Union Budget Analysis 2008-09 - kotaksecurities.com · Union Budget 2008-09 Sectoral impact Budget ImpactSectors Positive Automobiles, Capital Goods, Construction, ... 2000-01 2001-02

Registered Office: Kotak Securities Limited, Bakhtawar, 1st floor, 229 Nariman Point, Mumbai 400021 India.

Union Budget Analysis FY2009

February 29, 2008 FOR PRIVATE CIRCULATION

Consumers’ delight, farmers’ respiteq Focus on sustained growth through increased consumption. Cenvat rates have

reduced while exemption limits in personal income tax increased. The targetis to move up the growth rate in manufacturing to double-digits

q Focused investments in infrastructure and agriculture continue. Planexpenditure expected to rise by 17% v/s about 10% rise in non-planexpenditure.

q Various measures announced for the social sector and agriculture to furtherpromote inclusive growth. There is an increased stress on effectiveimplementation of proposals.

q Farmer debt waivers, a populist move in our opinion. May have a salutaryimpact on agricultural growth and rural consumption in the longer term.

q Fiscal prudence has been sought by reducing the fiscal deficit target to 2.5%of the GDP in 2008-09. The impact of the farmer debt relief and Sixth PayCommission provisions are uncertain. The Finance Minister has left scope forhigher borrowing, in case of need.

q Continued capital measures to ease supply-side constraints to restraininflation. However, international crude prices, commodity prices and foodprices seen as challenges. The impetus to consumption also poses a risk, inour opinion. Fiscal and monetary measures to control inflation may be needed.Possibility of interest rate reductions by RBI diminish, in the near future.

q The higher-than-expected exemption limit in personal income-tax and increasein threshold limit for service tax applicability are positive from the consumptionperspective. There have been no major changes on the corporate tax frontexcept marginal benefits in dividend distribution tax (DDT).

q Short-term negative for equity markets: Short-term capital gains tax has beenhiked from 10% to 15%. STT has been allowed as business expense,henceforth, v/s a set-off from tax earlier. Returns expected to be relativelylower for domestic participants. FIIs not to be impacted by STT changes, inour opinion.

q Overall, we see the Budget facilitating continued high growth in the economythrough consumption and additional investments. We also share theGovernment's optimism on promoting equitable growth, provided there iseffective implementation of the proposals.

q The hike in short-term capital gains and provisions related to STT may havea short-term impact on stock markets. There are potential negative implicationson a few sectors including banks (uncertainty related to farm loan write-offs)and cement. These may also continue to engage the market's attention inthe short-term. However, we see the continued growth in the economy helpingoverall corporate profit growth, in turn positively impacting the market in thelonger term.

Union Budget 2008-09

Sectoral impactBudget Impact Sectors

Positive Automobiles, Capital Goods, Construction, FMCG, Food Processing, Healthcare, Hotels, Logistics,Media, Metals, Mining, Oil & Gas, Pharmaceuticals, Power, Retail and Textiles

Neutral Banking, Fertilizer, Information Technology and NBFC’s

Negative Cement

Source: Kotak Securities - Private Client Research

Inflation (%)

Source: Bloomberg

®

UNION BUDGET ANALYSIS

Research Team+91 22 6634 1376

GDP growth (%)

Source: Economic Survey 2007-08

3.0

4.0

5.0

6.0

7.0

Jul-0

5O

ct-0

5Ja

n-06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-07

Apr

-07

Jul-0

7O

ct-0

7Ja

n-08

3

4

5

6

78

9

10

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08E

February 29, 2008 Kotak Securities - Private Client Research

Union Budget 2008-09 Please see the disclaimer on the last page For Private Circulation 2

FOCUS ON GROWTH THROUGH CONSUMPTION…The Finance Minister has expectedly maintained his focus on sustaining growth in theeconomy. This had assumed greater importance because of the relatively slower GDPgrowth in 2007-08, which is budgeted at 8.7%. The slower growth, in our opinion, wasexpected after a high growth of 9.6% in FY07 and due to the concerted efforts by theGovernment and RBI to reign in inflation.

The Finance Minister has indicated that while investment demand continues to remainstrong, it is consumption demand, which had shown signs of a slowdown. With a view torectifying this, the Budget has focused on increasing consumption through reduction inCenvat (excise) duties, while putting more monies in the hands of people through lowertaxes.

Thus, Cenvat duties have been brought down by 2% (to 14%). Specifically, with a view toproviding an impetus to the flagging consumer durables sector, duties on cars, two-wheelers, etc have been reduced by a larger margin. Lower excise duties are also aimedat combating inflationary expectations in our opinion.

These factors are indirectly expected to provide a boost to manufacturing. The Governmenthas set a target of increasing manufacturing growth to double digits from 8.6% witnessedin FY08. In our opinion, buoyancy in consumption would directly impact production, in turn,helping investments.

Plan allocation (Rs bn)FY07 % of FY08 % of FY09 % of

total RE total BE total

Agriculture & Allied Activities 73.91 3.0 85.44 2.9 100.74 2.7

Rural Development 182.68 7.5 211.47 7.2 238.31 6.3

Irrigation & Flood Control 4.62 0.2 4.54 0.2 4.11 0.1

Energy 688.25 28.2 722.30 24.7 938.15 25.0

Industry and Minerals 125.88 5.2 179.53 6.1 288.36 7.7

Transport 498.19 20.4 689.30 23.6 841.77 22.4

Communications 178.51 7.3 165.99 5.7 219.37 5.8

Science Technology & Environment 67.74 2.8 77.42 2.6 92.83 2.5

General Economic Services 25.66 1.1 30.43 1.0 60.52 1.6

Social Services 591.43 24.2 751.62 25.7 959.19 25.5

General Services 5.42 0.2 5.33 0.2 11.50 0.3

Grand Total 2,442.29 100.0 2,923.37 100.0 3,754.85 100.0

Source: Budget document 2008-09; Note: RE:Revised Estimate; BE:Budget Estimate

INVESTMENTS CONTINUE

The investment rate for FY08 is expected to be at a high level of 36.3%. It provides aplatform for higher growth in the next fiscal. For FY09, the Budget has allocated increasedamounts for investments in infrastructure, agriculture and social initiatives. This isadequately reflected in the 17% rise in plan expenditure. On the other hand, non-planexpenditure is budgeted to rise by about 10%. The government has also sort increasedprivate participation in the form of UMPP’s and NELP auctions.

Within infrastructure, there has been an increased allocation for segments like power, urbaninfrastructure and roads. The major provisions related to infrastructure include:

n The fourth ultra mega power project (UMPP) is to be awarded shortly. In addition tothis, states have been urged to bring five new UMPPs to the bidding stage.

n Rajiv Gandhi Vidyutikaran Yojana will be continued in Eleventh Five Year Plan with acapital subsidy of Rs.280 bn and an allocation of Rs.55 bn for FY09

n Allocation of Rs.68.7 bn (v/s Rs.54.8 bn in 2007-08) for Jawaharlal Nehru NationalUrban Renewal Mission. Allocation for National Highway Development Program hasbeen increased to Rs.130 bn v/s Rs.109 bn in FY08.

n Seventh round of bidding under New Exploration Licensing Policy (NELP) is estimatedto attract investment of about $3.5 bn - $8 bn for exploration and discovery

Focus on consumption ledgrowth through duty cuts and

lower taxes

Continued focus oninfrastructure



FOCUS ON INCLUSIVE GROWTH

With a view to making the growth more sustainable, the Government continues to focuson equitable growth. This is reflected in various measures, which have been announcedfor the social sector. The Government is cognizant of the fact that high growth in theeconomy can be sustained only if the growth is equitable and inclusive.

The Budget has increased allocations for several sections like farmers, poor, women,children and minorities. The central plan outlay for social services has been increased byabout 28% to Rs.959 bn.

The major initiatives include :

Education

With about 950 mn Indians expected to be in the working age group of 18-64 years by2026, increasing the demographic dividend is high on the Government's agenda.

n Increase in allocation for Sarva Shiksha Abhiyan from Rs.107 bn in FY08 to Rs.131bn in FY09. Focus will shift from access and infrastructure at primary level to retentionand quality of learning

n With a view to making India a knowledge society, 16 central universities will be set upin hitherto uncovered states. Three IITs and two Indian Institutes of Science Educationand Research (IISERs) will be set up.

n The mid-day meal scheme has been extended to upper primary classes in Governmentand Government-aided schools, which is expected to benefit 25 mn additional children

n An allocation of Rs.850 mn for Innovation in Science Pursuit for Inspired Research(INSPIRE)

Employment

n Allocation of Rs.160 bn (Rs.120 bn in 2007-08) for National Rural EmploymentGuarantee Scheme. The coverage will expand to all 596 rural districts in India,

Public health

n Total allocation of Rs.165 bn, an increase of 15% over the previous fiscal.

n Allocation of Rs.120 bn (Rs.110 bn) for National Rural Health Mission

n Rashtriya Swasthya Bima Yojana will be launched to provide health cover of Rs.30000for every worker in the unorganized sector falling under BPL category and his/her family

Plan expenditure

Source: Economic Survey 2007-08, Annual Budget FY2007-08

Non-plan expenditure

Source: Economic Survey 2007-08, Annual Budget FY2007-08;* Excluding the Rs.400 Bn on account of transactions relating totransfer of RBI's stake to the Govt.

600

1000

1400

1800

2200

2600

FY02

FY03

FY04

FY05

FY06

FY07

FY08

BE

FY08

RE

FY09

BE

5%

10%

15%

20%

25%

Plan Expenditure (Rs bn - LHS)

Growth (% - RHS)

0

1500

3000

4500

6000

FY

02

FY

03

FY

04

FY

05

FY

06

FY07

RE

FY08

BE

*

FY08

RE

*

FY09

BE

0%

5%

10%

15%

20%Non-Plan Expenditure (Rs bn - LHS)

Growth (% - RHS)

Central plan outlay for socialservices increased by 28%



Women and minority sectors

n Further funds committed for pre and post metric scholarships for SC/ST/OBC/minorities

n Rs.115 bn provided for 100% women specific programs and Rs.162 bn for schemeswhere 30% of allocation is for women specified programs

n Allocation for Ministry of Women and Child Development enhanced by 24% to Rs.72bn

AGRICULTURE - INCREASED ALLOCATIONS TO HELP GDP GROWTH

AND CONTROL INFLATION

With the Government focusing on sustaining growth, the contribution of agriculturebecomes important. With the sector expected to grow by only 2.6% in FY08, the allocationsfor the same have increased in the Budget.

The target for gross capital formation (GCF) in agriculture as a proportion of GDP in theagriculture sector has been raised to 16% for the Eleventh Plan from 12.5% in 2006-07.This is with a view to achieving a growth rate of 4%. The target for agriculture credit hasbeen set at a higher level of Rs.2800 bn in FY09.

The higher allocations to agriculture and irrigation have also been made with a view toreducing the supply-side constraints, with a view to control inflation. The Finance Ministerhas expressed confidence in improving the production of primary commodities through thevarious measures taken in the Budget. Various measures to improve productivity shouldalso ensure higher yields in agriculture over the years.

