Reliance Budget Exp 08 09

Pre Budget Expectationsfor 2008-09

Reliance Money House, Plot No - 250 - A - 1, Baburao Pendharkar Marg,Off Annie Besant Road, Behind Doordarshan Tower, Worli, Mumbai - 400025

GDP Growth %

The Union Budget for FY2008-09 will be the fifth and final budget of the UPA

government. Although technically the policy content of the Budget has lost its

significance in recent times, it still remains an important document to assess and

evaluate the direction and progress achieved within the economy. This Budget being

the last one to be presented by Mr Chidambaram, before the country’s next election

due in May 2009 makes it special in the sense that one could see political agenda

getting dominated wherein one is likely to see the Finance Minister strike a fine

balance between political objectives and stimulating the economic health of the

country.

The Indian economy is now clearly in a consolidation phase after 3 years of sustained

growth witnessed in the GDP from 7.5% in FY05 to 9.6% in FY07. To begin with the

overall macro environment, the domestic growth and inflationary situation while still

relatively benign is beginning to reflect global tendencies. The Advance Estimates

for 2007-08 by CSO clearly indicate that a slowdown in on the cards and it has

already estimated that this year GDP will grow at a slower pace of 8.7% from 9.6%

recorded last year.

The major reason for the deceleration in GDP growth has been the Manufacturing

Sector which contributes around 25% of the GDP and which is likely to grow by 9.4%

in 2007-08 as compared to 12% recorded last year. The other big disappointment for

the GDP growth has come in from the Agriculture sector which as per the CSO is

estimated to grow by 2.6% in 2007-08 from 3.8% last year. Going ahead we believe

that GDP growth will continue to grow at 8.5% plus levels and will benefit from a

sustained growth seen in the Services segment which now accounts for roughly

55% of the GDP as compared to 50% in FY2000.

On the other hand the manufacturing sector has consolidated its presence in the

GDP by accounting for 25% of its share of GDP. Agriculture which used to previously

account for a sizeable chunk (around 24%) of the GDP in 2001 has seen its share

drop to 17% in FY08 and has seen a volatile uneven trend after its peak 10% growth

in FY2004.

We believe that going ahead in order to sustain the GDP growth it would be imperative

for the government to focus on Infrastructure, Agriculture, Public Health and Education

as these will continue to remain the foundation blocks of the Indian economy. More

importantly we expect the government to continue its support towards the Agriculture

sector since almost 60% of our population still depends on agriculture as there

livelihood.

8.57.5

9.09.6

8.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2003-04 2004-05 2005-06 2006-07 2007-08

Election FElection FElection FElection FElection Friendlriendlriendlriendlriendly Budgy Budgy Budgy Budgy Budget Liket Liket Liket Liket LikelelelelelyyyyyResearch TeamTel.: 91-22-30443301

Source : CSO

Agriculture which used to previously

account for a sizeable chunk of GDP

(around 24% in FY2001) now accounts

for 17% of GDP.

Infrastructure, Agriculture, Public

health and Education would be the key

foundation blocks of the Indian

Economy

Contd...

Pre Budget Expectations 2008-09 Please see the disclaimer on the last page 2

18th February 2008

Share of Infrastructure in GDP is likely

to go up to 7.5 to 8% by the end of 11th

Five Year Plan.

Total STT Collection this year could

touch Rs. 7500 cr in FY08

New policy initiatives line the GST

rollout by FY2010 would be eagerly

awaited

On the other hand with the first year of the 11th five year plan (FY2008-2013) drawing

to a close, the government has set an ambitious target of 9% GDP during this period

which will be driven by a 4% average growth in Agri output from 1.7% average growth

recorded in the 10th five year plan. Also the Services and Manufacturing sectors are

targeted to grow by 10% and 12% respectively in the 11th five year period.

Alternatively 11th Five Year Plan (2008-2013) also envisages huge investments in

roads, power and other infrastructure projects, which is likely to result in a significant

rise in expenditure on infrastructure sectors to around 7-8% of GDP from around

4.5% currently. Similarly on social sectors like public health and education we expect

the government to significantly increase plan allocations.

More importantly the government has recorded healthy growth in direct tax collections

especially with regard to Corporate Tax which is up by 38% YOY during first 9 months

of FY08, followed by Income tax up by 45%YOY and Customs up by 18% YOY in the

same period. Also the STT (Securities Transaction Tax) which was introduced in

2004-05 has seen a sharp 86% YOY rise in tax collections aggregating Rs 6793 crs

between Apr. 2007 to Jan. 2008 indicating the fact that more investors have

participated in the India Growth story in the Indian capital markets.

In fact as far as the STT is concerned government estimates suggest that total

collection from this account itself can gross around Rs 7500 crs till Mar08. All these

developments are likely to provide the government some flexibility in reducing select

tax rates in this budget and meet its revenue deficit target under the FRBM.

While there is no doubt that 2007-08 has been a landmark year for tax collections, a

repeat performance in 2008-09 appears challenging, given the deceleration in

corporate profits a significant driver of tax buoyancy in 2007-08. There are concerns

from possible inflationary pressures from food and oil, increased fertilizer subsidies

and some enhancements to the employee guarantee proggramme which are likely

to cause additional fiscal pressure on the government. More importantly the continued

availability of funds at viable interest rates to complete ongoing projects will be very

critical as we are deep in the middle of an investment cycle almost across almost all

sectors, be it infrastructure, manufacturing, real estate, rural and urban sectors.

Therefore in terms of clear policy initiatives in this forthcoming Union Budget, we

expect the government to clearly address the above mentioned issues and make

announcements towards implementation of the common Goods & Services Tax

(GST) likely to be introduced from FY2010, possibly reduce surcharge on direct

taxes and further rationalize taxes for select sectors both in terms of inputs required

and the final end product, increase plan allocations to the Infrastructure and social

sectors like Education and Health and progressively look at reducing the revenue

deficit targeted in last years budget.

Contd...


18th February 2008

3.013.21

3.01

3.75 3.653.45 3.50 3.50

3.79 3.83 3.934.11 4.07

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Nov 10

th

Nov 17

th

Nov 24

th

Dec 1s

t

Dec 8t

h

Dec 15

th

Dec 22

nd

Dec 30

th

Jan 5

th

Jan 1

2th

Jan 1

9th

Jan 2

6th

Feb 2nd

Week Ended Inflation Nos ( In %)

Source : CSO

Recent market melt down has seen

fund withdrawals of $15bn in

redemptions from most emerging

markets.

Emerging markets like India have off

late been following the US market

trends

CONTRCONTRCONTRCONTRCONTROLING INFLAOLING INFLAOLING INFLAOLING INFLAOLING INFLATION - TION - TION - TION - TION - A A A A A TTTTTOP PRIORITYOP PRIORITYOP PRIORITYOP PRIORITYOP PRIORITY

During FY08, the inflation rate has been moderated and it had earlier come down to

3%, however in recent weeks it has again risen to 4.07%. Our belief is that the

government will further announce measures to reduce inflationary trends in the

economy. The recent petrol and diesel price hike is expected to raise the inflationary

trends in the economy in the short term and it remains to be seen how the government

controls this in the next 12 months.

Again as mentioned earlier by us that since this will be the last full Budget by the

Government before the 2009 General Elections, we expect greater focus and

allocations to several social initiatives like rural upliftment, employment, education,

agricultural growth and public health. Also we expect that the FM would announce

some relief packages for troubled export sensitive sectors like textiles, rubber, jewelry,

leather and IT services.

Also we expect some modifications in the subsidy schemes for the fertliser sector

and there are chances that several tax-incentives to promote investments in fertilizers

will be announced, to increase domestic capacity additions and to please the farmer

community thereby providing aids to improve agri growth in the year head.

MARKETS GOING FORWARDMARKETS GOING FORWARDMARKETS GOING FORWARDMARKETS GOING FORWARDMARKETS GOING FORWARD

After a horrendous start to 2008, most emerging market investors are now extremely

worried about the prospects for this calendar year. Forced out of their complacency

by massive fund withdrawals from the asset class (dedicated Emerging Market funds

had over $15 billion in redemptions in January, after $54 billion in inflows in 2007)

and serious price damage, most investors are wondering what happened.

Prior to January the script was very clear; irrespective of what happens in the US, the

emerging markets were economically decoupled and thus would be able to grow

through a US slowdown. Reams of research were written on how China was a more

powerful driving force for the Economists which pointed out the strong domestic

growth dynamic in many of the larger EM countries and the huge infrastructure and

capex cycle currently under way in India & China.

However, come January 08 and all this seems to have changed. The emerging

markets are now leading global equity markets on the downside, and the maximum

price impact has actually happened in India and China plays. The EM asset class is

behaving more in line with historical patterns of being a levered bet on global growth.

Investors seem to have forgotten about decoupling, in favour of the old adage of if the

US sneezes, the world catches a cold type of a scenario.

Contd...


18th February 2008

Most of the froth has been knocked out

of the Indian Capital Market

Valuations are now reasonable with

markets now trading at 15-16x FY09E

Indian markets look attractive from a

long term perspective

In the medium to long term, investors

would have to accept volatility as fact

of life.

