India Union Budget FY11-12 presentation

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India Union Budget FY11-12 presentation

  1. 1. ® Union Budget FY2012 Focus: Growth, Inflation, Fiscal Consolidation, G F G th I fl ti Fi lC lid ti GovernanceAlroy LoboMarch 01, 2011
  2. 2. Budget: Macro direction positive; Key is execution ®Fiscal 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: 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) • Balance of Payments: Contingent on global commodity prices and foreign flows Kotak 2
  3. 3. Fiscal deficit to influence long-term interest rate direction ®Monetary policy to drive short-term policy interest rates Tax revenue projections realistic Net tax revenue growth at 18% MAT hike/growth to drive corporate tax collections High oil prices, positive for custom duty collections Disinvestment receipts at Rs 40,000 40 000 cr Expenditure: -Plan expenditure over non-plan 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 revenues and extant cash surplusSource: Budget documents Kotak 3
  4. 4. Fiscal consolidation: Aligned to 13th Finance Commission ®Fiscal discipline: Key for sovereign ratings and global investor interest Fiscal consolidation path for the centre and states Thirteenth Finance Commission Recommendations ( as % of GDP) FY10 FY11RE FY12E FY13E FY14E FY15E 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) Deficit- 6.9 69 5.1 51 4.6 46 4.1 41 3.5 35 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 2000-01Union Budget highlights: Focus on growth, inflation and exit policy• Growth: FY12 growth likely at 9% (+/-0.25%); our expectations ~8% (nominal ~15%) (+/-0 25%);• Taxes: Maintaining status quo due to expected GST and DTC implementation Kotak 4
  5. 5. 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 borrowings (T b i (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 Source: Budget documents Kotak 5
  6. 6. India’s consolidated fiscal deficit high: Growth is therefore key ®Productive use of expenditure, important for fiscal consolidation Fiscal consolidation: Decline in combined fiscal deficit (as % of GDP) Tax (gross)-GDP (%): tax collection assumption realistic 12 12 10 10 8 8 State 6 6 4 4 Centre 2 2 0 0 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 Fy04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: Budget documents; note numbers for FY10 and FY11 include oil and fertilizer FY12E Source: Budget Documents bonds above the line • Net tax revenue growth of 18% budgeted for FY12 realistic • Tax revenues: Betting on g g growth, expansion of coverage and high oil p , p g g prices • Gross tax to GDP low at 10% • Corporate tax: Betting on MAT and growth Kotak 6
  7. 7. Tax revenue growth at 18%: realistic ®Customs duty upside in case of rising oil prices Higher revenues from customs duty on crude oil at current prices R evenues from cus toms duty on crude oil, March fis cal year-end, 2012E (R s bn) Imported crude oil (mn tons ) 112 Import duty (%) 5.15 R evenues from c us toms duty on c rude oil Crude 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 B udgeted revenue from C us toms duty 1517 Source: Budget documents, Kotak Institutional EquitiesCustoms/import tax• 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
  8. 8. Service tax coverage set to improve ®Service tax still accounts for a small share of total taxes Services tax still account for a small share of overall taxes S hare of taxes on products and s ervices in the Indian economy, March fis cal year-ends , 1991-2012B E (%) Corporate tax and excis e duty/T otal tax S ervice tax/T otal tax 70 60 50 40 30 20 10 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011R E 2012B E S ource: Government of India, Kotak Ins titutional E quities Kotak 8
  9. 9. 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) 1200000 80.00% 1000000 70.00% 800000 60.00% 50.00% 600000 40.00% 400000 30.00% 200000 20.00% 10.00% 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E 0.00% FY07 FY08 FY09 FY10 FY11 FY12E Rev Exp Cap Exp plan exp non plan exp Source: Budget Documents Source: Budget Documents • 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
