Crisil Budget Analysis 2013-14 PDF

March 2013
CRISIL BudgetAnalysis
Responsible for now

Need to watch expenditure as election nears
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Contents
Foreword Economy
Highlights Detailed economic analysis 4 5
Industry
Overall sectoral impact Overall company impact Airports Infrastructure Auto components & Tyres Automobiles Banking and Finance Cement Construction Fertilisers Hotels Household appliances Housing Information technology Media and Entertainment Non-ferrous metals Oil and Gas Paper Petrochemicals Pharmaceuticals Ports Power Roads Steel Sugar Telecom Textile 14 21 25 27 30 33 36 38 40 43 45 48 50 53 55 58 61 63 66 68 70 72 74 77 80 82
Continued
Contents
continued Capital markets
Equity market Mutual funds 88 94
II
Foreword
Responsible, for now Budget 2013-14 has taken forward the fiscal consolidation programme which began in the current fiscal year. It targets fiscal deficit at 4.8 per cent of GDP in 2013-14 as against the revised estimate of 5.2 per cent for this year. While fiscal consolidation can hurt growth in the short run, it does create an environment in which the Reserve Bank of India (RBI) can cut interest rates and provide some support to growth. These steps will also encourage domestic savings, boost the confidence and expectations of domestic and foreign investors. As budgetary proposals are broadly in line with our expectations, we retain our pre-budget forecast of 6.4 per cent GDP for 2013-14, which is the midpoint of the GDP growth range (6.1 to 6.7 per cent) that the budget has assumed.
In the budget, the finance minister has broad-based the thrust areas of infrastructure beyond ports and roads; he has focused on coal, industrial corridors, national waterways, and rural road construction (PMGSY-II). In addition, urban infrastructure will receive a boost through the allocation of Rs 14,873 crore for the JNNURM scheme. Other positive measures for infrastructure include the constitution of a regulatory authority for the road sector and the promise to award 3,000 km of road projects in five states in the first six months of 2013-14. Housing and textiles stand to benefit from concessions and continuation of the Technology Upgradation Funds Scheme respectively.
The revival of private investment is a key to raise Indias GDP growth, which is estimated to have reached a decadal low of 5.0 per cent in 2012-13. In order to improve the investment climate, the government has announced an investment allowance of upto 15.0 per cent of the total investments over Rs 100 crore in plant and machinery during the two years ending March 2015. But a substantial and sustainable boost to investment sentiment will come only when issues such as mining rights, land acquisition, environmental clearances are satisfactorily resolved. For sustenance of revenue growth and ensuring feasibility of medium-term fiscal targets, a sustained lift in GDP growth will be needed as some of the revenue gains through hike in surcharges will not last beyond 2013-14.
How credible is the fiscal arithmetic and medium-term consolidation programme?
We expect fiscal deficit to settle at 5.0 per cent of GDP against the budget target of 4.8 per cent. We believe the government is likely to miss the revenue growth target of 23.4 per cent in 2013-14 as disinvestment and spectrum sale targets are too ambitious.
In the recent past, while both expenditure overshooting and revenue underperformance have been responsible for higher-than-budgeted fiscal deficits, the latter has contributed more to the fiscal slippage. This year too, the budget is likely to miss the revenue growth target due to a possible slippage on the disinvestment and spectrum auction targets. Shocks from unanticipated changes in growth can throw the budgeted revenue estimates out of gear. However, in the past few years, irrespective of whether growth was higher or lower than expected, the government has consistently missed the tax revenue targets. This shows poor revenue marksmanship. Some overshooting on the expenditure front too is likely, particularly on food subsidies if the Food Security Bill is implemented during 2013-14.
Foreword
The medium-term target of trimming the fiscal deficit to 3 per cent of GDP by 2016-17 relies on healthy growth and a reduction in the subsidy bill by at least 1 percentage point of GDP. The subsidy roadmap outlined in the budget aims to cut subsidies to 1.6 per cent of GDP by 2015-16 from 2.6 per cent in 2012-13.
As raising agricultural productivity will take time and concerted effort, the hike in food subsidy may result in upward pressure on food inflation in the near term. Food inflation was already high at 11.9 per cent in January 2013. It has averaged 9.3 per cent in the past seven years as compared to 4.3 per cent in the preceding decade. Sadly, despite certain sporadic efforts, agriculture has not received the attention it deserves in previous budgets and this budget is no exception.
Overall, while the budget has taken a step towards fiscal discipline as well as announced steps to promote corporate investment and infrastructure, lasting fiscal discipline will depend on the ability to raise the projected revenue and to stick to the budgeted expenditure - an arduous task when growth is weak and elections are near.
Dharmakirti Joshi
Chief Economist, CRISIL
Economy
Highlights
x x x x x Fiscal deficit for 2012-13 pegged at 5.2 per cent of GDP and estimated at 4.8 per cent for 2013-14. Revenue deficit for the current year at 3.9 per cent and for 2013-14 at 3.3 per cent. Fiscal deficit to be brought down to 3 per cent, revenue deficit to 1.5 per cent and effective revenue deficit to zero per cent by 2016-17. Plan expenditure in 2013-14 will be 29.4 per cent more than the Revised Estimate of 2012-13.
Infrastructure To mobilise funds for investment in infrastructure, the following measures will be taken: o o o x x x x Encourage Infrastructure Debt Fund (IDF) Allow some institutions to raise tax-free bonds up to 50,000 crore (100 per cent more than the current year) India Infrastructure Finance Corporation (IIFC), in partnership with ADB, to help infrastructure companies to access the bond market to tap long-term funds States which have completed Pradhan Mantri Gramin Sadak Yojana will be eligible for PMGSY-II, others will continue with PMGSY-I. Rs 14,873 crore allocated to Jawaharlal Nehru Urban Renewal Mission (JNNURM) in budget estimate 2013-14 as against revised estimate of Rs 7,383 crore. Constitute a regulatory authority for the roads sector.
Investment 15 per cent investment deduction allowance apart from depreciation for companies investing Rs 100 crore or more in plant and machinery in April1, 2013 to March 31, 2015. Savings x x To incentivise greater savings, Rajiv Gandhi Equity Savings Scheme to be liberalised. Proposal to launch inflation indexed bonds or inflation indexed national security certificates to protect savings from inflation. Financial Sector x x x Rs 14,000 crore will be provided to public sector banks for capital infusion in 2013-14. Foreign institutional investors will be allowed to participate in exchange-traded currency derivatives. FIIs, will be permitted to use their investments in corporate bonds and government securities as collateral to meet their margin requirements. Tax proposals x x x x x x x x x Slabs and rate for personal income tax unchanged. Tax credit of Rs 2,000 to every person with total income up to Rs 5 lakh. 10 per cent surcharge on persons (other than complanies) with taxable income exceeding Rs 1 crore. Increase in surcharge from 5 to 10 per cent on domestic companies whose taxable income exceeds Rs 10 crores. Duty-free limit on gold raised to Rs 50,000 in case of males and Rs 100,000 in case of females. Specific excise duty on cigarettes and SUVs increased. Proposal for service tax on all air conditioned restaurants.
Subsidies Rs 10,000 crore of additional allocation to the Food Security Bill. Petroleum subsidies, at Rs 65000 crore, have been adequately provisioned for.
Economy analysis
Key messages
x CRISIL Research estimates fiscal deficit at 5 per cent of GDP in 2013-14 as against the budget estimate of 4.8 per cent. We expect a revenue shortfall since the governments disinvestment and spectrum auction targets are ambitious given the past experience. x To revive infrastructure investments, the budget announced an investment allowance of 15.0 per cent on plant and machinery and setting up of two new industrial corridors, among other measures. However, fast-tracking procedural approvals and removing administrative hurdles hold the key. x The budget relies on one- time increase in tax revenue via surcharges to finance higher expenditure. Since these one-off gains might not continue beyond 2013-14, the medium term fiscal consolidation looks difficult unless growth picks up sharply.
Budget Realistic on growth

Figure 1: Real GDP growth
Agriculture 3.5% F Industry 5.1% F Services 7.7% F
y-o-y%
CRISIL Research retains its pre-budget outlook for Indias GDP at 6.4 per cent in 2013-14. Our forecast is broadly in line with the budgets growth
FY14F FY13AE FY 12 FY 11 FY 10 FY 09 FY 08 FY 07 5.0
6.4
estimate (6.1 6.7 per cent). x Drivers of growth as per the budget 2013-14 are similar to that assumed by us: (i) normal
9.3 8.6
6.2
monsoons, (ii) continued efforts to maintain fiscal discipline, (iii) removal of bottlenecks in the mining sector and (iv) recovery in exports. While
6.7 9.3 9.6
the budget has announced steps to raise corporate and infrastructure investment, speedy implementation of these policies will be critical to
AE: Advance estimate, F: CRISIL Forecast Source: Central Statistical Organisation (CSO), CRISIL Research
improve the growth outlook.
Economy analysis
Figure 2: Extra budgetary measures needed to turn around private sector investment
% of GDP 17.3
The budget seeks to promote private corporate investment by (i) speeding up project clearance through the Cabinet Committee on Investment, (ii)
13.4 11.3 12.1 10.6
development of new industrial cities and corridors and (iii) the provision for deduction of investment allowance. x Private corporate sector investment has fallen from a high of 17.3 per cent of GDP in 2007-08 to 10.6 per cent during 2011-12. Policy
FY08
FY09
FY10
FY11RE
FY12RE
announcements in the budget will have to be complemented with the removal of procedural and administrative investment. hurdles to boost private
RE: Revised estimate Source:CSO, CRISIL Research
Figure 3: Boost to infrastructure investment

y-o-y% FY 13 (RE over actual) 39.1 27.5 18.7 8.5 7.6 29.6 19.9 8.9 21.7 FY 14 (BE over RE)
The budget announced some measures to revive investment in infrastructure such as raising the limit for issuance of tax-free infrastructure bonds up to Rs.50,000 crore and encouraging
infrastructure debt funds. x The government proposes to award 3000 km of roads during the first six months of 2013-14.
-10.3 Ministry of Power Ministry of Shipping Ministry of Ministry of Road transport Urban and highways development Railways
States
which
have
successfully
completed
PMGSY-I will now be eligible for PMGSY-II. Setting up of a regulator for the road sector is expected to expedite the projects. x Allowing additional deduction of Rs 1 lakh on interest on housing loan of Rs 25 lakh is expected to spur affordable housing demand in the economy.
Note:Based on Central Plan Outlay Source:Budget documents, CRISIL Research
Economy analysis
Inflation expected at 6.5 per cent
Figure 4: WPI Inflation (average)
y-o-y % 12.0 10.0 8.0 6.0 4.0 2.0 0.0 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY13F FY14F 6.5
In line with the budget, CRISIL Research expects inflation to decline during 2013-14. We expect WPI inflation to average 6.5 per cent during 2013-14 due to (i) lower international crude prices, (ii) strengthening of the rupee against the dollar and (iii) lower core inflation. However, upside risks to inflation could stem from the Food Security Bill if implemented.
The budget proposes to conatin food inflation through investments in agricultural supply chain and research and development. The budget allocated Rs. 27049 crore to the Ministry of Agriculture, an increase of 22 per cent over the previous year.
F: CRISIL Forecasts Source: Office of Economic Advisor, CRISIL Research
Marginal slippage on the fiscal front

Figure 5: Missing the deficit target
% of GDP 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 RE FY14 BE 2.6 6.0 6.4 5.8 5.1 5.2 5.0 F Budgeted Fiscal Deficit Actual Fiscal Deficit
We believe that the fiscal deficit would slip to 5.0 per cent of GDP as against 4.8 per cent forecast in the budget. This will be largely due to revenue shortfall since we believe that the budgets target of a 23.4 per cent revenue growth is difficut to achieve.
Given the governments poor track record of meeting disinvestment and non-tax revenue targets, the budget estimates for 2013-14 appear ambitious.
RE: Revised Estimate, BE: Budget Estimate, F: CRISIL Forecasts Source: Budget Documents, CRISIL Research
Economy analysis
Mild downside to bond yields
Figure 6: Interest Rates (March-end)
% 10.0 9.0 8.0 7.0 6.0 5.0 4.0 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 F Mar-14 F 7.7-7.8 10-year G-Sec yield Repo rate
The budget estimates net market borrowings to be Rs. 4,84,000 crore in 2013-14, up from Rs 4,67,000 crore during 2012-13, which will create an upside pressure on 10-year G-sec yields. However, we expect a lowering of the repo rate by 50-75 bps during the rest of 2013-14, due to lower inflation. This will lower the floor for the Gsec rate and soften yields to around 7.7-7.8 per cent by March-end 2014.
Lower yields will help reduce lending rates and thereby increase credit growth to around 17.0 per cent during 2013-14.
F: CRISIL Forecasts Source: RBI, CRISIL Research
Policy measures to strengthen foreign inflows

Figure 7: Exchange Rate (March-end)
INR/USD 54.0 51.2
x
53.0 51-52
Given Indias high current account deficit, the outlook for the rupee will depend on robust capital inflows in of 2013-14. GAAR Clarity over
52.0
51.0
implementation
50.0
provisions,
governments commitment to maintain fiscal discipline and improved policy communication should boost investor confidence and attract
45.1
48.0
46.0
44.7
foreign investments. x Allowing FIIs to use their investments in

FY12 FY13 F FY14 F
44.0 FY09 FY10 FY11
corporate and government bonds as collateral to meet their margin requirements will help in bringing foreign inflows into the economy. x With the capital inflows providing sufficient cover to the current account deficit (estimated at 3.5 per cent of GDP in 2013-14), we expect the rupee to settle around 51-52 by March-end 2014.
F: CRISIL Forecasts Source: RBI, CRISIL Research
Economy analysis
Table 1: Outlook 2013-14
(y-o-y, % growth) GDP (factor cost) Agriculture Industry Services 2012-13 F 1.8* 3.1* 6.6* 5.0* Other macroeconomic variables WPI inflation (average) Interest rate (10-year G-sec March-end) Exchange rate (Rs-$ March end) Fiscal deficit (% of GDP) 7.4 8.0 53 5.2** 6.5 7.7-7.8 51-52 5.0 2013-14 F 3.5 5.1 7.7 6.4
Note: * CSO Advance Estimates, ** Revised Estimate, F- CRISIL forecast Source: CSO, CRISIL Research
Fiscal Arithmetic?
Figure 8: Share of revenue and expenditure in GDP
% 18.0 15.0 12.0 Expenditure Revenue
Revenue shortfall will push the fiscal deficit to 5.0 per cent of GDP. In recent years, most of the fiscal slippage has been more an effect of revenue shrinking - with actual revenues lower than budgeted in the past four out of five years
9.0 6.0
(Table 2). Irrespective of the phase of growth, tax revenues, which form around 80 per cent of total
2012-13 RE 2013-14 BE 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
revenues, have underperformed. x Some of the revenue gains through hike in surcharges will not last beyond 2013-14. Thus achieving the medium term fiscal targets looks difficult.
Note: RE: Revised Estimate, BE: Budget Estimate Source: Budget Documents, CRISIL Research
Economy analysis
Table 2 Origins of fiscal slippage
% of GDP 1. Budgeted Fiscal Deficit 2. Effect of revenue shrinking (a+b+c+d) a) Tax revenue b) Non tax revenue c) Disinvestment d) Other non debt receipts 3. Effect of expenditure overshooting (i+ii) 4. Actual Fiscal Deficit (1+2+3) FY 09 2.5 1.9 1.6 0.1 0.1 0.0 1.6 6.0 FY 10 6.8 1.2 1.0 0.6 -0.4 0.0 -1.5 6.5 FY 11 5.5 -0.1 0.4 -0.7 0.3 -0.1 -0.6 4.8 FY 12 4.6 0.6 0.4 0.0 0.3 -0.1 0.5 5.7 FY 13 RE 5.1 0.6 0.3 0.3 0.1 0.0 -0.5 5.2
RE: Revised Estimates

Source: Budget documents, CRISIL Research
Revenues: High targets, low achievement

Table 3 : Growth in revenue (y-o-y %)
2009-10 2010-11 2011-12 A 2012-13 RE 2013-14 BE Direct tax Indirect tax Non-tax revenue Total Receipts * (net of borrow ings) 15.0 -10.0 19.9 10.8 19.2 38.1 88.0 35.9 12.7 11.5 -44.3 -4.3 14.6 19.5 6.6 15.4 18.1 20.2 32.8 23.4
In 2013-14, we expect revenue growth to be lower (Table 3) due to lower proceeds from disinvestment and spectrum sale.
Note: Total receipts excluding borrow ings and other liabilities RE: Revised Estimates, BE: Budget Estimates Source: Budget docum ents, CRISIL Research
Figure 9: Disinvestments consistenly fall short of targets

% of total revenue
6.0 5.0 4.0 3.0 2.0 1.0 BE Actual
With its inability to raise tax revenue (Table 2), the government has been increasing its
dependence on sources other than tax revenue, such as disinvestment. x This years disinvestment target of Rs 400 billion seems difficult to achieve since revival in growth is not expected to be as much and likely to hurt investor sentiments. In order to achieve the
0.0 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 RE BE
target, the government might need to start the process of disinvesting early in the fiscal.
Note: RE Revised Estimate, BE- Budget Estimate Source: Budget documents, CRISIL Research
10
Economy analysis
Subsidies adequately budgeted
Table 4: Growth in expenditure (y-o-y %)
2009-10 2010-11 2011-12 A 2012-13 RE 2013-14 BE Revenue Expenditure Capital Expenditure Plan Expenditure Non-Plan Expenditure Total Expenditure 14.9 25.0 10.2 18.5 15.9 14.1 39.0 24.9 13.5 16.9 10.1 1.3 8.8 9.0 8.9 10.2 5.8 4.1 12.3 9.7 13.7 36.6 29.4 10.8 16.4
CRISIL
Research
expects
government
expenditure to grow at around 16.4 per cent in 2013-14, in line with budgetary estimates. Unlike previous years, petroleum subsidies have been adequately budgeted for. The budget also accounts for petroleum under-recoveries carried forward to 2013-14 from the previous year. x However, an unforeseen increase in global crude oil prices or a discontinuation of phased deregulation in diesel prices during 2013-14 could raise petroleum subsidies above budgeted levels. The additional allocation of Rs 10,000 crore for food subsidies under the budget may not be sufficient if there is an all-India implementation of the 2013-14. Food Security Bill in
RE: Revised Estimates, BE: Budget Estimates Source: Budget docum ents, CRISIL Research
Switching expenditures from revenue to capital account

Figure 10: Ratio of capital to revenue expenditures
Actual Cap Exp/ Rev Exp Budgeted Cap Exp/Rev Exp
The quality of government expenditure as measured by the ratio of capital to revenue expenditure has suffered in the recent years, and is still well below the pre-crisis levels. During
0.25 0.20 0.15 0.13 0.10 0.05 0.00 2004-05 to 200708 2008-09 2009-10 2010-11 2011-12 2012-13 RE 2013-14 BE 0.11 0.20 0.16
2012-13, while revenue expenditure was almost at budgeted levels, the government reduced capital expenditure by 18 per cent from its budgeted levels in order to contain the rising fiscal deficit. x The budget corrects for this partially by raising growth in capital expenditures to 36.6 per cent from only 5.8 per cent in 2012-13. However, it is critical that the government does not slash capital expenditure during the year if revenues fall short of budgeted levels. x The government health has and increased allocation higher
Note: A - Actuals, RE Revised Estimate, BE- Budget Estimate F CRISIL Forecast Source: CSO, Budget Documents, CRISIL Research
towards
family
welfare,
education and school education & literacy in 2013-14 budget. A continuation of such
investments is necessary for sustainable growth.
11
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Industry
13
Overall sectoral impact

In the sector level analysis we have not incorporated proposals that are not sector specific such as increase in surcharge on corporate tax, proposals on dividend distribution tax and investment allowance.
Industry Airport infrastructure

