india budget fy14 - walk the talk

7/29/2019 India Budget FY14 - Walk the Talk

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Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely ofARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only withinIndia and to no countries outside India. Disclosures and analyst certifications are present in Appendix

Anand Rathi Research India Equities

Union Budget

Theme Report

India I Equities

Research Team+9122 6626 6666

[email protected]

High government borrowing: Crowding out private investment

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28 February 2013

India Budget FY14

Walk the talk

Against the backdrop of a hostile macroeconomic environment, thecurrent budget seems to be close to the best that could be rolled out.

The focus on fiscal consolidation, inducements for investment andfinancial savings and promotion of skill formation are laudable as alsothe attempt to avoid populist measures in the run-up to the nextgeneral election. Yet, we remain sceptical about some of the targetsset by the FY14 budget. The budget is positive for infrastructure andconstruction companies and negative for segments of auto, FMCGand media sectors.

Focus on fiscal consolidation. One of the redeeming features of thebudget announcement is the retraction to the fiscal consolidation path.Despite the large slippage in subsidy payments, the 5.2% fiscal deficit inFY13 could be achieved through major cut in spending, especially capitalspending. The finance minister has projected fiscal deficit of 4.8% of GDPin FY14. This is scheduled to be achieved through inter alia reduction ofnon-plan expenditure from 12.3% in FY13 to 10.8% in FY14 and increasein tax revenue 16.7% in FY13 to 19.1% in FY14.

Sector Positive. Greater focus on infrastructure could help infrastructure &construction companies. A positive for companies in building affordable housing.Greater expenditure on education and vocational course is positive for the sector.

Sector Negative. Increase in surcharge from 5% to 10% would expandincome tax rate across companies as well as Dividend Distribution Tax.Increase in excise duty on SUVs is negative for the auto sector; 18% hike inexcise duty on cigarettes is negative for cigarettes companies; increase incustoms duty on set top boxes is negative for media companies.

Sensex: 18862

Nifty: 5693

Key budget figures

FY13 (RE) FY14 (BE)

Budget size (`bn) 14,308 16,653

Gross tax-GDP ratio (%) 10.4 10.9Receipt / expenditure growth (%) 14.3 14.6Net govt. borrowing (`bn) 4,674 4,840Fiscal deficit-GDP ratio (%) 5.2 4.8RE- Revised estimates, BE-Budget estimatesSource: Government of India

Impact on sectorsPositive Infrastructure, Cap goods,

Construction, Metals andEducation

Negative Auto, Consumer & retail, Cigaretteand Media

Neutral Banks, NBFCs, Cement,Telecoms, IT Services,Pharmaceuticals, Logistics andReal estate

Source: Anand Rathi Research


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28 February 2013 India Budget FY14 Walk the talk

Anand Rathi Research 2

Contents

Budget FY14: Best in a bad situation............................................................ 3

Sector ........................................................................................................ 8

Autos............................................................................................... 9

Cement ......................................................................................... 11

Construction.................................................................................. 13

Consumer & Retail........................................................................ 15

Education...................................................................................... 17

Financial Services......................................................................... 18

Healthcare..................................................................................... 20

Industrials...................................................................................... 21

Logistics........................................................................................ 23

Media and Entertainment.............................................................. 24

Metals and Mining......................................................................... 25

Real Estate ................................................................................... 26

Telecommunications ..................................................................... 27


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Gautam Singh+9122 6626 6743

[email protected]

Sujan Hajra+9122 6626 6720

[email protected]

Sandeep Shenoy+9122 6626 6777

[email protected]

Budget FY14: Best in a bad situation

Against the backdrop of a hostile macroeconomic environment, thecurrent budget seems to be close to the best that could be rolled out.

The focus on fiscal consolidation, inducements for investment and

financial savings and promotion of skill formation are laudable asalso the attempt to avoid populist measures in the run-up to the nextgeneral election. Yet, we remain sceptical about some of the targetsset by the FY14 budget.

Best in a bad situation. The current budget has been rolled out in anextremely tough macroeconomic environment. The real GDP growthaccording to Central Statistical Offices (CSO) advanced estimate hasplunged at a decadal low. Despite considerable softening of themanufactured price inflation, food and consumer price inflation remain inthe double-digit zone. Indias fiscal deficit remains elevated and currentaccount deficit is at record high. Meanwhile, Indias saving and investment

rates have fallen considerably. Against this backdrop, according to ourassessment, the current budget is close to the best that could be rolled out.

Yet, we remain sceptical about some of the targets set by the FY14 budget.

Focus on fiscal consolidation. One of the redeeming features of thebudget announcement is the retraction to the fiscal consolidation path.

Despite the`68,000cr slippage in subsidy payments, the 5.2% fiscal deficitin FY13 could be achieved through major cut in spending, especiallycapital. The finance minister has projected fiscal deficit of 4.8% of GDP inFY14. This is scheduled to be achieved through inter aliareduction of non-plan expenditure from 12.3% in FY13 to 10.8% in FY14, increase in taxrevenue 16.7% in FY13 to 19.1% in FY14.

Challenges in achieving the desired fiscal consolidation. We envisagethe following challenges in meeting the desired level of fiscal consolidation:

High corporate income and service tax collection targets. TheFY14 budget estimates corporate income tax growth to accelerate to11.2% in FY13 and to 16.9% in FY14. This implicitly assumes strongjump by ~500bps in company earning growth between FY13 andFY14, which remains doubtful. Moreover, while India has registeredhigh growth in service tax collection in 16 out of the last 18 years, withthe gradual broadening of the tax base service tax now accounts for13% of the Centers gross tax revenue the assumption of 36%growth in service tax revenue looks ambitious.

Ambitious disinvestment and divestment plans.The budget FY14aims to garner`40,000cr through disinvestment. It has never been ableto get more than`25,000cr through disinvestment in a year, barringFY08. The budget has also factored in`14,000cr through divestmentof government stake in non-government companies. It would requirebullish equity market conditions for the government to be able to meetthese targets.

Ambitious subsidy reduction plans. The budget aims at reducingthe spending on three major subsidies food, fertilizer and petroleum

from`2,48,000cr in FY13 to`2,21,000cr in FY14. In the past twoyears, there have been large slippages on account of actual subsidyspending over the budget estimates on the same. The slippage was 56%in FY12 and 38% in FY13. Given these, the reduction in absolute


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amount of subsidy payment, especially on petroleum from`97,000cr

FY13 to`65,000cr in FY14, looks optimistic.

Fig 1 Rise in subsidies remains a major overhang on expenditure

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Source: Government of India, Anand Rathi Research Note: BE-Budget estimates

High nominal GDP growth rate. The budget calculations implicitlyassume nominal GDP growth at 11.7% in FY13 and 13.4% in FY14.

