Crisil Analysis Union Budget

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Contents

Key Messages 1

Economy

Economic analysis 3

Industry

Overall sectoral impact 14

Capital markets

Capital market 22

Annexure: Sector wise Impact

Airports Infrastructure 26

Auto components & Tyres 27

Automobiles 29

Banking 31

Cement 32

Construction 33

Fertilisers 34

Hotels 35

Household appliances 36

Information technology 37

Media and Entertainment 38

Non-ferrous metals 39

Oil and Gas 41

Paper 43

Petrochemicals 44

Pharmaceuticals 46

Ports 47

Power 48

Real Estate 49

Roads 50

Steel 51

Sugar 53

Telecom 54

Textile 55

CRISIL Budget Analysis

This Page is Intentially Left Blank

1

Key Messages

Economy

Realistic fiscal targets, but slippage possible in disinvestment: The government has stuck to a realistic target of

fiscal deficit at 3.9% of GDP for 2015-16 as opposed to the Finance Commissions recommendation of 3.6%. It has

managed to increase allocation for capital expenditure (to go up by 25.5% to Rs. 2,414 billion) because of the

headroom created from savings in oil subsidies and hike in excise duties on petrol and diesel. As a share of GDP,

capital expenditure will increase from 1.5% in 2014-15 to 1.7% in 2015-16. Even though tax collection targets look

achievable, there are chances of slippage in capital (disinvestment) receipts, which might bloat the fiscal deficit to

4.2% in the absence of any expenditure cut.

Getting public sector to revive investments: The budget lays focus on public investments, which will have large

spillovers on growth if implemented effectively. Despite pressure on fiscal consolidation, enough room has been

created for infrastructure spending through the governments own resources and by nudging PSUs to invest more.

Focus clearly is on four sectors -- roads, railways, power and rural development. This emphasis on strengthening

transportation infrastructure will also boost manufacturing. Overall, the budget is growth-enhancing as it supports a

mild pick-up in public investments, which can draw in private investments over time.

Fiscal federalism is an enabler: The government has raised states share in total divisible pool of tax revenues to

42% from 32% as per the recommendation of the 14th Finance Commission, recording the biggest-ever increase in

vertical tax devolution. This not only increases the pool of resources available to the states but also raises flexibility

to help states design, implement and finance programmes according to their specific needs. Total transfers from the

centre to the states have increased from 4.5% of GDP in 2013-14, 5.5% in 2014-15 to 6.0% in 2015-16.

Industry

Financial sector reforms a structural positive: Inclusion of NBFCs under the SARFAESI Act and new

bankruptcy code will provide a boost to recovery efforts and help rein in asset quality problems over the long run.

The setting up of autonomous bank board bureau for public sector banks is a step in the right direction. It is

expected to provide greater functional autonomy and pave way for bank holding company structure which will

optimise governments capital contribution.

Greater public funding and innovative financing schemes to support infrastructure: Higher government

allocations coupled with increase in funding availability for the infrastructure sector through National Infrastructure

Investment Fund, higher fuel cess for roads and rationalisation of tax on Infrastructure Investment Trusts will provide

significant opportunity for construction and capital goods companies.

Minor changes in tax rates, but glide path to lower rates and simplification: True to its promise, the finance

minister has avoided undertaking many sector/product specific changes in duties or exemptions. On the direct tax

front, too, in line with the Finance Ministers stated philosophy, the budget has provided a path towards lowering of

corporate tax rate and simultaneously doing away with multiple exemptions to simplify the tax administration and

reduce disputes.

Capital Markets

Incentivising financial savings and social security: The Budget includes measures to promote financial savings

and enhancing coverage of pension and health insurance. Gold bond scheme is also intended to encourage shift

from non-productive to productive saving. However, the efficacy of the schemes needs to be watched - given the

countrys penchant for physical gold holdings.

Little to cheer for the bond markets: Tax-free infrastructure bonds, encouragement for insurance and pension

products, clarity of taxation for Alternative Investment Funds etc. will help channel more investment to the bond

markets. Also, given the ambitious plans for improving infrastructure, debt markets need to play a vital role.

However, measures to catalyse the bond markets continue to remain elusive.


Economy

3

Economy analysis

Indian Economy Outlook

2013-14 2014-15F 2015-16F Budget Impact

GDP (y-o-y %) 6.9 7.4* 7.9 The budget supports a mild pick-up in public investments

which can crowd in private investments over time

CPI inflation (%, average) 9.5 6.5 5.8 Despite shifting the fiscal target by a year, commitment to

stick to fiscal consolidation is a plus for the downward

trending inflation and augurs well for further rate cuts by

RBI

Fiscal Deficit (% of GDP) 4.5 4.1** 3.9 Headroom created by savings on fuel subsidy bill and

increased income from duty hikes has allowed the

government to tread the fiscal consolidation path with ease

10 year G-sec yield (%, March-end) 8.8 7.7 7.5 Rate cuts and a restrained market borrowing programme

of the government would make yields go further south

Note: F=CRISIL Forecast, *CSO advance estimate, ** Budget estimate

Source: RBI, CSO, Ministry of Finance, Ministry of Commerce and Industry, CRISIL Research

Is the fiscal arithmetic credible?

The fiscal arithmetic laid out in the budget for 2015-16 is a standout when compared with the previous ones for the

following reasons:

o The government continues to follow the path of fiscal consolidation by aiming to bring down fiscal deficit to 3.9%

of GDP in 2015-16 from 4.1% of GDP in 2014-15. There is, however, a relaxation of 30 basis points when

compared with the 3.6% target set by the 14th Finance Commission (FFC). This is justified because:

Greater devolution to states will constrain central government finances.

Thrust on capital spending means additional money generated by relaxing the fiscal deficit target will be

used to improve the productive potential of the economy

o Nominal GDP growth target is realistic at 11.5% for 2015-16, same as for 2014-15.

o Revenue targets look achievable though scope of slippage remains on the disinvestment front.

o Rationalisation of the overall subsidy bill is still not adequate, though the trend of carrying forward arrears has

been reduced substantially.

Do the numbers add up?

The government has stuck to a more realistic fiscal deficit target of 3.9% of GDP for 2015-16 compared with the

Finance Commissions recommendation of 3.6% so as to provide an impetus to investments.

Allocation to capex is made possible by savings in oil subsidies and hike in excise duties on petrol and diesel.

Capex in 2015-16 is budgeted to increase 25.5% to Rs 2,414 billion. As a share of GDP, it is slated to rise from

1.5% in 2014-15 to 1.7% in 2015-16.

We estimate that the extra revenue generated on account of excise duty hikes on petrol and diesel will be Rs 780

billion and savings in petroleum subsidies over last year account for another Rs 267 billion. Together, the headroom

created is of Rs 1,047 billion or close to 0.74% of GDP in 2015-16.


4

Figure 1 & 2 : Headroom created on different accounts in FY16

Item Revenue

accrued

(Rs. Bn.)

Hike in excise duty on petrol & diesel 780

Lower fuel subsidy bill due to fall in oil

prices 267

Source: Budget documents, CRISIL Research

What could upset the applecart?

Tax collection targets are achievable, risk is on the divestment front

The overall tax collection target assumed in the budget appears manageable. Gross tax to GDP ratio increases

marginally from 9.9% in 2014-15 to 10.2% in 2015-16. The budget assumes a tax buoyancy of 1.4% for 2015-16

compared with 0.9% achieved in 2014-15 but this is largely due to structural changes such as higher excise on

petrol and diesel and increase in the service tax rate 12.36% to 14%

Figure 3: Tax buoyancy


0.55

0.19

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Petrol and Diesel Excise Hike Lower oil Subsidies

(% of GDP)

1.6

0.2 0.2

1.3

0.8

1.3

0.7

0.9

1.4

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 RE FY16 BE

5

Figure 4: Tax collection targets

Rs billion FY13 FY14 FY15RE FY16BE Average

growth

during FY12-

FY15

Growth

assumption for

FY16

Gross Tax Revenue 10,362 11,387 12,514 14,495 12.1 15.8

Corporation Tax 3,563 3,947 4,261 4,706 9.7 10.5

Income tax 1,965 2,429 2,786 3,274 19.3 17.5

Customs 1,653 1,721 1,887 2,083 8.2 10.4

Union Excise Duties 1,758 1,702 1,855 2,298 9.0 23.9

Service Tax 1,326 1,548 1,681 2,098 20.4 24.8


Non-tax revenue collections are projected to rise from Rs.2,178 billion in 2014-15 to Rs.2,217 billion in 2015-16, growing

by 1.8% compared with 9.5% in the last fiscal. The slowdown in non-tax revenue growth has been on a high base

because government revenues were boosted by spectrum auctions. Non-tax revenue gains are a one-off. For

sustainable increase in revenues, it is critical to adhere to the timeline for the roll out of Goods & Services Tax.

This apart, government has an ambitious target of Rs.695 billion through disinvestments. But past trend suggests that

government has always fallen short. The learning from this is that the government needs to frontload efforts and

capitalise on the current market buoyancy. If disinvestment proceeds are similar to last year, fiscal deficit would shoot up

to 4.2% of GDP.

