India Budget FY14

Union Budget
India I Equities
Theme Report
28 February 2013
India Budget FY14

Walk the talk
Against the backdrop of a hostile macroeconomic environment, the current budget seems to be close to the best that could be rolled out. The focus on fiscal consolidation, inducements for investment and financial savings and promotion of skill formation are laudable as also the attempt to avoid populist measures in the run-up to the next general election. Yet, we remain sceptical about some of the targets set by the FY14 budget. The budget is positive for infrastructure and construction companies and negative for segments of auto, FMCG and media sectors. Focus on fiscal consolidation. One of the redeeming features of the budget announcement is the retraction to the fiscal consolidation path. Despite the large slippage in subsidy payments, the 5.2% fiscal deficit in FY13 could be achieved through major cut in spending, especially capital spending. The finance minister has projected fiscal deficit of 4.8% of GDP in FY14. This is scheduled to be achieved through inter alia reduction of non-plan expenditure from 12.3% in FY13 to 10.8% in FY14 and increase in tax revenue 16.7% in FY13 to 19.1% in FY14. Sector Positive. Greater focus on infrastructure could help infrastructure & construction companies. A positive for companies in building affordable housing. Greater expenditure on education and vocational course is positive for the sector. Sector Negative. Increase in surcharge from 5% to 10% would expand income tax rate across companies as well as Dividend Distribution Tax. Increase in excise duty on SUVs is negative for the auto sector; 18% hike in excise duty on cigarettes is negative for cigarettes companies; increase in customs duty on set top boxes is negative for media companies.
High government borrowing: Crowding out private investment
-5 (Growth, %, Values in reverse order) 0 5 10 15 20 25 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 5,000 4,500 4,000 3,500 3,000 2,000 1,500 1,000 500 (` bn) 2,500
Sensex: 18862 Nifty: 5693
Key budget figures

FY13 (RE) FY14 (BE)
Budget size (`bn) Gross tax-GDP ratio (%) Receipt / expenditure growth (%) Net govt. borrowing (`bn) Fiscal deficit-GDP ratio (%)
14,308 10.4 14.3 4,674 5.2
16,653 10.9 14.6 4,840 4.8
RE- Revised estimates, BE-Budget estimates Source: Government of India
Impact on sectors
Positive Infrastructure, Cap goods, Construction, Metals and Education Auto, Consumer & retail, Cigarette and Media Banks, NBFCs, Cement, Telecoms, IT Services, Pharmaceuticals, Logistics and Real estate
Negative Neutral
Source: Anand Rathi Research
Research Team
+9122 6626 6666 Institutionalresearch@rathi.com
Net market borrowings (RHS)

Source: Government of India
Fixed investment
Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix Anand Rathi Research India Equities
28 February 2013
India Budget FY14 Walk the talk
Contents
Budget FY14: Best in a bad situation............................................................ 3 Sector ........................................................................................................ 8 Autos............................................................................................... 9 Cement ......................................................................................... 11 Construction.................................................................................. 13 Consumer & Retail........................................................................ 15 Education...................................................................................... 17 Financial Services......................................................................... 18 Healthcare..................................................................................... 20 Industrials...................................................................................... 21 Logistics........................................................................................ 23 Media and Entertainment.............................................................. 24 Metals and Mining......................................................................... 25 Real Estate ................................................................................... 26 Telecommunications ..................................................................... 27
Anand Rathi Research
28 February 2013
Budget FY14: Best in a bad situation

Gautam Singh
+9122 6626 6743 gautamsingh1@rathi.com
Sujan Hajra
+9122 6626 6720 sujanhajra@rathi.com
Sandeep Shenoy
+9122 6626 6777 sandeepshenoy@rathi.com
Against the backdrop of a hostile macroeconomic environment, the current budget seems to be close to the best that could be rolled out. The focus on fiscal consolidation, inducements for investment and financial savings and promotion of skill formation are laudable as also the attempt to avoid populist measures in the run-up to the next general election. Yet, we remain sceptical about some of the targets set by the FY14 budget. Best in a bad situation. The current budget has been rolled out in an extremely tough macroeconomic environment. The real GDP growth according to Central Statistical Offices (CSO) advanced estimate has plunged at a decadal low. Despite considerable softening of the manufactured price inflation, food and consumer price inflation remain in the double-digit zone. Indias fiscal deficit remains elevated and current account deficit is at record high. Meanwhile, Indias saving and investment rates have fallen considerably. Against this backdrop, according to our assessment, the current budget is close to the best that could be rolled out. Yet, we remain sceptical about some of the targets set by the FY14 budget. Focus on fiscal consolidation. One of the redeeming features of the budget announcement is the retraction to the fiscal consolidation path. Despite the `68,000cr slippage in subsidy payments, the 5.2% fiscal deficit in FY13 could be achieved through major cut in spending, especially capital. The finance minister has projected fiscal deficit of 4.8% of GDP in FY14. This is scheduled to be achieved through inter alia reduction of nonplan expenditure from 12.3% in FY13 to 10.8% in FY14, increase in tax revenue 16.7% in FY13 to 19.1% in FY14. Challenges in achieving the desired fiscal consolidation. We envisage the following challenges in meeting the desired level of fiscal consolidation:
High corporate income and service tax collection targets. The FY14 budget estimates corporate income tax growth to accelerate to 11.2% in FY13 and to 16.9% in FY14. This implicitly assumes strong jump by ~500bps in company earning growth between FY13 and FY14, which remains doubtful. Moreover, while India has registered high growth in service tax collection in 16 out of the last 18 years, with the gradual broadening of the tax base service tax now accounts for 13% of the Centers gross tax revenue the assumption of 36% growth in service tax revenue looks ambitious. Ambitious disinvestment and divestment plans. The budget FY14 aims to garner `40,000cr through disinvestment. It has never been able to get more than `25,000cr through disinvestment in a year, barring FY08. The budget has also factored in `14,000cr through divestment of government stake in non-government companies. It would require bullish equity market conditions for the government to be able to meet these targets. Ambitious subsidy reduction plans. The budget aims at reducing the spending on three major subsidies food, fertilizer and petroleum from `2,48,000cr in FY13 to `2,21,000cr in FY14. In the past two years, there have been large slippages on account of actual subsidy spending over the budget estimates on the same. The slippage was 56% in FY12 and 38% in FY13. Given these, the reduction in absolute
28 February 2013
amount of subsidy payment, especially on petroleum from `97,000cr FY13 to `65,000cr in FY14, looks optimistic.
Fig 1 Rise in subsidies remains a major overhang on expenditure
1,000 800 (` billion) 600 400 200 0 FY14BE FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Food
Source: Government of India, Anand Rathi Research
Petroleum
Fertilizer
Note: BE-Budget estimates
High nominal GDP growth rate. The budget calculations implicitly assume nominal GDP growth at 11.7% in FY13 and 13.4% in FY14. This is despite the likely slowdown in inflation and thereby the growth in GDP deflator in FY14. That is, the budget assumes at least 2 percentage point acceleration in the real GDP growth between FY13 and FY14. Once again, this looks ambitious.
The aforementioned points suggest that achieveing fiscal deficit at 4.8% of GDP in FY14 would be challenging. In the face of expenditure overrun and revenue shortfall, the finance minister had to aggressively scale down the planned and capital spending in FY13. If the country wants to stick to the fiscal consolidation process envisaged by the budget FY14, it might entail major reductions from the ambitious targets for plan and capital spending which have been pegged at 29% and 37%, respectively, set by the budget. Avoidance of overtly populist measures. In the run-up to the current budget, there were apprehensions that the current budget being the last before the next general election, the drift may become populist with the bulging of social spending. The finance minister has dispelled such fears. Even the allocations under the flagship food securities and MGNERAGA at `10,000cr and `33,000cr, respectively, remained modest.
Fig 2 Budget spend under NREGA
450 401 400 350 (` billion) 300 250 200 150 100 FY07 FY08 FY09 FY10 FY11 FY12 FY13BE FY14BE 113 120 160 335 400 330 330
Central allocation for NREGA

