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Economy

Budget 2010: Sector Impact

What’s in the IT budget for specific companies or sectors?

Real Estate

  • Interest rate subsidy of 1% for home loans less than 10L (on property less than 20L) to continue. But none of the large RE players are benefited – they just don’t have properties that qualify, and even if they did, people won’t put 50% down.
  • The tax slab changes puts more money into people’s hands, but that doesn’t change much; with a potential increase in interest rates soon, the differential will be wiped out by interest cost differentials alone. People in the mint meeting I went to expected RBI rates to harden by 1.5% – even if the bank lending rates only pass on 1% out of this, the interest rate difference will wipe out the tax gains. (For a 50 lakh loan, 20 year term, the EMI moves from 42K to 45K per month)
  • A provision to impose service tax on past rentals on commercial space – retrospective to 2007 – is bad for developers that rent out space they own.
  • Service tax will apply on all payments made to builders if any part of the amount is paid before construction is completed (“Completion certificate” is granted). This service tax even applies to projects that people have currently bought and are under construction. (though only after April 1, 2010)  That is hugely negative – most builders bank on the pre-construction revenue, and now they have to demand 10% extra from existing buyers. Some were already doing so, but a good number of deals have avoided this tax due to lack of clarity. Now, no choice.
  • What this means for you: If you have bought an “under-construction” property, be prepared to pay out about 10% more in every subsequent installment on whatever is not the land cost. This includes any “floor-rise” or such premium costs too. And if you think you are buying a “ready” flat – please demand a copy of the Occupancy Certificate and re-verify with the municipality – otherwise the service tax will apply. (Read this article)
  • Rural infrastructure boost could substantially help real estate players in smaller cities, if they keep their prices low enough.
  • Slum redevelopment – this has been bumped up to 1270 cr. from 150 cr., and HDIL will benefit.

Automobiles

  • Excise duty hikes will increase market prices – and nearly all of them have decided to pass on the duty hikes by raising car prices. (Boy am I glad I bought my car last year). Will car demand drop? We aren’t sure.
  • Excise duty exemptions for Agricultural trailers is good for manufacturers in this segment – M&M
  • R&D weighted deduction is now 200% – this should help local folks that have a research division, which is all the big players.
  • Huge positive for electric car manufacturers like Reva – Excise Duty reduced to nil.

Banks and Financials

  • The fiscal deficit looks like it has been tamed at 5.5% but the devil is in the details. We seem to have severely underallocated key items – Defence and security hasn’t got much, considering we have a potential war and serious anti-terrorism work to do, for instance. More details in another post.
  • A higher fiscal deficit will need financing from the market. A huge chunk of g-secs are maturing this year and everyone expects that people will put the money right back into new debt. That may not necessarily be true. Higher corporate demand with a potentially strong economy may drive down government bond prices, and if RBI removes the mark-to-market easing that it had done as part of the “stimulus” banks are going to be hit.
  • New banking licences – to expect the RBI to give licenses to Reliance or Birla is a jumping the gun; corporate houses have not yet been allowed more than 10% voting rights in banks and I doubt that will change this year. Even if it does, the added competition will only hurt the banks in the short run.
  • Overall growth is good but the banking system has great spreads today between lending rates and borrowing rates; that is likely to change as RBI gets tougher. Combined with lower leverage allowances, banks don’t look positive in general.
  • The government will put in more than 16,000 cr. in Tier 1 capital in banks. That is usually BAD for shareholders – it will dilute everyone and bring EPS down in the short term.

Other

  • Aviation: Service tax now applicable to all classes including domestic. Volumes will surely be impacted
  • Cement: Duty increases will make bags cost about more. The infrastructure impetus is nearly 1.75 lakh crore which will keep cement demand up a little bit at least.
  • Cigarettes: Obviously negative with higher excise, but that is always expected. Chewing tobacco also impacted.
  • IT Services: MAT Is a pain for smaller companies, but the MAT credit available keeps earnings inflated for a while. It’s a cash flow issue but IT is pretty good on cash flow to balance.
  • Oil and Excise duty hikes are going to hurt everybody.
  • Power: Huge allocation in budget and this is a government controlled sector. Overall positive but darn, look at some of the players – they are all in horrendously unprofitable zones and will have to wait a long time. Better to buy electrical equipment players that are cheap.
  • Retail is tough: just the service tax on leases with retrospective effect could hit margins hard. Hopefully, slightly higher disposable urban income from tax slab rejigs will help cushion it.
  • Telecom: The MAT increases have an impact on bottomlines. Cellphone battery charger duty cut might help but it does nothing for people like me who have at least two chargers of every make.
  • Gold and Precious metals have higher duty (still nothing at 2% or so) – I doubt this makes a very big difference to the industry.
  • ULIPs – service tax to only apply on fund management charges; this is positive but the industry is evil and I don’t want to bet on its future.
  • 3G Auctions will raise 36,000 cr., they say, and auctions will start on 9th April. It’s going to be interesting to see how they get funded and at what price the licenses go. One thing is for sure though: with this cost structure, the content developers for 3G will likely get very small payments for their work as the mobile operators will try and recover most of the money to pay for the licenses. (If you make a game that can be played with data on 3G and hope to fund it through a small charge in the user’s bill, the operator will take most of the money – 60% to 80%. Comparatively in the west, software developers get higher parts; that promotes the market.

Overall, I’m not convinced this budget is a game changer. The cues on the global front are more important – what happens to Greece and the Euro? American housing is going down again, and there is serious stress beginning to show. China is showing signs of overheating, and Dubai’s problems are far from over. This will impact us, in a bigger way than the budget will.

But there are small and medium size companies that will do phenomenally well, and it’s up to you and me to find them. I’m actively looking and building up positions; I will post once I’m done with the buying. Do chip in with suggestions.

Disclosure: I have positions in some of the above sectors.

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