india union budget fy11-12 presentation

®

Union Budget FY2012F G th I fl ti Fi l C lid ti GFocus: Growth, Inflation, Fiscal Consolidation, Governance

Alroy Lobo

March 01, 2011

®Budget: Macro direction positive; Key is executionFiscal consolidation: Reliance on growth and expenditure control

Positives

• Realistic: 14% nominal FY11 GDP growth in line 9% (+/-0.25%) real GDP growth in FY12

• Fiscal consolidation: Aligned to 13th Finance Commission roadmap; Net market borrowing surprises

• Intended focus: Stable revenue deficit; Expenditure – Plan to grow faster than Non-Plan

• Inflation: No meaningful change in tax or indirect tax rates; coverage for service tax and excise expanded

• Pro consumption: Continued focus on disposable income in hands of consumers• Pro-consumption: Continued focus on disposable income in hands of consumers

• Reform calendar: DTC (April 2012), GST; Slew of New Bills to be tabled

• Governance: Attempt to address corruption and unaccounted money in the system

• Markets: Opens up mutual funds for foreign investors meeting KYC norms; raises FII limit on infrastructure bonds

Challenges

• Fiscal consolidation: Dips into cash surplus to contain fiscal deficit

• Subsidies: Slippage likely subsidies accounted on accrual basis – elevated food, urea and oil prices are risks

• Divestments: Contingent on market conditions; Rs40000 crore budgeted for FY12 (shortfall in FY11)

Kotak 2

Divestments: Contingent on market conditions; Rs40000 crore budgeted for FY12 (shortfall in FY11)

• Balance of Payments: Contingent on global commodity prices and foreign flows

®Fiscal deficit to influence long-term interest rate directionMonetary policy to drive short-term policy interest rates

Tax revenue projections realisticNet tax revenue growth at 18% MAT hike/growth to drive corporate tax collectionscorporate tax collections High oil prices, positive for custom duty collections

Disinvestment receipts at Rs 40 000

Expenditure:

-Plan expenditure over non plan

40,000 cr

non-plan

-Subsidies key achieving expenditure targets –Slippages likely unless prices fall or higher prices passed on to consumers

Fiscal consolidation Deficit can be higher due to higher subsidies

Buffer remains on tax

Kotak 3

revenues and extant cash surplus

Source: Budget documents

®Fiscal consolidation: Aligned to 13th Finance Commission Fiscal discipline: Key for sovereign ratings and global investor interest

FY10 FY11RE FY12E FY13E FY14E FY15E

Fiscal consolidation path for the centre and statesThirteenth Finance Commission Recommendations ( as % of GDP)

Revenue deficit- Centre 4.8 3.2 2.3 1.2 0.0 -0.5

Fiscal Deficit-States 2.8 2.6 2.5 2.5 2.4 2.4

Fiscal Deficit-Centre (TFC) 6.8 5.7 4.8 4.2 3.0 3.0

Fiscal Deficit Centre (budget proj) 6 9 5 1 4 6 4 1 3 5 NAFiscal Deficit- Centre (budget proj) 6.9 5.1 4.6 4.1 3.5 NA

Fiscal Deficit-Consolidated 9.5 7.7 7.1 6.7 5.9 5.4

Source: Thirteenth Finance Commission Recommendations, budget documents ;note TFC nos based on old GDP base of 2000-01

Union Budget highlights: Focus on growth, inflation and exit policy

• Growth: FY12 growth likely at 9% (+/-0 25%); our expectations ~8% (nominal ~15%)• Growth: FY12 growth likely at 9% (+/-0.25%); our expectations ~8% (nominal ~15%)

• Taxes: Maintaining status quo due to expected GST and DTC implementation

Kotak 4

®Government Borrowing Program: Lower than expected Gilt yields to remain firm – Key driver of valuations

Budgeted net market borrowings -A positive

Net borrowing marginally below expectations

Rs Crore FY08 FY09 FY10 FY11BE FY11RE FY12 BE

Net market borrowings 136224 319472 398411 345010 335414 343000

Short term b i (Tborrowings (T-Bills) 25553 57500 -3908 NIL 10000 15000

Gross market borrowing 156000 306000 451093 457143 447000 417128

• Net market borrowing lower than expectations (Rs 358000cr (inc T-bills) vis-à-vis expectations of Rs390000cr)

• Cash drawdown of Rs20000 crore in FY12

• Gross government borrowing to keep long-term yields range bound; 10 year G-Sec Yield likely ~8-8.25%

• Our realistic fiscal deficit target for FY12 at ~5.1% of GDP

• RBI likely to hike policy rates by 75-100bps in FY12

Kotak 5


®India’s consolidated fiscal deficit high: Growth is therefore keyProductive use of expenditure, important for fiscal consolidation

Tax (gross)-GDP (%): tax collection assumption realistic

8

10

12

Fiscal consolidation: Decline in combined fiscal deficit (as % of GDP)

10

12

2

4

6

8State

Centre

0

2

4

6

8

Source: Budget documents; note numbers for FY10 and FY11 include oil and fertilizer bonds above the line

Source: Budget Documents

0 FY94

FY95FY96

FY97

FY98

FY99FY00

FY01

FY02

FY03FY04

FY05

FY06FY07

FY08

FY09

FY10FY11

FY12E

0 FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

Fy04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

• Net tax revenue growth of 18% budgeted for FY12 realistic

• Tax revenues: Betting on growth, expansion of coverage and high oil pricesg g , p g g p

• Gross tax to GDP low at 10%

• Corporate tax: Betting on MAT and growth

Kotak 6

®Tax revenue growth at 18%: realisticCustoms duty upside in case of rising oil prices