Figure 5: Disinvestment proceeds (Rs billion) have mostly trailed targets


400 400

300

558

634

695

0

100

200

300

400

500

600

700

800

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Disinvestment Budgeted Disinvestment Actual


6

What is the quality of fiscal consolidation?

While expenditure on subsidies in 2014-15 at 2.1% of GDP was only marginally lower than 2.2% of GDP in 2013-14, it is

budgeted to reduce significantly to 1.7% of GDP in 2015-16 benefiting from lower fuel subsidy bill. At the same time,

capex would rise from 1.5% to 1.7% even though it remains below levels of the high-growth years such as 2.4% in

2007-08. Since the quantum of revenue slippage is expected to be much lower in 2015-16, the budgetary objective of

improving the expenditure mix, might well succeed, unlike in the last few years.

The government has managed to achieve its fiscal deficit target of 4.1% of GDP for 2014-15 by mostly cutting

productive expenditure (capex plus part of revenue expenditure that creates capital assets) because of lower

revenues. Governments receipts in 2014-15 fell short by Rs 952 billion out of which the cut in productive

expenditure was Rs 706 billion. Majority of shortfall was due to lower tax collections, which stood at Rs 9,085 billion

compared with budgeted Rs 9,773 billion. Rest of the shortfall was in capital receipts because of lower divestments.

Non-tax revenues, on the other hand, were a tad higher at Rs 2,178 billion compared with a budgeted Rs 2,125

billion. Over the years, shortfall in revenue collections have led to huge cuts in productive spending. Between 2011-

12 and 2014-15, Rs 2,555 billion was cut in productive spending because of shortfall in revenues and persuasions of

lower-than-budgeted fiscal deficit.

Figure 6: Axe falls on productive spending


-113

-869 -867

-706

-1000

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

FY12 FY13 FY14 FY15

Cut in productive expenditure (Rs. Billion)

7

Figure 7: Direct benefit transfer can re-write the food subsidy script

Direct benefit transfer, or DBT, will likely prove to be a game changer in food subsidy. We estimate that DBT could help

the government save as much as 20% (or Rs 250 billion) in food subsidy expenditure by eliminating costs associated

with procuring, distributing and storing foodgrains. Moreover, DBT will help bring millions of poor households that

currently do not have access to PDS into the food subsidy net. We estimate that at fiscal 2016 prices, the cash transfers

under the DBT will amount to almost Rs 5,800 per year for a family of five, which will implicitly raise their disposable

income. At first glance, Rs 5,800 may seem small, but it is higher than the reported total annual expenditure (food +non-

food) of the poorest 5% of the rural households and more than half the annual expenditure of the poorest 10% of urban

households. Given the high marginal propensity to consume at lower income levels, such a significant unconditional cash

transfer will undoubtedly raise discretionary spending of the recipient households, providing a consumption boost the

economy.

Figure 8: After 8 years, capex will exceed subsidies


Will there be a boost to public investments?

Despite improving macros, India Inc remains cautious on fresh investments. A recent CRISIL survey of 192 listed,

private and public sector companies shows that planned capex by private companies surveyed is likely to decline in

2015-16. A revival in investments, therefore, hinges on increased public spending, especially on infrastructure

roads, power transmission/distribution and railways because of its significant multiplier effect of creating demand

for steel, cement, capital goods and commercial vehicles and spurring investments in the manufacturing space as

well.

What has the budget done to aid public investments and infrastructure creation?

The budget plans a 25% increase in capital expenditure in 2015-16, compared to 2.5% increase in 2014-15, taking

its ratio in GDP up by 20 basis points to 1.7%. Central plan outlay is budgeted to increase by 35.5% in 2015-16

compared to an average fall of 3.4% in the last three years. The budget lays focus on four sectors providing crucial

2.4

1.61.7

2.0

1.81.7 1.7

1.5

1.8

1.4

2.32.2 2.2

2.52.6

2.22.1

1.7

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 RE FY16 BE

Capital Expenditure (% of GDP) Major Subsidies (% of GDP)


8

infrastructure - roads, railways, power and rural development.

Focus on these sectors is important again because of the multiplier impact on output. For instance, the output

multiplier for rail equipment is 2.7. This means one unit increase in demand for rail equipment raises overall output

by 2.7 units. Similarly, the output multiplier for rail transport services is 1.9, while that for electricity is 2.2. The

Economic Survey said this government can now do for the neglected railways sector what the previous NDA

government did for rural roads. Such focus on strengthening transport infrastructure will also boost manufacturing.

Figure 9: Sectors with higher plan outlay (%, y-o-y) Figure 10: CPSUs shoulder most capital spending

RE: Revised estimate, BE: Budgeted estimate

Note: Data is only for central plan outlay and taken as per Heads of Development. I.E.B.R.: Internal and extra

budgetary resources which are raised by central PSUs through profits, loans and equity

Source: Budget documents

Where will the money come from?

1. Direct spending from budget:

The relaxation of the fiscal deficit target for 2015-16 by 30 basis points directly releases Rs 423 billion for funding

projects. So, while total central plan outlay is budgeted higher next fiscal, much of it is due to an increase in

budgetary support, which is 37.3% higher on a weak base.

Road cess and taxes on petroleum products - The budget raised additional excise duty on petrol and diesel to Rs 6

per litre from Rs 2 per litre, which is levied as road cess. This raises available funds for roads and railways to

Rs 431 billion in 2015-16 from Rs 232 billion in 2014-15. In addition, to fund infrastructure development

(particularly roads), the government had increased the basic excise duty on petrol and diesel by around Rs 7 to

8 per litre between October and January. Incremental revenues accruing from this is estimated at Rs 780 billion

in 2015-16.

Govts revenue collections In 2015-16, the budget plans to collect divestment revenues of Rs 695 billion on

account of stake sales and spectrum sale revenues of Rs 431 billion which can be utilised towards

infrastructure development.

2. Larger onus on CPSUs to raise money:

The budget also envisages a sharp 34.1% increase in investments by central public sector enterprises (CPSUs)

compared with a 10% drop last fiscal. Their share in total central plan outlay is thus budgeted at nearly 55%. To fund

this, CPSUs will have to raise resources from the bond market. Of the total estimated to be raised in 2015-16, nearly

-10.6

-30.6

11.17.3

174.5

66.553.0

15.5

Roads and Bridges

Rural Development

Railways Power

%, y-o-y

FY12 to FY15 average FY16 B.E.

60.6 61.156.4

44.5 45.0

39.4 38.943.6

55.555.0

2011-12 2012-13 2013-14 2014-15 RE 2015-16 BE

% share in total capital outlay

Budget support I.E.B.R.

9

37.1% is to come from accruals (down to 49% from last year), 37% from capital market (up from 26%) and 26% from

external commercial borrowings and other sources. From the bond markets, PSUs in the roads and railways sector

are together slated to borrow Rs 803 billion in 2015-16 compared with Rs 208 billion last year. The budget allows for

a large part of this borrowing to be in the form of tax-free bonds.

3. Crowding in private investment

Public investment in infrastructure (especially railways and roads) can create large complementarities for private

sector investments. In addition to increased spending, the budget also takes a few other measures to boost

infrastructure investments.

On infrastructure financing, the budget announced the setting up of a National Investment and Infrastructure Fund

(NIIF) where an annual budgetary flow of Rs 200 billion will be ensured. This will enable it to raise debt and further

invest as equity in infrastructure finance companies such as IRFC and NHB. The budget also proposed to permit

tax-free infrastructure bonds for roads and railway sectors where large investments are being planned. The budget

reiterates the governments intention to revisit the private-public-partnership.

Overall, despite the pressure on fiscal consolidation, the budget has managed to create room for infrastructure

spending through a mix of its own resources as well as by nudging CPSUs to invest more. However, though there is

an increase in resources available for funding infrastructure, the governments implementation capacity to ensure

efficient delivery remains a concern. This, therefore, should be the next area of focus for the government.

How fiscal federalism is an enabler

It is well understood that greater power to states is essential for local capacity building and efficient use of resources.

This power emanates through higher resources and flexibility in utilising these resources at the state level. The

government has taken steps in the right direction in this regard in the current budget. Total transfers as a percentage of

GDP from the centre to the states have increased from 4.5% in 2013-14, 5.5% in 2014-15 to 6.0% in 2015-16.

Figure 11: Increasing fiscal flexibility for states

2014-15 2015-16 Change in Flexibility

Total transfers % of GDP 5.5 6.0

Rs billion

Total Transfers 6,930 8,522

States Revenue share 3,378 5,240 Fully flexible/Untied

Central Assistance for State and UT plans 2,703 1,958 Restructured to make semi - flexible :

23 schemes fully supported by union,

13 supported on sharing pattern and 8

delinked from the union

Centrally Sponsored Schemes 46 239 Inflexible/tied

Non - Plan grants and loans 803 1,086

Note : Total transfers include grants and loans under the central assistance for state and UT plans, non -plan

grants and loans, revenue share of states and centrally sponsered scheme transfers.