We believe that the decoupling thesis has merit, although not entirely but to a

reasonable extent and that the economic performance of countries like India will

sustain. We will see some drop-off in GDP growth from 9 per cent plus to 7.5-8 per

cent, but this is unlikely to go lower. Corporate earnings should also be able to

sustain a 15-18 per cent type of trajectory. Most of the froth has been knocked off the

Indian markets, and capital raising, which was rampant, has come to a halt. The

whole concept of sum (SOTP) of the parts will also be used much more judiciously.

Speculation and outstanding positions have been dramatically reduced, and the

retail investor is once again almost totally absent in direct form.

Valuations have come down to more normal levels with the markets now trading at

15-16 times the March 2009 earnings. Again not cheap, but if we can grow earnings

at near 16-18%, when corporate earnings are declining in most other parts of the

world, it does not seem realistic.

The domestic investor base is strengthening with the insurance industry alone

expected to pump in almost $20 billion into the equity markets this year. The market

fall has not had much of an impact on this flow as of now. Mutual funds and PMS

schemes have continued to get strong fund inflows.

Hence we don’t think this is the end of the bull market, it has a much-needed correction

that will bring capital market intermediaries back down to earth. This dull and listless

phase, with the markets being range-bound, may last a while but will prepare the

foundation for a much more sustainable rally ahead in future and will extend the bull

run. Most investors recognize that India is a high-quality long-term growth story, and

this has not changed. The visibility and sustainability of our economic growth are

among the best in the EM universe.

The capital efficiency and quality of entrepreneurship are well recognized. Our problem

was the valuation and excess hype and froth, both of which are now getting corrected.

This fall will clean out most of the momentum players and bring in many longer-term

investors sitting on the sidelines.

Therefore one needs to keep the faith as the game is not over yet, we will see new

highs, though it may take some time. Therefore in conclusion we expect the markets

to remain extremely volatile before the Union Budget for 2008-09 is announced on

Feb 29th 2007. Traditionally we have observed that a pre budget rally is typically seen

across the markets before the budget, after which the markets tend to get corrected.

While sentiments on a shorter term basis would definitely get impacted by stock

market movements, the longer term India growth story continues to remain intact

and investors would have to accept short term volatility as a fact of life.

Contd...


18th February 2008

Pre & Post Budget Market Movments

2003-04

3000

3050

3100

3150

3200

3250

3300

3350

Feb-03 Mar-03

Pre Budget Post Budget

2004-05

5250

5350

5450

5550

5650

5750

5850

5950

6050

6150

Feb-04 Mar-04


Source : BSE

2006-07

9500

9700

9900

10100

10300

10500

10700

10900

11100

11300

11500

Feb-06 Mar-06


2005-06

6250

6350

6450

6550

6650

6750

6850

6950

Feb-05 Mar-05


04 04 05 05

06 06 07 07

We believe India’s macro economic prospects to continue remaining robust and

GDP growth is likely to grow albeit a slow pace between 8 to 8.5% during current year.

With tax collections both from direct taxes and indirect taxes being buoyant, we believe

that the Indian economy continues to remain in good health. Some of the sectors

where both topline and profit growth during Q3FY08 continued to be strong was from

sectors like Telecom, Cement, Infrastructure, Construction, Engineering, Banks and

Pharmaceuticals.

The sectors where the performance was disappointing this quarter included

Automobiles, Auto Components, Sugar, IT Services, Metals and Oil & Gas space.

However one observation on the corporate results declared so far clearly shows that

profit growth has slowed down due to high interest costs and effects of a higher

base.

Sector-wise GDP growth rates (In %)

Source : CSO

Sector 2005-06 2006-07 2007-08

1 Agriculture 5.92 3.76 2.59

2 Industry 8.02 10.63 8.63

(a) Mining & Quarrying 4.87 5.70 3.38

(b) Manufacturing 8.98 12.00 9.44

(c) Electricity, Gas, Water 4.68 5.98 7.83

3 Services 11.01 11.18 10.60

(a) Trade, hotels 11.51 11.82 12.11

(b) Financing, insurance 11.41 13.92 11.72

(c) Community services 7.21 6.89 6.97

(d) Construction 16.46 11.98 9.63

GDP at Factor Cost 9.40 9.62 8.73

FYFY

FY FY

We see India’s growth story is akin to a marathon. A marathon can appear boring to

spectators compared to a sprint (the broad stock market may appear equally unexciting

this year). However, we believe it is the ultimate sport for value buyers, and we expect

great Indian companies/entrepreneurs to emerge from nowhere (as they have over

the past few years) and become champions, and that is the best part of being a part

of the market; and we expect a few more to emerge this year. Smart Long Term

Investors should use this market crash as an opportunity to buy strong companies

with robust business models with excellent management bandwidth but more

important investors need to temper there return expectations and think long term.

Contd...


18th February 2008

Summary of Central Government FinancesProvisional Actual 2006/07, Budget Est. 2007/08 & Position upto Dec’07 (Rs. Crore)

2006-07 2007-08 Change For

Source : CSO, nic.in, Finance Ministry

Tax Nature 2006-07 2007-08 Full Year April - December 9 MonthsActual Budget Est Increase (%) 2006-07 2007-08 Increase(%)

Corporation 143391 168401 17.4 93851 128698 37.1Income 75792 86829 14.6 46425 66268 42.7Customs 86329 98770 14.4 63655 74455 17.0Excise 117701 130220 10.6 71816 75485 5.1Others 50111 63902 27.5 30781 44439 44.4Gross (Excl Surcharge) 473324 548122 15.8 306528 389345 27.0

Tax Collections - continue to be buoyant (Rs. Crore)

Source: CGA, Ministry of Finance

B E (Rev Actual Achieved (Budget Actual Achieved 2007-08 Apr-DecEst. Estimates) Apr-Dec (%) Estimates) Apr-Dec (%) (%) ’07 (%)

Tax Revenue 327,205 345,971 232,171 67.1 403,872 295,994 73.3 16.7 27.5

Non-Tax Revenue 76,260 77,360 48,744 63.0 82,550 59,652 72.3 6.7 22.4

Revenue Receipts 403,465 423,331 280,915 66.4 486,422 355,646 73.1 14.9 26.6

Plan Expenditure 143,762 172,730 93,901 54.4 205,100 137,163 66.9 18.7 46.1

Non-Plan Expenditure 344,430 408,907 253,791 62.1 475,421 337,090 70.9 16.3 32.8

of which Interest 139,823 146,192 92,634 63.4 158,995 111,764 70.3 8.8 20.7

Non-Interest Non-Plan Rev Exp 204,607 362,183 161,157 44.5 383,546 280,050 73.0 5.9 73.8

Non-Interest Rev Exp 348,369 144,584 255,058 176.4 174,354 114,806 65.8 20.6 -55.0

Total Rev Exp 488,192 506,767 347,692 68.6 557,900 394,856 70.8 10.1 13.6Revenue Deficit 84,727 83,436 66,777 80.0 71,478 39,210 54.9 (14.3) (41.3)

Cap. Exp. + Net Lending 67,799 74,870 28,077 37.5 122,621 79,397 64.7 63.8 182.8

Total Expenditure 555,991 581,637 375,769 64.6 680,521 474,253 69.7 17.0 26.2

Other Non-Debt capital receipts 3,840 5,978 0 43,151 41,029 95.1 621.8 -

Fiscal Deficit 148,686 152,328 94,854 62.3 150,948 77,578 51.4 (0.9) (18.2)Primary Deficit 8,863 6,136 2,220 36.2 (8,047.0) (34,186.0) 424.8 (231.1) (1,639.9)

But broadly the numbers are in line with expectations and we expect corporate earnings

to grow at a healthy clip of 18% in FY08 and 20% during FY09. The Central Statistical

Organisation (CSO) has estimated that FY08 GDP growth at 8.7%, while most of the

economist think tanks have given a range of 8% to 9%. This growth is due to the

healthy contribution by Services and Manufacturing sectors despite Agriculture

recording underperformance.

Contd...


18th February 2008

HIGH GDP GROWTH TO BE SUSTAINED

We believe that the sustained growth in GDP will be supported by a rapidly growing

Services segment now accounting for roughly 55% of the GDP as compared to 50%

in FY2000. On the other hand the manufacturing sector has consolidated its presence

in the GDP by accounting for 25% of its share of GDP. The only exception is Agriculture

which has seen its share drop to 18% in the overall GDP during FY08 from 24% in

2001 as per the CSO and which has seen a volatile trend.

We hence believe that a relatively larger share of services in GDP, which is growing

at a faster pace, should ensure a higher sustainable growth rate for the economy.

Other factors which have driven growth across most sectors are favorable

demographics (growing proportion of young workers), rising wages, increasing

urbanization, a housing boom, and massive infrastructure spending. Rising income

is helping to drive the consumption boom – this is evident from rapid growth in

cellular subscribers, air travel, cars, consumer durables, multiplex movie theatres,

credit cards and personal loans.