Source: Government of India, Anand Rathi Research Note: BE-Budget estimates
28 February 2013
Inducement to investment. The redeeming feature of the FY13 budget has been announcements on the infrastructure sector.
Capex of `1bn undertaken during FY14-15 will be eligible for a deduction 15% of the investment, in addition to the current rates of depreciation. The provision of a deduction of 15% on capex of `1bn and above will be cash-flow positive for companies, thereby spurring demand for equipment 3,000 kms of road projects which were previously stalled in states like Gujarat, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh to be cleared and awarded in the next six months Three new ports have been planned in addition to seven new cities under the Delhi Mumbai Industrial Corridor in the 12th Plan To improve access to funds, the government will encourage setting up of Infra Debt Funds and selectively give permission for issuance of tax free infra bonds of up to `50,000cr States to be encouraged to get the finances of their Electricity Boards restructured at the earliest. This should materialize into demand for T&D equipment.
Inducement for financial saving. In a bid to induce households to save more, the budget FY14 proposes the following: Introduction of inflation indexed bond or inflation indexed national security certificates. The structure and tenor of the instruments to be announced later
Under the Rajiv Gandhi Equity Savings Scheme, the first-time investor can now avail tax benefits on investment in mutual funds and in listed shares for three successive years Loan for the first home up to `25,00,000 during FY14 would be entitled to an additional deduction of interest of up to `100,000.
Focus on vocational training and skill formation. Continuing its initiatives for skills development, the government envisages training 50m people in the 12th Plan, including 9m in 2013-14. A further `10bn would be set aside to encourage youth to voluntarily enrol at skill-development institutions. Each individual who undergoes training would be provided an incentive of `10,000. This, together with the recognition given to industryled assessment and certification, would build up aspiration for skills and contribute significantly to ongoing efforts to ensure that India is in a position to leverage its demographic dividend. Furthermore, vocational institutes affiliated with the State Councils of Vocational Training have been included in the negative list of service tax. This would make skills training affordable and more accessible to people, particularly for those at the bottom of the pyramid. Direct taxes: Small relief No change in personal income tax. Both the rate and slabs have been kept unchanged for the personal income tax. However, the budget proposes to provide a tax credit of `2,000 to every person who has a total income up to `5 lakh (1.8 crore tax payers are expected to benefit to the value of `3,600 crore). A breather for the equity market. After several budgets, the FY13 Budget has taken specific measures for the equity market. These include:
28 February 2013
Rajiv Gandhi Equity Savings Scheme. This scheme has been restructured and now includes new retail investors (annual income below `12 lakh) who can invest in mutual funds and in listed shares for three successive years Reduction in Securities Transaction Tax (STT). STT has been reduced for equity futures from 0.017 to 0.01%, for MF/ETF redemptions at fund counters from 0.25 to 0.001%, MF/ETF purchase/sale on exchanges from 0.1 to 0.001%. No change in service tax rate. The budget FY14 proposes no change in the: (1) Peak rate of basic customs duty of 10% for non-agricultural products; (2) normal rate of excise duty of 12%; and (3) normal rate of service tax of 12%. However, duty on specified machinery for manufacture of leather and leather goods, including footwear, were reduced from 7.5% to 5.0%. Also, excise duty on cigarettes has been increased by 18%, except on cigarettes of less that 65mm.
Indirect taxes: No change
28 February 2013
Fig 3 Expenditure control to keep fiscal deficit in check