Source: Budget documents, Crisil Research


10

Budget implements Fourteenth Finance Commissions (FFC) recommendation

Greater resources for states

The Budget has raised states share in total divisible pool of tax revenues to 42% from 32% as per the recommendation

of the FCC, recording the biggest-ever increase in vertical tax devolution. In level terms, states share of the divisible

pool will rise to Rs 5.24 trillion in 2015-16 twice the share in 2011-12 from Rs 3.38 trillion in 2014-15. This money

will help states design, implement and finance programmes according to their specific needs. In addition, higher tax

devolution will also imply that any buoyancy in tax collections will benefit states to a greater extent as compared to

previous years.

Transfers under centrally sponsered schemes have risen

In order to ensure that the fiscal situation of the center remains preserved, with increasing transfers from the divisible

pool the central assistance to states has seen a decline. The total central assistance for State and UT plans has

moderated from Rs 2.7 trillion in 2014-15 to Rs 2 trillion in 2015-16. On the flipside, even as the centres position is

squeezed with higher devolution, the transfers under centrally sponsered schemes has risen substantially to Rs 239

bilion from Rs 46 billion in 2014-15. Allocations as per schemes has risen under MGNREGA ( rose by Rs 12 billion) and

in sectors such as agriculture, education, health, and rural infrastructure including roads.

But flexibility of transfers has also increased

Past data suggests that above 50% of the divisible pool is given to the states but a major portion of this goes under tied

or conditional transfers. In the last few years, plan transfers have moved away from the Gadgil formula to more

discretionary transfers resulting in lower flexibility. These are the conditional or tied transfers. As per the

recommendation of the FFC, the central assistance to state and UT plans has been restructured.The budget has

announced a changed sharing pattern between the centre and the state in terms of scheme implementation and

financing. The budget also proposes 8 centrally sponsered schemes (CSS) to be de-linked from the support of the centre

and 13 schemes ( for example, Urban Rejuvenation Mission 500, Development of 100 smart cities etc) to be run in a

sharing pattern between the centre and states. Details of the sharing pattern are yet to be disclosed.

Implementing capacity of states now needs attention

With an increase in fiscal flexibility of the states also comes the question of capability of the states to invest these

resources. In the past, states have not fully utilised the fiscal resources available to them resulting in insufficient capital

expenditure. Capital expenditure as a % of GDP has fallen from 2.8% in 2008-09 to 2.2% in 2012-13. As, recommended

by the FFC, the absorptive capacity of states needs to be enhanced to raise capital expenditure and boost growth.

Other measures at fiscal federalism

The government since June has also announced other changes that will result in greater benefit for states. One such

change is the revenue sharing on natural resources auctions. The auctions of 204 coal blocks a corrective measure

after the coal scandal will benefit state finances. So far, 18 blocks have been auctioned and will help raise over Rs 1

trillion over the next 30 years in states such as Jharkhand, Odisha, Chhattisgarh, Madhya Pradesh, Maharashtra and

West Bengal. This will contribute towards states fiscal resources.

11

Overall, this budget showcased a strong resolve towards encouraging cooperative federalism in India. That said, certain

sections of the transfers continue to be tied/conditional. Therefore, continued steps towards increased federalism will be

needed in the coming years. In addition, the ball is in the states court now and they need to use these resources

judiciously to enhance growth.

How will the budget boost manufacturing?

Manufacturing sector is a private sector enterprise with over 90% of the investments and output generated in the private

sector. Government can play a facilitative role in improving its prospects. The budget has taken many small steps to

support the manufacturing sector through indirect channels.

Support through forward and backward linkages : The government has taken measures to boost the

manufacturing sector by improving the domestic investment environment and raising the spending on physical

infrastructure which complements manufacturing activity. Spending on rail, road and ports will crowd in private

investment and support manufacturing activity via backward and forward linkages.

Improvement in ease of doing business: The above will be complemented by efforts to improve the ease of doing

business in India - its current rank is 142 out of 189 countries. Towards this regard, the budget announced reforms

in bankruptcy law to bring about legal certainity and speediness.

Reduction in custom and excise duty to support Make in India : The budget supports the Make in India

initiative through reduction in custom duty on certain inputs to address the problem of duty inversion and reduce the

cost of raw materials.


12


Industry


14

Overall sectoral impact

There are five focus areas in the Union Budget and each will impact India Inc. Heres a look at how:

Enabling financial sector efficiencies: Setting up of autonomous bank board bureau marks the initial move

towards formalising a holding company structure for public sector banks. This will improve governance, optimise

capital contribution by government, and provide greater functional autonomy. Along with more stringent bankruptcy

laws, these are two key long-term positives. On the other hand, providing a mere Rs.79 bn towards capital support

for public sector banks is grossly inadequate. Elsewhere, the inclusion of NBFCs under the purview of SARFAESI

Act, along with the new bankruptcy code will improve recovery efforts for financial institutions and support their

capital position. The new Micro Units Development Refinance Agency (MUDRA) Bank for refinancing of

microfinance institutions will support micro credit. Proposals to promote financial savings are also a positive.

Enabling infrastructure investments: The intent to ratchet up public spending on infrastructure is clearly visible.

There is a sharp increase in allocation to roads, railways and rural infrastructure development. In addition, many

significant steps have been taken to improve the availability of funds for infrastructure. This includes higher

allocation for road cess, more funding through the National Infrastructure Investment Fund, tax-free bonds and

rationalisation of taxes for infrastructure investment trusts. However, timely implementation of projects remains a

key concern. The governments intent to salvage the broken public-private partnership model to attract investment is

also a positive. The deferment of GAAR and allowing foreign capital in alternative investment funds will attract

foreign capital.

Boosting power and renewable energy: The government has set an aggressive target for renewable energy of

close to 175 GW, including 100 GW of solar capacity by 2022. It has also announced five new UMPPs for

conventional power -- with all approvals in place to ensure faster execution. But the key concerns remain timely

implementation, resolution on fuel availability, clearances, transmission corridor availability and financial health of

distribution companies. The government continues increasing allocation towards transmission and distribution its

up 26% in 2015-16 compared with the current fiscal. Coal cess has also been increased a touch, which will

marginally lift tariffs. We expect generators to pass it on.

Marginal changes in taxes: The budget has proposed a marginal increase in excise duty from 12.36% to 12.5%

and in service tax from 12.36% to 14%. However, given the decline in input prices (both food and non-food), we

expect companies (manufacturers or service providers) to largely pass on the burden to customers and protect their

margins. Although surcharge on corporate tax has been increased for this fiscal, paving a structural path towards

lower rates by doing away with many exemptions is a positive.

Leg-up to rural income: With increased allocation to MGNREGA, rural incomes should rise. Add a good monsoon

and what you get is greater consumption of FMCG products and higher sales of consumer durables and two-

wheelers. Increased agricultural credit would also lead to higher sales of tractors and irrigation equipment. Better

volume growth and softer commodity prices will improve the margins of companies in this arena.

15

Industry Impact

Automobiles: Marginally positive for tractors, neutral for other segments Neutral

Key budget proposals:

Farm credit target increased by Rs 500 billion to Rs 8.5 trillion. Higher allocation to rural financing agencies such as

NABARD and RRBs, and to initiatives such as MGNREGA, micro-irrigation watershed programs, etc.

Allocation of Rs 750 million to promote manufacturing of electric vehicles (EVs). Concessional customs and excise

duties on hybrid and EV parts extended until March 2016.

Increase in customs duty on fully-built commercial vehicles (CVs) from 10% to 20%. Reduction in excise duty on

ambulance chassis from 24% to 12.5%.

Tax on royalty payments to foreign companies reduced to 10% from 25%.

Creation of a trade receivables discounting platform for medium and small enterprises (MSMEs).

CRISIL Researchs View

The increase in allocation to farm credit and rural schemes is likely to be favourable for tractor sales. Proposals on

electric and hybrid vehicle parts will not materially impact the sector given low population of vehicles in India (less than

1% share). The proposals will have a limited impact on the CV segment as imports of fully built CVs and sales of

ambulances comprise a small proportion of the CV industry. The reduction in tax on royalty payments to foreign

companies will be marginally positive for Indian companies who import technology. Creation of an electronic platform for

facilitating financing of trade receivables of MSMEs will help improve liquidity of auto component manufacturers.

Cement: Higher spending on infrastructure to benefit in the medium term Positive


Investments outlined under various infrastructure schemes related to areas such as roads, urban development and

irrigation indicate a targeted government spending of Rs 1,080 billion in 2015-16.

Duties and tariffs directly levied on cement have increased marginally. The effective excise duty on cement has

increased marginally from 12.4% + Rs 120 per tonne to 12.5% + Rs 125 per tonne.

The clean energy cess on coal (domestic and imported) has been hiked to Rs 200 per tonne from Rs 100 per tonne.

The rail freight rate for cement has been increased by 2.7% and for coal by 6.3%.


The governments focus on infrastructure is evident with the total targetted spending in 2015-16 almost double the

revised estimates of 2014-15. This should result in a sustained recovery in demand, but the execution capability of

funding institutions/players has to be scaled up appropriately. Further, the rise in duties and tariffs is expected to have a

muted impact on total cost, which is expected to increase 0.8%. Power and fuel cost (~20% of cost of sales) will increase

2%. Freight cost, which accounts for 25-30% of cost of sales, will increase 1% with the rise in freight rates. However,

amid rising demand, players will be able to offset it with a rise in prices.


