes Education cess of 3 per cent has been included in the customs duty and excise duty. Additional CVD of 4 per cent has been levied on polymers and basic petrochemicals and intermediates. Landed cost also includes handling charges. Source: CRISIL Research
57
Union Budget
Petrochemicals
Unchanged duty structure: Neutral impact for petrochemicals sector
Com pany Basic petrochem icals and interm ediates Reliance Industries Ltd Supreme Petrochem Ltd Finolex Industries Ltd Chemplast Sanmar Ltd Haldia Petrochemicals Ltd Com m odity chem icals Phillips Carbon Black Ltd Tamil Nadu Petroproducts Ltd IG Petrochemicals Ltd Thirumalai Chemicals Ltd Hindustan Organic Chemicals Ltd Note The impact specified is only for the petrochemicals business of the companies listed above. Source: CRISIL Research A Im pact Im pact factors
Impact factors Petrochemicals - Basic and polymers A. Customs duty on Carbon Black Feedstock (CBFS) has been reduced to 2.5 per cent from 5 per cent. CBFS comprises the largest component of input costs for carbon black manufacturers. Since it is largely imported, a reduction in the customs duty on CBFS will lower the raw material costs for carbon black manufacturers. However, the impact of the Union Budget 2011-12 on the domestic petrochemicals industry is neutral, as no significant changes were announced in the excise and customs duties.
58
Union Budget
Pharmaceutical
Industry on strong footing; exports to remain buoyant The Indian pharmaceutical industry is estimated to grow by a healthy 20-22 per cent y-o-y to $25-26 billion in 2010-11. Exports (bulk drugs and formulations) are estimated to grow by around 22 per cent y-o-y, driven primarily by exports of bulk drugs to regulated markets. The domestic formulations market will grow at 17-18 per cent y-o-y with robust growth in chronic segments such as anti-diabetic, cardiovascular (CVS), neuro/central nervous system (CNS) and gynaecology and steady growth in anti-infectives. In 2011-12, CRISIL Research expects the industry to grow by 17-19 per cent y-o-y to $30 billion. Exports will continue to drive growth during the year. With a continuous rise in outsourcing opportunities, exports of bulk drugs are expected to grow by 21-23 per cent y-o-y. Bulk drugs exports to regulated markets for manufacturing off-patent drugs are expected to outpace those to semi-regulated markets. Generic opportunity in the regulated market will continue to drive growth in formulation exports, which is set to grow at 18-20 per cent y-o-y in 2011-12. The domestic formulations market is expected to grow steadily at 13-15 per cent y-o-y to reach $12 billion in 201112. Growth will be driven by chronic and lifestyle segments such as anti-diabetic, CNS, CVS and gastrointestinal ailments.
Pharmaceuticals: Tariffs
(per cent) Bulk drugs Formulations
1 2
Custom s 1,2 2010-11 7.7 10.3 2011-12 7.7 10.3
Excise 1 2010-11 10.3 4.1 2011-12 10.3 5.2
Tax rates include education cess of 3 per cent Customs duty on select lif e saving drugs and bulk drugs used to manufacture them, f or treating life saving diseases like breast cancer, hepatitis, rheumatic arthritis etc have been reduced f rom 10 per cent to 5 per cent
59
Union Budget
Pharmaceutical
Pharmaceuticals: Neutral impact as players will pass on the increase in excise duty
Com pany Aurobindo Pharma Ltd Cipla Ltd Dr Reddy's Laboratories Ltd Ranbaxy Laboratories Ltd Piramal Healthcare Ltd Glenmark Pharmaceuticals Ltd Sun Pharmaceuticals Industries Ltd Source: CRISIL Research Impact Impact factors A, B A, B A, B A, B A, B A, B A, B
Impact factors A. The excise duty on formulations has been increased from 4 per cent to 5 per cent. This increase is not expected to have any significant impact on Indian formulation players as we expect them to pass it on. B. The government has increased the Minimum Alternate Tax (MAT) to 18.5 per cent from 18 per cent while reducing the surcharge levied to 5 per cent from 7.5 per cent. The cut in the surcharge rate offsets the impact of increase in MAT, keeping the effective rate of MAT unchanged.
60
Union Budget
Ports
Ports sector to witness strong growth in traffic and investments Total traffic in Indian ports is expected to grow by 5 per cent from 850 million tonnes in 2009-10 to 978 million tonnes in 2010-11, outstripping the 4 per cent growth in capacity from 962 million tonnes to 1,016 million tonnes. Consequently, capacity utilisation levels are expected to increase from 88 per cent in 2009-10 to 96 per cent in 2010-11. In 2011-12, we expect port traffic to grow strongly by 9.6 per cent. Pace of capacity addition is expected to improve going forward. The share of traffic handled by non-major ports is expected to increase to 35 per cent in 2010-11 from 34 per cent in 2009-10. Non-major ports are likely to grow at a faster pace vis--vis the major ones, owing to increased private participation, better operational efficiencies and lesser congestion levels. CRISIL Research expects the ports sector to attract investments of Rs 181 billion in 2011-12, up from an estimated Rs 116 billion invested in 2010-11. Of the expected investments in 2011-12, around Rs 103 billion would be directed towards major ports, while the non-major ports are expected to see investments to the tune of Rs 78 billion
61
Union Budget
Ports
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 more foreign funds to the ports sector.
Com pany Mundra Port and Special Economic Zone Ltd Gujarat Pipavav Port Ltd ABG Infralogistics Source: CRISIL Research Impact Impact factors A -
Impact factors A. The inclusion of SEZs under MAT will have a negative impact on players with operational SEZs.
62
Union Budget
Power
Strong capacity additions likely; fuel availability to be a key concern Demand for electricity in India is expected to grow by 7-8 per cent in the medium term. CRISIL Research estimates capacity additions of around 48 GW in the Eleventh Plan as against the Government target of 62 GW. Over 2010-11 to 2014-15, we expect 82 GW of capacities to be added that will be spearheaded by the private sector. Private participation is also increasing in the transmission and distribution space, with players being awarded transmission projects and distribution circles under the franchisee route. Fuel availability poses a major challenge to the sector due to slow ramp-up of coal production by Coal India Limited (CIL) and logistical constraints in coal transportation. Some generation capacities have also been delayed due to land acquisition, environmental clearance and equipment supply issues. During 2010-11, short term power (merchant power) prices declined by 33 per cent to Rs 3.6 per kWh on a y-o-y basis. However, prices have started to increase since January 2011. CIL has increased non-coking coal prices for Grade A and B by 1.5 times. These grades account for only 3-5 per cent of coal consumption in the sector, and the price increases are expected to be passed on to consumers.
63
Union Budget
Power
Limited impact of budget on power sector
Company Adani Power Ltd Bharat Heavy Electricals Ltd National Thermal Power Corp Ltd Power Grid Corporation of India Ltd Reliance Power Ltd Suzlon Energy Ltd Tata Power Company Ltd Source: CRISIL Research Impact Impact factors A,B C A,B A,B A,B A,B A,B
Impact factors A. Sunset date for tax holiday under section 80IA for the sector has been extended by another year. This will encourage investments in the sector. B. Creation of infrastructure debt funds with tax benefits and increase in Foreign Institutional Investor (FII) limit for investing in corporate bonds issued by infrastructure companies to $40 billion will also aid the availability of funds to the sector. C. 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 which currently enjoy a concessional customs duty of 2.5 per cent and exemption from countervailing duty. This will have a marginal positive impact on domestic equipment manufacturers.