Higher revenues from customs duty on crude oil at current pricesR evenues from cus toms duty on crude oil, March fis cal year-end, 2012E (R s bn)

Imported crude oil (mn tons ) 112Imported crude oil (mn tons ) 112 Import duty (%) 5.15 Revenues from customs duty on crude oilCrude price at US $80/bbl 154 Crude price at US $90/bbl 173 Crude price at US $100/bbl 192 Crude price at US $110/bbl 211 Crude price at US $120/bbl 231 Budgeted revenue from Customs duty 1517

Source: Budget documents, Kotak Institutional Equities

Customs/import tax

• Customs duty unchanged for most products• Customs duty unchanged for most products

• Customs revenue to growth 15% in FY12 (BE)

• Upside likely in customs revenue in case oil prices inch higher

Kotak 7

®Service tax coverage set to improveService tax still accounts for a small share of total taxes

Services tax still account for a small share of overall taxesS hare of taxes on products and services in the Indian economy, March fiscal year-ends , 1991-2012BE (%)

Corporate tax and excise duty/Total tax S ervice tax/Total tax

40

50

60

70Corporate tax and excise duty/Total tax S ervice tax/Total tax

10

20

30

0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

RE

2012

BE

S ource: Government of India, Kotak Ins titutional E quities

Kotak 8

®Expenditure: Composition/efficiency to decide long-term growth Calibrated focus on Plan over Non-Plan spend; revenue spend rising

Trends in total expenditure (Rs Cr) Higher growth in non plan expenditure in FY12

Composition of plan and non plan expenditure (% of total expenditure)

1000000

1200000

70.00%

80.00%

400000

600000

800000

30.00%

40.00%

50.00%

60.00%

0

200000

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

Rev Exp Cap Exp

0.00%

10.00%

20.00%

FY07 FY08 FY09 FY10 FY11 FY12E


plan exp non plan exp


• Focus on planned expenditure: Growth of 12% in FY12 while non- plan expenditure growth largely flat.

• Interest payments still forms a large portion of non-plan expenditure

Kotak 9

®Subsidy management, a politically sensitive subjectKey risk : Full compensation for oil under-recoveries not provided

FY09 FY10 FY11BE FY11RE FY12BE

Lower subsidy burden estimated for FY12 Key components of subsidy (Rs cr)

Total subsidy 129243 131025 116224 164153 143569

As % of GDP 2.4% 2.1% 1.7% 2.1% 1.6%

-Food subsidy 43627 56002 55578 60599 60573

-Fertilizer subsidy 76028 52980 49981 54977 49998Fertilizer subsidy 76028 52980 49981 54977 49998

-petroleum subsidy 2876 14954 3108 38386 23640

- Interest subsidy 4063 2719 4416 5223 6868

-other subsidy 2827 4369 3141 4968 2490


Lower subsidies budgeted in FY12

F d b id F d it bill t b t bl d d i FY12- Food subsidy: Food security bill to be tabled during FY12

- Petroleum subsidy: Indicative of oil reforms or expectations of hike in fuel prices

- Key risk: Higher urea food and oil prices can upset fiscal deficit calculations

Kotak 10

Key risk: Higher urea, food and oil prices can upset fiscal deficit calculations

®Subsidies: Likely to surprise on the upsideUnder provisioning of fertilizer subsidies

The government has left the prices of urea unchanged in the budget despite ris ing urea pricesUrea prices (Middle E as t fob), March fis cal year-ends , 2001-2011 (US $/ton)

800Urea price (US $/ton) Yearly average (US $/ton)

Ris ing imports of urea over the past few yearsP roduction, consumption and imports of urea, March F is cal year-ends , 2006-14E , mn ton

6.9 6 640 8

P roduction (LHS ) Consumption (LHS ) Imports (R HS )

200

400

600

2.0

4.8

6.9

5.7

4.6

5.86.2 6.3 6.6

10

20

30

2

4

6

S Bl b K t k I tit ti l E iti

0

Feb

-01

Feb

-02

Feb

-03

Feb

-04

Feb

-05

Feb

-06

Feb

-07

Feb

-08

Feb

-09

Feb

-10

Feb

-11

S ource: Kotak Ins titutional E quities

0

2006

2007

2008

2009

2010

2011

E

2012

E

2013

E

2014

E

0

S ource: B loomberg, Kotak Ins titutional E quitiesq

Lower subsidies budgeted in FY12

F tili b id E ti t d t R 50b i FY12 d t R 55b i FY11- Fertilizer subsidy: Estimated at Rs 50bn in FY12 compared to Rs 55bn in FY11

- Rise in global urea prices in the wake of high crude oil prices- risk to subsidy provisions

Kotak 11

®Oil Subsidy: Under provision in Union BudgetOil under-recovery difficult to manage at current crude prices

Under-recovery will be difficult to manage at crude price of US $100-110/bblS ubs idy loss breakdown at various levels of crude oil price, March fis cal year-end, 2012E (R s bn)

Dated Brent crude price (US$/bbl) 80 85 90 95 100 105 110 LP G 229 266 304 342 380 418 456 Kerosene 188 203 219 235 251 266 282 Diesel 196 284 372 460 549 637 725 Auto fuels 196 284 372 460 549 637 725 Cooking fuels 416 470 523 577 630 684 738 Total subsidy loss 612 754 896 1,037 1,179 1,321 1,463

S ource: Kotak Ins titutional E quities es timates

Large increase in retail prices required at crude price of US $100-110/bblGap between required market prices and current selling prices at various levels of crude oil, March fis cal year-end, 2012E