  10. 10. Subsidy management, a politically sensitive subject ®Key risk : Full compensation for oil under-recoveries not provided Lower subsidy burden estimated for FY12 Key components of subsidy (Rs cr) FY09 FY10 FY11BE FY11RE FY12BE 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 Fertilizer 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 Source: Budget documentsLower subsidies budgeted in FY12- Food b id Food F d subsidy: F d security bill to be tabled during FY12 it t b t bl d d i- 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 urea Kotak 10
  11. 11. Subsidies: Likely to surprise on the upside ®Under provisioning of fertilizer subsidies R is ing imports of urea over the pas t few yearsThe government has left the prices of urea unchanged in the budget des pite ris ing urea prices P roduction, cons umption and imports of urea, March F is cal year-ends , 2006-14E , mn tonUrea prices (Middle E as t fob), March fis cal year-ends , 2001-2011 (US $/ton) Urea price (US $/ton) Yearly average (US $/ton) P roduction (L HS ) Cons umption (L HS ) Imports (R HS )800 40 8 6.9 6.6 66 6.2 6.3600 5.7 5.8 30 6 4.8 4.6400 20 4 2.0200 10 2 0 0 0 F eb-01 F eb-02 F eb-03 F eb-04 F eb-05 F eb-06 F eb-07 F eb-08 F eb-09 F eb-10 F eb-11 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E S ource: Kotak Ins titutional E quities qS ource: B l loomberg, K t k I titutional E quities b Kotak Ins tit ti l iti Lower subsidies budgeted in FY12 - Fertilizer subsidy: E ti t d at R 50b in FY12 compared t R 55b i FY11 F tili b id Estimated t Rs 50bn i d to Rs 55bn in - Rise in global urea prices in the wake of high crude oil prices- risk to subsidy provisions Kotak 11
  12. 12. Oil Subsidy: Under provision in Union Budget ®Oil under-recovery difficult to manage at current crude prices Under-recovery will be difficult to manage at crude price of US $100-110/bbl S ubs idy los s breakdown at various levels of crude oil price, March fis cal year-end, 2012E (R s bn) Dated B rent c rude pric e (US $/bbl) 80 85 90 95 100 105 110 LP G 229 266 304 342 380 418 456 Keros ene 188 203 219 235 251 266 282 Dies el 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 s ubs idy los s 612 754 896 1,037 1,179 1,321 1,463 S ource: Kotak Ins titutional E quities es timates Large increas e in retail prices required at crude price of US $100-110/bbl Gap between required market prices and current s elling prices at various levels of crude oil, March fis cal year-end, 2012E Dated B rent c rude pric e (US $/bbl) 80 85 90 95 100 105 110 L P G (R s /cylinder) (227) (264) (301) (339) (376) (414) (451) Keros ene (R s /liter) (17.6) (19.0) (20.5) (22.0) (23.5) (24.9) (26.4) Dies el (R s /liter) (3.1) (3 1) (4.5) (4 5) (5.9) (5 9) (7.4) (7 4) (8.8) (8 8) (10.2) (10 2) (11.6) (11 6) S ource: Kotak Ins titutional E quities es timates Kotak 12
  13. 13. Pro-consumption bias: Thrust on disposal income with consumers ®Drivers: Personal tax benefits, NREGARight 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) Modest h M d t changes in tax slabs i t l b Income tax and corporate tax slabs for FY12 E xis ting (F Y2011) R evis ed (F Y2012) Individual inc ome tax Individual tax rates Upto R s 1,60,000 - Nil Upto R s 1,80,000 - Nil Above R s 1,60,000 - R s 5,00,000 -10% Above R s 1,80,000 - R s 5,00,000 - 10% Above R s 5,00,000 - R s 8,00,000 - 20% Above R s 5,00,000 - R s 8,00,000 - 20% Above R s 8,00,000 - 30% Above R s 8,00,000 - 30% S enior Citizen E xemption limit - R s 2,40,000 E xemption limit - R s 2,50,000 S enior Citizen age 65 years 60 years Very s enior citizen (80 years +) NA E xemption limit - R s 5,00,000 E ducation ces s 3% 3% C orporate inc ome tax T ax rates 30% 30% S urcharge rate 7.5% 5% E ducation ces s 3% 3% Minimum Alternative T ax 18% of book profits 18.5% of book profits Other inc entives S cientific res earch (b) 175% of expenditure 200% of expenditure Notes : (a) Additional exemption of R s 20,000 for inves tment in infras tructure bonds . p (b) Weighted deduction on payments made to National L aboratories , univers ities and Ins titutes of technology for s cientific res earch. Source: Budget documentsKotak 13
