Union Budget 2010 11 Jitendra Shekhar

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Income up to Rs 1.6 lakh – nil. Income above Rs 1.6 lakh and up to Rs 5 lakh - 10 per cent.

Government's net borrowing to be Rs 3,45,010 crore for 2010-11.

Additional deduction of Rs 20,000 allowed on long term infrastructure bonds for income tax payers.

A unique identity symbol would be provided to the Indian Rupee in line with US Dollar, British Pound Sterling, Euro and Japanese Yen.

Defence allocation pegged at Rs 1,47,344 crore in 2010-11.

Fiscal deficit pegged at 6.9 per cent in 2009-10 as against 7.8 per cent in the previous fiscal.

UNION BUDGET, FY2010-11

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Overview

This time India Inc has more to cheer after the Union Budget 2010-11.

As the tax increments(roll back of stimulus measures) are on expected

lines for majority of the sectors, the budget has positively surprised

everyone on the personal tax front and thus putting more disposable

income in the hands of the consumer. Most importantly, the

government's fiscal consolidation road map to reduce the fiscal

deficit to 4.1% of GDP by 2013 is the most encouraging aspect for FIIs

to bring in more investment. Markets have already indicated their

acceptance of budget as they rallied post the announcement. So, we

hope this favorable budget paves the way for India to achieve higher

growth rates.


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Highlights of Union Budget 2010-11 (1/4)

1. The gross tax revenue receipts are estimated at Rs.746651 cr

and non-tax revenues are expected at Rs.1,48,118 cr. The total

expenditure proposed is Rs.11,08,749 cr.

2. Fiscal deficit for FY2010-11 estimated at 5.5% of GDP at

Rs.3,81,408 cr.

3. The government has given a road map for fiscal consolidation

and thus expects the fiscal deficit to decline to 5.5% by FY2010-

11 as compared to revised value of 6.9% in FY2009-10 and then to

4.8% in FY2012 and 4.1% in 2013.

4. 46% of the total planned outlay at Rs.1,73,000 cr is reserved for

infrastructure development.

5. Additional banking licenses to private sector players. Non

Banking Financial Companies could also be considered, if they

meet the RBI’s eligibility criteria.


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Restart the PPt 6. Further public sector bank capitalization by providing

Rs.16,500 crore to ensure that the Public Sector Banks are able

to attain a minimum 8 per cent Tier-I capital by March 31,

2011.

7. A Nutrient Based Subsidy policy for the fertilizer sector has

been approved by the Government and will become effective from

April 1, 2010.

8. The oil and fertilizer subsidies are to be paid in cash rather than

bonds.

9. The disinvestment process in government owned companies is in

progress and is expected to raise Rs.40,000 cr during FY2010-11.

10. The 3G Auction is expected to fetch Rs.35,000 cr.



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Restart the PPt 11. Partial roll back of stimulus plans as the standard central

excise duty rate for all non-petroleum products increased from

8% to 10% ad valorem.

12. To finalize the structure of the Goods and Services Tax and

introduce it by April, 2011.

13. Widening of tax slabs for individual taxpayers as shown below.

FY 2009-10 FY 2010-11

Income upto Rs 1.6 lakh Nil Income upto Rs 1.6 lakh Nil

Income from Rs 1.6 lakh-Rs.3 lakh 10% Income from Rs 1.6 lakh-Rs.5 lakh 10%

Income from Rs.3 lakh - Rs.5 lakh 20% Income from Rs.5 lakh - Rs. 8 lakh 20%

Income above Rs. 5 lakh 30% Income above Rs. 8 lakh 30%



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Restart the PPt 14. Deduction of an additional amount of Rs.20,000 for tax savings

allowed for investment in long-term infrastructure bonds.

15. Minimum Alternate Tax (MAT) to be increased from 15 per

cent to 18 per cent of book profits.

16. Clean energy cess of Rs.50/tonne to be levied on domestically

produced as well as imported coal.

17. Service Tax retained at 10% to pave the way forward for GST.



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Sector Wise Impact of The Union Budget

Sectors (Click On Sector Name) Impact

Automobile Positive

Consumer Durables Positive

Retail Positive

Banking Positive

Infrastructures Neutral

Fertilizers Positive

Oil & Gas Positive

Ferrous Metals Neutral

Non-Ferrous Metals Neutral

Textiles Neutral

IT & ITES Negative

Real Estates Negative

Telecom Negative

Health Care & Pharmaceuticals Marginally Positive


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The auto sector has seen significant rise in sales and the 22% rise in sales for April-December 2009 period over the previous year.

The partial roll back of stimulus measures is anticipated very much and so, the rise in excise duty from 8 to 10% across board and from 20% to 22% for SUVs and MUVs has already been priced in the stock prices.

