ICRA Budget Comment on Cement, Iron & Steel, Oil & Gas and Port Sector

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Cement

Mr. Sabyasachi Majumdar
Sr.VP, Co-head, Corporate Sector Ratings
ICRA Ltd

Government measures to promote investment in ports, roads, rail, irrigation and other infrastructure projects, besides revival of stalled road projects are likely to provide a fillip to cement demand. Cement companies are also likely to benefit from increase in long term funding availability for infrastructure projects which is likely to facilitate more investment in these sectors. The increase in clean energy cess on coal by Rs. 200/MT is likely to impact cost of production by about Rs. 1.50-2.0 per bag (depending upon plant efficiency levels). It is likely to impact the operating margins of cement companies (albeit marginally by around 0.5-1%) given that they may not be fully able to pass on the costs given the competitive pressures.

IRON & STEEL

ICRA Post Budget comments By- Jayanta Roy
Sr.VP, Co-head, Corporate Sector Ratings
ICRA Ltd

The doubling of clean environment cess on coal will adversely affect the margins of sponge iron players by around 1.8-2%, while the impact on steel producers will be lower between 0.5% and 0.8%, depending on the choice of technology. On the other hand, removal of export duty on iron ore with less than 58% of Fe content will help miners in states including Goa. Also, large investments planned in areas like roads, railways and affordable housing should provide a support to steel demand. This, coupled with lower imports because of minimum import prices of steel should help correct an adverse demand-supply scenario in the country.

NON FERROUS METALS

The focus on rural electrification is a positive for demand of aluminium, copper and zinc. Primary aluminium players will also benefit from a 2.5% hike in import duty from 5% to 7.5%, if they can pass it on to their customers. However, a large part of this potential gain will be neutralised by the doubling of clean environment cess on coal. Power cost typically accounts for over one third of the production cost of aluminium, and higher coal costs because of higher cess therefore can impact the operating margin of a player by 1.5-2% at current price levels.

Port

By- K Ravichandran
Sr.VP, Co-head, Corporate Sector Ratings
ICRA Ltd

The budget has proposals for opening new Greenfield ports on the western and eastern coasts of India. Emphasis has also been placed on the Sager mala projects and Inland waterways development. However, allocation of Rs 800 Cr seems insufficient for such projects. The budget also allows Inland Waterways Authority of India (IWAI) to raise funds from the market through infrastructure bonds, which will be a positive for the sector.

Oil & Gas

By- K Ravichandran
Sr.VP, Co-head, Corporate Sector Ratings
ICRA Ltd

Subsidy provided for the oil sector is Rs 26947 Cr for 2016-17, which ICRA believes will be sufficient to meet the subsidy for fiscal year 2016-17. Because of significant fall in gross under recoveries for the sector, there may not be any need to carry forward the last quarter subsidy if the oil prices stay below @40/bbl. This will be positive for the OMCs who will be getting the subsidy in a timely manner thereby, saving on the interest cost on short term borrowings. The budget also lays emphasis on additional LPG connections to BPL families through a separate allocation, which will also be positive for the OMCs as it will a give a boost to the LPG sales volumes and margins. The budget gives a relief to the upstream companies in terms of change in levy of cess from specific rate (Rs 4500/MT or ~$9/bbl now) to an advalorem rate of 20%, who stand to gain ~$3/bbl at the current oil prices. However, in the event of sharp rise in oil prices beyond $45/bbl, it will negatively impact the industry’s profits unless the rates are brought down. The budget also has favourable proposals for the upstream sector in terms of marketing freedom on gas for new discoveries in deepwater and complex fields and pricing benchmarked against alternate fuels. However, its non applicability for existing discoveries could be a dampener for the industry.