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
Simmering Success
"The Budget, on the whole, is a balanced one. However, ONGC does take a net marginal hit of around Rs 50 crore, mainly on account of dividend tax, since we are the highest dividend-paying company in the country"
Chairman and Managing Director/ONGC

Accelerated M&A activity, growing demand, an evolving regulatory environment, and competition for access to new hydrocarbon reserves-2006-07 was an eventful year for the Indian oil and gas sector. The New Exploration and Licensing Policy VI (NELP VI) and Coal Bed Methane III (CBM III) licensing rounds witnessed record participation; and OVL acquired interests in nine overseas blocks during the year. Inbound investments also increased; significant among them were Chevron's acquisition of a 5 per cent stake in Reliance's new refinery at Jamnagar, L.N. Mittal's purchase of a 49 per cent stake in HPCL's Bhatinda refinery, and ENI's upstream asset swap agreement with ONGC. Meanwhile, India's gas market is coming of age. Reliance, GSPC and ONGC have struck significant reserves in the kg basin; additional capacities are being built by Petronet LNG at Dahej and Kochi; and there has been a revival of interest in the Iran-Pakistan-India (IPI) pipeline project. All of these are likely to result in an increase in supply of gas from 90 MMSCMD at present to 200 MMSCMD by 2009.


» The proposal to extend service tax to services rendered for mining of oil and gas will impact the upstream industry, though the proposed reduction in excise duty on petrol and diesel from 8 to 6 per cent will benefit oil marketing companies.
» Separately, in line with the recent gas discoveries in India, tax concessions offered to cross-country natural gas distribution networks will provide a much-needed impetus to the pipeline sector.
» The proposal exempting bio-diesel from excise duty will spur demand for it and reduce India's dependence on fossil fuels. Over time, this will also pare India's oil import bill.


» Indian Oil Corporation: India's largest company will gain Rs 1,250 crore from the lower excise duty on petrol and diesel.
» Reliance Industries: The company will benefit from the infrastructure status granted to gas pipelines and also gain from the cut in excise duties on petrol and diesel.
» ONGC: This Navratna will take a marginal net hit of around Rs 50 crore after netting out its gains and losses on account of dividend distribution tax, education cess, customs duty reduction and CST.
» GAIL: The company will suffer a small dent in its bottom line due to the increase in the dividend tax rate. But the grant of infrastructure status to the pipeline sector will reduce costs.

Focus on Rural Markets

"There are a few positives but there's nothing in terms of bold moves that will change the industry's growth trajectory or decisively impact public health. It is an opportunity lost to provide a major thrust to the sector"
MD & COO/ Dr Reddy's Laboratories

The Indian pharmaceutical industry is ranked as fourth by volume and thirteenth by value in the world and the country is among the top 5 manufacturers of bulk drugs. India is now a destination of choice for international companies for outsourcing their R&D and manufacturing requirements. Contract Research and Manufacturing Services (crams) has become a major revenue driver for many Indian pharmaceutical companies. A majority of the deals in this sector is driven by the crams model (for example, Dishman's acquisition of Carbogen and Roche's acquisition of DRL's API business). Meanwhile, Indian pharma majors have made some large acquisitions to gain entry into new markets. These include Dr Reddy's buyout of betapharm, Germany, for $500 million (Rs 2,250 crore) and Ranbaxy's acquisition of Terapia for $250 million (Rs 1,125 crore). The domestic market is expected to grow at 14-15 per cent over the next 5 years. Within this, companies are expected to continue their focus on rural India which is growing at almost 40 per cent.


» 150 per cent weighted deduction on R&D expenditure extended by 5 years up to March 31, 2012.
» Concessional customs duty rate of 5 per cent and nil excise duty on specified items such as scientific and technical instruments extended to all registered research institutions.
» Clinical trials of new drugs by Clinical Research Organizations approved by Drug Controller General of India exempt from service tax.
» Basic customs duty on general medical equipment and certain chemicals (including active pharmaceutical ingredients) reduced from 12.5 per cent to 7.5 per cent.


» Ranbaxy Laboratories: It will benefit from the exemption of clinical trials from the service tax net, though the extension of FBT to ESOPs will hit it, and others, hard.
» Cipla: The increased focus on immunisation programmes will help the company.
» Biocon: It will gain from extension of the weighted average deduction of R&D expenditure but, like others, could be hurt by ESOPs being brought under the fringe benefit tax (FBT) net.
» Apollo Hospitals: Will, like most other leading hospital chains, gain from the reduction in import duties on medical equipment as it is expanding quite rapidly. Also, the provisions on health insurance could generate greater business for it.