  14. 14. Infrastructure : On-going area of thrust ®No 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) 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% 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% 13 9% General services 1353 1377 7230 425.1% Total plan outlay 425590 502250 592457 18.0% Source: Budget documents Kotak 14
  15. 15. 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 contained gp 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 - 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 in surcharge on corporate tax from 7.5% to 5% Reduction i h f 7 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
  16. 16. 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
  17. 17. Union Budget: Attempt to address the Governance deficit ®Steps towards tackling corruption and governance issuesUnion 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 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 treatment of income tax on payments (deductions) and receipts (income) to and from such jurisdictions ―Concluded discussions for 11 Tax Information Exchange Agreements (TIEAs) ―13 new Double Taxation Avoidance Agreements (DTAAs) ―Revision of provision of the existing 10 DTAAs Kotak 17
  18. 18. ® FY12 Union Budget: Sectoral Impact
  19. 19. Union Budget FY12: Sectoral Impact ®Negative Cement; Autos – Positive Companies Sector FY12 Budget Proposal Nature of Impact Impacted Comments AUTOMOBILES To infuse Rs 30 bn in NABARD to POSITIVE M&M, Escorts NABARD is the nodal agency which shore up the paid up capital to Rs refinances banks lending to the 50bn. 50bn Additional 3% interest agricultural sector (including tractors) 1 subvention for farmers paying dues on time. Thus, effective interest rate for these farmers would be 4% Indexing of wages under the NREGA POSITIVE Hero Honda, Maruti Higher disposable incomes in the 2 scheme with inflation Suzuki, M&M hands of rural customers to drive auto sales in these areas CEMENT Bagged cement of retail price in NEUTRAL to All cement The impact will be largely neutral as excess of Rs 190 per bag to attract NEGATIVE companies the 10% ad-valorem rate will be an ad-valorem duty of 10% plus a charged on the ex-factory price plus specific duty of Rs 160 per MT as freight cost to the depot. At current 1 against 10% ad-valorem duty on g y all-India average p g prices of Rs 250-260 MRP as was the case earlier per bag, this measure will not have any significant impact Import duty on gypsum and POSITIVE All companies and Reduction of custom duties in an petroleum coke brought down to especially Shree inflationary environment will bring 2 2.5% Cement down operational costs for the industry i d t 1% excise duty w/o CENVAT Credit NEGATIVE All cement Will lead to higher raw material costs 3 imposed on fly-ash companies Imposition of 5% excise duty or 1% NEGATIVE All cement Will lead to slightly higher raw 4 w/o CENVAT credit on coal, coke, companies material costs peat, tar etc Excise duty of 5% or 1% w/o NEGATIVE Grasim, Ultratech, Will lead to higher end user prices and 5 CENVAT credit imposed on RMC ACC, Madras could impact demand Cements Kotak 19
  20. 20. Union Budget FY12: Sectoral Impact ®Oil: largely neutral; Metals-Increase in export duty on iron ore Nature of Companies Sector FY12 Budget Proposals Impact 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% 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 Marginally All refineries Impact is almost negligible as hit on GRM will be anything 5% to 2.5% negative less than US$ 0.2/bbl depending on product slates for each refineries 3 System for transfer of cash subsidy on Neutral OMCs This is Thi i re-iteration of earlier intent and recommendations it ti f li i t t d d ti LPG, kerosene directly to end-user by by various Expert Committees. Implementation is key and Mar12 revision in retail price most implementation is also critical 4 Petroleum