union budget 2011-12 preview-210211

8/7/2019 Union Budget 2011-12 Preview-210211

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February 21, 2011

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Union Budget 2011-12 - Preview

Union Budget 2011-2012 Addressing supply constraints is criticalThe Indian economy has the potential to grow by 10% but has got chained to a moderate 8% GDP growth rate onaccount o supp y constra nts, an no ou t a ot can e one on t e po cy re orm ront. e country s current ygrappling with several headwinds that can be effectively addressed through policy reforms and fiscal action ratherthan monetary action alone. For instance, our savings rate is low, current account deficit is high and headline

inflation is also high, mainly on account of supply constraints. Demand, on the other hand, is showing signs of,

the low level of manufacturing price increases that is leading to margin compression for a number of companies.Mining, infrastructure and agriculture are amongst the key affected sectors and positive measures in the budget forthese sectors would be more than welcome.

Increasing agri-production is criticalLooking at the anatomy of our high inflation problem, there appear three drivers for the same. First is domesticsupply-side inflation (this is mainly crop-related inflation) that stands at 15.6% yoy. The second is global commodityinflation mainl crude and metals which is also at elevated levels of 17.5%. Put to ether these articles have 29%weightage in the WPI and are contributing 61% to the current 8.4% headline inflation number. Inflation inmanufactured products is the third driver (that can be seen as a proxy to demand-driven inflation), which stands atjust ~4.4%. Looking at the second driver of inflation first, in our view, policy makers need to find ways of meeting

the economys global resource requirements more sustainably and, beyond that, remain policy-neutral to globalcommodity inflation.

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As far as domestic supply-side food inflation is concerned, India is clearly at a critical juncture where stronggovernment focus on agriculture is needed. In the current year, India has grown by 78%; while at the same time,a riculture out ut has rown at less than 1%. India has around 146mn hectares ha of land under a riculture

which yields 188mn tonnes of food grain; while in case of China, it has 100mn ha of land, which yields 412mntonnes of food grain. India produces around 600mn tonnes of food products (fruits + vegetables), of which 25

30% is wasted due to lack of adequate logistical support. Hence, the need to raise production along withproductivity of land and developing cohesive logistical support is of utmost importance and the best way tomanage the long-term food security issue. In case of fertilisers, the country has not seen new plants being set up inthe last two decades, while 25% of the total consumption is still imported. Urea continues to be the most consumedfertiliser, as its prices are the lowest. Thus, a new fertiliser policy is an immediate requirement, wherein the privatesector is encouraged to expand fertiliser capacity.

Mining activity needs further boostMoreover, in a resource-rich country like India, it is unfortunate that we are ending up importing gigantic 35mntonnes of thermal coal, even though we have the worlds fourth-largest reserves. Sufficient coal availability is likelyto e a ey constra nt or t e power sector as coa - ase power p ants ave een ac ng ue s ortage on accountof various reasons such as delay in procuring coal linkages, issues in obtaining environment clearances and otherregulatory approvals for developing coal blocks, hurdles in expansion of coal blocks, and logistical and

infrastructural issues. To a smaller extent, we are also importing steel, while exporting 100mn tonnes of iron ore - -,

exporting country. Therefore, the government needs to take urgent action to reverse this situation by fast-trackingpolicy reforms and incentives as well as speeding up coal and iron ore mine auctions, allocations and clearances,if we are to sustainably grow at a higher GDP rate.

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Infrastructure spending must be ramped upMoreover, it goes with saying that no country can grow without ramping up infrastructure investments. Our currentn rastructure nvestments o - o nee to ncrease to - , our growt tra ectory s to go up. venthat the sector plays a vital role in achieving the desired run rate of economic growth, we expect someannouncements to come through, viz. higher allocation to flagship programs of Bharat Nirman, JNNURM, APDRP,

AIBP and NHDP. Land acquisition and environment clearance are the two major bottlenecks hampering the timely. , .

Welcoming FDI and incentivising exports also requiredOpening up of sectors that can attract foreign investments, such as retail and insurance, needs to be hastened,espec a y as we ave no a e o our orex reserves o a e. e n us ry as cons an y a voca e a

foreign direct investment (FDI) should be allowed in single-brand retailing. Currently, FDI of up to 51% undersingle-brand retail trading and 100% in the cash-and-carry wholesale format is allowed under the automatic route.Additionally, FDI may be allowed in diluted form in multi-brand retailing. If this happens, it would expedite growthof the or anised format in the countr leadin to lower rices im roved roduct ualit and a wider choice ofproducts available to consumers. Moreover, other emerging markets have been growing on the steam of highercontribution of exports to their GDP. The government also cannot afford to ignore this lever of growth, consideringour vast, expanding, low-cost workforce. So, more momentum is required to incentivise manufacturing exports

through SEZs, especially when our closest competitors currency is pegged.

