Service tax

Direct tax

Excise duty

Defenseexpenditure

Fiscal deficits

Subsidies

Government borrowings

Budget deficits

Indirec

t tax

Corporation tax

Income tax

Import duties

R

R

Expenditure

Good

s and

servi

ce ta

x

PRE BUDGET ANALYSIS REPORT FMCG

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 21

PRE-BUDGET ANALYSIS February 15 2013

FMCG

Current view Recent reports indicate that some progress has been made on GST negotiations,

and rollout in FY15 is not unlikely. As such, a roadmap/ timeline shall bewatched for. GST shall provide long-term benefits to FMCG sector, on accountof: 1/ greater parity with unorganized sector (hitherto non-tax paying) shall en-able FMCG organized sector greater, long-term growth, 2/ supply chain benefitsthat accrue on account of GST.

The inclusion agenda of the Congress government in both terms has been a cru-cial driver of FMCG sector growth. We believe that purely by way of subsidies/allocation to flagship schemes of the government, this budget is unlikely to sur-prise positively (given fiscal constraints). However, the government has beenmaking progress on two other counts that enable greater real transfer payments,viz. Food Security Bill, and the Direct Cash Transfer scheme. The budget willlikely contain timelines about large scale rollout of these, especially the cashtransfer scheme. Net-net, on the inclusive agenda of the government, we expectthe budget to be modestly positive.

Excise duties on cigarettes, given 21% hikes across categories last year, arelikely to be lower in the year. Post hikes in last year's budget, we believe indus-try volumes have held firm, and the government has an opportunity to raise col-lections by way of higher duties. We believe that the budget is likely to raiseexcise duties on cigarettes in high single digits. Last year's budget had introduced(and then annulled, via financial amendment bill), ad-valorem duties on ciga-rettes. We believe that ad-valorem duties, if introduced, shall be a negative forcigarette manufacturers. Excise on some packaged items may also be raised.

EXPECTED BUDGET IMPACT:Neutral

LONG TERM OUTLOOK:Neutral

Continued focus onrural growthenhances incomes atbottom of pyramid;direct cash transfersto be more wide-spread; outline forfood subsidy bill

Inclusive GrowthAgenda

Expect modestgrowth in expen-ditures on ruralsector; expectpostiive projectionson Direct CashTransfers

Fiscal deficit primeconcern; DCT, FoodSubsidy Bill should beseen as electorateempowering initiatives

Positive Impacton FMCGstocks fromDirect CashTransfers/ FoodSubsidyexpectations

Timelines for GSTimplementation; GSTto reduce supplychain constraints,improve competi-tiveness of FMCGcompanies againstunorganized players

Progress on GST Expect positivestance on imple-mentation fromFY2015

GST discussions betweencentre and states haveprogressed, as reportedby media

FMCG stocks tobenefit fromannouncement

No change, due todistortionary impactof differentialtaxation on tobaccoproducts

Excise Duties onCigarettes

Expect hike inhigh single digits

Significant hikes in thelast year's budget reducelikelihood of stronghikes, volumes staystagnant

c.10% hikeshall be neutralfor cigarettemanufacturers.No/ low-singledigit hikes shallbe a positive

Key budget expectations

Issues Industry wish-list Our expectation Rationale for our Impact of ourexpectation expectation

Source: Kotak Securities - Private Client Research, Industry

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 22

PRE-BUDGET ANALYSIS February 15, 2013

FMCG (contd...)

Top picks

Company Price EPS (Rs) PE (x) Recommendation(Rs) FY13E FY14E FY13E FY14E as per our last

report

ITC LTD. 300 9.4 11.2 31.9 26.8 ACCUMULATE

MARICO LTD. 209 6.3 7.9 33.2 26.5 ACCUMULATE

Source: Kotak Securities - Private Client Research

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 38

PRE-BUDGET ANALYSIS February 15, 2013

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Fundamental Research TeamDipen ShahITdipen.shah@kotak.com+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, Engineeringsanjeev.zarbade@kotak.com+91 22 6621 6305

Teena VirmaniConstruction, Cementteena.virmani@kotak.com+91 22 6621 6302

Saurabh AgrawalMetals, Miningagrawal.saurabh@kotak.com+91 22 6621 6309

Saday SinhaBanking, NBFC, Economysaday.sinha@kotak.com+91 22 6621 6312

Arun AgarwalAutomobilesarun.agarwal@kotak.com+91 22 6621 6143

Ruchir KhareCapital Goods, Engineeringruchir.khare@kotak.com+91 22 6621 6448

Ritwik RaiFMCG, Mediaritwik.rai@kotak.com+91 22 6621 6310

Sumit PokharnaOil and Gassumit.pokharna@kotak.com+91 22 6621 6313

Amit AgarwalLogistics, Transportationagarwal.amit@kotak.com+91 22 6621 6222

Jayesh KumarEconomykumar.jayesh@kotak.com+91 22 6652 9172

K. KathirveluProductionk.kathirvelu@kotak.com+91 22 6621 6311

Technical Research Team

Shrikant Chouhanshrikant.chouhan@kotak.com+91 22 6621 6360

Amol Athawaleamol.athawale@kotak.com+91 20 6620 3350

Premshankar Ladhapremshankar.ladha@kotak.com+91 22 6621 6261

Derivatives Research TeamSahaj Agrawalsahaj.agrawal@kotak.com+91 22 6621 6343

Rahul Sharmasharma.rahul@kotak.com+91 22 6621 6198

Malay Gandhimalay.gandhi@kotak.com+91 22 6621 6350

Prashanth Laluprashanth.lalu@kotak.com+91 22 6621 6110