64
Union Budget
Roads
Momentum expected to continue; quicker awarding under NHDP CRISIL Research estimates an investment of Rs 6,372 billion in roads and highways over 2010-11 to 2014-15, more than double the investment spend in the previous 5-year period. National highways are expected to comprise the largest share of total investment at Rs 2,706 billion followed by state roads and rural roads. The resolution of policy issues such as termination clause and exit clause in the second half of 2009-10 sped up awarding of national highway projects. However, land acquisition issues are hampering project execution. Overall, around 50 per cent of the total length under the National Highway Development Programme (NHDP) remains to be awarded. Stretches under Phase II have largely been awarded while awarding of projects under Phase III is going on at a brisk pace. Awarding of projects under Phase IV and Phase V has picked up in 2010-11.
65
Union Budget
Roads
Measures aimed at improving fund availability
Com pany IRB Infrastructure Developers Ltd IL&FS Transportation Netw ork Ltd Gammon Inf rastructure Projects Ltd Larsen & Toubro Ltd Hindustan Construction Corporation Ltd Nagarjuna Construction Company Ltd IVRCL Infrastructure & Projects Ltd Note The additional fund availibility w ill have a positive impact on developers executing BOT road projects. Source: CRISIL Research Im pact Impact factors A, B A, B A, B B B B B
Impact factors A. National Highways Authority of India has been allowed to raise tax-free bonds amounting to Rs 100 billion, and the foreign institutional investment limit in corporate infrastructure bonds has been raised by $20 billion. Further, IIFCLs loan disbursal target has been set higher at Rs 250 billion for 2011-12. These proposals are expected to have a positive impact on BOT (build-operate-transfer) road developers, in terms of faster awarding of projects and additional availability of funds. B. 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.
66
Union Budget
Steel
Steel demand to stay robust, but input costs to increase Domestic consumption of finished steel rose by 9.7 per cent y-o-y during April-October 2010, led by increased demand from end-user segments automobiles, infrastructure and construction. In 2010, global steel prices (based on HR, FoB CIS Black Sea) rose by about 31 per cent y-o-y to $614 per tonne on account of rising demand and higher raw material costs. In line with this, domestic steel prices also increased to Rs 35,625 per tonne in 2010 from Rs 31,329 per tonne in 2009. However, during April-December 2010, industry margins declined slightly owing to higher input costs. CRISIL Research expects domestic steel demand to grow 10-11 per cent in 2011-12, on the back of strong growth in the infrastructure and automobile segments. However, player margins are expected to be under pressure owing to rising input costs. While steel prices are expected to increase by 10-12 per cent y-o-y, CRISIL Research expects contract prices of iron ore and coking coal to increase by 15-20 per cent. Players with access to iron ore and coking coal mines will, however, be less affected by the rise in input costs. The 30 per cent increase in non-coking coal prices will adversely affect profitability of sponge iron players.
67
Union Budget
Steel
Budget focuses on iron ore conservation
Steel: Tariffs, prices and landed costs
Tariff (per cent) Customs 2010-11 GP/GC CR coils HR coils Bars and rods Alloy steel Billets/slabs Pig iron HBI/sponge iron Ferro alloys Steel melting scrap Iron ore
2 1
Prices Domestic (Rs/tonne) 50,000 47,000 42,000 38,000 36,500 32,000 19,500 25,000 International ($/tonne) 890 840 797 677 640 522 443
Landed cost (Rs/tonne) Pre-budget Post-budget
Excise 2010-11 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 2011-12 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3
2011-12 5.2 5.2 5.2 5.2 5.2 5.2 5.2 -
5.2 5.2 5.2 5.2 5.2 5.2 5.2 -
50,428 47,672 45,302 38,689 36,649 30,146 24,508
50,428 47,672 45,302 38,689 36,649 30,146 0 0 24,508
2.1 -
2.1 -
10.3 -
10.3 -
Coking coal (< 12% ash content) Coking coal (> 12% ash content) Metallurgical coke Non-coking coal
1 2
5.2
5.2
Tariff rates are inclusive of 3 per cent education cess. The Government raised ad-valorem export duty on iron ore fines and lumps to 20 per cent each from 5 per cent and 15 per cent,
respectively. Notes 1) International prices are on FOB (CIS Black Sea) basis for February 2011 2) Domestic prices are average prices for February 2011 Source: Metal Bulletin, CRISIL Research
68
Union Budget
Steel
Neutral impact on domestic steel players
Company name Steel Authority of India Ltd Tata Steel Ltd JSW Steel Ltd Jindal Steel and Power Ltd Bhushan Steel Ltd Source: CRISIL Research Impact Impact factors A A A A A
Impact factors A. The Union Budget 2011-12 will have a neutral impact on domestic steel players. 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. This will benefit the domestic steel industry in the long term, as emphasis on conservation will help India to maintain self-sufficiency in iron ore.
69
Union Budget
Sugar
Prices remain subdued on the back of high production and delay in OGL exports Sugar production in the country is expected to be 24.9 million tonnes in SS 2010-11 (Sugar Season: October 2010 to September 2011), clocking a rise of about 31 per cent as compared to SS 2009-10. Increase in area under sugarcane cultivation, higher yields and recoveries are expected to drive this growth. With consumption expected to be 23.3 million tonnes during SS 2010-11, India would record a surplus in sugar availability for the first time in 3 years. Adverse weather has affected production in major exporting and importing countries. Therefore, exportable surplus for countries such as Brazil, Australia has reduced and the import demand from countries like China, Russia, and Pakistan has risen significantly, resulting in a demand-supply deficit for the third straight year. Consequently, international raw and white sugar prices have risen to near historic highs. Indian sugar mills, however, are currently unable to benefit from the global price rise despite surplus availability, as the government has not yet announced release orders for exports under the Open General Licence (OGL) scheme. Consequently, domestic sugar prices (Mumbai S-30 variety) have remained subdued at Rs 28-29 per kg over the past 2 months. For the entire SS 2010-11, CRISIL Research believes that sugar prices would average Rs 29-32 per kg, assuming that India would allow OGL exports of about 1 million tonnes during the season. Operating margins of players in SS 2009-10 were under pressure due to high cane prices paid by sugar mills anticipating sugar prices to remain firm at historic high levels. Sugar prices were at a record high of Rs 39 per kg in January 2010; they averaged Rs 31 per kg in SS 2009-10. CRISIL Research expects the profitability of domestic sugar players to rise by 200-600 bps in SS 2010-11; however, the extent of improvement would vary across regions. Operating margins of mills based in North India are likely to rise by 400-600 bps due to reduction in sugarcane procurement costs. For mills based in South India, margins are expected to rise by 200-400 bps on account of increased realisations resulting from Advance Licence Scheme (ALS) exports.
70
Union Budget
Sugar
Sugar: Tariffs