Budget 2013-14 offers further concessions to Indian aircraft maintenance providers
Effect Neutral
The Indian aircraft manufacture, repair and overhaul (MRO) industry is in its nascency. The domestic MRO service providers usually have a revenue sharing arrangement with airport developers. In order to give a fillip to the industry, a full exemption from customs duty and countervailing duty for aircraft spares, tyres and testing equipment was proposed for Indian MRO service providers in the last budget. In Union Budget 2013-14, further concessions for aircraft maintenance facilities have been proposed. The move is expected to help Indian MROs to become viable and also aid carriers to reduce aircraft maintenance costs.
Auto components & tyres

No impact on auto components and tyres
Neutral
With no change in basic customs duty & excise duty, we do not expect any significant impact on the auto components and tyres industries. Doubling of SIDBIs re-financing capabilities will benefit a large number of Tier II and III vendors. Duty concessions on parts of electric & hybrid vehicles have been extended but its impact will be insignficant, given the low population of these vehicles in India. Royalty payments to foreign companies will now be taxed at a higher rate, but will be subject to direct tax avoidance treaties that are already in place. The overall impact of these measures will be ltd.
Automobiles
Marginally negative for utility vehicles; neutral for other segments
Neutral
With excise duty being hiked to 30 per cent from 27 per cent, demand for non-taxi sports utility vehicles with engine capacity above 1500 cc (and more than 4,000 mm long; ground clearance of over 170 mm), will be marginally impacted. Demand for luxury cars (priced over $40,000 and/or engine capacity exceeding 3000 cc for petrol cars and 2500 cc for diesel cars) will be hit, with basic customs duty being hiked to 100 per cent from 75 per cent. An increase in basic custom duty to 75 per cent from 60 per cent will impact sales of motorcycles with engine capacity of 800 cc or more. However, these high-end vehicles constitute a miniscule portion of the overall sales for the industry. The purchase of 10,000 buses under the JNNURM and a reduction in excise duty on truck chassis to 13 per cent will benefit commercial vehicle sales.
Banking
Recapitalisation of PSBs and boost to housing finance
Positive
The Union Budget proposes to provide Rs 140 billion as capital support to all public sector banks (PSBs) in 2013-14. The government also stated its intent to help PSBs comply with Basel III regulations.For 2013-14, banks have been directed to lend Rs 7,000 billion to the agri sector an increase of 21.7 per cent over the target for 2012-13. Farmers who avail of farm loans from PSBs and repay in a timely manner get loans at subsidised rates. They will now be able to access this credit facility from private banks as well. We believe this move will help private banks increase lending to this segment. The clear focus on giving a boost to the housing market is also positive for financiers. An additional tax deduction of Rs 100,000 on interest paid towards home loans up to Rs 25 lakh availed in 2013-14 for first home buyers (over and above the existing Rs 1,50,000 deduction) has been introduced for 2013-14, to give a boost to the affordable housing segment. This additional deduction can be claimed over a period of 2 years. In addition, an amount of Rs 20 billion has been allocated towards a proposed Urban Housing Fund to be set up by the NHB.
Continued
14
ctoral impact Overall sec

continued
Industry Cement
ructure Hike in freight costs to offset the benefits arising from the boost to housing and infrastr
Effect Neutral
segments. This is expected ed The Union Budget 2013-14 has propose many schemes to boost infrastructure and housing s
, to prop up cement demand. However, this upside is likely to be offset by the increase in freight costs for cement
proposed a fuel adjustment companies, due to the proposed hike in railway freight. The Railway Budget 2013-14 has p
es. component linked revision of freight rate
Construction
ads, urban infrastructure Measures to boost investments in roa
Positive
gain been allowed in 2013rnment agencies for infrastructure sectors has once ag Issue of tax-free bonds raised by gover
ture sectors such as roads, This will provide additional funds to various infrastruct 14 up to a total limit of Rs 500 billion. T
ports and power.
he es In the roads sector, the budget propose to set up an independent regulatory authority. In th medium term, this could radhan Mantri Gram Sadak help in reducing delays and fast-tracking the implementation of road projects. Further, the Pr
d, Yojana (PMGSY) II has been announced which could boost investments in rural roads.
ssion) has been doubled in Allocation towards the JNNURM programme (Jawahar Lal Nehru National Urban Renewal Mis n will 2013-14 over the previous year. This w boost spending on ongoing and upcoming urban infrastructure projects. In by Drinking Water and Sanitation has been increased b 17 per cent in 2013-14, addition, allocation to the Ministry of D
supply and sanitation. driving investment, particularly in water s
Fertilisers
ain Fertiliser subsidy for 2013-14 to rema unchanged y-o-y
Neutral
l subsidy is expected to stay constant at last years level of Rs 659 billion, although In 2013-14, the governments fertiliser s
the demand for complex fertilisers is likely to improve. This is because nutrient-based subsidy (NBS) on complex
subsidy of Rs 10 billion on ternational prices soften. The increase in budgeted s fertilisers is likely to be reduced, as int
hat indigenous urea for 2013-14 implies th the government is not expected to hike retail urea prices during the year.
m omestic natural gas will force plants converting from high-cost naphtha/fuel oil Further, unavailability of incremental do
her feedstock to import gas at relatively high spot prices.
continued
15

continued
Industry Hotels
Neutral impact on hotel industry
Effect Neutral
Impact of the Budget on the premium segment hotel industry is neutral. As of July 2012, only air-conditioned restaurants that served liquor were levied a service tax at 12.36 per cent, with an abatement of 60 per cent (net service tax of 4.95 per cent). In the Union Budget of 2013-14, it has been proposed to include all air-conditioned restaurants, including those which do not serve liquor, under the service tax net. This proposal is not expected to impact demand as the service tax will be passed on to consumers.
Household appliances
No impact on household appliances industry
Neutral
The Budget had no specific proposal pertaining to the household appliances industry. A tax credit of Rs 2,000 for a person with income upto Rs 5 lakh per annum, introduced in the Union Budget 2013-14, will result in higher disposable income in the hands of people in the lowest tax bracket. But, this is unlikely to translate into any meaningful impact on the industry.
Housing
Measures to tackle housing shortage
Positive
First-time home buyers taking a loan of up to Rs 25 lakh in 2013-14 can avail of an additional interest deduction of Rs 1 lakh in the first year, over and above the existing Rs 1.5 lakh benefit. This is likely to boost new home sales.
Allocation towards Rural Housing Fund has been increased by 50 per cent to Rs 6,000 crore for 2013-14. A Rs 2,000crore Urban Housing Fund by the National Housing Bank is also being proposed. These steps will boost fund availability and address the overall housing shortage.
However, service tax abatement for premium apartments (with a carpet area of 2,000 sq ft or above and/or valued at Rs 1 crore or more) has been reduced to 70 per cent from 75 per cent. While this would result in an increase of 0.6 per cent in the effective service tax rate, the impact on demand is expected to be negligible.
Information technology
No significant impact on the IT sector
Neutral
The Budget does not have any specific proposals for the IT sector. Focus on education and skill development is a structurally long-term positive for the sector. The increase in surcharge from 5 per cent to 10 per cent for companies with taxable income higher than Rs 100 million will increase the effective MAT levied to 21 per cent, from the current 20 per cent. The additional surcharge will be applicable only for the financial year 2013-14.
continued
16

continued
Industry Media & entertainment

Budget to not impact sector significantly
Effect Neutral
ntertainment sector would be neutral. The increase in customs duty on set-top The Budget impact on the media & en
rect boxes (STBs) to 10 per cent from 5 per cent would increase subscriber acquisition costs of dir -to-home operators and ncrease may not be passed m, multi-system operators in the short term as most STBs are still imported and the entire cost in hile, the government stated s on to subscribers. At a sector level, this is not expected to have a significant impact. Meanwh s its intent to auction 839 FM stations in 294 more cities in 2013-14, thereby covering all cities with a population of more
than 0.1 million with private FM radio services.
Non-ferrous metals
Negligible impact
Neutral
The 10 per cent export duty levied on bauxite will help improve its domestic availability. However, the impact will be
s negligible as India exports less than 5 per cent of its production. In 2011, 0.4 mn tonnes of bauxite (2 per cent of
production) were exported.
ing ed Excise duty of 4 per cent has been levie on silver obtained from smelting zinc or lead, to bri the rate on par with the
pper ores and concentrates. As the sale of by-products such as silver typically duty levied on silver obtained from cop
accounts for a mere 5-10 per cent of a zinc manufacturers revenues, the impact of the increase in excise duty is expected to be negligible.
Oil and gas

arginally positive Change in exploration policy to be ma
Positive
xploration and development The proposed change in the exploration policy to revenue sharing from profit sharing for ex ny stream companies, as this is expected to remove an ambiguity related to the contracts is marginally positive for ups provals from the regulatory ation and development, and will avoid delays in app ascertaining of costs related to explora he authority. This policy will be applicable for the blocks that will be awarded henceforth, and th benefits will accrue over
s the long term. Furthermore, clearances will be provided to awarded but stalled NELP blocks. The government also
declared a review of the current natural gas pricing policy, which is positive for the sector, as it is expected to incentivise
13 exploration investments. Additionally, a shale gas policy is expected to be announced in 201 -14. However, this would
n improve domestic natural gas production only over the long term.
Paper
Increase in education spending to help sustain demand for Writing & Printing paper
Neutral
per The government has proposed a 19 p cent increase in spending on education in 2013-14. This will help sustain
ebooks and other education s demand for Creamwove paper, which is primarily used in the manufacture of textbooks, note
stationery. Creamwove paper accounts for 17 per cent of paper and paperboard demand.
continued
17

continued
Industry Petrochemicals
No impact on the industry
Effect Neutral
The overall impact on the domestic petrochemicals industry is neutral as no major changes have been announced and excise duty and customs duties remain unchanged. Companies that have expansion plans or invest above Rs 1 billion over the next two financial years may benefit from the introduction of 15 per cent investment allowance for plant and machinery.
Pharmaceuticals
No dosage prescribed
Neutral
The overall impact on the Indian pharmaceuticals industry is neutral with no changes announced in the excise or customs duties on formulations or bulk drugs.
Ports
Announcement of new ports in a period of overcapacity
Neutral
The proposal to develop a new major port each in Sagar, West Bengal, and in Andhra Pradesh will add 100 million tonnes of capacity. Further, a new outer harbour in the V.O. Chidambaranar port in Tamil Nadu through PPP will add another 42 million tonnes of capacity. Both these measures will lead to an increase in port capacities in a phased manner over a period of 5-6 years. There are limited benefits for private players as traffic at ports continue to register moderate growth and overall capacity utilisation rates are expected to decline. Allocation of funds in the form of tax-free infrastructure bonds and low-cost infrastructure debt funds is expected to marginally benefit the sector by facilitating availability of funds for port projects.
Power
Sunset clause extension and incentives for renewable energy to benefit power sector
Positive
Extension of the sunset clause by one year, to avail the 10-year tax holiday, would benefit 18-20 GW of capacities expected to be commissioned in 2013-14. Funding availability for the sector will improve with issuance of tax-free bonds of Rs 500 billion and credit enhancement through IIFCL. Additionally, the proposal to adopt a PPP framework for coal production will improve domestic coal supply in the long term. Customs duty on imported coal, which was previously exempt, has been increased to 2 per cent, while CVD has been increased by 1 per cent. Further, as per the Railway Budget 2013-14, freight rates have been hiked by 5.8 per cent. Consequently, generation costs would increase by 2-3 paise per unit for domestic coal-based power projects. However, for imported coal-based power projects, generation costs are expected to increase by 5-6 paise per unit. Investments in wind energy, which nearly halved in 2012-13 due to withdrawal of benefits, are expected to increase significantly due to reinstatement of generation-based incentive (GBI), with an outlay of Rs 8 billion. Further, capacity additions in solar power are expected to increase, with interest subvention for a period of five years by IREDA, through the National Clean Energy Fund.
continued
18

continued
Industry Roads & highways

Budget addresses funding concerns and delays
Effect Positive
e e The government has allowed the issue of tax-free bonds to fund infrastructure sectors once again in 2013-14 up to a
Highways Authority of India expected to provide additional funds to the National H total limit of Rs 50,000 crore. This is e ntracts on EPC basis. (NHAI) for executing national highway projects. We believe that it will allow NHAI to award con
hority. In the medium term, Another positive for the roads sector is the proposal to set up an independent regulatory auth
astracking the implementation of road projects. this could help in reducing delays and fa
he e After the substantial completion of the Pradhan Mantri Gram Sadak Yojana (PMGSY), th PMGSY II has been enefit the small local road t introduced, which will provide a boost to rural road development. This is expected to be
contractors.
Steel
Neutral impact for the steel industry
Neutral
or There are no major announcements fo the steel industry. Hence, the overall impact on the sector is neutral. The
o o proposed schemes providing a boost to the infrastructure and housing segments are likely to give a fillip to demand for
steel in the long run.
Sugar
No impact on industry
Neutral
There is no impact of the Budget on the domestic sugar industry.
continued
19

continued
Industry Telecom
Neutral impact on the sector
Effect Neutral
The Budget would have a neutral impact on the telecom sector. The excise duty on mobile phones, with retail price greater than Rs 2,000, has been hiked to 6 per cent, from 1 per cent. This will not significantly impact domestic manufacturers since most of their phones sold are basic feature phones priced below this level. A large proportion of high-end smartphones are imported.
Textiles
TUFS extension, removal of excise duty on readymade garments beneficial
Positive
The Budget is positive for the sector as the Technology Upgradation Fund Scheme (TUFS) has been extended and the excise duty on readymade garments has been abolished. TUFS, which is essential to attract investments into the sector, has been extended for the 12th Five-Year Plan, with an investment target of Rs 1,510 billion as compared to Rs 1,506 billion under the 11th Five-Year Plan. For 2013-14, budgetary allocation under the TUFS has been increased to Rs 24 billion from Rs 22 billion in 2012-13. Additionally, the excise duty of 3.6 per cent (12 per cent of 30 per cent of the maximum retail price) on readymade garments, which was mandatory last year, has been removed. Garment manufacturers are expected to see an improvement in margins despite partially passing on the benefit to end-users.
20
Overall com pany impact

Company
Impact
Industry
ACC Ltd.
Adani Power Ltd.
Aditya Birla Nuvo Ltd.
Alok Industries Ltd.
Ambuja Cements Ltd.
Amtek Auto Ltd.
Andhra Pradesh Paper Mills Ltd
Arvind Mills Ltd.
Ashok Leyland Ltd.
Bajaj Auto Ltd.
Bajaj Hindustan Ltd.
Balaji Telefilms Ltd .
Ballarpur Industries Ltd.
Balrampur Chini Mills Ltd.
Bannari Amman Sugars Ltd.
Bharat Forge Ltd.
Bharti Airtel Ltd.
Bhushan Steel Ltd.
Bosch Ltd.
Cairn India Ltd.
Chambal Fertilisers & Chemicals Ltd.
Chemplast Sanmar Ltd.
Cipla Ltd.
Coromandel Fertilisers Ltd.
Dish TV India Ltd.
DLF Ltd.
Dr Reddy's Laboratories Ltd.
EID Parry Ltd.
EIH Ltd.
Entertainment Network India Ltd.
Essar Steel Ltd .
Exide Industries Ltd.
Finolex Industries Ltd.
Firstsource Solutions Ltd.
Q Q K K Q Q Q K K Q Q Q Q Q Q Q Q K Q K Q Q Q Q L Q Q Q Q K K Q Q Q
Cement
Power
Textiles
Textiles
Cement
Auto Components & Tyres
Paper
Textiles
Automobiles
Automobiles
Sugar
Media & Entertainment
Paper
Sugar
Sugar
Telecom
Steel
Oil & Gas
Fertiliser
Petrochemicals
Pharmaceuticals
Fertiliser
Housing
Pharmaceuticals
Sugar
Hotels
Steel
Petrochemicals
Continued
21
Overall company impact

continued
Company
Impact
Industry
Gammon India Ltd.
Glenmark Pharmaceuticals Ltd.
GMR Infrastructure Ltd.
Gokaldas Exports Ltd.
Grasim Industries Ltd.
Gujarat Pipavav Ltd.
Gujarat State Fertilisers Company Ltd.
GVK Power and Infrastructure Ltd.
Hathway Cable & Datacom Ltd.
HCL Technologies Ltd.
HDFC Bank Ltd.
Housing Development and Infrastructure Ltd.
Hero Motocorp Ltd.
Hindalco Industries Ltd.
Hindustan Construction Co Ltd.
Hindustan Copper Ltd.
Hindustan Organic Chemicals Ltd.
Hindustan Zinc Ltd.
Hotel Leelaventure Ltd.
HT Media Ltd.
ICICI Bank Ltd.
Idea Cellular Ltd.
IG Petrochemicals Ltd.
India Cements Ltd.
Indian Hotels Company Ltd.
Indo Rama Synthetics (India) Ltd.
Infosys Ltd.
IRB Infrastructure Developers Ltd.
IL&FS Transportation Networks (India) Ltd
IVRCL Infrastructures & Projects Ltd.
JBF Industries Ltd.
JK Paper Ltd.
JSW Energy Ltd.
JSW Steel Ltd.
Larsen & Toubro Ltd.
Mahindra & Mahindra Ltd.
K Q Q K K Q Q Q L Q Q Q Q Q K Q Q Q Q K Q Q Q Q Q Q Q K K K Q Q Q K K Q
Roads/Construction
Pharmaceuticals
Airports
Textiles
Textiles
Ports
Fertiliser
Airports
Banking
Housing
Automobiles
Non-Ferrous Metals
Roads/Construction
Non-Ferrous Metals
Commodity Chemicals
Non-Ferrous Metals
Hotels
Banking
Telecom
Commodity Chemicals
Cement
Hotels
Textiles
Roads/Construction
Roads/Construction
Roads/Construction
Textiles
Paper
Power
Steel
Roads/Construction
Automobiles
continued
22
Overall com pany impact

continued
Company
Impact
Industry
Maruti Suzuki Ltd.
MIRC Electronics Ltd.
Mahanagar Telephone Nigam Ltd.
Mundra Airport and SEZ Ltd.
Nagarjuna International Ltd.
National Aluminium Company Ltd.
National Fertilisers Ltd.
National Thermal Power Corporation Ltd.
Oil and Natural Gas Corporation Ltd.
Oil India Ltd.
Orient Green Power Ltd.
Oriental Hotels Ltd.
Parsvnath Developers Ltd.
Phillips Carbon Black Ltd.
Punjab National Bank Ltd.
PVR Ltd.
Ranbaxy Laboratories Ltd.
Rashtriya Chemicals and Fertilisers Ltd.
Raymond Ltd.
Reliance Communications Ltd.
Reliance Industries Ltd.
Reliance Power Ltd.
Seshasayee Paper and Boards Ltd.
Shree Cement Ltd.
Shree Renuka Sugars Ltd.
Sobha Developers Ltd.
Sona Koyo Steering Systems Ltd.
State Bank of India Ltd.
Steel Authority of India Ltd
Sterlite Industries (India) Ltd
Sun Pharmaceutical Industries Ltd
Sun TV Ltd
Sundaram Fasteners Ltd.
Q Q Q Q Q Q Q K K K K Q Q Q K Q Q Q K Q K K Q Q Q Q Q K Q Q Q Q Q
Automobiles
Telecom
Ports
Fertiliser
Non-Ferrous Metals
Fertiliser
Power
Oil & Gas
Oil & Gas
Power
Hotels
Housing
Commodity Chemicals
Banking
Pharmaceuticals
Fertiliser
Textiles
Telecom
Oil & Gas
Power
Paper
Cement
Sugar
Housing
Banking
Steel
Non-Ferrous Metals
Pharmaceuticals
continued
23
Overall company impact

