f o r    m a n a g i n g    t o m o r r o w
MARCH, 2007
 Cover Story
 Sector Analysis

The centre is looking at removing the distinction between FDI and FII investments. This will impact sectors like asset reconstruction, real estate and aviation, where separate ceilings apply to FDI and FII investment. However, allowing FDI through the FII route in the realty sector could result in prices shooting through the roof. The Asian financial crisis of the '90s is still fresh in mind, and a method should be devised to moderate possible volatility in key sectors.

S&P And After
For the first time in 14 years, international credit rating agency, Standard and Poor's (S&P), has raised India's credit rating to investment grade. S&P is the last of the three major international rating agencies to do so. Moody's Investors Service did it in January 2004 and Fitch Ratings in August 2006. The upgrade is likely to spur the flow of foreign investment into power, steel and other industries, which receive less than a tenth of the funds going China's way.
More Net Specials
A Great Gig For All
A Business Today-Ernst & Young analysis of Budget 2007 impact on key sectors.

Finance minister P. Chidambaram actually said it in so many words. He mentioned the time (15-20 minutes) he spent announcing proposals meant for the agricultural sector. Nothing wrong with that; but industry is disappointed that he, largely, chose to maintain status quo on other sectors of the economy. But some sectors, like textiles, will benefit. Says Gautam Hari Singhania, Chairman and Managing Director, Raymond: "The Budget has generally been positive for the textile industry. The extension of the TUF Scheme will expedite the release of subsidies. And increased allocations for textile parks is very welcome as it will boost the setting up of additional capacities."

Banking, steel, oil and gas and the roads sectors have also emerged as winners in this Budget. "Budget 2007-08 will play an important part in maintaining India's economic momentum," says K.V. Kamath, Managing Director and CEO of ICICI Bank, India's largest private sector bank. "It is a fine balance of resource allocation across various sectors of the economy and focusses on growth," he adds. Ravi Uppal, Vice Chairman and Managing Director, ABB India echoes these thoughts. "Bringing down the peak customs duty to 10 per cent, the renewed commitment to phasing out CST and the success of vat are positive indicators that the government remains committed to the reforms process," he says.

But large sections of India Inc. feel let down. The pharmaceuticals and healthcare sector, which was hoping for a leg up in this Budget, makes no bones about its unhappiness. "The pharmaceuticals industry was completely off the Finance Minister's radar last year. So, we were hoping to be compensated with a 'Dream Pharma Budget' this year. But, alas, that was not to be," moans Ranjit Shahani, President, Organization of Pharmaceutical Producers of India and Vice Chairman and Managing Direcot, Novartis India. The hospitality industry is also upset-at the fact that only hotels in the National Capital Region have been given tax incentives.

But, to be perfectly fair to Chidambaram, it must be admitted that there's little in this Budget that can actually be termed as negative or uncalled for. Here, we look at what the Budget holds for 15 important sectors.

Vrooming Ahead

"The Finance Minister's focus on inclusive growth, particularly the thrust on the rural sector, will be good for the farm equipment business, including tractors"
President, Farm Equipment Sector/Mahindra & Mahindra

The automobile industry continued to remain in the limelight in 2006-07. The momentum was provided by Budget 2006, which slashed the excise duty on small cars by 8 per cent. For the first time in history, domestic vehicle production crossed the 10-million-mark in a calendar year (2006). Passenger vehicles, two- and three-wheelers recorded double digit growth while the CV segment registered the highest growth of 37.15 per cent during April-December 2006. The auto ancillary industry recorded a 17 per cent y-o-y growth in sales and 45 per cent y-o-y growth in profits for the first nine months of FY 2007. The industry also witnessed big ticket transactions, such as M&M's acquisition of a stake in Jeco Holding and Warburg Pincus' acquisition of 9 per cent stake in Amtek Auto. Robust sectoral performance and outlook has resulted in both domestic and global companies announcing significant investment plans. The Government's draft Auto Mission Plan (AMP) aims at doubling the contribution of the automotive sector to GDP to 10 per cent (i.e. a turnover of $145 billion) by 2016. Double-digit growth rates are expected across all segments of the industry.


» Customs duty cut will help reduce costs of imported inputs. This will increase demand for cars in the domestic market.
» Amendment in valuation rules for job-work will make life less attractive for units engaged in contract work for other manufacturers and also increase input costs.
» Reduction in excise duty on petrol and diesel to have an impact on consumer sentiment (this, though, has not resulted in any immediate reduction in petrol and diesel prices).
» 1 per cent cut in CST will improve margins, reduce prices and spur demand.


