Textiles: Cotton yarn producers to gain

As expected earlier, Union Budget has touched on the points for the relief of Textile Industry. However, it has left a mixed bag of impression in the industry players but also addressed its needy points.

Budget provisions

Some of the provisions in the budget that could have a direct and indirect bearing on the cement sector are as follows:

• The textile industry which was drastically hit by the Global economic slow down has been allotted substantially increased in allocation for Technology up gradation Fund scheme (TUFS) by whooping 188% to Rs 3140 crore.
• The Government has increased allocation of integrated textile parks and announced two mega power parks for handlooms each at Tamil Nadu & West Bengal and one power Loom Park in Rajasthan.
• Minister has Extended 2% Interest subvention on pre shipment credit till from September 30, 2009 to March 30, 2010.
• Eliminated (FBT) Fringe Benefit Tax and (CTT) Commodity Transaction tax
• Customs duty on both cotton waste and wool waste has been reduced from 15% to 10%
• Excise duty on manmade fiber and yarn to be increased from 4% to 8%.
• Excise duty on raw materials of polyester like PTA and DMT to be increased from 4% to 8%.
• Excise duty on polyester chips to be increased from 4% to 8%.
• Excise duty on Acrylonltrile to be increased from 4% to 8%.
• The scheme of optional excise duty of 4% for pure cotton is restored.
• Excise duty for man-made and natural fibers other than pure cotton, beyond the fiber and yarn stage, to be increased from 4% to 8% under the existing optional scheme.
• An optional excise duty exemption to be provided to tops of manmade fiber manufactured from duty paid tow at par with tops manufactured from duty paid staple fiber.
• Introduction of the Goods and Services Tax (GST)  with effect from 1st April, 2010.
• Minimum Alternate Tax (MAT) to be increased to 15% of book profits from10%. The period allowed carrying forward the tax credit under MAT to be extended from seven years to ten years.

Budget impact

The reintroduction of 4 per cent optional excise duty for cotton textile products is welcoming sign as the companies would use cenvat credit on capital goods, dyes and chemicals, packing materials etc. The increase in the TUFS assistance would also help industry for the capital requirements of the capex and also address some part of working capital requirements.

Reduction of customs duty for cotton and wool waste is also invited. The demand on extension of 2 per interest subvention on exports till March 2010 was partially met as the government has not restored it to 4 per cent. On the flip side, instead of industry demand of abolishing excise duty on man made fibers, filaments and their raw materials, it has been increased from 4 to 8 per cent.

This will dent competitiveness of the man made fibers.  Further, increase in the MAT to 15 per cent will have a negative impact on textile firms, as very few companies enjoy profit making, given the tough scenario.

The hike in Minimum Alternate Tax from 10% to 15% is an irritant for the corporate sector.  On the positive side, this hike has come with a benefit of extending the period allowed to carry forward the tax credit under MAT from seven years to ten years.

Also, the hike in MAT will not be earnings dilative but will only be cash flow dilative.  The increase in liability towards MAT will be matched by an incremental deferred tax credit.  Hence, the net profit or EPS of a company will not change due to hike in MAT from 10% to 15%.

But it will mean increase in cash outflow, and if the company is not returning to profits as per Income tax act within ten years, then it may have to forego them. So, from a current year(s) point of view, increase in MAT from 10% to 15% is not earnings dilative but cash flow dilative. On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.

Stock to watch

Indorama Synthetics, JBF Industries, Century Enka, Garden Silks, Raymond, Alok Industries, Aditya Birla Nuvo, RSWM etc.

Outlook

The significant 1885 spike in allocation for Technology up gradation Fund scheme (TUFS) to Rs 3140 crore is the big positive from the Union Budget 2009-10 for the textile sector. Also, the announcements of new textile parks in two different states are welcome.

Before the Budget, Textiles Minister Dayanidhi Maran has indicated that the industry should look for opportunities abroad out side USA and EU. The Industry needs for the short term are addressed by export subvention and restoring excise duty of 4% on cotton.

On the flipside, the excise duty on man made fiber industry and its inputs were hiked from 4% to 8%.  This can slightly impact the MMF sector, in its inter fibre competitiveness with cotton.  Over all, the outlook for textiles is neutral with a negative bias.  Specifically, while cotton and blended yarn producers will benefit from budget provisions but MMF producers will be adversely impacted.