Budget Impact - Oil & Gas Sector

Oil & Gas:

THE HIKE IN CUSTOMS AND EXCISE DUTY TO CUT INTO THE PROFIT OF MANY REFINING COMPANIES.
*Increase in MAT by 3%.
*Hike in custom duty on crude oil and other refined products.

*A Re 1 hike in excise duty on petrol and diesel.

The rise in customs and excise duties is expected to have a negative impact on refineries. Under-recoveries for the refiners is expected to increase by Rs 13,200 Cr in 2010-11 and Rs 14,100 Cr in 2011-12 due to the rise in custom duty. The Re 1 rise in excise duty is expected to increase under-recoveries for refiners by Rs 10,600 Cr in 2010-11 and Rs 11,400 Cr in 2011-12. According to Religare Hichens, increase in minimum alternative tax is expected to negatively impact Reliance Industries' earnings per share (EPS) by Rs 2 in 2010- 11 and Rs 3.8 in 2011-12. The EPS of Cairn India is expected to get negatively impacted by Re 1 in 2010-11 and Rs 1.4 in 2011-12.

Impact: The hike in customs duty will have a negative impact on Reliance Industries and oil marketing companies like Essar Oil and MRPL but it is positive for ONGC and Oil India.

COMPANIES MAY PASS ON THE INCREASE IN COST DUE TO HIGHER EXCISE DUTY TO THE CONSUMER.

The Budget failed to address the under-recovery issue and the Finance Minister indicated that a decision on Kirit Parik Committee recommendations will be taken in due course by the Petroleum Ministry. Nevertheless, apart from the industrywide changes in MAT rate and surcharge, there were few sector-specific duty changes.

A] Customs duty on crude hiked from nil to 5%:

The Budget has proposed an increase in customs duty on crude from nil to 5%. Earlier in June 2008, the government had reduced customs duty from 5% to nil to give some respite to oil companies from higher crude prices (Brent had peaked at US$147/bbl v/s last 6-month average of US$74/bbl).

B] Duties on petrol and diesel hiked:

An increase in customs duty on petrol and diesel from 2.5% to 7.5% and from 5% to 10% on other refined products is proposed. Also, specific duty hike of Rs1/liter on petrol and diesel is proposed.

C] MAT rate increased to 18%, surcharge lowered:

*MAT would increase from 15% to 18%. This is the second consecutive year of MAT rate hike; in FY10, MAT was hiked from 10% to 15%.

*Surcharge on income tax is reduced from 10% to 7.5%. For a full-tax paying company, tax rate will reduce from 34% to 33.2% and for a MAT paying company tax rate will increase.

D]Clarity on subsidy sharing post decision on Parikh Committee recommendations:

*During 9MFY10, upstream shared 100% of the auto fuel under-recoveries and the government compensated Rs120b to OMCs as against domestic fuel losses of Rs209b.

*The Budget document indicates Petroleum Ministry demand of Rs253b towards subsidy to OMCs as against estimated domestic fuel losses of Rs311b. However, clarity on the final FY10 subsidy would only emerge post decision on the Kirit Parikh Committee recommendations.

Impact:
*Additional customs duties will fetch Rs155b and increase in excise duties on petrol and diesel will fetch Rs86b for the government.

*Retail prices of petrol and diesel have been increased by Rs2.7/liter and Rs2.5/liter, respectively, neutralizing the impact of increase in duties.

*EPS estimates for RIL will be reduced by ~3.5% and increase for ONGC by ~3% for FY11 and FY12. We will wait for more clarity on Cairn and OMC's before revising our estimates. The Budget does not impact GAIL, IGL and GSPL.

Budget Impact - Realty Sector

Real Estate:

SATELLITE TOWNSHIPS AND CITIES TO GET A BOOST DUE TO HIGHER ALLOCATION TO RAIL, ROAD AND PORTS

*Interest rate subvention of 1 per cent for property loans extended

*Higher allocation for housing and urban poverty alleviation

*Increase in allocation for Rajiv Awas Yojana (RAY) for slum dwellers and urban poor

*Pending projects given another year for claiming deduction on profits under Section 80IB (10).