» Bajaj Auto: There is no direct impact, but the slight reduction in peak customs duty may benefit the company since it imports certain components (like alloy wheels).
» Hero Honda: The increased focus on the rural sector could result in higher rural sales (Bajaj Auto will also benefit).
» Tata Motors: The continuing focus on developing world class highways is likely to result in an uptick in the sales of Tata Motors' commercial vehicles, particularly those with large tonnages.
» Maruti Udyog: There is no direct impact on the country's largest automaker. The high levels of localisation it has achieved means it will get few benefits from the reduction in peak customs duty.

The Going Gets Better

"The financial sector policies announced in the Budget are in consonance with the current supportive environment. In particular, the decision to use the PAN number as the sole identification number in capital markets transactions is a welcome move"

The banking and financial services sector has grown remarkably during the current financial year. Demand for credit, both from corporate and retail customers, has grown 31 per cent. However, the country's leading banks have also increased both their lending and deposit rates. Despite this, there is little evidence of the burgeoning credit demand tapering off. The key challenge for the sector will be to raise sufficient resources to meet the growing credit demand, while retaining a reasonable spread. There were widespread expectations that the Budget would exempt income from interest on bank deposits from income tax; this would have improved deposit mobilisation by making FDI as attrative as other products. This expectation, however, was belied. The Insurance Bill, which proposes to increase the FDI cap in the insurance sector from the current level of 26 per cent to 49 per cent, is expected to be tabled in the ongoing Budget session of Parliament.


» Pass-through status to venture capital funds limited to only income earned from investments in specified industries.
» DDT on income distributed by money market and liquid fund MF schemes raised to 25 per cent. This is likely to result in huge outflows from liquid funds owing to reduced tax arbitrage.
» Government to acquire RBI equity in SBI for Rs 40,000 crore.
» Regional Rural Banks asked to undertake significant branch expansion.
» NABARD to be permitted to issue tax-exempt bonds up to Rs 5,000 crore guaranteed by the Government.
» Institutions allowed to short sell and undertake securities lending and borrowing to facilitate delivery.


» State Bank of India: It will benefit from the 25 per cent dividend distribution tax levied on money market and liquid MFs as bank FDs will become more attractive and allow it to mobilise larger amounts of money.
» Punjab National Bank: It will benefit from the increased rural thrust as it owns over a dozen of the largest regional rural banks.
» ICICI Bank: Its innovative rural delivery channel (read: franchisee model) is ideally placed to tap the rural opportunities thrown up by this Budget.
» HDFC Bank: It has one of the largest SME portfolios in the banking sector; so an increased focus on this segment, as envisaged in the Budget, will benefit the bank.

A Stellar Performance

"The increase in excise duty is not good news. There is a limit of Rs 190 beyond which excise will be levied at Rs 600 per metric tonne. Even if there is an increase in cost inputs because of inflation, prices will rise beyond Rs 190. I do not think the decision is good for the industry"
Whole Time Director & CFO/ Grasim Industries

India is the second-largest cement producer in the world, with a capacity of approximately 160 million tonnes (and 95 per cent capacity utilisation in 2006). The current financial year, during which domestic consumption has grown more than 10 per cent, has been one of the best for the industry. A reduction in customs duties on limestone and gypsum, increased allocation of coal blocks to cement companies and an increased thrust on infrastructure development are some of the key growth drivers. Cement prices rose 32 per cent during the year due to the robust demand and limited capacity additions. The industry witnessed consolidation activity-such as the acquisition of a 18.4 per cent stake in Gujarat Ambuja by Holcim for $618 million (Rs 2,785 crore) and the buyout of a 51 per cent stake in Mysore Cement by Heidelberg for $94 million (Rs 423 crore). Major capacity additions are planned over the next 3 years to meet the burgeoning domestic demand. A ban on the export of cement is also on cards.


» The 31.6 per cent increase in allocation towards Bharat Nirman and increase in outlay for the National Highway Development Programme to Rs 10,667 crore augurs well for the industry.
» Excise duty on cement reduced from Rs 400 per tonne to Rs 350 per tonne if the retail sales price is Rs 190 per 50 kg bag or below. But this may not benefit the cement industry, as it will have to take a substantial hit on the bottom line at this price level. Excise duty on cement costing more than Rs 190 per bag has been raised to Rs 600 per tonne. This may affect demand.
» Improving GDP growth rate and continued focus on infrastructure will sustain the cement consumption rate.