Dated Brent crude price (US$/bbl) 80 85 90 95 100 105 110 LP G (R s /cylinder) (227) (264) (301) (339) (376) (414) (451)Kerosene (R s /liter) (17.6) (19.0) (20.5) (22.0) (23.5) (24.9) (26.4)Diesel (R s /liter) (3 1) (4 5) (5 9) (7 4) (8 8) (10 2) (11 6)Diesel (R s /liter) (3.1) (4.5) (5.9) (7.4) (8.8) (10.2) (11.6)

S ource: Kotak Ins titutional E quities es timates

Kotak 12

®Pro-consumption bias: Thrust on disposal income with consumersDrivers: Personal tax benefits, NREGA

Right Focus: Private consumption 57% of India’s GDP

• Personal tax benefits : To support on-going urban consumption recovery

• National Rural Employment Guarantee (NREGA): Linking minimum wages under NREGA to inflation (CPI-agriculture labour)

M d t h i t l bModest changes in tax slabs Income tax and corporate tax slabs for FY12

Existing (FY2011) Revised (FY2012)Individual income taxIndividual tax rates Upto R s1,60,000 - Nil Upto R s1,80,000 - Nil

Above R s1,60,000 - R s5,00,000 -10% Above R s1,80,000 - R s5,00,000 - 10%Above R s5,00,000 - R s8,00,000 - 20% Above R s5,00,000 - R s8,00,000 - 20%Above R s5,00,000 R s8,00,000 20% Above R s5,00,000 R s8,00,000 20%Above R s8,00,000 - 30% Above R s8,00,000 - 30%

S enior Citizen E xemption limit - R s2,40,000 E xemption limit - R s2,50,000S enior Citizen age 65 years 60 yearsVery senior citizen (80 years+) NA E xemption limit - R s5,00,000E ducation ces s 3% 3%Corporate income taxTax rates 30% 30%S urcharge rate 7.5% 5%E ducation ces s 3% 3%Minimum Alternative Tax 18% of book profits 18.5% of book profitsOther incentivesS cientific research (b) 175% of expenditure 200% of expenditure

Notes :(a) Additional exemption of R s20,000 for inves tment in infras tructure bonds .

Kotak 13


p(b) Weighted deduction on payments made to National Laboratories , univers ities and Ins titutes of technology for s cientific research.

®Infrastructure : On-going area of thrustNo major proposals announced; focus now on execution

• Infrastructure allocation: Total allocation of Rs 214000 crore, 48.5% of Gross Budgetary Allocation (23.3% growth)

• Long term infrastructure bonds: Deduction of an additional amount of Rs 20,000 allowed, over and above the existing limit of Rs1Lakh on tax savings to be continued for another year

• FII limit for investment in corporate bonds (with residual maturity of over five years issued by companies in infrastructure sector) raised by an additional limit of US$ 20Bn to US$ 25Bn. Total limit for FIIs investment in corporate bonds hiked to US$40Bn

• Size of tax free infrastructure bonds to be issued during FY12 will be Rs300bn. This applies to those issued by Railways, NHAI, etc.

Plan outlay by sectors (Rs Cr) 2009-10RE 2010-11RE 2011-12BE % Change

Agri and allied 10123 14362 14744 2.7%

Rural development 51560 55438 55288 -0.3%

Plan outlay by sectors (Rs Cr)

Irrigation and flood control 404 413 565 36.8%

Energy 109685 126225 155495 23.2%

Industry and minerals 30694 38852 45214 16.4%

Transport 88948 98727 116861 18.4%

Communications 16099 12169 20256 66.5%

Science, technology and environments 9908 12652 16186 27.9%

General economic services 5446 14878 15802 6.2%

Social services 101370 127157 144816 13 9%

Kotak 14

Social services 101370 127157 144816 13.9%

General services 1353 1377 7230 425.1%

Total plan outlay 425590 502250 592457 18.0%Source: Budget documents

®Financials: Lifeline of the economy Focus on financial inclusion and health of the banking system

• Financial inclusion- New banking licenses for private sector players/NBFCs – to be announced by FY11end

• Net borrowing program containedg p g- G-Sec yields likely to stay range bound at the longer end of the yield curve

- Limits MTM losses on bond portfolio of banks if borrowing is contained- Positive especially PSU Banks

• Recapitalization of PSU Banks• Recapitalization of PSU Banks- Rs. 20157 crore provided in FY11 to ensure that Public Sector Banks attain a minimum 8% Tier-I capital

- Rs 6000 crore in FY12

R d i i h f 7 5% 5%• Reduction in surcharge on corporate tax from 7.5% to 5%- Positive for bank earnings

• Mortgage loans eligible for priority sector raised to Rs25 Lakhs from Rs 20 Lakhs

• Equity MFs can accept inflows from foreign investors post KYC norms are fulfilled

• Dividend Distribution Tax (except for equity schemes) for non individuals raised

Kotak 15

®New initiative in FY12 Focus on introducing financial sector legislation

• Financial sector legislation to be introduced

• The Insurance Laws (Amendment) Bill, 2008- to increase FDI in insurance from 26% to 49%; IPO norms

• The revised Pension Fund Regulatory and Development Authority Bill, first introduced in 2005

• Banking Laws Amendment Bill, 2011- to increase voting rights in line with holding (currently capped at 10%)

• The State Bank of India (Subsidiary Banks Laws) Amendment Bill: To change the face value of the shares of subsidiaries, remove ownership cap of 200 shares of subsidiaries and increase the voting right cap from 1% to 10%

• Direct Tax Code: DTC to be implemented by April 1, 2012

• Goods and Services Tax:

• Constitution Amendment Bill to be introduced in the current session of Parliament

• Drafting of the model legislation for the Central and State GST.

