2012 Budget - Impact on Indian Automobile Industry

The Budget 2012 was the much awaited one, though no one was expecting a positive move for the Indian Automobile sector and here it is. Below are the highlights of the same. o Share of Manufacturing in GDP to Increase from 15% to 20% o Government plans to make 8,800 Kms of Highway o Avg. fuel price in FY2011-12 has been $115/barrel, which affected the growth of Auto sector in current year o Standard excise duty hiked from 10% to 12% o Raise duty on Large cars from 22% to 24% o Custom duty on bicycles increased from 10% to 30% o Custom duty on bicycle parts increased from 10% to 20% o Raise custom duty on import of vehicles from 50% to 75% o Import of aircraft parts exempted from Customs duty list o FY13 Fuel subsidy at Rs 43,580 Cr o Basic customs duty on Hybrid vehicles to remain the same however, Battery parts included under cover. o Based customs duty on vehicles costlier than $ 40,000 has been increased from 60% to 75% o Advalorem duty on commercial vehicles body manufacturers reduced from 10% to 3%

Budget delivers neutral impact for Banking Industry

The banking sector is highly interrelated with the economy of the country. The GDP growth is estimated at 7.6 per cent for FY13 which gives us a hint that the Indian economy is expected to recover and be back on the growth track in FY13. With this development the banking space may also witness a spurt in growth in their business next fiscal. However, the Union Budget 2012-13 has offered both positives and negatives for the sector. The budget has proposed to provide a sum of Rs 15,888 crore of capitalization for the public sector banks, regional rural banks and other financial institutions, including NABARD. Last year the budget had estimated capital infusion of Rs 6,000 crore in PSBs but the real scenario is that the government is infusing capital of more than Rs 16,000 crore during this financial year. The estimate for this year could be considered as appropriate and therefore this could be a positive factor for the public sector banks as the capital infusion would help banks in maintaining their minimum tier - I capital, thereby will build confidence in investors about the financial quality. The budget has proposal to extend the scheme of capitalization of weak RRBs by another 2 years to enable States to contribute their share and to allocate Rs 10,000 crore to National Bank for Agriculture and Rural Development for refinancing the regional rural banks (RRBs). The proposal to extend the scheme of capitalization of weak RRBs is a welcome

move as setting up of a short-term RRB credit refinance fund would enhance the capacity of RRBs to disburse short term crop loans to the small and marginal farmers. Finance Minister pegged fiscal deficit be grow at 5.1 per cent of the GDP for FY13. For financing this deficit the government will create a market borrowing of Rs 5,75,000 crore which is higher by Rs 1,00,000 crore as compared to last year. The higher market borrowings will further have an upward pressure on the interest rates. The RBI which wishes to cut down the rate may again take a pause in the near future. Thus, overall the budget was neutral for the banking space. The budget remained silent on the licensing of new banks in the private sector issue. As for the issues of priority sector lending and on creating a public financial holding company for the banks, the budget has created no impact on an immediate basis. It seems that the FM (after giving estimates of fiscal deficit) has now passed on the buck to the RBI governor for deciding up the trajectory of key policy rates. Banking: There can be certain guidelines on the banking industry during Budget speech. Finance minister may guide banks to have stringent credit policies to avoid defaults. There can be clarity on issuing new banking licenses which would further increase competition in the industry. Again, banking industry would face ups and downs throughout the year. There would be increased liquidity on the back of the declining interest rates but demand would be slow because of slow-down in real estate and automobile industry. International situations would also add pressure to the banking industry. Increasing defaults from the corporate would put a question mark on the assets quality of the banks. We believe banks would be neutral through-out financial year 2012-13.