The private sector has been a major contributor to the GDP growth and we do not

expect any negative measures, which could affect the confidence of India Inc at this

point in time. We expect that, the major thrust in this budget will be on agriculture,

infrastructure, social sectors like public health and education, tax simplification &

implementation thrust towards taxpayers.

Composition of GDP (%)

FY2001

FY2008E

Source : CSO

24%

50%

26%

Se r vice s A g r icu ltu r e In d u s tr y

27%

55%

18%

Services Agriculture Industry

Sales EBITDA P A T% Change % Change % Change

Corporate Earnings Growth - NIFTY 50 Companies (Rs. Crore)

Source : CapitalineNote:Q3FY08 does not include 4 companies as their results were not declared namely: ABB, RPL, Cairn India and Glaxosmithline

All the 3 Quarters do not include the NIFTY 50 companies as some companies have been included or excluded due to the changes in the index and for other reasons.

* Is the total number of companies in a sector in Q3 FY 08# Is the total number of companies in a sector in Q3 FY 07$ Is the total number of companies in a sector in Q2 FY 08No sign denotes there are same no of companies all the 3 quarters.

Q3FY08* Q3FY07# YoY Q2FY08$ Q3FY08* Q3FY07# YoY Q2FY08$ Q3FY08* Q3FY07# YoY Q2FY08$

Atuomobiles (5) 20,110.9 18,385.4 9.4 20,490.4 2,444.3 2,323.2 5.2 2,884.5 1,973.1 1,685.6 17.1 1,940.3

Aviation(0)* & (1)# & (0)$ - 1,875.4 - - - 140.5 - - 40.0 -

Banking & Finance (5)* & (5)# &(5)$ 29,092.0 20,931.5 39.0 32,289.2 19,484.3 14,072.6 38.5 21,372.1 4,658.6 3,238.6 43.8 4,760.5

Cement (3) 5,900.4 5,201.7 13.4 6,909.4 1,774.1 1,616.6 9.7 2,037.7 993.1 1,107.8 (10.4) 1,289.4

Engineering & Capital Goods (4)* & (4)# & (5)$ 14,916.2 11,187.9 33.3 16,672.6 2,231.6 1,707.9 30.7 2,381.4 1,788.9 1,285.9 39.1 1,858.3

FMCG (2)* & (3)# & (2)$ 7,145.4 6,837.2 4.5 6,638.0 1,763.9 1,650.8 6.9 1,478.3 1,462.2 1,306.2 11.9 1,178.9

Information Technology & Media (6) 16,656.7 13,645.9 22.1 18,063.6 4,400.0 3,882.4 13.3 4,561.2 3,958.7 3,336.3 18.7 3,947.6

Metals (5)* & (4)# & (5)$ 22,782.8 19,111.3 19.2 54,423.7 6,438.7 6,056.2 6.3 10,751.3 4,106.2 3,966.2 3.5 7,703.5

Oil & gas and Petrochemicals (4)* & (6)# & (6)$ 82,937.6 97,549.7 (15.0) 101,390.7 15,174.1 16,517.3 (8.1) 18,041.5 13,358.2 9,530.6 40.2 11,421.5

Pharmaceuticals (4)* & (5)# & (5)$ 3,607.3 3,487.3 3.4 5,090.7 437.9 847.9 (48.4) 943.4 647.3 992.1 (34.8) 986.4

Power Generation (3)* & (2)# &(3)$ 12,255.7 2,727.4 349.4 2,892.3 3,306.8 285.4 1,058.6 3,191.7 2,278.8 2,584.2 (11.8) 2,433.0

Realty (1)* & (0)# & (0)$ 818.5 - - 532.5 - - 368.9 - 410.8

Telecommunications (4)* & (5)# & (4)$ 12,770.6 10,053.4 27.0 13,024.5 4,454.6 3,698.7 20.4 4,911.6 2,103.0 2,279.3 (7.7) 4,588.6

Total - Excl. banking (41)* & (44)# & (44)$ 208,883.0 192,608.5 8.4 244,370.1 59,998.6 50,335.7 19.2 69,670.2 33,620.9 29,667.1 13.3 40,578.5

Total (46)* & (49)# & (49)$ 221,653.7 202,661.9 9.4 257,394.6 64,453.2 54,034.4 19.3 74,581.8 35,723.9 31,946.4 11.8 45,167.1

Contd...


18th February 2008

As mentioned earlier Infrastructure, Agriculture, Public Health and Education would

continue to remain the foundation pillars of the Indian economy in order to sustain

the present and future level of GDP growth. Our belief is that with 60% of India’s

population dependent on Agriculture, it is imperative for the government to increase

plan allocation here as the benefits of a sustained level of GDP growth have not yet

seen a majority of the population reap its benefits. The government is also looking

at imposing a 1% cess on direct taxes and 2% on direct taxes to part finance debt

relief packages to farmers.

Therefore with increased plan allocations the government is likely to ensure that

Agriculture grows annually by 3-4% so that eventually higher growth from here would

lead to a increase in rural incomes which will drive demand for goods and services

thereby also improving employment opportunities.

On the other hand, Infrastructure creation would be continue to be a thrust area for

the government. As per the CII Infrastructure spending by the end of the 11 th Five

Year Plan would have to go up to 10% of GDP involving a estimated investment of $

337.5 bn in order to sustain an average 9% GDP growth over the next 5 years.

Similarly on social sectors like public health and education we expect the government

to increase allocations. We already have a education cess of 2% and there are

expectations that this would be increased to 3-4% in this budget.

AAAAAGRICULGRICULGRICULGRICULGRICULTURE –TURE –TURE –TURE –TURE –

We believe that, agriculture would continue to be a thrust areas for the governmentconsidering the fact that –

60% population depends on Agriculture

Agriculture production has remained volatile and poses a challenge for sustainable

GDP growth

Bridging the gap between urban and rural income is important

Significant increase in consumption possible with higher disposable income from

rural India

Higher employment generation potential in rural India

INFRASTRUCTUREINFRASTRUCTUREINFRASTRUCTUREINFRASTRUCTUREINFRASTRUCTURE

Some of the key reasons why infrastructure will get a boost are –

To Increase FDI an Improved Infratructure is a must

Improved Infrastructure will a key driver in providing value addition to customers

Growing Urbanisation has made the existing infrastructure inadequate and needs

to overhauled sizeably

Agriculture growth is targeted to grow at

average 4% pa in the 11th Five Year

Plan

India’s majority population is yet agri

based with 60% population dependent

on agriculture

Contd...


18th February 2008

Education is now a very important

variable to sustain and increase GDP

growth in future

Government plans to increase the

outlay on education to Rs.2,77,837 cr

in the 11th Five Year Plan from Rs.

59,181 cr in the 10th Five Year Plan

To get a knowledgeable workforce, a

healthy workforce will be essential

EDUCAEDUCAEDUCAEDUCAEDUCATIONTIONTIONTIONTION

Education has now become a very important variable for sustaining future growth of

the economy. For a country which has dreams of becoming the knowledge capital of

the world, not much has invested in our educational system. This is quite critical

considering the fact that nearly 350 mn children will require to be educated over the

next 30 years making it an average of over 10 mn every year. We believe that going

ahead Education will call for major investments from the government and it will also

require the government to encourage the private sector to invest in this sector to

upgrade existing facilities here.

Here it would be interesting to note that the government has plans to increase the

spend on the sector to Rs. 2,77,837 crores in the 11th Five Years Plan from Rs.

59,181 crores in the 10th Plan. This spend would include expenditure on elementary,

adult and higher education. Thus in conclusion as per the planning commission

total public spending plan and non-plan on education would account for 5% of GDP

by the end of 11th Five Year Plan. Additionally we believe the government is also likely

to increase its financial outlay towards increasing and enhancing the teachers faculty

capacity and capability as there is a huge shortage of this crtical resource as on date.

As per the government, it has outlined the following targets in the draft 11th five year

plan document. These include.

Reduce dropout rates of children from elementary school from 52.2% in 2003-04 to

20% by 2011-12.

Develop minimum standards of educational attainment in elementary school, and

by regular testing monitor effectiveness of education to ensure quality.

Increase literacy rate for persons of age 7 years or more to 85%.

Lower gender gap in literacy to 10 percentage points.

Increase the percentage of each cohort going to higher education from the present

10% to 15% by the end of the 11th Plan.

HEALHEALHEALHEALHEALTHTHTHTHTHTo ensure that we have a knowledgeable highly educated workforce in the Indian

economy it is essential that we need to have a healthy employee workforce to sustain

the economy growth ahead. The government, has outlined the following targets in

the draft 11th five year plan document as far as the health sector is concerned. These

include.

Reduce infant mortality rate (IMR) to 28 and maternal mortality ratio (MMR) to 1 per

1000 live births.

Reduce Total Fertility Rate to 2.1.

Provide clean drinking water for all by 2009 and ensure that there are no slip-backs

by the end of the 11th Plan.

Reduce malnutrition among children of age group 0-3 to half its present level.

Reduce anemia among women and girls by 50% by the end of the 11th Plan.

Contd...