(`bn) FY09 FY10 FY11 FY12 FY13RE FY14BE (Growth, %) FY13RE FY14BE
Total receipt Revenue receipt Total tax receipt Share of state, UT in Central taxes Tax receipt for Centre Personal income tax Corporate income tax Customs duty Excise duty Services tax Other tax Non-tax receipt Interest Dividend and profit Other non-tax Capital receipt Net market borrowings Disinvestment of PSUs Receipts from small savings etc. Recovery of loans Other capital receipt Total expenditure Non-plan expenditure Revenue expenditure Interest payments Defence Explicit subsidies Others Capital expenditure Loans and advances Defence Others Plan expenditure Revenue expenditure Central plan States plan Capital expenditure Central plan States plan Gross fiscal deficit Revenue deficit Primary deficit Gross fiscal deficit (% of GDP) Revenue deficit (% of GDP) Primary deficit (% of GDP)
8,401 5,403 6,053 1,620 4,433 1,060 2,134 999 1,086 609 164 969 207 386 376 2,999 2,336 6 (13) 61 608 8,840 6,087 5,590 1,922 733 1,297 1,638 497 15 409 73 2,752 2,348 1,665 683 405 317 88 3,370 2,535 1,448 6.0 4.5 2.6
10,259 5,728 6,245 1,680 4,565 1,323 2,447 833 1,030 584 28 1,163 218 503 442 4,531 3,984 246 133 86 82 10,245 7,211 6,579 2,131 907 1,414 2,128 632 11 511 110 3,034 2,539 1,788 751 495 401 94 4,185 3,390 2,054 6.5 5.2 3.2
11,909 7,885 7,931 2,232 5,699 1,466 2,987 1,358 1,377 710 33 2,186 197 480 1,509 4,024 3,254 228 112 124 305 11,973 8,183 7,265 2,340 921 1,734 2,270 918 61 621 236 3,790 3,142 2,325 818 648 535 113 3,736 2,523 1,396 4.8 3.2 1.8
13,204 7,514 8,892 2,594 6,298 1,703 3,228 1,493 1,456 975 36 1,217 203 506 508 5,689 4,362 181 (103) 189 1,061 13,044 8,920 8,120 2,732 1,030 2,179 2,179 799 6 679 115 4,124 3,337 2,413 925 786 671 116 5,160 3,943 2,428 5.7 4.4 2.7
14,308 8,718 10,380 2,959 7,421 2,061 3,589 1,649 1,720 1,327 35 1,297 166 554 577 5,641 4,674 240 86 141 501 14,308 10,016 9,197 3,167 1,089 2,577 2,364 819 43 696 81 4,292 3,434 2,438 996 858 734 124 5,209 3,912 2,043 5.2 3.9 2.0
16,653 10,563 12,359 3,518 8,841 2,476 4,195 1,873 1,976 1,801 37 1,723 178 739 806 6,090 4,840 558 58 107 527 16,653 11,100 9,929 3,707 1,169 2,311 2,742 1,171 2 867 301 5,553 4,433 3,200 1,232 1,121 990 130 5,425 3,798 1,718 4.8 3.3 1.5
8.4 16.0 16.7 14.1 17.8 21.0 11.2 10.4 18.1 36.1 -1.5 6.6 -18.1 9.6 13.5 -0.8 7.1 32.7 -183.7 -25.3 -52.8 9.7 12.3 13.3 15.9 5.7 18.2 8.5 2.5 659.0 2.5 -29.4 4.1 2.9 1.0 7.7 9.1 9.4 7.3 1.0 -0.8 -15.9 -
16.4 21.2 19.1 18.9 19.1 20.2 16.9 13.6 14.9 35.8 5.3 32.8 7.0 33.2 39.8 7.9 3.6 132.6 -32.8 -24.3 5.3 16.4 10.8 8.0 17.1 7.4 -10.3 16.0 42.9 -95.4 24.7 271.9 29.4 29.1 31.3 23.7 30.6 34.9 5.1 4.1 -2.9 -15.9 -
BE: Budget estimate, RE- Revised estimates,
28 February 2013
Sector
28 February 2013
Autos
Rohan Korde
+9122 6626 67333 rohankorde@rathi.com
The budget was marginally negative for the auto sector. Calls for a lower excise duty to boost flagging demand, and counter calls for levy of additional differential duty on diesel vehicles, were ignored. However, excise duty on SUVs was raised by 3%, which will mainly hit M&M. An increase in surcharge on tax would lower profits ~2% for all companies. Lastly, higher JNNURM outlay for purchase of buses and 1% reduction in excise duty on truck chassis are positives for CV companies.
Fig 4 Impact on sector and stocks
Budget announcements Impact on sector Impact on companies
3% increase in excise duty on SUVs JNNURM allocation for purchase of up to 10,000 buses for hilly states 1% lower excise duty on CV chassis Increase in surcharge from 5% to 10% Increase in surcharge from 5% to 10% on Dividend Distribution Tax Investment allowance of 15%
Negative Positive Positive Negative Negative Positive
M&M, Tata Motors Ashok Leyland, Tata Motors, Eicher Motors CV companies All companies All companies All companies
Budget announcements

Excise duty rates hiked from 27% to 30% for SUVs. Surcharge on domestic companies increased (from 5% to 10%) and surcharge on Dividend Distribution tax (DDT) increased (from 5% to 10%). Excise duty on truck chassis reduced from 14% to 13%. JNNURM outlay has been provided at `148.73bn, of which, a significant portion will be used to support the purchase of up to 10,000 buses, especially by hilly states. Basic customs duty on new passenger cars and other motor vehicles (high end cars) with CIF value of more than US$ 40,000 and/or engine capacity exceeding 3000cc for petrol run vehicles and exceeding 2500 cc for diesel run vehicles has been increased from 75% to 100%. Basic customs duty on motor cycles with engine capacity of 800cc or more was increased from 60% to 75%. Companies investing `1bn or more in plant and machinery during the period from 1 April 2013 to 31 March.2015 would be entitled to deduct an investment allowance of 15% of their investment.
Impact on the sector Overall, the impact of the budget is marginally negative for the auto sector. Calls for a lower excise duty to boost flagging demand, together with levy of differential duty on diesel vehicles, were ignored. However, excise duty on SUVs was raised 3%, which will result in price increases, and may hit demand. A higher tax rate will impact profitability of all auto and auto component companies by ~2%. However, benefits from deduction of the investment allowance may provide relief. An increase in Dividend Distribution Tax will result in lower money for distribution to shareholders.
28 February 2013
Higher customs duty on high-end imported vehicles would be a dampener for this niche segment. Lastly, a higher outlay under the JNNURM scheme (for purchase of ~10,000 buses mainly for the hill states), and 1% reduction in excise duty on truck chassis are positives for CV companies. Impact on companies Higher excise duty on SUVs would result in a price increase of ~2.0-2.5%, and hence may slightly hit M&Ms demand. Other SUV manufacturers like Tata Motors and other unlisted companies may also face demand slowdown. Increase in tax on royalty/technical fees to be paid to a non-resident is unlikely to impact Maruti Suzuki, since it is covered under a DTA with Japan, capping it at 10%. Higher surcharge on income tax will hit earnings of all auto and auto component companies by ~2% in FY14e. However, companies undertaking capex of `1bn or more in plant and machinery over FY14-15 may be able to avail benefits from deduction of the investment allowance. The outlay under JNNURM for purchase of up to 10,000 buses would benefit CV companies. Key beneficiaries are Ashok Leyland and Volvo, while Tata Motors and Eicher Motors may also get a share of the pie.
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28 February 2013
Cement
Jaspreet Singh Arora
+9122 6626 6727 jaspreet@rathi.com
Manish Valecha
+9122 6626 6552 manishvalecha@rathi.com
The budget is neutral for the cement sector. Introduction of investment allowance for new projects and greater allocation for infrastructure are positives, while rationalisation in customs duty on imported coal is a negative. The hike in tax on royalty/technical fees is neutral for MNC cement companies.
Tax rate on royalty/technical fees raised to 25% Neutral from 10%; DTAA rates applicable 15% investment allowance for projects costing Positive >`1bn and set up during F14-15 Rationalisation of customs duty and CVD on bituminous and steam coal Higher allocation for infrastructure projects Extension of Sec.80-IA benefits
ACC, Ambuja, Heidelberg Shree, Ultratech, JK Cement, Mangalam, JK Lakshmi, Dalmia, Century Ambuja, Ultratech, Madras Cement, Birla Corp. All cement companies Shree, India Cement
Negative Positive Positive
In a case of distribution of profits by a subsidiary to a foreign parent company in the form of royalty and fees for technical services, the rate of tax currently paid is the lower of that provided in Income Tax (IT) Act (10%) and Double Tax Avoidance Agreements (DTAA). The rate as per IT Act is now proposed to be raised to 25%. However, the applicable rate will be the rate of tax stipulated in DTAA. To attract new investment and quicken implementation of projects, an investment allowance of 15% is proposed for projects requiring `1bn or more in plant and machinery during April 01, 2013 to March 31, 2015. This will be in addition to the current rates of depreciation. Steam coal is exempt from customs duty but attracts a concessional CVD of 1%. Bituminous coal attracts a duty of 5% and CVD of 6%. Since both kinds of coal are used in thermal power stations, a standard rate of 2% customs duty and 2% CVD is proposed. Continued thrust on infrastructure programmes such as the Pradhan Mantri Gram Sadak Yojana (PMGSY), National Housing Development Programme (NHDP), and Jawaharlal Nehru National Urban Renewal Mission (JNNURM). The budget proposes to award 3000kms of road works in 1HFY14, besides offering higher provision for rural housing (from `40bn to `60bn) and urban housing (`20bn from nil).
Impact on the sector Increase in rate of tax on royalty and fees for technical services will only impact companies which are now paying at 10% and there is no DTAA between India and the foreign country where the parent company is based. The investment allowance of 15% will benefit companies which have work underway for expansion projects or which can setup new capacities over FY14-15. Since capex in cement projects is substantial, the implied benefit to individual companies in the form of tax savings will be meaningful. However, this may also result in substantial capacities getting added in endFY15, thereby reducing the capacity utilisation rates in FY16.
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28 February 2013
Rationalisation of custom duty on imported coal used in thermal power plants will raise the cost by 3% for companies which use 100% imported steam coal in their power plants. This means EBITDA for these companies would drop by 1-2%, depending on the quantum of coal imported used. Since only a few companies in the industry use imported coal to generate power, the proposal is likely to have limited impact. Continued impetus on infrastructure areas of urban projects, roads and housing through various schemes is likely to boost demand for cement. Impact on companies Increase in rate of tax on royalty and fees for technical services will have no impact on any company since the applicable rate as per DTAA for ACC, Ambuja and Heidelberg is at 10%. The investment allowance of 15% will largely benefit companies which have work underway for expansion projects like Shree Cement, Ultratech, JK Cement, Mangalam, JK Lakshmi, Dalmia, Century. Others like ACC, India Cement, Birla Corp, Sagar Cement, with potential of brownfield expansion (can be done in <2 years), will also benefit if work on projects starts by 1QFY14. The rationalisation of customs duty on imported thermal coal is negative for captive power-producing companies such as Ambuja, Ultratech, Madras Cement, and Birla Corp. Continued impetus on various infrastructure schemes is positive for all cement companies from the perspective of better demand growth rate.
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28 February 2013
Construction
Manish Valecha
+9122 6626 6552 manishvalecha@rathi.com
Jaspreet Singh Arora