16

Consumer goods: Little to savour Neutral


Basic customs duty on organic LED (OLED) panels removed.

Specific excise duty on tobacco and tobacco products increased 15-25%.

Excise duty of 2% without CENVAT credit or 6% with CENVAT credit levied on condensed milk and peanut butter.

Basic excise duty increased to 18% from 12% on mineral water and aerated water containing added sugar or other

sweeteners/flavours. Additional excise duty of 5% on the products exempted.

Excise duty on leather footwear with retail price exceeding Rs 1,000 per pair halved to 6%.


Improvement in rural income, owing to increase in MNREGA allocation, to support consumer durable and FMCG sales.

Removal in customs duty on OLED to only marginally affect OLED TV sales as segment accounts for less than 0.5% of

panel TV sales. The excise duty hike will hurt the demand for tobacco-based products, but aerated beverages demand

will only be marginally impacted.

Financials: Setting up of holding company and bankruptcy code a positive Positive


The Union Budget has proposed to provide Rs 79.4 billion as capital support to all public sector banks (PSBs) in

2015-16.

NBFCs registered with RBI, having an asset size of Rs 5,000 million and above, may be considered for notification

as 'Financial Institution' under the SARFAESI Act, 2002.

Autonomous Bank Board Bureau and bank holding company to be set up to improve governance of public sector

banks.

Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs 200 billion and credit guarantee

corpus of Rs 30 billion, to be created.

MUDRA Bank will be responsible for refinancing all microfinance Institutions, which lend to small entities, and

focusing on scheduled caste/ scheduled tribe entrepreneurs.


Allocation of funds (an average of Rs 111 billion has been infused over the past three years till 2014-15) for capitalising

PSBs seems inadequate, given the high capital requirements to meet Basel 3 commitments. In this context, the proposal

to create a holding and investment company and an Autonomous Bank Board Bureau would be a positive and improve

autonomy for PSBs and help them raise funds, as the holding company too can leverage.

Allowing NBFCs recourse to SARFAESI Act will help smoothen the asset recovery process. This, coupled with

establishment of the Bankruptcy Code would help improve asset quality within the banking and financial services

industry.

Setting up of MUDRA bank will help improve availability of funds for small business entrepreneurs.

17

Infrastructure: Investment boost through higher public funding Positive

Key Budget Proposals:

Budgetary allocation: Total outlay for infrastructure has been increased by 1.5 times to Rs 2.8 trillion (roads,

railways and urban infrastructure the biggest beneficiaries).

Roads: Investments for development of national highways proposed to be hiked by 178% y-o-y to Rs 85,607 crore.

A major portion of this increase will be funded by a Rs 4 per litre increase in road cess on petrol and diesel.

Railways: Total outlay raised by 52% to Rs 1,000.11 billion. In the Railway Budget 2015-16, there have been many

announcements of PPP projects in areas of coastal connectivity, gauge conversion, dedicated freight corridors

(DFCs) and the Mumbai suburban rail.

Airports & Ports: No new project announcements. Exemption on service tax for constructing airports and ports has

been withdrawn.

Funding availability: A Rs 200 billion National Investment and Infrastructure Fund to be set up for infrastructure

finance companies to raise debt. The budget also provides for issuance of tax-free bonds for roads, railways and

irrigation projects, and aims to rationalise the tax regime for Infrastructure Investment Trusts.

Other measures: The government's intent to table a Public Contracts (Settlement of Disputes) Bill will help speedy

redressal of disputes in large public projects and create a conducive environment for PPP projects.


At a time when private sector interest in infrastructure development is low, the increase in budgetary support holds the

potential to kick-start capital investments in the economy. Moreover, the significant increase in public funding for the

roads sector has the potential to boost execution of national highway projects by about 5,800 km annually and create a

robust construction opportunity for road engineering procurement & construction (EPC) companies.

The National Investment and Infrastructure Fund will create additional funding resources for private developers, over and

above the rise proposed in public funding. Moreover, rationalisation of tax regime for Infrastructure Investment Trusts

may help free up private capital currently locked in completed projects.

While the budget provisions are positive, it puts the execution capability of implementing agencies such as the National

Highways Authority of India (NHAI) at test. Addressing on-ground issues such as clearances and land acquisition

becomes extremely critical to ensure a sharp increase in project execution.

Metals: No big announcement Neutral


Basic excise duty increased to 12.5% from 12.36%.

Clean energy cess on coal doubled to Rs 200 per tonne.

Basic customs duty on metallurgical coke raised to 5% from 2.5%.

Special additional duty on iron and steel scrap reduced to 2% from 4%.


The thrust on infrastructure is a long term positive. But in the near term, the budget proposals will have negligible impact


18

on the sector. Increase in basic excise duty will only slightly raise aluminium and steel prices by Rs 200 and Rs 50 per

tonne, respectively. Hike in clean energy cess will also have only a mild impact on sponge iron and aluminium players.

Similarly, impact of hike in customs duty on metallurgical coke will be negligible as most Indian steel players import

coking coal and subsequently convert it into coke.

Oil & gas: Higher Govt share in under-recovery burden for 2015-16: positive for oil companies Positive


Government announces oil subsidy of Rs 300 billion for 2015-16.

Change in excise duty structure on petrol and diesel: Reduction in CENVAT by Rs 3.5-3.7 per litre, increase in road

cess by Rs 4 per litre, removal of 3 per cent education cess levied on overall excise duty

Exemption of special additional customs duty on petrol and diesel, in excess of Rs 6 per litre


The overall impact is marginally positive. The government's estimate of oil subsidies in 2014-15 and 2015-16 will wipe

out the subsidy rollover of Rs 90-100 billion from 2014-15, reducing working capital requirements of oil marketing

companies. With the government contributing Rs 300 billion towards fuel subsidies (including rollover), upstream oil

companies will see a 5% decline in their contribution to under-recoveries in 2015-16.

Increase in road cess on petrol and diesel has been completely offset by the decline in basic excise duty and removal of

education cess. Hence, there will be no impact.

As petrol and diesel imports are marginal, exemption in special additional customs duty will not have any major impact.

Power: Higher budgetary allocations and fund availability to boost investments Positive


Capacity additions: Installed capacity target for renewable energy set at 175 GW, led by additions of 100 GW of

solar power capacity by 2022. Setting up of five ultra-mega power plants (UMPPs), each of 4,000 MW, with pre-

awarded clearances and fuel linkages envisaged.

Budgetary allocation: Allocation to transmission & distribution (T&D) segment increased by 26% to Rs 63.5 billion .

Funding to renewable energy sector has also been increased by 5% to Rs 61.6 billion.

Funding availability: Rs 200 billion National Investment and Infrastructure Fund to be set up for help infrastructure

finance companies to raise debt.

Duties and levies: Clean energy cess on coal doubled to Rs 200 per tonne in 2015-16; however, the rise in

generation cost of Rs 0.06/unit to be largely passed through. Moreover, steps have been taken to correct the

inverted duty structure in renewable energy for selected components. However, the overall impact on capital costs is

less than 5%.

Dispute redressal: Public Contracts Bill introduced for resolving contractual disputes to create a conducive

environment for PPP projects

Other benefits: Additional depreciation of 20% granted to new plant and machinery installed by a manufacturing unit

or a unit engaged in generation and distribution of power.


The budget provides a thrust on investments in the power and renewable energy space, with a 16% y-o-y increase in

19

planned expenditure. We believe that a healthy growth in capacity additions and augmentation of T&D infrastructure will

reduce power deficit to about 1% by 2018-19. However, a favourable regulatory framework coupled with states

facilitating implementation of projects will be critical to boost investments.

While the provisions are positive, addressing fuel availability issues and improving the financial health of state distribution

companies is important to alleviate financial stress in the sector

Real Estate: Commercial real estate developers to benefit in the medium term Neutral


Rationalisation of capital gains tax for the sponsors at the time of listing of real estate investment trusts (REITs).

Service tax increased from 12.36% to 14%.


Rationalisation of capital gains tax for the sponsors* exiting at the time of listing of REITs is positive for developers with a

significant exposure to rental yielding real estate assets. The increase in service tax will be marginally negative for the

real estate sector.

*As per the Securities Exchange Board of India, sponsor has been defined as any person(s) who set(s) up the REIT and

designated as such at thetime of application made to the Board

Textiles: Allocation under TUFS slightly reduced; No major impact Neutral


Budgetary allocation under the Technology upgradation Funds Scheme (TUFS) has been reduced to Rs 15.2 billion

for 2015-16 from Rs 18.6 billion in 2014-15.


The government has been supporting the industry through TUFS, which enables players to expand/ modernise at lower

costs. Though the budgetary allocation under TUFS has been reduced slightly in 2015-16, it will not greatly impact the

industry given the existing demand-supply dynamics. Continuation of a zero excise duty will aid a 6-8% rise in domestic

sales volumes of apparels in 2015-16, vis-a-vis a 5-6% rise in 2014-15.