18th February 2008

TTTTTAX PRAX PRAX PRAX PRAX PROPOSALS – EXPECTOPOSALS – EXPECTOPOSALS – EXPECTOPOSALS – EXPECTOPOSALS – EXPECTAAAAATIONSTIONSTIONSTIONSTIONS

DIRECT DIRECT DIRECT DIRECT DIRECT TTTTTAXES –AXES –AXES –AXES –AXES –

Surcharge on Corporates and Personal Income Tax currently pegged at 10% may

be exempted fully

Tax Breaks likely for Infrastructure Bonds likely

Minimum Tax Exemption Limit for Individuals to be raised to Rs 2 lacs from Rs 1.5

lacs presently

Standard deduction limit likely to be raised to Rs 1.20 lacs from the present level of

Rs 1 lac under Sec 80C

Securities Transactions Tax – Likely to see a marginal increase

Increase in Highway cess by another 30 paise from the present Rs 2 per litre

charged on petrol and diesel

Dividend Distribution Tax likely to be cut to 12.5% from 15% presently.

New 1% cess on Direct Taxes and 2% cess likely to be imposed to partly fund

farmers relief packages

REITS (Real Estate Investment Trusts) to get the benefits through a tax waiver on

dividend income from such instruments.

INDIRECT INDIRECT INDIRECT INDIRECT INDIRECT TTTTTAXES –AXES –AXES –AXES –AXES –

Reduction in peak customs duty from 10% to 7.5% in this Budget which is in line

with tariffs closer to ASEAN levels.

Excise Duties to remain unchanged at 16%

Basic Framework for preparation of the Goods & Service Tax regime by 2010

Service Tax likely to be kept at 12% currently but 12 new services are likely to come

in the tax net. These could include service providers of legal draft writing

intermediaries and stamp paper vending intermediaries, all un aided non

government schools and colleges, un aided non government hospitals, amusement

parks, coin operated amusement machines and other recreation and amusement

services.

SECTSECTSECTSECTSECTORAL BIAS -ORAL BIAS -ORAL BIAS -ORAL BIAS -ORAL BIAS -We expect the following sectors to benefit from the budget process. These include

Capital Goods, Power Equipment, Construction, Cement, Real Estate, Hotels,

Retailing, Telecom, Insurance,Food processing, Fertilisers, Oil & Gas/Allied services

players.

With this budget being the last one

before the general election, the middle

class is likely to gain from some tax

cuts and concessions from the FM

Service tax likely to increase its net

over new category of services

Contd...


18th February 2008

Mid CapSector Stocks we likeAuto Ashok Leyland

Auto Ancillary Ahmednagar Forgings, Amtek Auto

Capital Goods Cummins, Kirloskar Oil, Thermax, Bharati Shipyard, Ratnamani

Education Core Projects

Pharma Elder Pharma, Indoco Remedies, Orchid Chem

Telecom Gemini Comm

Large CapSector Stocks we likeAuto M&M, Maruti

IT Infosys, Tata Consultancy, Satyam

Power Utilities NTPC

Pharma Ranbaxy

Source:Reliance Money Research


STOCKS We Like -


18th February 2008

SectorwiseExpectations


18th February 2008

AUTOMOBILECurrent view

EXPECTED BUDGET IMPACT

LONG TERM OUTLOOK

Neutral

Positive

Currently the Indian Automobile sector is going through a tough period. Higherinterest rates, stringent financing norms adopted by financing institutions areimpacting demand for Automobiles. But we expect moderate interest rates goingahead to again drive demand for Automobile sector. We remain positive onAutomobile sector. Rising income levels, higher replacement demand, ban onoverloading of trucks, rising infrastructure spending, strong freight rates woulddrive the demand for automobiles in India. We expect the automobile sector togrow at a CAGR of 10-12% over next 3-4 years.

Key budget expectationsIssuesExcise duty

Classif icationof excise duty

Deduction onR&D Expenses

Interest rates

S p e c i a lIncentives forLPG and CNGbased AutoManufacturers

Current Status16% Small cars24% Big cars16% Tractors24% Motor vehicle >10seater16% CVs >8T16% Motorcycles16% Bicycles

Currently classified onlength and engine capacity

150% deduction on R&Dexpenses till 2012

Interest rates for cars & Uvswent up by 300-350bps inlast 2 years

No special Incentives

Industry ExpectationUniformity of excise duty forall cars , Reduce excise onsmall cars and MUV's to 10-12% rest all shld be at 16%,Lower excise duty on hybrid/green vehicles, Cut in exciseduty on two wheelers to 12-8 %

Should be classified solelyon the basis of length andnot on the basis of enginecapacity

Should be extended till foranother 10 years from 2012

Govt should moderateinterest rates on new loansto farmers for tractors andother vehicles

Special excise duty, tax ratesfor such vehiclesmanufactured

ImpactPositive

Positive

Positive

Positive

Positive

RationaleCut in excise duty would bringprices of vehicles and in turnwould increase the demandfor auto market

It will help companies inmaking powerful small carsand help them in savingexcise costs

It will help companies indeveloping new products,more efficient products, hybridcars, environment friendly cars

Auto industry has witnessedslowdown mainly due to risinginterest rates and it would getsome relief due moderation ininterest rates, Tractor industryis also facing tough time andany moderation in interestrates on loans to farmers fortractors would revive theindustry

It would bring down the cost ofvehicle to some extent andwould increase the demandfor the products

Top PicksCompany Price EPS (Rs) PE (x) Recommendation

(Rs) FY09E FY10E FY09E FY10EAshok Leyland 36 3.7 4.2 9.7 8.6 BUYM&M 619 44.8 49.2 13.8 12.6 BUYMaruti 813 68.7 74.6 11.8 10.9 BUY



18th February 2008

AUTO ANCILLARYCurrent view


LONG TERM OUTLOOK

Neutral

Positive

Auto Ancillary sector is growing steadily mainly because of lower demand fromdomestic OEMs and strong rupee appreciation which impacted exports of autoancillary players. But we believe going ahead domestic auto demand will improveand auto ancillary sector will continue to grow. We remain positive on Auto Ancillarysector. The global outsourcing opportunity available for Indian Auto componentvendors is mainly because of competent engineering skills, delivery capabilitiesand cost advantage.

Key budget expectationsIssuesExcise Duty onraw materials

Fiscal and TaxIncentives

Customs Dutyon raw material

Increasing FTAs(Free TradeAgreements)

R&D

ForeignInvestments inauto componentindustry

Import Duty onRubber

Current StatusExcise Duty on raw materialslike GP/GC sheets, HR coils,Aluminium, Copper, Nickel at16.5%

No benefits

Customs duty on rawmaterials like zinc , copper ,lead , steel , aluminium , ironcurrently at ~5%

The growing number of FTAsthat are being signed by Indiawith ASEAN countries areimpacting negatively todomesitc players

Government has set upNational testing and R&DInfrastructure project for autoR & D

Offers l imited fiscalincentives to foreign investorsNatural rubber Imported Dutyat 20%

Finished Tyres Imported at10%

Industry ExpectationExcise Duty on these keyraw materials should bringdown

Tax Holidays, creation ofspecial auto-componentparks (SAPs) and other VATbenefits

Customs Duty on thesebasic raw materials shouldbe brought down fromcurrent peak levels

Reduction in excise duty orreduce the number of FTAs

Define roadmap and givespecial emphasis to autocomponents industry

Should promote ForeignInvestment by offering fiscalincentives

Import Duty on naturalrubber needs to be at leastat par with finished Tyres at10%

ImpactPositive

Positive

Positive

Neutral

Positive

Positive

Neutral

RationaleIt would bring down the cost ofmanufacturing of autocomponents and wouldenhance competitiveness ofplayers

It will help India in emergingas a global manufacturing hublike china and other developingcountries

Lower Customs Duty on rawmaterials would make IndianAuto Component players morecompetitive

Domestic Auto Componentmanufacturers pay relativelyhigher excise duty of ~25% ascompared to players in theinternational arena who pay 1-10% Excise duty

It will promote design anddevelopment activities in Indiaand would make domesticplayers more competitive ininternational market

Countries such as Thailand,China , Malaysia, etc. offerlarge incentives to companiesfor investing in autocomponent manufacturing.India should also benchmarkits policies with suchcompeting countries topromote Auto Componentsindustry

Manufactures prefer to importfinished Tyres instead ofmanufacturing it here


(Rs) FY09E FY10E FY09E FY10EAhmednagar Forgings 200 30.7 38.3 6.5 5.2 BUYSource:Reliance Money Research


18th February 2008

CAPITAL GOODSCurrent view


LONG TERM OUTLOOK

Positive

Positive

We remain positive on Capital Goods & Power Equipment sector. Powerhas remained as a key resource for Indian economy growth. Strong growthin economy, growth in infrastructure, industrial production would drivethe demand for capital goods sector. Government has given infrastructurestatus to power generation and distribution sector, we expect the demandfor power to remain strong and power remains one of the critical successfactors in India growth story. We expect it will drive strong demand forcapital goods and power equipments as well.