This is despite the likely slowdown in inflation and thereby the growthin GDP deflator in FY14. That is, the budget assumes at least 2percentage point acceleration in the real GDP growth between FY13and FY14. Once again, this looks ambitious.

The aforementioned points suggest that achieveing fiscal deficit at 4.8% ofGDP in FY14 would be challenging. In the face of expenditure overrun andrevenue shortfall, the finance minister had to aggressively scale down theplanned and capital spending in FY13. If the country wants to stick to the fiscal

consolidation process envisaged by the budget FY14, it might entail majorreductions from the ambitious targets for plan and capital spending which havebeen pegged at 29% and 37%, respectively, set by the budget.

Avoidance of overtly populist measures. In the run-up to the currentbudget, there were apprehensions that the current budget being the lastbefore the next general election, the drift may become populist with thebulging of social spending. The finance minister has dispelled such fears.Even the allocations under the flagship food securities and MGNERAGA

at`10,000cr and`33,000cr, respectively, remained modest.

Fig 2 Budget spend under NREGA

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Source: Government of India, Anand Rathi Research Note: BE-Budget estimates


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Inducement to investment. The redeeming feature of the FY13 budgethas been announcements on the infrastructure sector.

Capex of`1bn undertaken during FY14-15 will be eligible for adeduction 15% of the investment, in addition to the current rates of

depreciation. The provision of a deduction of 15% on capex of`1bn

and above will be cash-flow positive for companies, thereby spurringdemand for equipment

3,000 kms of road projects which were previously stalled in states likeGujarat, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh tobe cleared and awarded in the next six months

Three new ports have been planned in addition to seven new citiesunder the Delhi Mumbai Industrial Corridor in the 12th Plan

To improve access to funds, the government will encourage setting upof Infra Debt Funds and selectively give permission for issuance of taxfree infra bonds of up to`50,000cr

States to be encouraged to get the finances of their Electricity Boardsrestructured at the earliest. This should materialize into demand for

T&D equipment.

Inducement for financial saving. In a bid to induce households to savemore, the budget FY14 proposes the following: Introduction of inflation indexed bond or inflation indexed national

security certificates. The structure and tenor of the instruments to beannounced later

Under the Rajiv Gandhi Equity Savings Scheme, the first-time investorcan now avail tax benefits on investment in mutual funds and in listedshares for three successive years

Loan for the first home up to `25,00,000 during FY14 would beentitled to an additional deduction of interest of up to`100,000.

Focus on vocational training and skill formation. Continuing itsinitiatives for skills development, the government envisages training 50m

people in the 12th Plan, including 9m in 2013-14. A further`10bn wouldbe set aside to encourage youth to voluntarily enrol at skill-developmentinstitutions. Each individual who undergoes training would be provided an

incentive of`10,000. This, together with the recognition given to industry-led assessment and certification, would build up aspiration for skills andcontribute significantly to ongoing efforts to ensure that India is in aposition to leverage its demographic dividend. Furthermore, vocationalinstitutes affiliated with the State Councils of Vocational Training havebeen included in the negative list of service tax. This would make skillstraining affordable and more accessible to people, particularly for those atthe bottom of the pyramid.

Direct taxes: Small relief

No change in personal income tax. Both the rate and slabs have beenkept unchanged for the personal income tax. However, the budget

proposes to provide a tax credit of`2,000 to every person who has a totalincome up to`5 lakh (1.8 crore tax payers are expected to benefit to the

value of`3,600 crore).

A breather for the equity market. After several budgets, the FY13 Budgethas taken specific measures for the equity market. These include:


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Rajiv Gandhi Equity Savings Scheme. This scheme has beenrestructured and now includes new retail investors (annual incomebelow`12 lakh) who can invest in mutual funds and in listed shares forthree successive years

Reduction in Securities Transaction Tax (STT). STT has beenreduced for equity futures from 0.017 to 0.01%, for MF/ETFredemptions at fund counters from 0.25 to 0.001%, MF/ETFpurchase/sale on exchanges from 0.1 to 0.001%.

Indirect taxes: No change

No change in service tax rate. The budget FY14 proposes no changein the: (1) Peak rate of basic customs duty of 10% for non-agriculturalproducts; (2) normal rate of excise duty of 12%; and (3) normal rate ofservice tax of 12%. However, duty on specified machinery formanufacture of leather and leather goods, including footwear, werereduced from 7.5% to 5.0%. Also, excise duty on cigarettes has beenincreased by 18%, except on cigarettes of less that 65mm.


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Fig 3 Expenditure control to keep fiscal deficit in check(`bn) (Growth, %)

FY09 FY10 FY11 FY12 FY13RE FY14BE FY13RE FY14BE

Total receipt 8,401 10,259 11,909 13,204 14,308 16,653 8.4 16.4

Revenue receipt 5,403 5,728 7,885 7,514 8,718 10,563 16.0 21.2

Total tax receipt 6,053 6,245 7,931 8,892 10,380 12,359 16.7 19.1

Share of state, UT in Central taxes 1,620 1,680 2,232 2,594 2,959 3,518 14.1 18.9