Tariff Custom s (per cent) 2010-11 Domestically produced sugar Free sale Levy Imported w hite sugar Imported raw sugar Molasses n.a.: Not Applicable Notes 1) Domestic and international prices are the average f or January 2011. 2) Duty f ree imports of raw sugar have been allow ed until March 31, 2011. 3) Duty f ree imports of w hite sugar have been allow ed until March 31, 2011. 4) Excise duty includes Basic duty, Additional duty and the Education cess. 5) Landed cost includes the duties, freight, port handling, transport and refining costs. Source: CRISIL Research n.a. n.a. 0.0 0.0 10.3 n.a. n.a. 0.0 0.0 10.3 978.5 638.6 978.5 978.5 772.5 978.5 638.6 978.5 978.5 772.5 29,074 18,460 770 654 2011-12 Excise (Rs per tonne) 2010-11 2011-12 Prices (January 2011) Dom estic (Rs/tonne) International ($/tonne) Landed cost (Rs/tonne) PrePostbudget budget
39,582 39,582 37,314 37,314 -
71
Union Budget
Sugar
No impact on the industry
Com pany Bajaj Hindusthan Ltd Balrampur Chini Mills Ltd Bannari Amman Sugars Ltd EID Parry Ltd Dhampur Sugar Mills Ltd Source: CRISIL Research Impact Impact factors -
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.
72
Union Budget
Telecom
Profitability continues to remain under pressure as operating metrics deteriorate The telecom sector witnessed robust subscriber growth, having added 227 million subscribers during 2010, driven entirely by wireless services. The wireless subscriber base reached 752 million by December 2010. However, revenues grew at a much slower pace, due to a sharp decline in tariffs and the growing use of multiple SIM cards. As of December 2010, 30 per cent of the total wireless subscriber base was inactive, reflecting the magnitude of usage of multiple SIM cards. With these factors coming into play, industry ARPUs declined by an estimated 25 per cent during the year. Consequently, growth in industry revenues is likely to be subdued at 6 per cent in 2010-11. With most of the new rollouts behind us and the implementation of mobile number portability (MNP), we expect the explosive growth in subscriber base to moderate compared to the past 1 year. This would lead industry ARPUs to stabilise. We therefore expect industry revenues to grow by 10-12 per cent in 2011-12. Telecom operators have been facing severe pressure on profitability with the sharp decline in ARPUs. Operating margins are likely to dip by almost 500 bps y-o-y in 2010-11. With implementation of MNP and the impending launch of 3G services, operators will continue to face cost pressures, especially network operating and subscriber acquisition costs, which will exert pressure on their profitability. CRISIL Research expects the industrys operating margins to dip by 100-150 bps in 2011-12. The wireline segment recorded a drop of 1.97 million subscribers in 2010. While the subscriber base of government-owned companies, BSNL and MTNL, reduced by 2.47 million during the year, private players cumulatively added 0.5 million subscribers. As of December 2010, the total wireline subscriber base stood at 35.09 million. Going forward, we expect higher private sector participation and focus on broadband services to restrict the decline in the wireline segment. The Department of Telecommunications (DoT) is expected to unveil the New Telecom Policy (NTP) in 2011-12, which will provide a roadmap on new licences, licence fee and spectrum charges, merger and acquisition (M&A) norms in the sector.
Telecom: Tariffs
(per cent) Cellular phones Telecom netw orking equipment Base stations Wireless internet data card HDSL HDSL: High bit-rate digital subscriber line Source: CRISIL Research Custom s 2010-11 0.0 0.0 0.0 0.0 0.0 2011-12 0.0 0.0 0.0 0.0 0.0 Excise 2010-11 10.3 10.3 10.3 0.0 10.3 2011-12 10.3 10.3 10.3 0.0 10.3
73
Union Budget
Telecom
Overall impact on the Telecom services sector is neutral
Com pany Bharti Airtel ITI MTNL Reliance Comm Idea Cellular Tata Comm Source: CRISIL Research Im pact Impact factors A B B A,B A -
Impact factors A. 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 rate from 7.5 per cent to 5 per cent. The cut in surcharge neutralises the impact of MAT increase by keeping the effective rate of MAT unchanged. B. The exemption from basic, countervailing duty (CVD) and special additional duty (SAD) on components and accessories of mobile handsets has been extended for the next financial year and a few more items have now been included in its ambit (like battery chargers, headphones, components for manufacture of PC connectivity cables and subparts of parts and components of PC connectivity cable). The extension of duty exemptions would help sustain the current low prices of mobile handsets.
74
Union Budget
Textiles
High cotton prices to impact profitability of players The textile industry has benefited from the stable 8-9 per cent y-o-y demand growth in the domestic market and a rebound in exports in 2010-11. However, an unprecedented increase in cotton prices during cotton season 2010-11 is expected to pull down the profitability of spinning companies and readymade garment manufacturers. Cotton yarn and cotton Cotton yarn demand is expected to grow at a CAGR of 6 per cent during 2011-12 and 2012-13 led by domestic demand, which accounts for around 55 per cent of total demand. Revival in garment exports and strong yarn exports will support the growth. Cotton prices are currently on an upswing in the domestic and international markets. However, growing resistance from downstream players (weaving and garmenting units) will restrict spinning companies flexibility to pass on any further rise in cotton prices. This would pull down margins for spinning companies by around 200 basis points y-o-y in 2011-12. MMF Price competitiveness of polyester vis--vis cotton has been improving due to a sharper rise in cotton prices. As a result, polyester demand grew at 8 per cent CAGR between 2009-10 and 2010-11. CRISIL Research expects this demand growth to be maintained over the next 2 years. Polyester industry has been characterised by low operating rates and limited pricing flexibility for manufacturers. However, rising cotton prices enabled polyester manufacturers to increase product prices and improve their spreads in 2010-11. With cotton prices expected to remain firm, spreads for polyester manufacturers would improve in 2011-12. Readymade garments Total readymade garment demand (domestic and exports) is estimated to have grown by 7-8 per cent in 2010-11 led by growth in domestic demand. While Indias exports to the US recovered in 2010 to grow at around 9 per cent y-o-y, revival in the EU market was slower at 2 per cent. Market shares of Indian exporters in the EU and the US were affected as they increased prices to pass on the rise in raw material costs. Given the rising costs in China and limited availability of raw materials in Bangladesh and Vietnam, India has a lot of opportunities to improve its competitiveness in global markets, provided the industry invests in increasing scale and improving efficiency, especially in weaving and processing.
75
Union Budget
Textiles
Apparels and fabrics: Tariffs
Tariff (per cent) Custom s 2010-11 Cotton-based apparels 1 Non-cotton-based apparels Cotton w oven f abrics1 Non-cotton w oven fabrics Cotton knitted fabrics 1 Non-cotton knitted fabrics
1 *
Excise 2011-12 10.3 10.3 10.3 10.3 10.3 10.3 2010-111 4.1 10.3 4.1 10.3 4.1 10.3 2011-12 5.2* 10.3 5.2 10.3 5.2 10.3
10.3 10.3 10.3 10.3 10.3 10.3
Excise duty on cotton apparels and fabrics w as concessional and optional Mandatory excise duty of 10.3 per cent has been imposed on branded garments and
Cotton and cotton yarn: Tariffs, prices and landed costs