» Gujarat Ambuja: Being a large player, Gujarat Ambuja will be in a position to pass on the higher excise duty on cement to the consumer, so, there will not be much of an impact on its bottom line or margins.
» ACC: Like other large players, ACC, too, will not be much affected by the higher excise duty on cement.
» UltraTech Cement: The decision to hike excise duties for cement bags that are sold at more than Rs 190 per bag could affect the company, though it is likely to pass it on to the consumer.
» India Cements: The higher excise duty will hit it hard. Being a smaller player, it will not be easy for the company to pass on the increased price burden to its customers.

Riding On A Bumpy Road

"The Budget will improve the quality of life at the bottom of the pyramid. This will increase disposable income, consumption and FMCG demand"
Chief Financial Officer/Marico

Stable growth was the mantra for the FMCG sector, which recorded a revenue growth of 22 per cent over the past year. But margins remained under pressure due to an increase in input costs on the back of higher crude prices; this, however, was partly mitigated by an increase in the prices in certain categories such as soaps and detergents (after years of price wars). The industry is banking upon increased consumer spending and greater penetration of organised retailers to provide it with a growth impetus. The durables sector, meanwhile, recorded a growth of about 10 per cent during 2006-07, which is consistent with past trends. As in FMCG, margins continued to remain under pressure on account of higher input prices, greater advertising costs and the threat of cheaper imports (especially from FTA jurisdictions). However, industry players remain optimistic on the prospects of consumers "up-trading" to higher-end products; they are also hoping that specialised durable retail formats will provide a fillip to sales.


» Rationalisation of excise on footwear parts, umbrellas, and exemption from excise for certain packed biscuits, food mixes and water purification devices will benefit many FMCG companies.
» Reduction of customs duty on food processing machinery, non-agricultural items, textiles, pet food, sunflower oil, umbrella parts and exemption of additional duty of custom on edible oil will further help FMCG companies.
» Fringe Benefit Tax not to be levied on expenditure incurred towards display of products and distribution of samples.
» Increase in excise levies on cigarettes, bidis and tobacco products is unlikely to result in lower demand.


» Hindustan Unilever: Reduction of CST by 1 per cent will serve to bring down costs and provide some respite to its margins. Also, the removal of additional CVD on edible oils will result in savings.
» Marico: The reduction in CVD on imports will have only a marginally favourable impact. But the service tax on rents will shave off a couple of crore from its bottom line.
» Britannia Industries: It will benefit from the reduction in excise duty on biscuits. The increased dividend distribution tax will affect it only marginally.
» Dabur: Exclusion of expenditure on free samples and displays from the scope of FBT will help the company. Incentives on Ayurvedic products will drive top line growth.

Boom Time

"It's a favourable Budget, but nothing spectacular. Singling out 2-, 3- and 4-star hotels for incentives, though, is unfair; he should have extended the tax holiday to all hotels"
Chairman/ The Leela Group

The hospitality sector continued its strong growth in 2006-07. In the premium category, Revpars (revenues per available room) grew 15-57 per cent (y-o-y) across 10 major cities (April-December, 2006). Foreign tourist arrivals surged 14 per cent during this period and the domestic travel segment also showed an uptrend. Given this buoyancy, hospitality industry players are expanding in order to acquire a pan-India footprint and new players are entering the market. Huge concessions have also been announced for 2-, 3- and 4-star hotels in the National Capital Region. This will increase the supply of rooms in the NCR and correct hotel tariffs in the medium term. The flip side of the boom is that land prices have gone up, straining the viability of all hotels in general and budget hotels in particular. The issue of high land prices is being addressed by developers through mixed use developments. To boost the development of budget hotels, additional initiatives such as public-private partnerships, cost-effective availability of land and pan-India tax incentives are required. The Budget is silent on all these counts.


» 100 per cent tax holiday for five years provided to companies engaged in the business of hotels (2-, 3- and 4-star categories) and convention centres (details to be prescribed) in specified areas (Delhi, Gurgaon, Faridabad, Gautam Budh Nagar and Ghaziabad), if construction and operation starts between April 1, 2007 and March 31, 2010. This is expected to provide a fillip to the hospitality industry in the NCR
» Total outlay for tourism infrastructure increased from Rs 423 crore in 2006-07 to Rs 520 crore.