+9122 6626 6727 jaspreet@rathi.com
Governments attempts to make financing available for projects and to remove bottlenecks in infrastructure development are positives for construction companies.
Increase in the limit of tax-free bonds by government agencies for infrastructure financing (from `250bn to Positive `500bn). Formation of PPP policy framework with Coal India as one of Positive the partners, to increase production of coal. Award of 3000km of road project in Gujarat, Madhya Pradesh, Positive Maharashtra, Rajasthan and Uttar Pradesh in 1HFY14 Formation of regulatory authority for road sector Increase in allocation to road transport and highways ministry from `289bn to `375bn Work to start on two cities Dholera, Gujarat and Shendra Bidkin, Maharashtra. Government shall provide, if required, additional funds during 2013-14 within the share of the GoI in the overall outlay for the project DMIC project. Enhanced provisions under Rural Housing Fund, from `40bn to `60bn and set up of Urban Housing Fund with a outlay of `20bn. Increase in allocation for rural drinking water and sanitation, from `130bn to `153bn Support to municipalities that will implement waste-to-energy projects through different instruments such as viability gap funding, repayable grant and low cost capital Interest deduction of `0.1m over FY14-15 for housing loan up to `2.5m for first home buyers Increased allocation for PMGSY to `217bn and introduction of PMGSY-II Increased allocation to JNNURM to `147bn vs a revised estimate of `74bn in FY13. Higher allocation positive for Metro rails and urban transport segment Launch of the first two Infrastructure debt funds Extension of the sunset clause for power companies under Sec.80-IA of the Income Tax Act, 1961 Allocation under Rural Infrastructure Development Fund (RIDF) to `200bn
All construction companies NCC J Kumar, KNR, Supreme, NCC, Ramky J Kumar, KNR, Supreme, NCC, Ramky J Kumar, KNR, Supreme, NCC, Ramky All construction companies
Positive Positive
Positive
Positive Positive Positive Positive Positive Positive Positive Positive Positive
Pratibha, J Kumar and Supreme Pratibha, Ramky Ramky All construction companies KNR, Supreme Pratibha, J Kumar All construction companies NCC All construction companies

Increase in the limit of tax-free bonds by government agencies for infrastructure financing (from `250bn to `300bn). Formation of PPP policy framework with Coal India as one of the partners, to increase production of coal. Award of 3000km of road project in Gujarat, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh in 1HFY14. Formation of regulatory authority for the road sector is a positive and so is the higher allocation to road transport and highways ministry from `289bn to `375bn. Extension of the terminal date of the sunset clause for the tax holiday for the power sector under Sec.80-IA of the Income-Tax Act, 1961, by a further year up to 31 Mar 14. Enhanced provisions under the Rural Housing Fund, from `40bn to `60bn and set up of Urban Housing Fund with an outlay of `20bn.
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28 February 2013
Increase in allocation for rural drinking water and sanitation from

`130bn to `153bn, and for PMGSY to `217bn (along with introduction
of PMGSY-II). Allocation under Rural Infrastructure Development Fund (RIDF) to `200bn. Impact on the sector The greater allocations to various schemes for infrastructure spending would be positive for the sector. Thrust given to financing projects would also be positive, and so will be the formation of regulatory authority of road sector and award of 3000kms in 1HFY14. Impact on companies Companies focused on roads, housing, power, water and urban infrastructure would largely benefit. Ramky, Pratibha, KNR, J. Kumar, and Supreme would gain from the greater allocation for infrastructure.
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28 February 2013
Consumer & Retail

Shirish Pardeshi
+9122 6626 6730 shirishpardeshi@rathi.com
Aniruddha Joshi
+9122 6626 6732 aniruddhajoshi1@rathi.com
The budget is marginally negative for the consumer sector due to the 5% increase in surcharge on income tax as well as on the dividend distribution tax. The 18% increase in excise on income tax is negative for cigarette companies (ITC and VST). Removal of excise on readymade garments is positive for Lovable and Page Industries.
Suman Memami
+9122 6626 6707 sumanmemani@rathi.com
Increase in excise on cigarettes by 18% Increase in surcharge from 5% to 10% Increase in surcharge from 5% to 10% on dividend distribution tax Removal of excise on readymade garments Removal of customs duty on peanut butter from 30% to 0%
Negative Negative Negative Positive Positive
ITC, VST All companies All companies Page, Lovable, Rupa Agro-Tech Foods