The various measures taken by the Budget are enumerated in the accompanying table.

Agriculture Sector InitiativesIssues Initiatives

Farm credit n Short-term crop loans will continue to be disbursed at 7% per annumn An initial provision of Rs.16 bn for interest subvention in 2008-09

Investment in Agriculture n Gross Capital Formation (GCF) is targeted to be raised to 16% during the Eleventh Plan to achievethe target growth rate of 4%

Water Resources n Accelerated Irrigation Benefit Programme (AIBP) 24 major and medium irrigation projects and 753minor irrigation schemes will be completed in this financial year.

n The outlay for 2008-09 has been increased to Rs.200 bn with a grant component of Rs.55.5 bn.n Allocation of Rs.4 bn for Rainfed Area Development Programme.n To allocate Rs.5 bn for the micro irrigation scheme in 2008-09 with a target of covering another 400,000

hectare.

National Horticulture Mission n An area of 276,000 hectare has been brought under horticulture crops and an area of 56,000 hectareof old plantations has been rejuvenated.

n Provided Rs.11 bn for NHM in 2008-09.n 500 soil testing laboratories will be set up in the public and private sectors during the Eleventh Plan

period with Government assistance of Rs.30 lakh per laboratory

Plantation Crops n The Special Purpose Tea Fund provided Rs.400 mn in 2008-09n Similar support to other plantation crops such as cardamom (Rs.106.8 mn), rubber (Rs.194.1 mn) and

coffee (Rs.180 mn).

Crop Insurance n Provided Rs.6.5 bn for the National Agriculture Insurance Scheme (NAIS) for Kharif and Rabi during2008-09.

Cooperative Credit Structure n For reviving the long-term cooperative credit structure (total cost Rs.30.7 bn), where Central

Government's share will be Rs.26.5 bn or 86% of the total burden.

Debt Waiver and Debt Relief n For marginal farmers (holding upto 1 hectare) and small farmers (1-2 hectare), there will be a completewaiver of all loans that were overdue on December 31, 2007 and which remained unpaid until February29, 2008.

n In respect of other farmers, there will be a one time settlement (OTS) scheme for all loans that wereoverdue on December 31, 2007 and which remained unpaid until February 29, 2008.

n The total value of overdue loans being waived is estimated at Rs.500 bn and the OTS relief on theoverdue loans is estimated at Rs.100 bn.

Rural Infrastructure Development Fund n To raise the corpus of RIDF-XIV in 2008-09 to Rs.140 bn.n To operate a separate window under RIDF-XIV for rural roads with a corpus of Rs.40 bn.

Source: Budget Document 2008-09

Target growth of 4% inagriculture



FURTHER MEASURES WILL BE NEEDED TO CONTROL INFLATION,IN OUR OPINION

While the Finance Minister has taken several steps to reduce the supply-side bottlenecksin the longer term, we feel that in the short to medium term, further monetary measureswill be needed to restrict the impact of imported inflation (high commodity prices and capitalflows) and also that arising from the focus on consumption.

While some measures like reduction in excise duties and a lower fiscal deficit may help incontaining inflation, the Finance Minister has indeed indicated that the Government andRBI would be vigilant in countering higher inflation. With uncertain international factors,high international commodity prices and the potential impact of higher consumption, webelieve the RBI may not reduce interest rates in a hurry.

FISCAL PRUDENCE

The Government has been successful in reducing the fiscal and revenue deficit in FY08to lower-than-targeted levels. Thus, it has been able to adhere to the FRBM targets. TheFinance Minister has budgeted for a further reduction in the fiscal and revenue deficit to2.5% of GDP and 1% of GDP in FY09, thus, continuing with the trend.

The positive part of this target is that the Government has targeted this reduction on theback of moderated growth targets in tax revenues (18% rise in tax revenues) and also onthe back of controlled spend in non-plan expenditure (10% rise).

However, we also note that the Government has not made any provision for loan waiversto the farmers and also the potential impact of the Sixth Pay Commission. While the impactof the former may not impact the deficit, the Sixth Pay Commission is expected to havean impact post its announcement in March 2008. The Finance Minister has indicated thatthe Government has headroom to increase borrowings, in case of need.

Chart showing fiscal and revenue deficit (%)

Source: Budget document 2008-09

Farmer loan waivers

As a populist measure, the Budget has proposed waiving off of a significant amount ofdebt for farmers. The scheme is proposed to cover all loans disbursed by scheduledcommercial banks, regional rural banks and cooperative credit institutions up to March 312007 and overdue as on December 31 2007.

The Budget has proposed a complete waiver of all loans that were overdue on December31 2007 and which remained unpaid until February 29 2008 for marginal farmers and smallfarmers. It has also proposed a one-time settlement (OTS) scheme in respect of otherfarmers for all loans that were overdue on December 31 2007 and which remained unpaiduntil February 29 2008. A rebate of 25% has been proposed against payment of thebalance of 75% under OTS.

About 30 mn small and marginal farmers and about 10 mn other farmers are expected tobenefit from the scheme. The total value of overdue loans being waived off is estimatedat Rs.500 bn while the OTS relief is estimated at Rs.100 bn.

-2.0

0.0

2.0

4.0

6.0

8.0

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08(BE)

2007-08(RE)

2008-09(BE)

Fiscal Deficit Revenue Deficit Primary Deficit

Uncertain internationalfactors, high international

commodity prices and thepotential impact of higher

consumption to be watched

The total relief expected tobe Rs.600 bn



The implementation of the debt waiver and debt relief scheme is to be completed by June30 2008. Moreover, farmers availing the relief would be entitled to fresh agricultural loansfrom banks in accordance with normal rules.

We see this as a populist move of the Budget. We also feel that it can impact the deficitfigures, in case the Government decides to reimburse the banks. There is still uncertaintyabout how the banks will be compensated for this debt waiver, with the Finance Ministernot disclosing his options.

On the other hand, this measure has the potential to increase food grain production, controlprices and improve the balance sheets of banks going ahead.

TAXATION - INDIVIDUALS REJOICE, NO MAJOR CHANGE FORCORPORATES

Proposals on direct taxes — more notes for the Government (STT,STCG), cheers for individual tax payers

The Finance Minister has attempted to use certain relaxations in direct tax norms, aimedat increasing disposable incomes to support consumption led economic growth, in ouropinion. Prominent among these is the increase in exemption limits in personal incometaxes. The Budget has also proposed industry-specific incentives (hospitals, hotels andagro-industry), modifications in the tax treatment of STT and a hike in the short-term capitalgains tax.

Other proposals include the withdrawal of the banking cash transaction tax (BCTT) witheffect from 1 April 2009, after its usage in building efficiency in the tax administrationnetwork and the introduction of a commodities transaction tax (CTT) that is on the samelines as STT on options and futures, in equity markets.

The hike in exemption limits for personal income tax is higher than our expectation. Thethreshold exemption limit is now up to Rs.150,000 (Rs.110,000 earlier), Rs.180,000(Rs.145,000 earlier) for a woman assessee and Rs.225,000 (Rs.195,000 earlier) for seniorcitizens. As the below illustration exhibits the proposals could end up adding cRs.44000per annum to the taxpayer’s pocket, assuming an income of Rs.600,000 pa.

Below we have tried to analyze the impact of changed salary slabs on the net disposableincome of a person. Our base assumptions are an annual salary of Rs.600,000, noadditional cess/surcharge and no other tax saving instruments being used by the assessee.If additional cess is included in the calculations the savings for an individual will be evenhigher, in our opinion.

Personal income tax - impact of increase in exemptionsRs. lakh Applicable Tax paidOld Slabs New Slabs Tax Rate (%) Old New

Rs.0 – 1.1L Rs.0 - 1.5L 0 NIL NIL

Rs.1.1 – 1.5 L Rs.1.5 - 3.0L 10 Rs.4000 Rs.15000

Rs.1.5 - 2.5L Rs.3.0 - 5.0L 20 Rs.20000 Rs.40000

Rs.2. 5L – above Rs.5.0L - above 30 Rs.105000 Rs.30000

Total Rs.129000 Rs.85000

Savings: Rs.44000

Source: Budget Document 2008-09; Kotak Securities — Private Client Research

Vitally, we believe the Finance Minister is possibly using higher disposable income as alever to support consumption led growth in the economy, a point we have illustrated earlierin the report.

For the industry, corporate tax rates and surcharges have been left unchanged by theFinance Minister — in line with our expectations. The service tax rate remained unchangedand the net was widened (four services) added — again in line with expectations.

Also, from a company perspective, double taxation of dividends will be avoided as theparent company would now be allowed to set off dividends received from the subsidiarycompany against the dividends distributed by it.

Exemption limits for individualtax payers increased

No change in corporate taxrates, surcharge



STT and STCG — Short-term negatives for capital markets

From an impact analysis perspective, we opine the hike in STCG to be 15% (10% earlier)and the modifications in tax treatment of STT will be short-term negative for capital markets.

Below, we have attempted to detail the likely impact of the modification in tax treatment ofthe STT on profitability of involved entities.

STT — now will be a business expense, negative for arbitrageurs

Earlier, STT paid on securities transaction was allowed to be deducted from the net taxliability. Now, according to the Budget provision, STT would be allowed as a businessexpense. So, it can be set off against business income. This is negative for traders in themarket like arbitrageurs who typically do larger volumes of transactions and may lead tolower volumes in the segment, in our opinion.

Illustration of change in STT’s tax treatment with the help of a trade example

Gross investment Rs.1000000

STT for Buying @0.125% Rs.1250

Assumed return 11%

Sell price Rs.1110000

STT for Selling @0.125% Rs.1387.5

Earlier Now

Profit Rs.110000 Rs.110000

Total STT paid Rs.2638 Rs.2638

Assumed Interest cost @ 10% Rs.100000 Rs.100000

PBT Rs.10000 Rs.7362.5

Tax payable @33.99% Rs.3,399 Rs.2503

Less STT paid Rs.2638 Rs.0

Tax now payable Rs.761.5 Rs.2503

PAT Rs.6601 Rs.4860

Source: Kotak Securities — Private Client Research

Levy of STT only on premium — attractive for option traders

Earlier, STT was payable on the premium as well as strike price for all options. However,now STT has to be paid on only the premium in case the option is not exercised. So thisis likely positive as in our opinion a large number of options are not exercised.

Indirect taxes — lower excise duties and Cenvat; tools for fightinginflationary expectations

The Finance Minister has proposed to lower excise duties on an assortment of goods andalso lowered the Cenvat to 14% from 16%. In addition to providing impetus to respectiveindustries, the indirect tax proposals are also a means of moderating prices ofmanufactured goods — a possible lever for inflation control, in our opinion.

Also, there is no change in the peak import duties that are unchanged at 10%, the reasonbeing an 11% rupee appreciation (in FY08) that has made imports cheaper, in our opinion.Also, a further reduction in duties would have increased competition for domesticcompanies.

From an industry perspective, automobiles, engineering, capital goods and pharmaceuticalsseem beneficiaries from these proposals. From a reform perspective, the Finance Ministerhas reiterated his confidence in ushering in a unified GST by April 1 2010. The FinanceMinister’s decision to reduce the central sales tax to 2% from 3% is in line with this goal,in our opinion.