Kotak 16

®Union Budget: Attempt to address the Governance deficit Steps towards tackling corruption and governance issues

Union Budget initiates steps towards addressing governance issues

• Constitution of Group of Ministers to look into

―State funding of elections

― Speedier processing of corruption cases

―Transparency in public procurement and contractsTransparency in public procurement and contracts

―Competitive system for award of natural resources

• Government appears keen to address the black money issue

―Adopted five pronged strategy to address generation and circulation of black money

―India, member of Financial Action Task Force (FATF), a key G-20 initiative for anti-money laundering

―Government to notify jurisdictions that do not effectively exchange information with India – stricter treatmentof income tax on payments (deductions) and receipts (income) to and from such jurisdictions

―Concluded discussions for 11 Tax Information Exchange Agreements (TIEAs)

Kotak 17

―13 new Double Taxation Avoidance Agreements (DTAAs)

―Revision of provision of the existing 10 DTAAs

®

FY12 Union Budget: Sectoral Impact

®Union Budget FY12: Sectoral ImpactNegative Cement; Autos – Positive

Sector FY12 Budget Proposal Nature of ImpactCompanies Impacted Comments

AUTOMOBILES

To infuse Rs 30 bn in NABARD to shore up the paid up capital to Rs 50bn Additional 3% interest

POSITIVE M&M, Escorts NABARD is the nodal agency which refinances banks lending to the agricultural sector (including tractors)1 50bn. Additional 3% interest

subvention for farmers paying dues on time. Thus, effective interest rate for these farmers would be 4%

agricultural sector (including tractors)

2Indexing of wages under the NREGA scheme with inflation

POSITIVE Hero Honda, Maruti Suzuki, M&M

Higher disposable incomes in the hands of rural customers to drive auto sales in these areas

CEMENT

1

Bagged cement of retail price in excess of Rs 190 per bag to attract an ad-valorem duty of 10% plus a specific duty of Rs 160 per MT as against 10% ad-valorem duty on

NEUTRAL to NEGATIVE

All cement companies

The impact will be largely neutral as the 10% ad-valorem rate will be charged on the ex-factory price plus freight cost to the depot. At current all-India average prices of Rs 250-260 g y

MRP as was the case earlierg p

per bag, this measure will not have any significant impact

2

Import duty on gypsum and petroleum coke brought down to 2.5%

POSITIVE All companies and especially Shree Cement

Reduction of custom duties in an inflationary environment will bring down operational costs for the i d tindustry

3 1% excise duty w/o CENVAT Credit imposed on fly-ash

NEGATIVE All cement companies

Will lead to higher raw material costs

4Imposition of 5% excise duty or 1% w/o CENVAT credit on coal, coke, peat, tar etc

NEGATIVE All cement companies

Will lead to slightly higher raw material costs

Kotak 19

5Excise duty of 5% or 1% w/o CENVAT credit imposed on RMC

NEGATIVE Grasim, Ultratech, ACC, Madras Cements

Will lead to higher end user prices and could impact demand

®Union Budget FY12: Sectoral ImpactOil: largely neutral; Metals-Increase in export duty on iron ore

Sector FY12 Budget ProposalsNature of Impact

Companies Impacted Comments

Oil & Gas

1 MAT rate applicable for SEZ units Negative RIL Since Reliance Petroleum unit will now come under MAT, cash outgo on tax will increase from ~16% now to 19 5% cash outgo on tax will increase from ~16% now to 19.5% but overall tax rate may up by lower extent since company is already providing for tax at MAT rate.

2 Cut in customs duty on pet coke from 5% to 2.5%

Marginally negative

All refineries Impact is almost negligible as hit on GRM will be anything less than US$ 0.2/bbl depending on product slates for each refineries

3 System for transfer of cash subsidy on Neutral OMCs Thi i it ti f li i t t d d ti 3 System for transfer of cash subsidy on LPG, kerosene directly to end-user by Mar'12

Neutral OMCs This is re-iteration of earlier intent and recommendations by various Expert Committees. Implementation is key and revision in retail price most implementation is also critical

4 Petroleum subsidy provided at Rs236 bn for FY12

Neutral OMCs If for FY12, this will not be final number since the subsidy requirement will cross Rs 600 bn. It is also possible that Rs 236 bn may pertain to balance for FY11, totaling ~Rs 440 bn which is as per requirement to limit OMCs' net 440 bn which is as per requirement to limit OMCs net under-recovery to ~Rs 50 bn

Metals & Mining

1 Increase in export duty on iron ore Negative Sesa Goa Earnings to be negatively impacted by 16-18% for FY12-1 Increase in export duty on iron ore lumps and fines from 15% and 5% respectively to 20%

Negative Sesa Goa Earnings to be negatively impacted by 16 18% for FY1213

Increase in export duty on iron ore lumps and fines from 15% and 5% respectively to 20%

Positive JSW Steel Lower iron ore exports can reduce domestic iron ore prices. However, this situation is not different from current situation at Karnataka due to export ban

2 Inc ease in impo t on concent ates Ma ginall Hindalco 0 5% ed ction in d t diffe ential fo c stom coppe

Kotak 20

2 Increase in import on concentrates from 2% to 2.5%

Marginally Negative

Hindalco, Sterlite

0.5% reduction in duty differential for custom copper smelters which can impact copper EBIDTA by ~10%. However, impact on valuation is insignificant as total copper EBIDTA is ~5% of consolidated EBIDTA for both Hindalco and Sterlite Industries

®Union Budget FY12: Sectoral ImpactFMCG: Positive; no hike in excise duty on cigarettes

Sector FY12 Budget ProposalNature of Impact Companies Impacted Comments

FMCG

1 No excise hike on Cigarettes Positive ITC Godfrey Phillips VST Market expectation of around 7 10% excise 1 No excise hike on Cigarettes Positive ITC, Godfrey Phillips, VST, GTC