subsidy provided at Rs236 Neutral OMCs If for FY12, this will not be final number since the subsidy bn for FY12 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 OMCs 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- 16 18% FY12 lumps and fines from 15% and 5% 13 respectively to 20% Increase in export duty on iron ore Positive JSW Steel Lower iron ore exports can reduce domestic iron ore lumps and fines from 15% and 5% prices. However, this situation is not different from current respectively to 20% situation at Karnataka due to export ban 2 Increase Inc ease in impo t on concentrates import concent ates Marginally Ma ginall Hindalco, Hindalco 0.5% ed ction 0 5% reduction in d t diffe ential fo c stom coppe duty differential for custom copper from 2% to 2.5% Negative Sterlite 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 Kotak 20
  21. 21. Union Budget FY12: Sectoral Impact ®FMCG: Positive; no hike in excise duty on cigarettes Nature of Sector FY12 Budget Proposal Impact Companies Impacted Comments FMCG 1 No excise hike on Cigarettes Positive ITC, ITC Godfrey Phillips VST Phillips, VST, Market expectation of around 7 10% excise 7-10% GTC hike. This will lead to a sharp jump in volumes for cigarettes company 2 Reduction of customs duty on crude palm Positive HUL, GCPL, ITC Some relief in raw material prices for soap steering for manufacturing of soap. manufacturers 3 Reduction in excise duty on corrugated boxes Positive All Reduced packaging cost to 5%( from 10%) 4 Reduction in excise duty on Sanitary napkins Positive P&G HH, GCPL and diapers 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 consumers 20000 7 Lower surcharge of 5% on domestic companies Positive Lower tax rate 8 Sops for establishing cold storage facilities in Positive Food companies terms of excise duty exemption 9 Concessional rate of d l f duty of 5% extended to f d d Positive Jagran, HT media, HMVL d mail room equipment and DB Corp 10 1 % additional excise duty on many edible Negative Nestle, HUL, Dabur, GSK Some pressure on the margins as the likely items including Coffee or tea pre mixes, Cons, ITC, hood of a higher rate with implementation of noodles, Pasta, Sauces, Ketchups, Soups, Fruit GST will put further pressure on the Juices, Tooth powder etc profitability of these products 11 MAT increase from 18% to 18.5% Negative Dabur, Marico, GCPL, A higher tax rate Emami Kotak 21
  22. 22. Union Budget FY12: Sectoral Impact ®Infrastructure: mixed trends Nature of Sector FY12 Budget Proposal Impact Companies Impacted Comments Infra 1 SEZ developers and units operating in Negative Mundra Port, Real Estate Companies which EPS impact in Mundra of - SEZ brought under MAT net - SEZ have developed few SEZs also Like DLF 15% and NAV impact of 4%, developers who were earlier exempted Mundra will be required to even from MAT during their tax holiday MAT for FY12-FY18, however period will be brought in the MAT rate the MAT so paid will be eligible to set off against tax liability in subsequent year (FY19-FY28) subject payment of tax at MAT rate in those subsequent years 2 Customs duty exemptions for several Positive All construction companies Materially it s not a very big construction equipments - Some driver for the businesses and construction equipments like TBM (tunnel stock price of these boring machine) etc. have been companies. 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 3 MAT rate - MAT rate increased from t t i df Neutral N t l All Infrastructure developers like GMR, GVK, I f t t d l lik GMR GVK Effective MAT rate t remain Eff ti t to i 18.0% to 18.5%, but surcharge reduced IRB, ITNL, Mundra etc at ~20.0% from 7.5% to 5.0% Kotak 22