STT and STCG — Short-term negatives for capital

markets

Cenvat reduced to 14%

No change in peak importduties



Capital markets - short-term negative…

The Budget has been negative for the stock markets, in the short-term. The FinanceMinister has increased the short-term capital gains tax from 10% to 15%. This may leadto reduced volumes and also higher profit booking in the near term (before March 2008).

On the securities transaction tax (STT), the Finance Minister has changed the method oftreating the same. In our opinion, this may reduce returns, leading to impact on volumes.Thus, these factors may have a negative impact on the markets in the short-term.

… but positive in the long-term

We believe the Budget has done the right thing by focusing on sustainable long-termgrowth of the economy. While fiscal and monetary steps will be needed to control inflationduring the year, the focus on consumption should lead to sustainable high growth.

On the corporate profits front, we do not expect any major negative impact of the Budgetprovisions on the profitability of the companies under our coverage. This is reflected inthe fact that most of the sectors under our coverage have been either positively impactedor are neutral to the Budget. We expect changes in the dividend payments tax to have apositive impact on a section of companies.

While higher short-term capital gains and STT may keep the markets soft in the short term,we expect the economic growth and investments to fuel corporate profits in the mediumto long term and remain positive on the long-term prospects of the markets.

Direct taxes


Indirect taxes


0

1000

2000

3000

4000

FY02

FY03

FY04

FY05

FY06

FY07

FY08

BE

FY08

RE

FY09

BE

15%

20%

25%

30%

35%

40%

Direct Tax (Rs bn - LHS) Growth (% - RHS)

600

1200

1800

2400

3000

3600

FY02

FY03

FY04

FY05

FY06

FY07

RE

FY08

BE

FY08

RE

FY09

BE

12%

15%

17%

20%

22%

Indirect Tax (Rs bn - LHS) Growth (% - RHS)

Hike in STCG and changes inSTT - short-term negatives

Positive in the long-term



CENTRAL GOVERNMENT FINANCES

Central Government Finances (Rs bn)FY07 FY08BE FY08RE % Gth FY09BE % Gth

REVENUETax Revenue

Corporation Tax 1,443.2 1,684.0 1,861.3 29.0 2,263.6 21.6

Income Tax 750.8 868.3 1,034.7 37.8 1,206.0 16.6

Excise Duty 1,176.1 1,302.2 1,279.5 8.8 1,378.7 7.8

Import Duty 863.3 987.7 1,007.7 16.7 1,189.3 18.0

Service Tax 376.0 502.0 506.0 34.6 644.6 27.4

Other Taxes 125.8 137.0 165.0 31.2 194.9 18.1

Gross Tax Revenue 4,735.1 5,481.2 5,854.1 23.6 6,877.2 17.5

Less: States' share 1,203.3 1,424.5 1,518.4 26.2 1,787.7 17.7

Net Tax Revenue 3,531.8 4,056.7 4,335.7 22.8 5,089.5 17.4

Non-tax Revenue 1,722.1 1,779.8 2,058.3 19.5 2,214.5 7.6

Total Revenue Receipts 5,253.9 5,836.5 6,394.0 21.7 7,304.0 14.2

EXPENDITURE

Revenue Expenditure

Interest 1,502.7 1,590.0 1,719.7 14.4 1,908.1 11.0

Defense 516.8 540.8 548.0 6.0 575.9 5.1

Subsidies 529.4 543.3 697.4 31.8 714.3 2.4

Admn & Social Services 1,173.0 1,161.4 1,164.7 -0.7 1,285.2 10.3

Non-plan Expenditure 3,721.9 3,835.5 4,129.8 11.0 4,483.5 8.6

Plan Expenditure 1,424.2 1,743.5 1,756.1 23.3 2,097.7 19.4

Total Revenue Expenditure 5,146.1 5,579.0 5,885.9 14.4 6,581.2 11.8

Capital Expenditure

Non-plan Expenditure 413.4 518.8* 488.7* 18.2 591.5 21.0

Plan Expenditure 274.4 307.5 319.1 16.3 336.2 5.3

Total Capital Expenditure 687.8 1,226.2 807.9 17.5 927.7 14.8

Plan Expenditure on Rev & Cap a/c 1,698.6 2,051.0 2,075.2 22.2 2,433.9 17.3

Non-plan Exp on Rev & Cap a/c 4,135.3 4,354.2 4,618.5 11.7 5,075.0 9.9

Total Expenditure 5,833.9 6,405.2 6,693.7 14.7 7,508.8 12.2

* Excluding the Rs.400 Bn on account of transactions relating to transfer of RBI's stake to the Govt.

DeficitsFY07 FY08BE FY08RE FY09BE

Fiscal Deficit 1,425.7 1,509.5 1,436.5 1,332.9

% of GDP 3.5 3.3 3.1 2.5

Revenue Deficit 802.2 714.8 634.9 551.8

% of GDP 1.9 1.5 1.4 1.0

Primary Deficit (77.0) (80.5) (283.2) (575.2)

% of GDP (0.2) (0.2) (0.6) (1.1)

Source: Government of India, Annual Budget FY2008-09



BUDGET HIGHLIGHTS FY2008-09Changes in direct taxesItem Pre Budget Post Budget

Corporate Tax Rate 30% 30%

Change in personal IT slabs Old Slab (Rs) Tax Rate (%) New Slab (Rs) Tax Rate (%)

0-110,000 0 0-150,000 0

110,000-150,000 10 150,000-300,000 10

150,000-250,000 20 300,000-500,000 20

250,000-above 30 500,000-above 30

Dividend distribution tax Parent company allowed to set-off thedividend received from its subsidiary

Comodities Transaction tax Non-existent Is to be introduced now on same linesas STT on futures and options

Corporate debt instruments Subject to TDS Now exempted from TDSissued in demat form and listed on recognised stock exchanges




Change in Indirect Taxes (%)Pre-budget Post-budget

CUSTOMS DUTIESNon Agricultural products 10 10

Project Imports 7.5 5

Steel melting scrap 5 Nil

Certain life saving drugs and bulk drugs used for their manufacture 10 5

Vitamin premixes and mineral mixtures 30 20

Phosphoric acid 7.5 5

Bactofuges 7.5 Nil

Specified parts of set top boxes and specified raw materialsused in IT/electronic hardware industry 7.5 Nil

Convergence products 10 5

Specified sports goods manufacturing machinery 7.5 5

Rough cubic zirconia and polished cubic zirconia 10 5

Rough coral 10 5Crude and unrefined sulphur 5 2

Naptha imported for manufacture of fertilizer Nil Nil

Naptha imported for manucature of polymers 0 5

Chrome ore Rs.2000/metric tonne Rs.3000/metric tonne

4% cvd on few specified projects in the power sector

EXCISE DUTIESGeneral CENVAT on all goods 16 14

Reduction in CST 3 2

All products produced in Pharmaceutical sector 16 8

Buses and their chasis 16 12

Small cars 16 12

Hybrid cars 24 14

Two wheelers and three wheelers 16 12

Paper,paper board & articles made therefrom manufactured out of non 12 8

conventional raw materials by units not having an attachedbamboo/wood pulp making plantReduction on clearances upto 3500 MT 8 Nil

Certain varities of writing, printing and packing paper 12 8

Composting machines 16 Nil

Wireless data cards 16 NilPackaged coconut water 16 Nil

Tea and coffee mixes 16 NilPuffed rice 16 Nil

Water purification devices 16 8Veeners and flush doors 16 8

Sterile dressing pads 16 8Specified packing material 16 8

Breakfast cereals 16 8

Packaged software 8 12

Refrigeration equipment on end use basis consisting of compressor,condensor, evaporator etc above 2TR and using above 50KW power Nil

Bulk cement Rs.400/mt Rs.400/mt or 14%ad valorem

whichever is higher

NCCD on polyester filament yarn 1 Nil

Cement clinkers Rs.350/metric tonne Rs.450/metric tonne

Non-filter cigerettes < 60mm Rs.168/1000 Cig Rs.819/1000 CigNon-filter cigerettes > 60mm Rs.546/1000 Cig Rs.1323/1000 Cig




SECTOR SUMMARY

Sector summarySector Budget Impact Top Picks

Automobile Positive NA

Banking Neutral Axis Bank, ICICI Bank, IOB & PNB

Capital Goods Positive BHEL, L&T, BlueStar, Cummins, Nitin Fire & Numeric

Cement Negative NA

Construction Positive Punj Lloyd, Simplex Infrastructure, IVRCL,Unity Infraprojects, Sunil Hitech

Fertilizer Neutral NA

FMCG Positive Marico, Colgate palmolive (India) Ltd.

Food Processing Positive Riddhi Siddhi Gluco Biols, Gujarat Ambuja Exports

Healthcare Positive NA

Hotels Positive Indian Hotels, Hotel Leela

Information Tech Neutral Infosys, Satyam, TCS, Infotech

Logistics Positive CONCOR, Gateway Distriparks, GATI

Media Positive ENIL, PVR

Metals Positive NA

Mining Positive NA

NBFCs Neutral LIC Housing Finance, PFC, HDFC

Oil & Gas Positive GSPL, IGL

Pharma Positive Ranbaxy, Cipla, Glenmark Pharma, Nicholas Piramal,Jubilant Organosys

Power Positive NTPC

Retail Positive Provogue (India), Vishal Retail

Textiles Positive JBF Industries

Source: Kotak Securities - Private Client Research



SECTOR IMPACT ANALYSIS



AUTOMOBILES & AUTO ANCILLARIES

BUDGET HIGHLIGHTS & IMPA C T

n Excise duty on small cars reduced from 16% to 12% and on hybrid cars from24% to the general revised rate of 14%.Impact: Reduction in excise duties will likely support volume growth for the industry,going forward. This is positive for players given the recent headwinds the sectoris facing on account of falling sales volumes on the back of high interest rates.This is positive for car manufacturing companies like Maruti and Tata Motors, inour opinion.

n Excise duty reduced on two wheelers, three wheelers and buses from 16% to12%

Impact: Reduction in excise duties will likely lead to higher volume growth for theindustry, going forward. This is positive for players given the recent slowdownthe two-wheeler sector has been facing on the back of high interest rates. This ispositive for Bajaj Auto, TVS Motors and Hero Honda (two wheeler and three wheelercompanies) and Ashok Leyland and Tata Motors (buses).

n Peak import duties left unchanged at 10%.Impact: Positive for the sector. The proposal is on expected lines as cheap importsfrom China, post last year's cut in import duties have been an industry concern.Also, an appreciating rupee did not offer much reason to further cut import duties.

n Increase in exemption limits of personal income tax

Impact: The increase in the exemption limits of personal income tax will lowerthe effective tax outgo for individuals resulting in an increase in disposable income.We opine that this would boost spending power and impact consumption trendspositively. This would benefit consumption driven sectors like media, automobiles,retail and FMCG.

We do not have active coverage on the sector.