(Rs) FY09E FY10E FY09E FY10ECummins India 333 19.5 22.6 17.0 14.7 BUYKirloskar Oil 120 9.3 11.3 12.9 10.6 BUYThermax 662 34.8 45.6 19.0 14.5 BUYBharati Shipyard 615 56.0 85.3 11.0 7.2 BUYRatnamani Metals & Tubes 941 140.2 185.5 6.7 5.1 BUY


Key budget expectationsIssuesExcise Duty

APDRPscheme

Rajiv GandhiGraminVidyutikaranYojna (RGGVY)

Customs Duty

Infrastructurestatus to powerequipmentsuppliers

Current StatusExcise duty on raw materialsand all products supplied topower generation,transmission anddistribution is at 16%, with aSecondary and HigherEducation Cess of 1% on theaggregate of duties of excise

The current allocation offunds to the APDRP schemeis Rs 800 crs.

The current allocation offunds to the RGGVY schemeis Rs 3983 crs

Customs Duty on aluminum,copper, zinc and steel alloyshas already been reduced to5% from 7.5% in January2007

Benefits u/s 80 IA availableto util it ies engaged ingeneration, transmissionand distribution of power in arestricted manner.

Industry ExpectationTill the time a uniform GSTis implemented, a merit rateof Excise Duty @ 8% shouldbe applicable on allproducts, supplied to PowerGeneration, Transmission &Distribution projects.

In the current budget theindustry expects theallocation to increase toatleast Rs 8000 crs to realizeits full benefits.

Tax exemptions (like 80IA ofIncome Tax) given toschemes like Water Supply& Sanitation Scheme or asenvisaged for rural areadevelopment schemes,should be also offered toRGGVY scheme

The Customs Duty on theseBasic Raw Materials shouldbe brought down to 0%

Power Generation,Transmission andDistribution businessshould be added to the listof "infrastructure IndustryStatus", appearing underINCOME TAX ACT- SECTION80 IA and Service Tax Act withthis facility available forprojects commissioned till31st March 2012, so thatbenefits currently availableonly to the Utilities (Ownersof the projects) will also beprovided to all stakeholders.

ImpactPositive

Positive

Positive

Positive

Positive

Rationale It would offer some respite topower equipment manufactur-ers as raw material priceshave gone up substantially~50%

It would help the governmentto achieve its target of 15%AT&C losses from the currentnational average of 30%. TheAPDRP scheme has alsoseen very low pay back peri-ods of ~3 years

If the tax benefits are extendedto RGGVY it will result in bring-ing down the cost of thescheme to the extent of 25%,with possibly more villagescould be electrified

It would bring down the costdifferential between interna-tional and domestic marketand would benefit equipmentmanufacturers.

This will help the Govt ofIndia's Programme " Electric-ity for All at affordable cost byyear 2012".


18th February 2008

CEMENTCurrent view


LONG TERM OUTLOOK

Positive

Positive

We remain optimistic on future outlook of cement industry because of governmentfocus on infrastructure, increasing housing demand, opening of retail sector &raising capacities of corporate sectors. The future growth of the industry will bedriven by expected GDP growth of more than 8 %. One of the main concerns for theIndian cement industry is the cheap imported cement. We feel budget 2008-09would have a positive impact on the sector.

Key budget expectations

IssuesTaxes & Levies

Excise Duty oncement

VAT

Import duty

Duty on cementimport

Current StatusTotal tax and levies arearound 22% (which constitute60% or more of the ex-factoryprice)

If MRP is > Rs.190 and <Rs.250 per bag excise dutyis 12%, MRP is < Rs 190then a specific rate of exciseduty of Rs 350 per tonnes ischarged, where MRP is overRs 250 then a specific rate ofexcise duty of Rs 600 pertonnes is charged.-In absence of abatement,tax is levied on base of Trademargin & tax on tax.

VAT on cement & clinker ischarged @ 12.5%

Currently coal and pet cokeare charged with an importduty of 5%.

Withdraw of CVD & zerocustom duty

Industry ExpectationTo Rationalize the tax rate

To abatement of 55% on theexcise duty and rationalizethe ad valorem duty.

VAT on cement & clinkershould be brought in linewith similar constructionmaterial like steel to 4%.

To be completely abolished.

Restatement of CVD onImported cement to theextend of excise duty

Impact Positive

Positive

Positive

Positive

Positive

RationaleThis would help in reductionprices

It will give cement makers awindow to improve realisationand expand capacities to coupup increasing domesticdemand.

Would help to reduced cost perbag of cement, which would behelpful in propping upInfrastructure growth.

Would reduce input cost andhelp to compete with importedcement.

Provide level playing field forthe domestic producers



18th February 2008

CONSTRUCTION / INFRASTRUCTURECurrent view


LONG TERM OUTLOOK

Positive

Positive

We remain optimistic on Construction and Infrastructure sector going forward.The incremental participation in the Construction equipment sector by thegovernment and private players has accelerated the growth at over 30 % p.a.Infrastructure development in India has taken off in a major way in the last 2 yearsand is witnessing impressive growth across various segments such as Roads,Power, Ports, Telecommunication, Railways and Airports.

The Planning Commission has proposed to increase infrastructure expenditureas a percentage of GDP from its current share of 5% to 9% by 2012. The totalinfrastructure investments planned for the next 5 years of US$ 350bn requireshuge participation from FDI and FII inflows and the Government's recent decisionof permitting FDI's up to 74% equity for road and bridge construction as a part ofinfrastructure will boost the sector largely.

Key budget expectationsIssuesIncrease therate ofinvestment

Viability GapFunding

Tax on Interestincome

Tax sops forinfra-funding

Infrastructurestatus for solarenergy projects

Tax holidaybenefit u/s 80-IA

Service tax to bewithdrawn

Current StatusCurrent level of investment isat 35% of GDP

Currently VGF is at 20% forthe urban transport systemslike metro, monorail and roadtransport system

Tax on Interest income frominvestments in infrastructurebond is at 20%

The exemption waswithdrawn by the Finance Act,2006

Solar Energy projects are notgiven the infrastructure status

Healthcare industry nothaving an infrastructurestatus

At present service tax is leviedat around 5%.

Industry ExpectationTo increase theinvestments by over $ 350billion in next five years andthe rate of investmentsshould be raised by 5%.

To raise the limit on theViability Gap funding to30%

Exemption of tax onincome from interest oninvestments ininfrastructure securitiessuch as in power androads

Reintroduction of tax sopson infra-funding undersection 10(23G)

Infrastructure status for”solar energy projects”and also want the existingpower plants to installsolar systems to the extentof 10 % of their electricitygeneration

Expect to grant'infrastructure status' to thehealthcare industry andthereby provide tax holidaybenefit u/s 80-IA

Since the constructionsector as a whole hasbeen declared as anindustry under the IDBI Act,no service tax should beapplicable to an industryas per the Act

ImpactPositive

Positive

Positive

Positive

Positive

Positive

Positive

RationaleWould encourage highereconomic growth in theinfrastructure segment at theinternational level

Would help to improve theviability of an infrastructureproject as VGF is a one-timegrant by the government with along gestation period

Would encourage investors toinvest in infrastructure

Would improve theinvestments in infrastructureand other projects

Would help the industry to givea an environment friendlysource of energy and alsoreducing the dependence onpower from other sources

Would provide a boost to thehealthcare industry which isgrossly inadequate.

Would motivate private sectorinvestments



18th February 2008

EducationCurrent view


LONG TERM OUTLOOK

Positive

Positive

India is currently one of the largest markets for formal school education in theworld with an addressable population of 400-450 mn and an annual spend ofabout $35 bn. India currently has over 1 mn schools proving education from k-12to over 200mn students. Education has become prime focus for the governmentand has allocated Rs.106.71bn for Sarva Shiksha Abhiyan to improve the educationsystem, teacher training and innovative initiative in the country. The allocation forschool education for 2007-08 was Rs 14,779.29 crore (Rs 147.79 billion), while theallocation for Sarva Siksha Abhiyan in the Eleventh Plan is Rs 71,000 crore (Rs710 billion), up from the Tenth Plan outlay of Rs 17,000 crore (Rs 170 billion). Goingforward, we believe with India steadily moving towards a more knowledge basedeconomy the spending on education will increase manifold with the householdsspend on Education moving up the priority list education ought to become the topmost priority of Government, thus Education sector is likely to witness more robustgrowth in the coming years.


(Rs) FY09E FY10E FY09E FY10ECore Projects & Tech. Ltd 200 14.9 28.4 13.4 7.0 BUY

Key budget expectationsIssuesBudgetAllocation

Quality Issues

Technical upgradation

Current Status Allocattion for Education tobe enhanced by 34.2%fromRs.17133 crore to Rs.23142crore, of which Rs.10,671crore for SSA

Two lakh more teachers to beemployed and five lakh moreclassrooms to beconstructed.

1,396 Indian technicalinstitutes to be upgraded toachieve technical excellence.

