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Tyre : The biggest beneficiary of Union Budget 2005-2006 is the tyre industry. The excise
duty on replacement tyres has been brought down from 24% to 16%, thereby benefiting all
tyre companies, particularly those with a greater share of the replacement market.
Though the import duty on tyres has also been reduced, from 20% to 15%,
the industry is not complaining. Also, the reduction in customs and excise duty on
polyester yarn, and the customs duty on other inputs like styrene butadiene rubber (SBR),
polybutadiene rubber (PBR) and carbon black will also benefit the industry.
The savings in excise duty on sale of replacement tyres will be the
maximum at the net profit level for Goodyear, Ceat and JK Industries. But when it comes to
incremental EPS, MRF is a clear winner due to its very low equity base of Rs 4.24
crore and virtually being the market leader, with greater share of revenue from the
replacement market.
Airconditioner : Summer is approaching, but airconditioner (AC)
prices can cool down from the pre-budget levels, largely due to the removal of special
excise duty of 8% on AC, leading to reduction in tax incidence on ACs, from 24% to 16%.
The industry will also benefit from the reduction in customs duty on aluminium, copper,
alloy steel and polymers, from 15% to 10%, and on compressors, from 20% to 15%.
However, central airconditioning is treated as a turnkey project and,
hence, no excise duty on turnkey project is leviable. As a result, there will not be any
impact of the reduction in excise duty on central AC manufacturers like Blue Star, and
Voltas.
Window and packaged AC manufacturers like Videocon, Hitachi, Whirlpool
of India, and Fedders Lloyd Corporation will benefit from the reduction in excise duty.
Polyester : The special excise duty of 8% has been
removed on polyester filament yarn, including polyester texturised yarn. But the 1%
national calamity contingent duty remains. As a result, the total excise incidence
(excluding education cess) on PFY has come down from 25% to 17%.
Also, the customs duty on all yarns, including polyester yarns, and on
its inputs like PTA, MEG and DMT has been reduced, from 20% to 15%. The 500 basis-point
reduction, both on inputs (PTA, MEG and DMT) and outputs (PFY/POY) will be marginally
negative for non-integrated players like Indo Rama Synthetics and JBF Industries. However,
their ability to retain even part of the benefit of reduction in excise duties will enable
them to gain from the reduction in both customs and excise duty on polyester and inputs.
Much depends on Reliance Industries's POY/PSF pricing policy, which has
to be followed with minor discounts by other domestic players. For now, RIL has fully
passed on the savings in excise duty. But market reports indicate tightening of POY
supplies by RIL, hinting at possible sharing of excise savings shortly among all stake
holders.
Apparel : The customs duty on textile fabrics and garments has
been reduced, from 20% to 15%. Also, coupled with the similar reduction in duty on PTA,
MEG and DMT, domestic polyester prices can come down from the current levels. With record
production in the global and domestic markets, cotton prices are already lower.
In addition to the normal benefits available under the Technology
Upgradation Fund Scheme (TUFS), the government has announced 10% capital subsidy for the
textile-processing sector. Also, optional cenvat scheme, — zero excise duty with no
credit for excise duty paid on inputs or cenvat at 8% with due credit for excise duty on
inputs — has been extended to independent processors. This scheme is applicable to
those processors who process filament yarns (including polyester filament yarn)
manufactured from yarn procured from outside by them.
The customs duty on textile machinery and raw materials and parts for
manufacture of such machinery has also been brought down, from 20% to 10%.
These initiatives, coupled with the favourable trend for the Indian
apparel industry to garner a greater share of the global pie in the current quota-free
regime, should facilitate the domestic apparel industry.
Pharmaceutical : In the recent rally in the stock market, the
pharmaceutical sector has underperformed. While the BSE Sensex grew by 4.2% since the end
of 2004, the BSE Healthcare Index fell drastically by 12.9% in this period.
The pre-budget announcement of a switch to MRP-based excise duty has virtually taken the
sheen off the pharma industry. Not even the increase in abatement on MRP, from 35% to 40%,
just before the budget, revived the sentiment.