Market expectation of around 7-10% excise hike. This will lead to a sharp jump in volumes for cigarettes company

2 Reduction of customs duty on crude palm steering for manufacturing of soap.

Positive HUL, GCPL, ITC Some relief in raw material prices for soap manufacturers

3 Reduction in excise duty on corrugated boxes Positive All Reduced packaging cost3 Reduction in excise duty on corrugated boxes to 5%( from 10%)

Positive All Reduced packaging cost

4 Reduction in excise duty on Sanitary napkins and diapers

Positive P&G HH, GCPL

5 Higher wage rate under NREGA Positive All FMCG companies More money with rural poor

6 Increase in Income Tax exemption limit by Rs Positive All FMCG companies More disposable income with consumers6 Increase in Income Tax exemption limit by Rs 20000

Positive All FMCG companies More disposable income with consumers

7 Lower surcharge of 5% on domestic companies Positive Lower tax rate

8 Sops for establishing cold storage facilities in terms of excise duty exemption

Positive Food companies

l f d f d d d9 Concessional rate of duty of 5% extended to mail room equipment

Positive Jagran, HT media, HMVL and DB Corp

10 1 % additional excise duty on many edible items including Coffee or tea pre mixes, noodles, Pasta, Sauces, Ketchups, Soups, Fruit Juices, Tooth powder etc

Negative Nestle, HUL, Dabur, GSK Cons, ITC,

Some pressure on the margins as the likely hood of a higher rate with implementation of GST will put further pressure on the profitability of these products

Kotak 21

11 MAT increase from 18% to 18.5% Negative Dabur, Marico, GCPL, Emami

A higher tax rate

®Union Budget FY12: Sectoral ImpactInfrastructure: mixed trends


Infra

1 SEZ developers and units operating in SEZ brought under MAT net - SEZ developers who were earlier exempted even from MAT during their tax holiday period will be brought in the MAT rate

Negative Mundra Port, Real Estate Companies which have developed few SEZs also Like DLF

EPS impact in Mundra of -15% and NAV impact of 4%, Mundra will be required to MAT for FY12-FY18, however the MAT so paid will be eligible to set off against tax liability in subsequent year liability in subsequent year (FY19-FY28) subject payment of tax at MAT rate in those subsequent years

2 Customs duty exemptions for several construction equipments - Some construction equipments like TBM (tunnel

Positive All construction companies Materially it s not a very big driver for the businesses and stock price of these construction equipments like TBM (tunnel

boring machine) etc. have been exempted from customs duty. These equipments are used primarily in highways construction and hydropower projects, hence it will reduce capital cost marginally for some companies

stock price of these companies.

3 MAT t MAT t i d f N t l All I f t t d l lik GMR GVK Eff ti MAT t t i 3 MAT rate - MAT rate increased from 18.0% to 18.5%, but surcharge reduced from 7.5% to 5.0%

Neutral All Infrastructure developers like GMR, GVK, IRB, ITNL, Mundra etc

Effective MAT rate to remain at ~20.0%

Kotak 22

®Union Budget FY12: Sectoral ImpactUtilities and Telecom: Neutral to negative


UTILITIES

1Introduction of excise duty on coal @5% or 1% without CENVAT credit

Negative Merchant Power players

this would be pass through for PPA's as change of law, Merchant power players would have to bear the cost.

2MAT rate applicable for SEZ developers and units inside SEZ

Neutral Adani Power, KSK the street as well as the companies were building in MAT rate in the tax provisions

3

Parallel Excise Duty exemption for domestic suppliers producing capital goods needed for expansion of existing mega or ultra mega power projects.

Positive All utilities, BHEL, L&T Differential treatment removed. Earlier exemption was given to imported capital goods for Mega power projects. This has been extended to domestic players.

Extension of 80IA benefit for Neutral All utilities Was already factored in the street estimates4

Extension of 80IA benefit for power projects

Neutral All utilities Was already factored in the street estimates.

5Increase in MAT rate from 18% to 18.5%

Negative Merchant Power players

this would be pass through for PPA's as change of law, Merchant power players would have to bear the cost.

TELECOM

1 Rs 30,000 cr budgeted as revenue from the telecom sector

Neutral Bharti, Rcom, Idea Yearly recurring revenue share from telecom operators is about 15000 cr as license and spectrum fees. The Balance 15000 cr. Seems to be from the one time charges for excess spectrum above 6.2 MHz. this is inline with the current expectation.

Kotak 23

®Union Budget FY12: Sectoral ImpactInfrastructure financing: Positive


Infra Financing

1 FII limit in corporate bonds of Positive Entire Sector Positive for large infra asset 1 FII limit in corporate bonds of infrastructure companies has been raised from USD 5bn to USD 25bn, thus taking overall FII limit in corporate bonds to USD 40bn.

FIIs will be allowed to invest in project specific SPVs. There will be a lock-in period of three years, during which FIIs can trade amongst

Positive Entire Sector Positive for large infra asset developers, as they will be better placed to raise such money from FII debt investors.

y g gthemselves, but not with domestic banks, financial institutions

2 Tax free Bonds - Infra related sectors to be allowed to raise Rs 300 bn from tax free bonds. To facilitate fund raising by organizations like

Positive Entire Sector Nothing new, we see it as continuation of the same thi it i li To facilitate fund raising by organizations like

NHAI, Port etc. and facilitate funding for projects

thing as it was in earlier years

3 IIFCL - The disbursements target till March, 2012 is kept at Rs 250 bn against Rs 200 bn till March, 2011, IIFCL to disburse additional Rs 35bn under take-out

Neutral Entire Sector Target for additional disbursement in FY12 is muted

financing route (v/s current o/s of Rs 15bn)

4 Allocation to Bharat Nirman up 21% to Rs 580bn in FY12. These include rural housing, rural roads, rural electrification and other social schemes.