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All this, without hampering fiscal consolidation A key challengeAs far as fiscal deficit is concerned, in the last budget, the government had committed to a sustained path of fiscalconso at on. oo ng at t e a rea y r s ng nterest rates, t s mportant t at t e government e vers on t s ront.Unlike last year, when the government received ~`1,00,000cr from auctions of 3G and BWA spectrum, there areno such benefits expected in the short term. Any further increase in fiscal deficit would further harden interest rates,

eventually hitting credit demand in the economy. In this regard, we expect fund-raising plans by the government.

disinvestment process for SAIL and Hindustan Copper, among others.

On a related front, it will also be important to see if there are any measures to address the mismatch in credit-deposit growth prevailing in the economy. The gap between savings and investments is being plugged by the highcurrent account e c t at present. t g er epos t mo sat on e ng t e nee o t e our, measures to

encourage savings, such as reducing lock-in period on tax-saving FDs, may become a reality in the coming budgetsession.

As far as ensuring healthy availability and flow of credit to various sections of the economy is concerned, thegovernment has already been quite pro-active in the last few budgets. For instance, the `65,000cr farm waiverincreased the ability of banks to channel more funds to the agriculture sector, where investments to alleviate supplyconstraints are the need of the hour. Similarly, the `16,500cr capital infusion in PSU banks should alleviate

constraints to their credit growth and the granting of IFC status to infrastructure lending companies should increaset e ava a ty o muc -nee e ong-term un s or t e sector. t cre t growt a rea y qu te strong, we wounot expect any major moves on this front in the upcoming budget, though more avenues of long-term financing forthe infrastructure sector, including creation of corporate debt market, dedicated infrastructure debt fund andattracting foreign investment, would be welcome.

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Conclusion Policy reforms hold the key to higher GDP growth rateLooking ahead, we believe an increase in policy reforms and faster project clearances would hold the key forta ng t e growt rate eyon t e - . expectat ons. ear y, n case o most o t e economy s currentwoes, growth is being held back due to supply-side constraints and lack of execution, whether it comes toagriculture, mining or infrastructure. It is important that the budget shows decisive commitment and clear action on

the governments part to fast-track the removal of all these shackles to our growth so that the private sector can. , , ,

also expected to help restore equilibrium to the current imbalances such as low domestic savings, high currentaccount deficit and high inflation.

The Sensex is available at a much more reasonable 15x P/E now. Moreover, the Indian markets haveunderperformed other emerging markets recently and the Sensex is now trading at lower valuations than theShanghai Composite, in spite of enjoying stronger structural tailwinds. In fact, Dow Jones in the last six months hasappreciated by 20-25%, Chinese markets have appreciated by 10%, while Indian markets have come down by 10-12%. From a sectoral standpoint, post the correction, banking and infrastructure sectors are looking especiallyc eap y va ue . so, we cont nue to n uge va ue n some o t e ottom-up p c s n t e m -cap space, w care either high-quality entry-barrier businesses or are available at dirt cheap valuations. All in all, even with ourGDP growth rate at 8-8.5%, the Sensex is looking reasonably valued at 15x P/E, and we maintain our positive

outlook, with a March 2012 Sensex target of 21,845.

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Sector-wise Expectations

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Expected Impact: Positive

Agriculture

India is currently at a critical juncture where strong government focus on agriculture is needed. Last years droughtresulted in high food inflation in most basic food commodities. In the current year, India has grown by 78%; while atthe same time a riculture out ut has rown at less than 1%. Althou h a riculture contributes ust 18% of the total GDPit engages approximately 60% of the countrys labour force. India has around 146mn hectares (ha) of land underagriculture, which yields 188mn tonnes of food grain; while in case of China, it has 100mn ha of land, which yields412mn tonnes of food grain. India produces around 600mn tonnes of food products (fruits + vegetables), of which2530% is wasted due to lack of adequate logistical support. Hence, the need to raise production along withpro uct v ty o an an eve op ng co es ve og st ca support s o utmost mportance an t e est way to manage t elong-term food security issue.

Farm production and yield can be increased with the help of (a) modern irrigation systems, (b) access to better-qualityseeds, (c) access to right fertilisers and (d) increasing priority sector lending norms. Logistical support can be addressedby allowing more private sector participation.

