Reliance Budget Exp 08 09

Pre Budget Expectations
for 2008-09
Research Team Election Friendl

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Tel.: 91-22-30443301
The Union Budget for FY2008-09 will be the fifth and final budget of the UPA
government. Although technically the policy content of the Budget has lost its
significance in recent times, it still remains an important document to assess and
evaluate the direction and progress achieved within the economy. This Budget being
the last one to be presented by Mr Chidambaram, before the country’s next election
due in May 2009 makes it special in the sense that one could see political agenda
getting dominated wherein one is likely to see the Finance Minister strike a fine
balance between political objectives and stimulating the economic health of the
country.
GDP Growth %
The Indian economy is now clearly in a consolidation phase after 3 years of sustained
12.0
9.6 growth witnessed in the GDP from 7.5% in FY05 to 9.6% in FY07. To begin with the
10.0 9.0
8.5 8.7
8.0 7.5 overall macro environment, the domestic growth and inflationary situation while still
6.0 relatively benign is beginning to reflect global tendencies. The Advance Estimates
4.0 for 2007-08 by CSO clearly indicate that a slowdown in on the cards and it has
2.0 already estimated that this year GDP will grow at a slower pace of 8.7% from 9.6%
0.0
2003-04 2004-05 2005-06 2006-07 2007-08
recorded last year.
Source : CSO
The major reason for the deceleration in GDP growth has been the Manufacturing
Sector which contributes around 25% of the GDP and which is likely to grow by 9.4%
in 2007-08 as compared to 12% recorded last year. The other big disappointment for
the GDP growth has come in from the Agriculture sector which as per the CSO is
estimated to grow by 2.6% in 2007-08 from 3.8% last year. Going ahead we believe
that GDP growth will continue to grow at 8.5% plus levels and will benefit from a
sustained growth seen in the Services segment which now accounts for roughly
55% of the GDP as compared to 50% in FY2000.
Agriculture which used to previously On the other hand the manufacturing sector has consolidated its presence in the
account for a sizeable chunk of GDP GDP by accounting for 25% of its share of GDP. Agriculture which used to previously
(around 24% in FY2001) now accounts account for a sizeable chunk (around 24%) of the GDP in 2001 has seen its share
for 17% of GDP. drop to 17% in FY08 and has seen a volatile uneven trend after its peak 10% growth
in FY2004.
We believe that going ahead in order to sustain the GDP growth it would be imperative
Infrastructure, Agriculture, Public for the government to focus on Infrastructure, Agriculture, Public Health and Education
health and Education would be the key as these will continue to remain the foundation blocks of the Indian economy. More
foundation blocks of the Indian importantly we expect the government to continue its support towards the Agriculture
Economy sector since almost 60% of our population still depends on agriculture as there
livelihood.
Contd...
Reliance Money House, Plot No - 250 - A - 1, Baburao Pendharkar Marg,

Off Annie Besant Road, Behind Doordarshan Tower, Worli, Mumbai - 400025
18th February 2008
On the other hand with the first year of the 11th five year plan (FY2008-2013) drawing
to a close, the government has set an ambitious target of 9% GDP during this period
which will be driven by a 4% average growth in Agri output from 1.7% average growth
recorded in the 10th five year plan. Also the Services and Manufacturing sectors are
targeted to grow by 10% and 12% respectively in the 11th five year period.
Alternatively 11th Five Year Plan (2008-2013) also envisages huge investments in
Share of Infrastructure in GDP is likely roads, power and other infrastructure projects, which is likely to result in a significant
to go up to 7.5 to 8% by the end of 11th rise in expenditure on infrastructure sectors to around 7-8% of GDP from around
Five Year Plan. 4.5% currently. Similarly on social sectors like public health and education we expect
the government to significantly increase plan allocations.
More importantly the government has recorded healthy growth in direct tax collections
especially with regard to Corporate Tax which is up by 38% YOY during first 9 months
of FY08, followed by Income tax up by 45%YOY and Customs up by 18% YOY in the
same period. Also the STT (Securities Transaction Tax) which was introduced in
2004-05 has seen a sharp 86% YOY rise in tax collections aggregating Rs 6793 crs
between Apr. 2007 to Jan. 2008 indicating the fact that more investors have
participated in the India Growth story in the Indian capital markets.
In fact as far as the STT is concerned government estimates suggest that total
Total STT Collection this year could collection from this account itself can gross around Rs 7500 crs till Mar08. All these
touch Rs. 7500 cr in FY08 developments are likely to provide the government some flexibility in reducing select
tax rates in this budget and meet its revenue deficit target under the FRBM.
While there is no doubt that 2007-08 has been a landmark year for tax collections, a
repeat performance in 2008-09 appears challenging, given the deceleration in
corporate profits a significant driver of tax buoyancy in 2007-08. There are concerns
from possible inflationary pressures from food and oil, increased fertilizer subsidies
and some enhancements to the employee guarantee proggramme which are likely
to cause additional fiscal pressure on the government. More importantly the continued
availability of funds at viable interest rates to complete ongoing projects will be very
critical as we are deep in the middle of an investment cycle almost across almost all
sectors, be it infrastructure, manufacturing, real estate, rural and urban sectors.
Therefore in terms of clear policy initiatives in this forthcoming Union Budget, we

expect the government to clearly address the above mentioned issues and make
New policy initiatives line the GST announcements towards implementation of the common Goods & Services Tax
rollout by FY2010 would be eagerly (GST) likely to be introduced from FY2010, possibly reduce surcharge on direct
awaited taxes and further rationalize taxes for select sectors both in terms of inputs required
and the final end product, increase plan allocations to the Infrastructure and social
sectors like Education and Health and progressively look at reducing the revenue
deficit targeted in last years budget.
Contd...
Pre Budget Expectations 2008-09 Please see the disclaimer on the last page 2
18th February 2008
CONTROLING INFLA
CONTROLING TION - A TOP PRIORITY
INFLATION
During FY08, the inflation rate has been moderated and it had earlier come down to
Week Ended Inflation Nos ( In %)
3%, however in recent weeks it has again risen to 4.07%. Our belief is that the
4.5
4.11 4.07
4 3.75 3.65
3.45 3.50 3.50
3.79 3.83
3.93
government will further announce measures to reduce inflationary trends in the
3.5 3.21
3
3.01 3.01
economy. The recent petrol and diesel price hike is expected to raise the inflationary
2.5
2
trends in the economy in the short term and it remains to be seen how the government
1.5
1
controls this in the next 12 months.
0.5
Again as mentioned earlier by us that since this will be the last full Budget by the
th
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th
nd
th
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th
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17
24
15
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12
19
26
22
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ec
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Source : CSO
Government before the 2009 General Elections, we expect greater focus and
allocations to several social initiatives like rural upliftment, employment, education,
agricultural growth and public health. Also we expect that the FM would announce
some relief packages for troubled export sensitive sectors like textiles, rubber, jewelry,
leather and IT services.
Also we expect some modifications in the subsidy schemes for the fertliser sector
and there are chances that several tax-incentives to promote investments in fertilizers
will be announced, to increase domestic capacity additions and to please the farmer
community thereby providing aids to improve agri growth in the year head.
MARKETS GOING FORWARD
After a horrendous start to 2008, most emerging market investors are now extremely
worried about the prospects for this calendar year. Forced out of their complacency
Recent market melt down has seen
by massive fund withdrawals from the asset class (dedicated Emerging Market funds
fund withdrawals of $15bn in
had over $15 billion in redemptions in January, after $54 billion in inflows in 2007)
redemptions from most emerging
and serious price damage, most investors are wondering what happened.
markets.
Prior to January the script was very clear; irrespective of what happens in the US, the
emerging markets were economically decoupled and thus would be able to grow
through a US slowdown. Reams of research were written on how China was a more
powerful driving force for the Economists which pointed out the strong domestic
growth dynamic in many of the larger EM countries and the huge infrastructure and
capex cycle currently under way in India & China.
However, come January 08 and all this seems to have changed. The emerging
markets are now leading global equity markets on the downside, and the maximum
price impact has actually happened in India and China plays. The EM asset class is
Emerging markets like India have off
behaving more in line with historical patterns of being a levered bet on global growth.
late been following the US market
Investors seem to have forgotten about decoupling, in favour of the old adage of if the
trends
US sneezes, the world catches a cold type of a scenario.
Contd...
18th February 2008
We believe that the decoupling thesis has merit, although not entirely but to a
reasonable extent and that the economic performance of countries like India will
sustain. We will see some drop-off in GDP growth from 9 per cent plus to 7.5-8 per
Most of the froth has been knocked out
cent, but this is unlikely to go lower. Corporate earnings should also be able to
of the Indian Capital Market
sustain a 15-18 per cent type of trajectory. Most of the froth has been knocked off the
Indian markets, and capital raising, which was rampant, has come to a halt. The
whole concept of sum (SOTP) of the parts will also be used much more judiciously.
Speculation and outstanding positions have been dramatically reduced, and the
retail investor is once again almost totally absent in direct form.
Valuations have come down to more normal levels with the markets now trading at
15-16 times the March 2009 earnings. Again not cheap, but if we can grow earnings
Valuations are now reasonable with
at near 16-18%, when corporate earnings are declining in most other parts of the
markets now trading at 15-16x FY09E
world, it does not seem realistic.
The domestic investor base is strengthening with the insurance industry alone
expected to pump in almost $20 billion into the equity markets this year. The market
fall has not had much of an impact on this flow as of now. Mutual funds and PMS
schemes have continued to get strong fund inflows.
Hence we don’t think this is the end of the bull market, it has a much-needed correction
that will bring capital market intermediaries back down to earth. This dull and listless
phase, with the markets being range-bound, may last a while but will prepare the
Indian markets look attractive from a
foundation for a much more sustainable rally ahead in future and will extend the bull
long term perspective
run. Most investors recognize that India is a high-quality long-term growth story, and
this has not changed. The visibility and sustainability of our economic growth are
among the best in the EM universe.
The capital efficiency and quality of entrepreneurship are well recognized. Our problem
was the valuation and excess hype and froth, both of which are now getting corrected.
This fall will clean out most of the momentum players and bring in many longer-term
investors sitting on the sidelines.
Therefore one needs to keep the faith as the game is not over yet, we will see new
highs, though it may take some time. Therefore in conclusion we expect the markets
to remain extremely volatile before the Union Budget for 2008-09 is announced on
Feb 29th 2007. Traditionally we have observed that a pre budget rally is typically seen
across the markets before the budget, after which the markets tend to get corrected.
While sentiments on a shorter term basis would definitely get impacted by stock
In the medium to long term, investors
market movements, the longer term India growth story continues to remain intact
would have to accept volatility as fact
and investors would have to accept short term volatility as a fact of life.
of life.
Contd...
18th February 2008
We see India’s growth story is akin to a marathon. A marathon can appear boring to
spectators compared to a sprint (the broad stock market may appear equally unexciting
this year). However, we believe it is the ultimate sport for value buyers, and we expect
great Indian companies/entrepreneurs to emerge from nowhere (as they have over
the past few years) and become champions, and that is the best part of being a part
of the market; and we expect a few more to emerge this year. Smart Long Term
Investors should use this market crash as an opportunity to buy strong companies
with robust business models with excellent management bandwidth but more
important investors need to temper there return expectations and think long term.
Pre & Post Budget Market Movments

