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Sector insights
February 2011
kpmg.com/in
As the Indian Finance Minister Pranab Mukherjee unveiled the Union Budget 2011 on
February 28, 2011, our Nation was hoping for a continued focus on the reform agenda and
sustenance of growth while balancing out challenges such as the high Current Account
Deficit and high inflation levels.
In line with the trend of fiscal consolidation and inclusive growth, the Budget provisions
allowed for moderate growth in government expenditure, left the central excise duty
untouched, permitted foreign money in Indian mutual funds, increased the long term
infrastructure bonds limit for Financial Institution Investors , and reduced corporate surcharge
in an attempt to move towards the Direct Tax Code framework. Further, although no specific
provisions were laid down to tackle inflation, there was an emphasis on eliminating flaws in
agricultural marketing and distribution systems and supply linkages, which have played their
part in contributing to increasing inflation .
Regards,
Vikram
Head – Markets and Private Equity Advisory
KPMG in India
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
IT-ITeS
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
IT-ITeS
1. Budget 2011
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
IT-ITeS
2. Budget 2011
3. KPMG Analysis
4 . Money Control.com
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
IT-ITeS
Tata
2 BitGravity The US Acquisition India NA NA
Communications
Micro
Block Trade
3 Technologies India HT Media Ltd India 4.4 100%
(Investment)
India Ltd
Computaris R Systems
4 The UK Acquisition India 14.27 NA
International Ltd International Ltd
IndoUS Venture
Jasper Infotech Acquisition Partners (IUVP) ;
5 India India 12 NA
Pvt Ltd (Funding) Nexus Venture
Partners
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
PHARMACEUTICALS
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Pharmaceuticals
Positive Implications
Gaurav Khungar
Head, Weighted deduction on payments for research enhanced: The weighted
deduction on payments made to National Laboratories, Universities and Indian
Pharmaceuticals
Institute of Technology for approved scientific research programme will be
gkhungar@kpmg.com enhanced from 175 percent to 200 percent in order encourage innovation in the
country. This is expected to boost the research and development scenario in the
pharma sector to some extent.
Other positives: Other few positives include the reduction in surcharge from 7.5
percent to 5 percent for domestic companies and from 2.5 percent to 2 percent
for foreign companies.
One of the proposals is to reduce the import duties on specified raw material for
the manufacture of syringes and needles to 5 percent basic and 4 percent
countervailing duty (CVD). Basic customs duty on import of endovascular stents
is exempted. The customs duty on four specified life saving drugs and their bulk
drugs is reduced to 5 percent with nil CVD (by way of excise duty exemption).
Moreover, the importance given to the cold chains and its recognition as an
infrastructure sub-sector could indirectly benefit the pharma industry. Cold chain
management is important for medicines as they require temperature controlled
equipment and facilities throughout the supply chain.
1. Crisil Research
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Pharmaceuticals
Negative Implications
Minimum Alternate Tax (MAT) of 18.5 percent on book profits: The increase
of MAT from 18 percent to 18.5 percent is expected to hit the profitability of the
pharma companies marginally.
MAT on developers of Special Economic Zones (SEZs) as well as units operating
in SEZs is expected to adversely affect the pharma companies that have made
huge investments / operate in the SEZs. Further, Dividend Distribution Tax is now
payable by SEZ developers for dividends declared, distributed or paid on or after
June1,2011. Many pharma companies or their promoters operate or have their
own SEZs including Cipla, Wockhardt, Zydus Cadila, Serum Institute and JB
Chemicals, etc. to avail of the tax-exemption policy of the government.3 The tax-
exemption policy of the Government for SEZs helped companies to invest for the
long-term in manufacturing and in research. This step is expected to result in a
higher tax for several large export-oriented companies in the country which
operate out of SEZs.
2. Economic Times_Pharmaceuticals - Budget 2011: Most drug prices likely to go up_March 3, 2011
3. Business Line_Minimum Alternate Tax On Sez Will Stunt Growth, Say Drug Firms_March 2, 2011
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Pharmaceuticals
Acquisitions
WCI Consulting
1 UK Acquisition TAKE Solutions India NA
Group
Aizant Drug
Zephyr Peacock India
2 Research Solutions India PE India 5
Fund
Pvt. Ltd.
