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.