Fitch: India FY10 Budget Impact on Corporates Credit Neutral

Fitch: India FY10 Budget Impact on Corporates Credit Neutral

Fitch Ratings-Mumbai/Singapore-06 July 2009: Fitch Ratings says today that the impact of India's FY10 union budget on corporates is expected to be broadly neutral from a credit perspective. While the new budget seeks to continue providing relief to export hit sectors and also provides for tax and other benefits to other sectors such as oil and gas, autos, gems and jewellery, the benefits on account of these, in Fitch's opinion, are likely to be marginal. Fitch also notes that the union budget does not adequately address the issue of subsidies in the fertilizer and petroleum sectors. The adhoc nature and timeliness of the subsidy policy has in the past, resulted in liquidity pressures for entities within these sectors and while these risks have abated due to declining prices of crude and inputs costs for fertilisers, the risks cannot be ignored. Fitch however, notes that the government has proposed to set up an expert panel to look at the petroleum pricing mechanism and has also laid out a direction for future fertilizer policy, the timelines for implementation of these initiatives remains uncertain and could potentially impact short-term liquidity for entities in these sectors. The risks could be accentuated by India's increasing fiscal deficit.

The impact of the budget proposals on some key corporate sectors are summarized below:

Oil & Gas

The budget makes several proposals for the O&G sector, the most important one being that related to extending the tax holiday, under section 80-IB(9) of the Income Tax Act, to commercial production of natural gas. There are some proposals which could have a long term impact on the O&G sector - like the setting up of a National Gas Grid and the Expert Group on pricing petroleum products. Some proposals meanwhile would rationalize the tax regime or provide specific incentives, like that on man-made fibres and intermediaries, blended petro-diesel and cross-country pipelines. The long term impact of this budget on the O&G sector depends on the speed with which the government acts on its proposals and its willingness to accept expert committee recommendations. For details on the impact of the budget on this sector, please refer to our comment titled "India Budget Proposals Long Term Positive for Oil & Gas Sector" and available on our website www.fitchratings.com

Auto Sector

The budget has been marginally positive for the auto sector, primarily in the form of a reduction in indirect taxes. Excise duties for petrol trucks have been reduced to those applicable for diesel trucks. In addition, the ad valorem (duty by value) duty on cars and Utility Vehicles (UVs) above 2,000cc has been reduced by INR5,000/unit which will benefit the respective OEMs. In terms of volumes, this measure will have a wider impact on the UV market. In addition, the budget has further provided for a more level playing field between road freight and other modes of transport (including coastal shipping and railways) by applying a uniform service tax rate. This will reduce the incremental disadvantage in pricing faced by road freight operators

Gems & Jewellery

Jewellery (finished product) exporters are likely to be impacted by the increase in excise duty on gold bars, which will increase their raw material costs marginally by under 1%. However, domestic jewellery players have been provided with an offset in the form of a reduction in excise duty to nil from 2%. Man-made textile and yarn players have also been impacted by the increased excise duty, which will marginally reduce their cost differential with cotton textiles.

Steel and Cement

The focus on infrastructure with an additional outlay of INR610bn during the current financial year could potentially provide some impetus to demand for steel and cement. Domestic volumes across both sectors have continued to remain strong despite the global contraction in construction and automotive demand, reflecting the demand from infrastructure and growing demand from rural India. With a greater focus on the National Rural Employment Guarantee Scheme through increased allocation and impetus from additional infrastructure spending, Fitch expects volumes for both sectors to remain strong during FY10. However, pricing pressures are likely to persist, reflecting the continuing structural imbalances in global steel markets and the risks of additional domestic cement capacities coming onstream during the current financial year.

Contacts: Rakesh Valecha, Mumbai, Tel: +91 22 4000 1740/e-mail: rakesh.valecha@fitchratings.com, Abhinav Goel, New Delhi, Tel: +91 11 4356 7240/e-mail:abhinav.goel@fitchratings.com, Priyamvada Balaji, Mumbai, Tel: +91 22 4000 1700/e-mail:priyamvada.balaji@fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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