Stimulus III
Benefits likely to be passed through
The FM announced further cut in rates in excise duty and service tax to provide further stimulus to the economy. Central excise rates were reduced from 10% to 8% while excise duty on bulk cement has been reduced to 8% or Rs230 per ton, whichever is higher. Excise duty on goods attracting rates of 8% and 4% remain unchanged. Service tax has been reduced by 2% to 10%
Impact on economy
Back of the envelope calculations suggest that a 2% cut in excise and service tax is likely hit the revenue estimates by 4.8%. The incremental fiscal deficit could be to the
tune of Rs300bn (or 0.5%). Thus, the revised fiscal deficit for FY10 will be 6.0%. Caveat: We have presumed that the budget numbers were based on assumption of continuance of the 4% excise duty cut which was announced earlier. If not the impact could be 13% on revenues and 1.2% on the fiscal deficit. The fiscal deficit could be revised to 6.7%.
Although, many of the industries had responded to earlier excise duty cut by cutting prices, the consumption failed to pick up as reflected in January sales numbers for commercial vehicles and passenger vehicles. The cement dispatches have been aberration to the same. We believe that today's 2% cut in excise duty is unlikely to boost
the consumption soon as people anticipate more price cuts with falling commodity prices and more importantly due to lack of availability of the retail credit in many consumption segments.
Sectorwise impact
We believe that these further rate cuts will not have any incremental effect on the profitability of companies as these benefits are likely to be passed on the consumers. However companies could gain on account of higher demand fuelled by lower prices.
Cement
Excise duty on Bulk cement reduced to 8% (earlier 10%) or Rs230/ton (earlier Rs290/ton) whichever is higher. This measure is unlikely to have significant impact as bulk cement sales form only 6-8% of total cement volumes. Excise duty on bagged cement unchanged at 8%.
Metals
We believe that 2% cut in excise duty will not have any significant impact on Metals sector as such. Current ex-factory steel prices are at Rs25,000/t. So the price to consumer comes to Rs27,500/t (inclusive of 10% excise duty). Post reduction of excise duty, the price to consumer will be Rs27,000/t (inclusive of 8% excise duty). So net reduction of Rs500/t in the price to consumer, which we believe will be passed on entirely to the end-user. However, we believe that this reduction of Rs500/t may not have a significant impact in boosting the steel demand and as such this excise duty cut is expected to be neutral for the entire sector.
Auto
Excise duty on CVs reduced to 8% (earlier 10%) while on small cars excise duty remained at 8%. We do not see any major impact of this step on auto volume growth. We believe that availability of consumer finance and growth in consumer spending are the critical factors for the revival of auto industry.
FMCG
Most of the companies in the FMCG sector operate in the tax free zone. Hence the duty reduction would hardly provide any benefit for the companies in the business.
Telecom
Service tax has been reduced from 12% earlier to 10%. The change would have little direct implication to the operators as the service tax is entirely pass through. The 2%
saving from service tax, even if re-spent on telecom services would lead to minimal impact to the sector.
Paints
Paint industry is expected to benefit for the reduction in duty from 10% to 8%. However, most of the companies are likely to pass on the benefit on customers.
Paper
Excise duty on paper is likely to remain unchanged which is 4% at present. Hence there is not likely to be any impact on companies.
Fertiliser and Chemicals
Excise duty on chemicals is reduced to 8% (earlier 10%) in line with reduction in general excise duty by 2%. However this measure is unlikely to have any significant impact on companies since we expect benefit is likely to be passed on to end consumers. Few companies which can be positively impacted (if they do not reduce the
prices) are like Tata chemicals, Deepak Fertiliser, GSFC and GNFC.
Global Cues
After a 15% fall in the past few days the Dow recovered a bit yesterday on the back of Fed Chairman's assurance that US govt is not thinking of nationalization of banks. On this news the banks stocks witnessed a sharp recovery & provided the much needed impetus to the mkts. However the concerns on AIG's multi billion losses & the bank's stress test scheduled for Wednesday remain & are likely to play heavy on mkts.
Asian mkts are trading in green taking cues from the western counterparts. Most of the Asian mkts are trading up between 1-1.5% while SGX is trading up by 38 points.
Our Markets:
Yesterday the govt came out with a surprise third stimulus package by providing relief in excise duty & service tax. As mentioned in this communication elsewhere we believe most of the benefits from this package will be passed on to the consumers. However we believe this kind of packages are temporary sentiment boosters. No major financial impact can be expected from this in near term as was the case with previous excise cut in Jan 09. Nevertheless our mkts may react some more to this package today after a bit of reaction yesterday. We are also on the penultimate day of expiry of Feb F&O series. Therefore mkts will take cue from positions built in the system.
For today we may expect to start the day on a firm note providing a small bounce back to our mkts. However we would like to remind important news that S&P has downgraded India's rating on the back of high fiscal deficit. This news will be negative for the mkts in the longer term & will have larger fundamental negative impact on our mkts as international investors become suspicious.
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