IMPACT - Mini-Budget 04!

Measures largely beneficial to corporate sector, and clearly aimed at boosting growth

Mini-Budget 2004, announced on Thursday last week by finance minister Jaswant Singh, caught industry and markets completely unawares.

But thankfully, the measures announced in the budget are largely beneficial to the corporate sector, and clearly aimed at boosting economic growth.

Even as some industries may cry foul on account of the customs duty reduction, these cuts are inevitable as India aligns with WTO regulations.

Some key measures that are likely to benefit the competitiveness of India Inc are the reduction in import duties on coal and projects.

Sectors like cement, steel and other metals spend nearly 40-50 per cent of their total cost on power. The reduction in import duty is likely to result in cost savings of around 5 to 7 per cent depending on the quantum of coal imported.

Again, the reduction in the import duty on projects will make new projects cost-effective. Companies planning major capacity expansions, particularly in industries like refinery and auto, should be beneficiaries.

However, capital goods companies will face pressures on margins. Read on for an elaborate sector-wise analysis.

Automobiles (Positive)

MEASURES

• Cut in peak customs duty from 25 per cent to 20 per cent and abolishment of SAD.

IMPACT

• Cut in peak customs duty will result in a drop in steel prices.
• Drop in steel prices will, in turn, reduce input costs for domestic auto components (Tata Motors, M&M, etc.) as well as foreign manufacturers (Hyundai, Toyota, etc.).
• The move will also reduce the import cost of completely knocked down (CKD) kits, engines and parts of transmission systems that are imported by most foreign OEMs like Toyota Kirloskar Motors, SkodaAuto India, General Motors and Honda SIEL Cars India.

Tata Motors: The company will save on account of a fall in input prices, mainly that of steel. But the effect is marginalised since steel prices have been seeing a steady uptrend. Reduction in prices of cars from foreign counterparts could impact the company.

Maruti: Maruti imports critical components like engines and transmission parts. The company stands to gain depending upon the parts that attract peak customs duty. Its imports were 15 per cent of its sales in FY03.

Auto ancillaries (Positive)

MEASURES

• Cut in peak customs duty from 25 per cent to 20 per cent and abolishment of SAD.

IMPACT

• The sector will not have any significant impact mainly because auto ancillaries are cheaper in India.
• The reduction in the prices of steel will result in a decrease in the input costs of auto component manufacturers.
• The reduction in peak duty will result in a 7-8 per cent decrease in the cost of imported components.
• A large part of benefits accruing from reduction in steel prices will be passed on to OEMs due to competitive pressures.

Bharat Forge: Coal and nickel prices (which are inputs for steel) going cheaper will benefit the company indirectly.

Mico: Cheaper imports will benefit the company. Mico's imports were 15 per cent of its sales in FY03.

Capital goods (Negative)

MEASURES

• Reduction in peak customs duty from 25 per cent to 20 per cent and abolition of SAD.

IMPACT

• The move will negatively impact capital goods manufacturers (ABB, Bhel, Crompton Greaves, etc.). These companies already face stiff competition from imports and the move will further put pressure on them. Imports have increased by 18 per cent in FY03 compared to the previous year.

Bhel: The company is likely to be marginally affected due to the increased threat from imported T&D equipment (T&D equipment accounts for about 4-5 per cent of Bhel's business). Imported equipment will come much cheaper than what's available here.

Siemens: The company will suffer on the power equipment front due to cheaper imports. However, around 20 per cent of its business is from medical equipment which be cheaper to import now.

Consumer durables (Positive)

MEASURES

• Reduction in customs duty on CTVs, refrigerators, ACs and washing machines.
• Reduction in customs duty on Colour Picture Tubes and compressors.

IMPACT

• No major impact on account of reduction in customs duty on durable goods.
• CTV makers to benefit from reduction in picture tube prices.
• Refrigerator players focused on the higher capacity refrigerator segment will benefit as these are largely imported.
• Refrigerator and AC players will benefit from the reduction in the customs duty on compressors, a key input in the manufacture of these products.

Mirc Electronics: The company may pass on savings on account of duty reduction in inputs to customers, spurring demand.

Samtel Colour: The company will face pressure on margins as it will be forced to reduce prices in the wake of cheaper imports.

Whirlpool & Electrolux: Both will benefit from input cost reduction in certain segments.

Cement (Neutral)

MEASURES

• Reduction of basic customs duty on non-coking coal from 25 per cent to 15 per cent.
• Abolition of special additional duty of 4 per cent.

IMPACT

• The government's decision to slash basic customs duty on non-coking coal is expected to benefit cement companies, though only partially.
• Considering that international prices of non-coking coal have nearly doubled in the last 12 to 18 months, the reduction in duty will only provide partial relief to cement units. Moreover, the cement industry is largely dependent on local supplies for non-coking coal.
• Coal accounts for around 20 per cent of the direct cost of cement makers. Duty cuts, coupled with an expected pick-up in demand, should help cement companies struggling on both the cost and realisation fronts.