Neutral Entire Sector Nothing new, we see it as continuation of the same thing as it was in earlier years

Kotak 24

5 Corpus of Rural Infrastructure Development Fund will be raised from Rs 160bn to Rs 180bn.

Neutral Entire Sector Nothing new, we see it as continuation of the same thing as it was in earlier years

®Union Budget FY12: Sectoral ImpactReal Estate: Positive

Sector FY12 Budget ProposalNature of Impact Companies Impacted Commentsg p p p p

Real Estate

Priority sector limit for housing loans extended from loan amount of Rs2mn to Rs2.5mn (here there is no cap on the

Positive Sobha, Puravankara and other companies engaged in affordable homes where loan amount is generally upto Rs2.5mn

Materially it s not a very big driver for the businesses and stock price of these

1Rs2.5mn (here there is no cap on the cost of the house)

amount is generally upto Rs2.5mn stock price of these companies

Interest rate subvention – Earlier, there was scheme of 1% interest subvention

Positive There is hardly any listed company to benefit out of this except HDIL,

Materially it s not a very big driver for the businesses and

2

on housing loans up to Rs1mn where the cost of the house does not exceed Rs2mn.

This limit for home loans has been increased to Rs1.5mn and limit for cost of house has been increased to

p ,Puravankara which has a very small part of their developmental pipeline which has product under ticket size of Rs2.5mn

stock price of these companies

Rs2.5mn.

Kotak 25

®Union Budget FY12: Sectoral ImpactIT and Pharmaceuticals: Largely neutral


Technology

1 SEZ profits now included in calculation of book profits for MAT

Neutral Mindtree As MAT is applicable for the entity level, not for individual units, as most IT companies have more than 20% tax rate, it will not matter. Tax in the P&L will be as per IT act, MAT represents a cash flow item, so will not affect EPS but will affect DCF valuation affect EPS, but will affect DCF valuation

2 STPI ends Neutral All IT companies All IT companies' tax rates will increase, but it is along expected lines, so no impact on stock price is expected

Pharma

1 SEZ profits now included in calculation of book profits for MAT

Neutral Divi's, Dishman, Cipla

As MAT is applicable for the entity level, not for individual units, as most Pharma companies have more than 18% tax rate or around it, it will not matter. Also tax in the P&L will be as per IT act, MAT represents a cash flow item, so will not affect EPS affect EPS.

2 Increase in weighted R&D deduction from 175% to 200%

Neutral All Pharma companies

All companies have 6-9% of sales in R&D costs, due to this proposal, effective tax rate will go down between 30 to 50 bps in most companies

3 Increase formulation Excise duty from 4% to 5%

Neutral All Pharma companies with

small increase and a pass through item, will not matter

Kotak 26

from 4% to 5% companies with domestic revenues

not matter

®Union Budget FY12: Sectoral ImpactIrrigation, education: Positive to neutral; Retail: Negative

Sector FY12 Budget ProposalNature of Impact


Irrigation Increase in subsidy allocation by Rs970 cr. to Rs 1130 cr – growth of 16%

Mild Positive

Jain Irrigation Will be positive for Jain Irrigation

Custom duty on Micro Irrigation equipments reduced from 7 5% to 5%

Mild Negative7.5% to 5% Negative

Retail No mention of Service Tax on lease rental Mild positive

Pantaloon Shoppers Stop & Trent is providing for service tax on rentals, Pantaloons is not providing. 15 cr. would have been the impact on

fit i t l d t idprofits is pantaloons need to provide

Increased focus on APMC Act Mild positive

All Retail companies Companies can directly procure from farmers

Increased (Rs. 20000) exemption limit for personal tax Mild positive

All Retail companies General positive

No mention of FDI in Retail sector Emphasis on Negative All Retail companiesNo mention of FDI in Retail sector. Emphasis on liberalizing FDI in general

Negative All Retail companies

10% mandatory excise duty on readymade branded garments textile made ups bearing a brand name is being charged. Duty is charged on 60% of their retail price

Negative Pantaloons, Zodiac, Shoppers Stop, Trent

Impact is more on Pantaloons than Shoppers

Paint No roll back of excise duty concession of 2% Positive Asian paints, Kansai, Berger, Akzo Noble

Market was expecting roll back

Education 24% increase in allocation of Education to Rs 52050 cr. Positive Educomp, Everonn Vocational courses will get additional allocation

Kotak 27

Increased in outlay on Sarva Shiksha Abhiyan from Rs 13000 cr. to Rs 21000 cr.

Positive Educomp, Everonn

®Union Budget FY12: Sectoral ImpactAviation, jewellery and insurance: Neutral to negative

Sector FY12 Budget ProposalNature of Impact


Hospitals Service tax on health services provided by all air conditioned hospitals with > 25 beds

Negative All hospitals This will impact all hospitals > 25 beds and competitiveness of players i t h iis not changing

Aviation Basic custom duty on aircraft bought for non-scheduled operations

Neutral N/A N/A

Increase in Service tax on air travel as follows – Negative All aviation Low cost carriers will be impacted Increase in Service tax on air travel as follows Negative All aviation companies

Low cost carriers will be impacted more than full service carriers since demand is more elastic for them. Above rates will be applicable from 01-Apr-2011

- Domestic economy class from Rs. 100 to Rs. 150 per ticket

- International economy class from Rs. 500 to Rs. 750 / ticket

- Domestic (business class) 10% standard rate

Jewellery Excise Duty of 1% being introduced on branded Jewellery and branded articles of precious metals

Negative Titan Titan will be 1% expensive than local jewelers

Insurance Service tax increased from 1% to 1.5% on non-investment portion of premium

