Budget Analysis Feb 2011

PRIVATE CLIENT RESEARCH
UNION BUDGET ANALYSIS

FEBRUARY 28, 2011
UNION-BUDGET ANALYSIS UNION BUDGET ANALYSIS FY2011-12

Research Team
+91 22 6621 6301
Intent clear, is implementation near?
q The FM has presented a reform-oriented budget, focusing equally on
containing inflation while promoting growth in a challenging environment.
Targeted fiscal deficit of 4.6% is a big positive, provided the Government is
able to control the expenditure to the desired extent.
q In a bid to reduce supply side constraints, the FM has allocated significant
GDP growth (%)
sums to agriculture, especially for commodities, which have seen sharp price
10 rise. More importantly, there is significant stress on removing supply
bottlenecks, in line with our pre-budget expectations.
9 q To sustain growth, investments in infrastructure have been increased and
the FM has also announced measures to attract more private and foreign
8 funds, especially in debt. We expect rigorous implementation of the
allocated sums. Plan expenditure is up by 11.8% over and above the 31%
7 rise in FY11 (RE). Equitable growth has rightly been focused on with higher
allocations for education, public health, agriculture and employment.
6 q The FM has announced his intention to introduce various reforms during
2010-11*
2005-06
2006-07
2007-08
2008-09
2009-10
FY11-12. Some of the important bills relating to banking, insurance and

pension can be introduced. The FM has announced that, eligible foreign
investors will be allowed to invest in Mutual Funds. Cash - based direct
subsidy is expected to be launched in FY11-12. A constitutional amendment
Source: CSO, * Stands for Revised Estimate bill on GST will be introduced in the budget session and DTC is expected to
be implemented WEF FY12-13.
q The 4.6% fiscal deficit target for FY11-12 came as a pleasant surprise.
However, the Government will have to rely on effective implementation to
Inflation (%) control expenditure to the desired extent. Removing control on fuel prices
and effective implementation of direct cash subsidy can help in reducing
16 overall expenditure.
12 q On indirect taxes, the headline rates have been left unchanged. However,
additional services have been brought under service tax net and base excise
8 duty rate has been increased from 4% to 5%.
q With a view to compensate consumers for inflation, income tax exemption
4 limit has been increased by Rs.20,000 to Rs.180,000, in effect putting
Rs.2,000 more in the hands of the individuals. A marginal increase in MAT
0
will be largely offset by a reduction in surcharge. Non-MAT companies will
see tax burden reduce marginally.
-4
q The budget is largely in line with our expectations as far as larger issues of
Jul-08
Jul-09
Jul-10
Jan-09
Jan-10
Jan-11
Oct-08
Oct-09
Oct-10
Apr-08
Apr-09
Apr-10
growth, inflation and fiscal discipline are concerned. While the market's
concern on excise duty rise was addressed (no increase) the concern on
fiscal deficit will likely be resolved during the year, we opine.
Source: Economic Survey 2010-11
q Thus, we do not expect any major impact on the markets in the near term.
Over the medium - to - long term, we expect the valuations and global
economic scenario to dictate market movements. We opine that, valuations,
based on FY12E consensus earnings, leave scope for gains over this period.
Sectoral impact
Budget Impact Sectors
Positive Agriculture/Fertilizer, Automobiles, Banking & NBFC, Construction, FMCG, Logistics, Retail
Neutral Capital Goods & Engineering, Information Technology, Media, Metals & Mining, Power, Real Estate & Telecom
Negative Aviation, Cement, Hotels, Oil & Gas
Source: Kotak Securities - Private Client Research
Registered Office: Kotak Securities Limited, Bakhtawar, 1st floor, 229 Nariman Point, Mumbai 400021 India.
February 28, 2011 Kotak Securities - Private Client Research
Attacking supply side constraints in agriculture

With WPI inflation remaining at elevated levels and food inflation at 11.5%, Mr.
Mukherjee has tried to address some long pending structural issues in agriculture.
These issues are expected to attack the supply side constraints and ease inflation.
We had expected higher focus on removing supply bottle-necks to increase sup-
plies. We opine that, in the backdrop of a challenging fiscal situation, effective
implementation rather than high spends, will alleviate the supply side issues effec-
tively.
The budget has stated the Government’s express intent to removal of production
and distribution bottlenecks for items like fruits and vegetables, milk, meat, poultry
and fish. Approval is being given to set up 15 more Mega Food Parks during 2011-
12. Moreover, efforts are being made to augment storage capacity through pri-
vate entrepreneurs and warehousing corporations area also being fast tracked.
Another important provision is that of making capital investment in creation of
modern storage capacity eligible for viability gap funding of the Finance Ministry. It
is also proposed to recognize cold chains and post-harvest storage as an infrastruc-
ture sub-sector allowing them to avail additional benefits.
There is a repeat mention of bringing about a second green revolution in parts of
Eastern India and allocation of Rs.4bn have been made towards improving rice-
based cropping system in this region. Also, the FM has tried to address the struc-
tural short-fall in important commodities like pulses and oil palms. Allocations have
been made to promote 60,000 pulses villages in rain-fed areas.
As per the first advance estimates, production of kharif crop in 2010-11 is esti-
mated to be 114.63 mn tonnes, which is lower than the target of 125.31 mn
tonnes set out for the year (but higher than 103.84 mn tonnes during last year).
To provide support to agriculture, the target credit growth for farmers has been
raised to Rs.4.75trn v/s Rs.3.75trn in FY11. Allocation under Rashtrita Krishi Vikas
Yojana has been increased from Rs.67.5bn to Rs.78.6bn YoY.
However, there have been no duty cuts, either excise or customs, to cushion the
impact of high prices. The FM was likely constrained by the significant volatility in
the crude prices during the year as well as in past years, which may render the
duty changes non-effective. We believe that, the FM may act once the volatility
subsides.
Sustained focus on growth …

The Finance Minister has rightly focused on sustaining and improving the high
growth rates of the economy.
After experiencing a slowdown in FY09 and the early part of FY10, Indian
economy has recovered smartly. According to the advance estimates of CSO, the
Gross Domestic Product (GDP) growth for 2010-11 is pegged at 8.6%, which will
be the second fastest growth across major economies. The growth is expected to
be led by all three segments viz agriculture (5.4%), industry (8.1) and services
(9.6%)
The economic survey for 2010-11 has laid down targets of 9% in FY12 and
double-digit growth rates in the future years. However, these are subject to several
challenges like high crude prices, monsoons and global economy in the short term
and structural changes in the economy over the longer term.
Union Budget 2011-12 Please see the disclaimer on the last page For Private Circulation 2
Growth in Real GDP (%)

(Base year:2004-2005) 2005-06 2006-07 2007-08 2008-09PE 2009-10QE 2010-11AE
Agriculture, Forestry & Fishing 5.1 4.2 5.8 -0.1 0.4 5.4
Mining & Quarrying 1.3 7.5 3.7 1.3 6.9 6.2
Manufacturing 10.1 14.3 10.3 4.2 8.8 8.8
Electricity, Gas & Water Supply 7.1 9.3 8.3 4.9 6.4 5.1
Construction 12.8 10.3 10.7 5.4 7.0 8.0
Trade, Hotels, Transport & Communication 12.1 11.7 10.7 7.6 9.7 11.0
Finance, Real Estate, Other Businesses 12.7 14.0 11.9 12.5 9.2 10.6
Community, Social & Personal Services 7.0 2.9 6.9 12.7 11.8 5.7
GDP at Factor Cost 9.5 9.6 9.3 6.8 8.0 8.6
Source: CSO
…through investments
Towards this objective, the FM has allocated significant sums towards investments
in agriculture as well as infrastructure. The plan expenditure has thus, been
increased by about 11.8% as compared to the revised estimates for FY11. This is
over and above the 30% rise in FY11 (RE).
The allocation for infrastructure has been increased to Rs.2.14trn, about 23%
higher YoY. Infrastructure allocation now forms 48.5% of total plan allocation. To
boost infrastructure development, tax free bonds of Rs.300bn are proposed to be
issued by Government undertakings during 2011-12.
Financial assistance will be made available for metro projects in Delhi, Mumbai,
Bengaluru, Kolkata and Chennai. Moreover, capital investment in fertiliser
production is now proposed to be included as an infrastructure sub-sector.
Central Plan Outlay by Sectors (Rs bn)

FY10 % of Total FY11BE % of Total FY11RE % of Total FY12BE % of Total
Agriculture & Allied Activities 110.1 2.7 123.1 2.3 143.6 2.9 147.4 2.5
Rural Development* 473.7 11.6 551.9 10.5 554.4 11.0 552.9 9.3
Irrigation & Flood Control 4.2 0.1 5.3 0.1 4.1 0.1 5.7 0.1
Energy 1,143.1 28.1 1,465.8 27.9 1,262.3 25.1 1,555.0 26.2
Industry and Minerals 306.9 7.5 390.2 7.4 388.5 7.7 452.1 7.6
Transport** 864.5 21.2 1,020.0 19.4 987.3 19.7 1,168.6 19.7
Communications 147.5 3.6 185.3 3.5 121.7 2.4 202.6 3.4
Science Technology & Environment 98.6 2.4 136.8 2.6 126.5 2.5 161.9 2.7
General Economic Services 40.1 1.0 75.5 1.4 148.8 3.0 158.0 2.7
Social Services*** 867.9 21.3 1,275.7 24.3 1,271.6 25.3 1,448.2 24.4
General Services 12.4 0.3 15.4 0.3 13.8 0.3 72.3 1.2
Grand Total 4,069.1 100.0 5,244.8 100.0 5,022.5 100.0 5,924.6 100.0
Source: Union Budget FY2011-12
* Includes provision for rural housing but excludes provision for rural roads
** Includes provision for rural roads
*** Excludes provision for Rural Housing
RE: Revised Estimate
BE: Budget Estimate
More private partnership and administrative reforms targeted