Excise duty on cigarettes has been increased by 18%, except on cigarettes of less than 65mm. Excise duty on readymade garments has been reduced to 0%, from the earlier 12% (70% abatement). Increase in surcharge from 5% to 10% will impact all consumer companies as tax rates will go up 155bps. Increase in surcharge on the dividend distribution tax, from 5% to 10%, would result in an additional impact of 77bps.
Impact on the sector The overall impact on the consumer sector would be marginally negative. The increase in excise duty will compel cigarette companies to raise prices 11-12% to pass on the excise-duty increase. The reduction of duty on readymade garments would help companies such as Lovable, Page and Rupa. The higher tax rate would impact profitability of all consumer and retail companies 2% and 3% respectively. Consumer companies generate large free cash-flows and pay dividends. The increase in the dividend distribution tax would result in less money to distribute to shareholders. Impact on companies
Fig 8 Increase in excise duty on cigarettes
Cigarette Length (mm) Current * Revised * Hike (%)
Non-filter Non-filter Filter Filter Filter Filter Filter
<65 65-70 <65 65-70 70-75 75-85 >85
669 1,718 669 1,194 1,718 2,309 2,788
669 2027 669 1409 2027 2725 3290
18.0 18.0 18.0 18.0 18.0
Source: Anand Rathi Research * Duty (`) per 1,000 cigarettes
The 18% increase in excise duty on cigarettes would warrant a 360-bp rise in VAT. We believe this would compel ITC to raise prices 11-12% to pass on the entire impact. Considering the price hikes of ~15% in the past four
Anand Rathi Research 15
28 February 2013
quarters, ITC may find it slightly difficult to increase prices at one go. We believe the impact on its FY14e earnings would be 3-4%. We expect a similar impact on VSTs earnings. Removal of excise duty on readymade garments would help Lovable and Page Industries to expand margins without resorting to price hikes. Though some of the savings are likely to be re-invested in brand-building measures, earnings would go up 4-5% for Lovable and Page Industries.
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28 February 2013
Education
Atul Thakkar
+9122 6626 6724 atulthakkar @rathi.com
Increase in spending under the Sarva Shiksha Abhiyan (7%) is positive for the sector. Also of help would be the greater expenditure on skills development.
Greater expenditure on primary education Positive Increase in spending under the NSDC and other Positive skill-development schemes
Educomp, Everonn, NIIT, Core Education Everonn, NIIT, Core, Aptech
`272.58bn (a 7% increase) allocated for education under the Right to
Education Act and the Sarva Shiksha Abhiyan (RTE-SSA).

`39.24bn (a 25.6% increase) provided for the Rashtriya Madhyamik
Shiksha Abhiyan (RMSA).

`10bn (`10bn in FY12-13) allocated to the National Skills Development Corp. (NSDC) for FY13-14.
Vocational courses offered by institutes affiliated to the State Councils of Vocational Training, and Testing Activities in relation to agricultural produce to be included in the negative list of service tax.
Impact on the sector Greater expenditure on education. The Budget proposes to raise expenditure on education by 17% to `658.67.5bn. Of this, `27.3bn would be under the SSA, up 7% yoy. This is in line with the Right to Education Act, which gives every child between 6 and 14 years the right to free and compulsory education in a neighbourhood school till completing elementary education. A further rise in spending under the RMSA and the opening of new K-12 schools under PPP are positive for companies providing educational services in government schools. Government spend on skills development and sops for the private sector. The government has allocated `10bn to the NSDC for FY13-14. aiming to enhance skills of 9m people in 2013-14. Impact on companies Greater expenditure on education. Positive for companies providing educational and IT-related services to the government sector, such as Educomp, Everonn, NIIT, Aptech, Core Education. Skills development. Positive for NIIT, Aptech, Everonn and Core Education.
17
28 February 2013
Financial Services
Clyton Fernandes
+9122 6626 6744 clytonfernandes@rathi.com
Kaitav Shah
+9122 6626 6545 kaitavshah@rathi.com
While an above-estimated net market borrowing program by the government is slightly negative for the banking sector, the budget FY14 has some positives too: Re-cap of government banks, clearer taxation on securitization transactions by NBFCs and tax-free infrastructure bonds for select infra NBFCs.
Asheeta Kapadia
+9122 6626 6814 asheetakapadia@rathi.com
Fiscal deficit 4.8% of GDP in FY14, but governments net market borrowing of`4.84trn is slightly higher than expected Re-capitalization of government banks `140bn All-women PSU banks to be setup with `1,000cr capital Interest subventions to continue for agriculture and to be extended to private sector banks Interest deduction up to `0.1m on loans for first-time home buyers of up to `2.5m between April 1, 2013 and March 31, 2014. Clearer taxation of securitization transactions, not subject to double taxation Limit for raising tax-free bonds for infra lending increased to `500bn Introduction of commodities transaction tax of 0.1% on non-agri commodities
Negative for bond yields
All banks
Positive Neutral Neutral Positive
SBI, PNB, IDBI, Canara Bank, Union Bank No impact All banks All banks and housing-finance NBFCs Shriram Transport Finance, Magma Fincorp PFC, IDFC, REC MCX
Positive Positive Negative