Tax receipt for Centre 4,433 4,565 5,699 6,298 7,421 8,841 17.8 19.1

Personal income tax 1,060 1,323 1,466 1,703 2,061 2,476 21.0 20.2

Corporate income tax 2,134 2,447 2,987 3,228 3,589 4,195 11.2 16.9

Customs duty 999 833 1,358 1,493 1,649 1,873 10.4 13.6

Excise duty 1,086 1,030 1,377 1,456 1,720 1,976 18.1 14.9

Services tax 609 584 710 975 1,327 1,801 36.1 35.8

Other tax 164 28 33 36 35 37 -1.5 5.3

Non-tax receipt 969 1,163 2,186 1,217 1,297 1,723 6.6 32.8

Interest 207 218 197 203 166 178 -18.1 7.0

Dividend and profit 386 503 480 506 554 739 9.6 33.2

Other non-tax 376 442 1,509 508 577 806 13.5 39.8

Capital receipt 2,999 4,531 4,024 5,689 5,641 6,090 -0.8 7.9

Net market borrowings 2,336 3,984 3,254 4,362 4,674 4,840 7.1 3.6

Disinvestment of PSUs 6 246 228 181 240 558 32.7 132.6

Receipts from small savings etc. (13) 133 112 (103) 86 58 -183.7 -32.8

Recovery of loans 61 86 124 189 141 107 -25.3 -24.3

Other capital receipt 608 82 305 1,061 501 527 -52.8 5.3

Total expenditure 8,840 10,245 11,973 13,044 14,308 16,653 9.7 16.4

Non-plan expenditure 6,087 7,211 8,183 8,920 10,016 11,100 12.3 10.8

Revenue expenditure 5,590 6,579 7,265 8,120 9,197 9,929 13.3 8.0

Interest payments 1,922 2,131 2,340 2,732 3,167 3,707 15.9 17.1

Defence 733 907 921 1,030 1,089 1,169 5.7 7.4

Explicit subsidies 1,297 1,414 1,734 2,179 2,577 2,311 18.2 -10.3

Others 1,638 2,128 2,270 2,179 2,364 2,742 8.5 16.0

Capital expenditure 497 632 918 799 819 1,171 2.5 42.9

Loans and advances 15 11 61 6 43 2 659.0 -95.4

Defence 409 511 621 679 696 867 2.5 24.7

Others 73 110 236 115 81 301 -29.4 271.9

Plan expenditure 2,752 3,034 3,790 4,124 4,292 5,553 4.1 29.4

Revenue expenditure 2,348 2,539 3,142 3,337 3,434 4,433 2.9 29.1

Central plan 1,665 1,788 2,325 2,413 2,438 3,200 1.0 31.3

States plan 683 751 818 925 996 1,232 7.7 23.7

Capital expenditure 405 495 648 786 858 1,121 9.1 30.6

Central plan 317 401 535 671 734 990 9.4 34.9

States plan 88 94 113 116 124 130 7.3 5.1Gross fiscal deficit 3,370 4,185 3,736 5,160 5,209 5,425 1.0 4.1

Revenue deficit 2,535 3,390 2,523 3,943 3,912 3,798 -0.8 -2.9

Primary deficit 1,448 2,054 1,396 2,428 2,043 1,718 -15.9 -15.9

Gross fiscal deficit (% of GDP) 6.0 6.5 4.8 5.7 5.2 4.8 - -

Revenue deficit (% of GDP) 4.5 5.2 3.2 4.4 3.9 3.3 - -

Primary deficit (% of GDP) 2.6 3.2 1.8 2.7 2.0 1.5 - -

Source: Government of India, Anand Rathi Research BE: Budget estimate, RE- Revised estimates,


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Sector


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Autos

The budget was marginally negative for the auto sector. Calls for alower excise duty to boost flagging demand, and counter calls for levyof additional differential duty on diesel vehicles, were ignored.

However, excise duty on SUVs was raised by 3%, which will mainlyhit M&M. An increase in surcharge on tax would lower profits ~2%for all companies. Lastly, higher JNNURM outlay for purchase ofbuses and 1% reduction in excise duty on truck chassis are positivesfor CV companies.

Fig 4 Impact on sector and stocksBudget announcements Impact on sector Impact on companies

3% increase in excise duty on SUVs Negative M&M, Tata Motors

JNNURM allocation for purchase of up to10,000 buses for hilly states

Positive Ashok Leyland, Tata Motors, Eicher Motors

1% lower excise duty on CV chassis Positive CV companies

Increase in surcharge from 5% to 10% Negative All companiesIncrease in surcharge from 5% to 10% onDividend Distribution Tax

Negative All companies

Investment allowance of 15% Positive All companies

Source: Government of India, Anand Rathi Research

Budget announcements

Excise duty rates hiked from 27% to 30% for SUVs. Surcharge on domestic companies increased (from 5% to 10%) and

surcharge on Dividend Distribution tax (DDT) increased (from 5% to10%).

Excise duty on truck chassis reduced from 14% to 13%. JNNURM outlay has been provided at `148.73bn, of which, a

significant portion will be used to support the purchase of up to 10,000buses, especially by hilly states.

Basic customs duty on new passenger cars and other motor vehicles(high end cars) with CIF value of more than US$ 40,000 and/or enginecapacity exceeding 3000cc for petrol run vehicles and exceeding 2500cc for diesel run vehicles has been increased from 75% to 100%. Basiccustoms duty on motor cycles with engine capacity of 800cc or more

was increased from 60% to 75%.

Companies investing`1bn or more in plant and machinery during theperiod from 1 April 2013 to 31 March.2015 would be entitled to deductan investment allowance of 15% of their investment.

Impact on the sector

Overall, the impact of the budget is marginally negative for the auto sector.Calls for a lower excise duty to boost flagging demand, together with levyof differential duty on diesel vehicles, were ignored. However, excise dutyon SUVs was raised 3%, which will result in price increases, and may hitdemand.

A higher tax rate will impact profitability of all auto and auto componentcompanies by ~2%. However, benefits from deduction of the investment

allowance may provide relief. An increase in Dividend Distribution Tax willresult in lower money for distribution to shareholders.

Rohan Korde+9122 6626 67333

[email protected]


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Higher customs duty on high-end imported vehicles would be a dampenerfor this niche segment. Lastly, a higher outlay under the JNNURM scheme(for purchase of ~10,000 buses mainly for the hill states), and 1% reductionin excise duty on truck chassis are positives for CV companies.

Impact on companies

Higher excise duty on SUVs would result in a price increase of ~2.0-2.5%,and hence may slightly hit M&Ms demand. Other SUV manufacturers like

Tata Motors and other unlisted companies may also face demandslowdown.

Increase in tax on royalty/technical fees to be paid to a non-resident isunlikely to impact Maruti Suzuki, since it is covered under a DTA with

Japan, capping it at 10%.

Higher surcharge on income tax will hit earnings of all auto and autocomponent companies by ~2% in FY14e. However, companies

undertaking capex of`1bn or more in plant and machinery over FY14-15

may be able to avail benefits from deduction of the investment allowance.

The outlay under JNNURM for purchase of up to 10,000 buses wouldbenefit CV companies. Key beneficiaries are Ashok Leyland and Volvo,

while Tata Motors and Eicher Motors may also get a share of the pie.


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Cement

The budget is neutral for the cement sector. Introduction ofinvestment allowance for new projects and greater allocation forinfrastructure are positives, while rationalisation in customs duty on

imported coal is a negative. The hike in tax on royalty/technical feesis neutral for MNC cement companies.


Tax rate on royalty/technical fees raised to 25%from 10%; DTAA rates applicable

Neutral ACC, Ambuja, Heidelberg

15% investment allowance for projects costing>`1bn and set up during F14-15

PositiveShree, Ultratech, JK Cement,Mangalam, JK Lakshmi, Dalmia,Century

Rationalisation of customs duty and CVD onbituminous and steam coal

NegativeAmbuja, Ultratech, Madras Cement,Birla Corp.