Industry ExpectationLikely to enhanced further,Government has alreadyannounced allocation forSarva Siksha Abhiyan in theEleventh Plan is Rs 71,000crore (Rs 710 billion), upfrom the Tenth Plan outlay ofRs 17,000 crore (Rs 170billion

Likely to enhanced further

Likely to increase further

ImpactPositve

Positive

Positive

RationaleLikely to benefits playersoperating in the domesticEducation sector , withincreased budget outlay forthe sector.

Companies operating inEducation Infrastructure sectorlikely to get benefits.

Likely to benefits operating intechnical upgradation ofeducation.



18th February 2008

FMCGCurrent view


LONG TERM OUTLOOK

Positive

Positive

In FY07 the Rs 75,000-crore FMCG sector grew at a healthy 10-15%, backed bygrowth in urban markets and the surge in premium products, the industry had todeal with steep inflationary pressures. Costs of key raw materials such asvegetable oils, palm oils, crude-oil derivatives, wheat and milk have shot up by asmuch as 30-40% over the past eight to ten months. This has put huge pressure onoperating margins, which in turn have led to prices of products shooting up. Soapprices, for example, which have shot up 10% over the past six months, resulted ina steep 5% decline in soap volumes last quarter. However, we believe the IndianFMCG sector is well placed deliver stronger double digit growth on the back ofthurust of the Government on pro rural policies, over 8.5% GDP growth, creationbrand awareness among rural public Etc. We remain positive towards industrypeers like - Britania, Godrej Consumer, Hindustan Unilever etc.

Key budget expectationsIssuesExcise Duty

Central SalesTax

VAT

P r o - r u r a lPolicies

Current Status16% on Soaps & detergents.

Biscuits industry is chargedwith an excise of 8% but onlyon biscuits with retail pricesabove Rs 100 per kg.

Process foods currentlycharged with central sales taxof 3%

Biscuit industry is currentlycharged with a VAT of 12.5%

Industry ExpectationRationalisation of Exciseduty.

Full exemption from excise

Exemption from the CST

Reduction in VAT to 4%

ImpactNeutral

Positive

Positive

Positive

RationaleWith raw materials costsalready escalating, a reductionin excise duty on soaps anddetergents would result involume rise that got effected bycost push price rise.

Finance Minister hadexempted the biscuit categoryfrom excise duty but only onbiscuits with retail prices underRs 100 per kg.

Drive volume growth forprocessed foods.

Biscuits (along with cigarettesand pan masala) is the onlyexception among allprocessed foods categorieson which a 12.5% VAT is levied.

Pro-rural policies, which wouldactually put more money in therural consumers’ pockets,would fuel growth in the sector



18th February 2008

HOTELSCurrent view


LONG TERM OUTLOOK

Positive

Positive

We remain positive on Industry as there exist a demand-supply mismatch whichwill result in a healthy growth in occupancies & ARR's in near future. This will helpin improving margins of the Hotel S ector. Increased propensity to spend amongyounger upper middle class & growth in tourism has resulted in optimistic outlookfor hotel industry in longer term as well.


IssuesInfrastructurestatus

Tax exemption

Service tax

Section 32-Depreciation onHotel building

Current StatusCurrently not available

Tax holiday of 5 year for two-star, three-star, four-starhotels and conventioncenters with seating capacityof not less than 3000 in NCRarea of Delhi, Faridabad,Gurgaon & Ghaziabad toseed up the infrastructureneeds for the commonwealthGames.

-Hotel industry is required topay service tax on servicesreceived from Foreign Touroperators.-On banquet both service taxon food & beverage & VAT arecharged

The depreciation on hotelsbuilding @ 10%

Industry ExpectationInfrastructure status shouldbe given to hotel industry.

To be extended to new five-star hotels coming up inother parts of the country.

The exemption to Hotelindustry from paying servicetax on services receivedfrom Foreign Tour operators.-On banquet service onlyVAT to be charged

The depreciation rate to berestored to 20%.

ImpactPositive

Positive

Positive

Positive

Rationale To spur fresh investment forcreating more capacity andboost hotel industry

Prop up the investment in thecountry.

To avoid double taxation.

Higher cash flows



18th February 2008

INFORMATION TECHNOLOGYCurrent view


LONG TERM OUTLOOK

Negative

Positive

On account of continuing rupee appreciation coupled with slow down worries inthe US market has taken a toll on stock prices of Indian IT companies in recenttimes. Nevertheless, we believe on the back of incremental growth coming fromnon- US geographies coupled with growth in non-financials industry verticals andthrough inorganic initiatives Indian IT sector is on track with its growth agenda forcoming years. The Indian software and services exports are expected to touchthe $40 billion mark in FY08 ($31.3 billion in FY07), according to IT trade bodyNasscom's Strategic Review 2008. Indian IT industry can exceed its aspired targetof $60 billion by 2010 in software and services exports and $73-75 billion in overallsoftware and services revenues by 2010. In the medium term, we expect IT sectorto underperform the market indices, till the time it gets more clarity on the impendingUS IT budgets coupled with trending down of rupee appreciation.

Key budget expectationsIssuesTax exemptionsfor ITcompaniesunder section10-A and 10-Bfor 10-year taxexemptionunder theSoftwareTechnologyParks of India(STPI) schemee Duty

FBT on ESOP's

Excise duty onpackagedsoftware soldover thecounter

Allocation e-governanceproject

Current StatusSec 10A/10B SoftwareExports are exempted fromtax ti l l assessment year2009-10

Fringe Benefit Tax (FBT)levied on Employee StockOption Plans, the FBTimposition will be effectivefrom April 1, 2008

Currently there is 8% exciseduty levied on packagedsoftware sold over thecounter

Increased allocation to Rs7.2 bn as against Rs 3.9 bnin the previous year forambitious e-governanceproject

Industry ExpectationContinue the STPI schemeand tax incentive undersection 10A/10B for next tenyears.

More clarity on theaccounting treatment of theFringe Benefit Tax (FBT)levied on Employee StockOption Plans.

The industry wants the levyof this excise duty to bedropped completely oncustomized software andpackaged software.

Allocation likely to enhancedin the current union budget

ImpactNegative,Governmentmightconsiderextension ofbenefits toBPOs.

Neutral,Inclusion ofotherservicesand fringebenefitsoffers byIndian ITcompaniesto itsemployeesunder FBTwould putfurtherpressure onITcompanies..

Positive

POSITVE

RationaleIn the event of non-extensionof tax benefits under STPIEffective tax rates wouldincrease by 300-400 bps to 17-18% in FY10, post expiry of theSTPI benefits, which inherentlydampen the profitability.

Neutral, as employers willrecover FBT from employees.

This is in favour of nurturing theIndian Software industry bycutting duties andsubsequently making India afavoured IT and IT relatedactivities destination as well ascurbing the piracy in software.

Domestic focused ITcompanies are likely to benefitfrom the increased allocationto e-governance project


(Rs) FY09E FY10E FY09E FY10EInfosys Technologies Ltd 1519 97.3 107.5 15.6 14.1 HOLDTata Consultancy Services Ltd 871 62.7 67.3 13.9 12.9 HOLDSatyam Computer Services Ltd 425 30.1 32.8 14.1 13.0 BUYSource:Reliance Money Research


18th February 2008

MEDIA AND ENTERTAINMENTCurrent view


LONG TERM OUTLOOK

Neutral

Positive

Media and Entertainment is one of the fastest growing sectors in India. Theincreasing rate of urbanization, the penetration of television and radio industry inthe rural areas with the help of the technology and the rising levels of incomes ofthe people in India has facilitated the growth rate of Media and Entertainmentindustry in India. The Indian Media and Entertainment industry stands at the valueof around Rs 43,700-crore currently and is expected to grow at an annual growthrate of 19% to reach Rs 83,740 crore by 2010. The Indian economy is growing at afast rate and the Media and Entertainment industry is expected to benefitsignificantly from it. We expect union budget 2008-09 to have a neutral impact onthe sector, nevertheless on a longer term perspective we expect Indian mediaand entertainment sector to show strong growth prospects.

Key budget expectationsIssuesExcise Tax :Set Top Box:

BroadcastingEquipments:

Digital CinemaEquipments:

Custom Duty:Set Top Box:

BroadcastingEquipments:

Digital CinemaDevelopmentProjects:

FBT

Current Status

16.5%

16.5%

16.5%

0.0%

10.3%

7.7%

ESOPs having beenbrought under the FBT pre-view.

FBT on expenses like food,traveling, accommodationetc. was introduced last year

Industry Expectation

12.0%

Status Quo Maintained


5.0%





Impact

Neutral

Neutral

Neutral

Negative

Rationale

Reduction in excise duty andintroduction of 5% custom inthe set top boxes in order toboost domestic set top boxesmanufactures, will not directlyhelps any of the listedcompany, nevertheless withcheaper amiability of Set topboxes will help to increasepenetration of CAS(Conditional AccessSystem).

More clarity on the accountingtreatment of the FringeBenefit Tax (FBT) levied onEmployee Stock OptionPlans.Impact: Neutral, asemployers will recover FBTfrom employees.

FBT On Other Items LikeFood, Travelling,Accomodation Is Likely ToContiune.