  23. 23. Union Budget FY12: Sectoral Impact ®Utilities and Telecom: Neutral to negative Nature of Sector FY12 Budget Proposal Impact Companies Impacted Comments UTILITIES Introduction of excise duty on Negative Merchant Power this would be pass through for PPAs as change of law, 1 coal @5% or 1% without players Merchant power players would have to bear the cost. CENVAT credit MAT rate applicable for SEZ Neutral Adani Power, KSK the street as well as the companies were building in 2 developers and units inside SEZ MAT rate in the tax provisions Parallel Excise Duty exemption Positive All utilities, BHEL, L&T Differential treatment removed. Earlier exemption was for domestic suppliers producing given to imported capital goods for Mega power 3 capital goods needed for projects. This has been extended to domestic players. expansion of existing mega or ultra mega power projects. Extension of 80IA benefit for Neutral All utilities Was already factored in the street estimates estimates. 4 power projects Increase in MAT rate from 18% Negative Merchant Power this would be pass through for PPAs as change of law, 5 to 18.5% players Merchant power players would have to bear the cost. TELECOM 1 Rs 30,000 cr budgeted as Neutral Bharti, Rcom, Idea Yearly recurring revenue share from telecom operators revenue from the telecom sector 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
  24. 24. Union Budget FY12: Sectoral Impact ®Infrastructure financing: Positive Nature of Sector FY12 Budget Proposal Impact Companies Impacted Comments Infra Financing 1 FII limit in corporate bonds of Positive Entire Sector Positive for large infra asset infrastructure companies has been raised developers, as they will be from USD 5bn to USD 25bn, thus taking overall better placed to raise such FII limit in corporate bonds to USD 40bn. money from FII debt investors. FIIs will be allowed to invest in project specific SPVs. There will be a lock-in period of three y years, during which FIIs can trade amongst g g themselves, but not with domestic banks, financial institutions 2 Tax free Bonds - Infra related sectors to be Positive Entire Sector Nothing new, we see it as allowed to raise Rs 300 bn from tax free bonds. continuation of the same To facilitate fund raising by organizations like thing as it was i earlier years thi in li NHAI, Port etc. and facilitate funding for projects 3 IIFCL - The disbursements target till Neutral Entire Sector Target for additional March, 2012 is kept at Rs 250 bn against disbursement in FY12 is Rs 200 bn till March, 2011, IIFCL to muted disburse additional Rs 35bn under take-out financing route (v/s current o/s of Rs 15bn) 4 Allocation to Bharat Nirman up 21% to Neutral Entire Sector Nothing new, we see it as Rs 580bn in FY12. These include rural continuation of the same housing, rural roads, rural electrification thing as it was in earlier years and other social schemes. 5 Corpus of Rural Infrastructure Neutral Entire Sector Nothing new, we see it as Development Fund will be raised from continuation of the same Rs 160bn to Rs 180bn. thing as it was in earlier years Kotak 24
  25. 25. Union Budget FY12: Sectoral Impact ®Real Estate: Positive Nature of Sector FY12 Budget Proposal g p Impact p Companies Impacted p p Comments Real Estate Priority sector limit for housing loans Positive Sobha, Puravankara and other companies Materially it s not a very big extended from loan amount of Rs2mn to engaged in affordable homes where loan driver for the businesses and Rs2.5mn (here there is no cap on the amount is generally upto Rs2.5mn stock price of these 1 cost of the house) companies Interest rate subvention – Earlier, there Positive There is hardly any listed company to Materially it s not a very big was scheme of 1% interest subvention benefit out of this except HDIL, p , driver for the businesses and on housing loans up to Rs1mn where the Puravankara which has a very small part of stock price of these cost of the house does not exceed their developmental pipeline which has companies Rs2mn. product under ticket size of Rs2.5mn 2 This limit for home loans has been increased to Rs1.5mn and limit for cost of house has been increased to Rs2.5mn.Kotak 25
