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- A Times of India Report by CRISIL |
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| 1. |
Oil
and Gas |
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i. |
Overall industry profitability
declined in 2004-2005, due to lower marketing margins on retail auto
fuels (Rs. 1,200/kl) and higher subsidy under-recovery (RS 150 billion),
despite strong refining margins ($6.5/bbl). |
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ii. |
In 2005-2006, the demand
for petroleum products is likely to grow by 3%, while supply is expected
to rise by 5%. Although crude oil prices are likely to decline slightly,
steady refining margins are expected due to strong demand. Marketing
margins will depend on the government's stance of changing retail
prices in line with international prices. Subsidy under recovery is
expected to decline as international prices decrease. |
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| 2. |
Petrochemicals
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i. |
Global petrochemical product
prices and margins decreased sharply in 2004, driven mainly by lingering
worries over crude oil supply, lower capacity additions and healthy
demand growth (especially from China). CRIS INFAC forecasts prices
to remain strong over the next 15-18 months. |
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ii. |
Domestic prices will increase
in line with global prices in the medium term. In the wake of high
prices, the usage of recycled plastics and filters will increase,
thus reducing domestic polymer offtake. Post 2006-2007, new capacity
additions in the Middle East, reduction in customs duty and implementation
of the Asean Free Trade Agreement will strain domestic player margins. |
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| 3. |
Non-Ferrous
Metals |
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i. |
The recovery in the global
economy and high demand, especially from China, has led to an increase
in non-ferrous metal prices. Higher realisations and moderate demand
helped players to maintain steady margins. |
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Ii |
Although CRISIL expects
production to increase, the demand-supply balance of nonferrous metals
will remain favourable. |
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iii. |
Continuing global demand
will keep prices firm, resulting in steady margins for nonferrous
metal producers. |
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| 4. |
Tyres |
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i. |
The industry is currently
witnessing a volume growth of 10%, long-term growth is expected at
6-7%. Operating margins remained under pressure in the first half
of 2004-2005, as players were unable to pass on a major portion of
the increase in material costs to customers, because of the stiff
competition and threat of cheaper imports from China, which enjoys
a preferential customs duty of 15.3%, as against the standard rate
of 20.4%. Average rubber prices rose by 23% over 2003-2004, against
a mere 2-3% increase in tyre prices. |
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| 5. |
Steel |
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i. |
International prices surged
on the back of strong Chinese demand and rising input costs. Higher
realisations and increased volumes augmented the profitability of
the industry. In 2005-2006, average domestic prices of steel will
remain stable despite the softening of prices in the international
market. The profit margins of domestic players will come under pressure
in 2005-2006, due to a sharp increase in costs of raw materials like
iron ore and coke. |
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| 6. |
Consumer
Durables |
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i. |
The demand for CTVs and
ACs soared by around 20% during April-December 2004, while that for
refrigerators and washing machines grew by 5-10%. The huge middle
class population with rising income levels and growing aspirations,
coupled with easy availability of consumer finance, will drive consumer
durable demand in the medium term. While CTVs and Acs are expected
to continue their double digit growth, refrigerators and washing machines
may post moderate growth in the medium term. CTV prices are expected
to slip marginally, while prices of white goods will remain stable
or increase marginally due to rising input costs. |
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| 7. |
Cigarettes |
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i. |
The cigarette industry has
been witnessing very low volume growth in the past due to growing
awareness of the health hazards caused by smoking, ban on smoking
in public places, higher incidence of taxes and regulations for advertisement/promotion.
However, stable government taxation policies since 2002-2003 have
pushed up cigarette volume growth. |
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Ii |
In the medium term, consumption
is expected to grow by 3-5% annually, on account of higher disposable
incomes, growing proportion of the younger populace and shift of smokers
from bidis to cigarettes and the policy of certain state governments
banning gutka and other forms of chewing tobacco. |
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| 8. |
Man-Made
Fibres |
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i. |
Profitability of polyster
producers is under pressure as the prices of key raw materials (PTA/MEG)
are ruling high on account of tight supply. Margins are likely to
face pressure in the medium term as fresh PTA and MEG capacities are
expected only by 2005-2006. |
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ii. |
Ployster also attracts high
excise duty, partially oriented yarn (POY) at 24% and polyster staple
fibre (PSF) at 16% while cotton textiles have been given the option
of complete textile exemption. |
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iii. |
Operating rates of polyester
producers are likely to decline in the short to medium term. |
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| 9. |
Paints |
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i. |
Between 2003-2004 and 2007-2008,
the demand for paints is expected to grow at a steady rate of around
7% by volume and 10% by value. While the unexpected spurt in crude
oil prices in the first half prices of 2004-2005 led to an increase
in input costs, the pressure on margins was eased by the flexibility
to pass on the same. CRIS INFAC believes that productivity related
benefits, an increased focus on premium products and flexibility to
pass on any sharp change in input prices will ensure stable operating
margins in 2004-2005. |
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| 10. |
Banking
and Finance |
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i. |
The continued growth in
retail credit and the upturn in industrial activity have led to a
21% growth in advances in the first 9 months of 2004-2005. In 2005-2006,
advances will grow by 19%, driven by the continued demand from these
sectors. |
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ii. |
Interest rates, which had
bottomed out during 2003-2004, have started increasing marginally
during 2004-2005. |
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iii. |
The increased proportion
of low-cost deposits and lower interest rates scenarios has led to
an improvement in the industry's spreads. With treasury profit drying
up, the core banking business is expected to drive the future profitability
for players. |
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| 11. |
Capital
Goods |
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i. |
The growth momentum in the
capital goods sector is expected to continue in 2005-2006, driven
by the pick-up in industrial activity, fresh investments in sectors
like power, metals, oil and gas and a thrust on infrastructure. After
negative growth rates in 2001-2002, the sector grew by over 13% in
2003-2004 and 2004-2005, driving IIP growth. |
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ii. |
An export thrust has also
resulted in bulging order books for companies. The reduction of customs
duty in January 2004 has increased the competition from imports. High
raw material prices constrained margin growth in 2004-2005, but falling
raw material prices and demand growth are expected to stabilise margins
in 2005-2006. |
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| 12. |
Cars
and Utility Vehicles |
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i. |
Domestic passenger cars
sales rose by 22%, while domestic utility vehicles sales increased
by 20% in the first 9 months of 2004-2005, led by a strong growth
in family incomes, price reductions and new model/variant launches.
However, in 2005-2006, the growth in passenger cars will be 10-11%;
growth in utility vehicles will be 4-5%. This is due to a price hike
owing to the rise in input prices and compliance with Euro-III norms. |
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ii. |
Industry operating margins
are expected to improve marginally due to higher realisations owing
to change in product mix in favour of the compact and mid-size segments. |
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