In case of fertilisers, the country has not seen new plants being set up in the last two decades, while 25% of the totalconsumption is still imported. Urea continues to be the most consumed fertiliser, as its prices are the lowest. Totalfertiliser subsidy has ballooned from `126bn in FY2002 to `580bn590bn in FY2011E. Thus, a new fertiliser policy isan immediate requirement, wherein the private sector is encouraged to expand fertiliser capacity. However, profitability,returns and capex for the projects need to be kept in mind by the government. Along with relaxing rules pertaining toparticipation from corporates/private sector in contract farming, other farming-related activities need to be amended.

At the same time, the governments most successful scheme MGNREGA would continue to witness increased grants.We believe this is further likely to aggravate labour supply to the agriculture sector and because of that farmers arelikely to opt for modern tools such as farm mechanisation and crop protection chemicals (pesticides) as a replacementfor human labour.

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Budget Expectations

Head Current Status Wish List Potential Impact

Fertiliser

Current policy does notencourage corporates for

Greenfield expansion dueto marginal/low returns

New policy that allows higherreturn or gives capital subsidy

on new Greenfield capacity

If the industry wish list is satisfied completely, it wouldhelp corporates expand capacity and in turn eliminatethe countrys dependence on imports. Positive for all

fertiliser companies, especially Tata Chemicals,Chambal Fertiliser, Zuari Ind, GNFC, GSFC and RCF

Irrigation System Subsidy

`1,000cr through mainscheme and another`3,000cr4,000cr throughother schemes

Increase allocation by2025%.

Will help in bringing more drought-prone areas underirrigation. Positive for companies such as Jain Irrigationthat provides micro irrigation system solutions tofarmers

Top Picks

Company Reco CMP Target Price EPS (`) P/E (x) EV/EBITDA* (x)

Source: Company, Angel Research

(`) (`) FY2010E FY2011E FY2010E FY2011E FY2010E FY2011EUnited Phosphorus Buy 144 198 12.0 15.3 12.0 9.4 7.1 5.9

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Expected Impact: Neutral

Automobile

The automotive sector, which has emerged stronger post the 2008 recession, continued its growth momentum inthe current fiscal (YTD FY2011) with ~30% growth in volumes. Noticeably, concerns related to the slowdown in thesector due to increased excise dut in the 2010-2011 bud et were roved wron as demand remained robust.

However, with near-term headwinds in the form of higher raw-material prices, increasing fuel costs and rising

interest rates, Society of Indian Automobile Manufacturers (SIAM) has urged the government to retain excise duty atthe existing levels. We expect the status quo on excise duty to be maintained on small cars, two-wheelers andcommercial vehicles. However, we expect rates on large cars and utility vehicles to be raised on account ofconcerns raised by the environment ministry.

Further, the sector stands to benefit from indirect sops such as higher outlay for the rural sector (driving expectedconsumer spen ng an ncrease u ge ary a oca on or n ras ruc ure spen ng ea ng o ncrease roa

freight).

Overall, we expect the Union Budget 2011-12 to be Neutral for the automobile sector.

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Budget Expectations

Head Item Current Status Expected Change Potential ImpactE i D S llExcise Duty Small cars, two-

wheelers, commercialvehicles

arge at o c ange

Large cars and utility Charged at 22% Excise duty hike of 2-4% Negative for Mahindra & Mahindravehicles and Tata Motors. Price hike to be

passed on to end-consumers

Top Picks

Company Reco CMP Target Price EPS (`) P/E (x) EV/EBITDA (x)(`) (`) FY2011E FY2012E FY2011E FY2012E FY2011E FY2012EBajaj Auto Accumulate 1,353 1,491 88.0 99.4 15.4 13.6 9.9 8.6

aru uzu uy , , . . . . . .

M&M Buy 669 794 43.2 47.5 15.5 14.1 10.0 8.6

Tata Motors* Accumulate 1,251 1,384 130.3 138.6 9.6 9.0 6.3 5.5

Source: Company, Angel Research ; Note: * Consolidated

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Budget Expectations

Head Current Status Expected Change Potential Impactax-sav ng xe epos ts

(FDs)-year oc - n per o

`1lakh investment limit

-year oc - n per o emutual funds)

`2lakh investment limit

put oc - n on tax-sav ng s, at parwith ELSS

Will help increase deposit mobilisation by

the banking sector

Priority sector Interest subvention, lending targets,farm debt waiver

Increasing benefits Regular budget feature for inclusive growth.Negative for banks.