Dental Corporation
5 Australia Majority stake acquisition Fortis Global India NA
Holdings
Collaborations
Drug discovery
Dr. Reddy’s
1 Argenta Discovery UK collaboration in the area of India NA
Laboratories Ltd.
pain and inflammation
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TRANSPORTATION &
LOGISTICS
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Transportation & Logistics
In 2011, the cold chain market is expected to be worth INR 101 Billion, growing
at ~ 12 percent CAGR to reach INR 157 Billion by 2015. Though the growth is
rapid,
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Transportation & Logistics
76 12
80 9 9 11%
8 133
109 120
89 98
40
68 75 80
driven by multiple factors such as changing lifestyles and food habits, expanding consumer
markets, the advent of the retail sector, the sector faces critical challenges such as
fragmentation, quality supply deficit, poor farm and last mile connectivity, erratic power supply
and high price sensitivity of users.
There are multiple business models viz. standalone (transportation-only/storage only) or
integrated (transportation-cum-storage), chilled or frozen focused, palletized or unpalletized,
segment-focused or segment-agnostic. KPMG believes that players with a sharp focus on 1-2
segments, both standalone and integrated, shall enjoy higher client stickiness, claim price for
quality and develop a sharper service focus. Supply side differentiation shall be pivoted around
innovative management of seasonality, operational and cost leadership, control over quality
assets, ability to mix cargo types including frozen, chilled and dry, effective utilization of assets,
technology and brand.
Not surprisingly, investor interest, both strategic and financial, in the organized segment of this
sector is high owing to the strong fundamentals of this market and severe capacity deficit
buoyed further by policy sops. These investments are going into the build up of a modern
network of storage assets and distribution capabilities across key nodes in India.
Conclusion
Undeniably, the budget did not offer path breaking announcements for the transportation and
logistics industry. Even so, the industry, especially on the infrastructure creation side, has long
realized that announcements without strong execution tend to mean little. But while there is
disappointment, announcements around self-assessment of customs duty and benefits around
use of coastal shipping are indicators of the fact that the industry has started to make itself
heard.
Note: Deal value converted into INR at the rate 1 USD = INR 45; NA – Not available;
Source: Key deals – Venture Intelligence
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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REAL ESTATE AND
CONSTRUCTION
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Real Estate and Construction
The Finance Minister attempted to address the need for incentivising affordable
housing category by declaring certain policy incentives like liberalization of
interest subvention scheme, raising priority sector lending limits and tax incentive
like proposing investment linked incentives in the form of accelerated
depreciation sought to benefit the home seekers as well as the entire affordable
housing ecosystem.
The inherent objective of Finance Minister to create more supply of affordable
housing stock through investment linked deduction and generating demand
through liberalization of interest subvention scheme is debatable. Firstly, the
investment linked deduction is expected to help developers improve their cash
flows in initial years rather than any actual tax savings over the life of the project.
What really needs to be seen whether the developers would pass on some
benefit to the home seekers to make the purchase affordable.
Secondly, considerable rise in capital values in last one year is unlikely to help
home seekers especially in metros. Though it may prove to be beneficial to home
seekers in Tier II and III cities. Finally, the rise in interest rates by more than 2
percent1 in the last one year has disturbed the affordability economics.
1. Union Budget 2011-12
Continuing challenges
Financing projects at reasonable rates of interest continues to pose a
challenge for developers, as repayment schedules near. Additionally, factors
like limited availability of land, leading to rise in prices and absence of
concrete steps to create additional supply (increase in FSI, creation of new
areas with infrastructure etc.) remains one of the biggest challenges for the
sector.
Conclusion
The budget has failed to address certain key expectations of real estate
industry players like relaxation in FDI norms, access to ECBs (External
Commercial Borrowings), extension of 80 IA / 80-IB (10) benefits, assigning
infrastructure status enabling bank lending at reasonable rates, reduction in
stamp duty to reduce circulation of black money and upward revision in home
loan interest deductibility of INR 0.15 million.
Although marginally positive, the question that continues to remain: Are the
budget measures announced enough to unlock the true potential of this
sector?