BUDGET IMPACT: POSITIVE

Passenger car, sales growth YoY in %

Source: SIAM, Bloomberg

0

6

12

18

24

30

2003

2004

2005

2006

2007

(%)

0

9

18

27

36

2003

2004

2005

2006

2007

(%)

-4

0

4

8

12

16

20

2003

2004

2005

2006

2007

(%)

CVs sales growth YoY in %


Two wheelers, sales growth YoY in %




BANKING


n Debt waiver of Rs.600 bn of agricultural loans disbursed by banks (up toMarch 31 2007 and overdue as on December 31 2007)

Impact: All overdue loans as on December 31 2007 for marginal farmers (holdingup to 1 hectare) and small farmers (1-2 hectares), which remained unpaid untilFebruary 29 2008 will be completely waived off. For other farmers, one-time settlementscheme (OTS) will provide a rebate of 25% against payment of the balance of75%. The total amount estimated here is Rs.600 bn (Rs.500 bn and Rs.100 bn,respectively). This amounts to 20% of the agricultural loans and 3% of overall bankcredit.

The debt waiver is proposed to be completed by June 30, 2008. However, thereis no clarity as to who will bear the burden - Government or banks themselves.There is also uncertainty over how the Government will compensate the banksfor these loans - by cash or bonds.

We believe there could be three scenarios:

1) The Government will fully bear the burden and compensate the banks over thenext three years. This will be very positive for banks as they not only get thefull amount but will also end up cleaning their balance sheet.

2) Banks would bear the full burden. This would be very negative for banks andtheir earnings will be impacted for the next three years.

3) Both banks and the Government would share the burden, which seems morelikely to occur. The magnitude of the impact on the banks would depend on theburden sharing formula arrived between them.

This Rs.600 bn includes the exposure of all banks - scheduled commercial banks,regional rural banks and cooperative banks. So, the amount of exposure by thescheduled commercial bank is much lower than this ballpark figure.

Nevertheless, there is a moral hazard implication of this move. This move willcompensate distressed farmers but will be negative for banks as many borrowerswould be discouraged to pay in time in expectation of such waivers in the future.So, this could increase the risk of NPA on the agricultural sector lending.

n Parent company allowed to set off the dividend received from its subsidiariesagainst dividend distributed by the parent company provided it is not asubsidiary.Impact: It is positive for many banks as it would avoid double taxation on dividenddistributed.

n The increase in tax slab from Rs.110,000 to Rs.150,000 for male tax payersand from Rs.145,000 to Rs.180,000 for female tax payers.Impact: It would increase the disposable income of taxpayers. It would leave aroundRs.4,000 per annuam in the pocket of taxpayer at the lower end of the tax bracket,whereas tax payers in the highest tax bracket would benefit by around Rs.45,000per annum. This would have a rub-off effect and banks would benefit as this wouldreach them through any of their vast array of financial products.

Deposit and credit growth (%)

Source: RBI

Spread (%)


BUDGET IMPACT: NEUTRAL

Impact on EPS (Rs)Company Pre-Budget ABV Post-Budget ABV Current Target Recommendation

FY08E FY09E FY10E FY08E FY09E FY10E Price Price

Top picks

Axis Bank 241.1 272.8 315.8 241.1 272.8 315.8 1023 1260 BUY

ICICI Bank 407.6 440.9 487.6 407.6 440.9 487.6 1089 1505 BUYIOB 84.4 106.0 131.8 84.4 106.0 131.8 165 237 BUY

PNB 325.0 383.9 452.1 325.0 383.9 452.1 603 840 BUYOthers

J&K Bank 431.6 511.0 609.6 431.6 511.0 609.6 725 926 BUY

HDFC Bank 344.7 377.9 418.9 344.7 377.9 418.9 1457 1676 BUY

Source: Kotak Securites - Private Client Research

0

1

2

3

4

PS

U B

anks

For

eign

Ban

ks

Old

Pvt

Sec

tor

Ban

ks

New

Pvt

Sec

tor B

anks

FY06FY07

5%

11%

17%

23%

29%

35%

FY93

FY96

FY99

FY02

FY05

FY08

Credit Deposit



CAPITAL GOODS & ENGINEERING


n Increased allocation on Accelerated Irrigation Benefit ProgramImpact: The outlay under the Accelerated Irrigation Benefit Program, for 2007-08was Rs.110 bn with a grant component of Rs.35 bn. This has been increased in2008-09, and the estimated outlay is Rs.200 bn with a grant component of Rs.55.5bn. Beneficiaries would be pump makers like Kirloskar Brothers and Mather & PlattPumps.

n To create a national fund for T&D reform

Impact: The details of this scheme are yet to be worked out. The Governmenthas approved the continuation of the Rajiv Gandhi Grameen Vidyutikaran Yojanaduring the Eleventh Plan period. The capital subsidy has been raised to Rs.280bn (2007-11). This is likely to benefit companies including Crompton Greaves, BharatBijlee, ABB and Siemens.

n Defense allocation raised by 10% from Rs.960 bn to Rs.1056 bnImpact: Capital expenditure on defense was raised by 15% (11% in the previousBudget) to Rs.480 bn. This is positive for BEL, L&T, M&M and Tata Power.

n Reduction of customs duty on project imports from 7.5% to 5%Impact: This is marginally negative for capital goods manufacturers. Power generation(below 1000 MW for thermal and 500 MW for hydro) and transmission projectswere not subject to 4% special CVD. The Union Budget has proposed to impose4% special CVD on such projects. Chinese competition has been on an increase.This measure may provide some relief to Bhel and Thermax.

n Excise waiver on cold-chain equipmentImpact: Excise duty on refrigeration equipment (consisting of compressor, condenserunits, evaporator, etc) above 2 ton refrigeration (TR) utilizing power of 50 KW andabove have been exempted. This is likely to enable the development of cold chainnetwork. This is positive for Blue Star and Voltas.

n Reduction of general Cenvat rate on all goods from 16% to 14%Impact: This is likely to aid the sustained demand for consumer durables like ACs.This is positive for Blue Star and Voltas.

n Allowed a parent company to set off the dividend received from its subsidiaryImpact: At present, a domestic company is liable to pay dividend distribution tax(DDT). As a result, the distributed dividend is sometimes taxed twice in the handsof a subsidiary company and its parent company. In order to remove the hardship,it has been proposed to allow a parent company to set off the dividend receivedfrom its subsidiary company against dividend distributed by the parent company,provided the dividend received has been subject to DDT and the parent companyis not a subsidiary of another company. This is expected to benefit companieslike L&T, which have several subsidiaries in the infrastructure sector.

Capital goods index

Source: MOSPI

Growth in L&T's order inflows

Source: Company


10%

15%

20%

25%

30%

35%

40%

Q2

FY

07

Q3

FY

07

Q4

FY

07

Q1

FY

08

Q2

FY

08

Q3

FY

08

10%

15%

20%

25%

30%

35%

Apr

_07

May Jun

Jul

Aug Sep

Oct

N

ov

Dec



Impact on EPS (Rs)Company Pre-Budget EPS Post-Budget EPS Current Target Recommendation

FY08E FY09E FY08E FY09E Price Price

Top picks

BHEL 60.6 86.6 60.6 86.6 2,282 2,600 BUY

L&T 97.0 129.8 97.0 129.8 3,523 4,002 HOLD

Cummins 15.1 18.4 15.1 18.4 338 380 BUY

Blue Star 18.3 24.5 18.3 24.5 471 594 BUY

Nitin Fire Protection 20.1 41.0 20.1 41.0 488 650 BUY

Numeric Power Systems 77.1 94.2 77.1 94.2 681 1,100 BUY

Others

ABB 33.1 44.0 33.1 44.0 1,156 1,500 REDUCE

CGL 10.3 14.5 10.3 14.5 314 380 HOLD

Areva 58.7 74.6 58.7 74.6 1,846 2,100 BUY

Bharat Bijlee 142.4 176.5 142.4 176.5 2,875 3,320 HOLD

Siemens 24.3 30.8 24.3 30.8 817 900 HOLD

Suzlon 7.1 12.6 7.1 12.6 281 456 BUY

Voltamp 82.4 105.6 82.4 105.6 1,359 1,850 BUY

KOEL 7.1 9.4 7.1 9.4 114 174 HOLD

Voltas 6.5 9.1 6.5 9.1 203 235 HOLD

Thermax 25.1 29.2 25.1 29.2 663 675 HOLD

Mather & Platt 8.1 16.4 8.1 16.4 161 210 HOLD

Hind Dorr 6.3 9.3 6.3 9.3 132 181 BUY

BEL 81.0 100.0 81.0 100.0 1,454 1,725 BPP

AIA Engineering 66.7 98.1 66.7 98.1 1727 1,870 BUY

Everest Kanto Cylinder - FV Rs. 2 10.5 15.4 10.5 15.4 316 450 BUY

Source: Kotak Securites - Private Client Research; BPP: Book Partial Profits



CEMENT


n Excise duty on bulk cement has been changed to higher of either Rs.400 perton or 14% ad valorem.

Impact: The increase in excise duty on bulk cement is expected to bring it at parwith packaged cement. The bulk trade segment contributes 15-20% of total cementsales with prices lower by Rs.200-300 per ton compared to the retail segment. Ifexcise duty of 14% ad valorem is charged on MRP, it would result in an impact ofRs.160-200 per ton on prices. Otherwise, if it is charged on ex-factory cost, theimpact would be lower to the extent of Rs.40-80 per ton. In both cases, cementcompanies are likely to pass on this increase in excise duty in the bulk segment.However, we believe this move will be negative for the cement sector if companiesare unable to pass the impact to end users, especially if MRP-based excise islevied.

n Excise duty on cement clinker hiked to Rs.450 per ton as against Rs.350 perton earlierImpact: Increase in excise duty on clinker is unlikely to have a significant impacton cement companies since clinker sales contribute only a small percentage oftheir revenues. Also, higher excise is expected to be passed on to end users.

n Customs duty on project imports reduced to 5% from 7.5%

Impact: Reduction in customs duty on project imports to 5% is likely to reduceproject cost of cement companies importing equipment for their upcoming capacities.

n Thrust on infrastructure creationImpact: Thrust of the Union Budget 2008-09 on infrastructure creation in severalsegments such as roads, irrigation, rural and urban development should continueto maintain the cement demand growth over the next few years.