Tax break on provisions Provision for bad and doubtful Decreasing tax liability Increase in deduction/full deduction allowede s ma e y an s are a owe

as a deduction to the extent of 7.5%of gross total income and 10% ofaggregate average rural advancesmade by them

or ca cu a ng ax a y rom eprovisions covering bad and doubtful debts

Interest rate subsidy No such policy on lending to SEBs Interest rate subsidy on lendingto SEBs

Allay asset quality concerns in the powerfinancing segment

Help meet financing needs of SEBs

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Top Picks

Company Reco CMP Target Price EPS (`) P/E (x) P/ABV (x)(`) (`) FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E

Axis Bank Buy 1,317 1,688 82.2 101.0 16.0 13.0 2.9 2.5

Dena Bank Buy 99 127 21.6 21.0 4.6 4.7 1.0 0.9

ICICI Bank Buy 1,058 1,312 45.3 60.7 23.3 17.4 2.3 2.1

IndBk Buy 221 274 41.3 42.2 5.4 5.2 1.2 1.0

IOB Buy 135 166 17.4 23.6 7.8 5.7 1.1 0.9


J&K Bank Buy 773 987 126.6 138.2 6.1 5.6 1.1 0.9

SBI Buy 2,779 3,490 165.3 240.9 16.8 11.5 2.5 2.1

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Capital Goods

In its bid to fast track the power generation capacities, the Government of India (GoI) had permitted import ofequipment for mega power projects (1,000MW and above for thermal) at nil duty, while 5% duty is being levied onmport or sma er pro ects. e t oug t process or suc act on may e attr uta e to t e na ty o t e ocamanufacturers to meet the growing demand, while the Chinese equipment is relatively inexpensive and readilyavailable. The Chinese equipment makers, much like other exporters from China, also benefit from the low interest

rates and an undervalued currency to boost exports.

The BTG capacities in India have been increasing significantly during the last year post the expansions undertakenby BHEL and Larsen & Toubro. In addition, companies like BGR Energy, Thermax and Bharat Forge are also in themidst of setting up new facilities for manufacturing power equipment.

Amidst the backdrop of the ongoing capacity expansions, the Indian power equipment manufacturers have beendemanding imposition of customs duty to ensure a level playing field, while the IPP developers have been lobbyingfor cheaper imports. Going by the inclination of the GoI to encourage domestic manufacturing, it might considerthis industry demand in the upcoming budget.

Additionally, fund allocation to the various programs including the APDRP and RGGVY would continue to provide afillip to the transmission line players. Overall, we expect the Budget to be Positive for the Sector.

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Budget Expectations


Excise duty on cement

Excise duty charged at10% on cement price above`190/bag; and `250/tonne

The NCAER hasrecommended a 55%

With the industry expected to face a demand- supplymismatch , the pricing power is low for manufacturers.Hence, the reduction in excise duty will benefitmanufacturers as well as consumers. Positive for allcement companies.

`190/bag However, there is a possibility that the excise duty might be raised to 8%, which would act as a positivefor cement players.

`173,552cr under variousIncreased government spend on infrastructure will

-infrastructure

schemes in the Union

Budget FY2010-11.

infrastructure-

as against 7% currently. Positive for all cementcompanies.

Import duty on coal

Import duty of 5.1% iscurrently charged onthermal coal. Clean ener Abolition of im ort dut on

The elimination of import duty will result in a reductionin ower and fuel cost, as risin fuel rices ne ativel

cess of `50/tonne forimported and domesticcoal.

coal and clean energy cess affect operating margins. Positive for all cementcompanies.

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Company Reco CMP Target Price EPS (`) P/E (x) EV/EBITDA (x)(`) (`) FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E

Top Picks

(`) (`) FY2011E FY2012E FY2011E FY2012E FY2011E FY2012EGrasim Accumulate 2327 2521 211 251 11 9.2 5.4 4.9

India Cements Buy 93 136 1.4 3.1 65.7 30 12.2 8.5

Madras Cements Bu 98 139 7.7 6.4 12.7 15.3 7.3 6.9

JK Lakshmi Cement Buy 47 80 3.7 3.9 13 12.3 4.2 3.4


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FMCG

The year 2010 was mixed for the Indian FMCG sector. Steady growth was witnessed amidst steep raw materialprice inflation affecting overall profitability of the companies. However, all the companies resorted to price hikes to

. ,the FMCG companies and the sector itself.

The past few months saw prices of input costs for the FMCG companies sky-rocket, which are expected to remainrange bound. Adding fuel to the fire has been the concerns of high food inflation as well as the recent Egypt crisis.Prices of commodities like palm oil and most other agri commodities have spiked sharply. However, crude andcrude oil derivatives (like LAB and HDPE) are below their peaks. Going forward, we believe that the raw materialcost inflation would remain a prime concern for all the companies. We have factored in the input cost inflationand expect operating margins to decline compared to FY2010 levels.