Higher allocation for infrastructure projects Positive All cement companies

Extension of Sec.80-IA benefits Positive Shree, India CementSource: Government of India, Anand Rathi Research


In a case of distribution of profits by a subsidiary to a foreign parentcompany in the form of royalty and fees for technical services, the rateof tax currently paid is the lower of that provided in Income Tax (IT)

Act (10%) and Double Tax Avoidance Agreements (DTAA). The rateas per IT Act is now proposed to be raised to 25%. However, theapplicable rate will be the rate of tax stipulated in DTAA.

To attract new investment and quicken implementation of projects, aninvestment allowance of 15% is proposed for projects requiring

`1bnor more in plant and machinery during April 01, 2013 to March 31,

2015. This will be in addition to the current rates of depreciation.

Steam coal is exempt from customs duty but attracts a concessionalCVD of 1%. Bituminous coal attracts a duty of 5% and CVD of 6%.Since both kinds of coal are used in thermal power stations, a standardrate of 2% customs duty and 2% CVD is proposed.

Continued thrust on infrastructure programmes such as the PradhanMantri Gram Sadak Yojana (PMGSY), National Housing DevelopmentProgramme (NHDP), and Jawaharlal Nehru National Urban RenewalMission (JNNURM). The budget proposes to award 3000kms of road

works in 1HFY14, besides offering higher provision for rural housing(from`40bn to`60bn) and urban housing (`20bn from nil).


Increase in rate of tax on royalty and fees for technical services will onlyimpact companies which are now paying at 10% and there is no DTAAbetween India and the foreign country where the parent company is based.

The investment allowance of 15% will benefit companies which have workunderway for expansion projects or which can setup new capacities overFY14-15. Since capex in cement projects is substantial, the implied benefitto individual companies in the form of tax savings will be meaningful.However, this may also result in substantial capacities getting added in end-FY15, thereby reducing the capacity utilisation rates in FY16.

Jaspreet Singh Arora+9122 6626 6727

[email protected]

Manish Valecha+9122 6626 6552

[email protected]


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Rationalisation of custom duty on imported coal used in thermal powerplants will raise the cost by 3% for companies which use 100% importedsteam coal in their power plants. This means EBITDA for these companies

would drop by 1-2%, depending on the quantum of coal imported used.Since only a few companies in the industry use imported coal to generatepower, the proposal is likely to have limited impact.

Continued impetus on infrastructure areas of urban projects, roads andhousing through various schemes is likely to boost demand for cement.

Impact on companies

Increase in rate of tax on royalty and fees for technical services will have noimpact on any company since the applicable rate as per DTAA for ACC,

Ambuja and Heidelberg is at 10%.

The investment allowance of 15% will largely benefit companies whichhave work underway for expansion projects like Shree Cement, Ultratech,

JK Cement, Mangalam, JK Lakshmi, Dalmia, Century. Others like ACC,

India Cement, Birla Corp, Sagar Cement, with potential of brownfieldexpansion (can be done in


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Construction

Governments attempts to make financing available for projects andto remove bottlenecks in infrastructure development are positives forconstruction companies.

Fig 6 Impact on sector and stocks

Budget announcements Impact on sector Impact on companies

Increase in the limit of tax-free bonds by governmentagencies for infrastructure financing (from `250bn to`500bn).

Positive All construction companies

Formation of PPP policy framework with Coal India as one ofthe partners, to increase production of coal.

Positive NCC

Award of 3000km of road project in Gujarat, Madhya Pradesh,Maharashtra, Rajasthan and Uttar Pradesh in 1HFY14

PositiveJ Kumar, KNR, Supreme,NCC, Ramky

Formation of regulatory authority for road sector PositiveJ Kumar, KNR, Supreme,NCC, Ramky

Increase in allocation to road transport and highways ministryfrom`289bn to`375bn

PositiveJ Kumar, KNR, Supreme,NCC, Ramky

Work to start on two cities Dholera, Gujarat and ShendraBidkin, Maharashtra. Government shall provide, if required,additional funds during 2013-14 within the share of the GoI inthe overall outlay for the project DMIC project.


Enhanced provisions under Rural Housing Fund, from`40bnto`60bn and set up of Urban Housing Fund with a outlay of`20bn.

PositivePratibha, J Kumar andSupreme

Increase in allocation for rural drinking water and sanitation,from`130bn to`153bn

Positive Pratibha, Ramky

Support to municipalities that will implement waste-to-energyprojects through different instruments such as viability gapfunding, repayable grant and low cost capital

Positive Ramky

Interest deduction of`0.1m over FY14-15 for housing loan upto`2.5m for first home buyers


Increased allocation for PMGSY to`217bn and introduction

of PMGSY-II

Positive KNR, Supreme

Increased allocation to JNNURM to`147bn vs a revisedestimate of`74bn in FY13. Higher allocation positive forMetro rails and urban transport segment

Positive Pratibha, J Kumar

Launch of the first two Infrastructure debt funds Positive All construction companies

Extension of the sunset clause for power companies underSec.80-IA of the Income Tax Act, 1961

Positive NCC

Allocation under Rural InfrastructureDevelopment Fund (RIDF) to`200bn




Increase in the limit of tax-free bonds by government agencies forinfrastructure financing (from

`250bn to

`300bn).

Formation of PPP policy framework with Coal India as one of thepartners, to increase production of coal.

Award of 3000km of road project in Gujarat, Madhya Pradesh,Maharashtra, Rajasthan and Uttar Pradesh in 1HFY14.

Formation of regulatory authority for the road sector is a positive andso is the higher allocation to road transport and highways ministry from`289bn to`375bn.

Extension of the terminal date of the sunset clause for the tax holidayfor the power sector under Sec.80-IA of the Income-Tax Act, 1961, by

a further year up to 31 Mar 14. Enhanced provisions under the Rural Housing Fund, from `40bn to

`60bn and set up of Urban Housing Fund with an outlay of`20bn.

Manish Valecha+9122 6626 6552

[email protected]

Jaspreet Singh Arora+9122 6626 6727

[email protected]


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Increase in allocation for rural drinking water and sanitation from`130bn to`153bn, and for PMGSY to`217bn (along with introductionof PMGSY-II). Allocation under Rural Infrastructure DevelopmentFund (RIDF) to`200bn.


The greater allocations to various schemes for infrastructure spendingwould be positive for the sector. Thrust given to financing projects wouldalso be positive, and so will be the formation of regulatory authority of roadsector and award of 3000kms in 1HFY14.

Impact on companies

Companies focused on roads, housing, power, water and urbaninfrastructure would largely benefit. Ramky, Pratibha, KNR, J. Kumar, andSupreme would gain from the greater allocation for infrastructure.


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Consumer & Retail

The budget is marginally negative for the consumer sector due to the5% increase in surcharge on income tax as well as on the dividenddistribution tax. The 18% increase in excise on income tax is negative

for cigarette companies (ITC and VST). Removal of excise onreadymade garments is positive for Lovable and Page Industries.