BUDGET IMPACT: NEGATIVE

Capacity utilization

Source: Kotak Securities - Private Client Research, CMA

Trend in GDP and cement growth

Source: Kotak Securities - Private Client Research, Cris Infac

0

50

100

150

200

250

2005 2006 2007 2008E 2009E

Cap

acit

y an

d P

rod

uct

ion

(M

T)

80%

85%

90%

95%

100%

Operative capacity (LHS)Total Production (LHS)

Cap utilization (RHS)

-4%

0%

4%

8%

12%

16%

FY

93

FY

95

FY

97

FY

99

FY

01

FY

03

FY

05

FY07

E

FY09

E

(%)

DD - Growth GDP - Growth



Top Sells

ACC 76.6 73.6 76.6 73.6 796 960 REDUCE

UltraTech Cement 81.1 89.2 81.1 89.2 911 937 REDUCE

Shree Cement 122.2 144.9 122.2 144.9 1219 1440 REDUCE

Others

India Cements 26.9 28.4 26.9 28.4 210 302 HOLD




CONSTRUCTION


n Bharat Nirman, urban infrastructure and roads. The continued thrust oninfrastructure has led to higher allocation in Bharat Nirman from Rs.246 bn to Rs.312.8bn. There has been increased allocation in Jawaharlal Nehru National Urban RenewalMission (JNNURM) from Rs.54.8 bn in 2007-08 to Rs.68.66 bn in 2008-09. Provisionfor NHDP has also been increased from Rs.10.9 bn in 2007-08 to Rs.12.9 bn in 2008-09.Impact: Increased focus on Bharat Nirman, urban infrastructure and NHDP is likelyto provide a boost to the order books of construction companies and, thereby,enhanced revenue visibility for future.

n Irrigation and desalination. Outlay for irrigation under Accelerated Irrigation BenefitProgram (AIBP) has been increased from Rs.110 bn to Rs.200 bn. Union Budget 2008-09 also proposes to set up an Irrigation and Water Resources Finance Corporation(IWRFC) with an initial capital of Rs.1 bn contributed by the Central Government. Alongwith this, it proposes to set up a desalination plant in Chennai. Funds to the tune ofRs.3 bn have been allocated for the desalination plant.Impact: Increased allocations for AIBP as well as proposal for desalination plantis expected to benefit niche players like IVRCL, Nagarjuna Constructions and UnityInfraprojects having expertise in water and irrigation related projects.

n Rural infrastructure development and electrification. The Government hasincreased the allocation for rural infrastructure development fund to Rs.140 bn fromRs.120 bn. Along with this, it has approved the continuation of the Rajiv GandhiGrameen Vidyutikaran Yojana during the Eleventh Plan period and proposed anallocation of Rs.55 bn in 2008-09 as against Rs.39.8 bn in 2007-08.Impact: Higher outlay for rural infrastructure as well as rural electrification is likelyto benefit players in the road and electrification segment such as Era Infra, IVRCL,NCC, Madhucon Projects and Simplex Infrastructure.

n Set off of dividend distribution tax. The parent company is allowed to set off thedividend received from its subsidiary company against dividend distributed by theparent company.Impact: Set off of dividend distribution tax is likely to be positive for all constructioncompanies once their subsidiary companies executing several BOT projects startgenerating returns. This move is likely to avoid double taxation of dividend in thehands of the subsidiary company as well as the parent company.

Overall impact: The Union Budget 2008-09 is likely to be positive for the constructionsector in terms of higher order inflows in various segments as well as continuedfocus on implementation.


Budgetary allocations (Rs bn)

Source: Budget Document - 2008-09

Order book to FY08E sales (x)

Source: Companies

0

70

140

210

280

350

Bha

rat N

irman

JNU

RM

NH

DP

Rur

alIn

fras

truc

ture

Acc

eler

ated

Irrig

atio

nbe

nefit

pro

g

RG

GV

Y

(Rs

bn

)

FY07 FY08 FY09

0

45

90

135

180

Pun

j Llo

yd

Pat

el E

ng

IVR

CL

NC

C

Sim

plex

MP

L

Era

Infr

a

Uni

tyIn

frap

roje

cts

0.0

1.5

3.0

4.5

6.0

Order book (Rs bn - LHS)Sales (Rs bn - LHS)OB/Sales (x - RHS)





Top picks

Punj Lloyd 11.2 19.0 26.9 11.2 19.0 26.9 378 624 BUY

Simplex Infrastructure 15.9 31.4 46.8 15.9 31.4 46.8 631 800 BUY

IVRCL 14.3 19.3 23.5 14.3 19.3 23.5 470 547 BUY

Unity Infraprojects 46.9 57.4 73.0 46.9 57.4 73.0 730 1048 BUY

Sunil Hitech 13.3 23.6 NA 13.3 23.6 NA 277 450 BUY

Others

Nagarjuna Constructions 7.3 10.5 13.2 7.3 10.5 13.2 273 291 HOLD

Madhucon Projects 13.2 17.8 23.6 13.2 17.8 23.6 698 771 HOLD

Era Infra Engineering 57.5 50.3 64.8 57.5 50.3 64.8 680 780 HOLD




FERTILIZER


n Proposal to move to a nutrient-based subsidy regime and alternative deliverymethods being examinedImpact: Industry has been awaiting measures for a long time that will incentivizesetting up of fresh domestic capacities. Greater incentive for the same through amore effective subsidy policy and disbursal mechanism, as being examined bythe Government, will be vital for the sector's prospects, going ahead.

n Customs duty on phosphoric acid is proposed to be reduced from 7.5% to5%; on sulphur from 5% to 2%.Impact: This is positive for fertilizer companies that use phosphoric acid as aninput for manufacturing phosphatic fertilizers. Also, given that phosphoric acid priceshave spiraled internationally, lower customs duty would likely be positive for companies.Reduction of duties on sulphur is also marginally positive for the industry.

n Naphtha imported for production of fertilizers will continue to be exempt fromimport dutyImpact: Continuation of earlier policy is positive for industry players.

n Greater thrust and outlay for the agriculture sector and irrigation schemesImpact: The Government has increased the additional irrigation potential by 500,000hectares. Also, the outlay for the same in 2008-09 has been increased to Rs.200bn from Rs.110 bn in 2007-08. These higher outlays for the sector provide a positivemacro backdrop for the sector.

n Agriculture has been a thrust area for the Government with programs likeBharat Nirman and the accelerated irrigation program that entail significantadditions in farm land requiring to be irrigated. These provide a positive macroback drop for the fertilizer sector. The industry, though, has grappled for longwith issues like regulated pricing, an increasing disparity between costs ofproduction and selling, which are to be compensated through irregular subsidydisbursals by the Government. The Budget allocations for the fertilizer subsidybill has been increased marginally to Rs.310 bn from the Rs.305 bn earlier,even as the subsidy bill for 2008-09 is expected to touch Rs.500 bn.

n While increasing farm-gate prices seem unlikely given its politicalinconvenience, industry will await measures to incentivize fresh domesticcapacity additions in the industry. Fresh capacity additions by domestic playerswill not only cater to extant demand but will also help the Government managethe growing subsidy burden more effectively, in our opinion. Greater thruston facilitating fresh capacity additions, more effective subsidy disbursalmechanisms will be the key for alleviating the fortunes of this sector, in ouropinion.

n We do not have active coverage on the sector.


India’s fertilizer consumption/hectare

Source: Cris Infac

Trend in urea subsidy spending

Source: FAI, GoI

0

60

120

180

240

300

Indi

a

Wor

ld

US

A

Bra

zil

Pak

ista

n

Fra

nce

Chi

na

Kg/

Hec

tare

0

80

160

240

320

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

(Rs

bn

)



FMCG


n Increase in threshold limit of exemption for personal income taxImpact: The threshold limit of exemption has been increased from Rs.110,000 toRs.150,000. For women, it has gone up from Rs.145,000 to Rs.180,000 while forsenior citizens it has risen from Rs.195,000 to Rs.225,000. These increases inexemption limits will result in lesser tax outgo for individuals and put more disposableincomes in their hands. We believe this is positive for the sector as it will boostthe overall demand and induce the households to upgrade to premium brands.

n National Rural Employment Guarantee Scheme (NREGS) to be rolled out to all596 rural districts in India with provision of Rs.160 bnImpact: This underscores the Government's focus on inclusive growth to enablerural India to grow at an equally strong pace. This is a strong positive for the sectoras it will generate more employment in rural India. This will further drive consumptionof consumer goods.

n Excise duty on both filter and non-filter cigarettes brought at par by applyinghigher rates on non-filter cigarettesImpact: This will drive the consumers to lower grade tobacco options or upgradethem to filter cigarettes. We see lesser competition for filter cigarettes emanatingfrom non-filter brands. This is a positive for companies with the majority of incomecoming from filter cigarettes.

n Central sales tax rate being reduced from 3% to 2% from April 1 2008Impact: Along with reduction in the central sales tax, the Budget has also mentioneda roadmap for implementation of goods & services tax (GST) by April-2010. Gradually,central sales tax will be phased out. We think this is a positive for companies asit will further boost the consumption and lend demand buoyancy

n Dividend Distribution Tax (DDT) left unchangedImpact: It will have a neutral impact on the industry. Although the dividend distributiontax was higher last year, the revenues collected were lesser than expected. Typically,FMCG sector companies are high dividend paying and a slight reduction in theDDT would have resulted in a higher pay out to shareholders.


Per capita (Rs)


Category penetrations (%)

Source: Readership Survey - 2007

10000

15000

20000

25000

30000

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

Income Consumption

0

25

50

75

100

Toi

let s

oap

Too

thpa

ste

Sha

mpo

o

Hai

r oil

Det

erge

ntba

r

Ski

n cr

eam

Mos

quito

repe

llant

Was

hing

pow

der

Rural Urban Total



Top picks

Marico Ltd. 2.8 3.7 2.8 3.7 63 90 BUY

Colgate palmolive (India) Ltd. 17.6 21.0 17.6 21.0 373 474 BUY




FOOD PROCESSING


n Customs duty on project imports has been reduced from 7.5% to 5%.Impact: Reduction in customs duty on project imports of food processing machinerywould lead to easy and economical access to sophisticated food processing machinery,thereby leading to higher productivity and efficiency and finally resulting in betterprofitability for food processing companies.

n Excise duty to be reduced from 16% to NilImpact: Items like breakfast cereals (8%), packaged coconut water, tea and coffeemixes and puffed rice would be completely exempt from payment of excise duty.This would lead to reduction in prices of these products. Hence, this would leadto growth in consumption of processed and packaged foods.

n Food grain production in 2007-2008 estimated at 219.3 MMT, which is an all-time high.Impact: Rice production is at 94.1 MMT, maize at 16.8 MMT, and soybean at 9.5MMT. These are all at their individual all-time highs. This is positive for food processingcompanies as this will lead to lower prices of their key raw materials. This wouldboost consumption leading to higher profitability.


Foodgrains production - MMT




Top picks

Riddhi Siddhi Gluco Biols 22.8 48.2 22.8 48.2 237 390 BUY

Gujarat Ambuja Exports - FV Rs. 2 6.5 8.5 6.5 8.5 59 85 HOLD


Oilseeds production - MMT


213

198

209

217 219

175

185

195

205

215

225

FY

04

FY

05

FY

06

FY

07

FY08

E

2524

28

24

27

20

22

24

26

28

30

FY04

FY05

FY06

FY07

FY08

E



HOSPITALS / HEALTHCARE


n A five year income tax holiday to hospitals set up in any place outside the urbanagglomerations especially in Tier-II and Tier-III towns.

Impact: Positive. A five year income tax holiday has been announced for settingup hospitals anywhere in India, especially in Tier-II and Tier-III cities in order toserve the rural hinterlands. Certain specified urban agglomerations will not be covered.This window will be open for the period between April 1 2008 and March 31 2013,during which hospitals must commence operations.