While allocations have been increased, thrust is also on attracting more private
funds and removing procedural and administrative bottlenecks. To attract more
private funds, Government will come up with a comprehensive policy for further
developing PPP projects.
To enhance the flow of funds to the infrastructure sector, the FII limit for invest-
ment in corporate bonds, with residual maturity of over five years issued by com-
panies in infrastructure sector, has been raised by $20bn to $25bn. FIIs would also
be permitted to invest in unlisted bonds with a minimum lock-in period of three
years. However, they will be allowed to trade amongst themselves during the lock-
in period and this may make the bonds more attractive for FIIs.
To attract foreign funds for financing of infrastructure, the FM has proposed to
create special vehicles in the form of notified infrastructure debt funds. The inter-
est payment on the borrowings of these funds is proposed to be subjected to a
withholding tax rate of 5% instead of the current rate of 20%. The income of the
fund is proposed to be exempted from tax.
Also, the income tax exemption of Rs.20,000 available to individuals for investing
in infrastructure funds, has been extended by one year.
With a view to facilitate smooth functioning, two Committees have been set up
for greater transparency and accountability in procurement policy and for alloca-
tion, pricing and utilisation of natural resources. Environmental aspects have
gained importance of late and have been a prime reason for delays in a few
projects. Issues relating to reconciliation of environmental concern from various
departmental activities including those related to infrastructure and mining are
proposed to be now considered by a Group of Ministers.
Moreover, in pursuance of recommendations of Second Administrative Reforms
Commission, 62 departments have been covered under Performance Monitoring
and Evaluation System (PMES) to assess their effectiveness.
Plan expenditure Non-plan expenditure
Non-Plan Exp (Rs bn - LHS)

Plan Expenditure (Rs bn - LHS)
Grow th (% - RHS)
5000 Grow th (% - RHS) 40% 7500 25%
4000 32% 6000 20%
4500 15%
3000 24%
3000 10%
2000 16%
1500 5%
1000 8% 0 0%
0 0% -1500 -5%
FY11RE
FY11BE
FY12BE
FY11RE
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11BE
FY12BE
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: Economic Survey 2010-11, Budget FY2011-12 Source: Economic Survey 2010-11, Budget FY2011-12
Inclusive growth remains the corner-stone…

With a view to make the growth more sustainable, the Government has continued
its focus on inclusive growth. The Government has announced various measures
for the social sector and agriculture. We concur with the Government's assessment
that, high growth in the economy can be sustained only if it is equitable and
inclusive growth.
The most important announcement made was that the National Food Security Bill
will be introduced in the Parliament during FY12. We see this as a big reform push,
if implemented.
Higher allocations have been made for farmers, poor, women, children, etc.
Allocation for social sector has increased to Rs.1.61trn i.e. 36.4% of the total plan
outlay.
Social sector schemes allocations

Scheme/Initiatives Allocation
Bharat Nirman (Pradhan Mantri Gram Sadak Yojna (PMGSY), Accelerated Rs. 580 bn
Irrigation Benefit Programme, Rajiv Gandhi Grameen Vidyutikaran Yojna,
Indira Awas Yojna, National Rural Drinking Water Programme and Rural
telephony)
MGNREGA Rs. 400 bn
Rashtriya Swasthya Bima Yojana Rs. 267 bn
Sarva Shiksha Abhiyan Rs. 210 bn
Pradhan Mantri Gram Sadak Yojna Rs. 200 bn
National Program for Mid Day meals in school Rs. 103 bn
National Rural Health Mission Rs. 178 bn
Source: Budget document 2011-12
Significant reforms proposed - implementation to be the key

In our opinion, this is a reforms oriented budget in the sense that, the FM has in-
troduced or has indicated that he will introduce several long - pending reforms
during FY11-12, post political consultations.
The Constitutional Amendment Bill for GST is expected to be introduced in the
current budget session with the GST itself expected to be rolled out in FY13. The
FM has also indicated that DTC will be rolled out WEF April 1, 2012.
Apart from these, the FM has indicated that, the National Food Security Bill will be
introduced during the year. To ensure greater efficiency, cost effectiveness and
better delivery for LPG, kerosene and fertilisers, the FM has proposed that, Govern-
ment will move towards direct transfer of cash subsidy to people living below pov-
erty line in a phased manner. This, we opine, will be a significant reform, if imple-
mented, which can lead to benefits flowing to targeted people and leakages in
subsidies being sealed.
As part of the financial sector reforms, the FM has also proposed to move the fol-
lowing legislations : The Insurance Laws (Amendment) Bill, 2008, The Life Insur-
ance Corporation (Amendment) Bill, 2009, The revised Pension Fund Regulatory
and Development Authority Bill, Banking Laws Amendment Bill, 2011, Bill on Fac-
toring and Assignment of Receivables, The State Bank of India (Subsidiary Banks
Laws) Amendment Bill, 2009 and Bill to amend RDBFI Act 1993 and SARFAESI Act
2002.
Mr. Mukherjee has also proposed to bring suitable legislative amendments in the
budget session to the Banking Regulations Act for giving some additional banking
licences to private sector players.
Thus, several important reforms are expected to be introduced during the year. We
view this intent very positively. However, these will be implemented only after ex-
tensive political consultations and hence, we believe that, implementation will once
again be the key.
FY12BE fiscal deficit at 4.6% - will it, won't it

FM has announced a reduction in the fiscal deficit to 4.6% of GDP from an
estimated 5.1% in FY11; targets fiscal deficit at 4.1% in FY13 and 3.5% by FY14.
The net market borrowing is budgeted at Rs3.4 tn (excluding Rs200bn MSS,
Rs.150bn from T bills and draw down of Rs.200bn of cash balance). The total
liquidity outflow is budgeted at Rs4 trn.
If the FM is able to achieve this target, it will be viewed very positively. Lower fiscal
deficit and a consequent reduction in net borrowing requirement would reduce
the risk of crowding out private sector credit demand as well as help in containing
sharp increase in yield.
However, digging deeper into the numbers, we understand that, some of them
may be difficult to achieve, in case the economic scenario does not pan out along
expected lines.
On the expenditure front, the non - plan expenditure is budgeted to fall marginally
over revised estimates of FY10-11. The petroleum subsidy is expected to fall by
about 38% over FY11RE. This comes at a time when crude prices are above the
$100 per barrel mark, making the budgeted number seen very low.
We also believe that, higher amount may have to be provided in the budget unless
the crude price reacts down sharply (as it did in FY09). Alternatively, the
Government may deregulate the diesel prices at an opportune time when the
inflation rate moderates. However, there is a risk of this figure trending higher
during FY12. We note that, the FM has committed to implementing the cash -
based subsidy scheme on LPG and Kerosene, which, if implemented, can reduce
the subsidy burden.
We also opine that, FM has made some strong reduction assumptions on the
expenditure side :
n Total revenue expenditure is budgeted to grow by only 1% in FY12BE against
13% in FY11RE; similar estimates were made in FY11BE
n Allocation for Social security and welfare is budgeted at Rs50bn against
Rs200bn in FY11RE and Rs173bn in FY11BE
On the revenue front, corporate taxes are expected to grow by 21.5% v/s about
21% growth in FY11 (RE). Given the current high commodity prices (and
consequent impact on margins), recent slowdown in manufacturing and delays in
closures of major projects, this number may turn out to be optimistic.
Thus, we believe it may be difficult for the deficit targets to be met unless reforms
on subsidy front are undertaken or global commodity prices cool down
significantly.
Central Government Finances

(Rs bn) FY10 FY11BE FY11RE FY12BE
Fiscal Deficit 4184.8 3814.1 4010.0 4128.2

% of GDP 6.4 5.5 5.1 4.6
Revenue Deficit 3390.0 2765.1 2698.4 3072.7
% of GDP 5.2 4.0 3.4 3.4
Primary Deficit 2053.9 1327.4 1602.4 1448.3
% of GDP 3.1 1.9 2.0 1.6
Source: Union Budget Documents
Variance in Non-Plan expenditure (Rs bn)

FY 11RE FY 12BE
Interest Payments and Debt Servicing 2407.6 2679.9

Defence Expenditure 1515.8 1644.2
Pensions 532.6 545.2
Interest Subsidy 52.2 68.7
Grants to State Govts 517.6 654.7
Police 275.9 296.9
Capital Outlays (excluding defence) 277.0 132.1
Petroleum Subsidy 383.9 236.4
Agri Debt Waiver & Debt Relief Scheme 120.0 60.0
Fertilizer Subsidy 549.8 500.0
Grants & Loans to Public Enterprises 65.9 5.1
Postal Deficit 58.5 50.2
Other Non-plan Expenditure 1458.8 1288.6
Total (Non-Plan) Expenditure 8215.5 8161.8
Source: Annual Budget 2011-12
DIRECT TAXES
Corporate tax
n No change in corporate tax rate; MAT rate increased by 50bps; sur-
charge reduced
There have been no changes in the corporate tax rate. However, the MAT rate has
been raised from 18% to 18.5%. On the other hand, the surcharge has been
reduced from 7.5% to 5%. This will bring down the effective tax rate for non-
MAT corporates from 33.2% to 32.45%.
On the other hand, for MAT paying companies, the burden will marginally rise by
0.075bps as the increase in MAT is set-off by a reduction in surcharge.
n MAT for SEZ developers and SEZ units WEF FY12 - a negative
The budget has imposed MAT for SEZ developers and for units operating in SEZs.
Companies have to pay MAT on the Book profits as against the profits derived
under the Income Tax Act, if the taxable income is less than 30% of the book
profits.
This will have an impact on the cash flows of these companies. These companies
will now have to pay MAT WEF FY12 despite they being eligible for tax breaks.
This will have an impact on their cash flows but not on reported profits as they will
be able to claim deferred tax benefits. Thus, we believe that, this will be largely a
cash-flow impact.
Further benefits on personal income tax front

Increase in basic exemption limit
The budget has provided further benefits to individual tax payers by increasing the
basic exemption limit from Rs.160,000 per annum to Rs.180,000 per annum. The
tax benefit is expected to be about Rs.2,000. The exemption limit for women
assessee has been left unchanged at Rs.190,000. However, exemption limit has
been enhanced to Rs.250,000 (v/s Rs.240,000) and qualifying age reduced from
65 years to 60 years for senior citizens. Higher exemption limit of Rs.500,000 has
been recommended for Very Senior Citizens, who are 80 years or above.
We believe that, this has been done to provide more money into the hands of the
lower income class and the senior citizens, in the backdrop of rising inflation. This
increase of Rs.2000 per individual will also not result in any increase in
discretionary spends, thus having no impact on inflation.
On the other hand, by doing this, the FM has brought the exemption limit more in
line with the proposed limit of Rs.200,000 per individual under DTC.
Investment - linked tax incentives have been continued. A deduction of Rs.20,000
per annum will continue to be allowed on investments in infrastructure bonds.
While on the one hand, it will induce savings, it will also generate funds for
infrastructure investments.
A net revenue loss of Rs.115bn is estimated to be incurred as a result of the direct
tax proposals.
Individual direct tax impact

Tax payable
New Slab (Rs) Old Slab (Rs) Tax rate % New Old
Individual with income of Rs 5 lakh pa

0-1.8 lakh 0-1.6 lakh 0 0 0
1.8-5 lakh 1.6-5 lakh 10% 32000 34000
Total tax payout 32000 34000
Incremental tax saving Rs 2000
Senior Citizen above 60 years