Tariff (per cent) Custom s 2010-11 Cotton yarn (40s) Cotton
1 2 3 4 1
Prices (January 2011) Dom estic (Rs/tonne) 201,267 122,113 International3 ($/tonne) 7,200 3,945
Landed cost4 Pre-budget Post-budget (Rs/tonne) 367,715 182,648 (Rs/tonne) 386,652 182,648
Excise 2010-11 4.1

2
2011-12 10.3 0.0
2011-12 5.2 0.0
10.3 0.0
0.0
Domestic price of S-6 variety and international cotton price of a comparable variety Concessional and optional excise duty of 4 per cent FOB prices Landed cost includes handling charges of 2 per cent
Man-made fibres and intermediates: Tariffs, prices and landed costs

Tariff (per cent) Customs 2010-11 2011-12 PSF 1.2d VSF 1.5d POY 126d VFY 120d PV 30s (70:30) PTA MEG Paraxylene 5.2 5.2 5.2 5.2 10.3 5.2 5.2 0.0 5.2 5.2 5.2 5.2 10.3 5.2 5.2 0.0 Excise 2010-11 2011-12 10.3 10.3 10.3 10.3 10.3 10.3 10.3 4.1 10.3 10.3 10.3 10.3 10.3 10.3 10.3 5.2 Prices (January 2011) Dom estic International1 (Rs/tonne) 107,818 167,735 119,298 325,000 170,000 67,283 61,437 n.a. ($/tonne) 1,760 n.a. 1,945 n.a. n.a. 1,420 1,195 1,615 Pre-budget Post-budget (Rs/tonne) 98,296 n.a. 108,628 n.a. n.a. 74,666 60,508 77,769 (Rs/tonne) 98,296 n.a. 108,628 n.a. n.a. 74,666 60,508 77,769 Landed cost2
PSF: Polyester staple fibre; VSF: Viscose staple fibre; POY: Partially oriented yarn; VFY: Viscose f ilament yarn; PV: Polyester viscose; PTA: Purified terephthalic acid; MEG: Mono-ethylene glycol n.a.: Not available
1 2
FOB prices Landed cost includes handling charges of 2 per cent
76
Union Budget
Textiles
Mandatory excise to adversely impact branded garment manufacturers
Company Alok Industries Ltd Gokaldas Exports Ltd Indo Rama Synthetics (India) Ltd Vardhaman Textiles Ltd Welspun India Ltd JBF Industries Ltd Arvind Mills Ltd Raymond Ltd Grasim Industries Ltd Aditya Birla Nuvo Ltd Source: CRISIL Research A A B A, B A Impact Impact factors A A
Impact factors A. A mandatory excise duty of 10 per cent has been imposed on branded readymade garments (RMG) and textile made-ups, as opposed to the 4 per cent optional excise duty they were subject to earlier. In order to enable branded RMG players to claim Cenvat credit, yarn and fabric manufacturers may be forced to pay a higher excise duty of 5 per cent vis--vis an optional and concessional 4 per cent duty that they 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. B. The reduction in customs duties on acrylonitrile and rayon grade wood pulp from 5 per cent to 2.5 per cent each will reduce raw material costs of acrylic and viscose fibre manufacturers, and improve the price competitiveness of these fibres vis--vis cotton and polyester. Notes 1. 2. 3. Increase in budgetary allocation under Technology Upgradation Fund Scheme from Rs 22.67 billion to Rs 29.80 billion is a positive for the sector. An excise duty of 5 per cent has been imposed on automatic looms and projectile looms. As handloom weavers have been unable to repay debt due to weavers cooperative societies, they have become financially unviable. In order to support these cooperative societies and weavers, National Bank for Agriculture and Rural Development has proposed to release Rs 30 billion. This initiative will benefit 15,000 cooperative societies and about 300,000 handloom weavers.
77
Union Budget
Capital markets
78
Union Budget
Equity market
Comsi Comsa (so, so) While Budget 2011-12 has not rolled back the stimulus for the markets, it is low on significant policy actions. Hence, CRISIL Equities believes it is essentially neutral for the domestic equity markets. Higher capital outlay and other policy measures for infrastructure, education and realty sectors are expected to boost sentiments and support the players growth, but the overall impact on profitability may not be significant. The government has focused on easing financing to infrastructure. The allocation to infrastructure has been raised by 23.3 per cent to Rs 2.14 lakh crore. The FII limit for investment in corporate bonds (with maturity over five years) issued in the infrastructure sector has been raised by US$20 bn. Further, the additional deduction of Rs 20,000 for investment in long-term infrastructure bonds would be extended in FY12. While these measures will facilitate financing infrastructure projects, we believe execution delays rather than financing pose a bigger challenge for infra companies. The liberalization of interest subvention of 1 per cent on housing loans and enhancing of housing loan limit to Rs 25 lakh for units under priority sector lending would be positive for players in affordable and low income housing. The 24 per cent increase in budget allocation for education is expected to be positive for the sector. The removal of STPI exemption and bringing SEZ (developers and production units) under purview of MAT would adversely impact the IT sector. On the taxation front, while reduction in surcharge from 7.5 per cent to 5 per cent is positive for normal tax paying companies, the benefit would be nullified for companies under MAT due to 0.5 percentage points increase in MAT rate. Allowing foreign investors to invest in domestic mutual funds is a key positive for equity markets and is expected to lead to higher capital flow from foreign investors. Continuing with its divestment agenda, the government has set a target of raising Rs 40,000 crore through divestment of its stake in central public sector undertakings, which we believe would be challenging in the current market conditions. The Nifty started the budget day on a positive note. However, the index was very volatile. It witnessed an intra-day high of 5477 (+3.3 per cent) and an intra-day low of 5309 (+0.1 per cent); it closed at 5,333 (+0.6 per cent) for the day.
79
Union Budget
Equity market
NIFTY NIFTY Sectoral indices AUTO METAL BANKEX HEALTH CARE 8253 15349 11840 5718 8251 15344 11832 5720 0.0% 0.0% 0.1% 0.0% The liberalisation of interest subvention of 1 per cent REALTY 1982 1956 1.3% on housing loans and enhancing of housing loan limit to Rs 25 lakh for units under priority sector lending would be positive OIL&GAS CAPITAL GOODS PSU CONSUMER DURABLES POWER TECK IT FMCG 9459 12400 8381 5632 2523 3573 6107 3432 9405 12325 8216 5631 2522 3571 6107 3286 0.6% 0.6% 2.0% 0.0% 0.1% 0.0% 0.0% 4.5% Increase in tax exemption limit expected to result in tax savings of Rs 2,060 Divestment plans of Rs 40,000 crore for FY12 5333 Close as of 28-Feb-11 25-Feb-11 5304 0.6% Budget expected to be neutral for markets Change Remarks
Source: NSE, BSE
Outlook for 2011: A tale of two halves
For 2010, the domestic consumption story played out for consumer durables, auto, FMCG, banking and healthcare sectors, helping the markets to deliver 18 per cent returns. However, realty, metals, power, infrastructure and oil & gas sectors underperformed the broader markets. Net FII inflow in 2010 was Rs 627 bn in the secondary equity markets. The year 2011 has started with strong headwinds in the form of high inflation, rising crude prices, monetary tightening and dent in corporate credibility. These domestic concerns coupled with improvement in developed economies have so far led to net selling of over Rs 130 billion in the secondary equity markets. As a result, Indian markets have not only underperformed most of the developed markets but also most emerging markets significantly in the past two months. CRISIL Equities expects domestic consumption to remain strong and India to register GDP growth of 8.3 per cent in FY12. The recent spike in crude oil prices, driven by political turmoil in the crude-producing regions needs to be closely monitored because consistently high crude prices could pose a real threat to the Indian markets given its high dependence on oil imports. This risk is accentuated by an already high inflation and there is little leeway for further monetary tightening without impacting growth. While the government targets fiscal deficit of 4.6 per cent in FY12, we believe it could be a challenge to achieve.
80
Union Budget
Equity market
Nevertheless, CRISIL Equities believes that 2011 will be a tale of two halves for the Indian market. In the first half we expect the market to continue to remain subdued due to concerns on high commodity prices, inflation and earnings downgrades while in the second half we expect potential absence/bare minimum impact of most of these factors would provide buoyancy to the markets. A strong GDP growth expectation coupled with attractive valuation could support the market in the second half. On the back of global concerns and earnings downgrade we have tempered our returns expectations. We expect the Nifty to trade at 6200-6400 (Sensex 20700-21200) by the year-end (December 31). We expect banking, IT and pharma to deliver strong returns but remain neutral on telecom and infrastructure, and negative on real estate.
FII and DII flows in secondary equity markets
(Rs bn) 300 250 200 150 100 50 0 -50 -100 -150 0 5 7x 10 Median =14x FII DII
One-year forward P/E multiple

