Budget: Positives & Negatives

Pioneer Investcorp Limited has analysed the Budget presented by the Finance Minister Pranab Mukherjee and it gives its views, both negative and positive, of the impact of these proposals on various sectors of the economy.

BUDGET IMPACT

IT

STPI extension
The government announced a one-year extension of the tax holiday scheme for software exporting firms up to March 2011.

We believe that this would have limited impact on Infosys & TCS since most of their centers have already come out of the tax holiday. The extension will reduce the tax liability for other companies by ~2-4% but for Wipro and HCL Tech this could have upside in the range of ~4-6%.

FBT

Fringe Benefit Tax on the value of certain fringe benefits provided by employers to their employees to be abolished.

The removal of FBT will be positive for the Indian IT companies despite the fact that most of the Indian IT companies use to pass on this tax to employees. The removal will lead lower over-head cost and could hence help containing some general and admin expenses. We believe that actual impact of this would be negligible on the margin.

Packaged Software

The government has also exempted the packaged software from companies like Microsoft (Windows) and Oracle (ERP) from excise duty and CVDs.

We believe that this will make the prices of this software cheaper and affordable for small IT firms. The actual impact of this would be less than ~1% (+ve) on the gross margin for most of the Indian IT companies.

MAT

Minimum Alternate Tax (MAT) to be increased to 15% of book profits from 10%. The period allowed carrying forward the tax credit under MAT to be extended from seven years to ten years.

This is expected to marginally increase the tax liability for the Indian IT companies that are entitled to tax liability under the MAT. Benefits of MAT can be carried out for 10 years instead of earlier 7 years. The increase in the tax will be P&L neutral but it will have impact on the cash flow. The increase in the tax rate will be offset by creating deferred tax asset to be used after end of STPI benefit.Though the company will loose on the interest income of the cash tax paid.

UID project

The government plans to spend Rs 120cr towards the Unique ID project. The first set of unique ID number to be rolled in 12-18 months.

This is will a positive for the Indian IT vendors like Infosys, Wipro & TCS which have done a large amount of work for the Indian government in the past.

PHARMA

As in the past, the budget has largely been a non event for the Indian healthcare sector. We highlight some of the smaller changes and the companies that it is likely to impact.

Custom duty cut for 10 imported molecules

Cut in custom duty and exemption from Excise for 10 products used in the treatment of breast cancer, hepatitis-B, rheumatic arthritis etc. These molecules are Abatacept, Daptomycin, Entacevir, Fondaparinux Sodium, Influenza Vaccine, Ixabepilone, Lapatinib, Pegaptanib Sodium injection, Suntinib Malate, Tocilizumab.

Companies likely to marginally benefit from this include GSK India, Dr Reddy’s, Cipla, and Ranbaxy.

Increase in MAT rates from 10% to 15%

This will impact the tax provision for most Pharma companies although they will get a period of 10 years (v/s 7 years earlier) to claim credit on the same. This remains neutral from a P&L perspective while it may have impact on the cash flows to the tune of the higher tax element.

FBT abolishment

Piramal and Ranbaxy pay the highest FBT among most Indian Pharma companies and are likely to witness earnings upgrade of 2-3% on the abolishment of the same.

CEMENT

Proposal
No change in excise duty

Impact

Increase in excise duty was widely anticipated, however budget has maintained status quo. Positive for the sector

Proposal

Service tax imposed on transportation by railways

Impact

It will increase the freight cost for the cement companies as they are largely dependent on railways for movement of goods. Negative for the industry

AUTO
Proposal
Specific excise duty on vehicles of more than 2000cc reduced by Rs 5000. Now the excise duty stands at 20%+Rs15000

Impact

Fell short of expectations. It was expected that government will do away with specific excise duty completely. Likely beneficiary is Mahindra & Mahindra and premium segment car manufacturer.

Proposal
Excise duty on Petrol driven trucks reduced to 8% from earlier 20%

Impact

Petrol driven trucks is a marginal segment, as majority of trucks are diesel driven. Hence this proposal is not going to have any major impact on manufacturers

Proposal

150% Weighted deduction on Automobile R&D extended

Impact

All the companies will be benefitting, however this was on anticipated lines

POWER & INFRA

The Budget highlighted government’s focus on the infrastructure sector by way of raising sectoral investments to 9% of GDP by 2014. IIFCL has been guided to evolve a takeover financing scheme in consultation with banks to facilitate incremental lending to infrastructure sector. It will refinance 60% of commercial bank loans for PPP projects in critical sectors over the next 15-18 months. IIFCL and Banks are now in a position to support projects involving total investment of Rs 1,000 bn.