We believe this is positive for bigger hospital chains like Fortis Healthcare, ApolloHospitals and Wockhardt hospitals as this will encourage them to hasten and increasetheir expansion plans to these towns.

n Implementation of Rashtriya Swasthya Bima Yojana from April 1 2008n Additional deduction of Rs.15000 u/s 80D of Income Tax Act for paying medical

insurance premium for parentsImpact: Positive for healthcare service providers as an increase in health/medicalinsurance coverage leads to an increase in demand for quality health or medicaltreatment in bigger hospitals.

Note: We do not have active coverage on the healthcare sector.

Treatment costs in USA, Thailand and India (US$)Treatment USA Thailand IndiaOpen Heart Surgery (CABG) 300,000 14,250 4,400

Bone marrow transplant 250,000 62,500 30,000

Liver transplant 300,000 75,000 40,000

Orthopaedic surgery 20,000 6,900 4,500

Hysterectomy 2,012 511

Gall Bladder Removal 1,755 555

Source: IBEF Report Sept-2006


Break-up of Healthcare spending inIndia

Source: Crisinfac

Per-Capita Expenditure on Healthcare,2003 (US$/PPP)

Source: WTTC

Employer's spend15%

Insurance/social1%

Self paid64%

Government's spend20%

US$/Per Capita (PPP)

-

1,500

3,000

4,500

6,000

US

A

Kor

ea

Bra

zil

Thai

land

Chi

na

Indi

a



HOTELS


n Five year income tax holiday granted to Two, Three and Four-Star categoryhotels to be set in specified districts having Unesco-declared "World HeritageSites".Impact: Positive. A five-year income tax holiday will be granted to Two, Three andFour star category hotels established in specified 27 districts having Unesco-declared"World Heritage Sites". The hotel should be constructed and start functioning betweenApril 1 2008 and March 31 2013. The measure has been taken in view of significantrise in tourists arrivals, especially for cultural tourism.

Unesco-declared "World Heritage Sites" in IndiaCultural NaturalAgra Fort Kaziranga National Park

Ajanta Caves Keoladeo National Park

Buddhist Monuments at Sanchi Manas Wildlife Sanctuary

Champaner-Pavagadh Archaeological Park Nanda Devi & Valley of Flowers National Parks

Chhatrapati Shivaji Terminus, Mumbai Sundarbans National Park

Churches and Convents of Goa

Elephanta Caves, Mumbai

Ellora Caves

Fatehpur Sikri, Agra

Great Living Chola Temples

Group of Monuments at Hampi

Group of Monuments at Mahabalipuram

Group of Monuments at Pattadakal

Humayun's Tomb, Delhi

Khajuraho Group of Monuments

Mahabodhi Temple Complex at Bodh Gaya

Mountain Railways of India

Qutub Minar and its Monuments, Delhi

Red Fort Complex, Delhi

Rock Shelters of Bhimbetka

Sun Temple, Konârak

Taj Mahal, Agra

Source: UNESCO

Tourist Arrival in India

Source: Ministry of Tourism


Contribution of T&T economy to GDPand Employment (2007)

Source: WTTC

0

3

6

9

12

2003

2004

2005

2006

2007

E

2012

E

5

11

17

23

29

Tourist (mn - LHS)

Growth (% - RHS)

0

4

8

12

16

Wor

ld

Chi

na

Indi

a

Mal

aysi

a

Sin

gapo

re

Thai

land

T&T as % of GDPT&T as % of Employment



Top picks

Indian Hotels 6.2 7.3 6.2 7.3 140 180 BUY

Hotel Leela 3.9 4.1 3.9 4.1 51 84 BUY




Industry growth ($ bn)

Source : Nasscom

Growth in number of employees

Source : Nasscom

INFORMATION TECHNOLOGY


n Excise duty on packaged software increased from 8% to 12%, all customizedsoftware services will now attract a 12% service tax levy.

Impact: The proposal would impact companies that cater to the domestic marketthrough sale of packaged and/or customized software. In effect, companies wouldbe paying a uniform levy on domestic revenues - 12% excise duty on packagedsoftware and 12% service tax on customized software services.

Domestic revenues for IT services companies are low with TCS at the higher endwith a 9% domestic contribution in the revenue mix. Wipro, NIIT Technologies andRolta (not under coverage) are other companies that will be impacted by this proposal.

We opine that this would have minimal impact on financials, and leave our estimatesunchanged given the small proportion of revenues the proposal relates to andcompanies' confidence in passing the levy onto the end-customer.

n ITIs to get a push - 238 to be upgraded, a further 309 have been identifiedacross 29 states with corresponding industry partners. The Government hasalso allocated Rs.7.5 bn for upgrading 300 more ITIs.

Impact: The measures, in the longer term, could have a positive impact in termsof possibly easing supply side concerns that the sector currently faces with respectto technically qualified personnel.

n The parent company has been allowed to set off the dividend received fromits subsidiary company against dividend distributed by the parent company;provided the dividend received has paid DDT and the parent company is nota subsidiary of another company.Impact: This is marginally positive for companies as the proposal will help avoidmultiple taxation on dividends.

n The provisions of the Union Budget will not have a significant impact on thesector, in our opinion. The focus on promoting higher technical education,so as to meet the potential demand for employees from this sector is a positive,more so given the extant demand-supply gap.

n Over the recent quarters, the sector has been facing challenges from anappreciated rupee and demand uncertainty from the US, a major user economy.Since Q3FY08, economic growth in the US has been slowing with the increasedprobability of a recession. A prolonged recession in the US can impact volumegrowth for Indian IT services/BPO sector negatively.

n Going forward, we expect the rupee to appreciate in a gradual fashion againstthe dollar. Also, we believe a recession in the US, if it happens, will not bea prolonged one. With these assumptions and the current low valuations,we remain positive on the sector. We continue to back large caps and selectmid-caps in the sector. Large companies, we opine, are in a better positionto weather the abovementioned challenges.


0

11

22

33

44

Exp

orts

Dom

estic

Exp

orts

Dom

estic

Exp

orts

Dom

estic

FY06 FY07 FY08E

IT services ITES / BPO

-

400

800

1,200

1,600

FY

06

FY

07

FY08

E

(Th

ou

san

ds)

Exports Domestic





Top picks

Infosys 79.6 93.2 79.6 93.2 1,540 2,004 BUY

Satyam 25.8 30.7 25.8 30.7 432 560 BUYTCS 52.1 60.9 52.1 60.9 870 1,178 BUY

Infotech 15.6 19.7 15.6 19.7 278 338 BUY

Others

Wipro 22.6 27.8 22.6 27.8 434 537 BUYHCL Tech** 18.9 23.1 18.9 23.1 277 357 BUY

Mphasis 12.4 16.1 12.4 16.1 230 266 HOLDPatni* 33.5 31.7 33.5 31.7 242 405 HOLD

NIIT Technologies 23.6 26.8 23.6 26.8 131 307 BUYNIIT Limited 4.7 8.7 4.7 8.7 124 137 HOLD

I flex 41.9 51.3 41.9 51.3 1,070 1,230 BUYAllsec 2.9 4.7 2.9 4.7 95 108 REDUCE

Geometric 6.1 8.1 6.1 8.1 68 85 HOLDSubex -4.4 21.4 -4.4 21.4 270 313 REDUCE

Megasoft* 11.2 15.7 11.2 15.7 106 167 BUYKPIT 7.6 9.8 7.6 9.8 84 138 BUY

Zensar 25.2 28.3 25.2 28.3 128 265 BUYR Systems 14 17.9 14 17.9 101 139 HOLD

Aztec 4.5 5.4 4.5 5.4 79 67 REDUCE

Source: Kotak Securites - Private Client Research; * Corresponding periods being CY07 and CY08E.; ** June-08 & June-09



LOGISTICS

BUDGET HIGHLIGHTS & I M PA C T

n Exemption of excise duty on cold chain equipmentImpact: Excise duty would be completely exempted on end-use basis, on refrigerationequipment consisting of compressor, condenser units, evaporator, etc above 2-ton refrigeration and utilizing power of above 50 KW. This would help to developcold chain facilities across India. Almost 30% of fresh fruits and vegetables arewasted in India due to lack of proper cold chain facilities. The excise duty exemptionwould reduce the cost of cold chain equipment. Also, it would help the growingorganized retail sector.

n Exemption of customs duty on specified parts of IT and electronic hardwareImpact: Exemption of customs duty on specified parts and raw materials for ITand electronic hardware would boost their demand. This would, in turn, lead toincreased demand for their handling and warehousing and supply chain management.

n CST to be reduced from 3% to 2%Impact: CST would be reduced from 3% to 2% by April 1 2008. This is overallpositive for the logistics industry as it would facilitate easier interstate movementof goods thereby providing additional logistics opportunities.


Cargo traffic at major ports

Source: Indian Ports Association

0

100

200

300

400

500

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

0

2

4

6

8

10

12

Mn Tons Growth %

0

20

40

60

80

100

FY02

FY03

FY04

FY05

FY06

FY07

Rail Road

Cargo share (%)

Source: Railway Budget 2008-09



Top picks

CONCOR 120.1 145.1 120.1 145.1 1756 2875 BUY

Gateway Distriparks 7.4 10.5 7.4 10.5 110 200 BUY

GATI - june end - FV Rs. 2 4.6 6.7 4.6 6.7 123 168 BUY

Others

Allcargo Global Logistics - december end35.4 52.6 35.4 52.6 799 1000 BUY

Redington 15.8 22.4 15.8 22.4 356 440 BUY

TCI - FV Rs. 2 3.6 7.0 3.6 7.0 106 145 BUY




MEDIA


n Specified parts of set-top boxes (STBs) and specified raw materials for use inthe IT/electronic hardware industry to be exempted from customs duty

Impact: This is positive for the industry as it will provide a fillip to platforms likeDTH that use set-top boxes. Eventually, growth in the DTH platform will entail highersubscription revenue declaration -positive for broadcasting companies - andpossibly higher entertainment tax revenues for the Government. The reduction alsorationalizes the differential between importing raw material for set-top boxmanufacturing and importing the finished set-top box, which attracts zero customsduty. This move is expected to boost the domestic manufacturing of set-top boxes.

For companies it would likely lead to lower customer premise equipment costs -incentive for higher subscriber growth. DTH platform providers like Dish TV (listed)are likely beneficiaries.

n Increase in exemption limits of personal income taxImpact: The increase in exemption limits of personal income tax will lower theeffective tax outgo for individuals resulting in an increase in disposable income.We opine that would boost spending power and impact consumption trendspositively, which would benefit consumption driven sectors like media, automobiles,retail and FMCG.

n The parent company has been allowed to set off the dividend received from itssubsidiary company against dividend distributed by the parent company. Thisis provided that the dividend received has paid DDT and the parent company isnot a subsidiary of another company.Impact: This is marginally positive for companies as the proposal will help avoidmultiple taxation on dividends.

n We expect the Budget to have a positive impact on the prospects of the mediasector as a whole, and the companies operating within it. From a longer-termperspective, we believe that on the back of greater spending power, growingconsumerism - offshoots of the healthy economic growth being projected -consumer discretionary sectors like media and entertainment will continue toenjoy healthy growth prospects. India's evolving demographics, with a highproportion in the income earning age, is expected to support consumptiongrowth, going forward.