Lighting For Tomorrow

"The Budget proposals will benefit us marginally. We will gain on the reduction in peak rate of customs duty from 12.5 per cent to 10 per cent as this will translate into a saving of Rs 25 crore for a 1,000 MW plant"
Chairman and Managing Director/ NTPC

The year 2006 saw a major thrust on large transmission and mega power projects; additional capacity of 5,093 mw was created and power generation grew 7.2 per cent during the year. Increased private sector participation in coal mining and a thrust on imported coal-based power is expected to provide a further fillip to power generation. Major initiatives in line with the government's policy to accelerate capacity additions in power generation included the two Ultra Mega Power Projects of 4,000 mw each in Mundra and Sasan. These projects, entailing an investment of $8 billion (Rs 35,200 crore), were awarded to Tata Power and Lanco Power, respectively. Improvements in the distribution business through schemes like Accelerated Power Development and Reform Programme (APDRP) and strengthening the inter-regional grid were some of the key initiatives undertaken during the year under review. The Budget proposals will come as a shot in the arm for this sector.


» Ministry of Power has awarded two Ultra Mega Power Projects (UMPP) in Sasan and Mundra and two more UMPP will be awarded by July, 2007.
» Budgetary support for Accelerated Power Development and Reforms Programme increased from Rs 650 crore to Rs 800 crore.
» Allocation to Rajiv Gandhi Grameen Vidyutikaran Yojana increased from Rs 3,000 crore to Rs 3,983 crore.
» All coking coal, irrespective of ash content, to be fully exempt from customs duty.
» Tax holiday under Section 80 IA shall be available to all industrial undertakings, including power projects, which commence operations on or before March 31, 2008.


» NTPC: The reduction in CST will swell its kitty, but this will be partially offset by the increase in the education cess rate. Lower peak customs duty will lower the costs of its upcoming power plants at Farakka, Korba and Dadri.
» Reliance Energy: The company will be impacted by the increase in dividend distribution tax and the increase in the education cess rate.
» Power Finance Corporation: There will only be a marginal impact of Rs 10-15 crore on its bottom line due to the higher dividend distribution tax.
» Power Trading Corporation: The Budget will have a negligible impact on the company. The hike in the dividend distribution tax will cost it only around Rs 2 crore.

Wanted, More Transparency

"The introduction of service tax on office space rentals and contract works, the increase in cement prices and removal of income tax deductions for qualified projects will hit the profitability of real estate companies"

The year 2006-07 has seen a surge in development and funding activity in the real estate sector. Various companies have accessed both private equity and public markets to meet their needs for growth capital. A number of regional players have also scaled up their growth plans to increase their footprints in different parts of the country. Meanwhile, foreign inflows into the sector increased dramatically during the year. Industry estimates indicate that the share of real estate in FDI will be 26 per cent in 2006-07 compared to 10 per cent in the previous financial year. Further, more than $20 billion (Rs 88,000 crore) of capital (in the form of dedicated refs, IPOs, QIPs, private placements and FCCBs) has been raised and deployed in the Indian real estate market over the last 18 months. Real Estate Mutual Funds (REMFs), which are on the anvil, are expected to widen and deepen the market further. All this flow of institutional capital should act as a catalyst for increasing transparency, professionalism and corporatisation of the sector.


» TNational Housing Bank to introduce reverse mortgage; this product will provide liquidity to senior citizens.
» Regulations are being put in place for creation of mortgage guarantee companies.
» No extension of tax holiday under section 80-IB(10) for small housing projects; this will negatively impact developers and state housing boards. Also, service tax on rented properties will make malls and office spaces more expensive.
» Tax holiday benefits to industrial parks and SEZs under 80-IA will not be available upon amalgamation or demerger after March 31, 2007.


» DLF: It will be one of the biggest losers as rentals account for a major chunk of its income. The levy of service tax and removal of Sec 80-IB will also have an adverse impact.
» Indiabulls Real Estate: Thelevy of service tax on office space will have a negative impact on the company. And higher excise duty on cement will increase costs.
» Unitech: Like other real estate developers, the company will have to bear the brunt of rising excise duties on cement as its costs will rise.
» Ansal API: The Budget will result in costs increasing by 1 per cent that it may not be able to pass on to customers. The service tax to be paid on work contracts will also impact its bottom line.