0-2.5 lakh 0-2.4 lakh 0 0 0
2.5-5 lakh 2.4-5 lakh 10% 25000 26000
Very Senior Citizen above 80 years

0-5 lakh 0-2.4 lakh 0 0 0
2.4-5 lakh 2.4-5 lakh 10% 0 26000
Source: Annual Budget 2010-11
Direct taxes
Direct Tax (Rs bn - LHS)

6000 Grow th (% - RHS) 40%
4500 30%
3000 20%
1500 10%
0 0%
FY11RE
FY11BE
FY12BE
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: Economic Survey 2010-11, Annual Budget FY2011-12
INDIRECT TAXES
The budget has kept the headline rates of excise duty, customs duty and service
tax unchanged, in line with our expectations. Markets were expecting an increase
in excise duties by 200bps to 12%. Rate of tax on services has been retained at
10% to pave the way forward for GST. Peak customs duty rate has been left at
10%. However, some rationalization has been done to unify three rates namely,
2%, 2.5% and 3% at the middle level of 2.5%.
Certain services, hitherto untaxed, brought within the purview of the service tax
levy. Proposals relating to Indirect Taxes are estimated to result in a net revenue
gain of Rs.113bn for the year. Taking into account the direct taxes, the net
revenue loss is estimated to be Rs.2bn for the year. Major proposals are listed later.
Indirect taxes
4000 Indirect Tax (Rs bn - LHS) 40%

Grow th (% - RHS)
3000 30%
2000 20%
1000 10%
0 0%
-1000 -10%
FY11RE
FY11BE
FY12BE
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: Economic Survey 2010-11, Annual Budget FY2011-12
Capital markets - neutral in short-term but positive in the long-

term
The budget is largely in line with our expectations as far as larger issues of growth,
inflation and fiscal discipline are concerned. While the market's concern on excise
duty rise was addressed (no increase) the concern on fiscal deficit will likely be
resolved during the year, we opine.
Thus, we do not expect any major impact on the markets in the near term. Over
the medium term, we believe that, strict implementations of proposals,
implementation of reforms and positive action on subsidy (important from fiscal
deficit perspective) would be the likely positive triggers for the market. However,
unfavourable developments on the global economic front or a sharp rise in
commodity prices may have a negative impact on markets.
We opine that, given current conditions, valuations, based on FY12 consensus
earnings are reasonable, and leave scope for gains over this period. Foreign
investors who meet KYC requirements for equity schemes will now be allowed to
invest in mutual funds and this could be a positive for the equity markets over the
medium term.
BUDGET HIGHLIGHTS FY2011-12

Customs duty
Pre-budget Post-budget
Food/ Agro-Processing/ Agriculture

Specified Agricultural Machinery 5% 2.50%
Basic Customs Duty for parts of above 7.50% 2.50%
Micro Irrigation Equipment 7.50% 5%
Raw Pistachios 30% 10%
Sun-Dried Seedless Raisins 100% 30%
Cranberry products 30% 10%
Export of de-oiled rice bran oil cake 0% 10%
Textiles
Raw Silk 30% 5%
PTMEG, Diphenylmethane-4, MDI 7.50% 5%
Acrylonitrile 5% 2.50%
Sodium Polyacrylate 7.50% 5%
Caprolactum 10% 7.50%
Nylon chips, fibre and yarn 10% 7.50%
Rayon Grade Wood Pulp 5% 2.50%
Capital Goods/ Infrastructure
Specified Gems and Jewellery Machinery 7.50% 5%
Environment-Friendly Items
Solar Lanterns 10% 5%
Health Sector
Endovascular Stents 5% 0%
Specified Life Saving Drugs 10% 5%
Lactose for Homeopathy Medicines 25% 10%
Paper
Waste Paper 5% 2.50%
Metals
Ferro-Nickel 5% 2.50%
Export Duty-Iron Ore 20% 30%
Vanadium Petroxide, Vanadium Sludge 7.50% 2.50%
Miscallaneous
Carbon Black Feed Stock 5% 2.50%
Petroleum Coke 5% 2.50%
Mineral Gypsum 5% 2.50%
Excise duty
Item Pre Budget Post Budget
Sugar Confectionary, Pastry and Cakes 4% 5%

Starches 4% 5%
Paper and Paper Products 4% 5%
Textile Intermediates and textile Goods 4% 5%
Drugs, Medical Equipments 4% 5%
Automatic Looms, Projectile Looms 0% 5%
Capital Goods
Parts of Specified textile Machinery 10% 5%
Environmental Friendly Goods
Hybrid Kits 10% 5%
Cement
Mini Cement Plant
Selling Price< 190/50 kg bag Rs 185/Tonne 10% ad valorem
Selling Price>190/ 50kg bag Rs 315/ Tonne 10% ad valorem + Rs 30/ Tonne
Cleared Other than in packaged form Rs 215/ Tonne 10% ad valorem
Other Than Mini Cement Plant
Selling Price <190/ 50 kg bag Rs 290/ Tonne 10% ad valorem + Rs 80/ Tonne
Selling Price > 190/ 50 kg bag 10% of sale price 10% ad valorem +Rs 160/ Tonne
Cleared Other than in packaged form 10% or Rs 290/ Tonne (whichever higher) 10% ad valorem
Cement Clinker Rs 375/ Tonne 10% ad valorem + Rs 200/ Tonne
Health
Sanitary Napkins, baby & clinical diapers 10% 1%
Paper and Paperboard
Greaseproof Paper and glassine paper 10% 5%
Precious Metals
Serially Numbered Gold Bars, other than tola bars Rs 280/ 10 gms Rs 200/ 10 gms
Source: Union Budget Document 2010-2011
Central Government Finances (Rs bn)

REVENUE FY10 FY11BE FY11RE Variance FY12BE % Growth
(%) (FY12BE vs
FY11RE)
Tax Revenue
Corporation Tax 2447.3 3013.3 2963.8 -1.6 3599.9 21.5
Income Tax 1323.2 1280.7 1490.7 16.4 1720.3 15.4
Union Excise Duty 1036.2 1320.0 1377.8 4.4 1641.2 19.1
Customs 833.2 1150.0 1318.0 14.6 1517.0 15.1
Service Tax 584.2 680.0 694.0 2.1 820.0 18.2
Wealth Tax 5.1 6.0 5.6 -7.6 6.4 14.0
Taxes of UTs 16.1 16.5 19.1 15.7 19.7 3.3
Gross Tax Revenue 6245.3 7466.5 7868.9 5.4 9324.4 18.5
Less: States' share 1648.3 2090.0 2193.0 4.9 2634.6 20.1
Less: NCCD transferred to the NCCF 31.6 35.6 39.0 9.6 45.3 16.0
Net Tax Revenue 4565.4 5340.9 5636.9 5.5 6644.6 17.9
Non-Tax Revenue 1162.8 1481.2 2201.5 48.6 1254.4 -43.0

Interest Receipts 217.6 192.5 197.3 2.5 195.8 -0.8
Dividend and Profits 502.5 513.1 487.3 -5.0 426.2 -12.5
External grants + Other Non-Tax Revenue 430.5 766.3 1505.5 96.5 620.6 -58.8
Receipts of UTs 12.2 9.3 11.4 23.6 11.7 2.3
Total Revenue Receipts 5728.1 6822.1 7838.3 14.9 7898.9 0.8
Total Capital Receipts* 4530.6 4265.4 4477.4 5.0 4478.4 0.0

Non-debt Receipts 331.9 451.3 317.5 -29.7 550.2 73.3
Recovery of Loans & Advances 86.1 51.3 90.0 75.5 150.2 66.9
Miscellaneous Capital receipts 245.8 400.0 227.4 -43.1 400.0 75.9
Debt Receipts 4198.7 3814.1 4160.0 9.1 3928.2 -5.6
Market Loans 3984.2 3450.1 3354.1 -2.8 3430.0 2.3
Short term borrowings -97.7 0.0 100.0 NA 150.0 50.0
External assistance (Net) 110.4 224.6 222.6 -0.9 145.0 -34.9
Securities issued against Small Savings 132.6 132.6 177.8 34.1 241.8 36.0
State Provident Funds (Net) 160.6 70.0 100.0 42.9 100.0 0.0
Other Receipts (Net) -91.4 -63.2 205.4 -424.9 -138.7 NA
Draw-down of Cash Balance -13.9 0.0 -150.0 NA 200.0 NA
Total Receipts 10244.9 11087.5 12165.8 9.7 12577.3 3.4
EXPENDITURE
Revenue Expenditure
Interest Payments 2130.9 2486.6 2407.6 -3.2 2679.9 11.3
Defence Services 906.7 873.4 907.5 3.9 952.2 4.9
Subsidies 1413.5 1162.2 1641.5 41.2 1435.7 -12.5
Grants to State and U.T. Governments 459.5 460.0 526.1 14.4 663.1 26.1
Pensions 561.5 428.4 532.6 24.3 545.2 2.4
Other Revenue Expenditure 1107.2 1025.3 1252.2 22.1 1059.5 -15.4
Total Revenue Expenditure 6579.3 6436.0 7267.5 12.9 7335.6 0.9
Capital Expenditure
Defence Services 511.1 600.0 608.3 1.4 692.0 13.8
Other Non-plan Capital Outlay 109.5 310.5 277.0 -10.8 132.1 -52.3
Others 11.1 10.1 62.7 523.0 2.1 -96.6
Total Capital Expenditure 631.7 920.6 948.0 3.0 826.2 -12.8
Plan Expenditure on Rev & Cap a/c 3033.9 3730.9 3950.2 5.9 4415.5 11.8
Non-plan Expenditure on Rev & Cap a/c 7211.0 7356.6 8215.5 11.7 8161.8 -0.7
Total Expenditure 10244.9 11087.5 12165.8 9.7 12577.3 3.4
Source: Annual Budget FY2011-12; NCCF: National Calamity Contingency Fund; * stands for the receipts net of repayments
SECTOR SUMMARY
Sector Summary
Sector Budget Impact Preferred Picks
Agriculture & Fertilizer Positive NA