Increase in excise on cigarettes by 18% Negative ITC, VST

Increase in surcharge from 5% to 10% Negative All companies

Increase in surcharge from 5% to 10% on dividenddistribution tax

Negative All companies

Removal of excise on readymade garments Positive Page, Lovable, Rupa

Removal of customs duty on peanut butter from 30% to0%

Positive Agro-Tech Foods



Excise duty on cigarettes has been increased by 18%, except oncigarettes of less than 65mm.

Excise duty on readymade garments has been reduced to 0%, from theearlier 12% (70% abatement).

Increase in surcharge from 5% to 10% will impact all consumercompanies as tax rates will go up 155bps.

Increase in surcharge on the dividend distribution tax, from 5% to10%, would result in an additional impact of 77bps.


The overall impact on the consumer sector would be marginally negative.The increase in excise duty will compel cigarette companies to raise prices11-12% to pass on the excise-duty increase. The reduction of duty onreadymade garments would help companies such as Lovable, Page andRupa.

The higher tax rate would impact profitability of all consumer and retailcompanies 2% and 3% respectively. Consumer companies generate largefree cash-flows and pay dividends. The increase in the dividend distributiontax would result in less money to distribute to shareholders.

Impact on companies

Fig 8 Increase in excise duty on cigarettesCigarette Length (mm) Current * Revised * Hike (%)

Non-filter


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quarters, ITC may find it slightly difficult to increase prices at one go. Webelieve the impact on its FY14e earnings would be 3-4%. We expect asimilar impact on VSTs earnings.

Removal of excise duty on readymade garmentswould help Lovable andPage Industries to expand margins without resorting to price hikes. Though

some of the savings are likely to be re-invested in brand-building measures,earnings would go up 4-5% for Lovable and Page Industries.


17/28



Atul Thakkar+9122 6626 6724

atulthakkar @rathi.com

Education

Increase in spending under the Sarva Shiksha Abhiyan (7%) ispositive for the sector. Also of help would be the greater expenditureon skills development.

Fig 9 Impact on sector and stocks

Budget announcementsImpact onsector Impact on companies

Greater expenditure on primary education Positive Educomp, Everonn, NIIT, Core Education

Increase in spending under the NSDC and otherskill-development schemes

Positive Everonn, NIIT, Core, Aptech



`272.58bn (a 7% increase) allocated for education under the Right toEducation Act and the Sarva Shiksha Abhiyan (RTE-SSA).

`39.24bn (a 25.6% increase) provided for the Rashtriya MadhyamikShiksha Abhiyan (RMSA). `10bn (`10bn in FY12-13) allocated to the National Skills

Development Corp. (NSDC) for FY13-14.

Vocational courses offered by institutes affiliated to the State Councilsof Vocational Training, and Testing Activities in relation to agriculturalproduce to be included in the negative list of service tax.


Greater expenditure on education. The Budget proposes to raiseexpenditure on education by 17% to `658.67.5bn. Of this,`27.3bn would

be under the SSA, up 7% yoy. This is in line with the Right to EducationAct, which gives every child between 6 and 14 years the right to free andcompulsory education in a neighbourhood school till completingelementary education. A further rise in spending under the RMSA and theopening of new K-12 schools under PPP are positive for companiesproviding educational services in government schools.

Government spend on skills development and sops for the privatesector. The government has allocated`10bn to the NSDC for FY13-14.aiming to enhance skills of 9m people in 2013-14.

Impact on companies

Greater expenditure on education. Positive for companies providingeducational and IT-related services to the government sector, such asEducomp, Everonn, NIIT, Aptech, Core Education.

Skills development. Positive for NIIT, Aptech, Everonn and CoreEducation.


18/28



Financial Services

While an above-estimated net market borrowing program by thegovernment is slightly negative for the banking sector, the budgetFY14 has some positives too: Re-cap of government banks, clearer

taxation on securitization transactions by NBFCs and tax-freeinfrastructure bonds for select infra NBFCs.


Fiscal deficit 4.8% of GDP in FY14, butgovernments net market borrowing of`4.84trnis slightly higher than expected

Negative for bond yields All banks

Re-capitalization of government banks `140bn Positive SBI, PNB, IDBI, Canara Bank,Union Bank

All-women PSU banks to be setup with`1,000crcapital

Neutral No impact

Interest subventions to continue for agricultureand to be extended to private sector banks

Neutral All banks

Interest deduction up to`0.1m on loans forfirst-time home buyers of up to`2.5m betweenApril 1, 2013 and March 31, 2014.

Positive All banks and housing-financeNBFCs

Clearer taxation of securitization transactions,not subject to double taxation

Positive Shriram Transport Finance,Magma Fincorp

Limit for raising tax-free bonds for infra lendingincreased to`500bn

Positive PFC, IDFC, REC

Introduction of commodities transaction tax of0.1% on non-agri commodities

Negative MCX



Fiscal deficit announced at 4.8% of GDP in FY14 against 3% in FY15. Budgetary support of`14bn for re-capitalization of government-owned

banks, to ensure every bank meets Basel-3 requirements, strengthens itscapital adequacy and supports additional credit growth.

Target for agriculture credit set at`7,000bn (from`5,750bn). Interest subvention of 3% will continue to be paid as incentive to

farmers who repay short-term crop loans on time.

Interest deduction up to`0.1m on loans for first-time home buyers ofup to`2.5m between April 1, 2013 and March 31, 2014.

The SPV vehicle for securitization transactions, will be exempt fromincome tax, except at the time of distribution of income.

Tax-free bonds limit raised to`500bn for certain financial institutionsfor building resources for infra lending from the expected `250bn inFY13.

Introduction of commodities transaction tax (CTT) of 0.1% on non-agri commodities.


Higher net market borrowing a negative.While fiscal deficit (as percentof GDP), at 4.8% in FY14, was in line with our expectation, the above-estimated announcement of net market borrowing, at`4.84trn, is slightlynegative for government bond yields. Banks are likely to make lowertreasury gains or higher marked-to-market provisions on their investmentbooks.

Clyton Fernandes+9122 6626 6744

[email protected]

Kaitav Shah+9122 6626 6545

[email protected]

Asheeta Kapadia+9122 6626 6814

[email protected]


19/28



Provision for capital infusion augurs well. Banks would be given capitalto grow their business positive for those that are constrained for capital.

Continued focus on agriculture credit. The target for agriculture credit ishigh, in sync with the governments focus on this sector. In case of a poormonsoon in FY14, banks exposure to relatively riskier assets could

increase, leading to higher credit losses. Interest subsidies and interestsubventions for farm loans announced are minimal, and unlikely to have amajor impact.