In High Gear

"The Budget proposals on infrastructure are cursory and inadequate. Increased excise duty on cement will eventually be passed on to the consumer. The result will be higher and unpredictable costs"
Chief Financial Officer/L&T

The roads privatisation programme has entered a new phase of maturity. There has been a number of encouraging developments, including significant updations in the Model Concession Agreement used by the National Highways Authority of India (NHAI), a move towards six-laning of the Golden Quadrilateral (eight sizeable GG projects are currently being tendered out), significant interest for the first time from highway developers in western Europe and South East Asia in BOT highway projects in India and the large-scale entry of international equity funds in BOT projects. While national and state highways have benefitted from the increased focus on roadways, expenditure on urban roads remains inadequate. The central government will do well to consider developing model projects with private participation in the urban road sector. There were expectations that companies implementing projects under BOT would be exempted from mat, but this hasn't happened.


» Separate window under Rural Infrastructure Development Fund will augment funds for the programme by Rs 4,000 crore a year.
» Road-cum-rail bridges in Bihar and Assam to be taken up as national projects; they will, hence, receive priority funding.
» Provision for National Highway Development Programme (NHDP) increased from Rs 9,945 crore to Rs 10,667 crore. This will allow the private sector to bid for larger contracts.
» India Infrastructure Finance Company (IIFCL) allowed to access/borrow funds from National Small Savings Fund.
» Service tax of 2 per cent on total value of works contract on services involved in the execution of a works contract to increase total costs.


» Larsen & Toubro: The company is likely to gain from the increased allocation for National Highways Development Programme as it is expected to bid for and bag significant business in the next round of bidding.
» Punj Lloyd: The company is expected to bag more contracts to build National Highways and rural roads.
» IVRCL: The company is likely to gain from increased allocation for the National Highway Development Programme. Its power distribution business will also gain from higher spends on the Rajiv Gandhi Grameen Vidyutikaran Yojana.
» Jaiprakash Associates: The company will gain from increased allocations for roads, rural irrigation and power projects.

Metals on the Move

"The Budget is more focussed on bringing the under-performing sectors to perform, without jeopardising the growth trajectory of the overall economy. The Budget, as such, is neutral towards the steel sector"
Managing Director/Tata Steel

Steel production in India grew at a CAGR of 8.2 per cent from 2001-02 to 2005-06. During this period, aluminium production increased at a CAGR of 11.9 per cent; the automobile, construction and consumer durables sectors were the key growth drivers. The growth rate in other metals was also equally strong. Greenfield and brownfield expansions (steel production is expected to increase from 38 mmtpa in 2005 to 110 mmtpa by 2012) and landmark M&A transactions (example: Tata Steel's acquisition of Corus for $12.1 billion or Rs 54,450 crore, and Hindalco's acquisition of Novelis for $6 billion or Rs 26,400 crore) have been on an upswing. India is fortunate to have large reserves of iron ore and bauxite which will drive large investments in this sector. The government now needs to focus on reducing the time required for regulatory clearances, improve transparency and increase expenditure on infrastructure. Meanwhile, the export tax on iron and chrome ores may affect the enthusiasm of some players, like South Korea's Posco, which is in the process of setting up a steel plant in Orissa, subject to it being allowed to export ore.


» Inclusion of underground coal gasification and coal liquefaction as "specified end use" for allotment of coal blocks will result in enhanced coal mining activities.
» Incentives introduced for gems and jewellery industry; these include reduced (3 per cent) customs duty rates for cut and polished diamonds.
» Service tax on outsourced services for mining of minerals, oil or gas will increase the cost of mining activities.
» Export duty of Rs 300 per tonne of iron ore and Rs 2,000 per tonne of chrome ores to adversely impact exports.


» Tata Steel: Exemption of customs duty on all coking-coal imports is a positive for a large player like Tata Steel. Introduction of export duty on iron ore also augurs well for it as more ore is likely to become available to domestic players.
» Hindalco: The Budget is neutral on the aluminium sector. For Hindalco, it appears as if the impact in the short-term to medium-term will not be anything significant.
» SAIL: Focus on the development of infrastructure is a positive. Given that the steel sector is on a roll now, this could be a welcome development.
» Sterlite: If the infrastructure story continues, the metals story, too, will look good. Overall, the Budget is quite neutral for the non-ferrous metals sector.