The FMCG majors are aggressively pushing for growth and gain in market share ahead of margin preference.Competition has further intensified both at the domestic as well as the global level. Also, we believe that as therural area focus continues, the FMCG sector would stand to benefit. Any positive changes in the tax slabs,

. ,hike in customs duty on any raw materials may exert pressure on the companies.

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Budget Expectations


MAT MAT at 18% No changeIf the current MAT rate is increased, it could impactcompanies like HUL ,GCPL and Dabur India.

FMCG com anies benefit as the manufacturin

Excise Duty Currently at 10% No increase in excise duty facilities are located in excise-free zones. However, anyincrease could be negative for the companies (HULwill be impacted the most).

Rural initiatives to remain a

Positive for the sector as a whole, as it will maintain

Rural focus schemes schemes like NREGS, Indira

Gandhi Vikas Yojana

in allocation of resources

towards the mentionedschemes

the momentum to spur income levels. The FMCG

companies have been increasing their focus on ruralIndia.

Dut varies as er the

Expected hike expected to beA hike of ~5-6% in the excise duty on cigarettes wouldbe Neutral for ITC, as it will be able to ass on the

xc se u y on c gare es

length of the cigarette sticksmarg na ~ -

increase. ITC has already taken a weighted averageprice hike of ~5% in anticipation of an excise hike.

GST GST implementation Roadmap for implementation

FMCG companies will benefit from the uniform,

simplified and single-point taxation across productcategories, which will weed out waste from the system

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Company Reco CMP Target Price EPS (`) P/E (x) EV/EBITDA (x)Top Picks

(`) (`) FY2011E FY2012E FY2011E FY2012E FY2011E FY2012EITC Buy 158 186 6.7 7.7 23.8 20.6 13.2 11.4

Dabur India Accumulate 100 114 3.3 4.4 29.9 22.6 17.2 14.3


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Hotels

The hotel sector has been witnessing a gradual recovery in the key operating parameters, backed by animprovement in the economy and increased foreign tourist arrivals. In the last budget, the industry was given aoost w t nvestment- n e tax ncent ves or cap ta expans on n ote s un er t e two-star an a ove categor es.

Following are the key demands of the industry from the Union Budget 2011-12, which would enable it to continueon its growth trajectory:

airports and ports). This will enable hotel players to get the benefit of total deductions on profits and gains for 10years. The granting of infrastructure status would provide more scope for reinvestment into new capacity, therebypaving way for more guest rooms. In turn, it will help lower tariffs and will make India a more affordable tourismdestination, on the lines of Malaysia, Indonesia and Sri Lanka, further attracting foreign tourists.

The industry also wants the government to restore the depreciation rate to 20%. The depreciation rate was at 20%till March 2007; however, it was lowered to 10% later. The reason behind this demand is that hotel buildings (likefactory plants) are used around-the-clock and require heavy investments for constant renovation and upgradation.

Overall, we are positive on the sector.

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Budget Expectations


Infrastructure status Not grantedInfrastructure status underSection 80IA of the IncomeTax Act

Will enable hotel players to get the benefit of totaldeductions on profits and gains for 10 years. Positive forall hotel players.

Will positively impact cash flows and tax outgo of all

eprec a on a ehotel players

Top Picks


TAJGVK Buy 109 177 7.2 9.8 15.2 11.0 8.4 6.2


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Infrastructure

The sector has underperformed over the last twelve months relative to the BSE Sensex on the back of issues on theexecution front delays in financial closure, environment clearance issue, slowdown in order inflow and landacqu s t on re ate pro ems an consequent s ow own on t e earn ngs ront. oreover, t e n at onarypressures, spiraling commodity prices and rising interest rates are also hurting overall profitability of thecompanies.

, ,expect some announcements to come through, viz. higher allocation to flagship programs of Bharat Nirman,JNNURM, APDRP, AIBP and NHDP. Land acquisition and environment clearance are the two major bottle-neckshampering timely execution of projects. Hence, roll out of policies to expedite these procedures would lend a fillipto the sector.

Further, we expect the government to look at more avenues of long-term financing for the sector including creationof corporate debt market, dedicated infrastructure debt fund and attracting foreign investment, which would solvethe current asset-liability mismatch problem faced by the banks. However, creation of these funds would requireregu atory c anges.

Overall, we expect the Budget to be Positive for the Infrastructure Sector.