Media industry - Segmentwise revenue mix (2011E)

Source: PWC Report on Indian Media & Entertainment industry

Growth in overall ad revenues

Source: Industry, FICCI-PwC, Kotak Securities - Private ClientResearch

519

232175

17 9 22 19 100

150

300

450

600

TV

Prin

t Med

ia

Film

ed E

nt

Rad

io

Mus

ic

OoH

Live

Ent

Inte

rnet

Adv

(Rs

bn

)

118136

156179

203229

0

50

100

150

200

250

2005

2006

E

2007

E

2008

E

2009

E

2010

E

(Rs

bn

)





Top picks

ENIL - 15 - 15 425 585 BUY

PVR 8.9 17.4 8.9 17.4 280 396 BUY

Others

UTV 15.6 30.6 15.6 30.6 818 927 HOLD

Balaji Telefilms 13 16.2 13 16.2 212 347 BUY

HT Media 6.2 8.4 6.2 8.4 194 230 HOLD

DCHL 11.3 14.6 11.3 14.6 171 270 BUY




METALS & MINING

BUDGET HIGHLIGHTS & IMPA C T S

STEELBudget Impact - Positive

Though Budget impact is positive, we are extremely cautious on steel sector

n Tax benefits accruing for steel sector, not good enoughExcise duty reduction of 2% (from 16% to 14%)

Central sales tax reduction of 1% (from 3% to 2%)

In total, though there has been a 3% reduction in taxes, it is much lower than the8% excise duty cut that was demanded by the Steel Ministry/industry and the marketexpectations of 4% excise duty reduction for steel companies.

The demand for substantial benefit from the Budget was in the following backdrop:

(a) Humungous 25% (on an average for HRC) increase in steel prices required byvertically non-integrated steel companies to set off ballooning raw material costpressure.

(b) A free regime is unlikely to be available for steel companies to increase steelproduct prices to entirely cover increase in raw material costs, given the electionenvironment, going forward.

So, we believe the extra direct benefit coming for the steel sector from the Budgetwould not be good enough. There is an increasing possibility of margin shrinkagefor steel companies, going forward.

n Marginal comfort in excise duty reduction for end users

The deduction of 2% in peak excise duty across board and 4% deduction in exciseduty for two-wheelers, three wheelers and small cars, would improve the abilityof end users of steel to absorb higher steel costs. Hence, there is marginal comfortfor steel companies in that sense.

n 5% duty reduction on smelting steel scrap — marginally positive for few players

Import duty reduction of 5% for steel melting scrap would ease some cost pressurefor steel companies producing though EAF route using scrap as raw materials.The benefit would accrue to a few medium size companies like Ispat Industries,Usha Martin, etc and a large number of very small players. Most of the large steelcompanies in India are either using BF route or DRI route using sponge iron, sothey would not at all gain from this.

n Custom duty reduction on project imports from 7.5% to 5% will have littlefavorable impact in capital costs for the steel industry, which is currently in acapex mode.

IRON-OREBudget Impact - Neutraln Though budget impact is neutral, we are extremely bullish on the iron-ore

companies

There were very high expectations that the Government would try to restrict exportof iron-ore by hefty increase in export duties or/and substantially increase royaltieson mining of various commodities particularly iron-ore. With the Government choosingto maintain status quo, we believe it is extremely positive for iron-ore companies,which were not significantly re-rated upwards earlier despite at least 65% increasein long-term prices internationally, as big negatives were expected in the Budget.



NON-FERROUS

Budget Impact: Positive

We have positive outlook on non-ferrous companies.

n Focus on T&D - Positive for copper companies:The Finance Minister has laid his focus on improving the transmission & distribution(T&D) network across the country and mentioned enacting a new fund for this purpose.This business segment is highly copper intensive. Thus, it would be positive forcopper companies, which are currently operating at low capacity utilization levels.

2% reduction in excise duty and 1% reduction in central sales tax would also benefitnon-ferrous companies.

Aluminum scrap import duties have been reduced from 5% to 0%. This, we believe,would have a limited negative impact on aluminum companies.

FERROALLOYSBudget Impact - Neutraln Though budget impact is neutral, we are extremely bullish on the ferroalloy

sectorChrome ore export duty has been increased by 50% from Rs.2000/MT to Rs.3000/MT. Though it was done with the objective of helping non-integrated ferrochromeplayers and steel companies, we believe the impact would be very limited as chromeore exports had already been capped at 400,000 tons per annum in the last Budget.The underlying markets dynamics are similar to the one that existed for iron-orelast year.



NBFCS

BUDGET HIGHLIGHTS & IMPA C T S

n Thrust on Bharat Nirman:-

Impact: We believe the continuing thrust on Bharat Nirman would provide a boostto construction and infrastructure development activity. Subsequently, this is expectedto be positive for infrastructure financing companies. Hence, we maintain a positiveoutlook on infrastructure financing companies.

n Thrust on allocation & implementation of another five UMPPs, ARDRP andRGGVY:Impact: The Budget has hinted towards allocation of the Tilaiya project and bringingin another five ultra mega power projects (UMPPs). Meanwhile, higher allocationof Rs.8 bn under the Accelerated Power Development and Reforms Project (APDRP)and Rs.55 bn under the Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY) wouldcontinue to boost investment in the power sector (generation and infrastructure).The continuing thrust on the power sector would be positive for power sector financingcompanies like Power Finance Corporation (PFC).

n Status quo maintained on tax benefits against housing loan:Impact: We believe status quo has been maintained and continuation of the taxbenefit for housing loan interest payment and principal pre-payment is positive forthe mortgage business. On the back of this, we continue to maintain a positiveoutlook on the mortgage finance segment.

n Cut in excise duty on small cars, two wheelers and three wheelers:-Impact: The Finance Minister, in the Budget, has cut excise duty on small carand hybrid cars. The Finance Minister has also reduced the excise duty on twowheelers and three-wheelers from 16% to 12%. If the benefit of the cut in exciseduty is passed on to consumers, it would improve affordability. We are of the viewthat the cut in excise duty is an effort to boost consumption that would be significantlypositive for auto financing companies.

n Service tax extended to AUM charges on Ulip schemes of insurance companies:Impact: The additional four services, which have been brought under the purviewof service tax, include asset management service provided under unit linked insurancepolicy (Ulip). This has been done to bring it on par with their counterparts undermutual funds. We believe the AUM charges on Ulip, which varies between 1% and1.5% of the unit cost, would have a marginal impact, and is a pass through toinvestors. Hence, this would have an insignificant impact on the Ulip plans of insurancecompanies. Services provided by stock/commodity exchanges and clearing houseshave also been included.

n Rationalization of STT as expenditure: -

Impact: The Budget has proposed that the security transaction tax (STT) paid betreated like any other deductible expenditure against business income. We believethat due to this change in accounting treatment, brokerage firms and marketintermediaries, who have sizeable arbitrage funds or higher volume, would makethis segment relatively less attractive. Hence, if the proposal is passed through,then it would have some negative impact on stock market intermediaries.


Mortgage to GDP

Source: Crisinfac



Top picks

HDFC Ltd 86.5 94.1 86.5 94.1 2,802 3142 BUY

PFC 10.4 12.3 10.4 12.3 186 250 BUY

LIC Housing Finance 41.2 49.3 41.2 49.3 308 450 BUY


0%

25%

50%

75%

100%

Indi

aC

hina

Phi

lippi

nes

Thai

land

Fra

nce

Hon

gG

erm

any

Sin

gapo

re US

UK

Den

mar

kN

ethe

rlan

Investment in Infrastructure SectorsPublic-Private Partnership in India (FY08)

(Rs bn)

Airports 191.11Ports 604.87Railways 10.07Roads 470.91Urban development 18.79Total 1295.75




OIL & GAS


n Specific excise duty on petrol and dieselImpact: The ad valorem part of the excise duty on unbranded petrol and unbrandeddiesel is being abolished. It would be replaced by an equivalent specific duty ofRs.1.35 per liter. Also, there would be a specific duty of Rs.14.35 per liter on unbrandedpetrol and Rs.4.6 per liter on unbranded diesel. This is positive for oil marketingcompanies as now with rising crude prices the duty would remain fixed at thementioned rates and not rise as percentage of crude prices as was the case earlier.Thus, there would be no impact of duties on retail prices

n New exploration licensing policyImpact: The seventh round of bidding under the New Exploration Licensing Policy.Bids would be invited for 57 exploration blocks. It is estimated to attract investmentof the order of US$3.5 bn to US$8 bn for exploration and discovery. This is overallpositive for the oil and gas industry including the related transportation segment.

n Customs duty of 5% to be imposed on import of naphtha for polymers.Impact: This is positive for oil refineries who produce and sell naptha to the polymerindustry as now they would sell at import parity prices i.e. 5% higher due to impositionof customs duty.


Natural Gas - $/mmbtu

Source: Crisinfac

Crude oil - $/barrel

Source: Crisinfac

4

6

8

10

12

14

Apr

-03

Dec

-03

Aug

-04

Apr

-05

Dec

-05

Aug

-06

Apr

-07

Dec

-07

20

40

60

80

100

Apr

-03

Dec

-03

Aug

-04

Apr

-05

Dec

-05

Aug

-06

Apr

-07

Dec

-07



Top picks

GSPL 1.6 2.8 1.6 2.8 71 105 BUY

IGL 12.2 13.6 12.2 13.6 147 190 BUY




PHARMACEUTICALS


n Excise duty on all goods produced in pharmaceutical industry reduced from16% to 8%.

Impact: Positive. We believe this will improve the profitability of pharmaceuticalcompanies marginally (most ot the benefit may be passed on) and will also helpin making medicines more affordable to the common man.

n 125% weighted average deduction provided in income tax for outsourced R&D.Impact: Positive. In order to promote outsourcing of research, a weighted averagededuction of 125% is allowed on any payment made to companies engaged inresearch and development. The inclusion of outsourced research and developmentoperations under the exemption limits would boost drug discovery operations andinvestment in R&D in India.

n Customs duty on certain specified life saving drugs (formulation & bulk) reducedfrom 10% to 5%. These drugs are also exempt from excise & countervailing duty.

n Anti-AIDS drugs and Atazanavir (including their bulk drugs) to be exempted fromexcise duty.Impact: Positive for major pharmaceutical companies having a presence in life-saving drugs.

n Health sector: Rs.165.3 bn allocated for the sector marking an increase of 15%over 2007-08

n National Rural Health Mission: Allocation to NRHM has been increased fromRs.99.5 bn to Rs.120.5 bn

n HIV/AIDS: The National Aids Control Program provided Rs.9.9 bn

n Polio: Allocation for Polio Eradication Rs.10.4 bnImpact: Positive. Increased allocation for health is positive for both the healthcareand pharmaceutical industry. The drive to eradicate polio continues with a revisedstrategy and focus on the high risk districts in UP and Bihar. It is positive for PanaceaBiotec given its dominant presence in polio vaccination in India.