Gujarat Ambuja: The company, which imports about 40 per cent of its coal requirement, is likely to be a major beneficiary of the duty cut.

ACC: Not much impact on the company since it does not use much imported coal.

Grasim: Neutral for the company since it uses imported coal only occasionally.

Infotech (Positive)

MEASURES

• Reduction of excise duty for IT hardware to 8 per cent.
• Abolition of special additional duty.
• Exemption for recorded video compact discs (VCDs) and digital video discs (DVDs) from excise duties.

IMPACT

• PC sales and exports are expected to soar. Analysts expect prices to drop 8-10 per cent immediately which in turn would propel sales by 35-40 per cent for FY04. At present only 40 per cent of India's national PC demand is met by domestic makers.
• The grey market is expected to come under pressure which will in turn help domestic PC manufacturing. As PC prices drop, volumes are expected to pick up which will help branded products.
• The capital expenditure of software and ITES companies is bound to get reduced since hardware costs account for 40-50 per cent of the capital expenditure of these industries.

Wipro, HCL Infosystems, HP, Zenith and PCS Industries: The excise cuts will favour these top hardware manufacturers. They are likely to ramp up their domestic manufacturing operations.

Moser Baer: The company, a leading manufacturer of CDs, will gain from the exemption of VCDs and DVDs from excise duties. The prices of CDs could fall by 20 per cent. But there will be a pick-up in demand.

The cut in customs and excise duties is also likely to be beneficial to the company since nearly 80 per cent of its raw materials are imported.

Non-ferrous metals (Negative)

MEASURES

• Reduction of customs duty from 25 per cent to 20 per cent.
• Abolition of 4 per cent special additional customs duty.
• Reduction of customs duty on coal, power.

IMPACT

• Landed cost of aluminium imports is expected to decline around Rs 4,000 per tonne, resulting in a decline in domestic prices.
• Landed cost of copper imports, too, is expected to fall. Domestic prices are expected to come down by Rs 6,000-Rs 7,000 as per Cris Infac estimates.
• Some of the negative impact on copper will be neutralised by the removal of the special additional customs duty on copper concentrates.
• With power costs amounting to 40 per cent of total costs and nearly half of the coal being imported, there should be cost savings up to 4-5 per cent.

Hindalco: The company, with 50:50 revenues from aluminium and copper, will be hit as domestic prices will suffer.

Sterlite Industries: The company, with 90 per cent revenues from copper, will be negatively impacted.

Nalco: Nalco will not be affected as only 25 per cent of its revenue is from domestic aluminium sales. Around 35 per cent of revenue is from aluminium exports and 40 per cent from alumina which is used for captive consumption or exports.

Oil and gas (Positive)

MEASURES

• Reduction of customs duty on project imports from 25 per cent to 10 per cent.
• Reduction of excise duty on ATF from 16 to 8 per cent.

IMPACT

• Duty reduction in project imports is likely to reduce the cost of upcoming refineries and gas projects substantially.
• The excise duty cut will lead to a Rs 1.50-Rs 1.75 per litre decrease in ATF prices. This, along with the abolishment of air travel tax, will induce tariff reduction and increase demand for ATF. The increased demand will mitigate the extent of oversupply in ATF, estimated at about 0.74 million in 2002-03, predicts Cris Infac.

HPCL, BPCL and IOC: All these three refining companies will possibly see cost savings on account of reduction in import duty on projects.

IOC's Paradeep refinery, BPCL's Bina refinery and HPCL's Bhatinda refinery will see a reduction in project costs, even though the companies may have already negotiated concessional rates with the government, say analysts.

GAIL: The company's National Gas Grid project cost is likely to come down by more than Rs 2,000 crore, according to the company.

Power (Neutral)

MEASURES

• Reduction of customs duty from 25 per cent to 10 per cent.
• Abolition of Special Additional Duty (SAD - 4 per cent).
• Reduction of customs duty on electricity meters from 25 per cent to 15 per cent.
• Reduction in customs duty on imported coal from 25 per cent to 15 per cent

IMPACT

• Duty cuts will significantly cut down project costs, thus, raking in savings for utility and transmission and distribution (T&D) companies.
• Due to increased threat from T&D equipment imports, domestic T&D companies will be marginally affected. The gainers on this front are multinational subsidiaries like Siemens and ABB who will benefit by way of higher business volumes since these companies import equipment from their parents.
• Companies with imported coal-based power plants will also benefit from the reduction in customs duty on imported coal. Projects based on coal will be able to compete better with other fuel-based plants.
• But since very few utility plants are based on coal, there will hardly be any impact on grid tariffs. Cost of production for coastal imported coal-based power plants is likely to decline by Rs 0.15 per kwh.

Tata Power: The duty cut impact will be positive for power generation companies. Setting up new plants will be cheaper now, thus bringing down capex.

Also, the reduction in customs duty on imported coal (Tata Power imports 100 per cent of coal) will bring in savings of Rs 40-50 crore. But this will not have any impact on revenues since fuel costs are totally pass-through (passed on to consumers).