FY2004-05
FY 2003-04 6150
3350 Pre Budget Post Budget
Pre Budget Post Budget 6050
3300
5950
3250 5850
3200 5750
5650
3150
5550
3100
5450
3050
5350
3000 5250
Feb-03
04 Mar-03
04 Feb-04
05 Mar-04
05
FY 2005-06 FY 2006-07
6950 11500
Pre Budget Post Budget
Pre Budget Post Budget 11300
6850
11100
6750 10900
10700
6650
10500
6550 10300
6450 10100
9900
6350
9700
6250 9500
Feb-05
06 Mar-05
06 Feb-06
07 07
Mar-06
Source : BSE
We believe India’s macro economic prospects to continue remaining robust and

Sector-wise GDP growth rates (In %) GDP growth is likely to grow albeit a slow pace between 8 to 8.5% during current year.
Sector 2005-06 2006-07 2007-08 With tax collections both from direct taxes and indirect taxes being buoyant, we believe
1 Agriculture 5.92 3.76 2.59
that the Indian economy continues to remain in good health. Some of the sectors
2 Industry 8.02 10.63 8.63
(a) Mining & Quarrying 4.87 5.70 3.38 where both topline and profit growth during Q3FY08 continued to be strong was from
(b) Manufacturing 8.98 12.00 9.44 sectors like Telecom, Cement, Infrastructure, Construction, Engineering, Banks and
(c) Electricity, Gas, Water 4.68 5.98 7.83
Pharmaceuticals.
3 Services 11.01 11.18 10.60
(a) Trade, hotels 11.51 11.82 12.11
(b) Financing, insurance 11.41 13.92 11.72 The sectors where the performance was disappointing this quarter included
(c) Community services 7.21 6.89 6.97
Automobiles, Auto Components, Sugar, IT Services, Metals and Oil & Gas space.
(d) Construction 16.46 11.98 9.63
GDP at Factor Cost 9.40 9.62 8.73 However one observation on the corporate results declared so far clearly shows that
Source : CSO
profit growth has slowed down due to high interest costs and effects of a higher
base.
Contd...
18th February 2008
But broadly the numbers are in line with expectations and we expect corporate earnings
to grow at a healthy clip of 18% in FY08 and 20% during FY09. The Central Statistical
Organisation (CSO) has estimated that FY08 GDP growth at 8.7%, while most of the
economist think tanks have given a range of 8% to 9%. This growth is due to the
healthy contribution by Services and Manufacturing sectors despite Agriculture
recording underperformance.
Tax Collections - continue to be buoyant (Rs. Crore)

Tax Nature 2006-07 2007-08 Full Year April - December 9 Months
Actual Budget Est Increase (%) 2006-07 2007-08 Increase(%)
Corporation 143391 168401 17.4 93851 128698 37.1
Income 75792 86829 14.6 46425 66268 42.7
Customs 86329 98770 14.4 63655 74455 17.0
Excise 117701 130220 10.6 71816 75485 5.1
Others 50111 63902 27.5 30781 44439 44.4
Gross (Excl Surcharge) 473324 548122 15.8 306528 389345 27.0
Source: CGA, Ministry of Finance
Summary of Central Government Finances

Provisional Actual 2006/07, Budget Est. 2007/08 & Position upto Dec’07 (Rs. Crore)
2006-07 2007-08 Change For
BE (Rev Actual Achieved (Budget Actual Achieved 2007-08 Apr-Dec
Est. Estimates) Apr-Dec (%) Estimates) Apr-Dec (%) (%) ’07 (%)
Tax Revenue 327,205 345,971 232,171 67.1 403,872 295,994 73.3 16.7 27.5
Non-Tax Revenue 76,260 77,360 48,744 63.0 82,550 59,652 72.3 6.7 22.4
Revenue Receipts 403,465 423,331 280,915 66.4 486,422 355,646 73.1 14.9 26.6
Plan Expenditure 143,762 172,730 93,901 54.4 205,100 137,163 66.9 18.7 46.1
Non-Plan Expenditure 344,430 408,907 253,791 62.1 475,421 337,090 70.9 16.3 32.8
of which Interest 139,823 146,192 92,634 63.4 158,995 111,764 70.3 8.8 20.7
Non-Interest Non-Plan Rev Exp 204,607 362,183 161,157 44.5 383,546 280,050 73.0 5.9 73.8
Non-Interest Rev Exp 348,369 144,584 255,058 176.4 174,354 114,806 65.8 20.6 -55.0
Total Rev Exp 488,192 506,767 347,692 68.6 557,900 394,856 70.8 10.1 13.6
Revenue Deficit 84,727 83,436 66,777 80.0 71,478 39,210 54.9 (14.3) (41.3)
Cap. Exp. + Net Lending 67,799 74,870 28,077 37.5 122,621 79,397 64.7 63.8 182.8
Total Expenditure 555,991 581,637 375,769 64.6 680,521 474,253 69.7 17.0 26.2
Other Non-Debt capital receipts 3,840 5,978 0 43,151 41,029 95.1 621.8 -
Fiscal Deficit 148,686 152,328 94,854 62.3 150,948 77,578 51.4 (0.9) (18.2)
Primary Deficit 8,863 6,136 2,220 36.2 (8,047.0) (34,186.0) 424.8 (231.1) (1,639.9)
Source : CSO, nic.in, Finance Ministry
Contd...
18th February 2008
HIGH GDP GROWTH TO BE SUSTAINED

We believe that the sustained growth in GDP will be supported by a rapidly growing
Composition of GDP (%)
Services segment now accounting for roughly 55% of the GDP as compared to 50%
FY2001 in FY2000. On the other hand the manufacturing sector has consolidated its presence
26%
in the GDP by accounting for 25% of its share of GDP. The only exception is Agriculture
which has seen its share drop to 18% in the overall GDP during FY08 from 24% in
50%
2001 as per the CSO and which has seen a volatile trend.
24%
Se r vice s A g r icu lt u r e In d u s t r y We hence believe that a relatively larger share of services in GDP, which is growing
at a faster pace, should ensure a higher sustainable growth rate for the economy.
FY2008E
27% Other factors which have driven growth across most sectors are favorable
demographics (growing proportion of young workers), rising wages, increasing
55%
urbanization, a housing boom, and massive infrastructure spending. Rising income
18%
is helping to drive the consumption boom – this is evident from rapid growth in
Se r vice s Agr icultur e Indus tr y
cellular subscribers, air travel, cars, consumer durables, multiplex movie theatres,
Source : CSO credit cards and personal loans.
The private sector has been a major contributor to the GDP growth and we do not
expect any negative measures, which could affect the confidence of India Inc at this
point in time. We expect that, the major thrust in this budget will be on agriculture,
infrastructure, social sectors like public health and education, tax simplification &
implementation thrust towards taxpayers.
Corporate Earnings Growth - NIFTY 50 Companies (Rs. Crore)