25 19x 20 15 14x
Mar-10
Oct-10
Nov-10
May-10
Dec-10
Apr-10
Jan-10
Jun-10
Jul-10
Feb-10
Jan-11
Feb-11
Aug-10
Sep-10
Jul-06
Jul-07
Jul-08
Jul-09
Apr-06
Apr-07
Apr-08
Apr-09
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Apr-10
Jul-10
Source: NSE
Source: Industry
Jan-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
81
82
Union Budget
CMP (Rs)# (Rs mn)# 5,902 1,626 3,419 292,583 5/5 98.2 117.3 14.92 12.49 5/5 2.90 4.20 8.62 5.95 5/5 12.20 14.10 8.11 7.02 4/5 31.30 54.90 34.82 19.85 Grade EPS (Rs) (Rs) (x) (x) Impact M.Cap Remarks Valuation FY11 FY12 EPS P/E FY11 P/E FY12 Budget
Impact of budget on companies under CRISIL Equities coverage
Name
Fundamental Fair Value
Grade 1,090 99 25 1,465
(Rs)
Auto and Auto Components
Dynamatic Technologies 42
4/5
1,241
Ramkrishna Forgings
3/5
166
Kirloskar Ferrous Indus
3/5
Hero Honda Motors
5/5
1,893
Biotechnology 179 11,936 4/5 20.20 22.10 8.86 8.10
Panacea Biotec
3/5
220
Building Products 61 90 100 37 1,278 5/5 6.60 8.70 5.61 4.26 1,589 5/5 29.70 31.90 3.37 3.14 57 600 5/5 8.40 11.20 6.79 5.09 46 176 5/5 5.60 6.10 8.21 7.54
Beardsell
3/5
Orient Ceramics & Industries
3/5
Visaka Industries 84
3/5
151
Expenditure on rural housing schemes like Indira Awas Yojana increased. Expected to benefit in terms of volume growth
Somany Ceramics
4/5
Capital Markets 30 45 480 40 120 5/5 10.90 N.A. 66,898 3/5 0.90 18.90 22 16,795 5/5 1.50 1.80 14.93 533.33 3.64 20 139 5/5 6.90 7.40 2.95 2.75 12.44 25.40 NA
Union Budget Union Budget Union Budget
Sumedha Fiscal Services
2/5
JM Financial
4/5
Religare Enterprises 58
4/5
470
Qualified Foreign Investors allowed to invest in MF schemes
Lakshmi Finance & Industrial
1/5
Cements 135 104 5,920 5/5 17.80 2,009 5/5 2.10 7.60 26.10 64.21 5.85 17.74 3.99
Sagar Cements
2/5
202
Change in excise duty to impact negatively
OCL India
3/5
178
Chemicals 87 37 234 162 90 644 1,050 2,363 4/5 5/5 5/5 24 151 5/5 68 3,421 5/5 10.10 0.8 73.40 25.40 -26.30 12.10 3.8 156.40 30.80 -0.70 6.77 30.02 3.19 6.36 NM 5.65 6.11 1.50 5.25 NM continued
Dhanuka Agritech
3/5
Hydro S&S Industries
3/5
Navin Fluorine International
2/5
265
Plastiblends India
3/5
230
Punjab Chemicals & Crop
Protection
1/5
126
27
continued CMP (Rs)# (Rs mn)# 4,498 24,411 5,071 5/5 30.20 29.30 5.13 5.29 3/5 3.40 3.60 27.44 25.92 5/5 33.30 48.80 4.07 2.77 Grade EPS (Rs) (Rs) (x) (x) Impact 135 93 155 M.Cap Remarks Valuation FY11 FY12 EPS P/E FY11 P/E FY12 Budget
Name 290 85 266
Grade
(Rs)
Phillips Carbon Black
4/5
Responsive Industries
3/5
Dhunseri Petrochem & Tea
3/5
Construction & Engg. 919 208 268 286 320 353 153 1,928 5/5 40.90 59.00 3.74 2.59 110 3,643 5/5 6.10 17.00 18.10 6.49 178 3,122 5/5 32.20 38.10 5.54 4.68 192 34,838 5/5 13.80 17.20 13.88 11.14 149 3,485 5/5 25.30 35.40 5.89 4.21 624 9,257 5/5 82.40 97.30 7.57 6.41
ARSS Infrastructure Projects
2/5
C&C Constructions
2/5
Era Infra Engineering
4/5
MBL Infrastructures
3/5
Marg
3/5
MAT on SEZ developers to impact earnings
Simplex Projects
3/5
Consumer Durables 829 1,011 7,099 2/5 75.70 98.60 13.36 10.26
Symphony
3/5
Cut in Income Tax slabs and more disposable income in rural due to NREGA
Union Budget Union Budget
Consumer Finance 32 26 301 4/5 -0.05 1.60 NM 16.16
Wall Street Finance
2/5
Containers & Packaging 146 283 35 43 71 54 11,332 5/5 4.90 7.10 27 143 5/5 7.40 10.00 23 184 5/5 0.60 1.10 207 18,092 5/5 18.1 16.1 11.44 38.42 3.65 11.05 68 7,287 5/5 5.00 8.30 13.60 8.19 12.87 20.95 2.70 7.63
Everest Kanto Cylinder*
4/5
Hindustan National Glass &
Industries
4/5
Jumbo Bag
2/5
Kanpur Plastipack
2/5
Time Technoplast
4/5
Diversified Consumer Services 169 99 4,838 5/5 2.90 3.40 34.21 29.18
Aptech
3/5
Electrical Equipment 368 44 26 850 5/5 317 39,554 4/5 21.10 4.40 30.70 5.10 15.02 5.95 10.33 5.14
Havells India
4/5
Modison Metals
3/5
Energy Equipment & Services 305 136 2,273 5/5 20.50 31.30 6.61 4.33 continued
Dolphin Offshore Enterprises*
3/5
83
84 CMP (Rs)# (Rs mn)# 1,435 579 5,190 534 146 2,619 5/5 18.60 21.40 2.23 1.94 5/5 10.10 12.90 2.87 2.25 4/5 16.50 27.30 10.12 6.12 5/5 5.10 6.50 4.19 3.28 4/5 -11.00 17.30 NM 7.38 5/5 8.90 14.80 8.74 5.25 Grade EPS (Rs) (Rs) (x) (x) Impact M.Cap Remarks Valuation FY11 FY12 EPS P/E FY11 P/E FY12 Budget 78 128 21 167 29 41 39
continued
Name
Grade
(Rs)
Food Products
Harrisons Malayalam
3/5
113
Jeypore Sugar Co
2/5
152
KRBL
3/5
KSE 38
3/5
190
Increase in export duty on de oiled rice bran cakes to benefit domestic users
KLRF
2/5
Lakshmi Energy & Foods*
3/5
130
Health Care Services 465 57,984 4/5 13.40 17.10 34.70 27.19
Apollo Hospitals Enterprise
5/5
533
Hotel Restaurants & Leisure 73 41 490 5/5 5.20 5.90 7.89 6.96
Savera Industries
2/5
Introduction of 10% service tax (before adj. for 50% abatement) will impact earning given the oversupply in the industry
Union Budget Union Budget Union Budget
Power Utility 170 1,400,492 5/5 10.50 12.20 16.18 13.92
NTPC
5/5
232
Industrial Conglomerates 73 59 13,086 4/5 6.00 7.00 9.82 8.41
Century Plyboards India
3/5
Change in excise duty to impact negatively