Automobiles Positive Bajaj Auto, TVS Motors
Aviation Negative NA
Banking & NBFC Positive ICICI Bank, HDFC Bank, Axis Bank, SBI
BOI, Union Bank,IDFC, LIC Housing
Capital Goods and Engg. Neutral L&T, Thermax, Havells, Greaves Cotton
Bharat Electronics, Hind Dorr Oliver
Cement Negative Grasim, Shree Cements
Construction Positive IRB Infra, IVRCL, Pratibha Industries,
Unity Infra
FMCG Positive NA
Hotels Negative NA
Information Technology Neutral Infosys, TCS, KPIT, NIIT Technologies
Logistics Positive NA
Media Neutral ENIL, HT Media, Sun TV Network
Metals and Mining Neutral Sesa Goa
Oil & Gas Negative Cain India, IGL
Pharmaceuticals Negative NA
Power Neutral NTPC
Real Estate Neutral NA
Retail Positive NA
Telecom Neutral NA
SECTOR IMPACT ANALYSIS
BUDGET IMPACT: POSITIVE AGRICULTURE & FERTILIZER
BUDGET HIGHLIGHTS & IMPACT

In the budget, government has continued to provide thrust on its four-pronged
strategy covering 1) agricultural production 2) reduction in wastage of produce 3)
credit support to farmers and 4) impetus on the food processing sector.
Last year Nutrient Based Subsidiary (NBS) policy was successfully implemented for
all fertilizers except urea. The policy has been well received and the availability of
fertilizers has improved in the country. The extension of the NBS regime to cover
urea has also been under consideration.
To deal with the production and distribution bottlenecks, government has in-
creased allocations for the various schemes under the ongoing Rashtriya Krishi
Vikas Yojna (RKVJ) from Rs 67.5 bn last fiscal to Rs 78.6 bn in 2011-12. Similarly,
following are the key takeaways for the agriculture sector.
n 27% increase in targeted agriculture credit from Rs 3750 bn last year to
Rs 4750 bn in 2011-12.
Impact: Government has been constantly aiming at increasing the direct lending
to the farmers. In addition to the 25% increase in proposed agriculture credit,
the present interest subvention scheme of providing short term crop loans at
7% to farmers is further reduced to 4%. These higher outlays for the sector
provide a positive outlook for the sector. Continuance of loan concessions to
the farmers would also help in sustaining current growth in rural demand.
n Enhancing the storage and cold chains to boost the agriculture supply
chain in the country; expediting the processes of setting up of Mega food
parks
Impact: Strengthening the food supply chain has been among the key focus
areas of the government. It aims at expediting the process of setting up 15
mega food parks in addition to the proposed 15 in 2011-12. This is likely to
improve linkage between agriculture and industries and reinforce meaningful
investment in the sector. Government has also proposed for the introduction
of various viability gap funding schemes to boost public private partnership
in the sector.
n Reduction of basic custom duty on micro-irrigation equipment from 7.5%

to 5%.
Impact: Irrigation has been a thrust area for the government. Accelerated
irrigation programs that entail significant addition of farm land required to
be irrigated is likely to benefit from this. Micro irrigation is considered as
an environment friendly and efficient means of irrigation especially for dry land
farming.
n Include capital investment in fertilizer production as an infrastructure sub

sector.
Impact: Investment in fertilizer sector is capital intensive. Capacity addition
in this space has remained muted since past few years. Including capital
investment in the fertilizer production as an infrastructure space would benefit
the sector in the medium to long term.
n Special attention to palm oil promotion

Impact: The domestic production of edible oil meets only 50% of country's
annual demand. The gap in supply is met with relatively pricey imports.
Government has proposed to provide Rs 3 bn to bring 60,000 hectares of land
under palm plantation by integrating farmers with the market.
We do not have active coverage on this sector
BUDGET IMPACT: POSITIVE AUTOMOBILES

n Status-quo maintained on excise duty
2 wheeler - Sales volume
Impact: Finance Minister in his budget presentation kept the central excise
12
duty rates unchanged at 10% that was in line with our expectations.
Justifications given behind this move are 1. Better margin translating into higher
9 investment rates 2. Stay on course towards GST. We believe that this move
(million units)
will make the task of the auto players a bit easier who are already facing margin
6 pressure due to rising commodity prices.
3 n Emphasis on green fuel technology/car

Impact: Finance Minister in his budget speech showed his intentions towards
- promotion of vehicles that run on clean fuel. Following announcements were
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
made related to this aspect -

l National Mission for Hybrid and Electric Vehicles to be launched in
Source: SIAM collaboration with all stakeholders
l Custom duty exemption and concessional rate of excise duty extended to
batteries imported by the electrical vehicle manufacturers for the replacement
Passenger vehicles - Sales volume
market
l Vehicles based on the fuel cell or hydrogen cell technology to come under
2.5
the concessional 10% excise duty bracket
2.0 l Full exemption from custom duty and CVD in relation to import of specified
(million units)
part used in the making of hybrid vehicle. Furthermore concessional rate

1.5 of excise duty at 5% will be applicable if those specified parts are produced
1.0 domestically.
l Government has also proposed to lower the excise duty rate from 10%
0.5 to 5% on kits and their parts that help convert fossil fuel vehicles into hybrid
-
vehicles
Above measures are towards promoting clean fuel technology. However we
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
do not see any major positive impact of the above mentioned measures in
the short to medium term as this segment has hardly any presence in the Indian
Source: SIAM
automobile industry.
n Focus on agriculture continues

CVs - Sales volume Impact: Government through its budget continued to retain their focus on
700 the agriculture sector. Various schemes were announced for bringing about
the development of rural economy. Listed below are few measures which we
525
believe are positive for the automobile sector -
l 27% increase in credit flow to the farmers as against 18% increase provided
'000 units
350 during the previous budget

l Increase in interest subvention from 2% to 3% for farmers who repay their
175 crop loans on time and thereby bringing the effective interest rate on crop
loans to 4%.
- We believe that the above measures are positive for tractors players including
Escorts. Furthermore overall growth in the rural economy will be beneficial
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
for the 2W players as well.

Source: SIAM
Impact on EPS (Rs)

Company Pre-Budget EPS Post-Budget EPS Current Target
FY11E FY12E FY11E FY12E Price Price
Preferred picks
Bajaj Auto 89.7 97.6 89.7 97.6 1269 1464
TVS Motors 4.1 5.2 4.1 5.2 51 70
Others
Escorts 13.9 17.1 13.9 17.1 113 204
Maruti Suzuki 78.4 93.7 78.4 93.7 1208 1406
Hero Honda 99.7 112.6 99.7 112.6 1465 1576
Source: Kotak Securites - Private Client Research
BUDGET IMPACT: NEGATIVE AVIATION

Domestic passenger traffic (in mn) n Budget remains silent on tax rationalization of ATF
60 Impact: As expected, the budget did not touch upon the topic related to
lowering of taxes on ATF. Aviation companies have been demanding for long
to bring ATF under the declared goods status (where sales tax is charged at
45 4-5%) as against the current sales tax of more than 20%. Given high crude
oil prices, ATF prices have been constantly on a rise over the past few months
30 which is a major negative for all the players in the aviation sector.
n Increase in service tax on journey

15
Impact: Following changes were announced in the service tax and will come
into effect from 1st April 2011-
0
l Service tax increased from Rs100 to Rs150 for journey made in the economy
2006 2007 2008 2009 2010
class on the domestic route. We expect the players to pass on the increase
and do not see any major impact on the passenger traffic because the
Source - Civil Aviation Ministry
increase is nominal.
l Service tax increased from Rs500 to Rs750 for journey made in the economy
class on international routes. Competition from international carriers primarily
ATF Prices (Rs/KL) on the shorter routes will make it difficult for the Indian players to pass
this to the customers. This will have a negative impact on the players in
50,000 the sector.
l Service tax increased to 10% for journeys made in higher class (other than
45,000 economy class) on the domestic route (in line with journeys in higher class
on international air travel). We expect this will be passed on to the passengers
40,000 but could impact traffic in higher classes to a certain extent and accordingly
is negative for the sector.
35,000
30,000
Jul-09
Jul-10
Jan-09
Jan-10
Oct-09
Oct-10
Apr-09
Apr-10
Source - IOC
BUDGET IMPACT: POSITIVE BANKING & NBFCS

Deposit and credit growth (%) n The budgeted fiscal deficit for FY12E is 4.6% as against 5.1% (revised
estimate) reported for FY11; net market borrowing budgeted at Rs.3.43
35.0% Deposits tn for FY12E.
Credit Impact: The Government needs to borrow Rs.3.43 trillion from the market
28.0% to meet its fiscal deficit. This is lower than the market expectations and reduces
the concern of crowding out effect on private investment. RBI has exhibited
21.0%
its capability in recent years, when it managed additional borrowings in the
non-disruptive manner. We believe, RBI is likely to manage the market borrowing
program without much impacting the yield curve.
14.0%
n The budget has provided Rs.202 bn for recapitalization of state-run
banks.
7.0%
Impact: Rs.202 bn has been earmarked for recapitalization of PSU banks to
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
enable them to maintain the minimum tier-I capital at 8.0%. The proposed
recapitalization includes Rs.127 bn loans taken from World Bank and Rs.60
bn (plus another Rs.15 bn) allocated through budget.
Source: RBI
This would help PSU banks in maintaining the minimum tier-I capital at 8%
and increase government stake in some of the banks to 58%. This is likely
to aid them in growing their loan book without facing capital constraint.
Inflation (%) n FII limit in Infrastructure bonds with residual maturity of 5 years to be
raised to $25 bn ($5 bn earlier) taking the overall limit to $40 bn ($20 bn
16 earlier) in corporate bonds.
Impact: This hike in FII limits will help increase the investment in infrastructure
12
sector and lead to development of the corporate bond markets in the country.
8 In turn, it would also encourage capital inflows to meet the high current account
deficit in our economy.
4
FIIs would also be allowed to invest in unlisted bonds with a minimum lock-
in period of 3 years, during which they can trade amongst themselves. We
0
believe this would ease fund flow to the special purpose vehicles of infrastructure
-4 companies.
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Oct-08
Oct-09
Oct-10
n Extended the 1% interest subvention scheme on housing finance upto