BSES: The result of customs duty on imported coal will not have much impact on BSES since it imports only 15 per cent of coal fuel and also because fuel costs are pass-throughs.

Pharma (Positive)

MEASURES

• Reduction of peak duty on bulk drugs, intermediates and formulations to 20 per cent from 25 per cent.
• Reduction of customs duty on many life saving drugs from 25 per cent to five per cent.
• Abolition of SAD.
• Reduction of customs duty on parts of artificial limbs and specific rehabilitation aids to 5 per cent.
• Reduction of excise duty from 16 per cent to 8 per cent for medical, surgical, dental and veterinary furniture.
• As many as 24 medical devices, including X-ray goniometer and teletherapy stimulator machines have been brought under the 5 per cent customs duty umbrella.
• Reduction of customs duty on sulpha drugs and alkaloids (which are used as drugs) from 19 per cent to 14 per cent.

IMPACT

• The duty cuts relating to the pharma and healthcare industry will bring tariffs in the domestic pharma industry closer to global tariff rates.
• The peak duty cut is expected to benefit companies which import bulk drugs and intermediates.
• Lowering of customs duty won't have much of an impact as drug prices in India are already among the lowest in the world.
• Indian companies do not have to pay duties on raw materials to make products for exports. MNCs, which import products from their parents to be sold in the domestic market, will also benefit from duty reduction.

Ranbaxy, Dr Reddy's: Peak duty cut likely to benefit companies like Ranbaxy which imports 53 per cent of its raw material requirements. Dr Reddy's (43 per cent) and Aurobindo (65 per cent) are also in the same boat.

MNCs who import products from their parents to be sold in domestic markets like Glaxo SmithKline, Novartis and Aventis are likely to gain.

The duty cut on life-saving drugs will benefit pharma companies like Pfizer, Aventis, Wyeth Lederle and Fulford which import one or more of these medicines either as bulk drugs or formulations.

Apollo Hospitals: The company is expected to gain from reduced duty on hospital equipment.

Petrochemicals (Negative)

MEASURES

• Reduction in peak customs duty applicable to polymer products.
• Abolition of special additional duty of 4 per cent.

IMPACT

• Import of polymer producers will be cheaper by 11 per cent due to the cut in customs and special additional duty.
• Since the duty differential between final products and raw material (naphtha) has narrowed, companies will face pressure on margins.

Reliance Industries & IPCL: Operating margins of both Reliance and IPCL will come under pressure as polymer imports will be 11 per cent cheaper, according a Cris Infac analyst.

The savings on account of lower energy costs could provide some relief but will be too little to offset the impact of lower prices. Reliance's prices are nearly on a par with import prices and, hence, will have to be brought down further to compete with imports.

In fiscal 2003, polymers accounted for nearly a quarter of Reliance's revenues. IPCL derives almost all of its revenues from petrochem products.

Analysts say there may not be too much pressure on the companies to slash prices immediately as imports are not exactly flooding to India, given the huge uptake in Chinese demand.

Steel (Positive)

MEASURES

• Reduction in peak customs duty rate by 5 per cent.
• Abolition of special additional duty.
• Reduction of basic customs duty on non-coking coal from 25 per cent to 15 per cent.

IMPACT

• Overall impact of duty cut on coal would be beneficial for the sector as rising coal prices were one of the primary reasons for the steep rise in steel prices. As a result, input costs could be marginally lower in the foreseeable future.
• Recent steel price hikes may have to be rolled back in view of the duty cut on coal.
• The cut in duties applicable to project imports could also help steel manufacturers.

SAIL: Duty cut on coal to have positive impact on India's largest steel producer. Steel Authority of India imports almost Rs 2,000 crore of coal for steam and its bill is expected to shrink considerably.

Jindal Vijaynagar Steel and Ispat: Both the companies are expected to benefit.

Tisco: Not much impact expected on Tisco for a major proportion of steel sold by the company is through long-term contracts wherein domestic prices are much lower than landed costs of imported steel.

However, considering the fact that the company is planning an expansion programme worth Rs 2,000-crore , a large part of which is through the project-import route, the company is expected to benefit from duty reductions on project imports from 25 per cent to 10 per cent.

Who gains, who loses

STEEL: Cost of production could come down by 5-7 per cent. Tata Steel and SAIL benefit most.

INFOTECH: Hardware companies will benefit from excise duty cut. Wipro, HCL Infosys, Moser Baer and Zenith Computers to gain volumes.

PHARMA: Cheaper bulk drug imports will benefit pharma majors like Ranbaxy and Dr Reddy's. Apollo Hospitals to gain from duty cut on medical equipment.

CAPITAL GOODS: Domestic companies to see competitive pressure from imports. Going to get tougher for ABB, Bhel and L&T.

PETROCHEMICALS: Operating margins could suffer from customs duty cut. RIL and IPCL to see lower realisations