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Budget Expectations


Dedicated infrastructuredebt funds

N.A. Should become operational

provides long-term funding for projects and will removethe major concern of asset-liability mismatch faced bythe banks in the current scenario

Tax benefit on investments made in infrastructurebonds

`20,000 is allowed overand above the `1 lakh limitprescribed for investment intax saving schemes

Extending this window andenhance this limit to `50,000

This move will help in meeting the long-term needs ofinfrastructure development in India, as money raisedthrough these bonds will be invested in infrastructureprojects

MAT rate 18% Reduction in MAT rate Positive for all developers

Increased allocation tothe Sector

Current Infra spend of 6%of GDP is much below therequirement

Taking Infra spend to9-10% of GDP

It will help India to achieve 9%-plus economic growth,as currently physical infrastructure has emerged as thebiggest constraint in achieving the desired economic

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Company Reco CMP Target Price EPS (`) P/E (x) EV/EBITDA (x)Top Picks

(`) (`) FY2011E FY2012E FY2011E FY2012E FY2011E FY2012EL&T Buy 1,694 1,964 53.9 67.8 31.4 25.0 21.1 17.0

IVRCL Buy 80 126 7.2 8.4 11.0 9.5 7.4 6.6

NCC Buy 108 164 7.7 9.0 13.9 12.0 10.2 8.7

ITNL Buy 220 285 20.4 22.6 10.8 9.7 9.3 12.9


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Media

According to the FICCI-KPMG 2010 report, the Indian media and entertainment sector is well-poised for arecovery with the launch of more TV channels, digitisation and higher spend by the consumers going forward.

onsequent y, we t e sector post a o . to , , cr over - .

Overall, FY2011 has been a positive year for the media and entertainment sector as expansion was witnessed in

the print and broadcasting sectors. Moreover, recovery in economy saw revival in advertisement revenues, which

distribution expenses). Digitisation is also taking place rapidly and set to increase 4x by 2014.

Among the key Budget expectations of the media sector includes increase of FDI limit for the cable, DTH and radiosectors on account of being capital-intensive in nature. Increase in FDI limit would spur investments in thesesegments.

The sector expects GST implementation, post which the companies would avail benefits like uniform, simplified andsingle-point taxation across product categories and roll-out of Phase-III radio reforms and conditional accesssystem . xempt on o uty on t e set-top oxes current y at 5 w re uce cost ur en o t e ancable industries and pave the way for rapid digitisation.

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Budget Expectations

Head Current Status Wish List Potential ImpactFDI

Varied limit for differentsectors

Raise FDI limit in radio, DTHand cable

Positive for all media companies if the FDI limit israised as it would reduce the burden of the sector

Uniformit in taxesEntertainment tax levied bythe various states at

Taxes levied to be uniformthereb creatin arit in the

Positive for all companies if a uniform the tax structure

different rates

sectors us ere rep ac ng mu p e axes

Customs duty on set topboxes

The set top boxes aresubject to a customs duty of5%

Removal of customs duty alsorecommended by TRAI

Rapid digitisation would result, removal of customsduty on set top boxes would be a positive for DTH andthe cable industry

Top Picks

Company Reco CMP Target Price EPS (`) P/E (x) EV/EBITDA (x)(`) (`) FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E(`) (`) FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E

JagranPrakashan

Buy 116 185 6.8 7.7 9.3 17.1 15.2 12.6 10.7 9.6 8.4

HT Media Buy 147 175 7.5 8.6 9.7 19.7 17.2 15.3 11.0 9.2 8.2


DB Corp Buy 239 358 13.0 14.7 17.2 18.5 16.3 13.9 11.1 9.5 7.9

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Metals & Mining

The Union Budget 2011-12 is likely to be mixed for the metals and mining sector. While an increase in import dutyon ferro alloys will benefit ferro alloy producers, a hike in export duty on iron ore will benefit steel companiespurc as ng ron ore rom t e open mar et. owever, suc a move w a verse y a ect m n ng compan es e esaGoa and NMDC.

Further, imposition of mining tax of 26% on PBT level would be negative for mining companies as well as for steel.

We expect excise duty and customs duties on metal products to remain at current levels of 10% and 5%,respectively.

We believe fund-raising plans by the government through disinvestment will continue in FY2012. We believe the

FY2012 budget is likely to expedite the disinvestment process for SAIL and Hindustan Copper.Overall, we expect the FY2012 Budget to have a Neutral impact on metal companies, while having a negativebearing on mining companies.