Impact on cement
No doubt, cement prices had also been recently raised in different parts of the country, but it remains to be seen if the cement players' higher costs are fully offset. These developments come at a time when other key input costs for the industry, like coal prices also remain elevated. However, the budget's focus on developing infrastructure network across the country, coupled with a focus on rural housing, should provide a boost to cement demand over the next few quarters. An all-India player, ACC and its stock price was broadly flat at 2:20 pm - it declined 0.3% to Rs 1340 and hovering not too far from its recent 52-week high. The cement industry's total despatches grew 6.1% y-o-y during the period April till January of current fiscal, say brokerage house reports, helped largely by strong dispatch growth in northern and western region. Cement prices had been raised on different occasions earlier and it helped the industry to deal with higher input costs. For instance, in the December 11 quarter, this sector's aggregate net sales grew nearly 25% y-o-y, while net profit improved 64.6%. This was

broadly in tune the growth reported in the September 11 quarter, but much stronger than the growth reported in the June 11 quarter. And south-based players have benefited from the production discipline in their region and helped them to overcome higher costs. Post Budget announcements & Impact on FMCG sector Stocks o A proposal was made to increase the allocation of Bharat Nirman programme by another Rs 10,000 Crore to Rs 58,000 Crore. This will have a positive impact on the rural infrastructure development which consequently will boost the companies involved in driving rural Growth. Companies viz. HUL, Dabur, Nestle will be benefitted. o Remuneration was increased under the NREGA scheme. For Anganwadi workers the remuneration was increased from Rs 1500 per month to Rs 3000 per month. For Angandwadi helpers the remuneration was increased from Rs 750 per month to Rs 1500 per month. This will enhance the rural disposal income and will boost demand from the rural sector. Hence, FMCG companies which have substantial revenue from rural sector will be benefitted. o There were two proposals for the food processing industry. Government gave an approval to set up 15 mega Food Park in the fiscal year 2011-12. The storage capacity augmentation by private entrepreneurs and warehousing corporations will be put in a fast track. This will help reducing the loss of food articles especially when the food processing industry is plagued by the losses on account of food storage. o On the taxation front, No amendments were proposed in central excise duty. Though surcharge has been reduced from 7.5% to 5% the MAT has been increased from 18% to 18.5%. This means that the effective MAT rate will now be 20% instead of 19.3%. The custom duty was waived for the crude palm stearin which is the essential component in the manufacture of soap. This announcement will have a positive impact on the soap manufacture company viz. HUL, ITC etc. The central excise duty on bamboo for agarbatti has been reduced from 30% to 10%. Also, the central excise duty for warehouse facilities on agriculture produce was waived. These will have a positive impact on the small scale industries. Hence, the FMCG companies in the small caps might show an upsurge in their stock prices. o Since there was no announcement relating to the roadmap for implementation of GST, Government might miss the April 20112 deadline. Overall the budget has been positive for the FMCG sector especially when the FMCG sector is kneeling under surging input costs and high inflation. Major budget proposals that affected the pharma companies o The budget has proposed to tax all companies at the minimum alternate tax (MAT) of 18.5%. This will also include the partnerships firms based in the special economic zones (SEZ). Sun pharma will face a major hit as two of its facilities in Jammu and Sikkim enjoy benefits by avoidance of taxes as they do not pay the MAT.

o The budget also increased the excise duty on drug formulation and Active Pharma Ingredients (API) from 5% to 6% and 10% to 12% respectively. However, the companies have manufacturing facilities in the SEZ area will not be affected as they do not have to pay the excise duties. According to us, this will not have much impact on most of the companies in the pharmaceutical space. o The budget has further announced to continue the deduction of 200% for in-house R&D for another 5 years. The previous scheme was supposed to expire on 31st March 2012 which now stands extended to 31st March 2017. Large pharma players like Dr Reddy, Sun Pharma, Glenmark and Biocon will thereby continue their tax benefits on R&D expenses. o Further there were certain announcements for capital expenditure on large hospitals and it is expected to benefit the players who are into managing hospitals. Overall, the budget did not have anything encouraging for the pharmaceutical sector. However, the fact that there were no negative surprises itself has come as relief. The extension of deductions for the in-house R&D was a very good move and this will go a long way to incentivize the R&D within Indian pharmaceutical sector. Budget expectations by Telecom industry were o Announcing infrastructure status for the telecom industry which will benefit the industry with easy credit and lesser tax o Lowering of taxes as the Indian Telecom industry is paying the highest taxes (nearly 30%) in the world. o Tax holiday for new rollouts under section 80IA be restored to 20 years from the current 15 years o Expenditure on cell sites qualified as capital goods to allow Cenvat credit o Avoid double taxation of recharge coupons under VAT and Service tax. o The industry wanted a clarification on whether the payments made for 3G/BWA spectrum should be allowable as revenue expenditure or whether they could be amortised as licence fees or whether the same would be treated as intangible assets, eligible for tax depreciation. Budget announcement o The service tax increased from 10% to 12% which will increase the cost of mobile bills for the customers and also it will have a negative impact on the P&L of the telecom companies. o Parts of mobile phone parts are exempted from customs duty, however this will not have any major impact on the industry o Emphasis on rural economy and inclusive growth will have a positive impact on the rural penetration of telecom services. o Inclusion of telecom tower infrastructure in the viability gap funding and incentives for solar powers will strengthen rural penetration The industry is disappointed as there was no reference to broadband services. However this is likely to be addressed in the forthcoming National Telecom policy.