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
EDUCATION
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Education
The Union Budget 2011-12 presented by Mr. Pranab Mukherjee has allocated a “Greater expenditure on
sum of INR 52,057 crore for the education sector in FY12, an increase of 24
education is a welcome
percent compared to the current year. The focus of the budget this year has
been on skill development, national knowledge network, research and measure. It will help to
innovation. facilitate RTE
The existing operational norms of Sarva Shiksha Abhiyan (SSA) have been implementation, skill
revised to facilitate the implementation of Right to Education Act. The Budget development and boost
increased the allocation for SSA by 40 percent, pegging it at INR 21000 crore.
Narayanan research and innovation.
Besides the ‘Vocationalisation of Secondary Education’, a centrally sponsored
Ramaswamy But more concrete
scheme has been announced to improve the employability of youth.
National Head,
policy incentives were
Education A pre-matric scholarship scheme has been proposed for Scheduled Castes and
Scheduled Tribes students studying in classes IXth and Xth. This is expected to expected to accelerate
narayananr@kpmg.com
benefit about 40 lakh students. private investments, to
This year, the thrust of funding has been on existing institutions. Special grants strengthen vocational
of about INR 700 crore have been announced to recognize excellence in education and to push
universities and academic institutions. Various institutes like IIT Kharagpur, IIM
capacity building and
Kolkata, Kerala Veterinary and Animal Sciences University, The Centre for
Development Economics, Ratan Tata Library, Delhi School of Economics, Delhi, research in higher
and Madras School of Economics have received these grants with specific education”
objectives.
Narayanan
The Budget also mentions that the National Knowledge Network (NKN),
approved last year in March, would link 1,500 institutes of higher learning and Ramaswamy
research through an optical fibre backbone by 2012. About 190 institutes are
proposed to be connected to the NKN in this current year. National Head,
Education
To promote research and innovation, the weighted deduction on payments
made to National Laboratories, universities and Institutes of technology, for KPMG in India
scientific research has been enhanced from 175 percent to 200 percent.
We believe that there have been several encouraging announcements for the
sector in the budget. However our main concern is lack of specific allocation of
funds for teacher training & development and lack of push for capacity creation
in Higher Education, given that quality in education needs to be improved and
that country would need ~1000 more universities in next 10 years2. No
concrete incentives have been announced to attract private investments in
vocational education or in academic research. Also concerns over education
loan have not received any consideration in the budget.
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Education
• Plan allocation increase by 24 percent from INR 31,036 crore in 2010-11 to “The grant will help us
INR 52,057 crore in 2011-12
upgrade various
• Sarva Shiksha Abhiyan have been allocated INR 21,000 crore for 2011-12 , 40 laboratories. We need
percent higher than INR15,000 crore allocated in the Budget for 2010-11
modern technology in
• A revised Centrally sponsored Scheme, “Vocationalisation of Secondary nano sciences. It will
Education”, will be implemented from 2011-12 to improve the employability
of youth also help us in different
segments of high-end
• Approved in March 2010, the National Knowledge Network (NKN) will link
1500 Institutes of Higher Learning and Research through an optical fibre researches,“ 4
backbone. During the current year, 190 Institutes will be connected to NKN.
Since the core will be ready by March 2011, the connectivity to all 1500 -A.K. Majumdar
institutions will be provided by March 2012.
Deputy Director, IIT-
• Special grants announced include: Kharagpur
• Additional INR 5 billion proposed to be provided for National Skill Laboratory, IIM Kolkatta
Development Fund during the next year.
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FINANCIAL SERVICES
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Financial Services
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Financial Services
Tata Group’s innovative Foods Ltd. India Equity Partners (US) 16.5 N/A
Citigroup Venture Capital International (US) JBF Industries Ltd. 9.9 N/A
Citigroup Fund Services (Canada) Larsen & Tubero InfoTech Ltd. 40 N/A
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AUTOMOTIVE
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Automotive
1 The definition of Hybrid Motor Vehicle is amended to exclude micro-hybrid motor vehicle with start and stop technology
using battery powered electric motor only while in static condition
2 Hydrogen Vehicle has now been defined as a motor vehicle that converts the chemical energy of hydrogen to
mechanical energy by reacting hydrogen with oxygen in a fuel cell to run electric motor to power the vehicle drive trains
3 Union Budget 2011
4 KPMG Analysis
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Automotive
5 CKD unit is now defined as a unit having all the necessary components, parts or sub-assemblies for assembling a complete
vehicle but does include,-
- a kit containing a pre-assembled engine or gearbox or transmission mechanism; or
- a chassis or body assembly of vehicle on which any of the component or sub-assembly viz engine or gearbox or transmission
mechanism is installed.
