r pre budget analysis report construction - kotak … · kotak securities - private client research...

Service tax

Direct tax

Excise duty

Defenseexpenditure

Fiscal deficits

Subsidies

Government borrowings

Budget deficits

Indirec

t tax

Corporation tax

Income tax

Import duties

R

R

Expenditure

Good

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servi

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x

PRE BUDGET ANALYSIS REPORT CONSTRUCTION

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 19

PRE-BUDGET ANALYSIS February 15 2013

CONSTRUCTION

Current view Order inflows for the construction sector have remained subdued since past two-

three years due to issues related to policy decisions, delays in environmentalclearance and land acquisition. Steep increase in interest rates coupled with lackof fund raising by the companies also deteriorated the balance sheet of compa-nies.

We expect Union Budget 2013-14 to be positive for the infrastructure sector withhigher budgetary allocations in different segments such as roads, irrigation, urbaninfra, ports, airports, power etc which had been impacted by lack of order in-flows and delays in implementation during the current fiscal 2013. We expectinfrastructure companies to benefit positively in terms of higher order inflowsgoing forward. However, the increase in allocation may be muted.

We also expect further progress on National Investment Board which provides asingle window clearance to large sized projects and ease the bottlenecks beingfaced by several projects. In order to ease the funding requirement for the sector,industry expects an efficient and vibrant corporate debt market to meet the longterm funding requirements for the sector. To improve the viability of the infra-structure projects, industry expects MAT to be abolished for the tax holiday pe-riod under Section 80IA benefits; though we don't expect the same to happen.

We thus expect budget to address issues such as order inflows across varioussegments. We would continuously watch out for order inflows, easier funding ofprojects as well as viability of the projects going forward which will result in reviv-ing the entire sector.

Key beneficiaries from higher order inflows in roads, irrigation and urban infra areexpected to be IL&FS transportation network, IRB Infra, IVRCL, NCC, PratibhaIndustries, Unity Infraprojects.

EXPECTED BUDGET IMPACT:Positive

LONG TERM OUTLOOK:Cautious

Further progress onNational InvestmentBoard

Further progress onSingle windowclearance

To be carried out Eases the bottlenecksin implementing largesized projects andaugment growth

Positive for thesector

Key budget expectations

Issues Industry wish-list Our expectation Rationale for our Impact of ourexpectation expectation

Higher budgetaryallocation forBharat Nirman andNHDP, AcceleratedIrrigation BenefitProgramme,JNNURM

Fund allocation Higher allocation inbudget; Increasedprivate participation

Would supportinfrastructure creationwhich has beenimpacted by lack oforder inflows


Develop efficientand vibrantcorporate debtmarket

Long term fundingrequirements

Initial ground workcan commence

Would meet the longterm committedfunding requirementsfor the sector


Develop municipalbond market forfinancing urbaninfrastructure asconventional fiscaltransfers to urbanbodies fromgovernment are nolonger sufficient

Financing urbaninfrastructure

Status quo main-tained

May take a whilebefore it gets imple-mented

Neutral for thesector


PRE-BUDGET ANALYSIS February 15, 2013

Top picks

Company Price EPS (Rs) PE (x) Recommendation(Rs) FY13E FY14E FY13E FY14E as per our last

report

IL&FS TRANSPORTATION NETWORKS 190 27.9 27.5 6.8 6.9 BUY

IRB INFRASTRUCTURE 114 15.5 8.7 7.4 13.1 BUY

UNITY INFRAPROJECTS 37 13.2 14.9 2.8 2.5 BUY

PRATIBHA INDUSTRIES 42 9.5 11.6 4.4 3.6 BUY

Source: Kotak Securities - Private Client Research

Key budget expectations

Issues Industry wish-list Our expectation Rationale for our Impact of ourexpectation expectation

Construction (contd...)

MAT should beabolished for the taxholiday period underSection 80IA toimprove viability ofprojects

MAT during theperiod of availmentof Section 80IA

Status quomaintained

Tax collection forgovernment may getimpacted


Players havingmultiple SPVs shouldbe allowed to set offthe losses incurred inone SPV againstprofits earned inother SPVs

Tax offsets to lossmaking SPVs

Status quomaintained

Tax collection forgovernment may getimpacted


Full pass through ofDDT for infrastruc-ture SPVs

Dividend distributiontax for SPVs

Likely to beallowed

DDT exemption is likelyto benefit many compa-nies since most of themhave multi layer holdingstructure

Positive forplayers carryingout projects inseparate SPVstructures

Source: Kotak Securities - Private Client Research, Industry


PRE-BUDGET ANALYSIS February 15, 2013

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