Sales EBITDA PAT
% Change % Change % Change
Q3FY08* Q3FY07# YoY Q2FY08$ Q3FY08* Q3FY07# YoY Q2FY08$ Q3FY08* Q3FY07# YoY Q2FY08$
Atuomobiles (5) 20,110.9 18,385.4 9.4 20,490.4 2,444.3 2,323.2 5.2 2,884.5 1,973.1 1,685.6 17.1 1,940.3
Aviation(0)* & (1)# & (0)$ - 1,875.4 - - - 140.5 - - 40.0 -
Banking & Finance (5)* & (5)# &(5)$ 29,092.0 20,931.5 39.0 32,289.2 19,484.3 14,072.6 38.5 21,372.1 4,658.6 3,238.6 43.8 4,760.5
Cement (3) 5,900.4 5,201.7 13.4 6,909.4 1,774.1 1,616.6 9.7 2,037.7 993.1 1,107.8 (10.4) 1,289.4
Engineering & Capital Goods (4)* & (4)# & (5)$ 14,916.2 11,187.9 33.3 16,672.6 2,231.6 1,707.9 30.7 2,381.4 1,788.9 1,285.9 39.1 1,858.3
FMCG (2)* & (3)# & (2)$ 7,145.4 6,837.2 4.5 6,638.0 1,763.9 1,650.8 6.9 1,478.3 1,462.2 1,306.2 11.9 1,178.9
Information Technology & Media (6) 16,656.7 13,645.9 22.1 18,063.6 4,400.0 3,882.4 13.3 4,561.2 3,958.7 3,336.3 18.7 3,947.6
Metals (5)* & (4)# & (5)$ 22,782.8 19,111.3 19.2 54,423.7 6,438.7 6,056.2 6.3 10,751.3 4,106.2 3,966.2 3.5 7,703.5
Oil & gas and Petrochemicals (4)* & (6)# & (6)$ 82,937.6 97,549.7 (15.0) 101,390.7 15,174.1 16,517.3 (8.1) 18,041.5 13,358.2 9,530.6 40.2 11,421.5
Pharmaceuticals (4)* & (5)# & (5)$ 3,607.3 3,487.3 3.4 5,090.7 437.9 847.9 (48.4) 943.4 647.3 992.1 (34.8) 986.4
Power Generation (3)* & (2)# &(3)$ 12,255.7 2,727.4 349.4 2,892.3 3,306.8 285.4 1,058.6 3,191.7 2,278.8 2,584.2 (11.8) 2,433.0
Realty (1)* & (0)# & (0)$ 818.5 - - 532.5 - - 368.9 - 410.8
Telecommunications (4)* & (5)# & (4)$ 12,770.6 10,053.4 27.0 13,024.5 4,454.6 3,698.7 20.4 4,911.6 2,103.0 2,279.3 (7.7) 4,588.6
Total - Excl. banking (41)* & (44)# & (44)$ 208,883.0 192,608.5 8.4 244,370.1 59,998.6 50,335.7 19.2 69,670.2 33,620.9 29,667.1 13.3 40,578.5
Total (46)* & (49)# & (49)$ 221,653.7 202,661.9 9.4 257,394.6 64,453.2 54,034.4 19.3 74,581.8 35,723.9 31,946.4 11.8 45,167.1
Source : Capitaline
Note:Q3FY08 does not include 4 companies as their results were not declared namely: ABB, RPL, Cairn India and Glaxosmithline
All the 3 Quarters do not include the NIFTY 50 companies as some companies have been included or excluded due to the changes in the index and for other reasons.
* Is the total number of companies in a sector in Q3 FY 08

# Is the total number of companies in a sector in Q3 FY 07
$ Is the total number of companies in a sector in Q2 FY 08
No sign denotes there are same no of companies all the 3 quarters.
Contd...
18th February 2008
As mentioned earlier Infrastructure, Agriculture, Public Health and Education would

continue to remain the foundation pillars of the Indian economy in order to sustain
the present and future level of GDP growth. Our belief is that with 60% of India’s
population dependent on Agriculture, it is imperative for the government to increase
plan allocation here as the benefits of a sustained level of GDP growth have not yet
seen a majority of the population reap its benefits. The government is also looking
at imposing a 1% cess on direct taxes and 2% on direct taxes to part finance debt
relief packages to farmers.
Therefore with increased plan allocations the government is likely to ensure that
Agriculture growth is targeted to grow at Agriculture grows annually by 3-4% so that eventually higher growth from here would
average 4% pa in the 11th Five Year lead to a increase in rural incomes which will drive demand for goods and services
Plan thereby also improving employment opportunities.
On the other hand, Infrastructure creation would be continue to be a thrust area for
the government. As per the CII Infrastructure spending by the end of the 11 th Five
Year Plan would have to go up to 10% of GDP involving a estimated investment of $
337.5 bn in order to sustain an average 9% GDP growth over the next 5 years.
Similarly on social sectors like public health and education we expect the government
to increase allocations. We already have a education cess of 2% and there are
expectations that this would be increased to 3-4% in this budget.
A GRICUL TURE –
GRICULTURE
We believe that, agriculture would continue to be a thrust areas for the government
considering the fact that –
60% population depends on Agriculture

India’s majority population is yet agri Agriculture production has remained volatile and poses a challenge for sustainable
based with 60% population dependent GDP growth
on agriculture Bridging the gap between urban and rural income is important
Significant increase in consumption possible with higher disposable income from
rural India
Higher employment generation potential in rural India
INFRASTRUCTURE
Some of the key reasons why infrastructure will get a boost are –
To Increase FDI an Improved Infratructure is a must

Improved Infrastructure will a key driver in providing value addition to customers
Growing Urbanisation has made the existing infrastructure inadequate and needs
to overhauled sizeably
Contd...
18th February 2008
EDUCA TION
EDUCATION
Education has now become a very important variable for sustaining future growth of
the economy. For a country which has dreams of becoming the knowledge capital of
the world, not much has invested in our educational system. This is quite critical
Education is now a very important
considering the fact that nearly 350 mn children will require to be educated over the
variable to sustain and increase GDP
next 30 years making it an average of over 10 mn every year. We believe that going
growth in future
ahead Education will call for major investments from the government and it will also
require the government to encourage the private sector to invest in this sector to
upgrade existing facilities here.
Here it would be interesting to note that the government has plans to increase the
spend on the sector to Rs. 2,77,837 crores in the 11th Five Years Plan from Rs.
59,181 crores in the 10th Plan. This spend would include expenditure on elementary,
adult and higher education. Thus in conclusion as per the planning commission
Government plans to increase the
total public spending plan and non-plan on education would account for 5% of GDP
outlay on education to Rs.2,77,837 cr
by the end of 11th Five Year Plan. Additionally we believe the government is also likely
in the 11th Five Year Plan from Rs.
to increase its financial outlay towards increasing and enhancing the teachers faculty
59,181 cr in the 10th Five Year Plan
capacity and capability as there is a huge shortage of this crtical resource as on date.
As per the government, it has outlined the following targets in the draft 11th five year
plan document. These include.
Reduce dropout rates of children from elementary school from 52.2% in 2003-04 to
20% by 2011-12.
Develop minimum standards of educational attainment in elementary school, and
by regular testing monitor effectiveness of education to ensure quality.
Increase literacy rate for persons of age 7 years or more to 85%.
Lower gender gap in literacy to 10 percentage points.
Increase the percentage of each cohort going to higher education from the present
10% to 15% by the end of the 11th Plan.
HEAL TH
HEALTH
To ensure that we have a knowledgeable highly educated workforce in the Indian
economy it is essential that we need to have a healthy employee workforce to sustain
To get a knowledgeable workforce, a
the economy growth ahead. The government, has outlined the following targets in
healthy workforce will be essential
the draft 11th five year plan document as far as the health sector is concerned. These
include.
Reduce infant mortality rate (IMR) to 28 and maternal mortality ratio (MMR) to 1 per
1000 live births.
Reduce Total Fertility Rate to 2.1.
Provide clean drinking water for all by 2009 and ensure that there are no slip-backs
by the end of the 11th Plan.
Reduce malnutrition among children of age group 0-3 to half its present level.
Reduce anemia among women and girls by 50% by the end of the 11th Plan.
Contd...
18th February 2008
TAX PR OPOSALS – EXPECT