9.09 6.58 3.07 8.01 5.18
IT Services 182 160 130 401 144 4,041 5/5 6,595 5/5 89.30 17.40 1,806 5/5 42.40 7,034 5/5 24.30 18,037 5/5 20.00 22.70 30.90 48.70 100.00 29.50
Polaris Software Lab
4/5
235
Infinite Computer Solutions
3/5
269
Non extension of STPI,SEZ under MAT regime

2.68 4.49 8.28 4.01 4.88
Omnitech Infosolutions
3/5
282
Zylog Systems
3/5
656
Spanco
3/5
289
Shipping & Shipyard 346 17,624 3/5 45.60 49.10 7.59 7.05
ABG Shipyard
3/5
348
Machinery 224 1,030 2,060 1,291 5/5 4/5 29.10 93.60 36.80 115.00 7.69 11.00 6.08 8.96 continued
Eimco Elecon India
4/5
339
Wendt India
4/5
1,229
29
continued CMP (Rs)# (Rs mn)# 20,435 4/5 39.80 58.40 12.64 8.61 Grade EPS (Rs) (Rs) (x) (x) Impact M.Cap Remarks Valuation FY11 FY12 EPS P/E FY11 P/E FY12 Budget
Name
Grade 570 503
(Rs)
Media
UTV Software Communications
3/5
Metals & Mining 58 3.8 75 593 562 35,920 3/5 45.60 44.10 12.33 12.75 61 3,553 4/5 10.30 17.20 5.94 3.56 3 1,729 5/5 0.20 0.40 13.75 6.88 31 9,680 5/5 4.20 3.30 7.37 9.38
Electrosteel Castings
4/5
Nissan Copper
2/5
MSP Steel & Power
2/5
No export duty on iron ore pellets to encourage value addition process for iron ore fines
Monnet Ispat
4/5
Oil & Gas 20 18 4,555 4/5 2.10 3.30 8.38 5.33
Confidence Petroleum India
3/5
Paper & Forest Products 67 113 80 5,032 5/5 14.90 16.40 5.38 4.89 53 4,605 5/5 4.30 11.50 12.28 4.59
Union Budget
Rainbow Papers
3/5
Reduction in customs duty on waste paper is a positive
West Coast Paper Mills
3/5
Personal Products 44 38 158 4/5 7.90 5.50 4.82 6.92
GKB Opthalmics
2/5
Pharmaceuticals 530 370 12,605 5/5 76.50 75.70 4.84 4.89
Plethico Pharmaceuticals
3/5
Real Estate 640 356 192 220 176 63 31 15 1,758 5/5 29 12,816 5/5 136 23,605 5/5 125 2,342 5/5 24.30 7.40 4.10 1.80 177 25,652 3/5 8.60 212 359,627 5/5 12.60 206 14,991 5/5 19.60 61.60 15.70 9.60 31.90 15.40 5.10 4.30 10.52 16.81 20.59 5.14 18.38 7.18 8.14 3.35 13.49 18.45 3.92 8.83 5.77 3.41
Ackruti City*
3/5
DLF
3/5
Phoenix Mills
2/5
Ashiana Housing
3/5
Omaxe
2/5
Parsvnath Developers
2/5
Interest subvention & increase in priority limit is a positive for companies in affordable housing
Vipul
2/5
Specialty Retail 152 161 2,207 3/5 21.60 25.40 7.45 6.33 continued
Thangamayil Jewellery
2/5
85
86 CMP (Rs)# (Rs mn)# 360 1,406 598 749 11,724 6,039 2,962 1,791 1,670 143 3,361 5/5 35.3 32.6 2.64 5/5 2.00 2.30 6.30 5.48 2.86 5/5 12.6 16.3 3.36 2.60 5/5 35.6 41.1 2.42 2.09 4/5 56.2 64.4 5.62 4.90 4/5 38.3 46.1 12.80 10.62 5/5 53.20 58.10 3.08 2.82 5/5 3.29 1.96 3.84 6.43 5/5 11.90 8.20 2.93 4.26 5/5 12.80 13.60 4.68 4.41 5/5 30.90 33.30 3.02 2.80 Grade EPS (Rs) (Rs) (x) (x) Impact M.Cap Remarks Valuation FY11 FY12 EPS P/E FY11 P/E FY12 Budget 93 60 35 13 164 490 316 86 42 12.6 93 75 54
continued
Name
Grade
(Rs)
Textiles & Apparel
Kandagiri Spinning Mills
2/5
141
Aarvee Denims & Exports
3/5
Excise duty on branded garments to have some impact on demand
Filatex India
2/5
Ginni Filaments
2/5
18.2
JBF Industries
3/5
232
Kewal Kiran Clothing
4/5
560
Excise duty on branded garments to have some impact on demand Excise duty on branded garments to have some impact on demand
Siyaram Silk Mills
4/5
374
Shri Lakshmi Cotsyn 59
2/5
150
Sangam (India)
3/5
Jasch Industries
2/5
16.4
Union Budget Union Budget
Nahar Spinning Mills
3/5
136
* Grading is under review
# As on Feb 28, 2011
Explanation of CRISIL Fundamental and Valuation Grade