Mildly Negative

All Insurance players It will be passed on

No change in investment limit Neutral

Kotak 28

No change in investment limit Neutral

®Union Budget FY12: Sectoral ImpactTextiles, Mixed bag; Fertilizers: Positive


TEXTILES

Excise duty on branded garments to b l i d 10% / CENVAT

NEGATIVE Century Textiles, R d Z di

Will lead to higher prices on back of i i i l

1be levied at 10% w/o CENVAT as against 4%. The levy will be charged on 60% of the retail price

Raymonds, Zodiac Clothing

rising raw material costs

2

Excise duty on parts of 40 specified textile machinery to be bought down from 10% to 5%

POSITIVE Laxmi Machine Works, Voltas

Will bring down capital/operational expenses of textile mills

from 10% to 5%

3Basic custom duty on rayon grade wood pulp to come down from 5% to 2.5%

POSITIVE Grasim Industries Will bring down costs at a time when wood pulp prices are ruling firm

FERTLIZERS

1

Industry has been conferred infrastructure status

POSITIVE Tata Chemicals, Coromandel Fertilizers

Industry will avail of lower interest rates, concessional rates of custom duties on imported equipment

OTHERS

1Basic custom duty on carbon black feed stock to be reduced from 5% to 2.5%

POSITIVE Phillips Carbon Black, Aditya Birla Nuvo

Will help reduce raw material costs in an inflationary environment

2Basic custom duty on acrylonitrile to be reduced from 5% to 2.5%

POSITIVE Ineos ABS, Vardhman Acrylics

Will help reduce raw material costs in an inflationary environment

B i t d t l t t NEGATIVE GSFC Will b i d i t it i f

Kotak 29

3Basic custom duty on caprolactam to be reduced from 10% to 7.5%

NEGATIVE GSFC Will bring down import parity prices for these products

®

Market Outlook: Valuations and Risks

®India: Extremely resilient with external stimuli A ‘U’ turn in macro variables driven partly by economic circularity

Changing Macro Economic EnvironmentIndia: Key Data Points- Comparison

Peak-08 Jan- 08 Mar-09 Current India: Economic circularity makes external stimuli matter

MARKETS

BSE Sensex 20,827 20,827 9,709 17,823

GROWTH

Normalization of GDP growth: 8% (FY10); 8.6% (FY11E) ;

7.7%-8% (FY12E) on moderation in agriculture and

consumption growth

IIP (%) 9.50% 6.20% -2.30% 1.60%

INFLATION

WPI 12.82% 4.26% 0.70% 8.23%

Consolidated fiscal deficit at 9.50% of GDP in FY10; FY11 at

7.7% (RE); 7.6-8.1% (FY12E) -benefit from divestment and

central Government cash surplus

Oil Prices (US$/bbl) 145.00 97.77 46.80 112.09

INTEREST RATES

10 Year G Sec Yield 9 45% 7 75% 6 60% 8 01%

RBI policy: calibrated with credit creation and recovery

Average inflation likely at ~7% in FY12E; ~8-9% in FY11E

from ~4% in FY10; 9% in FY0910 Year G-Sec Yield 9.45% 7.75% 6.60% 8.01%

EXTERNAL SECTOR

Re/$ 50.52 39.42 51.30 45.27

INR to be range bound; Re/US$ likely between 44-47 over next

12 months

Kotak 31

NOTE: Real Interest Rate= 10 year G-sec Yield-WPI; trade deficit and IIP figure is for the month, current as on Feb 28, 2011

Peak is since Jan 2008 till date; Source: Bloomberg, RBI, CSO, oil prices is Brent crude;

Past performance is not an indicator of future performance or returns

®India: The structural transformation Stronger ability to withstand shocks and down-cycles

India’s growth story in numbersIndia s growth story in numbersComparison of various key parameters since 1990s to current

Assumption of good monsoons

i th

Variable 1980s 1990s 2000-04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

The Real Economy

Real GDP Growth (%) 6.3 5.8 5.7 7.5 9.4 9.6 9.0 6.7 8.0 8.6 7.7-8.0on agri growth; industrial recovery and rebound in urban consumption

Agriculture 4.4 3.5 2.2 0.0 6.0 3.8 4.5 1.6 0.4 5.4 3.0

Industry 7.4 6.7 5.7 8.4 8.0 11.0 8.5 3.9 8.0 8.1 8.5

Services 6.4 7.7 7.3 10 10.3 11.2 10.8 9.7 10.1 9.6 9.0

Nominal GDP Growth (%) 14 4 15 2 9 5 13 3 14 6 15 8 15 1 15 1 16 1 18 714.0-15 0

Key drivers of recovery

Nominal GDP Growth (%) 14.4 15.2 9.5 13.3 14.6 15.8 15.1 15.1 16.1 18.7 15.0

Savings and Investment

Private Consumption Expenditure (% of GDP) 74.3 65.6 64.6 65.7 64.3 58.6 55.3 55.5 57.0 57.6 57.0

Savings (% of GDP) 19.4 23.1 25.2 31.1 33.1 34.4 36.4 32.5 34.0 35.5 36.0

Following the path of fiscal consolidation

Investment (% of GDP) 21.3 23.1 24.6 32.7 34.3 35.5 37.7 34.9 35.0 36.0 37.0

Government Finances

Fiscal Deficit- Centre+States (% of GDP) 8.0 7.7 9.4 7.5 6.7 6.4 5.6 9.0 9.5 7.7

7.6-8.1

Fiscal Deficit- Centre (% of GDP) 6.8 5.7 5.6 4.0 4.1 3.7 3.1 6.0 6.7 5.1 4.6-5.2

End FY11 at ~7%+Inflation

Average WPI (%) 8.0 8.1 4.5 6.5 4.4 6.5 4.8 8.0 3.6~8.0-

9.0~6.0-

7.0

Balance of Payments

Foreign Exchange Reserves (US$

Kotak 32

Source: RBI, Kotak Estimates.

