Expectations from the Budget in regard to metals are the implementation of the National Mineral Policy (NMP) as well as clarity regarding the divestment roadmap. While the steel sector could be hit by a reversal of excise duty, the government may consider import duty shields to protect the sector from cheap imports. Clarity on PSU divestment could have a positive impact on Nalco, Sterlite and Hindustan Zinc.

Expectations

We should see some headway by the government on implementing the National Mineral Policy recommendations. These recommendations aim to speed up exploration and the operations of mines. They seek to de-regulate aerial reconnaissance and reduce the time frame for environmental clearances. We also expect more clarity from the government regarding its divestment plans.

Given the recent run-up in prices of base metals, we do not, however, expect any further duty cuts or imposition of safeguard duties. Similarly, given the low domestic consumption, we do not expect any curb on exports.

Also, as concerns regarding inflation have eased, we expect a reversal of excise duty on steel – from 8 per cent to 12 per cent. The ministry may also hike import duties on steel – from 5 per cent to 15 per cent – to guard the sector against cheap imports.

Impact on the sector

Implementation of the NMP recommendations should give a fillip to the mining sector. It would speed up exploration as well as the lag between successful prospecting and the start of mining.

Partial reversal of excise duty on steel, to 12 per cent, would be negative for the sector as the companies may not be able to pass through the entire hike in duty to the end-customer. This would strike at margins.

We also expect a hike in import duty on steel – from 5 per cent to 15 per cent – to safeguard domestic producers from cheap imports. This would benefit primary steel producers.

Clarity regarding the government’s divestment plans would also speed up the capacity expansion plans of domestic players for it would enable quicker access to capital.

Companies affected

Implementation of the NMP recommendations should benefit all metals players due to higher private sector participation in mining. Reversal of excise duty would hit all companies in the steel segment, for they may be unable to pass on the entire costs to end-customers.

An import duty hike should benefit the primary steel producers (SAIL, Tata Steel and JSW Steel) as they would be cushioned to some extent from a further fall in prices of steel.

The government has an 87.5 per cent stake in Nalco. With the latter’s ambitious line-up of expansion projects, it could be a candidate for some equity dilution.

A divestment roadmap could also throw some light on divestment of the government’s minority stake in Balco and Hindustan Zinc. Such a divestment would be positive for Hindustan Zinc and Sterlite.

(The report has been prepared by Amit Kasat and Rahul Menon of Anand Rathi Securities).