The reduction in peak import duty, from 20% to 15%, will benefit MNC
associates importing bulk drugs / formulations from their parent / associates. In fact,
Aventis India will be the major gainer as it imports nearly 52% of its bulk drugs and
formulations from outside. Other major MNC pharma companies with a greater share of
imports in the total material cost include GlaxoSmithkline Pharma and Abbott India.
For the domestic players, the budget has extended the benefit of 150%
weighted deduction on R&D expenditure and 100% profit deduction for companies dealing
with scientific research and development, which will encourage domestic players to
undertake R&D activities. This R&D support, at a time when the entire pharma
industry is looking at research, would help it to maintain the growth through R&D.
Because of this, domestic peers with significant focus on R&D, like Dr Reddy’s
Laboratories, Ranbaxy Laboratories, Nicholas Piramal, Wockhardt and Biocon, will benefit.
Also, the import duty on nine equipment used in pharmaceutical and
biotechnology research has been reduced, from 20% to 5%. This cut is expected to benefit
Ranbaxy, Cipla, Biocon, Matrix and Wockhardt involved in biotechnology and AIDS research.
Value-added tax (VAT) is to be implemented on schedule (i.e., 1 April
2005), as the finance minister said all states have agreed and the Central government is
to compensate the states for any revenue loss. This is like to cause aggressive de-stoking
in trade channels and declined offtake of medicines in the quarter ended March 2005,
resulting in reduced sales growth. Nevertheless, it will be beneficial for the entire
industry in the long term.
Plastic processors : The reduction in customs duty by 5%, from
15% to 10%, on various polymers like polyethylene, polypropylene, polystyrene and
polyvinyl chloride is expected to benefit the plastic processing industry. Hitherto,
plastic manufacturers were finding it difficult to pass the increase in plastic raw
materials, which was influenced by the historic increase in crude oil prices. The demand
for plastic products was affected in recent times due to high prices.
Plastic products are perceived as low-cost items. Even a small increase
in prices affects demand as it is met with stiff resistance by the users. Plastic products
are raw material intensive. The margin for plastic processors is very low. The reduction
in import duty has, thus, come as a relief for the industry. Nevertheless, the relief will
prove to be short term as crude prices continue to remain high and are still rising, which
can mean an increase in domestic polymer prices, despite the recent cut in customs duties.
Supreme Industries and Nilkamal Plastics are major users of plastic raw
materials and their margin was affected due to recent price increases. Moulded luggage
manufacturers/marketers like Blow Plast, VIP Industries and irrigation systems
manufacturers like Jain Irrigation are also expected to benefit due to the budget
measures. Incidentally, Jain Irrigation will benefit by the surge in demand for drip
irrigation plastic products due to the increased thrust on agriculture, particular
irrigation.
Oil & gas : The customs duty on crude and its derivatives
has been reduced by 500 basis points. The excise duty on petrol and diesel has been
revised upwards with significant reduction in advalorem duties on petrol, but a sharp rise
in specific duties on both petrol and diesel.
ONGC will be adversely affected by the reduction in import duty on
crude, but will benefit from the waiver of excise duty on kerosene and LPG, which will
lead to a reduction in its share of the subsidy burden.
The worst affected will be pure refinery companies like Chennai
Petroleum Corporation, Kochi Refineries, Bongaigon Refinery & Petrochemicals and
Mangalore Refinery & Petrochemicals. On the other hand, refinery-cum-marketing
companies like Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan
Petroleum Corporation will be marginally impacted. The refinery margin will come down
significantly due to the duty structure changes, which will be largely covered by
significant reduction in subsidy burden.
The biggest beneficiary in the oil & gas segment will be Gail
(India). On the polymer front, the company will lose revenue and margin due to the
lowering of customs duty on polymers. Unlike other polymer producers, the company will not
benefit from lower input costs as it uses gas procured domestically from ONGC, whose
prices have not been revised.
But the removal of excise duty on kerosene and LPG will lead to
substantial reduction in the subsidy burden on both oil producing and marketing companies
and, as a result, Gail (India)’s share of the subsidy burden will also come down. We
expect Gail (India)’s profitability to improve by over Rs 300 crore on account of the
change in the duty structure in the budget.