Apr-08
Apr-09
Apr-10
Rs.1.5 mn (Rs.1.0 mn earlier) and house value of Rs.2.5 mn (Rs.2.0 mn

earlier).
Impact: With government’s thrust on increasing affordable housing and to
Source: Bloomberg
continue stimulating small ticket home loan borrowers, the budget has extended
the 1% interest subvention scheme on housing loan upto Rs.1.5 mn (Rs.1.0
mn earlier) and house value of Rs.2.5 mn (Rs.2.0 mn earlier). We opine that,
the move will be significantly positive for the housing finance companies in
maintaining the traction in the home loan growth (especially small ticket
mortgages) in India.
n Allocation of ~Rs.2.14 tn towards infrastructure sector (23.3% growth
YoY); constitutes 48.5% of gross budgetary support to plan expenditure
Impact: Continuing thrust on infrastructure development is positive for overall
infrastructure development space. This will offer attractive opportunity to
domestic specialized financing institution to participate in development by way
of project financing as well as equity investment.
n Extension of the additional deduction of Rs.20,000 to investments made
by individuals in infrastructure bonds for one more year.
Impact: The extension of tax deduction on infrastructure bonds investment
for one more year would help mobilize retail savings into the sector. This is
positive for Infrastructure financing NBFCs.
n Raising the target of credit flow to the farmers from Rs.3.75 tn to Rs.4.75
tn.
Impact: By raising the growth target of ~27% for agriculture loans which comes
under priority sector loans (PSL) category is slightly negative for PSU banks
who would be forced to lend more than the system growth.
n To allow tax free bonds of Rs.300 bn to be issued by various government
undertakings in FY12.
Impact: This includes tax free bonds of worth Rs.100 bn by Indian Railway
Finance Corporation, Rs.100 bn by NHAI, Rs.50 bn by HUDCO and Rs.50 bn
by Ports. This is likely to boost infrastructure developments in railways, ports,
housing and highways development. This is positive for Infrastructure financing
NBFCs.
n Creation of “India Microfinance Equity Fund” of Rs.1.0bn with SIDBI to
support MFI in their growth targets.
Impact: Creation of a dedicated fund for providing equity to smaller MFIs would
help them in achieving scale and efficiency in their operations. Although it
is a small amount, it recognizes the importance of MFIs in achieving the goal
of financial inclusion.
n To permit SEBI registered MFs to accept subscriptions of foreign investors
who meet the KYC norms.
Impact: The proposed entry of FII investment into the MFs space will allow
strong fund flows in the coming year. This is likely to be positive for domestic
Financial Institutions having asset management business.
Impact on EPS (Rs)

Company Pre-Budget ABV Post-Budget ABV Current Target
Preferred picks
ICICI Bank 458.7 501.3 458.7 501.3 971 1364
HDFC Bank 517.0 597.7 517.0 597.7 2052 2052
Axis Bank 451.8 537.0 451.8 537.0 1219 1750
BoB 462.1 590.9 462.1 590.9 871 1241
IDFC 75.8 83.3 75.8 83.3 145 180
LIC Hsg Finance 85.2 100.5 85.2 100.5 188 240
SBI 989.4 1,157.0 989.4 1,157.0 2630 3475
Union Bank 181.2 236.4 181.2 236.4 314 400
PNB 574.4 721.5 574.4 721.5 1062 1450
Others
J&K Bank 715.7 843.7 715.7 843.7 755 1100
Allahabad Bank 165.7 199.7 165.7 199.7 198 260
HDFC Ltd 119.5 133.1 119.5 133.1 629 720
STFC 204.7 247.6 204.7 247.6 746 885
Indian Bank 165.1 214.3 165.1 214.3 204 320
Andhra Bank 101.2 122.9 101.2 122.9 136 175
Indian Overseas Bank 98.2 115.6 98.2 115.6 133 140
BUDGET IMPACT: NEUTRAL CAPITAL GOODS & ENGINEERING

n Excise rate maintained at 10%
L&T’s order booking (Rs bn)
Impact: Neutral. The FM has maintained Excise duty at 10%. The capital goods
250 industry is reeling under cost pressures from commodities and a further excise
rate hike would have been negative. Thus status quo on excise should come
210 as a relief to the manufacturing sector.
170 n Central excise exemption on specified equipment used for preservation

of agriculture produce
130 Impact: Positive. To attract investment in cold-storage chain, capital investment
will be eligible for viability gap funding scheme of the Finance Ministry. It is
90 also proposed to recognize cold chains and post-harvest storage as an
infrastructure sub-sector. The FM has also extended full exemption from excise
Q1 FY09
Q3 FY09
Q1 FY10
Q3 FY10
Q1 FY11
Q3 FY11
duty on air-conditioning equipment and refrigeration panels used for cold

storage. We believe this move will be a positive for manufacturers of cold-
storage equipments like Blue Star and Voltas.
Source: Company
n Rural Broadband connectivity
Impact: Positive. A plan has been finalised to provide Rural Broadband
Revenue visibility months Connectivity to all 2,50,000 Panchayats in the country in three years. This is
29 a positive for Sterlite Technologies, which is the largest manufacturer of optical
28 fibres cables in the country.
27
n Defence capex raised by 13.8%
26
Impact: Positive. Capital expenditure on defense for 2011-12 has been raised
25 by 13.8% to Rs.692 bn. The increase in planned capex on defence is positive
24 for Bharat Electronics Ltd (BEL) as higher allocation should translate into increase
23 in order book.
22
n Excise duty exemption on brownfield expansion of ultra-mega power
Q1 FY07
Q2 FY07
Q3 FY07
Q4 FY07
Q1 FY08
Q2 FY08
Q3 FY08
Q4 FY08
Q1 FY09
Q2 FY09
Q3 FY09
Q4 FY09
Q1 FY10
Q2 FY10
project
Impact: Positive. Excise duty on Greenfield investment in ultra-mega power
project is eligible for customs as well as excise duty under the mega-power
Source: Company policy. However, brownfield expansion of existing mega-power project has
to pay 2.5% customs duty (no CVD) in case of imported equipments and full
excise duty in case of domestic suppliers of main plant equipment. This creates
a disability for the domestic suppliers who are required to pay Central Excise
Capital goods index (%)
duty on supplies to such projects. To provide a level playing field to domestic
80 manufacturers (BHEL, L&T, BGR, JSW-Toshiba and Thermax), the FM has
proposed to exempt excise duty for ultra-mega power project brownfield
60 expansion. The benefit however is only symbolic as none of the ongoing ultra-
mega power projects have announced their brownfield expansion plans.
40
20
-20
Jun-10
Dec-10
Oct-10
Aug-10
Apr-10
Source: MOSPI
Impact on EPS (Rs)

Preferred picks
ABB 3 17.7 3 17.7 698 530
L&T 73.1 87.8 73.1 87.8 1681 2030
Greaves Cotton 4.7 7.3 4.7 7.3 88 110
Thermax 34.1 41 34.1 41 664 784
Havells India 21.3 28.9 21.3 28.9 350 450
Bharat Electronics 96.8 121.6 96.8 121.6 1662 1886
Diamond Power & Infrastructure 30.6 36.2 30.6 36.2 162 319
Others
AIA Engineering 19.7 24.6 19.7 24.6 335 370
Areva T&D 8.7 10.6 8.7 10.6 295 320
BHEL 119.5 141.8 119.5 141.8 2218 2632
Blue Star 17.7 23.2 17.7 23.2 395 448
Crompton Greaves 14.4 16.2 14.4 16.2 272 322
Cummins India 30.7 38.1 30.7 38.1 645 837
Everest Kanto Cylinder 5.5 6.6 5.5 6.6 81 111
Gujarat Apollo Industries 16.9 21.6 16.9 21.6 147 237
Hindustan Dorr-Oliver 8.6 10.3 8.6 10.3 84 145
Kalpataru power transmission 12.6 15.4 12.6 15.4 135 262
Siemens India 24.5 29.6 24.5 29.6 727 825
Suzlon Energy 0 3.8 0 3.8 48 51
Time Technoplast 5.6 6.9 5.6 6.9 48 85
TIL 61.7 77.3 61.7 77.3 555 850
Voltamp Ltd 52 62 52 62 629 873
Voltas Ltd 10.6 12.7 10.6 12.7 188 231
BUDGET IMPACT: NEGATIVE CEMENT

n Continued focus on infrastructure creation
Impact: Positive. Cement demand is expected gain momentum, after witnessing
subdued demand in FY11, with continuous thrust of government on
infrastructure creation. With cement demand having direct correlation with
infrastructure investments as well as GDP growth, we expect it to grow at a
CAGR of 9.9% between FY11-FY13.
n Change in excise duty structure
Impact: Negative. Existing excise duty rates have been changed for cement
sector to composite rate structure having an ad valorem and specific component.
For cement selling below Rs 190 per bag, new duty is at 10% ad valorem plus
Rs 80 per tonne as against Rs 290 per tonne earlier. For cement selling above
Rs 190 per bag, new duty is 10% ad valorem plus Rs 160 per tonne. Since
current average selling price in India is above Rs 260 per bag, we believe that
this change in the duty structure would result in increasing the overall excise
outgo by Rs 1.5-2 per bag. Ad valorem rate would be arrived at by taking
the ex factory price plus freight. Though cement companies are expected to
pass on the hikes to the end user but it will be difficult for companies to sustain
these price hikes in the present prevailing oversupply situation.
n Reduction in gypsum and pet coke customs duty
Impact: Positive. Customs duty on gypsum and pet coke has been reduced
from 5% to 2.5% now. This is expected to be positive for companies like Shree
Cement which are dependent upon pet coke. Overall impact of reduction in
gypsum and pet coke customs duty is approx Rs 1-1.5 per bag.
Capacity utilization Trend in GDP and cement growth
Operative capacity (MT - LHS) 12% DD Grow th GDP Grow th

Production (MT - LHS)
300 Capacity utilization (% - RHS) 110% 10%
225 100% 8%
150 90%
6%
75 80%
4%
FY11E
FY12E
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
0 70%
2006 2007 2008 2009 2010 2011E 2012E
Source: Kotak Securities - Private Client Research, CMA Source: Kotak Securities - Private Client Research, Cris Infac
Impact on EPS (Rs)

Preferred picks
Grasim 226.4 238.7 226.4 238.7 2,255 2,530
Shree Cements 76.1 118.2 76.1 118.2 1,729 1,948
Others
ACC 59.6 64.8 59.6 64.8 969 870
Ultratech Cements 39.5 62.6 39.5 62.6 931 951
India Cements 1.8 6.3 1.8 6.3 85 85
BUDGET IMPACT: POSITIVE CONSTRUCTION

n Allocation for infrastructure sector is 23.3% higher than FY11
Impact: Positive. Allocation of nearly Rs 2140 bn has been made towards
infrastructure sector which is 23.3% higher than FY11. It forms nearly 48.5%
of the Gross Budgetary Support to plan expenditure. We expect this amount
to be utilized for development of physical infrastructure such as roads, ports,
airports, railways to sustain high economic growth. This would translate into
higher order inflows for companies present in these segments such as IRB Infra,
IVRCL, NCC, Simplex Infra and Unity Infra.
n Increased allocations for road, irrigation, housing and drinking water

supply
Impact: Positive. Allocation for road, irrigation, housing and drinking water
supply has been increased by Rs 100 bn to Rs 580 bn for FY12. This would
be done through Bharat Nirman which includes Pradhan Mantri Gram Sadak
Yojna (PMGSY), Accelerated Irrigation Benefit Programme, Rajiv Gandhi Grameen
Vidyutikaran Yojna, Indira Awas Yojna, National Rural Drinking Water Programme
and Rural telephony. We expect it to be positive for IVRCL, NCC, Pratibha
Industries and Unity Infra
n Tax free bonds for infrastructure development

