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Budget Impact - Power and Capital goods

Jul 10, 2014

The Engineering and Capital goods space was easily one of the topmost beneficiaries of the Union Budget 2014. Given the government's thrust on providing power to all and also on improving infrastructure, there were various measures outlined for bringing about an improvement in these areas. Let us take a look at some of the major announcements made.

Engineering and Capital Goods -

  • The Finance Minister has estimated the capital expenditure of public sector units (PSUs), a major driver for the sector, to be Rs 2.5 trillion for the current financial year.

  • With the increase in the FDI cap from 26% to 49%, and a Rs 2.29 trillion budgetary allocation to the defense sector, the companies catering to this sector will be a direct beneficiary of the investments and expenditure therein.

  • Rs 7,060 crs has been allocated for developing 100 'smart cities', a fillip for players providing project engineering services to build such urban infrastructure.

  • Companies that provide various water treatment and sewerage treatment project solutions will benefit from the Rs 36 bn allocation made towards the National Rural Drinking Water program, as also the urban renewal programs which have been highlighted as another focus area.

  • Investments in power transmission and distribution (T&D) with a view to reduce technical and commercial losses have been envisaged.

  • Rs 143.89 bn has been allocated for development of rural roads. Further, Rs 370 bn has been allocated for national highway development, thus providing a boost to companies that build road projects.

  • Metro projects in cities with at least 2 m people have been proposed.

  • The development of another 15,000 km of gas transmission pipelines to complete the national grid has been proposed.

  • 16 new port projects have been envisaged this year. Further, Rs 116.35 bn has been allocated for development of existing ports and harbours.

  • Solving the impasse in the coal sector has been highlighted as a key priority. The coal sector coming back to normal so that coal availability to power plants can be improved would indeed be a key development that would provide a direct fillip to orders for power generation equipment.

Power Sector -
  • All India thermal plant load factor (PLF) or utilisation rates declined to about 65% in FY14. This was lower by about 5% YoY as compared to the previous year. Given that fuel supply has been a key factor behind the underperformance of the power sector over the past few years, the FM emphasized on ending the impasse on coal supplies to power plants that have been commissioned or will be commissioned by end of the current fiscal. If all goes as planned this would be a positive step power generation companies in particular especially considering that the incentives are now linked to PLFs as compared to plant availability factor (PAF) - as directed by the regulator CERC.

  • Further, as compared to extending the tax holidays (80 IA exemptions) every year, the FM extended the same till FY17; this would be a positive for the sector in terms of removing all the uncertainty (related to investment plans of companies) in this regard. Further, the FM also allocated Rs 1 bn for preparatory work of clean thermal energy scheme and Rs 5 bn for Ultra Modern Solar Power Projects in Rajasthan, Gujarat, Tamil Nadu and Ladakh.

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