PROPOSALS ATIONS
EXPECTA
DIRECT TAXES –
Surcharge on Corporates and Personal Income Tax currently pegged at 10% may
be exempted fully
With this budget being the last one
Tax Breaks likely for Infrastructure Bonds likely
before the general election, the middle
Minimum Tax Exemption Limit for Individuals to be raised to Rs 2 lacs from Rs 1.5
class is likely to gain from some tax
lacs presently
cuts and concessions from the FM
Standard deduction limit likely to be raised to Rs 1.20 lacs from the present level of
Rs 1 lac under Sec 80C
Securities Transactions Tax – Likely to see a marginal increase
Increase in Highway cess by another 30 paise from the present Rs 2 per litre
charged on petrol and diesel
Dividend Distribution Tax likely to be cut to 12.5% from 15% presently.
New 1% cess on Direct Taxes and 2% cess likely to be imposed to partly fund
farmers relief packages
REITS (Real Estate Investment Trusts) to get the benefits through a tax waiver on
dividend income from such instruments.
INDIRECT TAXES –
Reduction in peak customs duty from 10% to 7.5% in this Budget which is in line
Service tax likely to increase its net with tariffs closer to ASEAN levels.
over new category of services Excise Duties to remain unchanged at 16%
Basic Framework for preparation of the Goods & Service Tax regime by 2010
Service Tax likely to be kept at 12% currently but 12 new services are likely to come
in the tax net. These could include service providers of legal draft writing
intermediaries and stamp paper vending intermediaries, all un aided non
government schools and colleges, un aided non government hospitals, amusement
parks, coin operated amusement machines and other recreation and amusement
services.
SECTORAL BIAS -
SECTORAL
We expect the following sectors to benefit from the budget process. These include
Capital Goods, Power Equipment, Construction, Cement, Real Estate, Hotels,
Retailing, Telecom, Insurance,Food processing, Fertilisers, Oil & Gas/Allied services
players.
Contd...
18th February 2008
STOCKS We Like -
Large Cap
Sector Stocks we like
Auto M&M, Maruti
IT Infosys, Tata Consultancy, Satyam
Power Utilities NTPC
Pharma Ranbaxy
Source:Reliance Money Research
Mid Cap
Sector Stocks we like
Auto Ashok Leyland
Auto Ancillary Ahmednagar Forgings, Amtek Auto
Capital Goods Cummins, Kirloskar Oil, Thermax, Bharati Shipyard, Ratnamani
Education Core Projects
Pharma Elder Pharma, Indoco Remedies, Orchid Chem
Telecom Gemini Comm
18th February 2008
Sectorwise
Expectations
18th February 2008
EXPECTED BUDGET IMPACT AUTOMOBILE

Neutral Current view
Currently the Indian Automobile sector is going through a tough period. Higher
LONG TERM OUTLOOK interest rates, stringent financing norms adopted by financing institutions are
impacting demand for Automobiles. But we expect moderate interest rates going
Positive ahead to again drive demand for Automobile sector. We remain positive on
Automobile sector. Rising income levels, higher replacement demand, ban on
overloading of trucks, rising infrastructure spending, strong freight rates would
drive the demand for automobiles in India. We expect the automobile sector to
grow at a CAGR of 10-12% over next 3-4 years.
Key budget expectations

Issues Current Status Industry Expectation Impact Rationale
Excise duty 16% Small cars Uniformity of excise duty for Positive Cut in excise duty would bring
24% Big cars all cars , Reduce excise on prices of vehicles and in turn
16% Tractors small cars and MUV's to 10- would increase the demand
24% Motor vehicle >10 12% rest all shld be at 16%, for auto market
seater Lower excise duty on hybrid/
16% CVs >8T green vehicles, Cut in excise
16% Motorcycles duty on two wheelers to 12-
16% Bicycles 8%
Classification Currently classified on Should be classified solely Positive It will help companies in
of excise duty length and engine capacity on the basis of length and making powerful small cars
not on the basis of engine and help them in saving
capacity excise costs
Deduction on 150% deduction on R&D Should be extended till for Positive It will help companies in
R&D Expenses expenses till 2012 another 10 years from 2012 developing new products,
more efficient products, hybrid
cars, environment friendly cars
Interest rates Interest rates for cars & Uvs Govt should moderate Positive Auto industry has witnessed
went up by 300-350bps in interest rates on new loans slowdown mainly due to rising
last 2 years to farmers for tractors and interest rates and it would get
other vehicles some relief due moderation in
interest rates, Tractor industry
is also facing tough time and
any moderation in interest
rates on loans to farmers for
tractors would revive the
industry
S p e c i a l No special Incentives Special excise duty, tax rates Positive It would bring down the cost of
Incentives for for such vehicles vehicle to some extent and
LPG and CNG manufactured would increase the demand
based Auto for the products
Manufacturers
Top Picks
Company Price EPS (Rs) PE (x) Recommendation
(Rs) FY09E FY10E FY09E FY10E
Ashok Leyland 36 3.7 4.2 9.7 8.6 BUY
M&M 619 44.8 49.2 13.8 12.6 BUY
Maruti 813 68.7 74.6 11.8 10.9 BUY
18th February 2008
EXPECTED BUDGET IMPACT AUTO ANCILLARY

Auto Ancillary sector is growing steadily mainly because of lower demand from
LONG TERM OUTLOOK domestic OEMs and strong rupee appreciation which impacted exports of auto
ancillary players. But we believe going ahead domestic auto demand will improve
Positive
and auto ancillary sector will continue to grow. We remain positive on Auto Ancillary
sector. The global outsourcing opportunity available for Indian Auto component
vendors is mainly because of competent engineering skills, delivery capabilities
and cost advantage.

Excise Duty on Excise Duty on raw materials Excise Duty on these key Positive It would bring down the cost of
raw materials like GP/GC sheets, HR coils, raw materials should bring manufacturing of auto
Aluminium, Copper, Nickel at down components and would
16.5% enhance competitiveness of
players
Fiscal and Tax No benefits Tax Holidays, creation of Positive It will help India in emerging
Incentives special auto-component as a global manufacturing hub
parks (SAPs) and other VAT like china and other developing
benefits countries
Customs Duty Customs duty on raw Customs Duty on these Positive Lower Customs Duty on raw
on raw material materials like zinc , copper , basic raw materials should materials would make Indian
lead , steel , aluminium , iron be brought down from Auto Component players more
currently at ~5% current peak levels competitive
Increasing FTAs The growing number of FTAs Reduction in excise duty or Neutral Domestic Auto Component
(Free Trade that are being signed by India reduce the number of FTAs manufacturers pay relatively
Agreements) with ASEAN countries are higher excise duty of ~25% as
impacting negatively to compared to players in the
domesitc players international arena who pay 1-
10% Excise duty
R&D Government has set up Define roadmap and give Positive It will promote design and
National testing and R&D special emphasis to auto development activities in India
Infrastructure project for auto components industry and would make domestic
R&D players more competitive in
international market
Foreign Offers limited fiscal Should promote Foreign Positive Countries such as Thailand,
Investments in incentives to foreign investors Investment by offering fiscal China , Malaysia, etc. offer
auto component Natural rubber Imported Duty incentives large incentives to companies
industry at 20% for investing in auto
component manufacturing.
India should also benchmark
its policies with such
competing countries to
promote Auto Components
industry
Import Duty on Finished Tyres Imported at Import Duty on natural Neutral Manufactures prefer to import
Rubber 10% rubber needs to be at least finished Tyres instead of
at par with finished Tyres at manufacturing it here
10%
Top Picks
Ahmednagar Forgings 200 30.7 38.3 6.5 5.2 BUY
18th February 2008
EXPECTED BUDGET IMPACT CAPITAL GOODS