Technology, Media & Telecom: No significant impact of the Budget proposals Neutral


Mobile handsets: Excise duty on mobile handsets (costing above Rs 2,000) hiked from 6% (with CENVAT credit) to

12.5%.

Service tax: Service tax, hiked from 12.36% to 14%, will have a bearing on the bills of postpaid telecom

subscribers.

Telecom receipts: Budgeted receipts from spectrum auctions, one-time spectrum charges and other levies have

been estimated at Rs 429 billion for 2015-16, vis-a-vis Rs 432 billion for 2014-15.

Media: Service tax to be levied on tickets purchased for events such as concerts, pageants, sporting events and

award functions, if the admission amount exceeds Rs 500 per person.


20

IT: Rs 10 billion has been allocated towards the Techno-Financial Incubation and Facilitation Programme for

technology start-ups and self-employment activities. Also, input components used in manufacturing tablet computers

have been exempted from basic customs duty, countervailing duty (CVD) and special additional duty (SAD).


The proposals are unlikely to have a significant impact on the telecom and media sectors. The hike in excise duty on

mobile handsets would result in an increase in their prices, which would somewhat impact the rate of growth in

smartphone adoption. The hike in the service tax rate would inflate the bills of postpaid subscribers, who, however,

constitute only about 5 per cent of Indias wireless subscriber base. The budgeted receipts from telecom services

indicate that another round of spectrum auctions can be expected in 2015-16.

Service tax to be levied on event ticket prices exceeding Rs 500 is unlikely to have a major impact as organisers would

pass on the resultant price hikes to the ticket buyers.

The proposals will not have a significant impact on the IT industry. Allocation of funds for start-ups will help the IT

industry adopt new technologies and provide employment opportunities. Tablet computer prices are set to reduce with

the removal of custom duties.

Capital markets


22

Capital markets Focus on social security a good augury for future

A. Enhancing coverage of pension and health insurance:

With an aim to expand pension and insurance coverage in India, Arun Jaitleys Budget seeks to include the

unorganized and the under-privileged. As per CRISIL estimates, about 65% of the old age population in India is not

covered by social security.

Increase in deduction (by Rs 50,000) under Section 80C for contributions to pension funds and National Pension

System (NPS), and under Section 80CCC for pension funds launched by insurance companies is expected to boost

interest in these products. An additional tax deduction of Rs 50,000 has also been provided for contribution to the

NPS under Section 80CCD.

Increase in tax incentives for health insurance is expected to enhance the coverage of health insurance products.

The budget has increased the available choices in pension and health insurance. Subscribers can plan for

retirement by choosing between asset classes and products offered by the Employees Provident Fund (EPF) and

the NPS. Likewise, products recognised by the Insurance and Regulatory Development Authority of India (IRDA) for

health cover are an option to Employees State Insurance Corporation (ESIC). These measures are expected to

encourage healthy competition in the insurance and pension funds sectors.

B. Funding infrastructure through alternative investment funds

The budget includes key measures to enhance investor interest in alternative investment funds (AIFs). Increased

asset flow to AIFs, especially Category I and II AIFs, will boost funding options for the infrastructure and real estate

sectors.

The introduction of pass-through status for taxation of Category I and II AIFs allows for tax to be levied on the

investors (unit holders) of these funds and not on the funds. This is expected to increase investor interest in these

funds.

Opening of AIFs to foreign investors will enhance the investor base for AIFs. This is expected to boost inflows and

energise start-ups and projects that may otherwise face difficulties in funding. Details are, however, awaited on the

tax implications for such foreign investments.

C. Channelling physical gold savings to financial savings

India is amongst the largest consumers of gold. Gold investments are predominantly held in a physical form, which

means the investment once made is not used productively. Further, the huge demand for gold increases Indias gold

imports, which adversely impacts the balance of payment and the rupee. The budget seeks to introduce schemes

such as Gold Monetising Scheme, Indian Gold Coin and Sovereign Gold Bonds, which address these concerns.

While these are steps in the right direction, the efficacy of the schemes - given the countrys penchant for physical

holdings - remains to be seen.

23

D. New agency for government borrowings, yet very few measures for deepening debt market

The proposal to establish a Public Debt Management Agency for government borrowings is expected to facilitate

better planning and management of domestic and foreign market borrowings for the Centre. This will also reduce the

operational burden on the Reserve Bank of India and help it focus on core functions related to monetary policies.

Introduction of tax-free infrastructure bonds will help channnelise investments to the bond market. While provisions

for pension funds and AIFs are also likely to have a positive impact on asset flow to the debt markets, given the role

that the debt markets have to play in the realisation of several of the measures that have been announced in the

Budget, there is very little to cheer. No concrete measures have been announced for deepening or broadening the

markets.

E. Encouraging foreign investments

Continuation of the withholding tax rate of 5% and deferment in applicability of the GAAR are likely to maintain the

positive atmosphere for foreign investors. Modification to norms of Permanent Establishments (PE) and

rationalisation in Minimum Alternate Tax (MAT) are also positive. Details are awaited on the removal in distinction

between Foreign Portfolio Investors (FPIs) and Foreign Direct Investments (FDIs).

F. Very little for the mutual fund industry

The mutual fund industry could have done with a few more measures. Given the fact that mutual funds are expected

to be a key vehicle to channelise retail savings, this is a negative.

The only positive for the industry has been the proposal to provide tax neutrality on transfer of units in case of

mergers of schemes. This will enable mutual funds to consolidate similar schemes, which is important to retain

simplicity of products for retail investors.

Introduction of service tax for mutual fund distributors is likely to reduce the margins on distribution of schemes.

Given the challenges the industry faces with distribution, this is a negative. Increase in surcharge from 10-12% for

capital gains and distributed income will increase the effective tax rates for investors and may, in turn, impact

investor interest.

Annexure: Sector wise Impact


26

Airport Infrastructure

Increase in service tax to marginally impact non-aero revenues

Company Impact Impact factors

GMR Infrastructure Ltd A,B

GVK Power and Infrastructure Ltd A,B

Source: CRISIL Research

Impact factors

A. Increase in service tax to 14% from 12.36% to marginally affect airports non-aero revenues. Non-aero revenues

constitute 30-40% of total revenues for Mumbai, Bengaluru, Hyderabad and Delhi airports.

B. Improved funding availability through establishment of National Investment and Infrastructure Fund and

rationalisation of taxes for Infrastructure Investment Trust.

C. Service tax exemption on construction of airports has been withdrawn. Accordingly, service tax (including education

cess) of 14% is applicable. Greenfield airports will be largely affected as these comprise about 77% share of total

investments over next 5 years.

27

Auto components & tyres

No significant impact of the Budget


Apollo Tyres -

Exide A

Motherson Sumi A

Bosch -

Bharat Forge A


Impact factors

A. We do not expect concessional customs and excise duty rates (6%) on specified parts of electrically operated and

hybrid vehicles to have a major impact as sales of electric vehicles are very low.

Auto parts: Tariffs

(per cent)

2014-15 2015-16 2014-15* 2015-16

Engine and engine parts 7.7 7.7 12.4 12.5

Drive transmission, steering, suspension,

braking parts,silencer, exhaust pipes and

radiators

10.3 10.3 12.4 12.5

Electrical parts 7.7 7.7 12.4 12.5

Raw materials for auto components1 7.7 7.7 12.4 12.5

Excise duty includes education cess @ 3% (not applicable on 12.5% rate in 2015-16)

* Effective from 01/01/2015

Notes:

1) Raw materials for auto components include galvanised plate (GP)/galvanised coil (GC) steel,

hot rolled (HR), steel, aluminium, copper and lead.


Customs Excise


28

Tyres: Tariffs, prices and landed costs

International Pre-budget Post-budget

2014-15 2015-16 2014-15 2015-16 ($/tonne)

New tyres 10.3 10.3 10.3 10.3 - - - -

Used/retreaded tyres

Truck and bus 10.3 10.3 10.3 10.3 - - - -

Car cross ply/ Radials 10.3 10.3 10.3 10.3 - - - -

Raw materials for tyres

Natural rubber (Note 2) (Note 2) (Note 1) (Note 1) 127,446 1,703 143,063 143,063

SBR (1502) 10.3 10.3 12.4 12.5 n.a. 1,338 91,800 91,800

PBR (1220) 10.3 10.3 12.4 12.5 106,000 1,500 105,381 105,381

NTC fabric 10.3 10.3 12.4 12.5 n.a. 3,665 251,548 251,548

Carbon black (N330) 5.2 5.2 12.4 12.5 n.a. n.a. n.a. n.a.

NTC: Nylon tyre cord; PBR: Polybutadiene rubber; SBR: Styrene butadiene rubber

n.a.: Not available

* Domestic carbon black prices are available on quarterly basis. Included prices are for Q4 2014-15.

Notes

1) For natural rubber, there is a cess of Rs 2 per kg in lieu of excise duty w ith effect from September 1, 2011.

2) Customs duty on natural rubber w ill be charged at 20% or Rs 30 per kg, w hichever is low er, w .e.f. December 20, 2013.