Overall impact: Overall, we believe this is a positive budget for pharma & healthcarecompanies. Cut in custom and excise duty and 125% weighted deduction for R&Doutsourcing will add back to profits. More focus on HIV/AIDS eradication is positivefor MNC and some domestic pharma majors.

Global patent expiration (2006-11)

Source: Industry and companies

Global Outsourcing Opportunity by

2010 (US$ bn)

Source: Industry and companies


India: A preferred outsourcing destinationGlobal Outsourcing Market in 2006: US$34bnIndian Outsourcing Market in 2006: US$750mnGlobal Outsourcing Market in 2010E: US$64bnIndian Outsourcing Opportunity in 2010E: US$3.7bn

0

7

14

21

28

35

2006

2007

2008

E

2009

E

2010

E

2011

E

(US

$ b

n)

Custom Chem.

Synthesis8%

($5 bn)

Contract Manu-

facturing47%

($30 bn)

Discovery & Clinical Research

45%($29 bn)



Top picks

Ranbaxy Labs* 23.6 27.4 24.5 28.4 446 490 BUY

Cipla Ltd 8.9 10.1 8.9 10.4 207 235 BUY

Glenmark Pharma 21.7 26.7 21.7 27.7 485 610 BUY

Nicholas Piramal 18.0 22.0 18.0 22.7 274 364 BUY

Jubilant Organosys 22.2 26.6 22.2 27.5 357 460 BUY

Others

Alembic Ltd 10.5 10.6 10.5 10.8 55 130 BUY

IPCA Laboratories 57.2 66.4 57.2 68.3 625 800 HOLD

Lupin Ltd 44.7 42.7 44.7 44.1 556 730 BUY

Panacea Biotec 18.1 26.3 18.1 26.9 318 474 BUY

Pfizer India** 43.3 46.3 44.7 47.9 677 735 HOLD

Strides Arcolabs* 21.1 22.5 21.1 22.5 160 400 BUY

Torrent Pharma 14.6 18.7 14.6 19.3 158 283 BUY

Source: Kotak Securites - Private Client Research; * December Year End; ** November Year End



POWER


n Development of Debt marketImpact: This is a strong positive for the sector as it is facing a massive financialcrunch. According to the Eleventh Plan, the total fund requirement is to the tuneof Rs.10,000 bn. There is still a substantial funding gap of Rs.4500 bn that is yetto be filled. A developed and liquid debt market will make it feasible to raise moneyfrom the market at attractive rates reducing the capital outlay for projects.

n Parent company allowed to set off the dividend received from its subsidiarycompany against dividend distributed by the parent company, provided thedividend received has suffered DDT and the parent company is not a subsidiaryof another company.

Impact: We think this is positive for the sector as most new mega projects arebeing undertaken as a part of special purpose vehicles (SPVs). This move willavoid the cascading effect of taxes as in the earlier case, thereby leaving moremoney with the industry.

n Special 4% countervailing duty on specified projects in power sector

Impact: This will be an additional duty on project imports of sub-mega power projects(<1000MW in thermal power plants). We think it will encourage power generatorsto go for mega power projects, which will result in higher efficiencies and lowerlosses that the sector has been lacking.

n National Fund for T&D reformImpact: Renewed focus on the transmission and distribution (T&D) sector will bringdown losses and reduce the peak power deficit. We expect substantial investmentsto go into the sector comparable to equivalent investments seen in the generationsector.

n Ultra Mega Power Projects(UMPP): The fourth UMPP at Tilaiya will be awardedsoon and five more UMPPs are in the process. The respective five stategovernments have been asked to expedite the clearances and bring projectsto the bidding stage.

Transmission growth during 5-yr plans

Source: CEA

Power demand and deficit

Source: CEA


0

60000

120000

180000

240000

300000

6th

Pla

n

7th

Pla

n

8th

Pla

n

9th

Pla

n

10th

Pla

n

Till

Dat

e

Transmission Lines (ckm)Sub-station (MVA)

0

27

54

81

108

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

9M 0

7-08

0%

4%

8%

12%

16%

Demand (GW - LHS)

Peak deficit (% - RHS)



Top picks

NTPC 9.4 10.6 9.4 10.6 202 238 BUY




RETAIL


n Increase in exemption limits of personal income taxImpact: The increase in exemption limits of personal income tax will lower thetax outgo for individuals resulting in an increase in spending power and consumptionof the population. This would directly benefit retail companies. With the middle-class population being the major target market for organized retailers, the 165 mn(Source: E&Y) strong middle class having incomes between US$500-4700, wouldbe provided with higher disposable incomes. This will drive consumption at retailchains.

n Reduction in central sales tax rate from 3% to 2%Impact: This is positive for retail companies. The Budget has also mentioned thata road map was being prepared to implement goods and service tax (GST) byApril 1 2010. Central sales tax would be phased out by then.

n Overall ImpactImpact: Overall, we believe the Budget will have a positive impact on the retailsector. With the Budget focusing on driving consumption to stimulate growth, webelieve the retail sector would be a major beneficiary. With initiatives such as loweringpersonal income tax rates, the Budget has handed the population higher disposableincomes. We believe this will be used for personal consumption giving a boost tothe sector.

With the main driver of organized retail being higher incomes and higher spendingand growth of the middle class population, we believe this Budget has armed themiddle class with a further incentive to spend and consume. The increasing penetrationof organized retail would, in turn, drive further consumption befitting organized retailers.


Segment wise size of organised retail market (2006)

Source: CRISIL

Growth of Retail in India

Source: CRISIL; *E - Estimate **P - Projected

93

195

106

34 3410

44

14

0

50

100

150

200

Food

&B

ever

age

Clo

thin

gan

d Te

xtile

Con

sum

erD

urab

les

Hom

eD

écor

&

Jew

elle

ry&

Wat

ches

Bea

uty

care

Foo

twea

r

Boo

ks &

Mus

ic

(Rs

bn

)



Top picks

Provogue (India) 14.4 25.4 37.6 14.4 25.4 37.6 1196 1360 BUY

Vishal Retail 20.7 34.3 - 20.7 34.3 - 845 861 BUY

Others

Shoppers' Stop 2.9 6.6 - 2.9 6.6 - 473 480 HOLD


0

5000

10000

15000

20000

2005-06E* 2006-07P** 2010-11P0

2

4

6

8

10

Total Retail (Rs bn - LHS)Organised Retail (Rs bn - LHS)Organised Retail Penetration (% - RHS)



TEXTILES


n Customs duty on project imports has been reduced from 7.5% to 5%.Impact: Reduction in customs duty on project imports would lead to easy andeconomical access to modern textile machineries, thereby leading to higher productivityand efficiency and finally turning into better profitability.

n Cotton crop at 23.4 mn bales - all time high

Impact: The cotton crop has been at all-time high at 23.4 mn bales, which wouldhelp to moderate cotton prices for cotton yarn manufacturers and exporters.

n TUF and SITP continues in the Eleventh PlanImpact: Schemes for integrated textile parks (SITP) and the Technology UpgradationFund (TUF) will be continued in the Eleventh Plan period. Provision for SITP isbeing maintained at Rs.4.5 bn in 2008-09. Provision for TUF is to be increased toRs.10.9 bn in 2008-09 from Rs.9.1 bn in 2007-08.T As a result of this, we expectmore investments to be made in the textile sector, thereby making it more competitiveand profitable in the long run.

n Allocation for handloom to be increased to Rs.3.4 bn

Impact: For the development of the handloom sector, 250 clusters and 443 yarnbanks are being established under the cluster approach. Over 1.7 mn families ofweavers would be covered under the health insurance scheme by March 2008.Infrastructure and production would be scaled up by taking up six centers fordevelopment as mega clusters. Namely, Varanasi and Sibsagar will be taken upfor handlooms, Bhiwandi and Erode for power looms, and Narsapur and Moradabadfor handicraft. Each mega cluster would require about Rs.700 mn and the Governmentwould make an initial contribution of Rs.1 bn in 2008-09.

n NCCD of 1% removed on polyester filament yarnImpact: The Government has removed the 1% National Calamity Contingent Duty(NCCD), which was charged as a surcharge on excise duty. This would help toreduce the final cost of polyester filament yarn and, thus, help to increase itsconsumption.


Price trend - Rs/kg

Source: Ministry of Textiles



Top pick

JBF Industries 18.0 29.1 18.0 29.1 143 250 BUY


30

50

70

90

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

PTA MEGPolyester Chips POY

13

15

17

19

21

23

25

FY

03

FY

04

FY

05

FY

06

FY

07

Textile exports as % of total exports

Source: Ministry of Textiles



Disclaimer This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced orredistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is notto be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation wouldbe illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take intoaccount the particular investment objectives, financial situations, or needs of individual clients.We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy orcompleteness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising fromthe use of this document. This report contains analysis of budget proposals and expected impact on specific sectors and companies by ourexperts. There may be different interpretation and opinion for these proposals. Investors are advised to refer fine print of union budget 2008for complete details of budget proposals. The recipients of this material should rely on their own investigations and take their own professionaladvice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for futureperformance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities- involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock'sprice movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on acompany's fundamentals.Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonablebasis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so.Prospective investors and others are cautioned that any forwardlooking statements are not predictions and may be subject to change withoutnotice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendationsexpressed herein.Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has beenprepared by the Private Client Group . The views and opinions expressed in this document may or may not match or may be contrary withthe views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.We and our affiliates, officers, directors, and employees world wide may: (a) from time to time, have long or short positions in, and buy orsell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earnbrokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or act asadvisor or lender / borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and relatedinformation and opinions.The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subjectcompany or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related tospecific recommendations or views expressed in this report.No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent.

Registered Office: Kotak Securities Limited, Bakhtawar, 1st floor, 229 Nariman Point, Mumbai 400021 India.

Research TeamName Sector Tel No E-mail idDipen Shah IT, Media, Telecom +91 22 6634 1376 [email protected] Zarbade Capital Goods, Engineering +91 22 6634 1258 [email protected] Virmani Construction, Cement, Mid Cap +91 22 6634 1237 [email protected] Garg Pharmaceuticals, Hotels +91 22 6634 1406 [email protected] Doshi Logistics, Textiles, Mid Cap +91 22 6634 1366 [email protected] Gurnurkar IT, Media, Telecom +91 22 6634 1273 [email protected] Agrawal Metals, Mining +91 22 6634 1291 [email protected] Sinha Banking, Economy +91 22 6634 1440 [email protected] Ledwani Retail +91 22 6634 1507 [email protected] Lohra NBFCs +91 22 6634 1480 [email protected] Shet FMCG, Power +91 22 6634 1382 [email protected] Chouhan Technical analyst +91 22 6634 1439 [email protected] Ray Editor +91 22 6634 1223 [email protected]. Kathirvelu Production +91 22 6634 1557 [email protected]

Documents

Union Budget Analysis 2008-09 - kotaksecurities.com · Union Budget 2008-09 Sectoral impact Budget ImpactSectors Positive Automobiles, Capital Goods, Construction, ... 2000-01 2001-02