Budget impact on sectors: First Global

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Broking house, First Global has come out with Budget impact on various sectors.

• Automobiles - R&D tax credit the only good news...
• Banking- Budget turns out to be a bit unexciting for banks
• Cement- Focus on infrastructure may not bring the zing back to cement stocks...Ad-Valorem excise duty structure may add further to the carnage...
• IT Services- Introduction of MAT to impact bottomline
• Pharmaceuticals- Incentives for R&D and biotechnology...but no indications on drug pricing policy

First Global report:

Budget Impact on Automobiles

The proposal to extend weighted deduction of 150% on R&D for tax credit u/s 35(2AB) of the Income Tax Act for a period of 5 more years will help auto companies reduce their taxes, while simultaneously helping them scale up technologies to global standards.

The proposed reduction in customs duty on most chemicals and plastics from 12.5% to 7.5% will help marginally reduce raw materials costs.

In Auto space broking house has recommended outperform rating on Mahindra and Mahindra, Bajaj Auto and Hero Honda.

Auto Ancillaries- Budget offers little...growth to continue

Budget Impact on Auto Ancillaries

The proposal to extend weighted deduction of 150% on R&D for tax credit u/s 35(2AB) of the Income Tax Act for a period of 5 more years will help auto companies reduce their taxes, while simultaneously helping them scale up technologies to global standards.

The proposed reduction in customs duty on most chemicals and plastics from 12.5% to 7.5% will help marginally reduce raw materials costs.

In this sector firm has maintained long term outperform rating on MICO, while it has moderate outperform rating on Sona Koyo and Lumax.

Banking- Budget turns out to be a bit unexciting for banks....

Budget Impact on banking:

The government's overall focus in the Budget on agriculture sector will enhance rural income, which in turn, will help banks, particularly PSU banks, expand their rural operations. 

The Securitisation and Reconstruction of Financial Assets and Enforcement of Securitisation of Interest SARFAESI) Act is to be extended to loans advanced by Regional Rural Bank (RRBs). This is positive for the Banking sector, as it will strengthen the overall sector.

Cement- Focus on infrastructure may not bring the zing back to cement stocks...Ad-Valorem excise duty structure may add further to the carnage...

Budget Impact on Cement

Excise duty to be raised to Rs.600 per tonne on cement retail price higher than Rs.190 per bag. Excise duty cut from Rs.400 per tonne to Rs.350 per tonne on cement if retail price is over Rs.190 per bag. This will be negative for all cement companies, since cement prices are ruling above Rs.190 per bag in most regions.

Higher allocation for roads under NHDP to benefit cement companies.

Proposed reduction of 6% in rail freight cost for transportation of limestone. This will be neutral for all cement companies, since most cement plants are located close to limestone mines.

First Global has underperform  rating on ACC, Gujarat Ambuja, UltraTech, Grasim and Jaiprakash Associates.

IT Services- Introduction of MAT to impact bottomline...

Budget Impact on Technology

Companies that benefit from tax exemption under the provisions of the Section 10A and 10B of the Income-Tax Act will have to pay an effective minimum alternate tax of 11.22% from FY08. This will result in a higher effective tax rate for the companies and impact their bottomline.

Employee stock options will be included for calculating the Fringe Benefit tax (FBT).

The broking house has outperform rating on Infosys, TCS, HCL Technologies and Polaris. However they have moderate outperformer rating on Wipro, Satyam and Mastek.

Pharmaceuticals- Incentives for R&D and biotechnology...but no indications on drug pricing policy

Budget Impact on Pharma

Extension of the 150% weighted average deduction on R&D expenditure until FY07 to be extended by another 5 years.

Service tax exemption on clinical trials of new drugs.

The broking house has recommended outperform rating on Aurobindo and Lupin while, they have long term outperformer rating on Ranbaxy.

Telecom- Nothing much to cheer about

Budget Impact on Telecom
 
Constitution of a DoT committee to study and recommend on the issue of replacing current multiple duties, fees, charges, etc., with a single levy: While the proposal is positive, as it means a step towards bringing down the overall burden of levies and duties on the industry, the actual impact will depend on the committee's recommendations.

It has been proposed to extend the exemption from additional customs duty of 4% on cell phones parts, components and accessories set to expire on April 30, 2007 until June 30, 2009. The proposal is marginally positive, as it will help keep handset prices low and drive penetration levels up.

It has been proposed to impose service tax on the development and supply of content for use in telecom. This might lead to an increase in value added services (VAS) charges. However, the impact will be marginal, as data services contribute a small proportion (5-8%) of overall revenues.

The firm has maintained market perform rating on Bharti Airtel  and Reliance Communications.

Sugar- The beleaguered sector gets no relief ...

The firm has recommended sell rating on Balrampur Chini, Bajaj Hindusthan and Renuka Sugars.

Construction- Benefits of Section 80IA may not be available to construction companies

FMCG- Huge fillip to rural demand...

Logistics- Development of roadways, dedicated freight corridors and ports to enhance efficiencies and lower costs...

Power- More investment incentives to power rapid expansion...