Positive Current view
We remain positive on Capital Goods & Power Equipment sector. Power
LONG TERM OUTLOOK has remained as a key resource for Indian economy growth. Strong growth
in economy, growth in infrastructure, industrial production would drive
Positive the demand for capital goods sector. Government has given infrastructure
status to power generation and distribution sector, we expect the demand
for power to remain strong and power remains one of the critical success
factors in India growth story. We expect it will drive strong demand for
capital goods and power equipments as well.
Excise Duty Excise duty on raw materials Till the time a uniform GST Positive It would offer some respite to
and all products supplied to is implemented, a merit rate power equipment manufactur-
power generation, of Excise Duty @ 8% should ers as raw material prices
transmission and be applicable on all have gone up substantially
distribution is at 16%, with a products, supplied to Power ~50%
Secondary and Higher Generation, Transmission &
Education Cess of 1% on the Distribution projects.
aggregate of duties of excise
APDRP The current allocation of In the current budget the Positive It would help the government
scheme funds to the APDRP scheme industry expects the to achieve its target of 15%
is Rs 800 crs. allocation to increase to AT&C losses from the current
atleast Rs 8000 crs to realize national average of 30%. The
its full benefits. APDRP scheme has also
seen very low pay back peri-
ods of ~3 years
The current allocation of Tax exemptions (like 80IA of Positive If the tax benefits are extended
Rajiv Gandhi funds to the RGGVY scheme Income Tax) given to to RGGVY it will result in bring-
Gramin is Rs 3983 crs schemes like Water Supply ing down the cost of the
Vidyutikaran & Sanitation Scheme or as scheme to the extent of 25%,
Yojna (RGGVY) envisaged for rural area with possibly more villages
development schemes, could be electrified
should be also offered to
RGGVY scheme
Customs Duty Customs Duty on aluminum, The Customs Duty on these Positive It would bring down the cost
copper, zinc and steel alloys Basic Raw Materials should differential between interna-
has already been reduced to be brought down to 0% tional and domestic market
5% from 7.5% in January and would benefit equipment
2007 manufacturers.
Infrastructure Benefits u/s 80 IA available Power Generation, Positive This will help the Govt of
status to power to utilities engaged in Transmission and India's Programme " Electric-
equipment generation, transmission Distribution business ity for All at affordable cost by
suppliers and distribution of power in a should be added to the list year 2012".
restricted manner. of "infrastructure Industry
Status", appearing under
INCOME TAX ACT- SECTION
80 IA and Service Tax Act with
this facility available for
projects commissioned till
31st March 2012, so that
benefits currently available
only to the Utilities (Owners
of the projects) will also be
provided to all stakeholders.
Top Picks
Cummins India 333 19.5 22.6 17.0 14.7 BUY
Kirloskar Oil 120 9.3 11.3 12.9 10.6 BUY
Thermax 662 34.8 45.6 19.0 14.5 BUY
Bharati Shipyard 615 56.0 85.3 11.0 7.2 BUY
Ratnamani Metals & Tubes 941 140.2 185.5 6.7 5.1 BUY
18th February 2008
EXPECTED BUDGET IMPACT CEMENT

We remain optimistic on future outlook of cement industry because of government
LONG TERM OUTLOOK
focus on infrastructure, increasing housing demand, opening of retail sector &
Positive raising capacities of corporate sectors. The future growth of the industry will be
driven by expected GDP growth of more than 8 %. One of the main concerns for the
Indian cement industry is the cheap imported cement. We feel budget 2008-09
would have a positive impact on the sector.

Taxes & Levies Total tax and levies are To Rationalize the tax rate Positive This would help in reduction
around 22% (which constitute prices
60% or more of the ex-factory
price)
Excise Duty on If MRP is > Rs.190 and < To abatement of 55% on the Positive It will give cement makers a
cement Rs.250 per bag excise duty excise duty and rationalize window to improve realisation
is 12%, MRP is < Rs 190 the ad valorem duty. and expand capacities to coup
then a specific rate of excise up increasing domestic
duty of Rs 350 per tonnes is demand.
charged, where MRP is over
Rs 250 then a specific rate of
excise duty of Rs 600 per
tonnes is charged.
-In absence of abatement,
tax is levied on base of Trade
margin & tax on tax.
VAT VAT on cement & clinker is VAT on cement & clinker Positive Would help to reduced cost per
charged @ 12.5% should be brought in line bag of cement, which would be
with similar construction helpful in propping up
material like steel to 4%. Infrastructure growth.
Import duty Currently coal and pet coke To be completely abolished. Positive Would reduce input cost and
are charged with an import help to compete with imported
duty of 5%. cement.
Duty on cement Withdraw of CVD & zero Restatement of CVD on Positive Provide level playing field for
import custom duty Imported cement to the the domestic producers
extend of excise duty
18th February 2008
EXPECTED BUDGET IMPACT CONSTRUCTION / INFRASTRUCTURE

We remain optimistic on Construction and Infrastructure sector going forward.
LONG TERM OUTLOOK The incremental participation in the Construction equipment sector by the
government and private players has accelerated the growth at over 30 % p.a.
Positive
Infrastructure development in India has taken off in a major way in the last 2 years
and is witnessing impressive growth across various segments such as Roads,
Power, Ports, Telecommunication, Railways and Airports.
The Planning Commission has proposed to increase infrastructure expenditure

as a percentage of GDP from its current share of 5% to 9% by 2012. The total
infrastructure investments planned for the next 5 years of US$ 350bn requires
huge participation from FDI and FII inflows and the Government's recent decision
of permitting FDI's up to 74% equity for road and bridge construction as a part of
infrastructure will boost the sector largely.

Increase the Current level of investment is To increase the Positive Would encourage higher
rate of at 35% of GDP investments by over $ 350 economic growth in the
investment billion in next five years and infrastructure segment at the
the rate of investments international level
should be raised by 5%.
Viability Gap Currently VGF is at 20% for To raise the limit on the Positive Would help to improve the
Funding the urban transport systems Viability Gap funding to viability of an infrastructure
like metro, monorail and road 30% project as VGF is a one-time
transport system grant by the government with a
long gestation period
Tax on Interest Tax on Interest income from Exemption of tax on Positive Would encourage investors to
income investments in infrastructure income from interest on invest in infrastructure
bond is at 20% investments in
infrastructure securities
such as in power and
roads
Tax sops for The exemption was Reintroduction of tax sops Positive Would improve the
infra-funding withdrawn by the Finance Act, on infra-funding under investments in infrastructure
2006 section 10(23G) and other projects
Infrastructure Solar Energy projects are not Infrastructure status for Positive Would help the industry to give
status for solar given the infrastructure status ”solar energy projects” a an environment friendly
energy projects and also want the existing source of energy and also
power plants to install reducing the dependence on
solar systems to the extent power from other sources
of 10 % of their electricity
generation
Tax holiday Healthcare industry not Expect to grant Positive Would provide a boost to the
benefit u/s 80-IA having an infrastructure 'infrastructure status' to the healthcare industry which is
status healthcare industry and grossly inadequate.
thereby provide tax holiday
benefit u/s 80-IA
Service tax to be At present service tax is levied Since the construction Positive Would motivate private sector
withdrawn at around 5%. sector as a whole has investments
been declared as an
industry under the IDBI Act,
no service tax should be
applicable to an industry
as per the Act
18th February 2008
EXPECTED BUDGET IMPACT Education

India is currently one of the largest markets for formal school education in the
LONG TERM OUTLOOK
world with an addressable population of 400-450 mn and an annual spend of
Positive about $35 bn. India currently has over 1 mn schools proving education from k-12
to over 200mn students. Education has become prime focus for the government
and has allocated Rs.106.71bn for Sarva Shiksha Abhiyan to improve the education
system, teacher training and innovative initiative in the country. The allocation for
school education for 2007-08 was Rs 14,779.29 crore (Rs 147.79 billion), while the
allocation for Sarva Siksha Abhiyan in the Eleventh Plan is Rs 71,000 crore (Rs
710 billion), up from the Tenth Plan outlay of Rs 17,000 crore (Rs 170 billion). Going
forward, we believe with India steadily moving towards a more knowledge based
economy the spending on education will increase manifold with the households
spend on Education moving up the priority list education ought to become the top
most priority of Government, thus Education sector is likely to witness more robust
growth in the coming years.

Budget Allocattion for Education to Likely to enhanced further, Positve Likely to benefits players
Allocation be enhanced by 34.2%from Government has already operating in the domestic
Rs.17133 crore to Rs.23142 announced allocation for Education sector , with
crore, of which Rs.10,671 Sarva Siksha Abhiyan in the increased budget outlay for
crore for SSA Eleventh Plan is Rs 71,000 the sector.
crore (Rs 710 billion), up
from the Tenth Plan outlay of
Rs 17,000 crore (Rs 170
billion
Quality Issues Two lakh more teachers to be Likely to enhanced further Positive Companies operating in
employed and five lakh more Education Infrastructure sector
classrooms to be likely to get benefits.
constructed.
Technical up 1,396 Indian technical Likely to increase further Positive Likely to benefits operating in
gradation institutes to be upgraded to technical upgradation of
achieve technical excellence. education.
Top Picks
Core Projects & Tech. Ltd 200 14.9 28.4 13.4 7.0 BUY
18th February 2008
EXPECTED BUDGET IMPACT FMCG

In FY07 the Rs 75,000-crore FMCG sector grew at a healthy 10-15%, backed by
LONG TERM OUTLOOK
growth in urban markets and the surge in premium products, the industry had to
Positive deal with steep inflationary pressures. Costs of key raw materials such as
vegetable oils, palm oils, crude-oil derivatives, wheat and milk have shot up by as
much as 30-40% over the past eight to ten months. This has put huge pressure on
operating margins, which in turn have led to prices of products shooting up. Soap
prices, for example, which have shot up 10% over the past six months, resulted in
a steep 5% decline in soap volumes last quarter. However, we believe the Indian
FMCG sector is well placed deliver stronger double digit growth on the back of
thurust of the Government on pro rural policies, over 8.5% GDP growth, creation
brand awareness among rural public Etc. We remain positive towards industry
peers like - Britania, Godrej Consumer, Hindustan Unilever etc.