The hike in excise duty on petrol and diesel may weigh negative on the auto industry as such. But the rise in disposable income for the consumer is expected to more than compensate for the above negative factors as the demand for passenger vehicles and two wheelers rises.

Neutral for stocks like Ashok Leyland, Mahindra & Mahindra. Positive for stocks like Hero Honda, Bajaj, Maruti.


Automobile Positive

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As stated above the budgetary measures are the most positive

for consumer durables as the discretionary income raises in the

hands of the consumer and so does he spend more on

household appliances and other consumer durables.

The central excise duty on LED lights to be reduced from 8 per cent

to 4 per cent at par with Compact Fluorescent Lamps.

Effect: Positive for stocks like LG electronics, Whirlpool, SAMSUNG,

MIRC Electronics, MIC Electronics .


Consumer Durables Positive

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The latter half of FY2009-10 saw recovery in consumer spending at organised retail as the footfalls and same store sales for the major companies started to rise.

The latest budgetary measures which put more disposable income in the hands of upper middle class/rich consumer by widening the tax slabs and thus letting them spend more on consumer durables mostly through organized retail would prove to be a shot in the arm for the recovering industry.

The implementation of GST would also help the industry as it cuts down their operating costs due to easier movement of retail products across state borders.

Positive for stocks like Pantaloon, Koutons Retail, Shoppers stop.


Retail Positive

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Government’s proposal of infusing Rs.16,500 cr into Public Sector Banks to help banks maintain 8% tier 1 capital by March 2011 turns out to be a real positive for PSBs.

The extension of bank loan repayment periods for farmers by 6 more months to Sep 2010 would help delay the recognition of such loans as NPAs but may not make much of a difference to books of the banks. The interest subvention on farm loans will improve the quality of such assets.

The government has increased its emphasis on infrastructure financing as the disbursements from IIFCL are expected to rise to Rs.20,000 cr by end of FY2010-11.

Eeffect: Positive for PSBs especially DENA, Bank of Maharashtra. The proposal of giving additional banking licenses to NBFC would

help such NBFCs raise low cost capital and help grow their business.

Positive for NBFCs like Reliance Capital, IFCI, IDFC.


Banking Positive

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46% of the total plan allocation to about Rs.173552 crs is

provided for infrastructure development in FY2010-11. IIFCL’s disbursements are expected to reach Rs.20,000 cr by

March 2011 from Rs.9000 cr in March 2010 and refinancing of infrastructure projects to increase to Rs. 6000 cr.

The additional tax savings of Rs.20,000 by investing in long-term infrastructure bonds would mobilize more funds for the sector.

The government has continued its thrust on rural infrastructure projects as Rs.48000 cr has been allocated under Bharat Nirman Programme.

The MAT being increased from 15% to 18% for FY2010-11

may weigh negative on many players carrying out BOT projects.


Infrastructure Overall Effect: Neutral

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Roads : 13% has been increased in allocation to road transport from

Rs.17520 cr to Rs.19,894 cr. The payment of import duty on depreciated value rather than

the original value of resale machinery and the complete exemption of import duty to special machinery will reduce the overall capex for the players.

Marginally Positive for players like L&T, HCC, Reliance Infrastructure, IVRCL Infra, Gammon India, Nagarjuna Constructions.



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The Power : Plan allocation for power sector excluding RGGVY (Rajiv Gandhi

Grameen Vidyutikaran Yojna) increased 130% from Rs.2230 crore in 2009-10 to Rs.5,130 crore in 2010-11.

The government strengthened its stand for cleaner energy as it increased its outlay for New and Renewable energy by 61% to Rs.1000cr in 2010-11. And a clean energy cess is levied on

domestically produced coal of Rs.50/tonne as well as on imported coal.

Effect is Positive for players using renewable energy like Suzlon. Marginally negative for other power utilities.



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Housing : The allocation for Rajiv Awas Yojana has been increased from

Rs.150 cr last year to Rs.1270 cr in FY2010-11. Significant rise in allocation of Rs.1270 cr for Rajiv Awas Yojna as compared to RS.150 cr last year.

The extension of the scheme where 1% interest subvention is given on housing loan upto Rs.10 lakh would help the low-cost housing

industry. This would help players taking up slum rehabilitation works and

low cost housing. Positive for companies such as HDIL, Omaxe etc.



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The government has declared the subsidy in the form of cash contrary to the subsidy payment as done previously. This would help the companies to manage their working capital better.

The government has reiterated the implementation of nutrient based subsidy scheme starting April 1,2010 and also ensured that the complex fertilizer prices would remain constant post the NBS at the present levels.

Importantly, the measures announced in favor of agriculture sector like interest subvention for farmers would help improve agricultural activity which in-turn would improve the demand for fertilizers.

Positive for stocks like Nagarjuna Fertilisers, Chambal Fertilisers, GSFC.