Impact: Positive. Government has allowed tax free bonds of Rs 300 bn to give
boost to infrastructure development in railways, ports, housing and highways
development. This includes Indian Railway Finance Corporation 100 bn, National
Highway Authority of India Rs 100 bn, HUDCO Rs 50 bn and Ports Rs 50 bn.
This is expected to ease funds with these organizations and hence award more
projects.
n Hike in FII limit for infrastructure sector corporate bonds

Impact: Positive. FII limit for investment in corporate bonds of infrastructure
companies has been hiked from $5 bn to $25bn. This is likely to enhance the
flow of funds to the infrastructure sector and FIIs would also be allowed to
invest in unlisted bonds of of infrastructure SPV's with a minimum lock in period
of three years. This would be positive for companies having SPVs that are looking
for raising funds such as IVRCL, NCC, Madhucon Projects, IRB Infra.
Trend in oder inflow (Rs mn) Order book to FY12E sales (x)
OB (Rs bn - LHS)
60000 Q4FY10 Q1FY11 Sales FY12E (Rs bn - LHS)
315 4.5
OB/Sales (x - RHS)
Q2FY11 Q3FY11
45000
210 3.0
30000
105 1.5
15000
0 0.0
NCC
IRB Infra
BGR Energy
IVRCL
Patel Eng
MPL
Punj Lloyd
Simplex
industries
Infraprojects
Pratibha
0
Unity
Punj Lloyd IVRCL NCC Unity Infra Simplex

Infra
Source: Companies Source: Companies
n Infrastructure debt fund

Impact: Positive. Setting up of dedicated infrastructure debt fund has been
proposed to augment low cost funds from abroad for the infrastructure sector.
Income from that fund would be exempt from tax. It is also proposed that
any income received by non-resident from that fund shall be taxable at the
rate of 5% only. This is expected to ease liquidity for the infrastructure sector.
n Service tax exemption on few services

Impact: Positive. Service tax exemption is extended to works contract service
provided for construction or finishing of new residential complex under
Jawaharlal Nehru National urban renewal mission or Rajiv Awaas Yojana.
Exemption is also being provided for services provided within a port or airport
under 'Works contract' service for specified services. This would be positive
for construction companies carrying out works contract in these segments such
as Unity Infra, Pratibha Industries, NCC etc.
n Increase in MAT from 18% to 18.5%; surcharge reduced from 7.5% to 5%

Impact: Neutral. MAT has been increased from 18% to 18.5% but
correspondingly surcharge has been reduced from 7.5% to 5% so overall impact
in tax rate is not much. We expect this to be neutral for companies that fall
under MAT regime.
n MAT on SEZ's
Impact: Negative. Sunset clause has now been proposed for availability of
exemption from MAT in case of SEZ developers and units in SEZs. Thus, with
effect from FY12, SEZ developers or units operating in SEZs will have to pay
MAT. Along with this, exemption of dividend distribution tax is also proposed
to be discontinued from 1st June, 2011. This would be negative for companies
developing SEZs.
Impact on EPS (Rs)

Preferred picks
IRB Infra 12.6 15.0 12.6 15.0 184 291
IVRCL Infra 6.8 8.0 6.8 8.0 69 132
Pratibha Industries 6.5 8.9 6.5 8.9 54 81
Unity Infraprojects 12.0 12.9 12.0 12.9 58 109
Others
BGR energy systems 42.4 50.3 42.4 50.3 408 703
JP Associates 3.9 5.2 3.9 5.2 77 130
NCC 7.4 8.5 7.4 8.5 101 148
Simplex Infra 27.2 40.5 27.2 40.5 326 413
Madhucon Projects 8.5 9.0 8.5 9.0 95 140
Patel Engineering 12.8 19.5 12.8 19.5 142 254
J Kumar Infra 25.2 26.6 25.2 26.6 141 210
BUDGET IMPACT: POSITIVE FMCG

n Continued Emphasis on Rural Sector Growth, Financial Inclusion
FMCG Growth - Rural Vs Urban
Impact: Positive. The budget takes the following steps that affect rural income
24% Rural Urban generation/ fund availability – a/ 17% growth in social sector spending, to
Rs 1.61 trn, including growth in Bharat Nirman schemes of Rs 100 bn, b/
16% improved availability of credit through raising of credit flow to farmers to Rs.4.75
trn. We note that although NREGA allocation has not been raised, NREGA wages
8%
have been indexed to inflation. Companies that have a higher exposure to
rural India shall continue to benefit from the rural emphasis of the government.
0%
n No changes in headline excise duties, including cigarettes
Impact: Positive for FMCG companies, including tobacco companies. The budget
-8%
has left the excise duties for cigarettes unchanged, after the steep hike in last
2003
2004
2005
2006
2007
2008
2009
year’s budget. The lack of any changes is a positive for cigarette manufacturers,
as they would ensure higher volume growth and stability in FY12 profitability.
Source: Dabur India Presentation Excise duties on most items have remained unchanged, which augurs well for
the demand scenario in the sector.
n Improved Visibility on GST Implementation

Impact: Long-Term Positive for FMCG players. The government is due to
Size of the FMCG ind (Rs bn) announce a constitutional amendment bill in the current session of the
1500 parliament, aimed at introduction of GST. There is a clearer roadmap for GST
implementation, and the government’s commitment towards the same. GST
1200 is likely to reduce end – consumer prices, and is likely to benefit FMCG
companies. This announcement is, therefore a long-term positive for the industry
900 in general.
600 n Changes in MAT
300 Impact: Neutral. The changes in MAT (18.5%, from 18% currently), along
with the changes in surcharge (5%, from 7.5% currently) are largely neutral
0 for all companies under the MAT.
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
n Certain items, which were thus far enjoying excise rates of 4%, have
been raised to 5%.
Source: CII Report Impact: Minor Negative for large FMCG companies. Affected items include
miscellaneous consumer products such as sauces, ready-to-eat items, coffee,
and education stationary. However, given low dependence of most majors on
these items, we believe the negative impact shall be minor.
n Attempts to address long-term supply chain issues:

Impact: Long-Term Positive for FMCG players. The budget has taken attempts
to improve supply chain issues that arise in food items, and has, specifically,
launched a Rs 3 bn plan to improve palm oil output in the country. This is a
positive for companies highly exposed to the commodity.
BUDGET IMPACT: NEGATIVE HOTELS

n New services brought under service tax net
Impact: Following new services have been included in the service tax net -
l Hotel accommodation in excess of declared tariff of Rs1000 per day will
be levied an effective service tax rate of 5%
l Service provided by air-conditioned restaurants that have license to serve
liquor will be levied an effective service tax of 3%.
We view the above mentioned measures as a minor negative for the hotel
sector
BUDGET IMPACT: NEUTRAL INFORMATION TECHNOLOGY

n STPI sunset clause not extended beyond FY11
Indian IT Services-BPO Industry;
exports & domestic Impact: The sunset clauses for deduction in respect of export profits under
Sections 10A and 10B of the IT Act have not been extended beyond FY11.
Exports ($ bn - LHS)
Thus, companies will have to start paying profits on income generated from
Domestic (Rs bn - RHS)
units operating in software Technology Parks. While this will lead to higher
75 850
taxes for companies, it will not be incrementally negative because the sunset
60 780 clause was expected to expire on March 2011 and all projections were based
on that assumption.
45 710
30 640 n MAT for SEZ developers and units operating in SEZs WEF FY12
Impact: Companies operating in SEZs will now have to pay MAT WEF FY12.
15 570
This will be incrementally negative for these companies from a cash-flow
0 500 perspective. EPS estimates may not be impacted as companies can avail of
FY09 FY10 FY11E deferred tax credit. However, there will be an impact on cash flows of all
companies which is a marginal negative.
Source : Nasscom
n Reduction in surcharge
Growth in number of employees Impact:This provision will have a marginally positive impact for non-MAT
companies.
3,000
2,500 The provisions of the Union Budget have a largely neutral impact on the sector,
in our opinion. Changes in surcharge will impact marginally the EPS estimates
Thousands
2,000
for companies. MAT will have an impact in FY12 but marginal. The STPI sunset
1,500
clause not being extended beyond FY11 will result in status quo for companies.
1,000 The focus on opening up avenues for IT companies in government projects,
500 promoting higher technical education, so as to meet potential demand for
employees from this sector, are positive over the longer term.
-
FY11E
FY06
FY07
FY08
FY09
FY10
We remain optimistic on the longer term prospects of the industry. The Global
Delivery Model has gained significant acceptance among existing and potential
clients. We believe that, the outsourcing and off-shoring story will gather further
Source : Nasscom
steam in the future and this will see an increased flow of longer term and
larger contracts to Indian vendors. Also, focused smaller companies with
expertise on select verticals will be able to move up the value chain and attract
Rupee / US$ larger clients, thereby, improving their longer term prospects.
51 Stock prices of most IT companies have out-performed the markets in the recent
past, in line with the improvement in demand environment. We expect the
49 sentiment towards the sector to remain positive and the sector to provide decent
returns over the medium term, subject to near term volatility. At current levels,
47 we prefer larger names like Infosys and TCS; we also retain our positive bias
for select mid-caps like KPIT Cummins and NIIT Technologies.
45
43
Oct-09
Oct-10
Feb-10
Feb-11
Jun-09
Jun-10
Dec-09
Dec-10
Aug-09
Aug-10
Apr-09
Apr-10
Source : Bloomberg
Impact on EPS (Rs)

Preferred picks
Infosys 121.8 149.3 121.8 149.3 2,997 3,620
TCS 44.1 51.7 44.1 51.7 1,110 1,255
KPIT Cummins 11.5 14.4 11.5 14.4 146 196
NIIT Technologies 31.2 34.8 31.2 34.8 199 311
Others
Wipro 21.8 24.5 21.8 24.5 438 512
Mahindra Satyam 3.0 4.2 3.0 4.2 62 68
HCL Tech 21.9 30.1 21.9 30.1 442 547
Mphasis * 52.0 44.8 52.0 44.8 432 509
Patni ** 42 40.4 42 40.4 449 478
Infotech 12.8 16.3 12.8 16.3 159 197
NIIT Limited 5.1 7.0 5.1 7.0 49 74
Oracle 116.9 115 116.9 115 2,048 2,510
Geometric 9.1 10.4 9.1 10.4 66 87
Subex 8.8 10.2 8.8 10.2 53 91
Zensar 30.2 34.8 30.2 34.8 158 210
R Systems 13.1 11.2 13.1 11.2 130 121
BUDGET IMPACT: POSITIVE LOGISTICS

n Central excise exemption on specified equipment used for preservation
of agriculture produce
Impact: Positive. To attract investment in cold-storage chain, capital investment
will be eligible for viability gap funding scheme of the Finance Ministry. It is
also proposed to recognize cold chains and post-harvest storage as an
infrastructure sub-sector. The FM has also extended full exemption from excise
duty on air-conditioning equipment and refrigeration panels used for cold
storage. We believe this move will be a positive for manufacturers of cold-
storage equipments like Blue Star and Voltas.
n Service tax on air travel raised by Rs 50