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Budget Expectations

Head Current Status Expected change Potential ImpactImport duty on ferro

alloy5% on imports of ferroalloy

Increase to 7.5%Positive for ferro alloy producers such as Tata Steel,Visa Steel and Rohit Ferro

Export duty on iron ore15% duty on lumps

5% duty on fines

Increase in export duty on

fines to 15%

Hike in export duty on f ines would be negative formining companies such as Sesa Goa and NMDC

Mining tax NIL 26% on profit before tax

mpos t on o m n ng tax wou e negat ve ormining companies as well as steelmakers havingcaptive mines

To Picks


Sterlite Industries Buy 164 206 13.5 17.5 12.2 9.3 6.5 4.8

Hindustan Zinc Accumulate 1,285 1,356 103.4 125.3 12.4 10.3 7.6 5.5

Tata Steel Accumulate 655 747 66.0 69.1 9.9 9.5 6.4 5.8

SAIL Accumulate 166 182 12.2 15.9 13.6 10.4 8.8 6.9JSW Steel Accumulate 921 1,047 56.9 77.1 16.2 12.0 7.6 6.0

Electrosteel Cast. Buy 33 45 4.3 4.1 7.5 7.9 6.3 7.0


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Oil & Gas

Rising crude prices have resulted in mounting under recoveries for the oil marketing companies (OMCs), which isexpected to be ~`70,000cr in FY2011. The burden on OMCs could be higher in FY2012 if the crude stabilises atcurrent levels. We ex ect the bud etar measures to be focused on addressin these burdens b wa of reducinduties on crude oil and petro products and allocating higher amount of cash compensation. However, we do notsee material positives from these measures as these could only reduce the already mounting losses of the OMCs.

We also expect some clarity over the tax holiday to the natural gas producers who were awarded blocks during theNELP I-VII rounds.

Overall, the Budget is expected to be Neutral for the Sector.

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Budget Expectations

Head Current Status Expected Change Potential Impact

Rollback of customs dutyon crude oil and excise

duty on petro products

5 customs duty imposed on crude inlast Budget and`1/litre increase in

excise duty on petrol

Customs duty on crude reducedto nil and excise duty on petroproducts might probably bereduced to `1/litre or more

Improves scope of hiking fuel prices withoutburdening retail consumers and thus reducesunder recoveries of OMCs like BPCL, HPCL,

and IOC.an ese

Clarity over tax holidayunder Sec 80-IB for

Tax holiday benefitsare restricted on theprofit derived from theproduction of natural

Tax holiday should be extendedretrospectively to the profit Positive for upstream companies as their IRR

na ura gas pro ucerswho have won NELP I-VII

blocks

gas oc s censeunder NELP-VIII/Coal

Bed Methane (CBM),which commencedproduction on or after

registered from production of

natural gas blocks awardedunder NELP I-VII or CBM

from the respective blocks would improve

materially. RIL and ONGC would be the keybeneficiaries.

, .

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Top Picks

Company Reco CMP Target Price EPS (`) P/E (x) EV/EBITDA (x)(`) (`) FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E(`) (`) FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E

GAIL Buy 453 530 29.0 33.4 15.6 13.6 9.7 7.7

GSPLAccumulate

96 105 8.4 9.5 11.4 10.2 6.8 6.5

Gujarat Gas Buy 356 418 19.9 23.2 17.9 15.3 10.4 8.7

IGLAccumulate

306 345 18.5 21.1 16.5 14.5 8.6 7.7

ONGC Buy 278 350 30.6 32.2 9.1 8.6 4.0 3.7

RIL Buy 954 1.160 66.6 74.9 14.3 12.7 9.3 8.1


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Pharmaceutical


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Pharmaceutical

The Union Budget 2011-12 is expected to be a non-event for the pharma sector. The government could, however,continue to increase budgetary allocation for healthcare spending, which would be an overall positive for the

.

Indian pharma companies have been investing on the R&D front to tap opportunities both in the domestic andglobal markets. Although the government has increased the weighted deduction on R&D expenditure to 200%(in-house research), the industry expects an extension on the tenure of deduction, which is currently available onlytill FY2012. It is also expected to cover patent litigation costs under weighted deduction and widen the scope byincluding research work carried outside the R&D facility in India and outside India. Any extension of EOUprovisions would be positive for the sector, especially for companies that have not or have been slow in expandingthrough SEZ. On the excise front, the industry expects duty on API to be in sync with that on formulations or aetter c ar ty n terms o t e cre t re un mec an sm. e a atement on p arma pro ucts, w c s

currently 35% of the MRP, is also expected to increase, sufficient to cover the costs. There are apprehensions thatthe FDI cap of 100% would be reduced to 49%, which if happens would be negative for the sector. Overall, weexpect the budget to be Neutral for the sector.