18th February 2008

OIL & GAS AND ALLIED SERVICESCurrent view


LONG TERM OUTLOOK

Positive

Positive

We remain optimistic on the long term growth prospects in the Oil & gas sectormaintaining a stable outlook for both upstream (E&P) and downstream (refiningand marketing) sectors in India. The Center's plan to expand the explorationlicensing area from 44% of the Indian sedimentary basin to 80% by 2011-12 providesa positive outlook for the E&P companies.

The Government formulation of NELP has encouraged active participation fromforeign players to bid in oil and gas blocks and also through NELP- VII, it providesnewer business opportunities to both domestic as well as foreign players creatingnew developments in E&P sector. We expect this to be beneficial to the E&Pcompanies in the long term.

Key budget expectationsIssuesService Tax

Central SalesTax

Central ExciseDuty

Customs Duty

VAT Rate

Tax Holiday forh y d r o c a r b o nsector

Current StatusService Tax is at 12.36%Construction services to thePorts are exempted fromservice tax

Natural gas is currently taxedat 12.5%

The central excise duty onATF is 8%.Ad valorem component ofexcise duty on petrol anddiesel is at 6%

Currently, customs dutylevied* 5% on naphtha,* 5% on liquefied natural gas,* 4% on crude oil and coal

VAT rates is at 12.5%

The Legislature has granteda 7-year tax holiday to suchundertakings under section80-IB of the Income Tax Act1961.

Industry ExpectationExemption from service taxfor E&P activities related tooil and gas

Dredging services to thePorts be exempted

Inclusion of natural gas inthe list of 'Declared Goods'in order to provide a level-playing field among differentprimary energy sources

Rationalization of exciseduty on aviation turbine fuel(ATF) for regional jets.

Rationalization of advalorem excise duty onpetrol and diesel and to bereplaced with specific duties

Reduction of custom duty by3% on naphtha and liquefiedpropaneRationalization of the 5 %duty for liquefied natural gasThe Customs duty on crudeoil should be brought downto zero

Rationalization of VAT

The hydrocarbon sector tobe treated on a par with thepower sector, and a 10-yeartax holiday under Section80IA of the Income Tax Act tobe granted.

ImpactPositive

Positive

Positive

Positive

Positive

Positive

RationaleWould help in reducing theburden of the already-high costof exploration and alsowould encourage foreign oilgiants to participate in thefuture NELP bidding. Willreduce the development costsof the Ports and thereby makethe transaction costs of theirservices competitive

Would allow more usage ofnatural gas as it is environmentfriendly

Would help the Aviationindustry to cut down their majorcost component and thatwould in turn help theconsumers. Would allowlesser fluctuation of prices dueto changes in crude rate andwould benefit the consumers

Would benefit the powerindustry in controll ing thefluctuating price on import ofnaphtha and would encouragethem to increase the usage ofnatural gas as fuel

Would help reduce the burdenon the consumers, particularlypower and fertilizer sectors

Will encourage theentrepreneurs to undertakedevelopmental activities



18th February 2008

POWER UTILITIESCurrent view


LONG TERM OUTLOOK

Positive

Positive

Government still plays a key role in the development of this sector. The privateinitiative in the sector has just taken good pace due to favorable policy initiatives.When the renovation and capacity addition across the value chains of the industryhas become a necessity, not only for the industry but for the country itself, theindustry is looking for the favorable response from the budget proposals whichwill ultimately facilitate the investment in the sector. We believe the current taxsops for resource mobilization for the sector specific NBFCs like PFC and RECwould continue in the current budget and it would also be extended to players likeNTPC and other Private power Utilities. Looking at the growing interest of theforeign institution in the sector, we feel the restrictive ECB norms would be relaxedfor the sector with strict monitoring mechanism in place. Further we trust thegrants through the APDRP scheme would go for more rationalization which inother way help in well directed unbundling of the SEBs with increased privateinitiative. We therefore possess a positive outlook on the sector both in the shortand long term.

Key budget expectationsIssuesFundMobilization

Budgetarysupport to KeySchemes

Regulatory

EquipmentSupply

Industry ExpectationThis sop would continueand would be extended tothe utilities also. Further theECB norms would berelaxed for large powerproject executors as against$20 mn cap currently.

The RGGVY scheme for the11th plan has already got ago ahead last month. So weexpect the RGGVY would getits due and improvedsupport in the currentbudget. However the GrossBudgetary support for theAPDRP scheme maywitness a cut.

CERC would be allocatedthe duty of regulating thecoal prices. The miningactivity would enjoy 10 yeartax holiday.

Indirect and Direct Taxbenefits would be extendedto the new manufacturers ofcritical power equipment.

ImpactPositive

Negative inthe short termbut neutral inthe long run

Positive

Positive

RationaleThe mobilisation ofresources for the projectexecutors and owner shouldbe facilitated for meeting theplanned capacity addition.

Rural Electrif ication sti l lneeds the right support fromthe government as theeffective electrification is stillfar from the desired.However increased privateinitiative in the T&D sectorwith l imited but focusedbudgetary support throughAPDRP scheme wouldimprove the efficiency of theT&D sector upto a satisfactorylevel. So the Budgetarysupport may cut to aconsiderable extent in theAPDRP scheme.

Encouraging the mininginitiatives by the powergenerators.

This measure wouldameliorate the currentshortage of critical powerequipments in the country.

Current StatusThe industry is gettingconcessional finance fromvarious tax saving bondsfloated by the power financingcompanies like REC andPFC. However such benefitshave not been extended to theUtilities.

The total gross budgetarysupport for the two importantschemes, APDRP (from Rs650 crore in FY07 to 800 crorein FY08) and RGGVY (FromRs 3000 crore in FY07 to Rs3983 crore in FY08) got animproved support in the lastbudget. However due tosome internal differencebetween the power andfinance ministry the APDRPscheme for the 11th plan hasgone for a detail review.

Currently there is noregulator for regulating thecoal prices. Also the coalmining by the powergenerators don't get anyfavorable tax incentives forundertaking this diverseinitiative.

The power sector has notbeen allotted infrastructurestatus. There is no such taxsops for the setting up for thecritical power equipmentmanufacturing in the country


(Rs) FY09E FY10E FY09E FY10ENTPC 204 10.3 12.8 19.7 15.9 BuySource:Reliance Money Research


18th February 2008

PHARMACEUTICALSCurrent view


LONG TERM OUTLOOK

Positive

Positive

Research & Development is the prime focus of the Pharma Industry, as it aspiringto move forward in the pharma value chain by discovering new drug moleculesand new drug delivery system. Also Indian Pharma industry, with its advantagelike low cost technical pool and prospering R&D capabilities, is well placed tograb a major chunk of global outsourcing opportunity in the contract researchand manufacturing space. Considering industry scenario, we believe Governmentwould provide fiscal benefits to R&D, which would drive long term growth forIndian Pharma. Thus, We remain positive for the sector, specifically for R&Dintensive players like - Ranbaxy, Nicholas Piramal, Sun Pharma Advance ResearchCompany etc.

Key budget expectationsIssuesIncentives forR&D

Tax holiday

Excise Duty

Customs Duty

Fringe BenefitTax

Industry ExpectationWeighted deduction to beraised to 200% of R&Dspending and also to beextended to depreciation onland and building dedicatedfor research.

To be extended to ClinicalTrials, Bio-equivalencestudies etc. that are doneoutside the R&D facility,whether in India or in anyforeign country.

Patent filling and gettingproduct approval should beallowed for weighteddeduction.

The 100% deduction shouldbe extended upto 31stMarch, 2012.

To be reduced to 8% andabatement to be raised to55%

These should be fullyexempted from CustomsDuty

Physician samples shouldbe exempted from FBT

ImpactPositive

Positive

Positive

Positive

Positive

Neutral

Rationale

This would provoke higherspending towards innovativeR&D by Indian players andcould develop India as thepreferred global destinationfor Pharma R&D andmanufacturing.

This would prop up R&Dspending in country.

This would make themedicines affordable andcould see volume growth indomestic formulations.

To make Life saving drugsaffordable. A

Current StatusWeighted deduction of 150%on R&D spending (other thanany expense on the cost ofland and building) - U/s.35(2AB)

Deduction u/s.35 (2AB) areavailable only to basic re-search carried on at the in-house R&D facility.

Also spending in obtainingregulatory approvals and fill-ing of patents abroad are al-lowed of weighted deduction.

Companies having the mainobject of R&D and approvedby the prescribed authority iseligible for 100% tax exemp-tion from earnings upto 31stMarch 2007 u/s 801B(8A).

Currently 16% on MRP withan abatement of 42.5%.

Life saving drugs currentlyattracts custom duty in therange 5-10%.

Physician samples currentlyattract FBT.