Excise Duty 16% on Soaps & detergents. Rationalisation of Excise Neutral With raw materials costs
duty. already escalating, a reduction
in excise duty on soaps and
detergents would result in
volume rise that got effected by
cost push price rise.
Biscuits industry is charged Full exemption from excise Finance Minister had
with an excise of 8% but only exempted the biscuit category
on biscuits with retail prices from excise duty but only on
above Rs 100 per kg. biscuits with retail prices under
Rs 100 per kg.
Central Sales Process foods currently Exemption from the CST Positive Drive volume growth for
Tax charged with central sales tax processed foods.
of 3%
Biscuit industry is currently Reduction in VAT to 4% Positive Biscuits (along with cigarettes
VAT
charged with a VAT of 12.5% and pan masala) is the only
exception among all
processed foods categories
on which a 12.5% VAT is levied.
Positive Pro-rural policies, which would

Pro-rural
Policies actually put more money in the
rural consumers’ pockets,
would fuel growth in the sector
18th February 2008
EXPECTED BUDGET IMPACT HOTELS

We remain positive on Industry as there exist a demand-supply mismatch which
LONG TERM OUTLOOK
will result in a healthy growth in occupancies & ARR's in near future. This will help
Positive in improving margins of the Hotel S ector. Increased propensity to spend among
younger upper middle class & growth in tourism has resulted in optimistic outlook
for hotel industry in longer term as well.

Infrastructure Currently not available Infrastructure status should Positive To spur fresh investment for
status be given to hotel industry. creating more capacity and
boost hotel industry
Tax exemption Tax holiday of 5 year for two- To be extended to new five- Positive Prop up the investment in the
star, three-star, four-star star hotels coming up in country.
hotels and convention other parts of the country.
centers with seating capacity
of not less than 3000 in NCR
area of Delhi, Faridabad,
Gurgaon & Ghaziabad to
seed up the infrastructure
needs for the commonwealth
Games.
Service tax -Hotel industry is required to The exemption to Hotel Positive To avoid double taxation.
pay service tax on services industry from paying service
received from Foreign Tour tax on services received
operators. from Foreign Tour operators.
-On banquet both service tax -On banquet service only
on food & beverage & VAT are VAT to be charged
charged
Section 32- The depreciation on hotels The depreciation rate to be Positive Higher cash flows
Depreciation on building @ 10% restored to 20%.
Hotel building
18th February 2008
EXPECTED BUDGET IMPACT INFORMATION TECHNOLOGY

Negative Current view
On account of continuing rupee appreciation coupled with slow down worries in
LONG TERM OUTLOOK the US market has taken a toll on stock prices of Indian IT companies in recent
times. Nevertheless, we believe on the back of incremental growth coming from
Positive non- US geographies coupled with growth in non-financials industry verticals and
through inorganic initiatives Indian IT sector is on track with its growth agenda for
coming years. The Indian software and services exports are expected to touch
the $40 billion mark in FY08 ($31.3 billion in FY07), according to IT trade body
Nasscom's Strategic Review 2008. Indian IT industry can exceed its aspired target
of $60 billion by 2010 in software and services exports and $73-75 billion in overall
software and services revenues by 2010. In the medium term, we expect IT sector
to underperform the market indices, till the time it gets more clarity on the impending
US IT budgets coupled with trending down of rupee appreciation.

Tax exemptions Sec 10A/10B Software Continue the STPI scheme Negative, In the event of non-extension
for IT Exports are exempted from and tax incentive under Government of tax benefits under STPI
companies tax till assessment year section 10A/10B for next ten might Effective tax rates would
under section 2009-10 years. consider increase by 300-400 bps to 17-
10-A and 10-B extension of 18% in FY10, post expiry of the
for 10-year tax benefits to STPI benefits, which inherently
exemption BPOs. dampen the profitability.
under the
Software
Technology
Parks of India
(STPI) scheme
e Duty
FBT on ESOP's Fringe Benefit Tax (FBT) More clarity on the Neutral, Neutral, as employers will
levied on Employee Stock accounting treatment of the Inclusion of recover FBT from employees.
Option Plans, the FBT Fringe Benefit Tax (FBT) other
imposition will be effective levied on Employee Stock services
from April 1, 2008 Option Plans. and fringe
benefits
offers by
Indian IT
companies
to its
employees
under FBT
would put
further
pressure on
IT
companies..
Excise duty on Currently there is 8% excise The industry wants the levy Positive This is in favour of nurturing the
packaged duty levied on packaged of this excise duty to be Indian Software industry by
software sold software sold over the dropped completely on cutting duties and
over the counter customized software and subsequently making India a
counter packaged software. favoured IT and IT related
activities destination as well as
curbing the piracy in software.
Allocation e- Increased allocation to Rs Allocation likely to enhanced POSITVE Domestic focused IT
governance 7.2 bn as against Rs 3.9 bn in the current union budget companies are likely to benefit
project in the previous year for from the increased allocation
ambitious e-governance to e-governance project
project
Top Picks
Infosys Technologies Ltd 1519 97.3 107.5 15.6 14.1 HOLD
Tata Consultancy Services Ltd 871 62.7 67.3 13.9 12.9 HOLD
Satyam Computer Services Ltd 425 30.1 32.8 14.1 13.0 BUY
18th February 2008
EXPECTED BUDGET IMPACT MEDIA AND ENTERTAINMENT

Media and Entertainment is one of the fastest growing sectors in India. The
LONG TERM OUTLOOK
increasing rate of urbanization, the penetration of television and radio industry in
Positive the rural areas with the help of the technology and the rising levels of incomes of
the people in India has facilitated the growth rate of Media and Entertainment
industry in India. The Indian Media and Entertainment industry stands at the value
of around Rs 43,700-crore currently and is expected to grow at an annual growth
rate of 19% to reach Rs 83,740 crore by 2010. The Indian economy is growing at a
fast rate and the Media and Entertainment industry is expected to benefit
significantly from it. We expect union budget 2008-09 to have a neutral impact on
the sector, nevertheless on a longer term perspective we expect Indian media
and entertainment sector to show strong growth prospects.

Excise Tax :
Set Top Box: 16.5% 12.0%
Broadcasting 16.5% Status Quo Maintained

Equipments: Neutral Reduction in excise duty and
introduction of 5% custom in
Digital Cinema 16.5% the set top boxes in order to
Status Quo Maintained
Equipments: boost domestic set top boxes
manufactures, will not directly
Custom Duty: helps any of the listed
Set Top Box: 0.0% company, nevertheless with
5.0%
cheaper amiability of Set top
Broadcasting 10.3% boxes will help to increase
Equipments: Neutral penetration of CAS
(Conditional Access
Digital Cinema 7.7% System).
Development
Projects:
FBT ESOPs having been Neutral More clarity on the accounting

brought under the FBT pre- treatment of the Fringe
view. Benefit Tax (FBT) levied on
Employee Stock Option
Plans.
Impact: Neutral, as
employers will recover FBT
from employees.
FBT on expenses like food, Negative FBT On Other Items Like

traveling, accommodation Food, Travelling,
etc. was introduced last year Accomodation Is Likely To
Contiune.
18th February 2008
EXPECTED BUDGET IMPACT OIL & GAS AND ALLIED SERVICES

We remain optimistic on the long term growth prospects in the Oil & gas sector
LONG TERM OUTLOOK maintaining a stable outlook for both upstream (E&P) and downstream (refining
and marketing) sectors in India. The Center's plan to expand the exploration
Positive
licensing area from 44% of the Indian sedimentary basin to 80% by 2011-12 provides
a positive outlook for the E&P companies.
The Government formulation of NELP has encouraged active participation from

foreign players to bid in oil and gas blocks and also through NELP- VII, it provides
newer business opportunities to both domestic as well as foreign players creating
new developments in E&P sector. We expect this to be beneficial to the E&P
companies in the long term.