6 CKD unit for motor cycles etc is defined as a unit having all the necessary components, parts or sub-assemblies for
assembling a complete vehicle but does include,-
- a unit containing a pre-assembled engine or gearbox or transmission mechanism; or
- a body assembly of vehicle on which any of the component or sub-assembly viz engine or gearbox or transmission
mechanism is installed
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ENERGY AND
NATURAL
RESOURCES
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Energy and Natural Resources
The Union Budget 2011-12 announcements are likely to have neutral impact on
energy sector. Though the Government did not announce any significant direct
measures for energy sector that will have an impact in short term but it did send out
a positive signal with regards to continued impetus being provided to this sector.
The Budget has the following key announcements relating to the energy sector :
1. Proposed system of direct transfer of Kerosene and LPG subsidy: The
government has announced setting up a committee to review the existing
mechanism of LPG and kerosene subsidy and replacing it with cash subsidy to
below poverty households. This is a step towards market reform and the prices
Arvind Mahajan
of these two goods will be market determined and help in reducing the
Head government subsidy burden. This system will also help in reducing subsidized
Energy and Natural kerosene usage in commercial establishments and for diesel adulteration. For
Resources companies engaged in city gas distribution, it would mean better pricing ability
arvindmahajan@kpmg.com for household segment.
2. Increase in FII investment limit in infrastructure corporate bonds: The FII
ceiling on investment in corporate bonds with residual maturity of over five
years issued by companies in the infrastructure sector has been raised by an
additional USD 20billion, taking the ceiling to USD 25billion (at present it is USD
5billion). The ceiling for corporate bonds maturing within five years is
unchanged at USD15billionn. This will help Infrastructure developers as they
can get more funds from FIIs.
3. Infrastructure status to fertilizer Industry: Budget 2011 proposes to include
capital investment in fertilizer production as an infrastructure sub-sector. That
should help fertilizer producers to access cheap financing and be eligible for tax
holiday. This is likely to put pressure on domestic gas demand.
4. MAT levied on SEZ units: The government has proposed to levy Minimum
Alternate Tax (MAT) of 18.5 percent on the book profits of Special Economic
Zone (SEZ) developers and units. Several energy and oil and gas players like
Reliance Jamnagar refinery, Adani Enterprises, GMR Infra, GVK Power, etc.
have their units in SEZ and this proposal will likely to have a negative impact on
their profitability.
5. Excise duty exemption mega/ultra-mega power projects: Domestic power
equipment manufacturers for Mega/Ultra Mega power projects have been
exempted from excise duty to bring them on an even playing field with foreign
suppliers. This will help Indian power equipment manufacturers like BHEL,
L&T, BGR Energy, etc. as they will be able to compete with foreign
manufacturers.
6. Enhanced allocation for the flagship Bharat Nirman Yojna in FY12 (to INR
580 billion, a 20 percent increase yoy): This will help EPC vendors expand
and consequently facilitate infrastructural growth.
7. Greater allocation for R-APDRP (to INR 60billion) and RGGVY (to INR
20billion): This announcement will provide further impetus to the power
reforms in the energy sector and will help transmission and distribution
vendors.
However, the government has not addressed some of the long pending demands of
industry like reduction of indirect taxes on crude oil and petroleum products, service
tax exemption for power projects and long term concessions to private distribution
companies, etc.
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Energy and Natural Resources
© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
This document has been compiled by the Research, Analytics, and
Knowledge (RAK) team at KPMG in India.
kpmg.com/in
The information contained herein is of a general nature and is not intended to address the circumstances
of any particular individual or entity. Although we endeavor to provide accurate and timely information,
there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such information without appropriate
professional advice after a thorough examination of the particular situation.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
reserved.
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of
KPMG International.