India Calling

"We are encouraged by the formation of a committee that will work on the introduction of a single levy for telecom services. Today, there are as many as eight to nine levies, accounting for over a third of the customer's bill. This high level of taxation has retarded the expansion of services to unserved areas"
Managing Director/Idea Cellular

The Indian telecom industry witnessed mobile subscriber growth of 54 per cent in the first 9 months of the current financial year, taking the subscriber base to 142 million. The country's teledensity touched 18 per cent in December 2006, up from 13 per cent a year ago and total industry revenues are likely to cross Rs 60,000 crore by the end of 2006-07, compared to Rs 38,000 crore in the last financial year. Increasing per-capita GDP, improving demographics, falling tariffs, lower handset prices, aggressive expansion by operators, infrastructure sharing and lower regulatory levies have been key growth drivers. But Average Revenues Per User (ARPUS) are likely to remain under pressure due to the growth in the subscriber base in B and C circles and falling tariffs. WiMax and 3g are expected to grow significantly over the next two years. Multiple levies and taxes, interconnection delays (resulting in congestion and poor services) and spectrum constraints are some of the key challenges facing the sector.


» Withdrawal of the tax holiday for telecom services upon amalgamation or demerger after March 31, 2007.
» The Finance Minister has proposed to set up a committee to simplify the tax structure for the telecom sector; the idea is to move away from the current regime of multiple taxes to a single levy. This will reduce end-user charges and boost demand.
» Definition of telecom services for levy of service tax has been widened to cover all services provided by a telecom operator.
» Development and supply of content, including mobile value-added services, ringtones, games, wallpapers, etc., have been brought within the service tax net.


» Bharti Airtel: The constitution of a committee to study a single levy for the industry is a positive for the company, which is the largest mobile phone player in the country.
» Reliance Communications: The company's focus has been on getting into areas where telecom services have low levels of penetration. The elimination of excise duty on bio-fuels will allow it to provide telecom services in areas where electricity services are not dependable.
» MTNL: The Budget will have little impact on it.
» Idea Cellular: The elimination of excise duty on bio-fuels augurs well for it. At a time when the company is looking to expand its presence to more circles, this is a welcome development.

Back in Action

The Indian textiles sector saw rapid capacity expansion in spite of a pressure on margins due to the abolition of quotas. During the first half of 2006-07, more than Rs 3,000 crore was sanctioned under Technology Upgradation Funds Scheme (TUFS). This scheme, which was due to be phased out by the end of this financial year, has now been extended to the 11th Plan period. During the first 9 months of the current financial year, textile exports grew 23.9 per cent to $10.8 billion (Rs 47,520 crore). The exports of readymade garment outpaced other segments, growing 34 per cent to $5.9 billion (Rs 25,960 crore). The sector seems to be on track for rapid capacity expansion. There has been a spurt in fund raising through equity as well as debt. The industry is also expected to get into consolidation mode; the resulting economies of scale will enable it to take on increased global competition. The reduction in excise duty on man-made fibres and yarns and the reduction in customs duty on import of textile machinery will provide the ballast to sustain growth.


» Enhanced outlay on flagship initiatives. Integrated Textile Parks to get Rs 425 crore and the Technology Upgradation Fund Scheme to be continued during 11th plan with an outlay of Rs 911 crore.
» Cluster approach for development of handloom sector, introduced in financial year 2005-06, to be expanded. Social benefits by way of health insurance scheme will be extended to cover additional weavers and ancillary workers.
» Sector to benefit from reduction in customs duties on certain textile garments like polyester staple fibre, etc. However, removal of excise duty exemption for specified textile machinery could potentially increase capital costs.


» Raymond: It will gain from the extension of the TUF Scheme and the other incentives given to the textile industry as a whole. The extension of service tax to cover rentals of commercial properties will increase the operating costs of its retail venture, though.
» Indian Rayon: The extension of the TUF Scheme will help the company's expansion plans and allow it to enhance its competitive edge.
» Alok Industries: Extension of the TUF Scheme will allow it to increase capacities and improve cash flows.
» Bombay Dyeing: Continuation of TUF Scheme will help this one-time blue-chip carry out its ongoing modernisation and retail expansion plans with greater ease.