(Rs) FY09E FY10E FY09E FY10ERanbaxy Laboratories Ltd # 396.2 20.8 27.1 19.0 14.6 BUYElder Pharmaceuticals Ltd 390.0 45.8 57.3 8.5 6.8 BUYIndoco Remedies Ltd 266.0 53.4 65.1 5.0 4.1 BUYOrchid Chem & Pharma Ltd* 244.8 23.6 30.9 10.4 7.9 HOLD

* - Under Review# - Year Ending December


18th February 2008

RETAILCurrent view


LONG TERM OUTLOOK

Neutral

Positive

With the steady progress in Indian economy, improving disposable income andconsequent rising consumerism, we believe Indian Retail sector would growprogressively in future. Incidentally, the market penetration of India Retail inorganized sector is extremely low. As per industry estimates, Retail sector islikely to grow up to USD 427 billion by 2010 and the organized retail could accountup to a share of as high as 20%-22% of this market. Already, more than USD 30billion of investment is being planned by both domestic and foreign players inretail space in the coming five to seven years. Considering untapped potential &growth in retail sector, we remain positive in long term but like to be neutral inshort-term, as the sector still in the nascent stage.

Key budget expectationsIssuesIndustry status

Service tax onrenting ofi m m o v a b l eproperty

FiscalIncentives fordevelopment ofretailParks/set-up

Current StatusNot available

VAT on sales of goods andadditional12.24 % service taxon lease and rentals on im-mobile property used forcommercial purposes

There are no such initiative

Industry ExpectationTo grant industry status

Allow set off of service tax onlease rentals paid againstthe VAT liability on sale ofgoods, etc or create a newcomposition scheme

To allow 100% stamp dutyconcession and waiver ofregistration fee for purchase/ lease of land or building forretail. Relaxation of 100%FSI for designated retailprojects.

ImpactPositive

Positive

Positive

RationaleProvision of Industry status willensure retailers have greateraccess to funds, moretransparency with regard toinfrastructure, supply chain etc.Will also help retailers to dealwith issues of man power andprotests in a better way.

Would help in Standardizing taxstructure

Would help in penetration ofretail industry along withincrease in consumption andemployment opportunities inthe economy.


18th February 2008

REALTYCurrent view


LONG TERM OUTLOOK

Positive

Positive

Real estate sector in India is touching new heights as the boom in property pricesare spreading all across .Realty sector has been one of the most attractive sectorsfor which has drawn huge investments from domestic and foreign investors.Thissector is estimated to touch US$ 50 billion by 2009-10 along with the estimatedplanned investment of US$ 475 billion over 2007-12 and an expected growth of 7-8% of GDP. We remain positive on this sector.we believe that this sector will continueto be in limelight and will attract huge investments in both residential andcommercial space mainly because of the robust demand and growing economy.

Key budget expectationsIssuesInterest rates

Payment ofdouble stampduty on sale ofapartments /offices.

Concess i onsfor massa f f o r d a b l ehousing

Extension of 80IB(10)

REIT dividend

REITInvestments

S E Zfor SME’s in IT

Current StatusInterest rates up by ~300-350bps in last 3 years

Stamp duty is payable twice,once during purchase of landand again on sale ofapartment/ office by oneowner to another

No Incentives

The built up area of the shopin a housing project can notexceed 5% of the aggregatebuilt up area or 2000 Sq. ftwhichever is less

Dividends from REITs arenow taxable by both theinstitution and the receiver

Not allowed to invest inhousing developmentactivities

Currently, only thosecompanies buying at least25 acres of land are allowedto set up operations in SEZswhich offer various taxincentives.

Industry ExpectationGovernment should takemeasure towards reducinghome loan interest rates &project finance interest rates

Introduction of Value addedstamp duty (VAS) whereinStamp duty once paid duringpruchase of land will beadjusted towards stampduty paid during conveyanceof apartments / offices

Should be considered asinfrastructure projects andfinance should be madeavailable easily, Exemptionon exise, VAT & Service taxon Building material,Income tax exemption for 10Years

The built up area of the shopin a housing project shouldbe revised as 5% or 2000sq. ft whichever is higher

Divivdends paid should betaxed only to the institutionnot to the receiver

Should be allowed to investin housing developmentactivities, Exemption fromcapital gains tax on sale ofassets

Small and mediumenterprises in the IT industrywant extension of STPI sopsand exemption from fringebenefit tax and service tax onoffice space and must bepermitted co-ownership ofspace at special economiczones.

ImpactPositive

Positive

Positive

Neutral

Positive

Positive

Positive

RationaleIt will make housing affordable

It will reduce the burden ofstamp duty on residentialproperty owners.

Currently India is facing acuteshortage of houses.Concnessions to masshousing would attract moreinvestment in this segment

This would enable builders toundertake construction of alarge project or townshipwhere the requirement of theproject for commercialpremises would be muchhigher.

Will ensure wide participationof investors

Among the various classes ofreal estate, the one which ismost needed in India today, ishousing. This provision willenable REITS to promote notonly commercial buildings butalso provide assistance topromote Housing.

This will encourage andenhance the growth of SME'sin IT which are expected toexpected to contributesignificantly to total softwareand services revenues by2010.


18th February 2008

TELECOM EQUIPMENTSCurrent view


LONG TERM OUTLOOK

Neutral

Neutral

The telecom equipment manufacturing in our country has not been taken muchseriously due to strong long standing business association of the TELCOs withthe multinationals. However with the positive influence of the semiconductor policyand the consistent R&D effort and improved service capability of the equipmentmanufacturers in the country the manufacturing base is witnessing a satisfactoryletup. However with the growing alignment of the manufacturing effort of theIndian manufacturers with the other manufacturers of the world, we believe anypositive/negative recommendation of the budget will have any significant impacton the industry. We keep our neutral view on the sector so far as the budgetproposals goes, but possess a positive biased neutral business outlook for thelong term.


IssuesInverted DutyStructure

Revision ofDEPB rates

Current StatusCertain Vital TelecomEquipments like TelecomHousing, Outdoor Enclosure,Power Controllers etc that arenot covered in the ITA-1Classification are subject tothe levy of custom duty.

A current DEPB rate does notcompensate the local taxes.

Industry ExpectationExtend the ITA-1 benefits tothese vital components andreduce the custom duties tozero. Remove the duty on thedomestic manufacturedfinished products andreimburse the CVD or ED ofthe inputs.

The DEPB rates should berevised upwards

ImpactNeutral

Positive

Rationale ITA-1 telecom equipments enjoyzero duty and these products arejust the accessories for theseproducts. So it is imperative toextend such benefits

Will effectively compensate theappreciating rupee and unsoundlocal tax structure in the country


(Rs) FY09E FY10E FY09E FY10EGemini Comm 181.6 21.9 28.2 8.3 6.4 BUYSource:Reliance Money Research


18th February 2008

TELECOM SERVICESCurrent view


LONG TERM OUTLOOK

Positive

Positive

We remain quite optimistic on the growth of the telecom services sector. Thesector has provided its services at affordable rates despite being subjected totax at higher rates among the other industrial sectors. The industry is expectingfurther rationalization of the tax structure and procedures so as to make theservices more affordable to the general mass of the country. We believe thecurrent budget will streamline some of the tax procedures and more broaden theutilization of USO funds and maintain the emphasis of the sector in the BharatNirman Program.

Key budget expectationsIssuesUnified tax regime

H u g eaccumulation ofCenvat credit dueto limit of 20%utilization towardsInput and Inputservices in caseboth exemptedand taxableservices areprovided by theservice provider.

Service Tax onRenting ofI m m o v a b l eProperty for use inCommerce andBusiness

CENVAT credit forFuel

Levy and taxes oninternet /Broadband datacard

Current StatusNo such initiatives

As per Rule 6(3)(c) of theCenvat credit rules, theprovider of output servicesshall utilize only to anextent of an amount notexceeding 20% of theamount of service taxpayable on output service.

12.24 % service tax onlease and rentals onimmobile property used forcommercial purposes.

Not available

Internet / broadband DataCard imported, attractsBCD: Nil, CVD: 16%,Ed.Cess:2% and SpecialAddl. Duty: 4%. (Effectiveduty - 21.65%) Due to lackof clarity, operators havebeen classifying theinternet / broadband datacards in different customstariff codes

Industry ExpectationTo have a single levy onrevenue.

Should be exempted frommaintaining separateaccounts towards exemptedand taxable services andshould be allowed to availand utilize CENVAT credit tothe extent of the same usedtowards taxable outputservice.

Service tax on renting ofimmovable property for usein commerce and businessshould not be levied.

Telecom company shouldbe allowed input credit forconsumption of fuel used formaintenance and running ofnetworks

Wireless data modem/cardwith PCMCIA/USB/PCIExpress port be classifiedunder 8- digit custom tariffcode of 85 17 62 30 (Modem)and be exempted from CVD,Ed cess and SAD.

ImpactPositive

Positive

Positive

Positive

Positive

RationaleReduction of tax administrativeprocedures.

Reduction of accumulation ofCENVAT credit

Reduce the cost of service forthe end user and roll out ofaffordable services to all areasand especially to the semi-urban and rural areas.

Would lower the burden oflevies on the sector andprovide an incentive for greaterinvestment for expansion ofservice.

Would make the data cardcheaper and is thusencourage the usage ofinternet by the masses.



18th February 2008

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