  26. 26. Union Budget FY12: Sectoral Impact ®IT and Pharmaceuticals: Largely neutral Companies Sector FY12 Budget Proposal Nature of Impact Impacted CommentsTechnology1 SEZ profits now included in Neutral Mindtree As MAT is applicable for the entity level, not calculation of book profits for MAT 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 EPS2 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 expectedPharma1 SEZ profits now included in Neutral Divis, Dishman, As MAT is applicable for the entity level, not calculation of book profits for MAT Cipla 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. EPS2 Increase in weighted R&D deduction Neutral All Pharma All companies have 6-9% of sales in R&D from 175% to 200% companies costs, due to this proposal, effective tax rate will go down between 30 to 50 bps in most companies3 Increase formulation Excise duty Neutral All Pharma small increase and a pass through item, will from 4% to 5% companies with not matter domestic revenuesKotak 26
  27. 27. Union Budget FY12: Sectoral Impact ®Irrigation, education: Positive to neutral; Retail: Negative Nature of Companies Sector FY12 Budget Proposal Impact Impacted Comments Irrigation Increase in subsidy allocation by Rs970 cr. to Rs 1130 cr Mild Jain Irrigation Will be positive for Jain Irrigation – growth of 16% Positive Custom duty on Micro Irrigation equipments reduced from Mild 7.5% 7 5% to 5% Negative Retail No mention of Service Tax on lease rental Mild Pantaloon Shoppers Stop & Trent is providing positive for service tax on rentals, Pantaloons is not providing. 15 cr. would have been the impact on profits i pantaloons need to provide fit is t l dt id Increased focus on APMC Act Mild All Retail companies Companies can directly procure from positive farmers Increased (Rs. 20000) exemption limit for personal tax Mild All Retail companies General positive positive No mention of FDI in Retail sector Emphasis on sector. Negative All Retail companies liberalizing FDI in general 10% mandatory excise duty on readymade branded Negative Pantaloons, Zodiac, Impact is more on Pantaloons than garments textile made ups bearing a brand name is being Shoppers Stop, Trent Shoppers charged. Duty is charged on 60% of their retail price Paint No roll back of excise duty concession of 2% Positive Asian paints, Kansai, Market was expecting roll back Berger, Akzo Noble Education 24% increase in allocation of Education to Rs 52050 cr. Positive Educomp, Everonn Vocational courses will get additional allocation Increased in outlay on Sarva Shiksha Abhiyan from Rs Positive Educomp, Everonn 13000 cr. to Rs 21000 cr. Kotak 27
  28. 28. Union Budget FY12: Sectoral Impact ®Aviation, jewellery and insurance: Neutral to negative Nature of Companies Sector FY12 Budget Proposal Impact Impacted Comments Hospitals Service tax on health services provided by all air Negative All hospitals This will impact all hospitals > 25 conditioned hospitals with > 25 beds beds and competitiveness of players is i not changing t h i Aviation Basic custom duty on aircraft bought for non-scheduled Neutral N/A N/A operations Increase in Service tax on air travel as follows – Negative All aviation Low cost carriers will be impacted companies more than full service carriers since demand is more elastic for them. - Domestic economy class from Rs. 100 to Rs. 150 per Above rates will be applicable from ticket 01-Apr-2011 - 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 Negative Titan Titan will be 1% expensive than Jewellery and branded articles of precious metals local jewelers Insurance Service tax increased from 1% to 1.5% on non- Mildly All Insurance players It will be passed on investment portion of premium Negative No change in investment limit Neutral Kotak 28