continued
Company
Impact
Industry
Supreme Petrochem Ltd.
Suzlon Energy Ltd.
Taj GVK Hotels & Resorts Ltd.
Tamil Nadu Newsprint and Papers Ltd.
Tamil Nadu Petroproducts Ltd.
Tata Communications Ltd.
Tata Motors Ltd.
Tata Power Company Ltd.
Tata Steel Ltd.
Tata Consultancy Services Ltd.
Thirumalai Chemicals Ltd.
UltraTech Cement Ltd.
Unitech Ltd.
Vardhaman Textiles Ltd.
Videocon Industries Ltd.
Welspun India Ltd.
Whirlpool of India Ltd.
Wipro Ltd.
Zee Entertainment Enterprises Ltd.
Zuari Industries Ltd.
Q K Q Q Q Q Q Q Q Q Q Q Q K Q K Q Q Q Q
Petrochemicals
Power
Hotels
Paper
Commodity Chemicals
Telecom
Automobiles
Power
Steel
Commodity Chemicals
Cement
Housing
Textiles
Textiles
Fertiliser
24
Airport Infrastructure
Indian airports: Negative passenger and freight traffic growth
India`s domestic air passenger traffic is estimated to have declined by about 6 per cent y-o-y during April-November 2012. This is in sharp contrast to the almost double-digit growth recorded in domestic traffic since the advent of low cost carriers five years ago. Kingfisher Airlines exit due to financial turmoil and subsequent consolidation in the industry has led to lower competiton and a steep increase in ticket prices in 2012-13. Higher ticket prices in turn impacted demand growth, aggravated by the slowdown in the economy. We expect domestic passenger traffic to grow at a muted 3-5 per cent y-o-y in 2013-14. India's international passenger traffic however, grew by a mere 2.8 per cent y-o-y during April-November 2012 as Indian carriers are still in a position to add capacities unlike international carriers who have more or less exhausted seat quotas available to them under bilateral treaties. We expect international passenger traffic in India to grow at a muted 3-4 per cent y-o-y in 2013-14. Due to the slowdown in the global and domestic economies, domestic and international freight traffic fell by 4.7 per cent and 1.6 per cent y-o-y, respectively during April-November 2012. Freight traffic is expected to grow marginally during 2013-14. In 2012-13, CRISIL Research estimates investments of Rs 50-60 billion to flow into the sector, majority of which would be accounted for by the completion of the Mumbai and Bengaluru international airports. CRISIL Research expects investments of Rs 290-310 billion to materialise between 2012-13 and 2016-17. The Airports Economic Regulatory Authority recently mitigated the uncertainty on regulatory issues, approving methodology for determining aeronautical tariffs and its measure of allowing a significant hike in the aeronautical tariff charged by DIAL and MIAL. With these, the financials of these airports are expected to improve.
25
Airport Infrastructure
Aircraft maintenance to get concessions
Company GMR Infrastructure Ltd GVK Infrastructure Ltd Note: 1) GMR Infrastructure Ltds subsidiary companies, Delhi International Airport Ltd (DIAL) and GMR Hyderabad International Airport Limited (GHIAL), operate airports in Delhi and Hyderabad, respectively. Revenues from the airports business contributed 52 per cent of its consolidated income in 2011-12. 2) GVK Power and Infrastructure Ltd has its subsidiary companies, Mumbai International Airport Ltd (MIAL) and Bengaluru International Airport Ltd (BIAL), operating in Mumbai and Bengaluru, respectively. Revenues from the airport business contributed 86 per cent of its consolidated income in 2011-12. 3) The above impact applies to the airports business of these two companies. Source: CRISIL Research Impact Impact factors A A
Q Q
Impact factors
A. The Indian aircraft manufacture, repair and overhaul (MRO) industry is at a nascent stage. More than 90 per cent of the estimated $700 million that Indian carriers annually spend on MRO is spent outside the country (South East Asia, Middle East or Europe). Therefore, in order to give a fillip to the industry, in the last budget, a full exemption from customs duty and countervailing duty for aircraft spares, tyres and testing equipment was proposed for the Indian MRO service providers. In the Union Budget 2013-14, further concessions for aircraft maintenance facilities have been proposed. They are: x At present, basic customs duty exemption is available to parts and testing equipments for maintenance, repair and overhaul of aircrafts. This exemption is now being further extended to include more parts. x Time period for consumption/installation of parts and testing equipments imported for MRO of aircrafts by units engaged in such activities is being extended from 3 months to 1 year. x The move is expected to help carriers reduce aircraft maintenance costs and help MRO units in India (GMR Infrastructure Ltd, which runs a facility in Hyderabad, and Air India Ltd, which has such units in Mumbai and Delhi) become viable.
26

Auto components: Modest recovery in growth; margin pressure to abate in 2013-14
Auto component production is estimated to grow by 5-7 per cent y-o-y in 2012-13 vis--vis a 14 per cent growth in 2011-12 due to slowing vehicle production growth across segments, particularly medium and heavy commercial vehicles (30 per cent of overall demand), and slower exports. In 2013-14, auto component production is expected to improve in line with OEM prospects, particularly within the CV segment. OEM demand is expected to grow by 9-11 per cent during the year. Growth in replacement production will remain stable at 6-8 per cent. Growth in exports would remain capped at 7-9 per cent owing to uncertainties over EU destination markets (30-35 per cent of exports) even as prospects for the US market (20-25 per cent of exports) seem healthy. While basic raw material costs (accounting for 60-65 per cent of total raw material cost) have remained flat y-o-y during April-December 2012, lower utilisation levels and higher conversion costs of labour and power have kept operating margins under pressure. Operating margins are estimated to fall by 120-170 bps y-o-y to 12.3-12.8 per cent for 2012-13. While input prices are expected to remain flat in 2013-14 along with an improvement in utilisation levels, margin improvement is likely to be constrained at under 50 bps given the continued weak pricing environment during the first half of 2013-14. Industry RoCE is estimated to decline by 400-500 bps in 2012-13 owing to pressure on operating margins. RoCE is expected to remain at current levels of 13-14 per cent in 2013-14, even as margins improve slightly with commissioning of incremental capacities.
Tyres: Operating margins to remain flat in 2013-14

The tyre industrys revenues are estimated to grow by 9-11 per cent y-o-y in 2012-13, led by an increase in tyre prices during 2011-12. Domestic demand is expected to grow by 0-3 per cent due to lower freight availability and tepid growth in vehicle sales. In 2013-14, we forecast revenues to grow by 6-8 per cent in line with a growth in sales. Operating margins are estimated to improve by 200 bps in 2012-13 due to easing input cost and growth in realisations. Margins are likely to stay flat in 2013-14, as input prices continue to remain stable. Prices of natural rubber (35-40 per cent of the raw material cost) are projected to decline by 12-15 per cent in 201213 after growing by 80 per cent between 2009-10 and 2011-12. We expect natural rubber prices to remain flat or decline marginally in 2013-14. In 2012-13, industry RoCE is estimated to improve by 300-400 bps, led by improvement in profitability and lower capital investments. In 2013-14, we expect RoCE to improve marginally due to lower capital investments.
27

Auto parts: Tariffs
(per cent) Customs 2012-13 Engine and engine parts Drive transmission, steering, suspension, braking parts,silencer, exhaust pipes and radiators Electrical parts
1 1
Excise 2012-13 12.4 12.4 2013-14 12.4 12.4
2013-14 7.7 10.3
7.7 10.3
7.7 7.7
7.7 7.7
12.4 12.4
12.4 12.4
Raw materials for auto components Customs duty for air conditioner machine parts is at 10.3%
Notes 1) Raw materials for auto components include galvanised plate (GP)/galvanised coil (GC) steel, hot rolled (HR) steel, aluminium, copper and lead. 2) Duty-free imports from Thailand are allowed for engine parts, helical springs, ball bearings, lighting equipment and gear boxes under the Free Trade Agreement. Source: CRISIL Research
Tyres: Tariffs, prices and landed costs

Tariffs (per cent) Customs 2012-13 New tyres Used/retreaded tyres Truck and bus Car cross ply/ Radials Raw materials for tyres Natural rubber SBR (1502) PBR (1220) NTC fabric Carbon black (N330) NTC: Nylon tyre cord; PBR: Polybutadiene rubber; SBR: Styrene butadiene rubber n.a.: Not available Notes 1) For natural rubber, there is a cess of Rs 2 per kg in lieu of excise duty with effect from September 1, 2011. 2) Customs duty on natural rubber will be charged at 20% or Rs 20 per kg, whichever is lower, from April 2011. 3) China and South Korea enjoy a preferential customs duty of 8.6% on tyres under the Asia-Pacific Trade Agreement. 4) New tyres include the following categories: Truck and bus, light truck, car (cross ply and radial), tractor front, tractor rear, tractor trailor, moped, scooter and motorcycle. 5) An additional countervailing duty of 4% is levied on raw materials except for NTCF 6) Prices and landed cost are average rates for February 2013. Source: CRISIL Research 20.0 10.3 10.3 10.3 5.2 20.0 10.3 10.3 10.3 5.2 (Note 1) 10.3 10.3 10.3 10.3 (Note 1) 10.3 10.3 10.3 10.3 156,974 n.a. 155,000 n.a. n.a. 3,246 2,300 2,550 n.a. n.a. 223,760 136,363 153,732 n.a. n.a. 223,760 136,363 153,732 n.a. n.a. 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 2013-14 10.3 Excise 2012-13 10.3 2013-14 10.3 Prices (Feb 2013) Domestic (Rs/tonne) International ($/tonne) Landed costs (Rs/tonne) Prebudget Postbudget -
28

Budget 2013 to have neutral impact on auto component and tyre manufacturers
Auto components: Company impact
Company Bharat Forge Ltd Bosch Ltd Amtek Auto Ltd Sona Koyo Steering Systems Ltd Sundaram Fasteners Ltd Exide Industries Ltd Source: CRISIL Research Impact Q Q Q Q Q Q Impact factors A A A
Impact factors
A. Tax on royalty payments to foreign companies has been increased. But this is unlikely to have a significant impact as Indian auto component and tyre manufacturers generally pay under 2 per cent royalty to companies based in countries with favourable treatment under Double Tax Avoidance Agreements. B. SIDBIs re-financing capabilities have been doubled to Rs 100 billion per annum. This will help SMEs which make up the majority of auto component manufacturers.
29
Automobiles
Demand growth to recover, margins to be improve slightly in 2013-14
Lower freight availability and a rise in fuel cost impacted transporters profitability in 2012-13. We therefore expect MHCV truck sales to decline by about 25 per cent in 2012-13. LCV sales growth is also likely to be limited to 15-17 per cent (over a 30 per cent growth in 2011-12), as private consumption growth slows the most in a decade. Overall, we expect CV sales to marginally decline in 2012-13. Slower growth in incomes, fuel price hikes and high interest rates continued to impact car sales in 2012-13. We therefore expect growth in car sales to remain flat during the year despite a tepid growth of 2 per cent recorded in 2011-12. However, utility vehicle (UV) sales are likely to continue growing by 38-40 per cent, led by new model launches and increased preference for diesel vehicles. Overall, passenger vehicle sales are estimated to grow by 810 per cent in 2012-13. Growth in two-wheeler sales is expected to moderate to 3-5 per cent in 2012-13, following two years of healthy growth. Slower growth in farm incomes and higher fuel prices have impacted motorcycle sales during the fiscal. However, scooter sales are estimated to grow by 15-17 per cent, aided by new model launches and expansion of capacity by leading manufacturers which addressed pent up demand. In 2013-14, with GDP growth expected to be higher, concerns over income growth are also likely to ease. Moreover, an expected decline of 8-10 per cent in in petrol prices will drive a recovery in small car sales, which in turn will aid a 9-11 per cent growth in passenger vehicle sales. Higher rural incomes owing to normal monsoons will also drive up two-wheeler sales by 9-11 per cent. However, MHCV sales growth is expected to lag GDP growth and remain weak at 5-7 per cent (despite a low base), until transporters utilisation levels improve. LCV sales will however continue to grow by 14-16 per cent. Operating margins of automobile manufacturers are estimated to decline sharply in 2012-13 due to lower capacity utilisation and firm input cost. However, in 2013-14, margins are likely to slightly improve as prices of raw materials like steel decline and sales volumes recover.
30
Automobiles
Automobiles: Tariffs
(per cent) Customs 2012-13 New cars
1 #
Excise 2012-13 2013-14
2013-14
-Completely knocked down units (CKD) -Semi-knocked down units (SKD) -Completely built units (CBU) -Specified small cars
2 3
10.3 61.8 61.8 61.8 61.8 10.3 10.3 10.3 7.7 5.2
10.3 61.8 61.8^^ 61.8 61.8 10.3 10.3 10.3 7.7 5.2
12.4 24.7* 24.7 12.4 12.4 12.4

@ @
12.4 24.7* 24.7** 12.4 12.4 12.4

@ @
-Other than specified small cars Utility vehicles Two-wheelers

^
Trucks (LCVs and MHCVs) Buses (LCVs and MHCVs) Tractors Steel items Pig iron Engine and engine parts - Four-wheelers - Two-wheelers Drive transmission, steering, suspension, braking parts,silencer, exhaust pipes and radiators - Four-wheelers - Two-wheelers Electrical parts
1 4
12.4 12.4
12.4 12.4
7.7 7.7
7.7 7.7
12.4 12.4
12.4 12.4
10.3 10.3 7.7
10.3 10.3 7.7
12.4 12.4 12.4
12.4 12.4 12.4
LCV: Light commercial vehicles; MHCV: Medium and heavy commercial vehicles All Hybrid cars and cars based on fuel cell or Hydrogen cell technologies enjoy
concessional excise duty of 4 per cent