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Budget Expectations

Head Current Status Wish List Potential Impactxtens on o

statusene t ava a e t ee to e exten e or anot er t ree

yearsos t ve or t e ent re sector espec a y or

companies that have not or have been slow inexpansion through SEZ

MAT provisions MAT at 18% and MAT credit

available for five years

MAT should be restored to 15% Under our coverage, this would be positive for

Sun Pharma, Dishman and Indoco Remedies' 'ncrease n

deduction andwidening of thescope

urren y, e we g ededuction stands at 200%,applicable to only in-houseresearch. Further, the deductionis available till FY2012 only.

e scope o researc wor one ou s ethe R&D facilities that are in India oroutside India should be widened. Extensionof deduction for another 10 years. Also,costs for defending patents should beincluded under the weighted deduction.

os ve or e en re sec or

Rationalisation of

the excise dutystructure

Formulations at 4% and API at

10%

Duty on API to be reduced and brought in

line with formulations or the refundmechanism should be well defined.

Higher duty on API has resulted in accumulation

of CENVAT credit in books of small domesticpharma companies, which the companies havenot been able to utilise completely; and this isincreasing the cost for them

Increase in budgetallocation tohealthcareschemes

In the last budget, the allocationto the National Rural HealthMission was increased to `22bnfrom `19bn

Further increase in allocation expected Positive for pharma and healthcare companies

Abatement of The abatement on harma The abatement ercenta e should be Would be ositive for the entire harma industrcentral excise duty products is 35% of the MRP increased

Custom duties Currently, some of the life-saving drugs are under customduties

Total exemption on life-saving drugs fromcustom duties

Positive for MNC players

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Top Picks

Companies Reco CMP TP EPS (`) PE EV/EBITDA(`) (`) FY11E FY12E FY11E FY12E FY11E FY12E

Alembic Buy 67 92 7.5 9.5 8.9 7.1 6.8 5.3

Aurobindo Buy 237 283 20.2 23.3 11.7 10.2 12.0 9.4

Cipla Buy 306 388 13.0 17.6 23.4 17.3 20.2 15.5

Indoco Remedies Buy 413 541 40.4 54.1 10.2 7.6 8.2 5.9

Lupin Accumulate 416 466 18.6 23.3 22.4 17.9 18.1 15.1


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Power


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Power

The country continues to face power deficit due to delay in the commissioning of new capacities, fuel shortage inexisting plants and deficiencies in the T&D system. However, the UPA government has always viewed the power

,for the sector in the Eleventh and Twelfth Fived-year Plans. More measures are expected from the government toexpedite the capacity additions in the sector.

Sufficient coal availability is likely to be a key constraint for the power sector as the coal-based power plants havebeen facing fuel shortage on account of various reasons such as delay in procuring coal linkages, issues inobtaining environment clearances and other regulatory approvals for developing coal blocks, hurdles in expansionof coal blocks, and logistical and infrastructural issues.

Some of the anticipated Budget announcements in favour of the power sector include: 1) Extension of benefits

under 80-IA beyond FY2011, 2) Elimination of the duty on imported power equipment, 3) Abolition of duty oncapital and fuel inputs borne by the private power generating companies, and 4) More incentives to promoterenewal energy projects and coal mining activities.

Of all the anticipated announcements, we believe there is high likelihood that only the exemption under section80-IA will be extended by another year.

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Budget Expectations


Deduction under Section Available only to project Extension of the scheme

As per Section 80-IA, power generating companies areeligible for 100% deduction of the profits for 10consecutive years during the first 15 years ofoperations. The benefit under this section is availableonly till FY2011. Extension of the benefits beyond

80IA

FY2011.beyond FY2011 FY2011 will be of a major advantage to the project

developers, as it will substantially reduce their taxburden.

Positive for the private power generation companies.

Duty on import of PowerEquipment

5% duty on equipment usedfor projects awarded underthe InternationalCompetitive Bidding

No duty

Abolition of duty would result in reduction of power

cost.

Positive for generation companies setting up plantswith imported equipment like Reliance Power andprocess. Adani Power.

Reduction of import duty

on coal

Currently, 5% import duty. No dutyNeutral for regulated business; Positive for merchant

capacities and plants based on imported coal.

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Company Reco CMP Target Price EPS (`) P/E (x) EV/EBITDA (x)` `

Top Picks

` `NTPC Buy 180 230 10.4 11.4 17.4 15.8 12.2 11.3

CESC Buy 301 468 40.5 44.4 7.4 6.8 6.6 7.3

GIPCL Buy 93 135 6.8 10.2 13.7 9.1 8.6 6.3

PTC Buy 94 136 4.9 6.4 19.3 14.7 14.4 12.8


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Budget ExpectationsHead Current Status Wish List Potential ImpactTax-free profit earned by

Will boost mid-income housing segment thereby

Tax Holiday underSec 80 IB (10)

from housing projects(infrastructure development

,

Extension of interestsubvention

1% interest subvention onhousing loans of up to`1mn and cost of unit is

union budget 2011-12 preview-210211

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