The continuation of one per cent interest rate subvention will help improve volumes in the affordable housing segment. The higher fund allocation for Rajiv Awas Yojana and Indira Awas Yojana should benefit residential segments in both urban and rural centres. The increase in allocation for slum redevelopment to Rs 1,270 Cr should give a boost to companies involved in the rehabilitation business. The permission to use external commercial borrowing money for cold storages will give a boost to industrial and logistics parks. The higher allocation to rail, road and port infrastructure and impetus to special economic zones (SEZs) will have a cascading impact on real estates it will lead to the development of satellite townships and cities.

Impact: Should benefit HDIL, Indiabulls Real Estate, Unitech, DLF, Orbit Corporation and DB Realty.

The Union Budget 2010-11 is Negative for the real estate industry. Not only have key industry expectations such as (i)increase in income tax deduction under Sec 24(B) for housing loans from Rs0.15m to ~Rs0.25m, (ii) industry status for the real estate sector, and (iii) reforms for introduction of REITs in India not been met, but the scope of service tax has also been expanded, which will lead to a ~3% impact. However, measures aimed at increasing disposable income in the hands of consumers and continuation of interest cost subvention benefits for affordable housing for FY11, are positive.

Explanation of service tax on developers: The government has issued an explanation on the service tax payable by developers. The tax has now been broad-based to include all new buildings intended for sale, wholly or partly by the builder at any stage of the building or after the construction. Industry is still awaiting clarification on whether this service tax is applicable on construction cost or on sale value. Currently, the consensus view is that this tax is applicable on the construction cost and not on the sale value of a building. If the tax is on construction, it would imply a service tax burden of 6-7% for the builder (labor attracts 10% tax and work contract attracts 4% of tax), which would imply a burden of 2-3% on the sale value(assuming 40-50% profit margin and deducting land cost). While clarity on this is still awaited, our view is that this tax is likely to be inflationary.
Higher disposable incomes to boost affordability: The real estate sector is likely to be a key beneficiary from the tax slab rationalization, aimed at increasing disposable income of consumers. The rationalization of tax brackets would lead to lower tax incidence for 60% of the tax payers and would increase affordability for potential homebuyers.

Continuation of interest subvention of 1% for loans up to Rs1m for property priced up to Rs2m: This is positive for companies with focus on affordable housing such as Unitech, Purvankara, HDIL, Sobha, etc.

Allocation for urban development increased by 75% from Rs30.6b to Rs54b: Allocation for Housing and Urban Poverty Alleviation has been raised from Rs8.5b to Rs10b: This is positive for real estate, as it would facilitate urbanization of key metros, boosting demand for real estate. Increase in allocation for the Rajiv Awas Yojna to Rs12.7b from Rs1.5b: This is positive for real estate, as it would aid urbanization by encouraging states to provide property rights to slum dwellers.

Increase in allocation for the Indira Awas Yojna to Rs100b: This is positive for real estate, as it would augment the pace of rural housing.

One-time interim relief to the real estate sector: The government has allowed completion of pending projects within a period of five years v/s four years for claiming deduction on companies' profits. Norms would be relaxed for built-up area of shops and other commercial establishments in housing projects to enable basic facilities for their residents. This is positive for real estate companies as it allows them to claim deductions for an additional year.

Sector view:

The Union Budget 2010-11 is Negative for the real estate industry. The sector continues to be firmly set for recovery, following the successful balance sheet recapitalization by key companies and the pick-up in activity. Recent underperformance of large cap real estate companies coupled with the recent price correction provides investors an opportunity to accumulate real estate stocks at ~25% discount to NAV. We believe that the two key catalysts that would drive stock performance in the medium-term are: (1) recovery in the commercial and retail verticals, and (2) visible acceleration in execution. Our top large cap picks are DLF and Unitech (recently upgraded to Buy). Within mid-caps, we like Anant Raj, Mahindra Lifespaces and Phoenix Mills.