3) New tyres include the follow ing categories: Truck and bus, light truck, car (cross ply and radial), tractor front,

tractor rear, tractor trailor, moped, scooter and motorcycle.

4) An additional countervailing duty of 4% is levied on raw materials except for NTCF

5) Prices and landed cost are average rates for January 2015.


Domestic

Prices (January 2015) Landed costs (Rs/tonne)Tariffs (per cent)

(Rs/tonne)

Customs Excise

29

Automobiles

Marginally positive for tractors; neutral for other segments


Maruti Suzuki India Ltd B,D

Tata Motors Ltd A,B

Ashok Leyland Ltd A,B

Bajaj Auto Ltd -

Hero Motocorp Ltd C,D,F

Mahindra & Mahindra Ltd A,B,C,E,F


Impact factors

A. Increase in effective rate of customs duty on import of fully-built commercial vehicles (CV) to 20% from 10% will not

have a significant impact as fully-built CV imports are negligible.

B. Reduction in excise duty on ambulance chassis to 12.5% from 24% will not have a major impact on CV sales as

they form a small proportion of total sales.

C. Concessional customs and excise duty rates (6%) on specified parts of electrically operated and hybrid vehicles are

not expected to have a major impact as sales of electric vehicles are very low.

D. Reduction in tax on royalty payments to foreign companies to 10% from 25% will have a marginally positive impact

for Indian companies who import techonolgy.

E. The increase in funds allocated for farm credit by Rs 500 bn to Rs 8.5 trillion and agricultural initiatives such as

increase in allocation to MGNREGA and NABARD will be marginally favourable for tractor sales.

F. Allocation of Rs 750 million to promote manufacturing of electric vehicles (EVs) is another directionally positive step

but will not have much impact in the near term.


30

Automobiles: Tariffs

(%)

2014-15 2015-16 2014-15* 2015-16

New cars

-Completely knocked dow n units (CKD) 10.3 10.3 - -

-Semi-knocked dow n units (SKD) 61.8 61.8 - -

-Completely built units (CBU) 128.8 128.8 - -

-Specif ied small cars1 - - 12.4 12.5

-Other than specif ied small cars2 - - 24.7 24.7

Utility vehicles (less than 1500 cc) 128.8 128.8 24.7 24.7

SUVs (including utility vehicles exceeding 1500 cc and length 128.8 128.8 - -

exceeding 4000 mm, ground clearance of 170 mm and more) - - 30.9 30.9

Tw o-w heelers 10.3 10.3 12.4 12.5

Trucks (LCVs and MHCVs)3 10.3 20.6 12.4 12.5

Buses (LCVs and MHCVs)3 10.3 20.6 12.4 12.5

Tractors 10.3 10.3 - -

Engine and engine parts 7.7 7.7 12.4 12.5

Drive transmission, steering, suspension, braking

parts,silencer, exhaust pipes and radiators 10.3 10.3 12.4 12.5

Electrical parts 7.7 7.7 12.4 12.5

Steel items 7.7 7.7 12.4 12.5

Pig iron 5.2 5.2 12.4 12.5

Excise duty includes education cess @ 3% (not applicable on 12.5% rate in 2015-16)

LCV: Light commercial vehicles; MHCV: Medium and heavy commercial vehicles

Notes:

* Effective from 01/01/2015

1 Specif ied small cars include cars w ith length not exceeding 4000 mm and engine

capacity not exceeding 1200 cc for petrol cars and 1500 cc for diesel cars.

2 Others w ill include cars w ith length exceeding 4000 mm and

engine capacity exceeding 1200 cc for petrol cars and 1500 cc for diesel cars.

3 Represents effective rate for fully-built vehicles. Customs duty on commercial vehicles in

CKD kits w ill continue to be at 10%


Customs Excise

31

Banking

Positive for NBFCs and PSBs


State Bank of India A,C

Punjab National Bank A,C

ICICI Bank A

HDFC Bank A

HDFC Ltd B


Impact factors

A. The Union Budget has proposed to provide Rs 79.4 billion as capital support to all PSBs (PSBs) in 2015-16, lower

than the average Rs 131 billion provided in the past five years till 2014-15. This cut in allocation has come at a time

when PSBs are witnessing significant pressure on profitability and need to comply with stringent Basel III capital

requirements. To support credit growth of 15-16% in 2015-16, PSBs will need much more capital than the levels

budgeted for. Weaker banks with a lower capital adequacy, would be impacted the most if the required capital

infusion does not occur.

B. In this context, the governments intention to create a holding and investment company and an Autonomous Bank

Board Bureau for PSBs is a positive. This would provide autonomy to banks and help them raise funds. The bureau,

a precursor to the holding company, will search and select heads of PSBs and help them develop differentiated

strategies and capital raising plans through innovative financial methods and instruments. This step is in the right

direction as it will improve operating efficiency of PSBs.

C. NBFCs registered with RBI and having an asset size of Rs 5,000 million and above, would now be covered under

the SARFAESI Act, 2000. This, coupled with formulation of a new Bankruptcy Code, would help the banking and

financial sector manage their asset quality better.

D. Establishment of the Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs 200 billion,

and credit guarantee corpus of Rs 30 billion has been proposed. MUDRA Bank will be responsible for refinancing all

microfinance Institutions, which lend to small business units through the Pradhan Mantri Mudra Yojana. A Trade

Receivables discounting System (TReDS) - an electronic platform for facilitating financing of trade receivables of

MSMEs is proposed to be established, which will help ease liquidity for companies.


32

Cement

Measures to boost construction activity a positive; cost escalations minor


ACC Ltd. B

Ambuja Cements Ltd. B

India Cements Ltd. B

Shree Cement Ltd. B

UltraTech Cement Ltd. B


Impact factors

A. Duties and tariffs directly levied on cement hiked marginally. An increase in freight, power and fuel costs to drive up

players operating costs by 0.8%. However, they will be able to hike prices to offset this increase owing to rising

demand.

B. Clean energy cess on coal (domestic and imported) doubled to Rs 200 per tonne, which will increase power and fuel

costs (that form about 20% of cost of sales) by 2%.

C. Rail freight rate for cement hiked by 2.7% and for coal by 6.3%. This would drive up freight costs (which account for

25-30% of cost of sales) by 1%.

D. Increase in infrastructure funding to aid recovery. Key outlays are:

E. Investments towards roads and highways more than doubled to about Rs 856 billion.

F. Outlay towards urban infrastructure increased by 37% to Rs 188 billion.

G. The above moves would improve demand for cement over the medium term; however execution capability of

funding institutions/ players has to be scaled up appropriately. Further, steps taken to improve access to financing

for infrastructure projects could aid higher credit offtake over the long term.

Cement: Tariffs

(Per cent)

2014-15 2015-16 2014-15 2015-16 2014-15 2015-16

Portland cement 0 0 12.4 +Rs120/tonne 12.5 +Rs125/tonne 0 0

White cement 10.3 10.3 12.4 12.5 30 30

Cement clinker 10.3 10.3 12.4 12.5 0 0

Limestone 5.2 5.2 0 0 0 0

Gypsum 2.6 2.6 0 0 0 0

Pet coke 2.5 2.5 14.4 14.4 0 0

Imported coal 2.5% BD+2.0% CVD 2.5% BD+2.0% CVD 0 0 0 0

BD: Basic duty; CVD: Counter veiling duty

Customs Excise Abatement rate


33

Construction

Public funding to propel construction investments

Company Impact Impact Factors

Larsen & Toubro Ltd A,B,C,D,E,F

Hindustan Construction Co Ltd A,B,D,E,F

IVRCL Ltd A,B,C,D,E,F

Nagarjuna Construction Co Ltd A,B,C,D,E,F

Simplex Infrstructures Ltd A,B,C,D,E,F


Impact factors

A. Hike in allocation towards infrastructure sectors by 1.5 times to around Rs 2.8 trillion to provide strong construction

opportunity to EPC players. Roads & highways, railways and urban infrastructure segments to be major

beneficiaries. As private sector interest is muted, the budget plans to step up public funding. However, institutional

capacity to execute projects across sectors will have to be monitored.

B. Investment for development of national highways has been increased by 178% y-o-y to Rs 856 billion. A significant

portion will be funded through a Rs 4 per litre hike in road cess on petrol and diesel. The increase in public funding

has the potential to boost national highway execution by about 5,800 km annually, creating strong construction

opportunity for road EPC companies.

C. In railways, outlay has been increased by 52% to Rs 1 trillion, with focus on capacity expansion and decongestion of

the existing network. There have been significant PPP announcements in coastal connectivity, gauge conversion,

Direct Freight Corridor and expansion of the Mumbai suburban railway network.

D. Planned outlay on urban infrastructure development, which includes development of smart cities and metro rail

projects, has been increased by 37%.

E. Issuance of tax-free bonds for roads, railways and irrigation projects and establishment of the National Investment

and Infrastructure Fund (with corpus of Rs 200 billion) proposed to be explored as means for additional finance.

Rationalisation of tax regime for infrastructure investment trusts could free up private capital locked in completed

projects.

F. Governments intent to table Public Contracts Resolution of Disputes Bill to provide speedy dispute redressal in

large public projects and create conducive environment for PPP projects.