» ITC Welcomgroup: The Budget will fuel the growth of the chain's budget brand, Fortune Park Hotels. And though it already has a presence in the NCR, it is reportedly looking for more properties there.
» Indian Hotels: The Budget will hasten its entry in the budget hotel segment in the NCR.
» East India Hotels: There is no impact on the Group's flagship 5-star chain, but the incentives granted to 2-, 3- and 4-star hotels will come in handy for its lower-end Trident brand.
» The Grand Bharat Hotels: Again, its five-star properties will not be impacted. But the group is actively eyeing an entry into the budget segment within the next one year; so, the Budget proposals will come as a shot in the arm for it.

Grappling with the Talent Crunch

"The Budget is disappointing. We believe that the introduction of MAT will negatively impact most companies. It seems as if the government feels that the IT industry is now a mature one and so does not require further benefits. But this is a wrong impression"
Chairman/ Nasscom and Satyam Computer

The Indian IT-ITEs sector continues to chart double-digit (over 28 per cent) growth, and is expected to close 2006-07 with revenues in excess of $39 billion (Rs 1,71,600 crore). The engineering, R&D services and domestic markets, besides, of course, the traditional software and it services, have been the key contributors to this growth. In line with global trends, the Indian it sector has seen significant outbound and domestic M&A activity. Large players like TCS have acquired Pearl and Wipro has bought out New Logics. Within the country, the Essar Group has acquired Global Vantage and EXL has taken over Inductis. Despite robust growth, the sector faces some key challenges-like availability of skilled manpower, appreciation of the Indian rupee and availability of appropriate infrastructure to support future growth. The immediate concern is the continuation of the STPI Tax benefits after 2009 and its possible impact on the attractiveness of India as an offshoring destination.


» No reference to extension of tax holidays to STP/EOU units beyond March 2009. MAT (11.33 per cent) now levied on STP/EOU units (but not SEZ units).
» ESOPs are subject to FBT, burdening employers with a tax cost of 33.99 per cent on the difference between fair market value on the date of exercise of options and price paid.
» Test of export made simple: a service will be considered to be exported if it has been "provided from India and used outside India". This brings clarity to a vexed issue.
» Income earned by venture capital funds will be exempted from tax only if the income has been earned from IT hardware and software development. ITES/BPO segments not covered.


» Infosys Technologies: The imposition of MAT means Infosys' net margins will be hit by 1.5 per cent. The imposition of FBT on ESOPS will take its toll.
» Wipro: The company is yet to calculate the precise impact of the Budget on its margins, but it's certain that MAT and the tax on ESOPS will shave quite a few crore from its bottom line.
» 3i Infotech: Increased government spends on e-governance will benefit the company. The impact of the imposition of FBT on ESOPS and MAT, though, is not yet clear.
» TCS: Since it pays tax in other countries, it remains to be seen whether the MAT burden can be off set to some extent. Impact on margine yet to be calculated.

Action-packed Growth

"There is nothing in the Budget for the media, though we were looking for some parity between the print media and the electronic media. Also, the introduction of service tax on content needs to be studied in detail"

The Indian media and entertainment (M&E) sector continued to grow at 14 per cent. The television segment witnessed maximum activity last year-the Conditional Access System (CAS) was finally implemented in three metros with effect from January 1, 2007. In television broadcasting, new channels continued to be launched in the news and sports genres. The film segment embraced corporatisation, attracting, in the process, private equity and institutional financing. The ad spend in 2006 was about 0.34 per cent of GDP (Rs 14,500 crore), an increase of 10 per cent over the previous year. New distribution platforms and digital technology created new revenue streams for the segment. There has been a second coming for the print segment; this was driven by rising literacy levels, launch of new brands and a favourable regulatory environment. The inefficiencies in distribution that have existed in films, television broadcasting or publishing, are gradually easing out, thereby making the entire industry more transparent and profitable. The launch of DTH will further revolutionise the sector.


» Air space above Indian territory to be brought under the tax net with retrospective effect. This may impact foreign satellite companies and channel operators, depending on how the law is framed.
» Rate of TDS on commissions, brokerage and professional service charges increased to 10 per cent. This could impact the cash flows of Indian content producers commissioned by non-resident companies to produce television content.
» Service tax to be levied on sale of space in Yellow Pages and commercial catalogues. However, sale of space in newspapers continues to remain non-taxable.


» Zee Telefilms: The Budget will not have a major impact on the company.
» PVR Cinemas: The imposition of Service Tax on commercial property rents will affect the company-as its business is based on the rental model-and impact its margins to that extent.
» Prime Focus: Neutral impact. The company has already factored in the import duties that it pays currently and then projected the future earnings. Therefore, its projections will not be affected.
» Adlabs Films: Neutral impact on the film segment. However, there could have been some savings for Adlabs Radio as imported hardware will now become cheaper.