2
Specified small cars include cars with length not exceeding 4,000 mm and engine
capacity not exceeding 1,200 cc for petrol cars and 1,500 cc for diesel cars.
3
Others will include cars with length exceeding 4,000 mm and
engine capacity not exceeding 1,200 cc for petrol cars and 1,500 cc for diesel cars.
4
Customs duty for air conditioner machine parts is at 10.3 per cent
@Tax of 13.4 per cent or 25.8 per cent is applicable on transactions where only commercial vehicles chassis is sold * Additional duty of 3 per cent will be charged on cars and utility vehicles exceeding length of 4000 mm and which are of 1500 cc and above **Duty for utility vehicles with engine capacity exceeding 1500 cc length exceeding 4000 mm and having ground clearance of 170 mm is 30.9 per cent # CKD for vehicles with pre assembled engine and transmission parts is 30 per cent ^Customs duty on motorcycles with engine capacity of 800 cc or more has been increased from 61.8 per cent to 77.3 per cent ^^Customs duty on CBUs priced (CIF) over $40,000, with engine capacity exceeding 3000cc for petrol-run vehicles, 2500 cc for diesel-run vehicles, is 103 per cent Source: CRISIL Research
31
Automobiles
Budget marginally negative for utility vehicles; neutral for other segments
Company Maruti Suzuki Ltd Tata Motors Ltd Ashok Leyland Ltd Bajaj Auto Ltd Hero Motocorp Ltd Mahindra & Mahindra Ltd Note: Company list is classified as per sector classification Source: CRISIL Research
Impact Q Q K Q Q Q
Impact factors A, B, C, D B,D E E B, E
Impact factors
A. Demand for high-end imported luxury cars (with CIF value exceeding $40,000 and an engine capacity of over 3000 cc for petrol-run vehicles and 2500 cc for diesel-run vehicles) will be impacted as the basic customs duty has been raised to 100 per cent from 75 per cent. Similarly, sales of motorcycles (with an engine capacity of 800 cc or more) will be impacted by an increase in the basic customs duty to 75 per cent from 60 per cent. However, these high-end vehicles constitute a miniscule portion of the industrys overall sales. B. The excise duty on cars, two-wheelers and commercial vehicles remains unchanged at 12 per cent. Demand for non-taxi sports utility vehicles (defined as a motor vehicle of length exceeding 4,000 mm and having a ground clearance of 170 mm and above) with an engine capacity above 1500 cc, will be marginally affected by the increase in excise duty to 30 per cent from 27 per cent. Sales of such vehicles, which account for 10-12 per cent of total domestic passenger vehicle sales, grew by about 16 per cent during April 2012 to January 2013. A reduction in excise duty on truck chassis to 13 per cent from 15 per cent will marginally benefit commercial vehicle sales. C. Surcharge of 10 per cent on annual incomes exceeding Rs 1 crore could marginally impact demand for luxury vehicles. Currently, these vehicles account for less than 3-4 per cent of industry sales. D. E. An increase in allocation under JNNURM will aid purchase of 10,000 buses and will benefit bus manufacturers. Extension of interest rate subvention to farmers, focus on rural development schemes like the Mahatma Gandhi National Rural Employment Gurantee Act (MGNREGA), Pradhan Mantri Gram Sadak Yojana (PMGSY) and Indira Awaas Yojana (IAY), coupled with a 22 per cent increase in agri-credit allocation to Rs 7,000 billion is expected to have a marginally positive impact on sales of tractors and two-wheelers.
32
Banking
Banking sector to witness marginal improvement in credit offtake in 2013-14
Sluggish growth in the economy, shelving of capital expenditure plans by companies, and risk aversion by banks led to the overall deceleration in credit growth in 2012-13. Aggregate bank credit had grown by 16.4 per cent y-o-y as on February 08, 2013, compared with 17.1 per cent as on March 23, 2012. With GDP growth forecast to increase to 6.4 per cent from an estimated 5.0 per cent in 2012-13 and softening interest rates, we expect 2013-14 to be marginally better for the banking industry as compared to 2012-13. Aggregate bank credit is expected to grow by 17-18 per cent y-o-y, driven by improvement in agriculture growth, consumption-led recovery in the economy and pre-election welfare spending by the government. Deposits grew at a tepid pace of 13.3 per cent y-o-y as of February 08, 2013, owing to contraction of demand deposits as well as slower growth of savings bank deposits. In 2013-14 as well, mobilising deposits will remain a challenge for banks. While inflation is expected to moderate, term deposit rates are also likely to decline with the reduction in policy rates. We expect bank deposits to grow by 14-15 per cent y-o-y in 2013-14. Net interest margins will come under pressure in 2012-13 and are expected to decline by 10-15 bps due to competitive pressure on yields and high cost of deposits. Aggregate GNPAs of all public sector banks (PSBs) rose to 3.9 per cent as of December 2012 from 3.0 per cent as of December 2011. During the same period, private banks GNPA improved by ~18 bps to 1.9 per cent. CRISIL Research estimates the banking sectors GNPA will remain between 3.4-3.6 per cent by March 2014. GNPA is likely to peak in the first half of 2013-14 and ease off thereafter as corporate cashflows start to improve owing to demand growth and moderating commodity prices. The rise in GNPAs will also be restricted by the improvement in loan recovery ratio, sale of assets to asset reconstruction companies and debt restructuring to be undertaken by banks.
33
Banking
Recapitalisation of PSBs and boost to housing finance
Company State Bank of India Ltd Punjab National Bank Ltd ICICI Bank Ltd HDFC Bank Ltd Source: CRISIL Research Impact Impact factors A, B, C, D, E A, B, C, D, E B, C, D, E B, C, D, E
K K Q Q
Impact factors
A. x Capital support to PSBs The Budget proposed to provide Rs 140 billion as capital support to all PSBs in 2013-14. The government also intends to help PSBs comply with Basel III regulations. Capital support will be critical for PSBs to continue to pursue growth opportunities. B. x Home loans The clear focus on giving a boost to the housing market is also positive for financiers. An additional tax deduction of Rs 100,000 on interest paid towards home loans upto Rs 25 lakh availed in 2013-14 by first-time home buyers (over and above the existing Rs 150,000 deduction) has been introduced to give a boost to the affordable housing segment. This additional deduction can be claimed over a period of 2 years. x In addition, an amount of Rs 20 billion has been allocated towards a proposed Urban Housing Fund to be set up by the National Housing Bank (NHB). Such a fund is likely to assist the NHB in providing refinance and will mitigate the shortage of houses in urban areas. C. x Farm credit For 2013-14, banks have been directed to lend Rs 7,000 billion to the agriculture sector, 21.7 per cent higher than the target for 2012-13. x Farmers who avail of farm loans from PSBs and repay in a timely manner, get loans at subsidised rates. They will now be able to access this credit facility from private banks as well, thereby helping private banks increase lending to this segment. D. x Improving insurance penetration Banks have also been permitted to sell insurance products of multiple companies to increase insurance penetration. The move will supplement the fee income for such banks. x Additionally, banking correspondents have also been allowed to sell micro-insurance products.
34
Banking
E. x Post offices to contribute towards financial inclusion With an investment of Rs 49 billion (of which Rs 5.3 billion has be allocated in 2013-14) to modernise the postal network, post offices will become part of the core banking solution and offer realtime banking services. x F. x Post offices are envisaged to contribute to financial inclusion in India. Infrastructure Debt Funds (IDFs) In order to mobilise funds for an estimated Rs 55 trillion worth of investments in the infrastructure sector during the Twelfth Five-Year Plan, the Union Budget encourages setting up of more IDFs. Currently, there are four IDFs registered with SEBI. x The IDFs will offer take-out finance, credit enhancements and other innovative means to provide long-term lowcost debt for infrastructure projects. G. Inflation-indexed bonds x In order to increase household financial savings so that they can be used productively to boost the economy, the Budget proposes to introduce instruments that will protect savings from inflation, like inflation-indexed bonds or inflation-indexed national security certificates.
35
Cement
Growth in cement demand to improve in 2013-14
CRISIL Research foresees growth in cement demand to be muted at around 5 per cent on a year-on-year (y-o-y) basis in 2012-13 and reach around 236 million tonnes, due to subdued uptake in construction activity across realty and infrastructure segments. However, with a revival in housing and infrastructure spending by the government in 2013-14, cement demand is expected to gain traction and grow at around 7 per cent y-o-y during the year. CRISIL Research expects industry operating rates to bottom out at around 71 per cent in 2012-13 due to muted growth in cement demand and overcapacity in the industry. However, from 2013-14 onwards, we foresee a gradual revival in the cement operating rates due to improvement in demand and cement industry approaching the end of its investment cycle. CRISIL Research expects average cement price across India to rise sharply by around 15 per cent in 2012-13, largely led by the steep price rise in the eastern region due to supply constraints on account of unavailability of railway wagons. Going forward, with the industry poised for a revival, cement prices are estimated to rise by a moderate 4-5 per cent in 2013-14. CRISIL Research believes that in 2012-13, the sharp rise in cement prices will more-than-offset the pressure exerted by rising input costs, especially freight. Freight costs are likely to rise due to a hike in freight rates as well as an increase in lead distances.Consequently, industry operating margin is estimated to improve by 300 bps to 23-24 per cent during the year. However, in 2013-14, as escalation in input costs is likely to more-than-offset increase in realisatons, we estimate industry operating margin to marginally decline by 100 bps. Cement: Tariffs
(Per cent) Customs 2012-13 Portland cement White cement Cement clinker Limestone Gypsum Pet coke Source: CRISIL Research 0 10.3 10.3 5.2 2.6 0 2013-14 0 10.3 10.3 5.2 2.6 0 Excise 2012-13 12.4 +Rs120/tonne 12.4 12.4 0 0 15.1 2013-14 12.4 +Rs120/tonne 12.4 12.4 0 0 15.1 Abatement rate 2012-13 0 30 0 0 0 0 2013-14 0 30 0 0 0 0
36
Cement
Hike in freight costs to offset benefits arising from boost to housing and infrastructure
Company ACC Ltd Ambuja Cements Ltd India Cements Ltd Shree Cement Ltd UltraTech Cement Ltd Source: CRISIL Research Impact Impact factors A,B A,B A,B A,B A,B
Q Q Q Q Q
Impact factors
A. The Union Budget has proposed many schemes to boost the infrastructure (especially roads) and housing segments. This is expected to aid cement demand. B. However, this upside is likely to be offset by the increase in freight costs for cement companies, due to the proposed hike in railway freight. The Railway Budget 2013-14 has proposed fuel adjustment component linked revision for freight rates.
37
Construction
Slow revenue growth; declining profitability
The order book position of major construction companies has declined during the April-December 2012 period due to weak order inflows. Slowdown in awarding projects in sectors such as roads, power and irrigation has been the key reason for lower order inflows. Revenue growth has also been subdued due to the delays in execution, financial stress of companies and the weak macroeconomic environment. Further, profitability has declined with the rising share of low-margin segments in the overall business, and sustained pressure on contract pricing - especially in road projects. The financial flexibility of most construction companies is currently stressed owing to increased leverage and reduced ability to repay borrowings. Increase in long-term debt can be primarily attributed to the loans taken for BOT projects, while the short-term loans have increased considerably due to higher working capital requirement of these companies. In the near term, we foresee single-digit revenue growth with expected execution delays, particularly in power and irrigation. Profitability is expected to decline on account of the muted revenue growth and competitive pressures. However, the decline will be offset, to some extent, by the softening of material prices. Over the long term (next 5 years), CRISIL Research expects growth to pick up gradually and estimates the total construction opportunity to be around Rs 19.2 trillion between 2012-13 and 2016-17. Over 85 per cent of the total opportunity is likely to come from infrastructure spending, specifically the roads, irrigation and urban infrastructure sectors. In the industrial segment, the opportunity is expected to be low on account of sluggish expansion plans in the large contributors such as oil and gas, metals and automobiles. Roads will account for the lion's share of construction opportunity over the next 5 years. The Central government's programmes including the National Highway Development Programme (NHDP), Pradhan Mantri Gram Sadak Yojana (PMGSY), and road development programmes of the various state governments will support growth in road investments.
38
Construction
Measures to boost investments in roads, urban infrastructure
Company Larsen & Toubro Ltd Hindustan Construction Co Ltd IVRCL Infrastructures & Projects Ltd IRB Infrastructure Developers Ltd Gammon India Ltd Source: CRISIL Research Impact Impact factors A,B,C A,B,C A,B,C A,B A,B,C
K K K K K
Impact factors
A. Government agencies (including NHAI and HUDCO) have once again been permitted to issue tax-free infrastructure bonds in 2013-14 totalling up to Rs 500 billion. This will provide additional funds to various infrastructure sectors such as roads, ports and power. B. In the roads sector, the budget proposes to set up an independent regulatory authority. In the medium term, this could help faster implementation of road projects. After the substantial completion of the Pradhan Mantri Gram Sadak Yojana (PMGSY), the PMGSY II has been introduced to support rural road development. This is expected to benefit the small local road contractors. C. Allocation towards the JNNURM programme (Jawahar Lal Nehru National Urban Renewal Mission) has been doubled in 2013-14 from the previous year. This will boost spending on ongoing and upcoming urban infrastructure projects. In addition, allocation to the Ministry of Drinking Water and Sanitation has been increased by 17 per cent in 2013-14, driving investment, particularly in water supply and sanitation.
39
Fertilisers
Higher international prices and inadequate monsoon impacts non-urea fertiliser consumption
Domestic fertiliser demand is estimated to fall by 12 per cent y-o-y to 52.9 million tonnes (in product terms) in 201213, because of a steep rise in non-urea fertiliser prices and delayed monsoons. While demand for urea is likely to increase by 1 per cent to 29.9 million tonnes, sales of non-urea fertilisers are expected to decline by 24 per cent. In 2012-13, anticipating a decline in international fertiliser prices, the government cut subsidy rates on non-urea fertilisers by 10-12 per cent for N and K nutrients, and by 32 per cent for the P nutrient. While international fertiliser prices declined, a weakening rupee offset the benefits of same. Consequently, fetiliser manufacturers were forced to increase non-urea fertiliser prices (by an average of 25-30 per cent y-o-y), which affected demand. Besides high prices, delayed monsoons impacted Kharif sowing, thereby further impacting fertiliser consumption. The decline in demand has been more severe in southern and western regions as compared to North and East, due to inadequate monsoons and water shortage. In 2013-14, overall fertiliser demand is expected to improve, assuming normal monsoons and an expected decline in retail prices of non-urea fertilisers (by Rs 1,300-1,500 per tonne) owing to a decline in international prices. While demand for non-urea fertilisers is expected to rise by 12 per cent to 25.9 million tonnes, demand for urea is expected to grow by 4.1 per cent to 31.1 million tonnes. More urea plants will be set up, aided by a favourable investment policy approved by the government in December 2012. These capacity additions are likely to reduce dependence on imports over the long term.
40
Fertilisers
Fertilisers: Tariffs, prices and landed costs
Landed costs Tariffs (per cent) Customs 2012-13 Urea DAP MOP Ammonia Phosphoric acid Sulphur Rock phosphate Naphtha Fuel oil Contracted LNG
2
Prices (Jan 2013) Excise Domestic 2013-14 12.4 12.4 12.4 12.4 (Rs/tonne) 5,360 24,000 17,000 n.a. NT n.a. NT 59,520 39,400 International ($/tonne) 421 470 453 585 813 166 140 971 643 -
(Rs/tonne) Prebudget 25,595 30,538 28,394 41,653 47,333 9,386 9,321 54,534 36,300 24,268 Postbudget 25,595 30,538 28,394 41,653 47,333 9,386 9,321 54,534 36,300 24,268
2013-14 5.2 5.0 5.0 5.2 5.2 2.1 5.2 5.0
2012-13 12.4 12.4 12.4 12.4 -
5.2 5.0 5.0 5.2 5.2 2.1 5.2 5.0
DAP: Di-ammonium phosphate; LNG: Liquified natural gas MOP: Muriate of potash; NT: Not traded; n.a.: Not available "-" indicates not applicable Notes: 1) There is no excise and customs duty on naphtha and fuel oil used for production of fertilisers. 2) International prices are FOB prices. Source: CRISIL Research
41
Fertilisers
Fertiliser subsidy for 2013-14 to remain unchanged y-o-y
Company Nagarjuna International Ltd Chambal Fertilisers & Chemicals Ltd Coromandel Fertilisers Ltd Gujarat State Fertilisers Company Ltd National Fertilisers Ltd Rashtriya Chemicals and Fertilisers Ltd Zuari Industries Ltd Source: CRISIL Research Impact Q Q Q Q Q Q Q Impact factors B A,B A A,B B A,B A,B
Impact factors
In 2013-14, fertiliser subsidy is expected to stay constant at last years level of Rs 659 billion A. Subisidy on non-urea fertilisers is budgeted to decline by Rs 10 billion, despite higher demand, as nutrient-based subsidy (NBS) rates are expected to be reduced due to a fall in international prices. B. The increase in budgeted subsidy of Rs 10 billion on indigenous urea for 2013-14 implies that the government is not expected to hike retail urea prices during the year. Further, unavailability of incremental domestic natural gas will force plants converting from high cost naphtha/fuel oil feedstock to import gas at relatively higher spot prices, thus keeping subsidy burden high.
42
Hotels
Room additions to impact RevPARs
During April-December 2012, growth in room demand remained subdued at around 4 per cent for 12 key business and leisure destinations in India, due to an uncertain macroeconomic environment. However, room additions continued to grow at a faster rate of 10 per cent. As a result, occupancy rates (ORs) declined by 200 basis points on a year-on-year (y-o-y) basis to 60 per cent. Intense competition resulted in average room rates ( ARRs) declining by 3 per cent and consequently, revenue per available room (RevPARs) declined by 5 per cent y-o-y during this period. In 2013-14, growth in room supply is expected to outpace the growth in room demand in 12 key cities of India. While room demand is expected to increase by a modest 8 per cent, room supply is likely to rise by 14 per cent. This demandsupply mismatch will lead to a 200-300 basis point decline in occupancy rates (ORs), which could reach decadal lows of 58 per cent in 2013-14. Further, intensifying competiton, arising from supply additions, will cause ARRs to decline by 4-5 per cent y-o-y to Rs 7,000 per day in 2013-14, from Rs 7,400 per day in 2012-13. As a result, RevPARs are expected to dip by 8-9 per cent to Rs 4,050 in 2013-14, from Rs 4,450 in 2012-13. All business destinations are expected to witness a drop in RevPARs. Premium segment hotels in cities like Chennai, Bengaluru and Ahmedabad will witness RevPARs declining by over 15 per cent (y-o-y) in 2013-14. RevPARs in NCR and Kolkata are expected to decline by around 10 per cent. On the other hand, RevPARs in Mumbai, Pune and Hyderabad will decline at a relatively moderate pace of 2-5 per cent (y-o-y) in 2013-14, as supply additions are expected to be relatively slow. Among leisure destinations, RevPARS in premium hotels in Kochi and Jaipur will decline by around 15 per cent y-oy in 2013-14. RevPARs in Goa and Agra will increase by 5-7 per cent y-o-y on account of limited supply additions.
43
Hotels
Union Budget 2013-14 - neutral impact on hotel industry
Company Hotel Leelaventure Ltd EIH Ltd Oriental Hotels Ltd Taj GVK Hotels & Resorts Ltd Indian Hotels Company Ltd Source: CRISIL Research Impact Impact factors A A A A A
Q Q Q Q Q
Impact factors
A. As of July 2012, only air-conditioned restaurants that served liquor were levied a service tax at 12.36 per cent, with an abatement of 60 per cent (net service tax of 4.95 per cent). In the Union Budget of 2013-14, it has been proposed to include all air-conditioned restaurants, including those which do not serve liquor, under the service tax net. This proposal is not expected to impact demand as the service tax will be passed on to consumers.
44
Household Appliances
Demand for household appliances to improve in 2013-14
The household appliance industry is estimated to grow by 10 per cent in 2012-13 to Rs 384 billion. The growth will largely be supported by an increase in realisations as players have partially passed on the rise in raw material cost. CRISIL Research expects volume growth to be a mere 3 per cent, marginally higher as compared to 2011-12 due to weak consumer sentiment given the slow economic growth, high inflation, rising interest rates and rise in the prices of most appliances. In 2013-14, we expect better growth prospects with improvement in economic scenario - relatively lower inflation, stable product prices and decline in interest rates. Volume growth is expected to more than double to 7-8 per cent in 2013-14. Along with healthy volume growth, realisations would also increase due to a shift in favour of high-value products like LCD TVs, split ACs and fully automatic washing machines. We project overall revenue of the industry to grow at 11 per cent to Rs 426 billion. The different segments in the industry are expected to perform as follows: a) Television sales are likely to rise by 5 per cent in volume terms during 2013-14 driven by a robust demand growth in the LCD segment. b) Refrigerator volumes are estimated to grow at 9-10 per cent with healthy demand in both frost-free and direct cool segments. c) d) Washing machine segment is expected to register a volume growth of 8-9 per cent in 2013-14. Air conditioners (highly seasonal product), which recorded a marginal volume growth during 2012-13 due to a relatively cooler summer and high product prices, are expected to clock double-digit volume growth assuming favourable weather conditions. Prices of major raw materials used in household appliances are expected to come down in 2013-14 as steel prices trend lower. As a result, player operating margins are expected to improve by 40-50 basis points. In the long term, demand growth will be largely driven by favourable demographics, rising disposable incomes, shift in consumer preferences, low penetration (especially in rural areas) and competitive prices.
45
Household appliances: Tariffs
(Per cent) Customs 2012-13 B/W TVs Colour TVs (CRT, LCD) Refrigerators Room ACs Washing machines CPT and glass parts LCD panel Compressors, thermostat and tubes Steel Polymers 10.3 10.3 10.3 10.3 10.3 10.3 0.0 7.7 5.2 5.2 2013-14 10.3 10.3 10.3 10.3 10.3 10.3 0.0 7.7 5.2 5.2 Excise 2012-13 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 2013-14 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 Abatement rate 2012-13 30 35 25 35 2013-14 30 35 25 35 -
CRT: Cathode ray tube, LCD: Liquid crystal display, CPT: Colour picture tube Source: CRISIL Research
46
No impact on household appliance industry
Company Videocon Industries Ltd Whirlpool of India Ltd MIRC Electronics Ltd Source: CRISIL Research Impact Q Q Q Impact factors -
Impact factor
A. The Budget had no specific proposal pertaining to the household appliance industry. A tax credit of Rs 2,000 for a person with income upto Rs 5 lakh per annum, introduced in the Union Budget 2013-14, will result in higher disposable income in the hands of people coming in the lowest tax bracket. But, this is unlikely to translate into any meaningful impact on the demand.
47
Housing
Poor demand, high interest rates weigh on housing companies
Revenues of residential real estate developers remained almost flat y-o-y during April-December 2012, owing to weak demand. High interest rates and slow economic growth resulted in tepid housing sales. Average capital values have increased by about 5 per cent across the 10 major cities tracked by CRISIL Research.
Profitability of developers has declined owing to an increase in input prices, cost overruns in some projects and higher interest cost. Thus, financials of real estate companies have significantly deteriorated in the past 2-3 years. Some players therefore are looking to sell non-core assets.
Over the next 2 years, CRISIL Research expects residential real estate demand to pick up, led by an improvement in economic growth and softening of interest rates. As demand improves, capital values are also expected to increase. However, these factors are not expected to significantly improve developers financial profile over the medium term.
48
Housing
Measures to tackle housing shortage
Company DLF Ltd Housing Development and Infrastructure Ltd Parsvnath Developers Ltd Sobha Developers Ltd Unitech Ltd Source: CRISIL Research Impact Q Q Q Q Q Impact factors A,C A,C A,C A,C A,C
Impact factors
A. First-time home buyers taking a loan of up to Rs 25 lakh in 2013-14 can avail of an additional interest deduction of Rs 1 lakh in the first year, over and above the existing Rs 1.5 lakh benefit. This is likely to boost new home sales. B. Allocation towards the Rural Housing Fund has been increased by 50 per cent to Rs 60 billion for 2013-14. In line with the Rural Housing Fund, an Urban Housing Fund is proposed to be established by National Housing Bank. The fund has been allocated Rs 20 billion for 2013-14. These steps are aimed at boosting fund availability and addressing the overall housing shortage. C. For premium apartments (with a carpet area of 2,000 sq ft or above and/or valued at Rs 1 crore or more), abatement in service tax has been reduced to 70 per cent from 75 per cent. While this would result in an increase of 0.6 per cent in the effective service tax rate, the impact on demand is expected to be negligible.
49
Information Technology
Growth prospects to improve in 2013-14
The Indian information technology (IT) industry primarily consists of four segments IT services, IT enabled services, IT software and hardware. The slow economic growth in the US and European markets has adversely impacted Indian IT services exports growth in 2012-13. As a result, exports are expected to grow only by 10 per cent in USD terms in 2012-13, down from the 19 per cent growth seen in 2011-12. Growth is being led by volumes as billing rates are under pressure. Blended billing rates fell by 1-2 per cent with a slowdown in the billing of BFSI clients, who account for 41 per cent of total revenues, and the increasing proportion of lower value services in IT revenues. According to CRISIL Research estimates, in 2013-14, IT services exports will grow at a relatively faster pace of 13-15 per cent y-o-y to reach $50 billion. Although we expect the IT budget of clients to remain flat in 2013, increase in the share of offshoring will enable a higher growth in the coming year. According to NASSCOM, Indian ITeS exports grew by 12 per cent y-o-y in 2012-13. Although India is facing stiff competition in the customer relationship management (CRM) space, higher-value knowledge-based services will continue to drive growth in the ITeS industry. An inherent need to reduce costs will ensure continued offshoring by clients, thereby supporting growth. CRISIL Research expects ITeS industry export revenues to grow by 11-13 per cent y-o-y in 2013-14, driven by growth in transaction and knowledge based services. The domestic information technology (excluding IT hardware) is expected to grow by 14.1 per cent in rupee terms in 2012-13. Factors such as rapid advancement in technology infrastructure, enhanced focus by the government on egovernance projects and emergence of business models that help provide IT to new customer segments are driving technology adoption in India. During 2013-14, the Indian IT hardware Industry is expected to witness double-digit growth in rupee terms. In 2012-13, the operating margins of IT services exports players are likely to improve on account of benefit arising out of rupee depreciation. However, CRISIL Research expects this trend to reverse in 2013-14 as rupee is expected to appreciate against the dollar while the billing rates remain more or less flat.
50
IT: Hardware and software tariffs
Tariff (per cent) Customs 2012-13 Packaged software Personal computers Monitor Keyboard Mouse Printer FDD, HDD, CD-ROM drive and other storage drives Motherboards Microprocessors Routers Modems
1 2 3 3 2 1
Excise 2012-13 0.0 12.4 12.4 12.4 12.4 12.4 6.2 12.4 6.2 12.4 12.4 2013-14 0.0 12.4 12.4 12.4 12.4 12.4 6.2 12.4 6.2 12.4 12.4
2013-14 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tax rate is inclusive of education cess.
FDD: Floppy disk drive; HDD: Hard disk drive; CD-ROM: Compact disk-read only memory. Microprocessors meant for fitment inside the CPU housing/laptop body.
Source: CRISIL Research
51
No significant impact on the IT sector
Company Infosys Technologies Ltd Tata Consultancy Services Ltd Wipro Ltd Polaris Software Lab Ltd Firstsource Solutions Ltd Zenith Computers Ltd Source: CRISIL Research Impact Q Q Q Q Q Q Impact factors A,B A,B A,B A,B A,B A,B
Impact factors
A. The increase in surcharge from 5 per cent to 10 per cent for companies with taxable income higher than Rs 100 million will increase the effective MAT levied to 21 per cent, from the current 20 per cent. The additional surcharge will be applicable only for the financial year 2013-14. B. Focus on education and skill development is a structurally long term positive for the sector.
52
Media and Entertainment