Budget Impact - Infrastructure

Infrastructure:

HIGHER ALLOCATION TO THIS SECTOR SHOULD COUNTER THE IMPACT OF THE INCREASE IN MAT

*Higher budget allocation for infrastructure

*Increase in deduction under Section 80C of the IT Act

*Increase in IIFCL disbursement targets

Higher budget allocation of Rs 1.73 lakh core for infrastructure segments like roads, railways and schemes like JNNURM is expected to benefit companies operating in this space. The allocation for roads has been increased by 13.5 per cent to Rs 19,894 from Rs 17,520 Cr in 2009-10.

While the allocation for railways has been increased by 6% to Rs 16,752 Cr, the outlay for urban development has been beefed up by 80% to Rs 5,400 Cr. Even though the increase in MAT is expected to have negative impact, the increased allocation for the infrastructure segment is expected to result in larger orders for road construction and engineering companies.

Impact: Companies like IRB Infrastructure, Nagarjuna Construction, Gammon Infrastructure and Madhucon Projects involved in construction business. Increase in MAT is expected to have a slightly negative impact on the cash flows of GVK and GMR Infrastructure.

Union Budget 2010-2011 has continued the thrust on infrastructure development and has increased budgetary allocations for most segments. Budget allocation for the infrastructure sector stands at Rs1,735b, which accounts for 46% of plan spending. India Infrastructure Finance Company Limited (IIFCL) has disbursed Rs90b of funding for infrastructure projects till FY10E, which is expected to increase to Rs200b by FY11E. To further encourage fund raising for various NBFCs, banks, etc, the Budget has provided for deduction of up to Rs20,000 under section 80CCF by an individual (over and above the investment limit of Rs100,000 under section 80C). Increase in MAT rate from 15% to 18% is largely neutral, as it is a tariff adjustment and thus a pass-through for major infrastructure projects through "change in laws of land" clause. Service tax net has been expanded to cover services at airport, ports, etc; which is negative for project developers.

A] Key Budget Incentives that will drive demand

Bharat Nirman: Increased allocation to Rs480b in FY11BE, up from Rs453b in FY10BE and Rs409b in FY09.

Jawaharlal Nehru National Urban Renewal Mission (JNNURM): Allocation for FY11E increased to Rs116.2b v/s Rs63.3b in FY10RE (and Rs129b in FY10BE). The scheme caters to various projects in segments like Water Supply, Sanitation, Transportation, Roads and Housing in urban areas.

Accelerated Irrigation Benefit Program: Budget allocation for FY11 increased to Rs115b from Rs97b during FY10BE.

National Highway Development Program: Budgetary allocation has increased from Rs175b in FY10BE to Rs199b for FY11BE.

Key beneficiaries: Project developers like GMR Infrastructure, GVK Power and Infrastructure, IRB Infrastructure, Gammon, Larsen & Toubro; and also construction companies like Nagarjuna Construction, Simplex, HCC, etc.

B] Focus on facilitating funding for infrastructure projects

India Infrastructure Finance Company Limited (IIFCL) has disbursed Rs90b of funding for infrastructure projects till FY10E, which is expected to increase to Rs200b by FY11E. IIFCL has refinanced bank lending to infrastructure projects of Rs30b during FY10E and is expected to more than double in FY11. The take-out financing scheme announced in the last Budget is expected to initially provide finance for about Rs250b in the next three years.

To further encourage fund raising for various NBFCs and banks, the Budget has provided for a deduction of up to Rs20,000 u/s 80CCF by an individual (over and above the investment limit of Rs100,000 u/s 80C). This amendment is proposed to take effect from 1 April 2011 and will, accordingly, apply in relation to the assessment year 2011-12.

C] Widening service tax net on infrastructure assets

The Budget has widened service tax net to include 'airport services, 'port services', and 'other port services'. We understand that all services provided entirely within the airport/port premises would be classified as taxable services, without any authorization from the airport/port authority.