Impact: Neutral. The FM has proposed to raise the service tax on air travel
by Rs 50 in the case of domestic air travel and Rs 250 on international journeys
by economy class. It has also been proposed to tax travel by higher classes
on domestic sector at the standard rate of 10 per cent to bring it on par with
journeys by higher classes on international air travel. The increase in service
will be passed through to the customer.
n Tax free infrastructure bonds upto Rs 30 bn for investment in ports and

transportation infrastructure
Impact: Positive. In order to give a boost to infrastructure development in
railways, ports, housing and highways development, the FM has proposed to
allow tax free bonds of Rs 300 bn to be issued by various Government
undertakings in the year 2011-12. This includes Indian Railway Finance
Corporation Rs 100 bn, National Highway Authority of India Rs 100 bn, HUDCO
Rs 50 bn and Ports Rs 50 bn. The move is expected to improve logistics
infrastructure in the country.
n Progress on GST implementation

Impact: Positive. While no timeline has provided for shifting to GST, the FM
observed that decisions on the GST have to be taken in concert with the States
with whom the central government's discussions have made considerable
progress in the last four years. Areas of divergence have been narrowed. As
a step towards the roll-out of GST, it is proposed to introduce the Constitution
Amendment Bill in this session of Parliament. Work is also underway on drafting
of the model legislation for the Central and State GST. Among the other steps
that are being taken for the introduction of GST is the establishment of a strong
IT infrastructure.
Introduction of GST will lead to rationalization and simplification of the tax

structure at both the centre and state levels and there would be continuous
tax credit right from the producer to the final consumer level. This is overall
positive for the logistics industry as it would facilitate easier interstate movement
of goods and transfer of business from the unorganized to the organized sector,
thereby providing additional logistics opportunities.
BUDGET IMPACT: NEUTRAL MEDIA

n Continued emphasis on rural growth
Growth in revenues
Impact: Positive on the media sector (advertising revenues). Expenses on schemes
60 such as Bharat Nirman have been augmented significantly, and attempts are
being made to improve credit availability for the farm sector. These are long-
45 term positives for consumption in rural areas, and will impact media companies.
We believe regional newspapers (DB Corp, Hindustan Media Ventures, Jagran
30 Prakashan), and GEC players (Zee Entertainment, Sun TV) are likely to benefit
from the same.
15
n Changes in MAT and surcharge
Impact: Neutral. The government has changed the MAT rate to 18.5% from
0
18% currently, and has simultaneously reduced the surcharge to 5% from
2010E
2011E
2012E
2013E
2009
7.5%, which is largely a neutral event for all companies covered under MAT.
n Extension of concessional customs duty (5%) to mailroom equipment

Source: Industry, FICCI-KPMG, Kotak Se-
curities - Private Client Research Impact: Currently, concessional customs duty is applicable to high speed printing
presses. This announcement’s impact is likely to be insignificant; given low
dependence of companies on imported items in mailroom equipment, as also
the low capex requirements thereof.
n Full exemption on customs duty on jumbo film rolls of 400 feet and
1000 feet:
Impact: The announcement shall have an impact on companies involved in
the production of films, and is likely to benefit companies like UTV Software
and Eros International. However, the impact of the same is likely to be small,
given low expense exposure to these items.
Indian M&E revenue mix, segment wise Growth, advertising expenditures

Animation Gaming Grw , Nominal Advertising Expense (LHS)
OOH
and VFX 30% Grw , real PCE (RHS) 15%
2%
Online 4%
24% 12%
1% Music
Radio 1% 18% 9%
2%
12% 6%
Films
16% Television 6% 3%
46%
0% 0%
Print -6% -3%

28% FY97 FY99 FY01 FY03 FY05 FY07 FY09E
Source: Pwc Report on Indian Media & Entertainment industry Source: Kotak Securities - Private Client Research
Lack of any other announcement makes the budget a neutral event for media sec-
tor. The government has sounded positive on taking measures to contain inflation
in the long-term, which, along with emphasis on rural sector growth, is a positive
for media companies. We had expected a hint of reforms in radio FM, and
changes relating to digitization, in the budget sound-bytes. Absence of the same is
a minor disappointment, and announcements on these are likely delayed, not de-
nied.
We believe media companies remain fundamentally strong, on the back of strong

domestic demand growth and rising brand consciousness/ adoption. Our invest-
ment thesis on the media sector is derived from expectations of strong growth in
advertising expenditures, higher subscription revenues, as well as higher monetiza-
tion among companies that have invested behind new properties/ genres. The
budget shall have minimal impact on our investment ideas/ earnings estimates.
Our favored picks in the space are HT Media, Sun TV, and ENIL.
Softness in consumption growth, due to higher inflation or other macroeconomic
factors, is the largest risk to our sector view.
Impact on EPS (Rs)

Preferred picks
ENIL 10.3 12.1 10.3 12.1 211 264
HT Media 7.8 11.0 7.8 11.0 132 224
Sun TV Network 19.0 24.3 19.0 24.3 403 666
Others
DB Corp 13.3 14.6 13.3 14.6 235 312
IBN18 -0.4 2.3 -0.4 2.3 91 115
Jagran Prakashan 6.7 8.2 6.7 8.2 111 153
UTV Software 40.9 41.9 40.9 41.9 508 463
Zee Entertainment 5.9 5.9 5.9 5.9 119 117
BUDGET IMPACT: NEUTRAL METALS & MINING

Iron Ore (Negative)
n Export duty on iron ore fines quadruples to 20% while raised by one-
third for lumps
Impact: 300% increase in export duty on iron ore fines to 20% came as a
big negative surprise as expectations in case of increase were limited to 10%
and in best case 15%. Export duty on lumps also increased to 20%. This would
have significant negative impact on Sesa Goa.
Steel (Neutral)
n Sustained infrastructure thrust to stimulate steel demand
Impact: Budgetary support for steel intensive infrastructure sector increased
by 23% to Rs.2140bn. Positive for steel companies as higher outlay for road,
railways, power, urban and rural infrastructure development to lead to higher
steel consumption.
n Excise duty on steel/auto/consumer durable remains untouched at 10%

Impact: Further rollback of excise duty to 12% for steel, automobiles or
consumer durables would have been negative. So no duty change comes as
a relief.
n Increase in effective MAT by 0.075% to 19.425%

Impact: Negligible impact for steel and sponge iron players who have reasonable
contribution from power unit sales. MAT of 18% + 7.5% surcharge which
effectively meant 19.35% tax replaced by 18.5% + 5% surcharge which
effectively means 19.425%, so negligible change.
China iron ore import price (CIF $/t) China Steel Export Prices (USD)
62% Fe 58% Fe HRC Rebar

200 775
700
150
625
100
550
50 475
Feb-10
Feb-11
May-10
Nov-09
Nov-10
May-10
Nov-09
Feb-10
Nov-10
Feb-11
Aug-10
Aug-10
Source: Bloomberg Source: Bloomberg
Stainless Steel (Positive)/ Ferro Alloys (Negative)
n Duty cut on stainless scrap to 0 from 2.5% and from 5% to 2.5% on

ferro- nickel
Impact: The Budget has proposed to cut duty on stainless scrap to 0 from
2.5% and that on ferro- nickel to 2.5% from 5%. This would translate into
reduced cost of production by $15-17/t for stainless steel companies so
marginally positive for stainless steel companies. Ferro alloy companies would
be hit as imports become cheaper by 2.5%.
Impact on EPS (Rs)

Preferred picks
Sesa Goa 46.6 61.8 44.8 53.7 261 340
BUDGET IMPACT: NEGATIVE OIL & GAS

n MAT applicable to SEZ - section 115 JB (6)
Crude Oil ($/bbl)
Impact: Under the existing provisions of section 115 JB (6) of income tax act,
150 exemption was allowed from payment of MAT on book profits in respect of
income earned from special economic zone (SEZ). The government has removed
120 this exemption w.e.f 01St April 2011. Hence, erstwhile RPL (now merged with
RIL) refinery which is operating under a SEZ, will now be liable to pay MAT
90 at the rate of 20% (basic tax rate 18.5% (increased from 18%), surcharge
5% (reduced from 7.5%), education cess 3%). We believe this will be a negative
60 for RIL as its average tax rate will increase in FY12 leading to higher cash
outflows.
30
n Direct cash subsidy on kerosene - BPL
Feb-08
Feb-09
Feb-10
Feb-11
Aug-08
Aug-09
Aug-10
Impact: The government provides subsidies on fuel such as Kerosene and LPG.
However, a significant proportion of the subsidized fuel does not reach the
Source: Bloomberg targeted beneficiaries and hence there is a large scale diversion of subsidized
kerosene oil. In order to arrest this misuse, the government is now planning
towards direct transfer of cash subsidy to people living below poverty line in
a phased manner.
Naphtha ($/bbls)
160 A task force headed by Shri Nandan Nilekani has been set-up to work out the
modalities for the proposed system of direct transfer of subsidy for kerosene
120 and LPG. The interim report of the task force is expected by June 2011. The
government expects the system will be in place by March 2012. We believe
80 this is a major positive for the all OMCs in the long run, if implemented as
budgeted.
40
n Disinvestment in PSUs
0 Impact: In FY11, government will raise ~Rs.221.4 bn as against a target of
Rs. 400 Bn from disinvestment, as the government has postponed the FPO
Feb-08
Feb-09
Feb-10
Feb-11
Aug-08
Aug-09
Aug-10
of ONGC and IOC to FY12. We believe this will be stock Neutral.
n Govt. has reduced the subsidy allocation for petroleum sector