Interest deduction for housing loans. Interest deduction of`0.1m onloans for first-time home buyers of up to`2.5m between April 1, 2013 andMarch 31, 2014 is beneficial for all housing finance NBFCs. It is a positivefor banks too, as it would help them meet their priority-sector-lendingrequirements (home loans below`2.5m qualify for priority sector lending).

Taxation on securitization deals clearer. The SPV vehicle used forsecuritization transactions will be exempt from income tax, except at thetime of distribution of income. This clarity is likely to further boost thesecurization market.

Higher limit of tax-free infrastructure bonds. Increasing the limit to`600bn for raising tax-free bonds by certain financial institutions is apositive for infrastructure-financing companies and benefits their cost offunds.

Impact on companies

Increase in governments net market borrowing is a negative for banks;especially government owned, since they have longer duration portfoliosand higher marked-to-market exposures, as yields are unlikely to declinemuch.

Capital infusion in government-owned banks is positive for State Bank ofIndia, Punjab and Maharashtra Bank, IDBI, Canara Bank, and Union Bank.

Interest deduction of`0.1m on loans for first-time home buyers of up to

`2.5m between April 1, 2013 and March 31, 2014 is beneficial for banksand housing finance NBFCs like HDFC, LIC Housing Finance, and DewanHousing Finance.

Clarity on taxation could boost securization transactions and benefitNBFCs like Shriram Transport and Magma Finance which have a relativelyhigher proportion of off-balance sheet assets. It also gives more clarity onsell-down transaction by HDFC to HDFC Bank.

Increasing limit to raise tax-free bonds for certain financial institutions is apositive for infrastructure-financing companies like PFC, REC and IDFC.

Introduction of commodities transaction tax (CTT) of 0.1% on non-agricommodities is a negative for MCX.


20/28



Healthcare

We do not expect the Union Budget 13-14 to have any materialimpact on the pharmaceutical and hospitals sectors. All companiescould witness marginal increase in effective tax rate due to rise in

surcharge to 10% from 5%. Those investing more than `1bn in plantand machinery would benefit from 15% investment allowance fromtaxable income.


15% investment allowance to companieswho invest above`1bn in plant andmachinery in FY14-15

Marginal positive Slightly positive for companies whoinvest heavily on capex for plant andmachinery like Cipla, Lupin, DRL, Sunetc

Increase in surcharge rate from 5% to 10%for companies with taxable income of morethan`100m

Marginal negative Effective tax rate will increase by 5% ofexisting rate for all companies



Investment allowance of 15% from taxable income for manufacturingcompanies which spend more than`1bn during FY14-15 in installationof plant and machinery for manufacturing activities.

The surcharge on tax rate has been increased from 5% to 10% ondomestic companies whose taxable income is more than `100m peryear.


Investment allowance of 15% of the total investment amount from taxableincome for investment of more than `1bn would provide marginal taxbenefits to healthcare companies incurring capex for setting up newcapacity. This would help reduce effective tax rate and improve profits.

Increase in surcharge from 5% to 10% would impact all companiesmarginally in terms of increase in tax rate by 5% of the existing rate,thereby hitting profits marginally.

Impact on companies

All companies in sector with annual profit of more than`100m would havemarginal negative impact from increased tax rate on account of higher

surcharge. Larger companies like Cipla, Lupin, Sun, and DRL wouldmarginally benefit from lower effective tax rate on account of investmentallowance on capex in plant and machinery.

Sriram Rathi+9122 6626 6737

[email protected]

Sanjeev Chiniwar+9122 6626 6716

[email protected]


21/28



Industrials

For the 12th Five-year Plan, the Union Budget FY14 has peggedfunds required at US$1trn. The Finance Minister said that 53% wouldbe funded by the public sector; 47% would have to come from the

private sector.

To facilitate private-sector fund mobilisation, the government hasmade several plans, linked to easier access to debt. In expenditure,the government outlined an increase in social spending on welfare

programs such as the M-NREGS, the IAY and resumption of largeticket investments in infrastructure (roads, ports, power). This is

positive for most companies.

The increase in surcharge on corporate income tax, however, is aslight dampener for capital goods players and infrastructuredevelopers.

Fig 12 Impact on the sector and on stocksBudget announcements Impact on sector Impact on companies

Setting up infra debt funds Positive Infra developers: L&T, GMR, GVK,IRB, ITNL

Access to corporate debt markets and selectiveissue of tax-free bonds

Positive Infra developers: L&T, ITNL, IRB,GMR, GVK

Enhanced allocation for M-NREGS, IAY Positive Brown goods / consumer electricals:Havells, V-Guard, Bajaj Electricals

Award of 3,000km of road projects Positive Infra developers: L&T, GMR, GVK,IRB, ITNL

Progress on the Delhi-Mumbai Industrial Corridor Positive L&T

3 port projects planned Positive L&T, Simplex Infra

Restructuring SEB debt Positive L&T, BHEL, Siemens, ABB

Deduction of 15% on capex of`1bn and over Positive L&T, BHEL, Siemens, ABB

Surcharge on corporate income tax raised Negative All companies in the segment

Source: Government of India, Anand Rathi Research.


The government will encourage setting up Infrastructure Debt Funds(IDF). These will be utilized to raise resources and, through take-outfinance, credit enhancement and other innovative means, provide long-term low-cost debt for infrastructure projects.

India Infrastructure Finance Corporation (IIFC), in conjunction withthe Asian Development Bank (ADB), will facilitate companies /infrastructure developers to access corporate debt markets. Financial

institutions will be selectively allowed to issue tax-free bonds in FY14,of`500bn.

The government has also outlined an increase in social spending onwelfare programs such as the M-NREGS and the IAY.

3,000km of road projects in Gujarat, Madhya Pradesh, Maharashtra,Rajasthan and Uttar Pradesh, which had encountered hurdles, havebeen cleared and will be awarded in 1HFY14.

As part of the Delhi-Mumbai Industrial Corridor (DMIC) project,plans for seven new cities have been finalised while work on two newsmart industrial cities will commence in FY14.

Two new major ports (in West Bengal and Andhra Pradesh) and asupplementary harbour in Tamil Nadu should add 142m tons of cargo-handling capacity.

Amol Rao+9122 6626 6615

[email protected]

Deepak Agarwal+9122 6626 6520

[email protected]


22/28



Various state governments have been encouraged to get the finances oftheir electricity boards restructured by Mar13.

Capex of`1bn undertaken during FY14-15 would be eligible for adeduction of 15% of the investment, in addition to the current rates ofdepreciation.

The surcharge on corporate income tax has been raised from 5% to10%, w.e.f. FY14.


