Union Budget 2010-11 reiterated the commitment of the Government of India on accelerated development of Infrastructure in the country. On positive front the budget which apart from increasing the budgetary allocation for infrastructure has also provided for resale of specified construction machinery imported on concessional duty before 5 years by paying import duty on depreciated value or allowing to move to other eligible projects, which is long pending demand of the industry who were forced to invest in machines so as to pre-qualify but asked to keep the machine idle once the project is over before the stipulated 5 years. On the flip side the increase in MAT by 300 basis points to 18% has come as a shocked for the project developers who are largely covered by the MAT.
Budget provisions
Provided Rs 173552 crore, for infrastructure development which translates into over 46% of the total plan allocation.
The allocation for road transport has been increased by over 13% from Rs 17520 crore to Rs 19894 crore. And that for Railways was provided at Rs 16752 crore.
The allocation for urban development has been increased by more than 75% to Rs 5400 crore in 2010-11. Similarly the allocation for housing and urban poverty alleviation raised from Rs 850 to Rs 1000 crore in 2010-11.
Rural infrastructure under Bharat Nirman has been allotted Rs 48000 crore.
IIFCL's disbursement are expected to touch Rs 9000 crore by end March 2010 and to more than double to Rs 20000 crore by March 2011.
Financing to the tune of Rs 25000 crore would be provided through take out financing in the next 3 years.
Deduction of additional amount of Rs 20000 allowed over and above the existing limit of Rs 1 lakh on tax savings, for investment in long-term infrastructure bonds as notified by the Central Government.
The surcharge on corporate tax has been reduced from 10% to 7.5% while MAT has been hiked from 15% to 18%.
Resale of specified machinery for road construction projects which are not allowed to sales for 5 years from date of import is now allowed on payment of import duty at depreciated value at a rate applicable at the time of import.
Though reduction in surcharge is beneficial, we expect the power sector to be impacted by high in MAT.
Excise duty on cement (produced by non mini cement plants) is increased to Rs 290/ tonne (from Rs 230/ tonne) if retail sale price is not exceeding Rs 190 for 50/ kg bag or Rs 3800/ tonne or 10% of retail sale price (from 8%) for cement if retail sale price exceeding Rs 190 per Rs 50 kg bag or Rs 3800/ tonne. In case of cement sold other than packaged form 10% or Rs 290 per tonne which ever is higher compared to 8% or Rs 230/ tonne.
Excise duty on steel increased from 8% to 10%.
Stocks to watch
IRB Infrastructure, Larsen & Toubro, IVRCL Infrastructure, GMR Infrastructure
Impact & outlook
While the increased budgetary allocation for roads, rural infrastructure and others physical infrastructure is all set to increase the opportunities for construction service providers as well as infrastructure developers. The budget which reiterated the plan of GoI to construct 20 km of road a day is to throw more opportunities for infrastructure developers focused on road sector such as IRB Infrastructure, Sadbhav Engineering, and GMR Infrastructure IVRCL etc. Deduction of additional amount of Rs 20000 allowed over and above the existing limit of Rs 1 lakh on tax savings, for investment in long-term infrastructure bonds as notified by the Central Government is to result in increased funds for infrastructure financing. Statement of Finance Minister during his budget speech stating that about Rs 25000 crore would be financed through takeout financing in the next 3 years would solve the long term financing concerns.
Moreover allowing resale of specified machinery imported (under 0% import duty) for road construction before 5 years on payment of import duty at depreciated value or relocation of such machinery to other eligible projects will avoid idling of machines and duplication of investment in imported machines. With the restriction of 5 years gone the road projects with shorter gestation period could also see usage of high end machines leading to significant cost reduction for construction service providers.
The rise in excise duty for cement and steel though increase the cost of construction the negative impact will largely confine to fixed cost contracts as far as construction service providers. Since major part of the order book of industry players comprised of orders with price escalation clause, star contract or free supplies the impact of rise in cement and steel price will not be much. But as far as PPP project the order book is largely tend to be fixed rates contract the developer usually agree to share the major part of the hike and to that extent the burden will be split between developers as well as contract service providers.
The construction as well as developers though rejoice on increased opportunities on the back of continued thrust on infrastructure development as well as increased budgetary outlay; the increase in MAT by 300 bps to 18% will affect the profitability of infrastructure players such as IRB Infrastructure etc.
Overall the budget is positive for construction service providers and neutral for infrastructure developers.
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