CRISIL Valuation Grade 5/5 4/5 3/5 2/5 1/5 Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP) Assessment
CRISIL
Assessment
Fundamental Grade
5/5
Excellent fundamentals
4/5
Superior fundamentals
3/5
Good fundamentals
2/5
Moderate fundamentals
1/5
Poor fundamentals
31
Union Budget
Mutual funds
Sharp decline in mutual funds assets under management during 2010; retail participation expected to increase in 2011 The domestic mutual fund industry was impacted by liquidity tightening in the banking system, which resulted in systemic outflows from the industry. A key factor for the tight liquidity was the 3G/broadband auctions in the latter half of the year, from which the government collected over Rs 1 trillion. The industrys average assets under management (AAUM) declined by 15 per cent to Rs 6.78 trillion in December 20101 from Rs 7.96 trillion in the year-ago period.
Industry AUM and net flows during 2010
8.5 2200 1700 8.0
7.5
700 200 -300 -800 -1300
7.0
6.5
Jan-10
Mar-10
Feb-10
May-10
Jun-10
Nov-10
Net flows (Rs billion)
Industry AUM (Rs trillion)
Source: Association of M utual Funds in India (AM FI)
Mutual funds experienced net outflows aggregating Rs 0.91 trillion in 2010 compared with net inflows of Rs 1.43 trillion in 2009. Debt-oriented funds (mainly ultra short-term debt funds) accounted for the majority of these outflows, at Rs 0.83 trillion. In January 2011, the industry recouped most of the losses with inflows of Rs 0.84 trillion, the highest since April 2010. Money market funds registered the highest inflow at Rs 0.73 trillion, followed by income funds at Rs 0.10 trillion. Debt-oriented funds continued to garner a major share of the mutual fund assets at 68 per cent as of January 2011 vis--vis 70 per cent in the year-ago period. Equity-oriented funds accounted for the rest.
The Association of Mutual Funds in India (AMFI) has stopped disclosing monthly AAUM numbers from October 2010 and moved to a quarterly disclosure format starting quarter ended December 2010.
Dec-10
Aug-10
Sep-10
Jan-11
Apr-10
Jul-10
6.0
-1800
Oct-10
Net flows Rs billion
AUM Rs trillion
1200
87
Union Budget
Mutual funds
The industry remained top heavy, with the top five mutual funds accounting for 56 per cent share of the AUM, while the top 10 funds had 79 per cent share as of December 2010. The bottom-10 fund houses continued to account for less than 1 per cent of the industry assets. CRISIL Fund Services expects various market participants to continue to play a complementary role to enable retail participation. The regulator has initiated this by empowering investors through the removal of exit load, asking for simpler products and creating transparency in disclosure. Moreover, distributors have moved to an advisory model with a focus on investor goals, and asset managers have started investor education programmes and introduced financial planning-embedded products. Important regulations during the year from SEBI were as follows: o o o o All mutual fund investors now need to comply with know-your-customer (KYC) norms from January 1, 2011. In the past, retail investors who had invested less than Rs 50,000 were not required to follow KYC guidelines. Mutual fund investors now receive a weekly consolidated statement of their transactions instead of the monthly statement. Period for New Fund Offers (NFO), except for Equity Linked Savings Schemes (ELSS), was reduced to 15 days from 30-45 days w.e.f. July 1, 2010. SEBI modified the provisions regarding valuation of debt securities from August 1, 2010. Mutual funds now need to value debt securities with maturity of 91 days and more at the weighted average price at which they are traded on the valuation day. Budgetary measures and their impact 1. Foreign individual investors allowed to invest in mutual funds To liberalise the portfolio investment route, the government has decided to permit SEBI-registered mutual funds to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes. Currently, only FIIs and sub-accounts registered with the SEBI and NRIs are allowed to invest in mutual fund schemes.
Impact
This will widen the investor base of mutual funds and give non-SEBI registered foreign investors an opportunity to invest in Indian equity markets. The measure will also provide an avenue to boost AUM of equity mutual funds. More innovative and technology-enabled products with enhanced risk management practices are expected to be launched for overseas investors.
88
Union Budget
Mutual funds
2. Increase in FII limit in corporate bonds To enhance the flow of funds to the infrastructure sector, the FII limit for investment in corporate bonds, with residual maturity of over five years issued by companies in the infrastructure sector, is being raised by US$20 billion. This takes the additional limit to US$25 billion, and will raise the total limit available to FIIs for investment in corporate bonds to US$40 billion. FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of 3 years and will be allowed to trade amongst themselves during the lock-in period.
Impact
Although an increase in FII limit is a positive factor, the corporate bond market is expected to remain rangebound as the appetite for investment in infrastructure bonds by FIIs, which till now was US$5 billion, has not been utilised to its fullest. However, over the coming years, we expect the infrastructure sector to increase its share in the corporate bond market. Further, participation by FIIs will improve the overall depth of the Indian debt market. 3. Increase in allocation towards infrastructure bonds For 2011-12, the allocation for the infrastructure sector is over Rs 2,140 billion a y-o-y growth of 23.3 per cent. To give a boost to infrastructure development in railways, ports, housing and highways development, the government proposes to allow tax-free bonds of Rs 300 billion to be issued by various government undertakings in 2011-12. This includes Indian Railway Finance Corporation (Rs 100 billion), National Highway Authority of India (Rs 100 billion), HUDCO (Rs 50 billion) and ports (Rs 50 billion).
Impact
The continued thrust on infrastructure funding is expected to result in an increasing appetite for infrastructure-oriented mutual funds. The focus on infrastructure projects is likely to result in an increasing number of corporate bond and equity issuances for fund raising by infrastructure companies and institutions. This will expand investment avenues for mutual funds. It will also boost investment avenues for major market participants such as insurance companies and PF trusts, enabling them to utilise their investment limit in additional category as defined in their investment guidelines in these bonds.
89
Union Budget
Mutual funds
4. Setting-up of notified infrastructure bonds To attract foreign funds for infrastructure financing, the government proposes to create special vehicles in the form of notified infrastructure debt funds. The income of these funds would be exempt from tax.
Impact
This measure could lead to fund flow from private equity players and major overseas hedge funds. The added tax incentives could lead to an increase in allocation of their investments into emerging market debt through these funds. 5. Life insurance companies come under service tax net Services provided by life insurance companies in the area of investment are proposed to be brought into the tax net along the same lines as ULIPs.
Impact
This may have a negative impact on the bottomline of insurance companies. The incremental impact can be more on insurance companies that have a larger share of non-ULIP products. 6. Penetration of Swavalamban pension scheme The co-contributory pension scheme - Swavalamban - announced in the previous Budget has received over 4 lakh applications from workers in the unorganised sector. Based on feedback, the government proposes to relax the exit norms whereby a subscriber under Swavalamban will be allowed to exit at the age of 50 years instead of 60 years, or a minimum tenure of 20 years, whichever is later. Further, it is proposed to extend the benefit of the governments contribution from three to five years for all subscribers of Swavalamban who enroll during 2010-11 and 2011-12. An estimated 20 lakh beneficiaries are expected to join the scheme by March 2012.
Impact
The proposal to advance the exit age and extension of the governments contribution to five years from three years will help increase the penetration levels of the scheme.
90
List of Industries analysed by CRISIL Research