We also understand that scope of air passenger transport service is being expanded to include domestic journeys and international journeys in any class, and thus will attract service tax.

Negative: Project developers like GMR Infrastructure, GVK Power and Infrastructure, Mundra Port, etc would be negatively impacted, as this could impact passenger spend. While service tax on aero revenues at airports is a tariff adjustment and thus a pass-through, service tax on non-aero revenues will possibly have to be borne by the project developers. Also, GMR Infrastructure is already providing service tax on UDF at Hyderabad airport (impact to company); now the scope could be expanded.

D] Increase in MAT rate to 18% from 15%

The increase in MAT rate for infrastructure sector is likely to impact earnings as well as cash flows of project SPVs, and therefore, valuations. We understand that companies can create deferred tax assets in the P&L account and lower impact on the earnings.

Neutral / Negative: Project developers like GMR Infrastructure, GVK Power and Infrastructure, IRB, Larsen and Toubro, Mundra Port, etc will be impacted. Projects awarded through a competitive bid will entail adjustment to the tariffs and thus pass-through. Other projects will be impacted; for instance non-aero revenues at airports.

E] Flexibility in disposal of road construction equipment

Specified road construction machinery items are presently fully exempt from customs duty, subject to specified conditions. Sale or disposal of such machinery items was earlier permitted only after five years; now the sale/disposal is being permitted post payment of customs duty at depreciated value.

Positive: Several construction companies take contracts in JVs, and now such JVs can acquire road machinery. Previously, this was not tax-efficient as most projects are executed within 3-4 years.

Budget Impact - POWER Sector

Power:
PROPOSAL TO CREATE A COAL REGULATOR SHOULD MAKE THE PROCESS OF MINE ALLOCATION MORE FAIR

*Increase in planned allocation for power sector
*Key components of rotor blades exempt form excise duty
*Proposal to set up a coal regulator
*Clean energy cess on coal (both domestic and imported)

The plan allocation for power sector has been increased by 130%. Excluding RGGVY, the allocation has been increased from Rs 2,230 Cr to Rs 5,130 Cr, a positive for the power sector. The proposal to set up a coal regulator is also a good sign as delay in coal block allocation and lack of transparency in the mine allocation process is affecting expansion plans of companies. The 61 per cent increase in plan outlay for the ministry of new and renewable energy is seen as a positive development for equipment manufacturers.

Impact: Increased power allocation may benefit companies like KEC, Jyoti, EMCO and Crompton Greaves. However, increase in the coal energy cess can have a marginally negative impact on coal importing companies like Tata Power, GVK, Lanco and Adani Power. Suzlon is expected to benefit from the exemption of excise duty on key components for manufacturing rotor blades for wind power.
[A] Focus on power sector capacity addition: The government has accorded highest priority to capacity addition in power sector and has initiated steps to expedite the same. Budget 2010-11 provides for exemption of customs duty for mega power projects, for which power supply is tied-up on competitive bid mechanism.

[B] Rationalization of coal resources / plans to appoint coal regulator: Sufficient coal availability is likely to be a key constraint for the power sector; and to address the issue, the Budget has announced various initiatives.

Award coal blocks for captive mining through competitive bid mechanism (CBT). This, we believe is the key positive, as this would drive the private sector to expedite mine development.

"Coal Regulatory Authority" is proposed to be created to offer a level playing field in the coal sector.

[Utilities (Positive): NTPC, Tata Power, Reliance Power, Adani Power, JSW Energy. Capital Goods (Positive): BHEL, L&T, etc]
[C] Increase in defense spending: The government has increased budgetary allocation for capital expenditure on defense sector in FY11BE to Rs600b (+9%YoY) v/s Rs548b during FY10BE.