Service Tax Service Tax is at 12.36% Exemption from service tax Positive Would help in reducing the
Construction services to the for E&P activities related to burden of the already-high cost
Ports are exempted from oil and gas of exploration and also
service tax would encourage foreign oil
Dredging services to the giants to participate in the
Ports be exempted future NELP bidding. Will
reduce the development costs
of the Ports and thereby make
the transaction costs of their
services competitive
Natural gas is currently taxed Inclusion of natural gas in Positive Would allow more usage of
Central Sales natural gas as it is environment
at 12.5% the list of 'Declared Goods'
Tax friendly
in order to provide a level-
playing field among different
primary energy sources
The central excise duty on Rationalization of excise Positive Would help the Aviation
Central Excise ATF is 8%. duty on aviation turbine fuel industry to cut down their major
Duty Ad valorem component of (ATF) for regional jets. cost component and that
excise duty on petrol and would in turn help the
diesel is at 6% Rationalization of ad consumers. Would allow
valorem excise duty on lesser fluctuation of prices due
petrol and diesel and to be to changes in crude rate and
replaced with specific duties would benefit the consumers
Customs Duty Currently, customs duty Reduction of custom duty by Positive Would benefit the power
levied 3% on naphtha and liquefied industry in controlling the
* 5% on naphtha, propane fluctuating price on import of
* 5% on liquefied natural gas, Rationalization of the 5 % naphtha and would encourage
* 4% on crude oil and coal duty for liquefied natural gas them to increase the usage of
The Customs duty on crude natural gas as fuel
oil should be brought down
to zero
VAT Rate VAT rates is at 12.5% Rationalization of VAT Positive Would help reduce the burden
on the consumers, particularly
power and fertilizer sectors
Tax Holiday for The Legislature has granted The hydrocarbon sector to Positive Will encourage the
h y d r o c a r b o n a 7-year tax holiday to such be treated on a par with the entrepreneurs to undertake
sector undertakings under section power sector, and a 10-year developmental activities
80-IB of the Income Tax Act tax holiday under Section
1961. 80IA of the Income Tax Act to
be granted.
18th February 2008
EXPECTED BUDGET IMPACT POWER UTILITIES

Government still plays a key role in the development of this sector. The private
LONG TERM OUTLOOK initiative in the sector has just taken good pace due to favorable policy initiatives.
When the renovation and capacity addition across the value chains of the industry
Positive has become a necessity, not only for the industry but for the country itself, the
industry is looking for the favorable response from the budget proposals which
will ultimately facilitate the investment in the sector. We believe the current tax
sops for resource mobilization for the sector specific NBFCs like PFC and REC
would continue in the current budget and it would also be extended to players like
NTPC and other Private power Utilities. Looking at the growing interest of the
foreign institution in the sector, we feel the restrictive ECB norms would be relaxed
for the sector with strict monitoring mechanism in place. Further we trust the
grants through the APDRP scheme would go for more rationalization which in
other way help in well directed unbundling of the SEBs with increased private
initiative. We therefore possess a positive outlook on the sector both in the short
and long term.

Fund The industry is getting This sop would continue Positive The mobilisation of
Mobilization concessional finance from and would be extended to resources for the project
various tax saving bonds the utilities also. Further the executors and owner should
floated by the power financing ECB norms would be be facilitated for meeting the
companies like REC and relaxed for large power planned capacity addition.
PFC. However such benefits project executors as against
have not been extended to the $20 mn cap currently.
Utilities.
Budgetary The total gross budgetary The RGGVY scheme for the Negative in Rural Electrification still
support to Key support for the two important 11th plan has already got a the short term needs the right support from
Schemes schemes, APDRP (from Rs go ahead last month. So we but neutral in the government as the
650 crore in FY07 to 800 crore expect the RGGVY would get the long run effective electrification is still
in FY08) and RGGVY (From its due and improved far from the desired.
Rs 3000 crore in FY07 to Rs support in the current However increased private
3983 crore in FY08) got an budget. However the Gross initiative in the T&D sector
improved support in the last Budgetary support for the with limited but focused
budget. However due to APDRP scheme may budgetary support through
some internal difference witness a cut. APDRP scheme would
between the power and improve the efficiency of the
finance ministry the APDRP T&D sector upto a satisfactory
scheme for the 11th plan has level. So the Budgetary
gone for a detail review. support may cut to a
considerable extent in the
APDRP scheme.
Regulatory Currently there is no CERC would be allocated Positive Encouraging the mining
regulator for regulating the the duty of regulating the initiatives by the power
coal prices. Also the coal coal prices. The mining generators.
mining by the power activity would enjoy 10 year
generators don't get any tax holiday.
favorable tax incentives for
undertaking this diverse
initiative.
Equipment The power sector has not Indirect and Direct Tax Positive This measure would
Supply been allotted infrastructure benefits would be extended ameliorate the current
status. There is no such tax to the new manufacturers of shortage of critical power
sops for the setting up for the critical power equipment. equipments in the country.
critical power equipment
manufacturing in the country
Top Picks
NTPC 204 10.3 12.8 19.7 15.9 Buy
18th February 2008
EXPECTED BUDGET IMPACT PHARMACEUTICALS

Research & Development is the prime focus of the Pharma Industry, as it aspiring
LONG TERM OUTLOOK to move forward in the pharma value chain by discovering new drug molecules
and new drug delivery system. Also Indian Pharma industry, with its advantage
Positive like low cost technical pool and prospering R&D capabilities, is well placed to
grab a major chunk of global outsourcing opportunity in the contract research
and manufacturing space. Considering industry scenario, we believe Government
would provide fiscal benefits to R&D, which would drive long term growth for
Indian Pharma. Thus, We remain positive for the sector, specifically for R&D
intensive players like - Ranbaxy, Nicholas Piramal, Sun Pharma Advance Research
Company etc.

Incentives for Weighted deduction of 150% Weighted deduction to be Positive
R&D on R&D spending (other than raised to 200% of R&D
any expense on the cost of spending and also to be
land and building) - U/s.35 extended to depreciation on
(2AB) land and building dedicated This would provoke higher
for research. spending towards innovative
R&D by Indian players and
Deduction u/s.35 (2AB) are To be extended to Clinical Positive could develop India as the
available only to basic re- Trials, Bio-equivalence preferred global destination
search carried on at the in- studies etc. that are done for Pharma R&D and
house R&D facility. outside the R&D facility, manufacturing.
whether in India or in any
foreign country.
Also spending in obtaining Patent filling and getting

regulatory approvals and fill- product approval should be
ing of patents abroad are al- allowed for weighted
lowed of weighted deduction. deduction.
Tax holiday Companies having the main The 100% deduction should Positive This would prop up R&D
object of R&D and approved be extended upto 31st spending in country.
by the prescribed authority is March, 2012.
eligible for 100% tax exemp-
tion from earnings upto 31st
March 2007 u/s 801B(8A).
Excise Duty Currently 16% on MRP with To be reduced to 8% and Positive This would make the
an abatement of 42.5%. abatement to be raised to medicines affordable and
55% could see volume growth in
domestic formulations.
Customs Duty Life saving drugs currently These should be fully Positive To make Life saving drugs
attracts custom duty in the exempted from Customs affordable. A
range 5-10%. Duty
Fringe Benefit Physician samples currently Physician samples should Neutral

Tax attract FBT. be exempted from FBT
Top Picks
Ranbaxy Laboratories Ltd # 396.2 20.8 27.1 19.0 14.6 BUY
Elder Pharmaceuticals Ltd 390.0 45.8 57.3 8.5 6.8 BUY
Indoco Remedies Ltd 266.0 53.4 65.1 5.0 4.1 BUY
Orchid Chem & Pharma Ltd* 244.8 23.6 30.9 10.4 7.9 HOLD
* - Under Review# - Year Ending December
18th February 2008
EXPECTED BUDGET IMPACT RETAIL

With the steady progress in Indian economy, improving disposable income and
LONG TERM OUTLOOK
consequent rising consumerism, we believe Indian Retail sector would grow
Positive progressively in future. Incidentally, the market penetration of India Retail in
organized sector is extremely low. As per industry estimates, Retail sector is
likely to grow up to USD 427 billion by 2010 and the organized retail could account
up to a share of as high as 20%-22% of this market. Already, more than USD 30
billion of investment is being planned by both domestic and foreign players in
retail space in the coming five to seven years. Considering untapped potential &
growth in retail sector, we remain positive in long term but like to be neutral in
short-term, as the sector still in the nascent stage.

Industry status Not available To grant industry status Positive Provision of Industry status will
ensure retailers have greater
access to funds, more
transparency with regard to
infrastructure, supply chain etc.
Will also help retailers to deal
with issues of man power and
protests in a better way.
Service tax on VAT on sales of goods and Allow set off of service tax on Positive Would help in Standardizing tax
renting of additional12.24 % service tax lease rentals paid against structure
immovable on lease and rentals on im- the VAT liability on sale of
property mobile property used for goods, etc or create a new
commercial purposes composition scheme
Fiscal There are no such initiative To allow 100% stamp duty Positive Would help in penetration of
Incentives for concession and waiver of retail industry along with
development of registration fee for purchase increase in consumption and
retail / lease of land or building for employment opportunities in
Parks/set-up retail. Relaxation of 100% the economy.
FSI for designated retail
projects.
18th February 2008
EXPECTED BUDGET IMPACT REALTY

Real estate sector in India is touching new heights as the boom in property prices
LONG TERM OUTLOOK are spreading all across .Realty sector has been one of the most attractive sectors
for which has drawn huge investments from domestic and foreign investors.This
Positive sector is estimated to touch US$ 50 billion by 2009-10 along with the estimated
planned investment of US$ 475 billion over 2007-12 and an expected growth of 7-
8% of GDP. We remain positive on this sector.we believe that this sector will continue
to be in limelight and will attract huge investments in both residential and
commercial space mainly because of the robust demand and growing economy.
Interest rates Interest rates up by ~300- Government should take Positive It will make housing affordable
350bps in last 3 years measure towards reducing
home loan interest rates &
project finance interest rates
Payment of Stamp duty is payable twice, Introduction of Value added Positive It will reduce the burden of
double stamp once during purchase of land stamp duty (VAS) wherein stamp duty on residential
and again on sale of Stamp duty once paid during property owners.
duty on sale of
apartment/ office by one pruchase of land will be
apartments / owner to another adjusted towards stamp
offices. duty paid during conveyance
of apartments / offices
Should be considered as Positive Currently India is facing acute