Automobiles Automotive Components Cars and Utility Vehicles Commercial Vehicles Tractors Two-wheelers Tyres Chemicals Chlor Alkalies Commodity Chemicals Petrochemicals Pharmaceuticals Consumer Products Distillers and Brewers Household Appliances Sugar Tea Energy Coal Crude Oil Natural Gas Power Refining and Marketing Renewable Energy Sources Industrials Cement Fertilisers Paper Infrastructure Airport Infrastructure Construction Housing Ports Roads and Highways Telecom - Services Telecom Data Services Metals Aluminium Steel Products Steel Intermediates Services Airline Services Banking Domestic Freight Transport Services Educational Services Hotels Hospitals IT-enabled Services IT Services Media and Entertainment Retail Finance - Auto Retail Finance - Housing Retailing Shipping Textiles Cotton Yarn Man Made Fibres Readymade Garments
Sectors covered in MESCOR (Mid-size emerging segments and company research) Automotive Castings Cold Chain Container Freight Stations/Inland Container depot Earth Moving Equipments Material Handling Equipments Oil-field Equipments & Services Pharma: Bio-pharma Pharma: Bulk Drugs Pharma: Contract Research Power Cables Power Transformers Power Transmission Towers Steel Pipes Telecom Towers & Allied Services Warehousing
Special reports City Real(i)ty: An independent view of 10 cities in India SME: Sectors and clusters attractiveness Industry Risk score on 139 industries

CRISIL S Union Budget Analysis 2011 12

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CRISIL S Union Budget Analysis 2011 12

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CRISIL Research

Highlights Detailed economic analysis

CRISIL RESEARCH ANALYSIS, FEBRUARY 28, 2011

Equity market Mutual funds

CRISIL RESEARCH ANALYSIS, FEBRUARY 28, 2011

Table 2: Assessment of Key Macro Risks (2011-12 Vs 2010-11)

Table 3: Market borrowings

FY10 (A) 4,176 95 4,510 526 3,984

FY11 (RE) 4,010 84 4,470 1,116 3,354

FY12 (BE) 4,128 83 4,166 736 3,430

Fig 2: Incremental Expenditure

16.2 18.2 1.5 17.9

Rev enue expenditure

Capital expendi ture

Source: Budget documents

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

Fig 4: Growth in central plan outlay, yoy

FY11 (RE over actual) 156.2

FY12 (BE over RE)

75.5 45.4 15.1 4.9 11.7 3.5 -5.5 40.7

33.7 22.3 22.0 14.5 21.9 24.4 20.4

Source: Budget documents

Fig 6:% of total government expenditure

Total Funds to Dept of Rural dev Rural housing other prog

Source: Budget documents, CRISIL estimates

Source: Budget documents, NREGA reports

Overall sectoral impact

Overall sectoral impact

Overall sectoral impact

Overall sectoral impact

Industry Media and Entertainment

Overall sectoral impact

Overall sectoral impact

Industry Roads & highways

Overall sectoral impact

Overall company impact

Overall company impact

Overall company impact

Overall company impact

Auto Components & Tyres

Auto Components & Tyres

Excise 2010-11 10.3 10.3 2011-12 10.3 10.3

2011-12 7.7 10.3

Raw materials for auto components

Tyres: Tariffs, prices and landed costs

Prices (Jan 2011) Domestic (Rs/tonne) International ($/tonne) -

Landed costs (Rs/tonne) Pre-budget Post-budget

Excise 2010-11 2011-12 10.3 10.3

7.7 10.3 10.3 10.3 5.2

20.0 10.3 10.3 10.3 5.2

10.3 10.3 10.3 10.3

10.3 10.3 10.3 10.3

220,750 n.a. 187,000 n.a. n.a.

5,520 3,300 3,600 4,700 n.a.

286,000 165,411 183,225 252,000 n.a.

287,000 165,411 183,225 252,000 n.a.

Auto Components & Tyres

Impact factors C,D C,D C,D C,D C,D

Excise 2010-11 2011-12

10.3 22.7* 22.7* 22.7* 10.3 10.3 10.3 10.3 10.3

10.3 22.7* 22.7* 22.7* 10.3 10.3 10.3 10.3 10.3

10.3 10.3 7.7