Reliance Industries (BOM:532709)

The Union Budget 2009-10 had far and few Budgetary announcements for the Power Sector. A welcome measure, however, was the 160% and 27% increase in outlay for the Accelerated Power Development Reforms Programme (APDRP) and Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), respectively. This announcement is in line with our pre-Budget expectations. Another positive was the increase in the total outlay of financing by India Infrastructure Finance Company Limited (IIFCL) and commercial banks to Rs1,00,000cr for PPPs. There was no announcement regards extension of provisions of Section 80IA for another 10 years and also increasing the scope of the Section to include power equipment suppliers and EPC contractors. Instead, provisions of Section 80IA have been extended for another year till FY2011. The government also did not lower import duty on power equipment from 5% to NIL, but we believe that the projects that are up-coming are already the Mega power projects above 1000MW, which do not have any import duty on the power equipment. The move to increase the Minimum Alternative Tax (MAT) to 15% of Book Profits from the present rate of 10% is not expected to impact profitability of the power generating companies, since tax expense can be passed on.

There is some confusion regards which blocks will get the proposed benefit, whether the benefit is from NELP-VIII onwards or from the previous NELP blocks also. However, we believe that the benefit will be given to all blocks issued under the NELP rounds. The development was largely expected and the same was factored into our estimates for RIL. We expect all E&P companies to benefit on account of this move.

The move will help reduce the duty differential between branded and unbranded petrol and diesel and thus boost consumption of branded fuels.

Negative for RIL, Cairn and Essar Oil.

Negative for OMCs and Upstream companies, as the recent statement by the Oil Secretary hinted at oil bonds of Rs30,000cr.

Positive for user Industries.

The Budget is Neutral for the Oil and Gas Sector and much in line with our expectations. Markets were pinning lots of hopes on reforms in the Petroleum Product Pricing. Similarly, expectations were also high regards the visibility on the subsidy sharing burden (via budgetary allocation to the Sector). However, in line with our expectations, there were not manyannouncements made on these fronts and the government has planned to form yet another panel to review the Petroleum Pricing Policy. The oil bonds to OMCs for sharing burden of their under-recoveries are budgeted at Rs10,306cr as against market expectations of Rs30,000cr.

Nonetheless, the much anticipated modification in the definition of the 'Mineral Oil' as per Section 80-IB (9) of the Income Tax Act was made in the Budget to include Natural Gas under its purview. This provides 7-year tax holiday on the natural gas produced from the NELP blocks, as the definition is amended with retrospective effect. MAT has been increased from 10% to 15%, which will have a negative impact on RIL as it would impact its EPS.

Similarly,Excise Duty on DMT, PTA, man-made fibres and polyester chips was increased, which is slightly negative for RIL. Ad-valorem component of Excise Duty on branded petrol and diesel was replaced with specific rates. To develop the national gas grid, the government has planned to come out with a blueprint. Similarly, the business of laying and operating cross-country natural gas or crude or petroleum oil pipeline network, for distribution on common carrier principle, to be incentivised by providing investment linked tax exemptions rather than profit-linked exemptions. Under this method, all capital expenditure other than expenditure on land, goodwill and financial instruments will be fully allowable as deduction. The move is a positive for gas transmission (GAIL and GSPL) and pipeline manufacturing companies.

There is some confusion regards which blocks will get the proposed benefit, whether the benefit is from NELP-VIII onwards or from the previous NELP blocks also. However, we believe that the benefit will be given to all blocks issued under the NELP rounds. The development was largely expected and the same was factored into our estimates for RIL. We expect all E&P companies to benefit on account of this move.

The move will help reduce the duty differential between branded and unbranded petrol and diesel and thus boost consumption of branded fuels.

Negative for RIL, Cairn and Essar Oil.