34

Fertilisers

Announced subsidy adequate; overall neutral impact


Chambal Fertilisers & Chemicals Ltd A, B

Coromandel Fertilisers Ltd A, B

Gujarat State Fertilisers Company Ltd A, B

National Fertilisers Ltd A

Rashtriya Chemicals and Fertilisers Ltd A, B

Zuari Industries Ltd A, B


Impact factors

A. Budgeted subsidy of Rs 730 billion for 2015-16 will be adequate to cover the subsidy burden of Rs 697 billion. The

subsidy spillover to 2016-17 will be lower at Rs 260 billion, compared with Rs 290 billion in the previous year.

B. Customs duty on sulphuric acid (used for manufacturing phosphatic fertilisers) has been reduced to 5% from 7.5%.

However, sulphuric acid accounts for a small proportion of overall costs. Hence, the impact will be marginal.

Fertilisers: Tariffs, prices and landed costs

Tariffs (per cent) Prices (January 2015)

Customs Excise Domestic International Pre- Post-

2014-15 2015-16 2014-15 2015-16 (Rs/tonne) ($/tonne) budget budget

Urea 5.0 1.0 5,360 303 21,190 21,190

DAP 5.0 1.0 23,000 484 35,019 35,019

MOP 5.0 1.0 17,000.0 325 21,897 21,897

Ammonia 5.0 1.0 n.a. 515 36,590 36,590

Phosphoric acid 5.0 - NT 765 51,055 51,055

Sulphur 2.5 - n.a. 193 12,470 12,470

Rock phosphate 2.5 - NT 121 9,410 9,410

Naphtha 0 - 26,609 428 28,539 28,539

Fuel oil 0 - 27,262 280 18,399 18,399

Contracted LNG2 5.0 - - 713 46,588 46,588

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.


Landed costs

(Rs/tonne)

DAP: Di-ammonium phosphate; LNG: Liquif ied natural gas

MOP: Muriate of potash; NT: Not traded; n.a.: Not available

"-" indicates not applicable

35

Hotels

Impetus to tourism, positive for hospitality industry


EIH Ltd A,B

Hotel Leelaventure Ltd A,B

Indian Hotels Company Ltd A,B


Impact factors

A. The budget proposes to increase the service tax from 12.36% to 14%. For hotels in India, the service tax is

applicable for both rooms and food & beverage (F&B). CRISIL Research expects the increase in the service tax to

have a negligible impact on the hotel industry as hoteliers will be able to pass it on to the customers.

B. The budget proposes to extend the Visa on Arrival (VoA) facility, currently available for 43 countries, to 150

countries in a stagewise manner. This is expected to improve the tourism competitiveness of India and boost foreign

tourist arrivals (FTAs) in the country, which were 7.5 million in 2014. As per a survey conducted by the World

Economic Forum in 2013, India ranked 65th in the overall travel and tourism competitiveness but ranked a dismal

132nd in terms of visa restrictiveness (which factors in the ease in obtaining visas). Among the BRICS nations,

South Africa, Brazil and Russia outrank India in terms of flexible visa policies. In another move to boost FTAs along

with domestic tourist arrivals (DTAs), the budget proposes to carry out restoration work on nine World Heritage Sites

across India churches and convents of Old Goa, Hampi in Karnataka, Elephanta Caves near Mumbai, Kumbalgarh

and other hill forts of Rajasthan, Rani ki Vav in Patan, Gujarat, Leh Palace in Ladakh, Varanasi Temple Town in

Uttar Pradesh, Jalianwala Bagh in Amritsar and Qutub Shahi Tombs in Hyderabad. Since tourist growth typically

boosts demand for premium segment hotels, the proposals bode well for the hospitality industry in India.


36

Household Appliances

Basic customs duty exemption on OLEDs to have miniscule impact


Videocon Industries Limited A,B

Whirlpool of India Limited A,B

MIRC Electronics Limited A,B

Voltas Limited A,B


Impact factors

A. The basic customs duty for Organic LED (OLED) panels has been reduced to nil from 10%. However, as OLED TVs

account for less than 0.5% of total panel TV sales, this cut will not have any significant impact.

B. Increase in MNREGA allocation is expected to improve rural incomes, thus supporting consumer durable sales. This

will have a marginal positive impact on the sector.

Household Appliances: Tariffs

(Per cent)

2014-15 2015-16 2014-15 2015-16# 2014-15 2015-16

B/W TVs 10.3 10.3 12.4* 12.5 - -

Colour TVs (CRT, LCD, LED) 10.3 10.3 12.4* 12.5 30 30

Refrigerators 10.3 10.3 12.4* 12.5 35 35

Room ACs 10.3 10.3 12.4* 12.5 25 25

Washing machines 10.3 10.3 12.4* 12.5 35 35

CPT 0.0 0.0 12.4* 12.5 - -

LCD and LED panels 0.0 0.0 12.4* 12.5 - -

OLED panels 10.3 0.0 12.4* 12.5 - -

Compressors 7.7 7.7 12.4* 12.5 - -

Thermostat and tubes 7.7 7.7 12.4 12.5 - -

Steel coils 7.5 7.5 12.4 12.5 - -

Polymers 5.2 5.2 12.4 12.5 - -


Customs Excise Abatement rate

*Excise duty rates w ith effect from 1st January, 2015

CRT: Cathode ray tube, LCD: Liquid crystal display, Light Emitting Diode, CPT: Colour picture tube

#Education Cess and Secondary Higher Education Cess are subsumed in the Central Excise Duty and

general rate of Central Excise Duty rounded off to 12.5 per cent

37

Information Technology

No significant impact


TCS B

Infosys B

Wipro B

HCL Technologies B

Tech Mahindra B


Impact factors

A. Exemption of basic customs duty, countervailing duty and special additional duty on input components used in

manufacturing tablet computers to lower tablet prices.

B. Allocation of Rs 10 billion towards Techno-Financial Incubation and Facilitation Programme for technology start-ups

and self-employment to help industry adopt new technologies and provide employment opportunities.

Information technology: Tariffs

(%) 1

2014-15 2015-16 2014-15 2015-16**

Information technology softw are 10.3 10.3 10.3 10.3

Personal computers 0.0 0.0 12.4 12.5

Monitor 0.0 0.0 12.4 12.5

Keyboard 0.0 0.0 12.4 12.5

Mouse 0.0 0.0 12.4 12.5

Printer 0.0 0.0 12.4 12.5

FDD, HDD, CD-ROM drive and other storage drives2 0.0 0.0 12.4 12.5

Motherboards 0.0 0.0 12.4 12.5

Microprocessors3 0.0 0.0 12.4 12.5

Routers 0.0 0.0 12.4 12.5

Modems 0.0 0.0 12.4 12.5

1 Tax rate is inclusive of education cess.

2FDD: Floppy disk drive; HDD: Hard disk drive; CD-ROM: Compact disk-read only memory.

3Microprocessors meant for fitment inside the CPU housing/laptop body.* Basic customs duty and does not include CVD, SAD


Customs * Excise

** Education Cess and Secondary Higher Education Cess are subsumed in Central Excise Duty

and general rate of Central Excise Duty rounded off to 12.5%.


38

Media & Entertainment

No significant impact of the Budget


Balaji Telefilms -

Dish TV -

Entertainment Network India A

Hathway Cable & Datacom -

HT Media -

PVR -

Zee Entertainment Enterprises -


Impact factor

A. Service tax is to be levied on tickets purchased for events such as concerts, pageants, sporting events and award

functions if the admission amount exceeds Rs 500 per person. However, this is unlikely to have a major impact as

we expect the event organisers to pass on the hike in ticket prices to buyers.

Media & Entertainment: Tariffs

(Per cent) Customs Excise

2014-15 2015-16 2014-15 2015-16

Digital cinema equipment 7.7 7.7 12.4 12.5

Broadcast equipment 10.3 10.3 12.4 12.5

Set-top boxes 10.3 10.3 12.4 12.5


39

Non-ferrous metals

Neutral impact


Hindalco Industries Ltd A, B, C, D

Hindustan Copper Ltd A, C, D

Hindustan Zinc Ltd A, D

National Aluminium Co. Ltd A, B, C, D

Sesa Sterlite Ltd. A, B, C, D


Impact factors

A. Basic excise duty hiked to 12.50% from 12.36%; as a result, domestic prices of aluminium, copper, lead and zinc

will inch up marginally by Rs 200-300 per tonne

B. Clean energy cess on coal doubled to Rs 200 per tonne, which will also have a negligible impact as it accounts for

about 2% of total coal cost per tonne for aluminium players.

C. The Special Addtional Duty (SAD) on aluminium and copper scrap has been halved to 2%. This reduction would

address the problem of CENVAT credit accumulation emanating from the exisiting differential between the Central

Sales Tax (CST) of 2% and the SAD of 4%. In the existing structure, players are eligible for a CENVAT credit refund

of only 2% on an SAD levy of 4%. With both CST and SAD being equalised, players will be able to get a full refund

on the SAD.