Fiscal deficit announced at 4.8% of GDP in FY14 against 3% in FY15. Budgetary support of `14bn for re-capitalization of government-owned banks, to ensure every bank meets Basel-3 requirements, strengthens its capital adequacy and supports additional credit growth. Target for agriculture credit set at `7,000bn (from `5,750bn). Interest subvention of 3% will continue to be paid as incentive to farmers who repay short-term crop loans on time. Interest deduction up to `0.1m on loans for first-time home buyers of up to `2.5m between April 1, 2013 and March 31, 2014. The SPV vehicle for securitization transactions, will be exempt from income tax, except at the time of distribution of income. Tax-free bonds limit raised to `500bn for certain financial institutions for building resources for infra lending from the expected `250bn in FY13. Introduction of commodities transaction tax (CTT) of 0.1% on nonagri commodities.
Impact on the sector Higher net market borrowing a negative. While fiscal deficit (as percent of GDP), at 4.8% in FY14, was in line with our expectation, the aboveestimated announcement of net market borrowing, at `4.84trn, is slightly negative for government bond yields. Banks are likely to make lower treasury gains or higher marked-to-market provisions on their investment books.
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28 February 2013
Provision for capital infusion augurs well. Banks would be given capital to grow their business positive for those that are constrained for capital. Continued focus on agriculture credit. The target for agriculture credit is high, in sync with the governments focus on this sector. In case of a poor monsoon in FY14, banks exposure to relatively riskier assets could increase, leading to higher credit losses. Interest subsidies and interest subventions for farm loans announced are minimal, and unlikely to have a major impact. Interest deduction for housing loans. Interest deduction of `0.1m on loans for first-time home buyers of up to `2.5m between April 1, 2013 and March 31, 2014 is beneficial for all housing finance NBFCs. It is a positive for banks too, as it would help them meet their priority-sector-lending requirements (home loans below `2.5m qualify for priority sector lending). Taxation on securitization deals clearer. The SPV vehicle used for securitization transactions will be exempt from income tax, except at the time of distribution of income. This clarity is likely to further boost the securization market. Higher limit of tax-free infrastructure bonds. Increasing the limit to `600bn for raising tax-free bonds by certain financial institutions is a positive for infrastructure-financing companies and benefits their cost of funds. Impact on companies Increase in governments net market borrowing is a negative for banks; especially government owned, since they have longer duration portfolios and higher marked-to-market exposures, as yields are unlikely to decline much. Capital infusion in government-owned banks is positive for State Bank of India, Punjab and Maharashtra Bank, IDBI, Canara Bank, and Union Bank. Interest deduction of `0.1m on loans for first-time home buyers of up to `2.5m between April 1, 2013 and March 31, 2014 is beneficial for banks and housing finance NBFCs like HDFC, LIC Housing Finance, and Dewan Housing Finance. Clarity on taxation could boost securization transactions and benefit NBFCs like Shriram Transport and Magma Finance which have a relatively higher proportion of off-balance sheet assets. It also gives more clarity on sell-down transaction by HDFC to HDFC Bank. Increasing limit to raise tax-free bonds for certain financial institutions is a positive for infrastructure-financing companies like PFC, REC and IDFC. Introduction of commodities transaction tax (CTT) of 0.1% on non-agri commodities is a negative for MCX.
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28 February 2013
Healthcare
Sriram Rathi
+9122 6626 6737 sriramrathi@rathi.com
Sanjeev Chiniwar
+9122 6626 6716 sanjeevchiniwar@rathi.com
We do not expect the Union Budget 13-14 to have any material impact on the pharmaceutical and hospitals sectors. All companies could witness marginal increase in effective tax rate due to rise in surcharge to 10% from 5%. Those investing more than `1bn in plant and machinery would benefit from 15% investment allowance from taxable income.
15% investment allowance to companies who invest above `1bn in plant and machinery in FY14-15 Increase in surcharge rate from 5% to 10% for companies with taxable income of more than `100m
Marginal positive
Marginal negative
Slightly positive for companies who invest heavily on capex for plant and machinery like Cipla, Lupin, DRL, Sun etc Effective tax rate will increase by 5% of existing rate for all companies
Investment allowance of 15% from taxable income for manufacturing companies which spend more than `1bn during FY14-15 in installation of plant and machinery for manufacturing activities. The surcharge on tax rate has been increased from 5% to 10% on domestic companies whose taxable income is more than `100m per year.
Impact on the sector Investment allowance of 15% of the total investment amount from taxable income for investment of more than `1bn would provide marginal tax benefits to healthcare companies incurring capex for setting up new capacity. This would help reduce effective tax rate and improve profits. Increase in surcharge from 5% to 10% would impact all companies marginally in terms of increase in tax rate by 5% of the existing rate, thereby hitting profits marginally. Impact on companies All companies in sector with annual profit of more than `100m would have marginal negative impact from increased tax rate on account of higher surcharge. Larger companies like Cipla, Lupin, Sun, and DRL would marginally benefit from lower effective tax rate on account of investment allowance on capex in plant and machinery.
20
28 February 2013
Industrials
Amol Rao
+9122 6626 6615 amolrao@rathi.com
Deepak Agarwal
+9122 6626 6520 deepakagarwal@rathi.com
For the 12th Five-year Plan, the Union Budget FY14 has pegged funds required at US$1trn. The Finance Minister said that 53% would be funded by the public sector; 47% would have to come from the private sector. To facilitate private-sector fund mobilisation, the government has made several plans, linked to easier access to debt. In expenditure, the government outlined an increase in social spending on welfare programs such as the M-NREGS, the IAY and resumption of large ticket investments in infrastructure (roads, ports, power). This is positive for most companies. The increase in surcharge on corporate income tax, however, is a slight dampener for capital goods players and infrastructure developers.
Fig 12 Impact on the sector and on stocks
Setting up infra debt funds Access to corporate debt markets and selective issue of tax-free bonds Enhanced allocation for M-NREGS, IAY Award of 3,000km of road projects Progress on the Delhi-Mumbai Industrial Corridor 3 port projects planned Restructuring SEB debt Deduction of 15% on capex of `1bn and over Surcharge on corporate income tax raised
Source: Government of India, Anand Rathi Research.
Positive Positive Positive Positive Positive Positive Positive Positive Negative
Infra developers: L&T, GMR, GVK, IRB, ITNL Infra developers: L&T, ITNL, IRB, GMR, GVK Brown goods / consumer electricals: Havells, V-Guard, Bajaj Electricals Infra developers: L&T, GMR, GVK, IRB, ITNL L&T L&T, Simplex Infra L&T, BHEL, Siemens, ABB L&T, BHEL, Siemens, ABB All companies in the segment
The government will encourage setting up Infrastructure Debt Funds (IDF). These will be utilized to raise resources and, through take-out finance, credit enhancement and other innovative means, provide longterm low-cost debt for infrastructure projects. India Infrastructure Finance Corporation (IIFC), in conjunction with the Asian Development Bank (ADB), will facilitate companies / infrastructure developers to access corporate debt markets. Financial institutions will be selectively allowed to issue tax-free bonds in FY14, of `500bn. The government has also outlined an increase in social spending on welfare programs such as the M-NREGS and the IAY. 3,000km of road projects in Gujarat, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh, which had encountered hurdles, have been cleared and will be awarded in 1HFY14. As part of the Delhi-Mumbai Industrial Corridor (DMIC) project, plans for seven new cities have been finalised while work on two new smart industrial cities will commence in FY14. Two new major ports (in West Bengal and Andhra Pradesh) and a supplementary harbour in Tamil Nadu should add 142m tons of cargohandling capacity.
21
28 February 2013
Various state governments have been encouraged to get the finances of their electricity boards restructured by Mar13. Capex of `1bn undertaken during FY14-15 would be eligible for a deduction of 15% of the investment, in addition to the current rates of depreciation. The surcharge on corporate income tax has been raised from 5% to 10%, w.e.f. FY14.
Impact on the sector With the exception of the surcharge on corporate income, all the above developments are positive for companies. The paucity and high cost of funds in the recent past have been well documented; hence, a dedicated source of cash for infrastructure projects coupled with a streamlined process to avail of it should help speed up execution. The announcement of a regulatory body for highways and roads is a step in the right direction. With a single body legislating and overseeing the sector, projects stand a better chance of getting off the ground, especially in light of difficulties in land acquisition and securing environmental clearances. Restructuring SEB debt would set the ball rolling to beef up T&D infrastructure. This would, thereby, lay the foundation for greater demand for high-powered transformers, sub-station components and high voltage conductors. The provision of a deduction of 15% on capex of `1bn and above will be cash-flow positive for companies, thus spurring demand for equipment. Impact on companies We believe that, though the Budgetary measures are positive, concrete demand for domestic companies (L&T, BHEL, IRB, etc.) would take 2-3 quarters to materialise. We feel companies in the equipment space (L&T, BHEL, Siemens, ABB) could be primary beneficiaries of budgetary measures. Second-rung ancillaries (not under our coverage) supplying conductors, transformers and metering equipment as well as sizeable infrastructure construction operators (IRB, IL&FS Transportation) would be likely beneficiaries. Lastly, schemes like the IAY would most likely materialise into demand for brown goods (household wires and cables, fans, CFLs, switches, etc.). This should stand companies such as Havells, V-Guard and Bajaj Electricals in good stead.
22
28 February 2013
Logistics
Dhaval Dama
+9122 6626 6728 dhavaldama@rathi.com
The budget is neutral for the logistics sector. No clear roadmap for GST has been provided in the budget, which could further delay its implementation. This would be slightly negative for the sector. Plans to award 3,000km of new road projects in Gujarat, MP, Maharashtra, Rajasthan and UP would be positive.
No clear roadmap for GST New road projects to be awarded NABARD financing for warehouse construction
Negative Positive Positive
Container Corp. of India, Transport Corp. of India, Gateway Distriparks All companies Container Corp. of India, Transport Corp. of India