  29. 29. Union Budget FY12: Sectoral Impact ®Textiles, Mixed bag; Fertilizers: Positive Companies Sector FY12 Budget Proposal Nature of Impact Impacted Comments TEXTILES Excise duty on branded garments to NEGATIVE Century Textiles, Will lead to higher prices on back of be levied b l i d at 10% w/o CENVAT as / Raymonds, Z di R d Zodiac rising raw material costs i i i l 1 against 4%. The levy will be charged Clothing on 60% of the retail price Excise duty on parts of 40 specified POSITIVE Laxmi Machine Will bring down capital/operational textile machinery to be bought down Works, Voltas expenses of textile mills 2 from 10% to 5% Basic custom duty on rayon grade POSITIVE Grasim Industries Will bring down costs at a time when 3 wood pulp to come down from 5% to wood pulp prices are ruling firm 2.5% FERTLIZERS Industry has been conferred POSITIVE Tata Chemicals, Industry will avail of lower interest infrastructure status Coromandel rates, concessional rates of custom 1 Fertilizers duties on imported equipment OTHERS Basic custom duty on carbon black POSITIVE Phillips Carbon Black, Will help reduce raw material costs in 1 feed stock to be reduced from 5% to Aditya Birla Nuvo an inflationary environment 2.5% Basic custom duty on acrylonitrile to POSITIVE Ineos ABS, Will help reduce raw material costs in 2 be reduced from 5% to 2.5% Vardhman Acrylics an inflationary environment Basic B i custom duty on caprolactam to t d t l t t NEGATIVE GSFC Will b i bring d down i import parity prices f t it i for 3 be reduced from 10% to 7.5% these products Kotak 29
  30. 30. ®Market Outlook: Valuations and Risks
  31. 31. India: Extremely resilient with external stimuli ®A ‘U’ turn in macro variables driven partly by economic circularity Changing Macro Economic Environment India: Key Data Points- Comparison Peak-08 Jan- 08 Mar-09 Current India: Economic circularity makes external stimuli matter MARKETS Normalization of GDP growth: 8% (FY10); 8.6% (FY11E) ; BSE Sensex 20,827 20,827 9,709 17,823 7.7%-8% (FY12E) on moderation in agriculture and consumption growth GROWTH IIP (%) 9.50% 6.20% -2.30% 1.60% Consolidated fiscal deficit at 9.50% of GDP in FY10; FY11 at 7.7% (RE); 7.6-8.1% (FY12E) -benefit from divestment and INFLATION central Government cash surplus WPI 12.82% 4.26% 0.70% 8.23% RBI policy: calibrated with credit creation and recovery Oil Prices (US$/bbl) 145.00 97.77 46.80 112.09 INTEREST RATES Average inflation likely at ~7% in FY12E; ~8-9% in FY11E from ~4% in FY10; 9% in FY09 10 Year G-Sec Yield G Sec 9.45% 9 45% 7.75% 7 75% 6.60% 6 60% 8.01% 8 01% EXTERNAL SECTOR INR to be range bound; Re/US$ likely between 44-47 over next 12 months Re/$ 50.52 39.42 51.30 45.27 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; Kotak Past performance is not an indicator of future performance or returns 31
  32. 32. India: The structural transformation ®Stronger ability to withstand shocks and down-cycles India s India’s growth story in numbers Comparison of various key parameters since 1990s to currentVariable 1980s 1990s 2000-04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12EThe Real Economy Assumption ofReal GDP Growth (%) 6.3 5.8 5.7 7.5 9.4 9.6 9.0 6.7 8.0 8.6 7.7-8.0 good monsoons on agri growth; i thAgriculture 4.4 3.5 2.2 0.0 6.0 3.8 4.5 1.6 0.4 5.4 3.0 industrialIndustry 7.4 6.7 5.7 8.4 8.0 11.0 8.5 3.9 8.0 8.1 8.5 recovery and rebound in urbanServices 6.4 7.7 7.3 10 10.3 11.2 10.8 9.7 10.1 9.6 9.0 consumption 14.0-Nominal GDP Growth (%) 14.4 14 4 15.2 15 2 9.5 95 13.3 13 3 14.6 14 6 15.8 15 8 15.1 15 1 15.1 15 1 16.1 16 1 18.7 18 7 15.0 15 0Savings and InvestmentPrivate Consumption Expenditure Key drivers of(% of GDP) 74.3 65.6 64.6 65.7 64.3 58.6 55.3 55.5 57.0 57.6 57.0 recoverySavings (% of GDP) 19.4 23.1 25.2 31.1 33.1 34.4 36.4 32.5 34.0 35.5 36.0Investment (% of GDP) 21.3 23.1 24.6 32.7 34.3 35.5 37.7 34.9 35.0 36.0 37.0Government Finances Following theFiscal Deficit- Centre+States (% of 7.6- path of fiscalGDP) 8.0 7.7 9.4 7.5 6.7 6.4 5.6 9.0 9.5 7.7 8.1 consolidationFiscal Deficit- Centre (% of GDP) 6.8 5.7 5.6 4.0 4.1 3.7 3.1 6.0 6.7 5.1 4.6-5.2Inflation End FY11 at ~7%+ ~8.0- ~6.0-Average WPI (%) 8.0 8.1 4.5 6.5 4.4 6.5 4.8 8.0 3.6 9.0 7.0Balance of PaymentsForeign Exchange Reserves (US$Bn) 4.0 38.7 113 141.5 151.6 199.2 300.0 260.0 290.0 300.0 350.0Import Cover in Months 3.8 6.6 12.9 14.3 11.6 12.4 14.1 10.5 13.0 13 15Currency –Re/$ 17.5 44.9 45.9 43.8 44.6 43.6 40.2 46.0 44.92 44-47 44-47 Source: RBI, Kotak Estimates. Kotak Past performance is not an indicator of future performance or returns 32

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