[Positive: BEL, L&T]

[D] MAT rate increased to 18% from 15%: Under section 80-IA, power and infrastructure development was eligible for 100% tax exemption for 10 years out of any 15-year block. Thus, the developer was liable to pay MAT rate of tax during the years of 80-IA benefit.

Impact on power sector companies: Power sector firms under the regulatory regime such as NTPC and Powergrid get tax as pass-through in tariff. So, the hike in MAT rate has no implication on the profitability of these companies.
[E] Electricity generation from SEZ brought under customs net: Currently, electricity generation from SEZ supplies to Domestic Tariff Area is fully exempt from customs duty. Now, such sales of electrical energy would attract duty of 16% ad valorem + Nil special CVD. This change is being made retrospectively w.e.f. 26 June 2009. Exemption on supplies or imports of electrical energy, other than the above, would however continue.

[Négative: Adani Power]
[F] Transmission exempt from service tax: Budget has proposed to exempt transmission of electricity from service tax net, while electricity exchanges have been brought under service tax. This will lower the cost of power transmission.
[G] Excise rate increased to 10% from 8% on capital goods: Hike in basic rate of excise duty for all manufactured goods from 8% to 10% is marginally negative, as it could make domestic equipment slightly less competitive, as peak rate of customs duty is kept unchanged.

[Négative: Siemens, ABB, Crompton Greaves, Areva]
[H] Increased allocations towards APDRP, etc: Budgetary allocations to the sector have increased to Rs51.3b in FY11BE from Rs22.3b in FY10 (excluding RGGVY).
[I] 80IA benefit status quo till March 2011: The Budget has not clarified on the key industry expectation of extending deadline for claiming 80IA deadline for power generation projects commissioned post FY11. Our NPV factors in that projects commissioned post FY11 will also continue to enjoy section 80-IA benefits.
[J] Development and promotion of clean energy / environment management:

To build the corpus of National Clean Energy Fund, clean energy cess on coal produced in India at a nominal rate of Rs50 per ton to be levied. This cess will also apply on imported coal.

Concessional customs duty of 5% to machinery etc required for initial setting up of photovoltaic and solar thermal power generating units; these would also be exempt from central excise duty.

Allocation of Rs10b towards Jawaharlal Nehru National Solar Mission (JNNSM), with plans to add 20GW of solar power by 2022.
[K] Thirteenth Finance Commission Report has also recommended provision of Rs50b grant from the central government to states towards incremental costs for promoting renewable energy over a period of four years.

Further, to promote wind power generation, the government has announced zero excise duty on certain raw materials required for manufacturing rotor blades.

[Positive: Suzlon; Tata Power (PV manufacturing)]

BUDGET Impact - BANKING Sector

Banking:

PSU BANKS TO GET A MUCH REQUIRED EQUITY INFUSION THAT WILL ENHANCE THEIR GROWTH

*Net market borrowings to be lower

*New branch licenses to be issued to private players and NBFCs

*Increase in allocated amount for capital infusion in PSBs

The finance minister announced that the RBI might give additional banking licenses to private sector players. This step can change the landscape of the banking industry as a host of Indian corporates like Tatas, Birla group, and some of the older NBFCs have shown interest in the banking business. Also, the government has announced a provision of Rs 16,500 Cr to augment Tier I capital of PSU banks, which is a positive trigger. The government’s estimated borrowing is expected to come down from Rs 3.97 lakh Cr in 2009-10, to Rs 3.45 lakh Cr in 2010-11. This substantially lowers the concerns of crowding out of private investment.

Impact: IFCI, Reliance Capital and IDFC might apply for banking licenses. The capital infusion measures may help Dena Bank, Vijaya Bank, IDBI and Bank of Maharashtra to increase their tier-I capital. In the near-term, banks with near 8% tier-I ratio (like  UCO Bank, IDBI, Dena bank, CBoI, Vijaya Bank, Syndicate bank, IOB, Union Bank) likely to see capital infusion.

The six-month extension for repaying loans under the agri-debt relief scheme should benefit Bank of Baroda, PNB and Oriental Bank of Commerce.