C o n c e s s i o n s No Incentives
infrastructure projects and shortage of houses.
for mass finance should be made Concnessions to mass
affordable available easily, Exemption housing would attract more
housing on exise, VAT & Service tax investment in this segment
on Building material,
Income tax exemption for 10
Years
Extension of 80 The built up area of the shop The built up area of the shop Neutral This would enable builders to
IB(10) in a housing project can not in a housing project should undertake construction of a
exceed 5% of the aggregate be revised as 5% or 2000 large project or township
built up area or 2000 Sq. ft sq. ft whichever is higher where the requirement of the
whichever is less project for commercial
premises would be much
higher.
REIT dividend Dividends from REITs are Divivdends paid should be Positive Will ensure wide participation
now taxable by both the taxed only to the institution of investors
institution and the receiver not to the receiver
REIT Not allowed to invest in Should be allowed to invest Positive Among the various classes of
Investments housing development in housing development real estate, the one which is
activities activities, Exemption from most needed in India today, is
capital gains tax on sale of housing. This provision will
assets enable REITS to promote not
only commercial buildings but
also provide assistance to
promote Housing.
Currently, only those Small and medium Positive This will encourage and
S E Z companies buying at least enterprises in the IT industry enhance the growth of SME's
for SME’s in IT 25 acres of land are allowed want extension of STPI sops in IT which are expected to
to set up operations in SEZs and exemption from fringe expected to contribute
which offer various tax benefit tax and service tax on significantly to total software
incentives. office space and must be and services revenues by
permitted co-ownership of 2010.
space at special economic
zones.
18th February 2008
EXPECTED BUDGET IMPACT TELECOM EQUIPMENTS

The telecom equipment manufacturing in our country has not been taken much
LONG TERM OUTLOOK
seriously due to strong long standing business association of the TELCOs with
Neutral the multinationals. However with the positive influence of the semiconductor policy
and the consistent R&D effort and improved service capability of the equipment
manufacturers in the country the manufacturing base is witnessing a satisfactory
letup. However with the growing alignment of the manufacturing effort of the
Indian manufacturers with the other manufacturers of the world, we believe any
positive/negative recommendation of the budget will have any significant impact
on the industry. We keep our neutral view on the sector so far as the budget
proposals goes, but possess a positive biased neutral business outlook for the
long term.

Inverted Duty Certain Vital Telecom Extend the ITA-1 benefits to Neutral ITA-1 telecom equipments enjoy
Structure Equipments like Telecom these vital components and zero duty and these products are
Housing, Outdoor Enclosure, reduce the custom duties to just the accessories for these
Power Controllers etc that are zero. Remove the duty on the products. So it is imperative to
not covered in the ITA-1 domestic manufactured extend such benefits
Classification are subject to finished products and
the levy of custom duty. reimburse the CVD or ED of
the inputs.
A current DEPB rate does not The DEPB rates should be Will effectively compensate the
Revision of compensate the local taxes. revised upwards Positive appreciating rupee and unsound
DEPB rates local tax structure in the country
Top Picks
Gemini Comm 181.6 21.9 28.2 8.3 6.4 BUY
18th February 2008
EXPECTED BUDGET IMPACT TELECOM SERVICES

We remain quite optimistic on the growth of the telecom services sector. The
LONG TERM OUTLOOK
sector has provided its services at affordable rates despite being subjected to
Positive tax at higher rates among the other industrial sectors. The industry is expecting
further rationalization of the tax structure and procedures so as to make the
services more affordable to the general mass of the country. We believe the
current budget will streamline some of the tax procedures and more broaden the
utilization of USO funds and maintain the emphasis of the sector in the Bharat
Nirman Program.

Unified tax regime No such initiatives To have a single levy on Positive Reduction of tax administrative
revenue. procedures.
H u g e As per Rule 6(3)(c) of the Should be exempted from Positive Reduction of accumulation of
accumulation of Cenvat credit rules, the maintaining separate CENVAT credit
Cenvat credit due provider of output services accounts towards exempted
to limit of 20% shall utilize only to an and taxable services and
utilization towards extent of an amount not should be allowed to avail
Input and Input exceeding 20% of the and utilize CENVAT credit to
services in case amount of service tax the extent of the same used
both exempted payable on output service. towards taxable output
and taxable service.
services are
provided by the
service provider.
Service Tax on 12.24 % service tax on Service tax on renting of Positive Reduce the cost of service for
Renting of lease and rentals on immovable property for use the end user and roll out of
I m m o v a b l e immobile property used for in commerce and business affordable services to all areas
Property for use in commercial purposes. should not be levied. and especially to the semi-
Commerce and urban and rural areas.
Business
CENVAT credit for Not available Telecom company should Positive Would lower the burden of
Fuel be allowed input credit for levies on the sector and
consumption of fuel used for provide an incentive for greater
maintenance and running of investment for expansion of
networks service.
Levy and taxes on Internet / broadband Data Wireless data modem/card Positive Would make the data card
internet / Card imported, attracts with PCMCIA/USB/PCI cheaper and is thus
Broadband data BCD: Nil, CVD: 16%, Express port be classified encourage the usage of
card Ed.Cess:2% and Special under 8- digit custom tariff internet by the masses.
Addl. Duty: 4%. (Effective code of 85 17 62 30 (Modem)
duty - 21.65%) Due to lack and be exempted from CVD,
of clarity, operators have Ed cess and SAD.
been classifying the
internet / broadband data
cards in different customs
tariff codes
18th February 2008
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Reliance Budget Exp 08 09

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Pre Budget Expectations

Research Team Election Friendl

Reliance Money House, Plot No - 250 - A - 1, Baburao Pendharkar Marg,

Therefore in terms of clear policy initiatives in this forthcoming Union Budget, we

MARKETS GOING FORWARD

Pre & Post Budget Market Movments

We believe India’s macro economic prospects to continue remaining robust and

Tax Collections - continue to be buoyant (Rs. Crore)

Summary of Central Government Finances

HIGH GDP GROWTH TO BE SUSTAINED

Corporate Earnings Growth - NIFTY 50 Companies (Rs. Crore)

Aviation(0)* & (1)# & (0)$ - 1,875.4 - - - 140.5 - - 40.0 -

* Is the total number of companies in a sector in Q3 FY 08

As mentioned earlier Infrastructure, Agriculture, Public Health and Education would

 60% population depends on Agriculture

 To Increase FDI an Improved Infratructure is a must

TAX PR OPOSALS – EXPECT

EXPECTED BUDGET IMPACT AUTOMOBILE

Key budget expectations

EXPECTED BUDGET IMPACT AUTO ANCILLARY

Key budget expectations

EXPECTED BUDGET IMPACT CAPITAL GOODS

EXPECTED BUDGET IMPACT CEMENT

Key budget expectations

EXPECTED BUDGET IMPACT CONSTRUCTION / INFRASTRUCTURE

The Planning Commission has proposed to increase infrastructure expenditure

Key budget expectations

EXPECTED BUDGET IMPACT Education

Key budget expectations

EXPECTED BUDGET IMPACT FMCG

Key budget expectations

Positive Pro-rural policies, which would

EXPECTED BUDGET IMPACT HOTELS

Key budget expectations

Source:Reliance Money Research

EXPECTED BUDGET IMPACT INFORMATION TECHNOLOGY

Key budget expectations

EXPECTED BUDGET IMPACT MEDIA AND ENTERTAINMENT

Key budget expectations

Broadcasting 16.5% Status Quo Maintained

FBT ESOPs having been Neutral More clarity on the accounting

FBT on expenses like food, Negative FBT On Other Items Like

EXPECTED BUDGET IMPACT OIL & GAS AND ALLIED SERVICES

The Government formulation of NELP has encouraged active participation from

Key budget expectations

EXPECTED BUDGET IMPACT POWER UTILITIES

Key budget expectations

EXPECTED BUDGET IMPACT PHARMACEUTICALS

Key budget expectations

Also spending in obtaining Patent filling and getting

Fringe Benefit Physician samples currently Physician samples should Neutral

EXPECTED BUDGET IMPACT RETAIL

Key budget expectations

EXPECTED BUDGET IMPACT REALTY

Should be considered as Positive Currently India is facing acute

EXPECTED BUDGET IMPACT TELECOM EQUIPMENTS

Key budget expectations

EXPECTED BUDGET IMPACT TELECOM SERVICES

Key budget expectations

Source:Reliance Money Research

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60% population depends on Agriculture

To Increase FDI an Improved Infratructure is a must