With the exception of the surcharge on corporate income, all the abovedevelopments are positive for companies. The paucity and high cost offunds in the recent past have been well documented; hence, a dedicatedsource of cash for infrastructure projects coupled with a streamlinedprocess to avail of it should help speed up execution.

The announcement of a regulatory body for highways and roads is a step inthe right direction. With a single body legislating and overseeing the sector,

projects stand a better chance of getting off the ground, especially in lightof difficulties in land acquisition and securing environmental clearances.

Restructuring SEB debt would set the ball rolling to beef up T&Dinfrastructure. This would, thereby, lay the foundation for greater demandfor high-powered transformers, sub-station components and high voltageconductors.

The provision of a deduction of 15% on capex of`1bn and above will becash-flow positive for companies, thus spurring demand for equipment.

Impact on companies

We believe that, though the Budgetary measures are positive, concretedemand for domestic companies (L&T, BHEL, IRB, etc.) would take 2-3quarters to materialise.

We feel companies in the equipment space (L&T, BHEL, Siemens, ABB)could be primary beneficiaries of budgetary measures. Second-rungancillaries (not under our coverage) supplying conductors, transformers andmetering equipment as well as sizeable infrastructure construction operators(IRB, IL&FS Transportation) would be likely beneficiaries.

Lastly, schemes like the IAY would most likely materialise into demand forbrown goods (household wires and cables, fans, CFLs, switches, etc.). Thisshould stand companies such as Havells, V-Guard and Bajaj Electricals in

good stead.


23/28



Logistics

The budget is neutral for the logistics sector. No clear roadmap forGST has been provided in the budget, which could further delay itsimplementation. This would be slightly negative for the sector. Plans

to award 3,000km of new road projects in Gujarat, MP, Maharashtra,Rajasthan and UP would be positive.


No clear roadmap for GST Negative Container Corp. of India, TransportCorp. of India, Gateway Distriparks

New road projects to be awarded Positive All companies

NABARD financing for warehouseconstruction

Positive Container Corp. of India, TransportCorp. of India



No clear roadmap for the GST would result in further delays inimplementation

3,000km of new road projects to be awarded in Gujarat, MadhyaPradesh, Rajasthan and Uttar Pradesh

`50bn to NABARD to finance warehouse construction.Impact on the sector

The further delay in implementing the GST is a negative for the sector,especially for companies in warehousing. We do not expect any significantdecline in their revenues.

The further thrust on developing the road network would help reducebottlenecks for transportation companies. This would lead to reduced costsfor them in future.

NABARD funding warehousing construction would benefit companiesplanning to construct warehouses.

Impact on companies

The delay in implementing the GST is a slight negative for all logisticscompanies, especially Container Corp. of India (CCI), Transport Corp. ofIndia (TCI) and Gateway Distriparks.

The new roads would benefit companies such as CCI, TCI, Gati and otherlogistics companies involved in road transport.

The NABARD fund for warehouse construction would provide companiesaccess to low-cost funds to set up warehouses. It would benefit companiessuch as TCI and CCI.

Dhaval Dama+9122 6626 6728

[email protected]


24/28



Media and Entertainment

The Union Budget13-14 was negative for the sector. Increase incustoms duty on import of set top boxes (STB) would raiseinvestment required towards digitization of TV networks. Imposition

of surcharge on income and dividend distribution tax would hitprofitable companies in the sector with high dividend payout ratios.

Fig 14 Impact on sector and stocksBudget announcements Impact on ector Impact on companies

Increase in customs duty on STBfrom 5% to 10%

NegativeDish TV, Hathway Cable andDatacom, DEN Networks, Wire andWireless India and Hinduja Ventures

Plans to auction 839 FM radiolicenses across 294 cities in 2013-14

NeutralEntertainment Network India (ENIL),Reliance Broadcast Network

Increase in surcharge on income tax NegativeAll companies except Dish TV, HathwayCable, TV18 (which are suffering losses orface low effective taxes)

Increase in surcharge on dividend

distribution tax Negative Sun TV NetworkSource: Government of India, Anand Rathi Research


The union budget proposes increase in customs duty on STBs from 5%to 10%.

The budget announced governments plans to auction 839 FM radiolicenses across 294 cities in 2013-14, including 707 in 227 new cities.


Most of the STB requirements in the country are met out of imports. The

increase would thus raise investments required for the digitization of TVnetworks. This would hit multi-system operators and direct-to-home(DTH) companies.

The announcement pertaining to auction of radio licenses is in line with theexisting roadmap for radio licensing, and is neutral.

Impact on companies

Higher customs duty on STBs would adversely impact Dish TV, HathwayCable and Datacom, DEN Networks, Wire and Wireless India and Hinduja

Ventures. Capex for these companies is expected to rise ~5%.

Increase in surcharge on income tax would hit earnings of all companies by1.0-2.5% (except for Dish TV, Hathway Cable, and TV18 which aresuffering losses or face low effective taxes).

Greater surcharge on dividend distribution tax would especially impact SunTV Network as the company has a high payout ratio.

Yogesh Kirve+9122 6626 6731

[email protected]

Rajesh Zawar+9122 6626 6726

[email protected]


25/28



Metals and Mining

The budget is negative for the sector, already reeling under severecost inflationary pressure (shortage of raw materials, and higher fuel

prices). It has marginally added to earnings pressures by raising

customs duty on coal, higher surcharge on income tax andintroducing dividend distribution tax. The negative impact will,however, be partially offset by higher demand through thrust onmanufacturing capex, cheaper fund access and investmentallowance.


15% investment allowance to manufacturingcompanies which invest more than`1bn inplant and machinery during FY14 and FY15

PositivePositive for companies due to huge capexrun rates

Increase in surcharge rate from 5% to 10% forcompanies with taxable income of above`100m

NegativeEffective tax rate will increase by 5% ofexisting rate for all companies

Increase in coal import duty NegativeThe cost will increase 3% for purely importbased power plants or consumers.Negative for aluminium players.

Coal mining on PPP basis with Coal India aspartner

PositiveCoal production volumes will increase inthe long run, but no near-term impact

4% excise duty implemented on silver extractedfrom base metal smelting

NegativePossible pass through of excise duty, butcan be negative for realizations

Thrust on easing fund raising and spending forinfrastructure sector through IDF (Infra DebtFunds)

Positive Infra spending will support volumes

Export duty of 10% imposed on bauxite NeutralMerchant miners will be negativelyimpacted while smelters like SterliteIndustries will benefit



Investment allowance of 15% from taxable income for manufacturingcompanies which spend more than`1bn during FY14-15 in installationof plant and machinery for manufacturing activities.