Highways & Railways (Positive Impact)

Allocation to National Highways Authority of India (NHAI) for the National Highway Development Programme (NHDP) increased by 23% over B.E. 2008-09 in B.E. 2009-10 and allocation for Railways increased from Rs108bn in Interim B.E. 2009-10 to Rs158bn in B.E. 2009-10.

Urban Infrastructure (Positive Impact)

Allocation under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) stepped up by 87% to Rs129bn in B.E. 2009-10 over B.E. 2008-09. Allocation for housing and provision of basic amenities to urban poor enhanced to ~Rs40bn in B.E. 2009-10. This includes provision for Rajiv Awas Yojana (RAY), a new scheme announced. Provision for the project BRIMSTOWA initiated in 2007 and funded through Central Assistance to address the problem of flooding in Mumbai, enhanced from Rs2bn in Interim B.E. 2009-10 to Rs5bn in B.E. 2009-10 to expedite completion of the project.

Power (Positive Impact)

Allocation under Accelerated Power Development and Reform Programme (APDRP) increased by 160% to Rs21bn in B.E. 2009-10 over B.E. 2008-09.

Accelerated Irrigation Benefit Programme (Positive Impact)

Allocation under Accelerated Irrigation Benefit Programme (AIBP) increased by 75% over B.E. 2008-09. Allocation under Rashtriya Krishi Vikas Yojana (RKVY) stepped up by 30% in B.E. 2009-10 over B.E. 2008-09.

Bharat Nirman (Positive Impact)

Allocation for Bharat Nirman increased by 45% in 2009-10 over B.E. 2008-09. Allocations under Pradhan Mantri Gram Sadak Yojana (PMGSY) increased by 59% over B.E. 2008-09 to Rs120bn in B.E. 2009-10. Under Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), allocation increased by 27% to Rs70bn. Allocation under Indira Awaas Yojana (IAY) increased by 63% to Rs88bn in B.E. 2009-10. Allocation of Rs20bn made for Rural Housing Fund (RHF) in National Housing Bank (NHB) to boost the resource base of NHB for refinance operations in rural housing sector.

Top Picks / Possible Beneficiaries

• IRB Infra – BUY (TP Rs182)
• IVRCL – HOLD (TP Rs352)
• Patel Engineering – BUY (TP Rs507)
• Simplex Infra – BUY (TP Rs467)
• Madhucon Projects – BUY (TP Rs173)
• C&C Constructions – BUY (TP Rs180)
• J Kumar Infraprojects – BUY (TP Rs127)
• Kalpataru Power Transmission Ltd. (Not Rated)
• Jyoti Structures Ltd. (Not Rated)

Tax Proposals

Fringe Benefit Tax on the value of certain fringe benefits provided by employers to their employees to be abolished. (Impact – Positive)

Minimum Alternate Tax (MAT) to be increased to 15% of book profits from 10%. The period allowed carrying forward the tax credit under MAT to be extended from seven years to ten years. (Impact - Negative)

OIL & GAS

Govt to set up Natural Gas Highway for gas distribution. A national gas grid will be set up. Should benefit transport players like GSPL (enhanced volumes) & GAIL. Also should benefit pipe manufacturers. Tax holiday extended for mineral oil and natural gas included under the holiday (Section 80 I B). Should benefit upstream players like ONGC and Reliance. Further upsides in the form of clarity of oil pricing with an expert group to be set up for that purpose.

LOGISTICS

Increased allocation for National Highways (up 23%) and Railways (up 46%). This should benefit logistic players indirectly with more infrastructure and activity

CORPORATE NEWS

Sun Pharma : Caraco has announced that it is cutting its workforce by 350 employees of the base of ~670 in light of the development of the US FDA action against the company. This indicates the lack of clarity on the part of the company regarding the time lines of the resolution of the issues with the US FDA.

We re-iterate our Sell with a target price of Rs973, based on 16x FY10e recurring earnings of Rs60.

Hindustan Dorr Oliver Ltd has bagged an order from CIDCO, Navi Mumbai, for 70MLD Sewage Treatment Plant coming up in Kharghar, Navi Mumbai. The project value is Rs 603mn and completion period is 24 months. This is repeat order from same customer in past 2 years. The project also includes 5 year Operation and Maintenance.

MARKETS

Markets are expected to be volatile & may move in a band of 4100-4250 during the day.