Muted growth in advertising spends due to subdued macroeconomic environment
Advertising spends, which had slowed in 2011-12, have been further impacted in 2012-13 due to a weak macroeconomic environment. The overall growth in advertising spends is expected to be only 7-9 per cent in 2012-13, as compared with 9-10 per cent in 2011-12. Growth is expected to remain muted in the first half of 2013-14, with a rebound likely in the latter half of the year owing to a revival in economic activity. A slowing pace of growth in advertising spends would impact the topline of media companies, particularly broadcasters and newspaper publishers, where advertising constitutes more than 70 per cent of total revenues.
Growth in advertising spends in mobile & digital media and radio is expected to be higher as compared to traditional media such as television and newspapers. This would be on account of advertisers allocating an increasing share of spends towards digital & mobile media, given its growing reach. The implementation of FM Phase III coupled with increased traction from local advertisers is expected to drive growth in the radio segment.
Growth in subscription revenue in 2012-13 is expected to be higher at around 12 per cent y-o-y, primarily owing to impressive box office collections of films aided by a strong movie pipeline, increase in the number of multiplexes and a rise in the average ticket price. While subscription revenue growth for television is being driven by migration of subscribers to digital viewing platforms, for print, it is being driven by growth in circulation numbers. Growth in subscription is expected to remain steady at 9-11 per cent in 2013-14. Overall media revenues are, thus, expected to increase by 10-12 per cent in 2013-14.
The proportion of digital television subscribers is on the rise, as the deadline for digitisation has passed in all the metro cities and the Phase II deadline nears (April 2013) for 38 more cities. As a result, the digital television subscriber base, as a proportion of cable and satellite subscribers, is expected to rise to over 65 per cent by 201314 from 50 per cent in 2011-12. Digitisation would also ensure a higher proportion of subscription revenues being received to broadcasters, direct-to-home operators and multi-system operators.
Media and entertainment: Tariffs

(per cent) Customs 2012-13 Digital cinema equipment Broadcast equipment Set-top boxes Source: CRISIL Research 7.7 10.3 5.2 2013-14 7.7 10.3 10.3 Excise 2012-13 12.4 12.4 12.4 2013-14 12.4 12.4 12.4
53
Media and Entertainment

Overall impact neutral; negative for DTH operators and MSOs
Company Balaji Telefilms Ltd Dish TV India Ltd Entertainment Network India Ltd Hathway Cable & Datacom Ltd HT Media Ltd PVR Ltd Sun TV Ltd Zee Entertainment Enterprises Ltd Source: CRISIL Research Impact Q L K L K Q Q Q Impact factors A B A B -
Impact factors
A. The hike in customs duty on set-top boxes (STBs) to 10 per cent from 5 per cent would increase the subscriber acquisition costs of direct-to-home operators and multi-system operators in the short term, as most STBs are still imported. B. 839 FM channels in 294 cities are intended to be auctioned in 2013-14. While FM channels are expected to witness a healthy uptake in bigger cities, we expect that their demand would be subdued in smaller cities, owing to weak revenue earning potential.
54
Non-ferrous metals
Aluminium: Input costs to remain firm; prices to increase
Domestic demand for aluminium is expected to rise by 6-8 per cent y-o-y in 2013-14, led by steady growth in the power (the largest consumer) and consumer durables sectors. Further, a recovery in automobile demand during the year is also expected to support growth. Global aluminium prices are expected to fall by 14 per cent (y-o-y) to average $1990 in 2012-13. In spite of a decline in international prices, domestic prices are expected to increase by about 7 per cent (y-o-y) led by a weak rupee, and will average Rs 141,500 per tonne. International prices are likely to increase in 2013-14 and range between $2,100-2,300 per tonne in 2013-14.
In 2013-14, operating profitability of domestic aluminium players will remain stable as increase in realisations is expected to be offset by higher power costs.
Copper
In 2012-13, domestic prices are expected to be 7-8 per cent higher (y-o-y) as the landed cost of copper increased on account of a weak rupee. During the year, global copper prices are however expected to decline by 7-8 per cent on account of lower demand from the European Union, Japan and China. Operating margins of fully-integrated players are likely to improve, benefitting from higher realisations. However, margins of custom smelter players, treatment charges/refining charges (TC/RC) will remain under pressure because of a global shortage of copper concentrate.
Zinc
Domestic demand for zinc is estimated to increase by 4-6 per cent in 2012-13, because of slow growth in demand from the domestic galvanised steel products sector, which is the largest consumer. Global demand declined by 3 per cent in 2012 following a decline in demand from China and Europe. Average international zinc prices are expected to decline by about 7 per cent in 2012-13, owing to increased supply and weak demand in global markets, whereas rupee depreciation will push up average domestic prices by about 6-7 per cent during the year.
Lead
In 2012, global demand for lead fell by 1.5- 2.0 per cent on account of lower demand from China and the European Union. However, domestic production increased by 10.6 per cent during the year. Average international lead prices are expected to be 7-8 per cent lower in 2012-13. However, depreciation in the rupee value will push up average domestic prices by 7-8 per cent over the same period.
55
Non-ferrous metals
Non-ferrous metals:Tariffs, prices and landed costs
Tariff (per cent) Customs 2012-13 2013-14 Aluminium ingots Aluminium products - Flat-rolled products - Foils Aluminium scrap Non-coking coal Caustic soda Calcined petroleum coke Copper Copper scrap Copper ore and concentrates Lead Lead ore and concentrates Zinc Zinc ore and concentrates Note: Duties also include cess Source: CRISIL Research 5.2 2.6 5.2 2.6 12.4 4.1 12.4 4.1 149,333 2,151 142,578 142,578 4 1
Prices (February 2013) Domestic

2
Landed cost (Rs/tonne)

3
Excise 2012-13 2013-14 12.4 12.4
International
Pre-budget Post-budget
(Rs/tonne) 145,000
($/tonne) 2,078 137,764 137,764
5.2
5.2
5.2 5.2 5.2 0.0 7.7 2.6
5.2 5.2 5.2 2.1 7.7 2.6
12.4 12.4 12.4 0.0 12.4 12.4
12.4 12.4 12.4 0.0 12.4 12.4
5.2 5.2 2.6
5.2 5.2 2.6
12.4 12.4 4.1
12.4 12.4 4.1
525,333 -
8,173 -
539,006 -
539,006 -
5.2 2.6
5.2 2.6
12.4 4.1
12.4 4.1
130,000 -
2,407 -
159,453 -
159,453 -
56
Non-ferrous metals
No significant impact for the industry
Company Hindalco Industries Ltd Hindustan Copper Ltd Hindustan Zinc Ltd National Aluminium Company Ltd Sterlite Industries (India) Ltd Source: CRISIL Research Impact Q Q Q Q Q A B B Impact factors B
Impact factors
A. Excise duty has been levied at 4 per cent on silver obtained from smelting zinc or lead, to bring the rate on par with the duty levied on silver obtained from copper ores and concentrates. As the sale of by-products such as silver typically account for a mere 5-10 per cent of a zinc manufacturers revenues, the impact of the increase in excise duty is expected to be negligible. B. Export duty levy of 10 per cent will help improve domestic availability of bauxite. However the impact will be negligible as India exported only around 0.4 mn tonnes of bauxite (2 per cent of production) in 2011. C. The Railway Budget for 2013-14 has proposed a hike of 5.8 per cent in the freight rate. This would translate into an estimated increase of Rs 500-700 per tonne in logistics costs for aluminium facilities located away from the coal mines.
57
Oil and Gas

Under-recoveries to surge to record levels in 2012-13 despite price revisions
After averaging $114.4 per barrel in 2011-12, crude oil prices have remained high, averaging at $110 per barrel in 2012-13 (April 2012 to January 2013), due to sanctions imposed on Iran by the US and the EU, and political tensions in some of the countries in the MENA (Middle East and North Africa) region. CRISIL Research expects crude oil prices to average $112 per barrel in 2012-13. Crude oil demand rose by 5.3 per cent y-o-y to 160 million tonnes during April-December 2012. Imports also increased by 6.8 per cent y-o-y to 134.2 million tonnes as domestic production did not keep pace with demand. Due to inadequate revision in prices of regulated fuels, high crude oil prices and a weak rupee vis-a-vis the US dollar, the under-recoveries of oil marketing companies (OMCs) are expected to touch an all-time high of Rs 1,600 billion in 2012-13. The mounting under-recoveries have pushed OMCs into the red, as shrinking profits from their refining business have not been able to offset the marketing losses. However, the government affected a Rs 5 per litre increase in diesel prices in September 2012, and has allowed small revisions in diesel prices since January 2013 to gradually align the domestic prices to international prices. This will lead to a decline in under-recoveries in 2013-14. Gross refining margins (GRMs) remained flat at $5.2 per barrel during April-December 2012 as compared to the same period last year. Due to technical issues in the KG-D6 basin, Indias gas production declined to 115 mmscmd during April-November 2012 from 133 mmscmd in the same period last year. This impacted the profitability of gas production and transmission companies. Further, the higher usage of LNG affected the profitability of gas marketing companies.
58
Oil and Gas

Oil and gas: Tariffs, prices and landed costs
Tariffs (per cent) Customs 2012-13 Motor spirit (MS) Aviation turbine fuel (ATF) Naphtha Superior kerosene oil (SKO) - Industrial use - Domestic use High-speed diesel (HSD) Fuel oil Liquefied petroleum gas (LPG) - Domestic use Bitumen Crude oil
1 2
Prices (February 2013) Excise Domestic 2013-14 Rs 9.476/ltr 8.2 (Rs/tonne) 102,608 86,633 International ($/tonne) 1,109 1,036
Landed costs (Rs/tonne) PreBudget PostBudget
2013-14 2.6 8.2
2012-13 Rs 9.476/ltr 8.2
2.6 8.2
63,602 62,915
63,602 62,915
19.6
19.6
14.4
14.4
59,520
971
65,206
65,206
5.0 0.0 2.6
5.0 0.0 2.6
14.4 0.0 Rs 3.563/ltr
14.4 0.0 Rs 3.563/ltr
59,268 15,236 64,672
1,016 1,036 986
59,861 58,125 56,600
59,861 58,125 56,600
5.0
5.0
14.4
14.4
39,400
643
38,115
38,115
0.0 5.0 0.0
0.0 5.0 0.0
0.0 14.4 0.0
0.0 14.4 0.0
30,880 n.a. n.a.
1,043 643 864
59,648 38,500 -
59,648 38,500 -
Natural gas - APM
0.0 0.0 5.0
0.0 0.0 5.0
14.0 14.0 14.0
14.0 14.0 14.0
9,000 11,250 -
428
24,268
24,268
- Non-APM LNG
3
'-' indicates not applicable n.a.: Not available

1 2 3
Cess on crude oil (in lieu of excise) is Rs 4,500 per tonne Price per '000 scm Prices are for contracted LNG (landed cost) in Rs per '000 scm as per estimates
Notes 1) International prices are FoB Arab Gulf prices. 2) Domestic price of petroleum products are ex-storage point prices. 3) Priority sectors for natural gas include power and fertiliser. 4) Domestic natural gas prices represent landfall prices for each category. 5) Customs duty and excise duty on naphtha used for fertiliser is nil. 6) Customs duty and excise duty on fuel oil used in fertiliser is nil. Source: CRISIL Research
59
Oil and Gas

Change in exploration policy and review of current natural gas pricing policy to be positive
The proposed change in the exploration policy to revenue sharing from profit sharing for exploration and development contracts is marginally positive for upstream companies, as this is expected to remove any ambiguity related to the ascertaining of costs related to exploration and development, and will avoid delays in approvals from the regulatory authority. This policy will be applicable for the blocks that will be awarded henceforth, and the benefits will accrue over the long term. Furthermore, faster clearances will be provided to awarded but stalled NELP blocks. The government also declared a review of the current natural gas pricing policy, which is positive for the sector as it is expected to incentivise exploration investments. Additionally, a shale gas policy is expected to be announced in 2013-14. However, this would improve domestic natural gas production only over the long term.
Company Oil and Natural Gas Corporation Ltd Reliance Industries Ltd Cairn India Ltd Oil India Ltd Source: CRISIL Research Impact K K K K Impact factors A, B, C A, B, C A, B, C A, C
Impact factors
A. B. C. Proposed change in the exploration policy Clearances of stalled NELP blocks Review of the current natural gas pricing policy
60
Paper
Operating margins are expected to increase in 2013-14 after three continuous years of decline
Recent capacity additions coupled with weak domestic demand for paper (due to a slowdown in the macroeconomic environment) has pulled down operating rates from 78.5 per cent in 2010-11 to 76 per cent in 2012-13. In 2013-14, due to the recovery in the economy, demand growth is expected to improve from 5.9 per cent in 2012-13 to 6.4 per cent in 2013-14. This is expected to push up operating rates marginally to 77 per cent in 2013-14. Global pulp and wastepaper prices have fallen by 15 per cent and 18 per cent in 2012 over 2011 levels. However, domestic paper prices have not fallen in tandem, as the prices of domestic hardwood, which most of the large players use, have risen steeply. In 2013-14,CRISIL Research expects paper prices to increase on the back of improved demand and better pricing flexibility of players to pass on increases in raw material costs. Operating margins of players are expected to decline by 200 basis points in 2012-13 on account of subdued demand and players inability to pass on steep increases in raw material costs. In 2013-14, operating margins are expected to improve following improved demand, higher paper prices and decline in fuel costs. Despite global newsprint prices falling by 10 per cent in 2012, domestic newsprint prices have remained stable because of depreciation of the rupee vis-a-vis the US dollar. Increase in global newsprint prices following the shut down of capacitites in North America will support an increase in domestic newsprint prices in 2013-14. Margins of domestic newsprint players are expected to improve following an increase in domestic newsprint prices and a fall in global wastepaper prices. Tariffs
(per cent) Tariff (per cent) Customs 2012-13 Newsprint Maplitho Duplex board Art board Wood pulp (hard) Wood pulp (soft) Waste paper (OCC) n.a. - Not available NT: Not traded
1
Prices (February 2013) Excise Domestic 2013-14 0.0 6.2 6.2 6.2 2.1 (Rs/tonne) 33,500 58,000 31,840 59,000
1 1 1
Landed cost (Rs/tonne) Pre-budget Post-budget
International ($/tonne) 630 n.a. n.a. n.a. 650
2013-14 0.0 10.3 10.3 10.3 5.2
2012-13 0.0 6.2 6.2 6.2 2.1
0.0 10.3 10.3 10.3 5.2
33,877 37,510
33,877 37,510
NT
5.2
5.2
2.1
2.1
NT
645
37,222
37,222
0.0
0.0
6.2
6.2
11,300
245
13,989
13,989
Prices are delivered prices excluding VAT (delivered: basic+excise+octroi+avg freight prices)
61
Paper
Increase in education spending to help sustain demand for Writing & Printing paper
Company Andhra Pradesh Paper Mills Ltd Ballarpur Industries Ltd JK Paper Ltd Seshasayee Paper and Boards Ltd Tamil Nadu Newsprint and Papers Ltd Source: CRISIL Research Impact Q Q Q Q Q Impact factors A A A A A
Impact factors
A. Budgetary allocation for education has been increased by 19 per cent, which is expected to maintain demand for creamwove variety of Writing & Printing paper. This variety, primarily used in the manufacture of textbooks,
notebooks and other stationery for education, accounts for 17 per cent of paper and paperboard demand.
62
Petrochemicals
Petrochemical and polymer demand to improve gradually in 2013-14, resulting in an uptick in cracker margins
In calendar year 2012, cracker margins fell to average $168 per tonne of ethylene produced from $234 per tonne in 2011 due to weak demand from the downstream segments amidst high economic uncertainty in the EU and the US. Despite better realisations of by-products including olefins and aromatics, a sharp decline in butadiene prices led to a drop in cracker margins.
CRISIL Research forecasts cracker margins to improve y-o-y in 2013 to $170-210 per tonne, as feedstock prices are expected to decrease. Additionally, improved demand from downstream segments will bring some respite and pricing flexibility for players. Domestic prices are likely to follow the global price trend in the medium term.
Domestic demand for petrochemicals is estimated to grow by 4-7 per cent y-o-y in 2012-13 on account of weak demand from end-user sectors. However, demand growth is forecast to improve moderately at 6-9 per cent (y-o-y) in 2013-14, primarily driven by a recovery in demand in key end-use markets such as automotives, construction, woven sacks, household appliances, and packaging material industries.
Demand for commodity chemicals to grow at 6-9 per cent in 2013-14
Recovery in the growth rate of automotive and construction industries will be the key growth driver of domestic demand in the commodity chemicals sector, which is estimated to grow at 6-9 per cent annually in 2013-14. A large proportion of domestic demand will be met through imports. Capacity constraints in phenol and Linear Alkyl Benzene (LAB) and inadequate supply of feedstock (natural gas) for methanol will lead to an increase in imports.
Prices of all commodity chemicals have increased in calendar year 2012 in line with the increase in crude oil and feedstock prices. However, due to slowdown in demand globally, commodity chemical manufacturers were unable to pass on the total increase in prices. This led to a decline in tolling margins for all the chemicals, except Phthalic Anhydride (PAN), which recovered from the lowest decadal margins recorded in 2011. In 2013-14, tolling margins for most commodity chemicals are expected to improve with a recovery in demand. However, we expect margin pressure for PAN with relatively weak demand and higher feedstock prices.
63
Petrochemicals
Chemicals: Tariffs, domestic prices and landed costs
(per cent) Customs 2012-13 Polymers hdPE (IM) ldPE lldPE PPHP (IM) PVC PS (GP) ABS SBR (1502) PBR (1220) 5.2 5.2 5.2 5.2 5.2 5.2 5.2 10.3 10.3 5.2 5.2 5.2 5.2 5.2 5.2 5.2 10.3 10.3 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 99,317 100,079 99,766 102,023 70,558 124,764 130,970 160,000 157,000
1 1 1 1 1 1
Tariff (per cent) Excise 2012-13 2013-14
Prices (Jan 2013) Domestic (Rs/tonne) International ($/tonne)
Landed cost (Rs/tonne) Prebudget Postbudget
2013-14
1,458 1,424 1,444 1,438 995 1,881 2,024 2,250 2,500
3 3 3 3 3 3 3 3 3
99,259 96,945 98,306 97,898 67,739 128,057 137,792 160,680 178,534
99,259 96,945 98,306 97,898 67,739 128,057 137,792 160,680 178,534
Basic petrochemicals and intermediates EDC VCM Styrene Ethylene Propylene Butadiene Benzene Toluene Naphtha 2.6 2.6 2.6 5.2 5.2 5.2 5.2 5.2 5.2 2.6 2.6 2.6 5.2 5.2 5.2 5.2 5.2 5.2 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 14.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 14.4 n.a. n.a. n.a. n.a. n.a. 105,000 89,500 84,000 52,395 361 846 1,714 1,293 1,280 1,764 1,430 1,325 959
3 3 2 2 2 2 2 2 4
23,535 54,073 115,655 89,754 88,885 121,321 99,578 91,893 66,485
23,535 54,073 115,655 89,754 88,885 121,321 99,578 91,893 66,485
Commodity chemicals LAB PAN Methanol Phenol Orthoxylene