No clear roadmap for the GST would result in further delays in implementation 3,000km of new road projects to be awarded in Gujarat, Madhya Pradesh, Rajasthan and Uttar Pradesh
`50bn to NABARD to finance warehouse construction.
Impact on the sector The further delay in implementing the GST is a negative for the sector, especially for companies in warehousing. We do not expect any significant decline in their revenues. The further thrust on developing the road network would help reduce bottlenecks for transportation companies. This would lead to reduced costs for them in future. NABARD funding warehousing construction would benefit companies planning to construct warehouses. Impact on companies The delay in implementing the GST is a slight negative for all logistics companies, especially Container Corp. of India (CCI), Transport Corp. of India (TCI) and Gateway Distriparks. The new roads would benefit companies such as CCI, TCI, Gati and other logistics companies involved in road transport. The NABARD fund for warehouse construction would provide companies access to low-cost funds to set up warehouses. It would benefit companies such as TCI and CCI.
23
28 February 2013
Media and Entertainment

Yogesh Kirve
+9122 6626 6731 yogeshkirve@rathi.com
Rajesh Zawar
+9122 6626 6726 rajeshzawar@rathi.com
The Union Budget13-14 was negative for the sector. Increase in customs duty on import of set top boxes (STB) would raise investment required towards digitization of TV networks. Imposition of surcharge on income and dividend distribution tax would hit profitable companies in the sector with high dividend payout ratios.
Budget announcements Impact on ector Impact on companies
Increase in customs duty on STB from 5% to 10% Plans to auction 839 FM radio licenses across 294 cities in 2013-14 Increase in surcharge on income tax Increase in surcharge on dividend distribution tax
Negative Neutral Negative Negative
Dish TV, Hathway Cable and Datacom, DEN Networks, Wire and Wireless India and Hinduja Ventures Entertainment Network India (ENIL), Reliance Broadcast Network All companies except Dish TV, Hathway Cable, TV18 (which are suffering losses or face low effective taxes) Sun TV Network

The union budget proposes increase in customs duty on STBs from 5% to 10%. The budget announced governments plans to auction 839 FM radio licenses across 294 cities in 2013-14, including 707 in 227 new cities.
Impact on the sector Most of the STB requirements in the country are met out of imports. The increase would thus raise investments required for the digitization of TV networks. This would hit multi-system operators and direct-to-home (DTH) companies. The announcement pertaining to auction of radio licenses is in line with the existing roadmap for radio licensing, and is neutral. Impact on companies Higher customs duty on STBs would adversely impact Dish TV, Hathway Cable and Datacom, DEN Networks, Wire and Wireless India and Hinduja Ventures. Capex for these companies is expected to rise ~5%. Increase in surcharge on income tax would hit earnings of all companies by 1.0-2.5% (except for Dish TV, Hathway Cable, and TV18 which are suffering losses or face low effective taxes). Greater surcharge on dividend distribution tax would especially impact Sun TV Network as the company has a high payout ratio.
24
28 February 2013
Metals and Mining