D. The budget proposes to increase allocation towards the infrastructure segment by about 53% to Rs 2.8 trillion.

Higher public investments in infrastructure segments such as urban & rural development, power and aviation (end-

users of aluminium, copper and zinc) will marginally benefit the domestic non-ferrous metals industry.


40

Non Ferrous metals: Tariffs, prices and landed costs

Domestic2 International3 Pre-budget Post-budget

2014-15 2015-16 2014-15 2015-16 (Rs/tonne) ($/tonne)

Aluminium ingots 5.2 5.2 12.4 12.5 163,667 2,210 170,363 170,581

Aluminium products

- Flat-rolled products 5.2 5.2 12.4 12.5 - - - -

- Foils 5.2 5.2 12.4 12.5 - - - -

Aluminium scrap 5.2 5.2 12.4 12.5 - - - -

Non-coking coal 2.1 2.1 6.2 6.2 - - - -

Caustic soda 7.7 7.7 12.4 12.5 - - - -

Calcined 2.6 2.6 14.4 14.4 - - - -

petroleum

coke

Copper 5.2 5.2 12.4 12.5 450,000 5,693 437,049 437,607

Copper scrap 5.2 5.2 12.4 12.5 - - - -

Copper ore and 2.6 2.6 4.1 4.1 - - - -

concentrates

Lead 5.2 5.2 12.4 12.5 135,000 1,809 139,660 139,838

Lead ore and 2.6 2.6 4.1 4.1 - - - -

concentrates

Zinc 5.2 5.2 12.4 12.5 173,000 2,105 162,324 162,531

Zinc ore and 2.6 2.6 4.1 4.1 - - - -

concentrates

Note:

1) Tariff rates are inclusive of 3 per cent education cess in 2014-15

2) International prices are average LME cash prices; LME aluminium prices includes premium

3) Domestic prices are average prices for February 2015

Tariff (per cent)1 Prices (February 2015) Landed cost (Rs/tonne)


Customs Excise

41

Oil and Gas

Oil & Gas: Higher Govt share in under-recovery burden for 2015-16: positive for oil companies


Oil and Natural Gas Corporation Ltd A

Reliance Industries Ltd B

Cairn India Ltd -

Oil India Ltd A

Indian Oil Corporation Ltd. A,B

Bharat Petroleum Corporat.ion Ltd A,B

Hindustan Petroleum Corporation Ltd A,B

GAIL A


Impact factors

A. The government's estimate of oil subsidies in 2014-15 and 2015-16 will wipe out the subsidy rollover of Rs 90-100

billion from 2014-15, reducing working capital requirements of oil marketing companies (OMCs). With the

government contributing Rs 300 billion towards fuel subsidies (including rollover), upstream oil companies will see a

5% decline in their contribution to under-recoveries in 2015-16.

B. Increase in road cess on petrol and diesel has been completely offset by decline in basic excise duty and removal of

education cess. Hence, there will be no impact.


42

Oil and gas: Tariffs, prices and landed costs

Domestic InternationalPre-

Budget

Post-

Budget

2014-15 2015-16 2014-15 2015-16 (Rs/tonne) ($/tonne)

Motor spirit (MS) 2.6 2.6 Rs 17.46/ltr Rs 17.46/ltr 79,595 457 30,032 30,032

Aviation turbine fuel

(ATF)8.2 8.2 8.2 8.2 65,041 815 56,691 56,691

Naphtha 5.2 5.2 14.4 14.4 26,609 428 29,207 29,207

Superior kerosene oil

(SKO)

- Industrial use 5.2 5.2 14.4 14.4 44,839 500 34,039 34,039

- Domestic use 0.0 0.0 0.0 0.0 18,610 500 32,372 32,372

High-speed diesel

(HSD)2.6 2.6 Rs 10.26/ltr Rs 10.26/ltr 57,569 468 30,674 30,674

Fuel oil 5.2 5.2 14.4 14.4 27,261 280 19,347 19,347

Liquefied petroleum

gas (LPG)5.2 5.2 8.2 8.2 59,479 452 32,184 32,184

Bitumen 5.2 5.2 14.4 14.4 31,130 280 20,682 20,682

Crude oil 1 0.0 0.0 0.0 0.0 n.a. 353 - -

LNG3 5.0 5.0 - - - 713 46,588 46,588

CNG - - 14.0 14.0 - - 43,450 43,450

'-' indicates not applicable

n.a.: Not available

2 Price per '000 scm

3 Prices are for contracted LNG

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 pow er 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.

7) Additional customs duty of Rs 2/litre is levied on Motor spirit and HSD

Landed costs


(per cent) (January 2015) (Rs/tonne)

1 Cess on crude oil (in lieu of excise) is Rs 4,500 per tonne , National Calamity Contingent Duty (NCCD) of Rs 50/mt levied on

imports of crude oil

Tariffs

Customs Excise

Prices

43

Paper

Continued budgetory allocation for education to maintain demand for W&P paper


International Paper APPM A, B, C

Ballarpur Industries Ltd. A, B, C

Sirpur Paper Ltd A, B, C

Seshasayee Paper and Boards Ltd. A, B, C

Tamil Nadu Newsprint and Papers Ltd. A, B, C

West Coast Paper Mills Ltd. A, B, C


Impact factors

A. Budgetary allocation of Rs 689 billion to the education sector to translate into steady demand for creamwove and

maplitho paper (that together comprise about 25% of total paper consumption), which are used primarily as

education stationery.

B. Doubling of the energy cess will drive up power costs (that form about 15 per cent of total costs) and consequently

pull down profitability by 30 basis points, given the muted demand growth.

C. The governments push to the Digital India programme would affect demand, especially for writing and printing

paper, in the long term.

Paper: Tariffs

(per cent)

Domestic International Pre-budget Post-budget

2014-15 2015-16 2014-15 2015-16 (Rs/tonne) ($/tonne)

New sprint 0.0 0.0 0.0 0.0 35,000 561 34,594 34,594

Maplitho 10.3* 10.3* 6.2 6.2 51,000 n.a. - -

Duplex board 10.3* 10.3* 6.2 6.2 33,000 n.a. - -

Art board 10.3* 10.3* 6.2 6.2 56,000 n.a. - -

Wood pulp (hard) 5.2* 5.2* 2.1 2.1 NT 630 41,674 41,674

Wood pulp (soft) 5.2* 5.2* 2.1 2.1 NT 560 37,044 37,044

Waste paper (OCC) 12* 12* 6.2 6.2 12,200 250 18,326 18,326

* Custom duty values are 0 for ASEAN countries after the FTA in December 2013

n.a. - Not available

Tariff (per cent) Prices (Jan 2015) Landed cost (Rs/tonne)

Customs Excise

NT: Not traded

Prices are delivered prices excluding VAT (delivered: basic+excise+octroi+avg freight prices)



44

Petrochemical

Duty cuts to support profitability of most petrochemical players


Basic petrochemicals and intermediates

Reliance Industries Ltd A, B

GAIL A

Supreme Petrochem Ltd B

Finolex Industries Ltd B

Chemplast Sanmar Ltd B

Styrolution ABS Ltd B

Bhansali Engineering Polymers Ltd B

Note: The impact specified is only for the petrochemicals business of the companies listed above.


Impact factors

A. Excise duty on non-industrial polyethylene sacks and bags increased to 15% from 12% to have very limited impact,

as non-industrial bags segment constitutes a small portion of demand, and even after increase in duties the product

would still be cost-effective as compared to other available substitutes.

B. Basic customs duty on raw materials like ethylene dichloride (EDC), vinyl chloride monomer (VCM) and styrene

monomer (SM) reduced to 2% from 2.5%. Also, special additional duty (SAD) on EDC, VCM, naphtha and SM

lowered to 2% from 4%. Consequently, raw material cost would reduce for all naphtha-based petrochemical

producers which would be passed on. However, reductions in customs duty and SAD for feedstock would lower

costs for manufacturers of polyvinyl chloride (PVC) and downstream styrene products and support their profitability

as landed cost of raw materials would fall by around 2.4%.

45

Petrochemicals: Tariffs, domestic prices and landed costs


46

Pharmaceuticals

No major impact on industry revenues and profitability


Sun Pharmaceutical Industries Ltd A,B

Cipla Ltd A,B

Torrent Pharmaceuticals Ltd A,B

Alembic Pharmaceuticals Ltd A,B

Biocon Ltd A,B


Impact factors

A. The basic excise duty has been increased from 12.36% to 12.5% but we expect the impact on margins for large

pharmaceutical companies to be less than 10 bps as over 60% of their revenues comes from exports.

B. The increase in service tax rate to 14% is unlikely to impact profitability of most players as majority of their R&D

expenditure is in-house. However, for Biocons subsidiaries - Syngene and Clinigene - which operate in the clinical

trials space, the increase in service tax could have a marginally negative impact.

C. The government has also proposed to set up three new National Institutes of Pharmaceutical Education and

Research (one each in Maharashtra, Rajasthan, and Chhattisgarh) to help create a talent pool in the longer term.

Pharmaceuticals: Tariffs

(Per cent) Customs Excise

2014-15 2015-16 2014-15 2015-16

Bu

Crisil Analysis Union Budget

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Transcript of Crisil Analysis Union Budget