Foreign Exchange Reserves (US$ Bn) 4.0 38.7 113 141.5 151.6 199.2 300.0 260.0 290.0 300.0 350.0

Import Cover in Months 3.8 6.6 12.9 14.3 11.6 12.4 14.1 10.5 13.0 13 15

Currency –Re/$ 17.5 44.9 45.9 43.8 44.6 43.6 40.2 46.0 44.92 44-47 44-47


®Valuations—Fair vis-à-vis historical trading range

1-year rolling forward P/E, M3 adjusted valuation trading at full valuations1-year rolling forward P/E, P/B, RoE, EV/EBIBTDA, M3 growth rate adjusted valuations

2812 months rolling forward P/E (X)

6 30P/B (X) RoE (%) (RHS)21,000 Sensex 10X 12X 15X

8

12

16

20

24

2

4

20

5,000

9,000

13,000

17,000

4

Feb-

01

Feb-

02

Feb-

03

Feb-

04

Feb-

05

Feb-

06

Feb-

07

Feb-

08

Feb-

09

Feb-

10

Feb-

11

0

Feb-

01

Feb-

02

Feb-

03

Feb-

04

Feb-

05

Feb-

06

Feb-

07

Feb-

08

Feb-

09

Feb-

10

Feb-

11

10

20EV/EBITDA (X)

1,000

Feb-

01

Feb-

02

Feb-

03

Feb-

04

Feb-

05

Feb-

06

Feb-

07

Feb-

08

Feb-

09

Feb-

10

Feb-

11

21,000 1.8

Sensex M3 adj P/E (X, RHS)Poly. (M3 adj P/E (X, RHS))

8

12

16

1 000

5,000

9,000

13,000

17,000

0.6

1.2

4

Feb-

01

Feb-

02

Feb-

03

Feb-

04

Feb-

05

Feb-

06

Feb-

07

Feb-

08

Feb-

09

Feb-

10

Feb-

11

(3,000)

1,000

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

08

Jan-

10

Jan-

11

0.0

Kotak 33

Source: BSE, RBI, Kotak Institutional Equities.


®India: Valuation premium over regional markets expand Re-rating versus peers deserving; Valuation in a fair range

Valuations of Indian markets are reasonable based on PEG ratio

Valuation summary of regional markets, Feb 17, 2011, Calendar year-ends, 2009-11E

Earnings growth (%) P/E (X) PEG ratio (X)Earnings growth (%) P/E (X) PEG ratio (X)Index 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E

Brazil MS CI Brazil 18.7 16.7 11.6 12.2 10.5 9.4 0.8 0.7

China MS CI China 30.1 15.4 16.3 13.3 11.5 9.9 0.8 0.7

Hong Kong MS CI Hong Kong 28.0 8.6 12.6 18.0 16.6 14.8 0.9 0.8

India MS CI India 22 2 22 6 19 0 17 4 14 2 11 9 0 8 0 7India MS CI India 22.2 22.6 19.0 17.4 14.2 11.9 0.8 0.7

Korea MS CI Korea 50.1 12.5 12.7 11.1 9.9 8.8 0.5 0.4

Malays ia MS CI Malays ia -E M 29.6 16.9 11.8 17.2 14.7 13.2 1.0 0.9

Mexico MS CI Mexico -0.3 31.8 10.2 19.3 14.7 13.2 1.2 0.9

R uss ia MS CI R uss ia 30.9 14.7 12.7 7.3 6.4 5.7 0.4 0.3

i S C i 9 0 2 3 0 0 0Taiwan MS CI Taiwan 91.4 10.4 12.4 14.4 13.0 11.5 0.7 0.7

Thailand MS CI Thailand 19.9 21.0 15.9 14.1 11.7 10.1 0.7 0.6

Asia - Emerging markets MSCI EM Asia 42.3 14.7 14.6 13.4 11.7 10.2 0.7 0.6

S ource: Citigroup , IBE S Aggregate, MS CI

Kotak 34Past performance is not an indicator of future performance or returns

®Key risksRisk to macro stability largely from external sources

• Global economic and political issues―Middle East political crisis

E i t k k t i―Euro-zone issues to keep markets guessing - Large debt with large burden of external debt

- Policy action in the form of austerity measures could impact markets

• Oil price instability in the wake of the Middle East crisis

– A US$1/bbl increase in oil prices expands India’s current account deficit by ~US$600m; pressures fiscal deficitfiscal deficit

• US recovery a consensus call; any meaningful slowdown likely negative for equities―Impacts exports in our Balance of Payments

• Lack of progress in India on addressing the triple deficits- fiscal/current account and governance

Kotak 35

®

Disclaimer:

This material should not be construed as an offer to sell or the solicitation of an offer to buy any Security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material and is for general information only. This material is relevant only to clients who qualify as eligible counterparties. Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability as compared to developed markets. The price and value of the investments referred to in this material and the incomefrom them may go down as well as up, and investors may realize losses on any investments. Future returns are not guaranteed and a loss of the whole capital may occur. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. Clients may read relevant offer document or prospectus before investing. Past performance is not a guide for future performance. Investments in mutual funds are subject to market risk. The Kotak Mahindra group does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investmentstrongly advised to consult with their tax advisers regarding any potential investment.

Kotak 36

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Kotak 37

from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and maybe subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that areinconsistent with the recommendations expressed herein.

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Kotak 38

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Kotak 39

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Kotak 40

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