The government could re-introduce investment allowance for fresh capital acquisition and extend Sec 80 IA benefits beyond FY10. Spending on infrastructure and defence are expected to see a quantum jump.

Expectations

* The government may re-introduce Investment Allowance, under Sec 32A of the Income Tax Act, on the acquisition of new capital equipment such as plant & machinery, new ships and aircraft.

* Increase in infrastructure spending (especially in electricity, rural roads, airports, sea ports and irrigation projects) with PPP and/or viabilitygap funding being the preferred investment mode.

* Defence spending and spending on intelligence-gathering equipment to see a quantum jump.

* The government may also take a call on Sec 80 IA, which offers tax breaks for investment in infrastructure. This is applicable for projects that are underway till Mar ’10, and is likely to be extended. Impact on the sector

* Re-introduction of investment allowance would benefit the sector as acquisition of new capital equipment would become cheaper. This would spur demand for capital equipment. Companies with large capital expenditure programmes would benefit from lower taxation.

This would lower the payback period for projects.

* Increased infrastructure spending would lead to robust orders to the construction sector as a whole. Power equipment manufacturers would benefit from the sharper focus on electricity generation.

* Increase in defence and intelligence-gathering spending to benefit defence-equipment suppliers, security and electronic surveillance companies.

* Section 80 IA being extended would boost infrastructure projects.

Companies affected

* Machinery suppliers like L&T, BHEL, Crompton, Thermax, Voltas, Cummins, Siemens, and ABB would benefit from the increase in demand for capital equipment.

Sharper focus on electricity generation and transmission would benefit those like BHEL, L&T, and Crompton. Airport modernization and construction would lead to higher demand for HVAC services, which would benefit Voltas and Blue Star. The greatest benefit from higher infrastructure spending would accrue to construction companies especially L&T.

* Companies like Bharat Electronics, BEML, Dynamatic Technologies, Astra Microwave, and Zicom, would benefit from the increase in defence and intelligence-gathering-related spending.

* Extension of Sec 80 IA benefits would be helpful to all infrastructure companies like BHEL, L&T, NTPC, GMR, GVK, and Power Grid.

(The report has been prepared by Vinod Chari, Nishit Master, Rahul Agarwal and Madhurendra M of Anand Rathi Securities)