Non-ferrous metal : The customs duty on aluminium, copper and
zinc has been reduced, from 15% to 10%, while that of lead has been cut, from 15% to 5%.
In the process, domestic players will not be able to fully capture the rise in global
prices for the domestic market. Already, domestic aluminium prices have been cut by around
Rs 1000 per tonne by aluminium majors Nalco and Hindalco.
Firm international prices have facilitated copper and zinc producers to
hold on to prices. But for the cut in import duties, these players would have increased
the domestic prices in line with the increase in global prices. As per market
expectations, non-ferrous metal prices have been cut, but the 10% cut in import duty on
lead surprised the market. Major lead users are storage battery producers like Exide
Industries, Amara raja batteries, HBL Nife Power Systems, and Tudor India.
The storage battery producers have largely passed on the savings in
lead cost by reducing battery prices in India. In the process, they are trying to increase
their share of the robust and rising domestic market for storage batteries.
Steel : The customs duty on finished carbon steel including HR,
CR and galvanised steel has been retained at 5%. However, the budget has proposed a cut in
customs duty on alloy steel, including stainless steel, from 15% to 10%. Also, the customs
duties on certain inputs like refractories, graphite electrodes and input for refractories
were also reduced, from 15% to 10%. Stainless steel manufacturers like Jindal Stainless
and Shah Alloys are likely to be adversely affected due to the reduction in customs duty
on alloy steel. Automobile and auto ancillaries are the major users of alloy steel. They
will benefit from the reduction in customs duty on alloy steel.
The reduction in customs duty was largely negated by the increase in
excise duty, from 12% to 16%, on all steel products. Nevertheless, as excise duties are
cenvatable, all major user industries (except tractors and construction industry) will not
be adversely affected by the increase in excise duty on steel.
Detergent : The reduction in customs duty on soda ash and linear
alkyl benzene and on packing materials, from 20% to 15%, will force domestic producers to
bring down, or at least hold on to, domestic prices. Globally, the prices of these two
inputs are racing ahead largely due to firm demand and tight supplies. As a result,
detergent manufacturers will benefit from lower/stable input costs. HLL, P&G and
Henkel Spic stand to gain as a result. However, for Nirma, which also produces soda ash
and LAB, the benefit will be limited.
Computer : The budget has proposed the removal of basic customs
duty on 217 specific items specified under the Information Technology Agreement (ITA) with
WTO. Simultaneously, it proposes to levy 4% additional customs (AC) duty on these
products, in lieu of the sales tax and other local taxes imposed on the
domestically-manufactured items. Apparently, this should lead to lower cost of
inputs, resulting in easing of domestic computer prices.
But high value items like microprocessors and hard disk, hitherto not
subjected to any customs duty, will now attract 4% AC. Though this is cenvatable as the
excise duty on fully-built PC is nil, it remains unrecoverable for the industry.
Incidentally, microprocessors and hard disks together constitute about 40 to 50% of the
total PC price. Analysing the fine print, the industry finds itself a need to increase PC
prices instead!
Tractor : The excise duty on tractors has been removed in line
with the industry’s expectation. However, its plea that all components and inputs
sourced from various parties should also be removed from excise duty remains unfulfilled.
The budget has, however, proposed an increase in excise duty on steel, from 12% to 16%,
which is cenvatable. But as no excise duty is leviable on tractors, the benefit of cenvat
is not available, thereby increasing the tax /cost of steel in the total input cost for
tractors.
Housing : The pre-budget announcement allowing 100% FDI in
construction and realty sector took the market by surprise. But the industry is perturbed
by the service tax levy on construction of residential complexes with more than 12
residential houses or apartments together with common areas and other appurtenances as
well. The high-rise apartment culture, which is prevalent in and around Mumbai, is also
gaining significant ground in many smaller cities and suburban areas.
Also, the increase in excise duty on steel, from 12% to 16%, will increase the
construction cost as excise duty is not leviable on construction activity as well. Both
these provisions will ultimately increase the cost of such apartments for the end buyer. |
