June 26, 2020
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The Futures Budget

Some good news, some bad for the Sensex. Here's the outlook...

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The Futures Budget
What Gets Affected By What
  • Dual excise duty structure on cement will impact the sector; not many firms currently sell at the proposed Rs 190 a bag which will attract lower duty
  • FMCG firms like Hindustan Lever will benefit from the focus on agriculture; in the past such companies have gained from the spinoff effect
  • IT majors are peeved with the 1-3 per cent% MAT impact and the imposition of fringe benefit tax on ESOPs
  • Capital goods manufacturers, power firms and oil majors to benefit from the announcement of more Ultra Mega Power Projects


The impact of Budget '07 proposals on individual sectors will be much better than what the stockmarket's initial reactions would indicate. But on B-Day, Finance Minister P. Chidambaram's fourth budget on the trot (not counting earlier dreams) couldn't have received a worse reception from the bourses. On Bloody Wednesday (February 28), the markets tanked, with the BSE Sensex losing more than 540 points, a drop of more than four per cent and a huge loss of Rs 1,51,118 crore in market cap.

But as one looks carefully at the FM's proposals, one realises that there are many that should help firms in two sectors—agriculture and infrastructure. The other objective of curbing the current high inflation is likely to have a mixed impact. We present results from a study by Ambit RSM, an investment banking and consulting firm.

The Agri-Focus

The FMCG sector with bluechip stocks, including Hindustan Lever, is likely to be one that can be expected to benefit from enhanced budgetary support for agriculture. It is reasonable to expect that this focus would result in higher incomes of farmers and even those engaged in non-farm activities. In the past, a rise in these incomes has boosted the fortunes of FMCG companies. An encore seems likely. While this means that prospects are bright for Hindustan Lever, one of the 30 stocks constituting the Sensex, players such as ITC and Britannia are expected to benefit due to the excise duty exemption on biscuits retailing at a price of up to Rs 50 per kg. A large increase in allocation to irrigation is also expected to help the capital goods sector. It is reasonable to expect the spending on irrigation, especially agricultural pumps and motors, to go up. That is why stocks such as Kirloskar Brothers and KSB Pumps might do well since they operate in this space.

The Infrastructure Thrust

The capital goods sector is expected to benefit from the continued thrust to improve infrastructure. One major customer is expected to be power companies. The budget has stated the emphasis on Ultra Mega Power Projects (UMPP) will continue. While two projects, one at Sasan and another at Mundra, have already been cleared, seven are under process, of which two are expected to be cleared by July 2007. The budgetary support for power reforms and development has been increased from Rs 650 crore in 2006-07 to Rs 800 crore this year. Stocks such as BHEL and L&T, both Sensex stocks, besides abb and Siemens, can be expected to do well among capital goods companies. Same would be true for players such as Finolex and KEC International.

Power companies like Reliance Energy and Tata Power are also expected to gain. The thrust on energy security is likely to boost the fortunes of ONGC. Further proof of the government's focus in the area of energy is its proposal to completely exempt biodiesel from excise duties. This along with the infrastructure status to cross-country gas pipelines will help a range of companies from ONGC to GAIL.

The Double-Edged Sword

The finance minister has tried to use some proposals to control inflation in certain critical sectors. Bearing the brunt of one such proposal has been the cement sector, which will suffer from the dual excise duty structure that has been proposed, with Rs 350 per tonne for brands retailing at less than Rs 190 per bag and Rs 600 per tonne for those above Rs 190 per bag. All cement companies are expected to suffer from this new indirect tax burden and manufacturers feel this is a misdirected step.

The initiatives to control inflation in the metals sector can be expected to fare much better. Raw materials cost is expected to come down with proposals that seek to levy an export duty of Rs 300 per tonne on export of iron ores and concentrates, besides the reduction in customs duty on seconds and defectives from 20 to 10 per cent. This will benefit steel and aluminium majors such as NALCO, Hindalco, Tata Steel and SAIL. The government has proposed to cut ad valorem excise duties from 8 to 6 per cent on petrol and diesel. This would lead to a reduction in the under-recovery for oil marketing companies such as Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation on sales of petro-products. Last week, the petroleum ministry hinted at further cuts in petrol and diesel prices in the near future.

The Poor Cousins

Apart from cement, the budget has been unkind to the IT sector, which has been affected by the provision to bring the export tax exemption benefits under MAT. This is expected to bring down after-tax profit margins by 1-3 per cent in the case of software firms. On February 28, the BSE IT index saw a downward slide of 5.85 per cent, with top loser HCL Tech closing at Rs 596, down 9.74 per cent, followed by Satyam Computer Services, a Sensex stock, which fell 8.42 per cent.

Another sector at the receiving end was the petrochem sector. A proposal to cut customs duty from 10 to 7.5 per cent on polyester fibres and yarns, as well as on intermediaries like DMT, PTA and MEG, is expected to go against majors such as IPCL and Reliance Industries. Then, there is the construction sector that is expected to get adversely impacted by the additional costs due to dual excise on cement and the proposal to make Section 80I(A) unavailable for sub-contracted work.

The Bright Spark

On the brighter side were the provisions helping the pharma industry. Lately, India has emerged as a low-cost global centre for clinical trials. Large Indian pharma firms are also trying to break into the global league of discovering new drugs. This transition will need support for original R&D efforts, especially the tax breaks. The budget has announced that these breaks on R&D will continue till 2011-12. This, along with enhanced budgetary support to combat AIDS, will help.

The picture emerging from the disaggregated view of Budget '07's impact is clear. The government is encouraging India Inc to build a platform for the country's future growth. The only jarring notes in Chidambaram's budget symphony have been the measures to curb inflation, a short-term phenomenon. One hopes it won't cause long-term damages. And then again, as experts would testify, controlling inflation is easier said than done.

Udayan Ray And Rajesh Kumar
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