1 2
7.7 7.7 7.7 7.7 5.2

3
7.7 7.7 7.7 7.7 5.2
12.4 12.4 12.4 12.4 12.4

4
12.4 12.4 12.4 12.4 12.4

5
119,100 99,000 24,500 101,000 94,000
2,000 1,560 325 1,590 1,590

2
120,034 92,708 19,507 89,725 93,028
120,034 92,708 19,507 89,725 93,028
Market prices, Fob prices, C&F Far-East Asia, C&F Japan, Excludes trade discounts
LAB: Linear alkyl benzene; PAN : Phthalic anhydride n.a - not available Notes Education cess of 3 per cent has been included in the customs duty and excise duty. Additional CVD of 4 per cent has been levied on polymers and basic petrochemicals and intermediates. Landed cost also includes handling charges. Source: CRISIL Research
64
Petrochemicals
Neutral impact for the industry
The overall impact on the chemicals industry is neutral with no sector-specific announcements.
Company Basic petrochemicals and intermediates Reliance Industries Ltd Supreme Petrochem Ltd Finolex Industries Ltd Chemplast Sanmar Ltd Commodity chemicals Phillips Carbon Black Ltd Tamil Nadu Petroproducts Ltd IG Petrochemicals Ltd Thirumalai Chemicals Ltd Hindustan Organic Chemicals Ltd Note
Impact
Impact factors
Q Q Q Q
Q Q Q Q Q
The impact specified is only for the petrochemicals business of the companies listed above. Source: CRISIL Research
65
Pharmaceuticals
Industry on strong footing; healthy growth to continue
The Indian pharmaceuticals industry is estimated to grow by a robust 16-17 per cent y-o-y (constant exchange rate) to $33-34 billion in 2012-13. Exports (both bulk drugs and formulations) are estimated to grow by about 17 per cent y-o-y during the year, driven primarily by formulation exports to regulated markets, especially the US. The domestic formulations market is set to grow by an estimated 14-15 per cent y-o-y in 2012-13 with strong double-digit growth in drugs catering to chronic and lifestyle-related ailments such as anti-diabetic, cardiovascular and neuro/central nervous system. In 2013-14, CRISIL Research expects the industry to continue to expand at a healthy rate of 13-14 per cent y-o-y, reaching $36-37 billion. Export growth of formulations as well as bulk drugs is expected to moderate due to lower opportunity from drugs going off-patent in the global market in 2013-14 coupled with a high base in the previous year. Formulation exports and bulk drugs exports are both expected to grow by 12-13 per cent. The domestic formulations market is expected to maintain its growth momentum, expanding at a steady 14-15 per cent y-o-y to $13 billion in 2013-14. Growth will be driven by the chronic and lifestyle segments. The National Pricing Pharmaceutical Policy is expected to marginally bring down this growth rate post implementation. Pharmaceuticals: Tariffs
(per cent) Customs 2012-13 Bulk drugs Formulations
1 2 1,2
Excise 2012-13 12.4 6.2
2013-14 7.7 12.4
2013-14 12.4 6.2
7.7 12.4
Tax rates include education cess of 3 per cent Customs duty on select life saving drugs and bulk drugs used to manufacture them such as treating life-saving diseases like breast cancer, hepatitis, rheumatic arthritis, etc is 5 per cent.
66
Pharmaceuticals
No dosage prescribed
The overall impact on the Indian pharmaceuticals industry is neutral with no sector-specific announcements.
Company Sun Pharmaceutical Industries Ltd Cipla Ltd Dr Reddy's Laboratories Ltd Ranbaxy Laboratories Ltd Glenmark Pharmaceuticals Ltd Source: CRISIL Research Impact Q Q Q Q Q Impact factors -
67
Ports
Traffic at Indian ports to remain flat, pressure on utilisation rates to continue
Total traffic at ports is expected to remain flat at about 906 million tonnes in 2012-13 as compared to 908 million tonnes in 2011-12. On the other hand, cargo handling capacity is likely to grow by 3 per cent to 1,353 million tonnes in 2012-13. Consequently, capacity utilisation levels are expected to decline to 65 per cent in 2012-13 from 77 per cent in 2011-12. In 2013-14, we expect port traffic to revive and grow by 5 per cent due to better growth in container trade and coal imports. With capacity additions being moderate, utilisation rates are expected to witness marginal improvement in 2013-14. The share of non-major ports in total traffic is expected to increase to 40 per cent in 2012-13 from 38 per cent in 2011-12. Going forward, non-major ports are expected to grow faster than major ports, due to higher operational efficiency and lesser congestion. CRISIL Research expects the ports sector to attract investments of about Rs 160 billion in 2012-13 and a total of Rs 1 trillion over the next five years. Of the expected investments over the next five years, about 42 per cent would be directed towards major ports and the rest towards non-major ports. The private sector is expected to contribute more than 80 per cent of the expected investments.
Announcement of new ports in a period of overcapacity

The proposal to develop a new major port each in Sagar, West Bengal and in Andhra Pradesh will add 100 million tonnes of capacity. Further, a new outer harbour in the V.O. Chidambaranar port in Tamil Nadu through PPP will add another 42 million tonnes of capacity. Both these measures will lead to an increase in port capacities in a phased manner over a period of 5 -6 years. Private players will derive limited benefits from these measures as traffic at ports continue to register moderate growth and overall capacity utilisation rates are expected to remain subdued. Allocation of funds in the form of tax-free infrastructure bonds upto Rs 500 billion in 2013-14 is expected to marginally benefit the sector by facilitating availability of funds for port projects.
68
Ports
Budget has a neutral impact on port companies
Company Mundra Airport and SEZ Ltd Gujarat Pipavav Port Ltd Source: CRISIL Research Impact Q Q Impact factors -
69
Power
Favourable policy developments to result in improved fuel availability and stronger offtake from discoms
Demand for electricity in India is expected to grow by around 7.5-8.5 per cent over the medium term. CRISIL Research estimates capacity additions of around 80.5 GW in the Twelfth Five-Year Plan (2012-13 and 2016-17), led by the private sector. This is significantly higher than the 56 GW of capacity added during the Eleventh Five-Year Plan.
New capacities are facing significant fuel constraints due to slow ramp-up of coal production by Coal India Ltd (CIL) and falling KG-D6 basin gas output. To resolve the fuel availability issue, CIL has been mandated to sign Fuel Supply Agreements (FSAs) with power project developers. Coal requirement for FSAs will be fulfilled through a mix of domestic and imported coal. In addition, coal price pooling is expected to improve coal supply to the power sector. However, an increase in notified coal prices will also raise power tariffs by 6 to 8 paise per unit. PLFs of coal-based plants are expected to remain weak at 71 per cent in 2012-13. However, with improved coal supply, PLFs would gradually improve to 81 per cent by 2016-17.
Weak financials of the power distribution sector also pose a major challenge. Accumulated losses of state distribution utilties are estimated at around Rs 2.4 trillion in 2011-12, due to lack of tariff hikes, high aggregate technical and commercial (AT&C) losses and delays in disbursal of state government subsidies. To improve the financial health of discoms, the Cabinet Committee of Economic Affairs has cleared a financial restructuring programme for state-owned distribution companies. However, support from states, in ensuring timely tariff revisions and operational discipline, in terms of reduction in AT&C losses, are key to successful execution of this plan.
70
Power
Sunset clause extension and incentives for renewable energy to benefit power sector
Extension of the sunset clause by one year, to avail the 10-year tax holiday, would benefit 18-20 GW of capacities, expected to commission in 2013-14. Funding availability for the sector will improve with issuance of tax free infrastructure bonds of Rs. 500 billion and credit enhancement through IIFCL. Additionally, the proposal to adopt a PPP framework for coal production will improve domestic coal supply in the long term. Customs duty on imported steam coal, which was previously exempt, has been increased to 2 per cent, while CVD has been increased by 1 per cent. Further, as per Railway Budget 2013-14, freight rates have been hiked by 5.8 per cent. Consequently, generation costs would increase marginally by 2-3 paise per unit for domestic coal-based projects assuming blending of 10-12 per cent and inland transportation distance of 350 to 400 kms. On the other hand, imported coal-based projects will see a much higher increase of 5-6 paise per unit. Investments in wind energy, which nearly halved in 2012-13 due to withdrawal of accelerated depreciation and generation basd incentive (GBI) benefits, are expected to increase significantly due to reinstatement of GBI, with an outlay of Rs. 8 billion. Further, capacity additions in solar power are expected to increase, with interest subvention for a period of five years by IREDA, through the National Clean Energy Fund.
Company National Thermal Power Corporation Ltd Reliance Power Ltd Tata Power Company Ltd Adani Power Ltd JSW Energy Ltd Orient Green Power Ltd Suzlon Energy Ltd Source: CRISIL Research Impact K K Q Q Q K K Impact factors B, C, D B, C, D A, B, C A, B, C, D A, B, C E E
Impact factors
A. Increase in customs duty by 2 per cent and CVD by 1 per cent, on imported steam coal for power sector; hike in railway freight rate by 5.8 per cent B. C. D. E. Extension of sunset clause by one year to avail the 10-year tax holiday for power projects Issuance of tax-free bonds of Rs. 500 billion and credit enhancement through IIFCL Proposal to adopt a PPP framework for coal production Reinstatement of generation-based incentive (GBI) for wind power, with an outlay of Rs. 8 billion
71
Roads
EPC model expected to revive bidder interest in national highways
In 2012-13, awarding under the NHDP has been extremely slow, with only 880 km being awarded till January 2013. Many BOT (Build Operate Transfer) projects have not been able to attract private participation, given the highly leveraged financial profile of developers and concerns over funding. Developers have been facing issues in achieving financial closure as many of the banks are approaching their sectoral exposure limit for roads and are being more cautious while lending to the sector. Since bidder interest for BOT projects remains lacklusture, NHAI (National Highways Authority of India) plans to award a higher proportion of projects on the EPC model, as many low traffic density stretches are expected to be bid. While there are concerns on awarding, execution under NHDP has been progressing at a steady pace in the last 2-3 years owing to a healthy pipeline of awarded projects. In 2011-12, 7,406 km of national highway projects were awarded, whose implementation would start in 2012-13, as the typical lag is for 9-12 months. According to CRISIL Research estimates, investments of Rs 6.3 trillion are expected to flow into roads and highways during the period, 2012-13 to 2016-17. Nearly 53 per cent of the investments will go into state roads, 32 per cent into national highways and the rest into rural roads. State road projects and rural roads are largely government funded, while national highways have a significant share of private participation.
72
Roads
Budget addresses funding concerns and delays
Company Larsen & Toubro Ltd Hindustan Construction Co Ltd IVRCL Infrastructures & Projects Ltd IRB Infrastructure Developers Ltd Gammon India Ltd IL&FS Transportation Networks (India) Ltd Source: CRISIL Research Impact K K K K K K Impact factors A,B A,B A,B A,B A,B A,B
Impact factors
A. Issue of tax-free bonds raised by government agencies (including NHAI and HUDCO) for infrastructure, have once again been allowed in 2013-14 up to a total limit of Rs 50,000 crore. In the context of the roads sector, this is expected to provide additional funds to the NHAI (National Highways Authority of India) for executing national highway projects. We believe that it will allow NHAI to award contracts on EPC basis. B. Another positive for the roads sector is the proposal to set up an independent regulatory authority. In the medium term, this could help in reducing delays and fastracking the implementation of road projects. C. In order to support rural road development, the Pradhan Mantri Gram Sadak Yojana (PMGSY) II has been introduced, after the substantial completion of PMGSY. This is expected to benefit the small local road contractors.
73
Steel
Muted demand, high domestic ore prices to hit margins
Domestic demand for steel has been hit by a subdued investment climate in the infrastructure and industrial sectors during 2012-13. Demand has also been hit by a slowdown in end-user industries, such as automobiles and consumer durables. Consequently, domestic demand is expected to rise by a mere 3-5 per cent y-o-y in 2012-13. Hence, growth in demand will be significantly lower, compared to the robust growth rate of 8.4 per cent, recorded over the past five years. Muted demand, coupled with huge capacities coming on-stream over the next two years, will exert pressure on operating rates. During 2012-13 (April-January), global steel prices (based on HR, FoB CIS Black Sea) declined by about 14 per cent y-o-y to $578 per tonne, amid weak global demand and macroeconomic uncertainties in Europe and the US. However, domestic flat steel prices, which move in line with landed costs of imports, have remained flat between Rs 39,000-40,000 per tonne during this period. This is on account of a weak rupee, which has averaged at 54.5 to the dollar in 2012-13 (April-January) vis-a-vis 47.5 to the dollar, during the corresponding period in 2011-12. Meanwhile, domestic long steel prices have risen marginally, owing to tight supply in the domestic raw material market. The ban on Indian iron ore production in Karnataka, coupled with the government's drive to close illegal mining in Odisha, has resulted in domestic iron ore prices remaining firm in 2012-13. Iron and steel companies have been facing an acute shortage of iron ore in 2012-13. Many are resorting to closure of operations, while others are experiencing low utilisation levels. CRISIL Research expects domestic steel demand to gather pace only from the second half of 2013-14, with an expected pick-up in demand from key end-user sectors, such as construction, infrastructure and automobiles. Global steel prices are expected to fall further by 6 per cent y-o-y on account of muted demand and lower contract prices of iron ore and coking coal. Domestic steel prices too are expected to be on a downward slope during 2013-14. Owing to the weak demand environment, commissioning of huge capacities and firm domestic input costs, the profitability of Indian steel players is expected to decline in 2012-13 and remain under pressure in 2013-14.
74
Steel
Steel: Tariffs, prices and landed costs
Tariff (per cent) Customs 2012-13 GP/GC CR coils HR coils Bars and rods Alloy steel Billets/slabs Pig iron HBI/sponge iron Ferro alloys Steel melting scrap Iron ore Coking coal (< 12% ash content) Coking coal (> 12% ash content) Metallurgical coke
1 1
Prices Excise Domestic (Rs/tonne) 48,300 43,500 39,000 40,000 38,000 27,000 19,300 28,433 International ($/tonne) 715 670 580 608 545 398 387
Landed cost (Rs/tonne) Pre-budget Post-budget
2013-14 7.7 7.7 7.7 5.2 5.2 5.2 5.2 -
2012-13 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4
2013-14 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4
7.7 7.7 7.7 5.2 5.2 5.2 5.2 -
46,293 43,477 37,847 38,637 34,792 25,819 23,896
46,293 43,477 37,847 38,637 34,792 25,819 23,896
2.1 -
2.1 -
12.4 -
12.4 -
Tariff rates are inclusive of 3 per cent education cess.
Notes 1) HBI: Hot Briquetted Iron 2) International prices are on FOB (CIS Black Sea) basis for February 2013 3) Domestic prices are average prices for February 2013 Source: Metal Bulletin, CRISIL Research
75
Steel
Neutral impact for the steel industry
Company impact
Company name Steel Authority of India Ltd Tata Steel Ltd JSW Steel Ltd Essar Steel Ltd Bhushan Steel Ltd Source: CRISIL Research Impact Q Q K K K Impact factors A, B, C A, B, C A, B, C A, B, C A, B, C
Impact factors
A. The export duty on certain galvanised steel sheets has been brought down to nil, from 7.5 per cent earlier with full exemption from export duty being provided, with effect from March 1, 2011, retrospectively. This move will benefit Indian galvanised steel exporters such as JSW Steel, Bhushan Steel, Essar Seel etc. B. The proposed schemes, providing a boost to the infrastructure (especially roads) and housing segments, are likely to give a fillip to overall demand for steel in the long run. C. The Railway Budget for 2013-14 has proposed a hike of 5.8 per cent in the freight rate for coal, iron ore and steel. This would translate into an estimated increase in logistics costs, by Rs 300-500 per tonne, for steel manufacturers. We believe that steel players will pass on the hike in railway freight to end-users.
76
Sugar
Profitability of north- and south-based mills to move in opposite directions
Sugar production in the country will range between 23.5-23.8 million tonnes in Sugar Season (SS) 2012-13 (SS: October 2012 to September 2013), a decline of 8-10 per cent as compared to the production in SS 2011-12. The fall in sugar production will largely be due to lower acreage in key sugar-growing states of Maharashtra and Karnataka, deficient rainfall, low reservoir levels and diversion of cane towards fodder in Maharashtra. As domestic consumption is expected to be around 23.7 million tonnes, India will not have surplus sugar during the season. With demand being slightly higher than supply, closing stock as months' consumption will decline marginally to around 2 months in SS 2012-13. Domestic sugar prices (Mumbai S-30 variety) will average Rs 34.5-35 per kg in SS 2012-13, 12-13 per cent higher than the average price of Rs 30.8 per kg in SS 2011-12, mainly on account of the decline in domestic sugar production and increase in regulated cane procurement prices (SAP - State Advised Price, and F&RP - Fair and Remunerative Price), especially in the state of Uttar Pradesh (UP). SAP in UP has risen to Rs 280 per quintal in SS 2012-13, a rise of 17 per cent from Rs 240 per quintal in SS 201112. SAP in Tamil Nadu has increased to Rs 235-240 per quintal from Rs 215 per quintal, while F&RP, which is applicable in most of the other regions in the country, rose to Rs 170 per quintal from Rs 145 per quintal over the same period. In order to encourage sugarcane planting, the government has announced an increase of 23.5 per cent in F&RP to Rs 210 per quintal for SS 2013-14. While the SAP for north-based mills has risen by Rs 40 per quintal, sugarcane procurement costs for south-based mills have increased by Rs 25 per quintal for SS 2012-13. Consequently, EBIDTA margins of UP-based mills are expected to decline by 50-100 basis points, whereas that of south-based mills will improve by 100-130 basis points in SS 2012-13.
77
Sugar
Sugar: Tariffs
Tariff Prices (January 2012) Landed cost (Rs/tonne) Customs (per cent) 2012-13 Domestically produced sugar Free sale Levy Imported white sugar Imported raw sugar Molasses n.a.: Not applicable Notes 1) Domestic and international prices are the average for February 2012. 2) Excise duty includes basic duty, additional duty and education cess. 3) Landed cost includes the duties, freight, port handling and transport costs. Source: CRISIL Research n.a. n.a. 10.3 10.3 10.3 n.a. n.a. 10.3 10.3 10.3 978.5 638.6 n.a. n.a. 772.5 978.5 638.6 n.a. n.a. 772.5 33,309 19,048 505 417 33,075 27,799 33,075 27,799 2013-14 Excise (Rs per tonne) 2012-13 2013-14 Domestic (Rs/tonne) International ($/tonne) Prebudget Postbudget
78
Sugar
No impact on industry
Impact factors -
Company Bajaj Hindustan Ltd Balrampur Chini Mills Ltd Bannari Amman Sugars Ltd EID Parry Ltd Shree Renuka Sugars Ltd Source: CRISIL Research
Impact Q Q Q Q Q
Impact factors
There is no impact of the Budget on the domestic sugar industry.
79
Telecom
Competitive intensity on the decline
Operators are undertaking a large-scale clean-up of inactive subscribers from their network, due to which the wireless subscriber base is expected to drop in 2012-13. It has already declined by 54 million (to 865 million) till December 2012, as compared to additions of 108 million in 2011-12. This has boosted the proportion of active subscribers to 81 per cent. Such clean-up of the inactive subscriber base, along with the increased use of valueadded services, would help industry ARPUs increase in 2013-14. Some moderation in competitive intensity would aid a 9 per cent growth in wireless revenues in 2012-13; steady increase in ARPUs would ensure that revenue growth remains around 8-10 per cent in 2013-14. Operating margins for 2012-13 (up to December 2012) have declined from 2011-12 levels, owing to an increase in network operating costs, as operators expanded their coverage. However, an expected moderation in these costs and subscriber acquisition costs would lead to a 150-200 bps rise in EBITDA margins for the wireless industry, over the next two years. The wireline segment recorded a drop of 1.4 million subscribers in the first nine months of 2012-13, which shrunk the total subscriber base to 30.8 million, as of December 2012. Currently, even as BSNL and MTNL account for over 70 per cent of the wireline subscriber base, there has been a decline in their subscriber share. In 2013-14 too, we expect wireline subscribers to dwindle, as additions by private operators will not be able to cushion the fall in BSNL and MTNLs subscriber base. Recent announcements on spectrum refarming (replacing spectrum in the 900 MHz frequency with the less-efficient 1800 MHz) would adversely impact large operators. In all, 36 licences, which constitute a substantial 45 per cent of industry revenues, shall be due for renewal by April 2016. Such refarming (on licence renewal) would entail a substantial outgo for operators, on account of both, higher capital costs and payouts for spectrum at the time of licence renewal. In addition, any one-time payments on existing spectrum, if required to be paid, would further strain the cash flow position of operators.
Telecom: Tariffs
(per cent) Customs 2012-13 Cellular phones (price <= Rs 2000) Cellular phones (price > Rs 2000) Telecom networking equipment Base stations Wireless internet data card HDSL HDSL: High bit-rate digital subscriber line Source: CRISIL Research 0.0 0.0 0.0 0.0 0.0 0.0 2013-14 0.0 0.0 0.0 0.0 0.0 0.0 Excise 2012-13 1.0 1.0 12.4 12.4 0.0 12.4 2013-14 1.0 6.2 12.4 12.4 0.0 12.4
80
Telecom
Neutral impact on the sector
Company Bharti Airtel Ltd Idea Cellular Ltd Mahanagar Telephone Nigam Ltd Reliance Communications Ltd Tata Communications Ltd Source: CRISIL Research Impact Q Q Q Q Q Impact factors -
Impact factors
A. Excise duty on mobile phones, with a retail price exceeding Rs 2,000, has been hiked to 6 per cent from 1 per cent. This will not significantly impact domestic manufacturers, since most of their phones sold are basic feature handsets, priced below this level.Conversely, a large proportion of high-end smartphones are imported. B. Receipts of Rs 408 billion have been estimated from other communication services, which includes spectrum auctions, one-time spectrum charges, licence fees and spectrum usage charges. Going by the muted response to spectrum auctions in 2012-13, we believe that the government may find it difficult to achieve the budgeted receipt target in 2013-14.
81
Textiles
Demand to improve in domestic and international markets across the value chain
Growth in apparel sales have been sluggish in 2012-13 due to the economic slowdown and negative consumer sentiment. A decline in exports caused by a fall in demand from the US and EU has also added to manufacturers woes. The spinning industry however, recovered from its 2011-12 lows as exports grew strongly. High yarn prices and low cotton prices helped spinners margins improve in 2012-13. In 2013-14, we expect growth in apparel sales to improve marginally on account of better consumer sentiment. Consequently, sales volumes are expected to improve across the textile chain.
Readymade garments
In calendar year 2012, the domestic economic slowdown limited revenue growth to about 3 per cent, with volumes growing dismally. Export revenues declined by 6 per cent, because of a demand slump in the US & EU. An improvement in domestic economic growth is expected to drive demand for garments, leading to moderate growth in sales volumes. Exports are also expected to increase marginally as global economic growth recovers.
Cotton yarn spinners