Source: Bloomberg
Impact: Union Budget 2011 has pegged the petroleum subsidy provision at
Rs 236 Bn for FY12 as against Rs.383.9 bn in FY11. We believe the allocation
made for FY 12 is very low considering the current crude oil price levels. We
Natural Gas ($/MMBTU) believe this is not positive for OMCs unless crude price corrects substantially
15 or diesel price is de-regulated.
12 For FY11, till now the government has given a subsidy of Rs. 210 Bn to the
OMCs for the losses incurred on retail fuel sale and made a further provision
9 of ~Rs.173.86 Bn for FY11.
6
n MAT increased to 18.5% from 18%
3 Impact: The government at one hand has increased the MAT rate from 18%
to 18.5% but on the other hand has reduced the surcharge from 7.5% to
0 5.0%. So, we believe this is neutral for Cairn and RIL who are currently liable
Feb-08
Feb-09
Feb-10
Feb-11
Aug-08
Aug-09
Aug-10
to MAT.
Source: Bloomberg
Illustration
(Rs) Pre-Budget Post-Budget
Book profit 100 100

Basic Tax 18 18.5
Surcharge 1.35 0.93
Education Cess 0.58 0.58
Total Tax 19.9 20.0
Impact on EPS (Rs)

Preferred picks
Cairn 33.9 49.9 33.9 49.9 340 378
IGL 19.2 24.1 19.2 24.1 290 365
Others
GSPL 8.5 8.4 8.5 8.4 90 102
Petro net LNG 7.8 9.3 7.8 9.3 110 122
BUDGET IMPACT: NEGATIVE PHARMACEUTICALS

n SEZ is brought under MAT
Impact: Under the existing provisions of section 115 JB (6) of income tax act,
exemption was allowed from payment of MAT on book profits in respect of
income earned from special economic zone (SEZ). The government has removed
this exemption w.e.f 1st April 2011. This will increase effective tax rates for
companies. We believe this is negative for the sector especially for the currently
companies operating under SEZs.
Government has increased the MAT rate on one hand from 18% to 18.5%
but on the other hand has reduced the surcharge from 7.5% to 5%. Hence
effective tax rate remains the same.
n Excise duty on Pharma formulations will go up to 5% from 4%.
Impact: This could be marginally negative for the sector as pass through would
be difficult in the highly competitive environment.
BUDGET IMPACT: NEUTRAL POWER

n Excise exemption on equipment procured for brownfield expansion of
ultra-mega power project
Impact: Positive. Currently, brownfield expansion of existing mega-power
projects attract customs duty of 2.5% (no CVD) in case of imported equipments
and full excise duty in case of domestic equipments. The FM has proposed
to exempt domestic suppliers from excise duty in case of brownfield expansions.
This is expected to bring down the cost of equipment supply from domestic
players like BHEL and L&T. However, as of now, none of the ongoing UMPPs
have announced brownfield expansion.
n Increase in MAT marginally

Impact: MAT has been raised from 18% to 18.5% which will be partly offset
by reduction in surcharge from 7.5% to 5%. The overall impact will be marginal.
Impact on EPS (Rs)

Preferred picks
NTPC 10.6 11.7 10.6 11.7 170 220
Movement of short-term power Monthly Asian Thermal Coal Prices

price (Rs/unit) (US$/ton)
Bilateral trades 130
10 Unscheduled Interchange
8 120
6 110
4
100
2
0 90
Feb-10
Jun-10
Oct-10
Dec-10
Aug-10
Apr-10
Dec-10
Jun-10
Oct-10
Aug-10
Apr-10
Source: Company Source: Company
BUDGET IMPACT: NEUTRAL REAL ESTATE

n Enhanced limit in priority sector lending
Impact: Positive. Finance Minister has enhanced the housing loan limit from
Rs 2 mn to Rs 2.5 mn under priority sector lending. This move would be positive
for players focused on low cost housing.
n Extension of interest subvention

Impact: Positive. Interest subvention of one per cent has been extended to
housing loan upto Rs 1.5 mn where cost of house does not exceed Rs 2.5
mn from the present limit of Rs 1 mn where cost of house does not exceed
Rs 2 mn. This move would be positive for players focused on low cost housing.
n MAT on SEZ's
Impact: Negative. Sunset clause has now been proposed for availability of
exemption from MAT in case of SEZ developers and units in SEZs. Thus, from
1st April, 2012, SEZ developers or units operating in SEZs will have to pay MAT.
This would be negative for players developing SEZs.
We do not have active coverage on the sector.
Urban housing shortage (mn units) Rural housing shortage (mn units)
25 75 Immediate shortage
Immediate shortage
Total shortage Total shortage
20 60
15 45
10 30
5 15
0 0
2001 2005 2008 2010 2014 2001 2005 2008 2010 2014
Source: Industry Source: Industry
BUDGET IMPACT: POSITIVE RETAIL

n Boost in GDP growth to spur consumption
Impact: Positive. Continued measures of government to boost GDP growth
are expected to drive Indian consumerism. This is likely to be positive for the
retail sector.
n Higher disposable income due to higher tax exemption to spur growth

Impact: Positive. Due to increase in the exemption limits on personal income
tax for individuals, disposable income is expected to increase. This is expected
to result in higher spending power as well as consumption, thereby benefiting
retail sector.
Retail Penetration (%) Age wise classification of population - working age

grp (15-60yrs)
100% Traditional retail Organised retail <15 yrs 15-60yrs >60yrs
75% 100
75
50%
25% 50
0% 25
US
Malaysia
Indonesia
Thailand
China
India
Taiwan
0
1990 1995 2000 2005 2010 2015
Source: Industry Source: Industry
BUDGET IMPACT: NEUTRAL TELECOM

With gross subscriber base reaching 770 million and revenues crossing USD 20 bn,
Indian telecom sector has reached its maturity phase with incremental growth
coming from increasing penetration in rural/semi-urban areas.
In the budget, government has specified that it expects to raise Rs 296.5 bn
through recurring license fees and other usage charges from the telecom sector.
The usage charges include license fees from the telecom operators, receipts on
account of spectrum usage charges and auction of third generation (3G) and
broadband wireless access (BWA) spectrum.
n Status Quo for section 80IA (12A) of IT act.

Impact: Telecom sector has been looking forward for the extension of the
tax holiday benefits under Section 80IA of the I-T Act especially for the new
players in the industry. Such extension would have provided thrust to the industry
in the short to medium term in terms of the potential tax savings.
n Status Quo for section 80IA (12A) of IT act.

Impact: Amidst hyper-competition in the sector that has been forcing telecom
companies to streamline their operations, consolidation appears to be a viable
and inevitable option. However, the restrictive provisions in Section 80IA(12A)
of the I-T Act denying tax holiday to undertakings in the event of amalgamation
has been deterrent to such consolidations in the sector.
Research Team
Dipen Shah Saurabh Agrawal Ruchir Khare Jayesh Kumar
IT, Media Metals, Mining Capital Goods, Engineering Economy
dipen.shah@kotak.com agrawal.saurabh@kotak.com ruchir.khare@kotak.com kumar.jayesh@kotak.com
+91 22 6621 6301 +91 22 6621 6309 +91 22 6621 6448 +91 22 6652 9172
Sanjeev Zarbade Saday Sinha Ritwik Rai Shrikant Chouhan
Capital Goods, Engineering Banking, NBFC, Economy FMCG, Media Technical analyst
sanjeev.zarbade@kotak.com saday.sinha@kotak.com ritwik.rai@kotak.com shrikant.chouhan@kotak.com
+91 22 6621 6305 +91 22 6621 6312 +91 22 6621 6310 +91 22 6621 6360
Teena Virmani Arun Agarwal Sumit Pokharna K. Kathirvelu
Construction, Cement, Mid Cap Automobiles Oil and Gas Production
teena.virmani@kotak.com arun.agarwal@kotak.com sumit.pokharna@kotak.com k.kathirvelu@kotak.com
+91 22 6621 6302 +91 22 6621 6143 +91 22 6621 6313 +91 22 6621 6311
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Budget Analysis Feb 2011

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Budget Analysis Feb 2011

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PRIVATE CLIENT RESEARCH

UNION BUDGET ANALYSIS

UNION-BUDGET ANALYSIS UNION BUDGET ANALYSIS FY2011-12

FY11-12. Some of the important bills relating to banking, insurance and

Source: Kotak Securities - Private Client Research

Attacking supply side constraints in agriculture

Sustained focus on growth …

Growth in Real GDP (%)

Central Plan Outlay by Sectors (Rs bn)

Source: Union Budget FY2011-12

More private partnership and administrative reforms targeted

Plan expenditure Non-plan expenditure

Non-Plan Exp (Rs bn - LHS)

4000 32% 6000 20%

Inclusive growth remains the corner-stone…

Social sector schemes allocations

Source: Budget document 2011-12

Significant reforms proposed - implementation to be the key

FY12BE fiscal deficit at 4.6% - will it, won't it

Central Government Finances

Fiscal Deficit 4184.8 3814.1 4010.0 4128.2

Source: Union Budget Documents

Variance in Non-Plan expenditure (Rs bn)

Interest Payments and Debt Servicing 2407.6 2679.9

Source: Annual Budget 2011-12

Further benefits on personal income tax front

Individual direct tax impact

Individual with income of Rs 5 lakh pa

Senior Citizen above 60 years

Very Senior Citizen above 80 years

Source: Annual Budget 2010-11

Direct Tax (Rs bn - LHS)

4000 Indirect Tax (Rs bn - LHS) 40%

Source: Economic Survey 2010-11, Annual Budget FY2011-12

Capital markets - neutral in short-term but positive in the long-

BUDGET HIGHLIGHTS FY2011-12

Food/ Agro-Processing/ Agriculture

Source: Kotak Securities - Private Client Research

Sugar Confectionary, Pastry and Cakes 4% 5%

Source: Union Budget Document 2010-2011

Central Government Finances (Rs bn)

Non-Tax Revenue 1162.8 1481.2 2201.5 48.6 1254.4 -43.0

Total Capital Receipts* 4530.6 4265.4 4477.4 5.0 4478.4 0.0

Total Receipts 10244.9 11087.5 12165.8 9.7 12577.3 3.4

Agriculture & Fertilizer Positive NA

Source: Kotak Securities - Private Client Research

SECTOR IMPACT ANALYSIS

BUDGET IMPACT: POSITIVE AGRICULTURE & FERTILIZER

BUDGET HIGHLIGHTS & IMPACT

n Reduction of basic custom duty on micro-irrigation equipment from 7.5%

n Include capital investment in fertilizer production as an infrastructure sub

n Special attention to palm oil promotion

We do not have active coverage on this sector

BUDGET IMPACT: POSITIVE AUTOMOBILES

BUDGET HIGHLIGHTS & IMPACT

3 n Emphasis on green fuel technology/car

made related to this aspect -

part used in the making of hybrid vehicle. Furthermore concessional rate

n Focus on agriculture continues

350 during the previous budget

for the 2W players as well.

Impact on EPS (Rs)

Source: Kotak Securites - Private Client Research