Fertilizers Positive

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The government’s move to restore the basic duty of 5 per cent on crude petroleum would hurt the refining margins of the domestic refiners and is especially negative to private refiners.

Restoration of 7.5 per cent duty on diesel and petrol and 10 per cent on other refined products would provide duty protection for the oil marketing companies.

The Central Excise duty on petrol and diesel is enhanced by Re.1 per litre each but the effect on OMCs is neutral as such hike is passed on to the customer through higher retail prices.

The government has announced that the subsidy would be distributed in cash to the oil marketing companies and this will improve the cash flows for the oil marketing PSUs.

The increase in MAT rate may weigh negative on RIL. Overall effect is positive for oil marketing companies like HPCL, BPCL, Indian Oil .Neutral for oil exploration companies like ONGC, Oil India, Cairn and negative for private refiners like RIL..


Oil & Gas Neutral/Positive for OMCs

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The increase in excise duty on all ferrous products from 8% to 10%

as a part of the partial roll back in stimulus is expected to be passed

on to the end consumer by hiking the prices. Even the increase in

manufacturing cost due to levy of cess of Rs.50/tonne on coal is also

expected to be reflected in the price rise. The smaller players may have to take a slight hit on the margin

front considering the rise in raw material cost. But, the increased

outlay for infrastructure investment and improved emphasis on

housing is expected to drive the demand for steel going forward and

this can compensate for the rise in costs to a greater extent. Overall effect is neutral for the steel players like Tata Steel, Jindal

Steel.


Ferrous Metals Neutral

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Here it’s the same case as it is with the ferrous metals. The rise in

excise duty from 8% to 10% is expected to be passed on to the end-

customer and even the same applies to the levy of cess on coal.

And the 46% planned outlay on infrastructure investment

would create demand that could absorb the rise in prices.

So, overall effect is neutral for the non-ferrous manufacturers

like Nalco, Hindalco, Sterlite, Hindusthan Zinc.


Non-Ferrous Metals Neutral

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The 2% interest subvention on pre-shipment credit is extended for

1 more year upto March 31, 2011 which would help small scale

exporters save on interest costs.

The excise duty on man made fibre and yarn is increased to 10%

from 8% but the resultant rise in price is expected to be absorbed

by better demand.

The overall effect on the sector is neutral.


Textile Neutral

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The government in its Union Budget FY2010-11 has announced the

hike in MAT rate from 15% to 18%. As most of the IT companies

pay taxes at the MAT rate on their book profits, the 300 basis points

hike is expected to affect their net margins negatively. The significant rise in government spending on IT & IT related

projects is expected to generate decent business opportunities for

the firms focused on domestic market. But the overall effect is negative as the 3% rise in MAT may

more than compensate for any positive for the industry from the

budget. Negative for companies like Infosys, Tcs, Wipro.


IT & ITES Negative

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Extending of interest subvention of 1% for loans upto Rs.10 lakh for

low cost housing for one more year would help sustain more

demand in this category.

The budget announces that the service tax would be levied on

renting of property with retrospective effect from June 1, 2007.

New tax schemes are going to dent the profits of the real estate

players if they can’t be passed on to the customer completely. Even

any price rise would hurt the demand for the already ailing sector.

Overall effect is negative for real estate stocks like DLF, Anant

Raj, Unitech, Shobha Developers.


Real Estate Negative

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The 3% rise in MAT rate in the union budget is expected to decline

the net profit margins of the telecom majors.

Negative for companies such as Bharti Airtel, RCOM.

Mobile phones :

The exemption of basic, CVD and special additional duties on

domestically manufactured mobile phone accessories is to be

extended till March 31, 2011 and the existing exemption is now

being extended to parts of battery chargers and hands-free

headphones. These measures would encourage the domestic

manufacture of such items.


Telecom Negative

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Customs duty reduced from 7.5% to 5% on all medical devices and they even attract no countervailing duty. Also, the import duty exempted on specified inputs used for the manufacture of orthopedic implants.

Weighted deduction on expenditure incurred on in-house R&D, enhanced from 150 per cent to 200 percent. Weighted deduction on payments made to National Laboratories, research associations, colleges, universities and other institutions, for scientific research enhanced from 125 per cent to 175 per cent.

Positive for companies like Dr. Reddy’s Labs, Ranbaxy Labs, Cipla etc.

But here again the increase in MAT would have slight negative effect for many pharmaceutical players and in-turn would offset the positive takeaways for the sector from the budget.


Health Cares & Pharmaceuticals Marginally Positive

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Disclaimer

1. This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you.

2. Navia Markets Limited (hereinafter referred as Navia) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.

3. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such.

4. Navia or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.

5. Navia and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report.


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Union Budget 2010 11 Jitendra Shekhar

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