In 2012-13, cotton yarn sales volumes increased significantly, led by strong exports (mainly to China). Lower raw material (cotton) and high finished product (yarn) prices also helped spinners earn higher margins. Increased domestic and export demand for textiles will boost cotton yarn demand in 2013-14. Healthy demand and an increase in cotton prices are expected to keep operating margins stable in 2013-14.
Man-made fibres (MMF)

In 2012-13, modest MMF demand, due to subdued demand for blended and non-cotton yarn, led to a expansion of 160 bps in players margins. In 2013-14, demand is likely to improve, primarily driven by increased substitution of cotton by MMF, on the back of higher cotton prices.
82
Textiles
Apparels and fabrics: Tariffs
Tariff (per cent) Customs 2012-13 Cotton-based apparels Non-cotton-based apparels Cotton woven fabrics Non-cotton woven fabrics Cotton knitted fabrics Non-cotton knitted fabrics
1 *
Excise 2013-14 10.3 10.3 10.3 10.3 10.3 10.3 2012-13

1 *
2013-14 6.18/12.36** 12.4 6.2 12.4 6.2 12.4
10.3 10.3 10.3 10.3 10.3 10.3
6.18/12.36
12.4 6.2 12.4 6.2 12.4
Excise duty on cotton fabrics was concessional and optional
Excise duty on readymade garments was made mandatory at 12.36 per cent on 30 per cent of the MRP in 2012-13 Excise duty on readymade garments has been made optional, thus effectively bringing it down to zero in 2013-14 Education cess of 3 per cent on basic customs and excise duty Source: CRISIL Research
**
Cotton and cotton yarn: Tariffs, prices and landed costs

Tariff (per cent) Prices (February 2013) Customs 2012-13 2013-14 Cotton yarn (40s) Cotton
1 2 3 4 1
Landed cost
Excise
DomesticInter-national (Rs/tonne) 197,667 97,662
Pre-budget (Rs/tonne) 223,961 108,472
Post-budget (Rs/tonne) 223,961 108,472
2012-13 2013-14 6.2 0.0 6.2 0.0
($/tonne) 3,700 1,977
10.3 0.0
10.3 0.0
Domestic price of S-6 variety and international cotton price of a comparable variety Concessional and optional excise duty FOB prices Landed cost includes handling charges of 2 per cent
83
Textiles
Man-made fibres and intermediates: Tariffs, prices and landed costs
Tariff (per cent) Prices (January 2013) Customs 2012-13 PSF 1.5d VSF 1.4d POY 150d VFY 150d PV 30s (70:30) PTA MEG Paraxylene 5.2 5.2 5.2 5.2 10.3 5.2 5.2 0.0 2013-14 5.2 5.2 5.2 5.2 10.3 5.2 5.2 0.0 Excise 2012-13 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 2013-14 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 Domestic (Rs/tonne) 100,250 142,000 108,000 350,000 150,000 78,821 78,427 n.a. Inter-national
1
Landed cost
Pre-budget (Rs/tonne) 124,653 176,529 134,252 435,162 n.a. 75,127 72,284 94,789
Post-budget (Rs/tonne) 124,653 176,529 134,252 435,162 n.a. 75,127 72,284 94,789
($/tonne) 1,831 2,593 1,972 6,392 n.a. 1,194 1,193 1,645
PSF: Polyester staple fibre; VSF: Viscose staple fibre; POY: Partially oriented yarn; VFY: Viscose filament yarn; PV: Polyester viscose; PTA: Purified terephthalic acid; MEG: Mono-ethylene glycol n.a.: Not available
1 2
FOB prices Landed cost includes handling charges of 2 per cent
84
Textiles
Extension of TUFS and excise duty removal positive for industry
Company Alok Industries Ltd Gokaldas Exports Ltd Indo Rama Synthetics (India) Ltd Vardhaman Textiles Ltd Welspun India Ltd JBF Industries Ltd Arvind Mills Ltd Raymond Ltd Grasim Industries Ltd Aditya Birla Nuvo Ltd Source: CRISIL Research Impact K K Q K K Q K K K K A,B B B A,B B B Impact factors B B
Impact factors
A. Excise duty of 3.6 per cent on readymade garments, which was made mandatory last year, has been removed. Garment manufacturers are expected to see an improvement in margins despite partially passing on the benefit to end-users. B. The Technology Upgradation Fund Scheme(TUFS) has been extended for the 12th Five-Year Plan, with an investment target of Rs 1,510 billion as compared to Rs 1,506 billion under the 11th Five-Year Plan. Budgetary allocation under the TUFS has been increased to Rs 24 billion in 2013-14 from Rs 22 billion in 2012-13.
Notes
A. Customs duty on textile machinery and parts has been reduced to 5 per cent from 7.5 per cent, making it more affordable for Indian manufacturers. B. Other initiatives like incentives like additional funds for establishing apparel parks under the Scheme of Integrated Textile Parks and interest subventions for handloom sector have been announced to support the textile industry.
85
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Capital markets
87
Equity market
Lacks punch despite positives
The Union budget proposal for 2013-14 lacks punch but holds out a few positives for the Indian equity market and sectors such as infrastructure, financial services and housing. The budget has also focused on rationalising the fiscal deficit at 4.8 per cent in FY14 compared to 5.2 per cent, which is a positive. The proposal to allow an additional 15 per cent tax deduction for investments in plant and machinery will provide fillip to the flagging investment climate. However, policy bottlenecks need to be removed to make this proposal effective. The deduction will be allowed on new assets acquired and installed, totalling investment of Rs 1 bn or more made during FY14 and FY15. The infrastructure sector will benefit from this and a few other proposals such as one-year extension of Section 80IA of Income Tax Act allowing tax deduction, re-introduction of generation-based incentive for the wind power sector, introduction of a regulator for the road sector, and issuance of tax-free bonds of Rs 500 bn. The textile sector is expected to benefit with the continution of the Technology Upgradation Funds scheme in the 12 plan. Further, by permitting banks to act as insurance brokers and allowing insurance companies to open branches in tier II cites without prior approval will help increase penetration of insurance products. The budget has also focussed on rural development and has increased allocation to rural development by 46 per cent to Rs. 802 bn. Additional deduction on interest of upto Rs. 1 lakh on home loan of upto Rs. 25 lakh, will encourage low cost housing segment. We believe the focus on start-ups and small companies in the budget are also positive over the long term. Small and medium enterprises (SMEs) will now be allowed to list on SME exchanges without an IPO; as the issue will be restricted to informed investors, it will ease the listing process for SMEs. Also, SMEs will continue to enjoy non-tax related benefits and preference up to three years after these graduate to the higher category. Some of the positive proposals for the equity markets are a) reduction in securities transaction tax, b) extension of Rajiv Gandhi Equity Saving Scheme, and c) a few foreign-investor friendly proposals. The budget seeks to reduce the securities transaction tax (STT) on equity futures from 0.017 per cent to 0.01 per cent, on mutual funds/exchangetraded funds to 0.001 per cent (from 0.25 per cent for redemptions at fund counter and 0.1 per cent for sale on exchanges). The retail participation in equity markets could increase on account of extension in the Rajiv Gandhi Equity Savings Scheme (RGESS) which will now allow 50 per cent tax deduction for investment in mutual funds and listed shares for three successive years. Further, the first time investors income limit for this scheme has been increased from Rs 10 lakh to Rs 12 lakh. A few proposals such as deferment of implementation of modified General Anti Avoidance Rule (GAAR) to April 2016, and allowing FIIsto participate in exchange traded currency derivative segment and to use their investment in corporate bonds/G-sec for margin requirementare expected to increase FII inflows in the markets. Further, pension funds and provident funds will now be allowed to invest in exchange traded funds, debt mutual funds and asset backed securitiesthis is expected to lead to high inflow in the latter. The budgets proposals to raise income tax surcharge will adversely affect the corporate sector and high networth individuals. Increase in income tax surchage for corporates from 5 per cent to 10 per cent, surchage on dividend distribution tax from 5 per cent to 10 per cent, and increase in rate of tax on royalty and fees for technical services to non-residents from 10 per cent to 25 per cent will adversely affect corporate profitability. However, for companies undertaking capital expenditure over the next two years, the negative impact of surchage will be mitigated by the tax deduction allowed on investment in plant and machinary. The budget also has proposed to levy 10 per cent surcharge on individuals having income greater than Rs 10 mn.
th
88
Equity market
Nifty may deliver 11-14 per cent returns in FY14 Improvement in economic scenario and liquidity inflows may take Nifty to 6300-6500 by FY14-end
CRISIL Research has arrived at a fair value range of 6300-6500 for Nifty by FY14-end. This is based on our expectations of fair value of 50 index companies. We expect Nifty EPS of Rs 379 in FY13, Rs 440 in FY14 and Rs 493 in FY15, representing a 14 per cent CAGR over FY13-15. The implied range for P/E multiples for our range are 14.3x14.8x FY14E and 12.8x-13.2x FY15E earnings. Earnings growth will be driven by sectors such as financials, pharma, FMCG, and information technology. However, the sectors such as capital goods, metals and mining, and are expected to lag due to weak capex cycle and lower volumes. Though the tax incentives announced in the budget for large investments is a positive, a revival in the investment pipeline can be expected only in the second half of FY14. CRISIL Research expects Indias GDP to grow by 6.4 per cent in FY14 as against 5 per cent projected for FY13. Our forecast is based on expectation of normal monsoons and industrial growth. We expect revival in demand during the year, which should lead to improved capacity utilisation. Further, the service sector is expected to clock a healthy growth rate of 7.7 per cent in FY14. We expect only marginal improvement in corporate investment in FY14, hence policy actions are a monitorable. Some of the key proposed legislations may be put to vote in the Parliament, while some others - that were decided earlier - may be implemented. For companies with a global exposure, the scenario is also expected to improve, albeit marginally, in 2013. The US GDP is likely to grow at 2.7 per cent (as against 2.2 per cent in 2012). In the US, continued tax cuts for middle-income households and extension of unemployment benefits will help the economy to avert a recession. The euro zone is expected to recover, although it will continue be in recession; 0.1 per cent contraction compared to 0.5 per cent contraction in GDP in 2012. In the euro zone, fiscal deficits have reduced and few countries are now running primary budget surpluses (fiscal deficit excluding interest payments). The slowdown in China also appears to have bottomed out but Japan has slipped back into a recession with the positive impact from post-Tsunami reconstruction activities fading away. From a valuation perspective, the year is expected to remain range-bound. The global liquidity situation improved substantially in 2012 and we expect it to sustain through the year. The resultant flows into emerging markets, especially India, should reduce the downside risk to valuation multiples. During 2012, India attracted US$24.5 bn FII inflows, marginally lower than Japans US$27.7 bn and far higher than that of countries such as South Korea, Taiwan, The Philippines, Thailand and Indonesia. At the same time, valuation multiples may not expand much until economic growth rate improves and investment cycle revival is visible. Volatility in equity markets due to global socio-political factors may also remain high, as was experienced with the recent political stalemate after the elections in Italy. We reiterate our fair value range for Nifty at 6300-6500 by the end of FY14.
89
90
Fair value CMP 8.5 826.9 232.5 38.9 175.9 276.2 19.1 26.3 33.0 14.5 10.5 8.4 K 12.1 16.1 17.2 14.5 10.9 10.2 Q Continued focus on MGNREGA program The additional deduction of interest of upto Rs 1 lakh on the 58.0 54.0 6.0 8.1 9.0 6.7 K first home loan of less than or equal to Rs 2.5 mn will promote house ownership and hence will provide fillip to the cement and plywood industry Positives are (i) Additional deduction of interest of Rs 1 lakh for 284.0 167.3 32.0 37.0 42.0 5.2 4.5 4.0 K loans upto Rs 25 lakh to increase demand in lower-to-mid income housing segment (ii) Rural housing fund allocation of Rs 60 bn Continued support to agriculture through higher allocation to 117.0 163.0 100.0 45.0 20.0 33.0 125.0 540.0 80.0 48.3 12.3 581.8 62.5 66.5 17.2 97.1 -2.6 0.9 22.4 -2.3 0.8 11.2 1.6 2.7 1.9 20.1 19.9 2.4 4.5 8.0 110.0 13.3 8.3 8.3 6.9 -9.7 -37.3 9.3 3.9 98.6 17.2 38.5 5.7 122.6 13.0 13.8 0.0 9.4 8.9 2.6 4.4 4.2 27.9 107.8 8.7 2.8 2.5 51.1 2.4 K Q Q Q Q Q Q Q Q ministry of rural development and ministry agriculture as well as retention of attractive rates for short term crop loans 3.2 5.5 12.2 7.1 K 23.2 26.2 53.3 10.0 8.9 4.4 K 22.9 27.8 34.6 36.1 29.7 23.9 Q Additional deduction of interest of Rs 1 lakh for loans upto Rs 25 lakh to increase demand in mid-income housing segment Increase in defence capital expenditure by 9 per cent to benefit companies directly involved in the defence projects 3.4 5.6 7.3 2.5 1.5 1.2 K 18.0 982.0 303.0 55.0 247.0 412.0 EPS FY13 EPS FY14 EPS FY15 P/E FY13 P/E FY14 P/E FY15 Budget Impact Details of Impact Investment allowance of 15 per cent on investment (more than Rs 1,000 mn between FY14-FY15)
Impact of budget on companies under CRISIL Equity Research coverage
Short Name
Fundamental grade
Alok Industries Ltd
2/5
Apollo Hospitals Enterprise Ltd
5/5
Ashiana Housing Ltd
4/5
Astra Microwave Products Ltd
4/5
Bhartiya International Ltd
3/5
Butterfly Gandhimathi Appliances Ltd
3/5
Century Plyboards (India) Ltd
3/5
Dewan Housing Finance Corporation Ltd
4/5
Dhanuka Agritech Ltd
4/5
Dhunseri Petrochem and Tea Ltd
3/5
Dolphin Offshore Enterprises (India) Ltd
2/5
Electrosteel Castings Ltd
3/5
Emmbi Polyarns
2/5
Everest Kanto Cylinder Ltd
2/5
Fortis Healthcare Ltd
3/5
Gitanjali Gems Ltd
3/5
Helios & Matheson Information Technology Ltd
2/5
Notes:Pls note that all companies will be impacted negatively due to increase in surchage on income tax and dividend distribution tax
Short Name
Fundamental grade CMP
Fair value
EPS FY13
EPS FY14
EPS FY15
P/E FY13
P/E FY14
P/E FY15
Budget Impact Details of Impact Increase in allocation to the rural development ministry would lead to higher sales from rural India. Increasing tax rate on payments by way of royalty from 10 per cent to 25 per cent is a negative
Hero MotoCorp Ltd
5/5
1842.0
1667.5
108.1
119.6
150.2
15.4
13.9
11.1
Hitech Plast 185.0 180.0 215.0 395.0 23.0 194.0 106.5 31.5 54.3 3.4 2.0 K 14.6 -2.1 4.5 -6.9 3.2 Q 392.6 31.5 35.0 0.0 12.5 11.2 K 128.7 16.2 22.6 28.8 7.9 5.7 4.5 Q 94.8 32.5 35.2 2.9 2.7 Q 98.0 9.7 12.8 17.7 10.1 7.7 5.5 Q
3/5
73.0
50.1
6.3
9.3
14.4
8.0
5.4
3.5
HSIL Ltd
4/5
Infinite Computer Solutions (India) Ltd
3/5
Innoventive Industries Ltd
4/5
Continued support to agriculture through higher allocation to ministry of rural development and ministry of agriculture as well as retention of attractive rates for short term crop loans
Insecticides (India) Ltd
3/5
ISMT Ltd
3/5
JBF Industries Ltd
3/5
Investment allowance of 15per cent on investment (more than Rs 1,000 mn between FY14-FY15) (i) Lowering of STT on equity futures from 0.017per cent to 0.01 per cent and (ii) liberalisation of Rajiv Gandhi Savings Scheme - to have hardly any positive impact
JM Financial Ltd 628.0 707.1 38.8 44.1 53.9 18.2 16.0 13.1
4/5
36.0
16.4
2.3
3.3
7.1
5.0
Q K
Kewal Kiran Clothing Ltd
4/5
Benefit from removal of excise duty on garments ~3,000 km of road projects will be awarded in a few states in next six months; this is expected to increase order inflows.
KNR Constructions Ltd
3/5
120.0
96.3
5.3
19.1
0.0
18.2
5.0
Besides, the appointment of a road regulator might ease execution related bottlenecks but will be a key thing to watch for Duty withdrawn on de-oiled rice bran oil cake. Marginally positive as it contributes around 1 per cent to KRBL's revenues. Continued support to agriculture through higher
KRBL Ltd
3/5
33.0
24.1
6.1
6.6
0.0
4.0
3.7
allocation to ministry of rural development and ministry of agriculture as well as retention of attractive rates for short term crop loans
KSE Ltd 106.0 81.9 6.5
3/5
220.0
210.1
12.1
30.6 9.7
13.9
17.4 12.6
6.9 8.4
5.9
Q K Higher allocation for rural development would lead higher credit demand
Magma Fincorp Ltd
3/5
91
92
Fair value CMP 118.0 18.8 16.1 6.3 7.3 Q ~3,000 km of road projects will be awarded in a few states in next six months; this is expected to increase order inflows. 304.0 165.5 37.3 40.2 4.4 4.1 Q Besides, the appointment of a road regulator might ease execution related bottlenecks but will be a key thing to watch for 39.0 349.0 25.0 214.0 130.0 182.0 54.0 140.0 229.0 201.5 32.1 39.3 6.3 5.1 73.6 1.7 26.3 43.3 2.8 43.2 1.7 2.0 2.4 25.4 21.6 18.0 Q Q K Quantum of tax free bonds positive Allocation of Rs 15,260 crore to the ministry of drinking water 66.0 40.3 8.3 9.3 0.0 4.8 4.3 K and sanitation and Rs 1,400 crore towards setting up water purification plants to benefit EPC players in the water supply and sanitation industry 15.5 19.0 24.0 19.2 27.1 21.4 7.2 12.7 10.4 20.3 16.1 K Q Increase in excise duty on mobile phones above Rs 2,000 50.0 240.0 386.0 18.0 27.1 1.0 2.6 L Q from 1 per cent to 6 per cent would impact profitability for mobile handset and mobile retail business Investment allowance of 15 per cent on investment (more than Rs 1,000 mn between FY14-FY15) 167.8 22.8 33.2 7.4 5.1 Q Reduction in abatement rate to 70 per cent from 75 per cent for flats with carpet area of 2,000 sq ft or more and value of Rs 1 crore or more will have marginally negative impact 126.5 11.9 17.9 22.3 10.6 7.1 5.7 K 150.9 12.8 15.4 11.8 9.8 K 12.7 -0.5 2.5 3.5 -25.4 5.1 3.6 Q 232.5 61.9 41.2 45.2 3.8 5.6 5.1 Q Reduction in abatement rate to 70 per cent from 75 per cent for flats with carpet area of 2,000 sq ft and value of Rs 1 crore or more will have marginally negative impact Extension of 80IA benefit for one more year Investment allowance of 15 per cent on investment (more than Rs 1,000 mn between FY14-FY15) 20.8 5.1 11.3 0.0 4.1 1.8 Q 280.0 EPS FY13 EPS FY14 EPS FY15 P/E FY13 P/E FY14 P/E FY15 Budget Impact Details of Impact
Short Name
Fundamental grade
Maharaja Shree Umaid Mills Ltd
2/5
MBL Infrastructure Ltd
3/5
MSP Steel & Power Ltd
2/5
Navin Fluorine International Ltd
3/5
Nitesh Estates Ltd
2/5
NTPC Ltd
5/5
Omkar Speciality Chemicals Ltd
3/5
Omnitech Infosolutions Ltd
3/5
Parsvnath Developers Ltd
2/5
Phillips Carbon Black Ltd
4/5
Power Finance Corporation Ltd
4/5
Pratibha Industries Ltd
3/5
Rainbow Papers Ltd 107.0 94.0 4.9 7.4
3/5
67.0
79.2
5.1
11.0
Responsive Industries Ltd
4/5
S Mobility Ltd
2/5
S. E. Investments Ltd
2/5
Fundamental value 73.0 61.0 803.0 credit demand 1079.2 78.0 99.0 0.0 13.8 10.9 K 27.8 3.2 10.4 8.7 2.7 Q 39.3 14.0 12.2 14.5 2.8 3.2 2.7 Q CMP FY13 FY14 FY15 FY13 FY14 FY15 Impact Details of Impact
Fair
EPS
EPS
EPS
P/E
P/E
P/E
Budget
Short Name
grade
Sangam (India) Ltd
3/5
Sanghvi Forging and Engineering Ltd
2/5
Shriram City Union Finance Ltd
3/5
Higher allocation for rural development would lead higher Increase in excise duty on marble to Rs 60 from Rs 30 per sq
Somany Ceramics Ltd 37.0 27.7 0.9 2.7 30.7 10.2 Q
4/5
120.0
61.9
9.3
11.8
14.6
6.7
5.2
4.2
mt to have marginally positive impact on demand for tiles (substitute of marble)
Sterlite Technologies Ltd
3/5
~3,000 km of road projects will be awarded in a few states in 595.0 202.5 62.6 67.2 3.2 3.0 Q next six months; this is expected to increase order inflows. Besides appointment of a road regulator might ease execution related bottlenecks but will be a key thing to watch for
Supreme Infrastructure India Ltd
3/5
Technofab Engineering Ltd 301.0 291.0 63.0 3250.0 3305.9 109.8 143.0 227.4 30.1 23.1 40.8 5.2 6.8 8.3 7.8 6.0 4.9 14.5 316.7 20.7 27.7 15.3 11.4 K Q K 254.8 39.0 43.9 46.3 6.5 5.8 5.5 Q
3/5
168.0
125.1
28.7
29.9
33.6
4.4
4.2
3.7
Q Investment allowance of 15 per cent on investment (more than Rs 1,000 mn between FY14-FY15)
Thangamayil Jewellery Ltd
3/5
The Supreme Industries Ltd
4/5
Time Technoplast Ltd
4/5
TTK Prestige Ltd
5/5
Continued focus on MGNREGA programme
93
Funds and Fixed Income