Surcharge on income tax has been increased from 5% to 10% ondomestic companies whose taxable income is above`100m per year.


Investment allowance of 15% of the total investment amount from taxableincome for investment of more than `1bn would provide marginal taxbenefits to metal companies (with huge capex outlays). The impact will,

however, be offset by rise in income tax surcharge from 5% to 10% for allcompanies. Thrust on infrastructure financing and PPP model in coalmining are long-term demand drivers with no near-term impact.

Impact on companies

Increase in steam coal import duty will raise power and fuel costs 2-3% andis more negative for aluminium players in the sector. Introduction of exciseduty on silver obtained from base metal refining could be a realizationdampener for Hindustan Zinc, while no reduction in 30% iron ore exportduty is disappointing. Imposition of 10% export duty on bauxite will reducethe realizations of the merchant miners but it will benefit smelters likeSterlite Industries.

Rajesh Zawar+9122 6626 6726

[email protected]


26/28



Real Estate

The Union Budget13-14 has brought some cheer to home buyers. Anadditional `0.1m as interest deduction (in addition to `0.15m U/S 24of the IT Act) for loans up to `2.5m for property of`4m. This wouldboost demand in the affordable segment. Measures have been takento address the urban housing shortage.


Increase in home loan interest-deduction by`0.1m, for loans up to`2.5m and propertycost up to`4m for first-time property buyers,besides interest deduction of up to`0.15mU/S 24 of the IT Act

Positive for affordable housing.Moreover, most developers willshift to the affordable-homesegment

Benefit for PuravankaraProjects (for its brandProvident Housing)

Rural Housing Fund increased by 25%, to`60bn

Likely to further boost ruralhousing

Not likely to benefit any listedentity

Start of the Urban Housing Fund, with`

20bn allocated

Likely to take measures toaddress housing shortage in

urban areas

NA

TDS at 1% of the value of the transfer ofimmovable property where theconsideration exceeds`5m

This is a direction to curtailundervalued and unreportedtransactions

We do not see any l isted entityaffected as this is primarily asecondary transaction exceptof land sales

Homes & flats with carpet area of 2,000sq.ft. or more or of`10m or more. Lowerabatement rate, from 75% to 70%

Cost likely to go up verymarginally for high-end buyers.

Would be totally passed on tocustomers: DLF



Increase in interest deduction for home buyers by up to `0.1m forloans up to`2.5m and property cost not exceeding`4m. This benefit

can be enjoyed by home buyers if they do not have any residentialhouse property on the date of sanction of loan.

Allocation for the rural housing fund has been raised to`60bn alongwith introducing an urban housing fund, allocating`20bn.

TDS at 1% on the value of immovable property transferred where theconsideration exceeds`5m.TDS to be deducted by buyer when payingseller.

Homes and flats with carpet area of 2,000 sq. ft. or more or of a valueof`10m or more. Reduction in the abatement rate from 75% to 70%.


The budget has been positive by providing additional interest deduction tohome buyers, of`4m and of loans up to`2.5m. This would boost demandin the affordable segment. This would help developers increase volumes.

Introducing TDS at 1% on the transferable value of immoveable propertywould help curtail under-valued and unreported transactions, leading tomore transparency in the longer run.

Reduction of abatement, from 75% to 70%, in the case of property cost of`10m or more, or 2,000 sq. ft. would raise the service tax very slightly.Ultimately, this would be passed on to end customers.

Impact on companies

Positive for companies in the affordable segment (Puravankara). Marginalimpact on increase in service tax for high-end property sellers (DLF).

Suman Memani+9122 6626 6707

[email protected]


27/28



Telecommunications

The budget was largely neutral for the sector. Lower estimates

pertaining to proceeds from spectrum auction (`220-240bn vs `400bnoriginal estimate for FY13), could be owing to factoring in staggered

spectrum payment schedule or lower expectations on spectrumproceeds (auction, one-time excess fee). Proceeds target issentimentally positive for all telcos as it suggests that the reserve

prices would be lowered. Higher excise duty on mobile phones wouldmarginally and indirectly impact mobile service providers.

Fig 17 Impact on sector and on stocksBudget announcements Impact on sector Impact on companies

Estimated auction proceeds of`220-240bn in FY14versus`400bn in FY13

Positive Bharti Airtel, Idea Cellular

Increase in excise duty rate on mobile phones(costing >`2,000)

Negative All mobile operators



Budget estimates non-tax revenues from other communication services at`408bn for FY14. Assuming recurring levies (license fees, spectrum usagefees) to account for`170-190bn of this, proceeds from spectrum auctions

and one-time of excess spectrum is estimated at`220-240bn. The budgetproposes increase in excise duty on mobile handsets (costing more than

`2,000) from 1% to 5%. According to the finance minister, 70%/60% ofmobile phones imported/manufactured cost less than`2,000.


The estimated proceeds of`220-240bn pertaining to spectrum (auctions,one-time fee) for FY14 is lower than`400bn original budget estimate forFY13. Downward revision is possibly due to: (1) Spectrum already sold inFY13 (of`90bn); (2) estimated proceeds factoring in staggered payment of

winning bids (only 33% upfront); (3) lower expectations following failure ofauctions in FY13. To an extent, lower estimated proceeds from spectrumauctions reflect lower govt expectations; the proceeds target is sentimentallypositive for telcos (as it suggests lowering of reserve prices). However,these targets are academic, as actual proceeds would depend on demand-supply and resolution of legal/regulatory issues. Notably, in FY12, govt

expected`150bn proceeds as spectrum fee, whereas actual proceeds werenil. In FY13, it could raise only ~`30bn vs`400bn target.

Higher excise duty on mobile handsets would marginally hit sale offeatured/smart phones. Penetration of such phones is a key driver of dataconsumption for telecom operators, which may thus face indirect impact ofrate hike.

Impact on companies

Lower estimated spectrum fees (one-time/auction) bodes well for BhartiAirtel and Idea Cellular. Cost of renewal of licenses is likely to bebenchmarked to the spectrum price discovered in auctions. The renewalschedule of Reliance Communications and Tata Teleservices (Maharashtra)is more back-ended; these companies are less affected by the price

discovery. Higher excise duty on mobile phones is marginally negative forall companies, including listed ones like Bharti Airtel, Idea Cellular, RelianceCommunications, and Tata Teleservices (Maharashtra).

Yogesh Kirve+9122 6626 6731

[email protected]


28/28

Appendix

Analyst CertificationThe views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the researchanalyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound bystringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter SEBI) and the analysts compensation are completelydelinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report.

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors,

including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.Anand Rathi Ratings Definitions

Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (US$1bn) >15% 5-15%

india budget fy14 - walk the talk

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