Rajesh Zawar
+9122 6626 6726 rajeshzawar@rathi.com
The budget is negative for the sector, already reeling under severe cost inflationary pressure (shortage of raw materials, and higher fuel prices). It has marginally added to earnings pressures by raising customs duty on coal, higher surcharge on income tax and introducing dividend distribution tax. The negative impact will, however, be partially offset by higher demand through thrust on manufacturing capex, cheaper fund access and investment allowance.
15% investment allowance to manufacturing Positive companies which invest more than `1bn in plant and machinery during FY14 and FY15 Increase in surcharge rate from 5% to 10% for Negative companies with taxable income of above `100m Increase in coal import duty Negative
Positive for companies due to huge capex run rates Effective tax rate will increase by 5% of existing rate for all companies The cost will increase 3% for purely import based power plants or consumers. Negative for aluminium players. Coal production volumes will increase in the long run, but no near-term impact Possible pass through of excise duty, but can be negative for realizations Infra spending will support volumes Merchant miners will be negatively impacted while smelters like Sterlite Industries will benefit
Coal mining on PPP basis with Coal India as Positive partner 4% excise duty implemented on silver extracted Negative from base metal smelting Thrust on easing fund raising and spending for infrastructure sector through IDF (Infra Debt Positive Funds) Export duty of 10% imposed on bauxite
Neutral
Investment allowance of 15% from taxable income for manufacturing companies which spend more than `1bn during FY14-15 in installation of plant and machinery for manufacturing activities. Surcharge on income tax has been increased from 5% to 10% on domestic companies whose taxable income is above `100m per year.
Impact on the sector Investment allowance of 15% of the total investment amount from taxable income for investment of more than `1bn would provide marginal tax benefits to metal companies (with huge capex outlays). The impact will, however, be offset by rise in income tax surcharge from 5% to 10% for all companies. Thrust on infrastructure financing and PPP model in coal mining are long-term demand drivers with no near-term impact. Impact on companies Increase in steam coal import duty will raise power and fuel costs 2-3% and is more negative for aluminium players in the sector. Introduction of excise duty on silver obtained from base metal refining could be a realization dampener for Hindustan Zinc, while no reduction in 30% iron ore export duty is disappointing. Imposition of 10% export duty on bauxite will reduce the realizations of the merchant miners but it will benefit smelters like Sterlite Industries.
25
28 February 2013
Real Estate
Suman Memani
+9122 6626 6707 sumanmemani@rathi.com
The Union Budget13-14 has brought some cheer to home buyers. An additional `0.1m as interest deduction (in addition to `0.15m U/S 24 of the IT Act) for loans up to `2.5m for property of `4m. This would boost demand in the affordable segment. Measures have been taken to address the urban housing shortage.
Increase in home loan interest-deduction by Positive for affordable housing. `0.1m, for loans up to `2.5m and property Moreover, most developers will cost up to `4m for first-time property buyers, shift to the affordable-home besides interest deduction of up to `0.15m segment U/S 24 of the IT Act Rural Housing Fund increased by 25%, to Likely to further boost rural `60bn housing Likely to take measures to Start of the Urban Housing Fund, with address housing shortage in `20bn allocated urban areas TDS at 1% of the value of the transfer of immovable property where the consideration exceeds `5m Homes & flats with carpet area of 2,000 sq.ft. or more or of `10m or more. Lower abatement rate, from 75% to 70% This is a direction to curtail undervalued and unreported transactions Cost likely to go up very marginally for high-end buyers.
Benefit for Puravankara Projects (for its brand Provident Housing) Not likely to benefit any listed entity NA We do not see any listed entity affected as this is primarily a secondary transaction except of land sales Would be totally passed on to customers: DLF
Increase in interest deduction for home buyers by up to `0.1m for loans up to `2.5m and property cost not exceeding `4m. This benefit can be enjoyed by home buyers if they do not have any residential house property on the date of sanction of loan. Allocation for the rural housing fund has been raised to `60bn along with introducing an urban housing fund, allocating `20bn. TDS at 1% on the value of immovable property transferred where the consideration exceeds `5m. TDS to be deducted by buyer when paying seller. Homes and flats with carpet area of 2,000 sq. ft. or more or of a value of `10m or more. Reduction in the abatement rate from 75% to 70%.
Impact on the sector The budget has been positive by providing additional interest deduction to home buyers, of `4m and of loans up to `2.5m. This would boost demand in the affordable segment. This would help developers increase volumes. Introducing TDS at 1% on the transferable value of immoveable property would help curtail under-valued and unreported transactions, leading to more transparency in the longer run. Reduction of abatement, from 75% to 70%, in the case of property cost of
`10m or more, or 2,000 sq. ft. would raise the service tax very slightly.
Ultimately, this would be passed on to end customers. Impact on companies Positive for companies in the affordable segment (Puravankara). Marginal impact on increase in service tax for high-end property sellers (DLF).
28 February 2013
Telecommunications
Yogesh Kirve
+9122 6626 6731 yogeshkirve@rathi.com
The budget was largely neutral for the sector. Lower estimates pertaining to proceeds from spectrum auction (`220-240bn vs `400bn original estimate for FY13), could be owing to factoring in staggered spectrum payment schedule or lower expectations on spectrum proceeds (auction, one-time excess fee). Proceeds target is sentimentally positive for all telcos as it suggests that the reserve prices would be lowered. Higher excise duty on mobile phones would marginally and indirectly impact mobile service providers.
Fig 17 Impact on sector and on stocks
Estimated auction proceeds of `220-240bn in FY14 Positive versus `400bn in FY13 Increase in excise duty rate on mobile phones Negative (costing >`2,000)
Bharti Airtel, Idea Cellular All mobile operators
Budget announcements Budget estimates non-tax revenues from other communication services at `408bn for FY14. Assuming recurring levies (license fees, spectrum usage fees) to account for `170-190bn of this, proceeds from spectrum auctions and one-time of excess spectrum is estimated at `220-240bn. The budget proposes increase in excise duty on mobile handsets (costing more than `2,000) from 1% to 5%. According to the finance minister, 70%/60% of mobile phones imported/manufactured cost less than `2,000. Impact on the sector The estimated proceeds of `220-240bn pertaining to spectrum (auctions, one-time fee) for FY14 is lower than `400bn original budget estimate for FY13. Downward revision is possibly due to: (1) Spectrum already sold in FY13 (of `90bn); (2) estimated proceeds factoring in staggered payment of winning bids (only 33% upfront); (3) lower expectations following failure of auctions in FY13. To an extent, lower estimated proceeds from spectrum auctions reflect lower govt expectations; the proceeds target is sentimentally positive for telcos (as it suggests lowering of reserve prices). However, these targets are academic, as actual proceeds would depend on demandsupply and resolution of legal/regulatory issues. Notably, in FY12, govt expected `150bn proceeds as spectrum fee, whereas actual proceeds were nil. In FY13, it could raise only ~`30bn vs `400bn target. Higher excise duty on mobile handsets would marginally hit sale of featured/smart phones. Penetration of such phones is a key driver of data consumption for telecom operators, which may thus face indirect impact of rate hike. Impact on companies Lower estimated spectrum fees (one-time/auction) bodes well for Bharti Airtel and Idea Cellular. Cost of renewal of licenses is likely to be benchmarked to the spectrum price discovered in auctions. The renewal schedule of Reliance Communications and Tata Teleservices (Maharashtra) is more back-ended; these companies are less affected by the price discovery. Higher excise duty on mobile phones is marginally negative for all companies, including listed ones like Bharti Airtel, Idea Cellular, Reliance Communications, and Tata Teleservices (Maharashtra).
Appendix
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Anand Rathi Research Ratings Distribution (as of 28 Feb 2013) Buy Anand Rathi Research stock coverage (184) 65% % who are investment banking clients 4%
Hold 27% 2%
Sell 8% 0%
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India Budget FY14 - Walk The Talk

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India Budget FY14 - Walk The Talk

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Union Budget

Sensex: 18862 Nifty: 5693

Key budget figures

14,308 10.4 14.3 4,674 5.2

16,653 10.9 14.6 4,840 4.8

RE- Revised estimates, BE-Budget estimates Source: Government of India

Source: Anand Rathi Research

Net market borrowings (RHS)

India Budget FY14 Walk the talk

Anand Rathi Research

India Budget FY14 Walk the talk

Budget FY14: Best in a bad situation

Anand Rathi Research

India Budget FY14 Walk the talk

Note: BE-Budget estimates

Central allocation for NREGA

Anand Rathi Research

India Budget FY14 Walk the talk

Anand Rathi Research

India Budget FY14 Walk the talk

Indirect taxes: No change

Anand Rathi Research

India Budget FY14 Walk the talk

Fig 3 Expenditure control to keep fiscal deficit in check

BE: Budget estimate, RE- Revised estimates,

Anand Rathi Research

India Budget FY14 Walk the talk

Anand Rathi Research

India Budget FY14 Walk the talk

Negative Positive Positive Negative Negative Positive

Anand Rathi Research

India Budget FY14 Walk the talk

Anand Rathi Research

India Budget FY14 Walk the talk

Negative Positive Positive

Anand Rathi Research

India Budget FY14 Walk the talk

Anand Rathi Research

India Budget FY14 Walk the talk

Jaspreet Singh Arora

Positive Positive Positive Positive Positive Positive Positive Positive Positive

Anand Rathi Research

India Budget FY14 Walk the talk

Increase in allocation for rural drinking water and sanitation from

Anand Rathi Research

India Budget FY14 Walk the talk

Consumer & Retail

Negative Negative Negative Positive Positive

Non-filter Non-filter Filter Filter Filter Filter Filter

<65 65-70 <65 65-70 70-75 75-85 >85

669 1,718 669 1,194 1,718 2,309 2,788

669 2027 669 1409 2027 2725 3290

18.0 18.0 18.0 18.0 18.0

Source: Anand Rathi Research * Duty (`) per 1,000 cigarettes

India Budget FY14 Walk the talk

Anand Rathi Research

India Budget FY14 Walk the talk

Educomp, Everonn, NIIT, Core Education Everonn, NIIT, Core, Aptech

Education Act and the Sarva Shiksha Abhiyan (RTE-SSA).

Shiksha Abhiyan (RMSA).

Anand Rathi Research