Mutual Fund AUM at all time high in January 2013
x The Indian mutual fund industrys assets under management (AUM) rose to an all-time high of Rs 8.26 trillion in January 2013 following a sharp rise in 2012 vis-a-vis flat growth in 2011. x Average AUM rose by 15 per cent in 2012 to Rs 7.87 trillion in December 2012, while the month-end AUM rose by over 24 per cent to Rs 7.60 trillion. x Asset growth in 2012 was led by inflows of Rs 613 billion into income funds (long-term debt funds, dynamic bond funds and ultra-short term debt funds) and gilt funds on expectations of fall in interest rates following slowing domestic growth and easing inflation. Bond prices (net asset values) and interest rates (yields) move in opposite directions owing to which these funds benefit from a fall in interest rates. x The Reserve Bank of India (RBI) lowered its key interest rate (repo rate) by 0.50 per cent (50 basis points or bps) in April 2012 and later by 25 bps in January 2013 to 7.75 per cent. x While the AUM of all debt funds (income, gilt and liquid funds) rose by over 26 per cent in 2012 to Rs 5.34 trillion, equity funds AUM rose by nearly 19 per cent to Rs 1.92 trillion as of December 2012. x Equity funds rose on account of mark to market gains as the benchmark CNX Nifty was up by 28 per cent in 2012 mainly on reform measures announced by the Indian government and inflows from foreign institutional investors (FIIs). x Equity market saw FII investments worth Rs 1.3 trillion (USD 31 billion) during 2012 as compared with withdrawal of Rs 34 billion in the previous year. The domestic equity market gained FII confidence following the governments key reforms such as fuel price hike and raising of foreign direct investment (FDI) in varying levels in retail, airlines, trading exchanges and broadcast services. x Investors, however, booked profits in equity funds and the category witnessed net outflows of Rs 156 billion during 2012 as compared with inflows of Rs 77 billion in 2011. x Debt-oriented funds continued to corner a major share of mutual fund assets at 70 per cent in 2012, marginally up from 69 per cent in 2011. x The industry consisting of 44 fund houses continued to remain top heavy, with the share of assets of top 5 fund houses aggregating 54 per cent of AUM as of December 2012. The top 10 fund houses occupied a share of 77 per cent while the bottom 10 fund houses continued to occupy less than 1 per cent of the industry AUM.
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Chart 1 - Industry AUM and Net Flows
AUM (Rs trillion) 8.3 Net flows (Rs billion) Industry AUM (Rs trillion) Net flows (Rs billion) 1000
7.8
500
7.3 0 6.8 -500
6.3
5.8
-1000
May-12
Feb-12
Mar-12
Jul-12
Nov-12
Dec-11
Dec-12
Apr-12
Aug-12
Sep-12
Oct-12
Source: Association of Mutual Funds in India (AMFI)
The important regulations announced during the year included x The Securities and Exchange Board of India (SEBI) has allowed asset management companies (AMCs) to charge additional expenses up to 30 bps proportionate to the inflows from locations beyond the top 15 cities so as to improve the geographical penetration of mutual funds. However, the expenses will need to be reversed if the inflows are redeemed within one year. x AMCs are allowed to have fungibility across various expense heads in total expense ratio (TER). This provides them increased flexibility to allocate costs. x To avoid differential treatment across investor classes, SEBI directed all AMCs to follow a single expense structure across plans from October 1, 2012 instead of plans based on the minimum investment amount. Further, a new plan called Direct Plan was introduced w.e.f. January 1, 2013 through which investors can apply directly to the AMC instead of through distributors. Such plans will have a lower expense ratio as they will not charge distribution expenses. x SEBI issued final guidelines for the launch of the Rajiv Gandhi Equity Savings Scheme (RGESS) announced in the previous Union Budget. First-time equity investors with annual income less than or equal to Rs 1 million will be eligible for a 50 per cent tax deduction under Section 80CCG (new section) on investments up to Rs 50,000. Investments will be allowed only in stipulated stocks through direct equity, closed-ended mutual fund schemes and exchange traded funds (ETFs) besides public offerings from select government companies. x SEBI has allowed cash transactions in mutual fund schemes to the extent of Rs 20,000 to enhance the reach to small investors. x x Fund houses launching fixed maturity plans (FMPs) will need to spell out the sectors they will not invest in. Debt-oriented mutual funds have been allowed to take an additional exposure to housing finance companies (HFCs) within the financial services sector to the extent of 10 per cent of net assets of the scheme. This is over and above the existing 30 per cent limit for investment in a single sector by a mutual fund scheme.
Jan-12
Jun-12
Jan-13
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x x Mutual funds have been allowed to participate in repos in corporate debt securities with some riders. SEBI has stipulated a ceiling of 0.12 per cent for cash market transactions and 0.05 per cent for derivatives dealings with respect to brokerage and transaction costs to investors. x To energise the distribution system and to increase the 'feet-on-street' in distribution, it has been decided to: o Simplify the distributors' registration process and increase the base of mutual fund distributors by including postal agents, retired officials from government, banks, retired teachers, etc. for distribution of simple products. o o Introduce varied levels of certification and registration depending on products and services offered. Reduce fees for National Institute of Securities Market (NISM) certification and the Association of Mutual Funds in India (AMFI) registration. x As per the last suggestion by SEBI in the above regulation, AMF reduced the registration fees for mutual fund distributors w.e.f. November 1, 2012 to increase the penetration of mutual funds and incentivise distributors beyond the metros. x AMFI has waived off the Rs 3,000 registration fee for six months between February 1 and June 30 for first-time mutual fund distributors and independent financial advisors. x Further, AMFI has started issuing mutual fund common account statements (CAS) in an electronic form, called eCAS; it will replace paper statements.
96

Budgetary measures and their impact
1.
To provide uniform taxation for all types of funds, other than equity oriented funds, the budget has proposed to increase the rate of tax on distributed income from 12.5 per cent to 25 per cent in all cases where distribution is made to an individual or HUF. This amendment will take effect from June 1, 2013.
Impact
This will reduce the net income in the hands of the investor. It will also bring debt mutual funds at par with money market and liquid funds. The tax arbitrage, between investing in bank fixed deposits and debt mutual funds, earlier available to investors in the highest tax bracket, has reduced significantly. This is likely to impact assets under management (AUM) of ultra short term and short term debt funds. The tax implications are as follows
Existing Structure Debt schemes Effective tax rate Money market and liquid schemes Effective tax rate New Structure Effective June 1, 2013 Debt schemes Effective tax rate Money market and Liquid schemes Effective tax rate Individual / HUF 12.5 per cent tax (additional 5 per cent surcharge and 3 per cent cess) 13.519 per cent 25 per cent tax (additional 5 per cent surcharge and 3 per cent cess) 27.038 per cent Domestic Company 30 per cent tax (additional 5 per cent surcharge and 3 per cent cess) 32.445 per cent 30 per cent tax (additional 5 per cent surcharge and 3 per cent cess) 32.445 per cent NRI 12.5 per cent tax (additional 5 per cent surcharge and 3 per cent cess) 13.519 per cent 25 per cent tax (additional 5 per cent surcharge and 3 per cent cess) 27.038 per cent
Individual / HUF 25 per cent tax (additional 10 per cent surcharge and 3 per cent cess) 28.325 per cent 25 per cent tax (additional 10 per cent surcharge and 3 per cent cess) 28.325 per cent
Domestic Company 30 per cent tax (additional 10 per cent surcharge and 3 per cent cess) 33.990 per cent 30per cent tax (additional 10per cent surcharge and 3 per cent cess) 33.990 per cent
NRI 25 per cent tax (additional 10 per cent surcharge and 3 per cent cess) 28.325 per cent 25 per cent tax (additional 10 per cent surcharge and 3 per cent cess) 28.325 per cent
2.
The Rajiv Gandhi Equity Savings Scheme (RGESS) has been modified with a view to improve participation from new retail equity investors. Accordingly, provisions of section 80CCG will now include listed units of RGESS compliant equity oriented funds (those having greater than 65 per cent equity holding) besides exchange traded funds, close-ended equity mutual funds and direct equities. Further, the deduction will be allowed for three consecutive financial years, starting from the year in which the first RGESS investment was made. The gross total income of the investor has been increased to Rs.1.2 million from Rs.1 million now.
Impact
This will help broaden the base of equity mutual funds as more first time investors are likely to be attracted to invest in the scheme. For mutual funds, this will be a good source of stable AUM as RGESS has a one year fixed lock-in period and two years of flexible lock-in.
97

3.
Stock exchanges to have a dedicated debt trading segment. Insurance companies, provident funds and pension funds will be permitted to trade directly in the debt segment with the approval of the sectoral regulator.
Impact
As there has not been much action on this front, markets are bound to be cautiously optimistic and watch the roll out of the new segment. It will also depend on how the institutional investors make use of this new opportunity. This can help deepen debt markets and improve price discovery, if successfully implemented. Further, it will help reduce transaction cost of these institutional investors and may impact fixed income brokers in the long run.
4.
Introduction of inflation indexed bonds and inflation indexed National Security Certificates.
Impact
This is an innovative product whose details will be announced in due course. These bonds are expected to help investors get higher inflation adjusted returns as well as divert some investments from gold.
5.
The government had allowed many institutions to issue tax free infrastructure bonds which raised Rs.300 billion in 2011-12 and are expected to raise about Rs.250 billion in 2012-13. The budget proposed to allow some institutions to issue tax free bonds in 2013-14, strictly based on need and capacity to raise money in the market, upto a total sum of Rs.500 billion. Further, India Infrastructure Finance Corporation Ltd (IIFCL), in partnership with the Asian Development Bank, will offer credit enhancement to infrastructure companies that wish to access the bond market to tap long term funds.
Impact
This will help deepen bond markets besides encouraging retail participation in infrastructure bonds.
6.
FII investments in corporate bonds and government securities permitted as collateral for margin requirements.
Impact
This has provided greater flexibility to FII investments in fixed income securities and is expected to attract greater foreign inflows into the debt segment as well as deepen these markets. The FII limits are also likely to be utilized more efficiently.
7.
ETFs, debt mutual funds and asset backed securities allowed as investments for provident and pension funds.
Impact
This will broaden the investment options/avenues of provident and pension funds and at the same time help mutual funds attract more stable AUM over the long run from these long-term institutional investors.
98

8.
Securities Transaction Tax (STT) has been reduced for equity futures and mutual funds/ ETF redemptions as follows. Further, only the seller of units will need to pay STT. This will be effective from June 1, 2013.
Security 1. Delivery based purchase of units of an equity oriented funds entered into in a recognized stock exchange Delivery based sale of units of an equity oriented fund entered into in a recognized stock exchange Sale of a futures in securities Sale of a unit of an equity oriented fund to the mutual fund Payable By Purchaser Existing STT Rate 0.1 per cent Proposed STT Rate Nil
2. 3. 4.
Seller Seller Seller
0.1 per cent 0.017 per cent 0.25 per cent
0.001 per cent 0.01 per cent 0.001 per cent
Impact
This will help reduce overall transaction cost for investors and mutual funds (for equity futures) and thereby increase returns proportionately. Further, the STT will be only one way, i.e. for the seller.
9.
Insurance companies will be empowered to open branches in tier II cities and below without prior approval of Insurance Regulatory and Development Authority (IRDA). Further, all Indian towns with a population of 10,000 or more will have an office of LIC and an office of at least one public sector general insurance company.
Impact
This will help improve penetration of insurance products
10. Banks will be permitted to act as insurance brokers, know your customer (KYC) norms of banks will be
sufficient to acquire insurance policies, Banking correspondents will be allowed to sell micro-insurance.
Impact
This will allow banks to distribute products of more than one insurance company. A common KYC will reduce operational hassles with respect to purchase of insurance policies for retail investors. Further, penetration of insurance is likely to be enhanced through the branch network of banks.
11. The budget has proposed that a foreign investor having a stake of 10 per cent or less in a company will be
treated as Foreign Institutional Investment (FII), and, where the foreign investor has a stake of more than 10 per cent, the investment will be treated as Foreign Direct Investment (FDI).
Impact
This imparts greater clarity with respect to FDI and FII investments and is as per international best practices.
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12. Mutual fund distributors will be allowed to become members in the mutual fund segment of stock
exchanges so that they can leverage the stock exchanges network to improve their reach and distribution.
Impact
While the aim is to improve penetration of mutual funds across the length and breadth of the country through the stock exchange route, it needs to be seen whether distributors will be keen to avail this additional opportunity.
13. Introduction of a special taxation regime in respect of taxation of income of securitization entities, wherein
no additional income-tax shall be payable, if the income distributed by the securitization trust is received by a person who is exempt from tax under the Income Tax Act.
Impact
This offers greater clarity on taxation of investments in securitized instruments for mutual funds and will also help deepen the structured finance market.
14. The budget has introduced parity in taxation between an IDF-Mutual Fund that distributes income and an
IDF-NBFC that pays interest for payments made to a non-resident Indian (NRI). The rate of tax on such distributed income or interest will be 5 per cent. Earlier, the taxation for IDF-Mutual Fund was higher and in line with dividend distribution tax (DDT) of debt mutual funds
Impact
Earlier, the taxation for IDF-Mutual Fund vis--vis IDF-NBFC was higher and in line with dividend distribution tax (DDT) of debt mutual funds. The above has brought them at par.
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March 2013

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About CRISIL Limited

About CRISIL Research

How credible is the fiscal arithmetic and medium-term consolidation programme?

Chief Economist, CRISIL

Budget Realistic on growth

FY14F FY13AE FY 12 FY 11 FY 10 FY 09 FY 08 FY 07 5.0

6.7 9.3 9.6

improve the growth outlook.

13.4 11.3 12.1 10.6

RE: Revised estimate Source:CSO, CRISIL Research

Figure 3: Boost to infrastructure investment

Note:Based on Central Plan Outlay Source:Budget documents, CRISIL Research

F: CRISIL Forecasts Source: Office of Economic Advisor, CRISIL Research

Marginal slippage on the fiscal front

F: CRISIL Forecasts Source: RBI, CRISIL Research

Policy measures to strengthen foreign inflows

foreign investments. x Allowing FIIs to use their investments in

44.0 FY09 FY10 FY11

F: CRISIL Forecasts Source: RBI, CRISIL Research

RE: Revised Estimates

Revenues: High targets, low achievement

Figure 9: Disinvestments consistenly fall short of targets

Switching expenditures from revenue to capital account

investments is necessary for sustainable growth.

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Overall sectoral impact

Industry Airport infrastructure

Auto components & tyres

ctoral impact Overall sec

Overall sectoral impact

ctoral impact Overall sec

Industry Media & entertainment

Oil and gas

Overall sectoral impact

ctoral impact Overall sec

Industry Roads & highways

There is no impact of the Budget on the domestic sugar industry.

Overall sectoral impact

Overall com pany impact

Adani Power Ltd.

Aditya Birla Nuvo Ltd.

Alok Industries Ltd.

Ambuja Cements Ltd.

Amtek Auto Ltd.

Andhra Pradesh Paper Mills Ltd

Arvind Mills Ltd.

Ashok Leyland Ltd.

Bajaj Auto Ltd.

Bajaj Hindustan Ltd.

Balaji Telefilms Ltd .

Ballarpur Industries Ltd.

Balrampur Chini Mills Ltd.

Bannari Amman Sugars Ltd.

Bharat Forge Ltd.

Bharti Airtel Ltd.

Bhushan Steel Ltd.

Cairn India Ltd.

Chambal Fertilisers & Chemicals Ltd.

Chemplast Sanmar Ltd.

Coromandel Fertilisers Ltd.

Dish TV India Ltd.