Overall the budget is seen as to have neutral to mildly positive impact on the industry Impact on oil and gas industry: As expected, the Union Budget 2012-13 has failed to bring much cheer to the Indian oil & gas industry. With its back pushed against the wall and very little options left to explore, the government was required to deliver a reformist budget by de-regulating the subsidised fuels and cutting down on its subsidy burden. However, owing to political pressure against the backdrop of its dismal defeat in the state assembly elections of UP, Punjab and Goa, the government chose to not only adopt a more populist measure but also decided to shy away by completely ignoring to discuss certain important measures which the markets had looked forward to. Positive: The finance minister (FM) has proposed to allot VGF for the oil & gas sector. This is a positive move as it will help spur up investment activity in the sector, especially in the natural gas sector which has off late found itself in a situation where the companies have not been able to meet the rampant demand owing to supply constraints. Neutral: The finance minister indicated that the government has undertaken some concrete steps towards successfully implementing the mechanism of direct transfer of subsidies to people living below the poverty line. According to him, all the three oil marketers have launched LPG transparency portals to improve customer service and reduce leakage. Certain pilot projects have also been set up in cities of Mysore and Alwar (Rajasthan) to facilitate the direct reimbursement of subsidy into the beneficiarys bank account. This move is a very old move and may fail to bring about anything positive for the sector unless the subsidised prices are de-regulated. Negative: Under the amendments to the Central Excise Tariff Act, 1985, the FM has proposed to revise the ad valorem excise upwards to 14 per cent on petroleum goods. This is a negative development, as it would lead to rise in the prices of petrol and diesel which will in turn give rise to headline inflation. Subsidy Bill: Here is where the government has got its calculations completely wrong. The subsidy bill for FY12 is expected to have come in at a whopping Rs 6,8841 crore as against last years budgeted Rs 23,700 crore. Despite this stupendous rise in the subsidy bill and the sharp spurt seen in the global crude prices, the government, rather than de-regulating fuel prices and letting the economics of the market decide the prices, has gone on to set a target of Rs

43,580 crore for FY13 towards fuel subsidy. This target for fuel subsidy fails to provide any clarity as we cannot understand the governments intentions here. With the global crude prices expected to remain put at around the current levels, the overall subsidy burden for the government over the coming year will surely add to the pressure. The only possible outcome would be the politically sensitive move of hiking the retail fuel prices. Its inability to do so will prove fatal to its fiscal calculations going forward. Miscellaneous: The FM has proposed to increase the cess levied on indigenous petroleum crude oil from Rs 2,500 per MT to Rs 4,500 per MT. This would prove to be negative for the oil & gas explorers like ONGC and OIL who would be additionally burdened over and above the adhoc subsidy burden thats clouding their future. Private oil explorer Cairn India too would suffer on account of this development. Conclusion: Despite the need of the hour, the government has refrained from taking any bold steps fearing a backlash from the common man who is already dithering under the burden of high prices and slow growth. The only positive moves were the ones to directly transfer subsidies to end users and to provide VGF for the sector. However, while the direct transfer move is a very old one, the VGF move is also not too great for the sector given the governments whimsical interference from time to time. Also, the government has not touched upon the extension of the commissioning date of new refineries to avail the sevenyear tax holiday. Finally, as the case has been in the past, the budget has yet again failed to provide any major impact for the oil & gas sector.