Index

Strategy Sector-wise Expectations Automobile Banking Capital Goods Cement FMCG Infrastructure Information Technology Media g Metals & Mining Oil & Gas Pharmaceutical Power Real Estate Telecom 11 13 17 19 21 22 25 27 29 31 34 37 40 43 1

Union Budget 2012-13 Preview

Union Budget 2012-13 Low expectations; Fiscal discipline will suffice The central government is evidently suffering from regional shackles (exacerbated in the recent state elections) and, h l ti ) d hence, major reforms such as GST FDI i retail and l d acquisition may t k an extended j f h GST, in t il d land i iti take t d d period of time to get implemented. In the meanwhile, in the current budget, in our view markets will be happy even if the government at least delivers on one front a credible commitment towards fiscal discipline. For any fiscal discipline promises to be viewed as credible, in our view, the government would need t i l d to implement some concrete measures such as i di t t t t h indirect tax i increases, while refraining f hil f i i from any increase in populist programs at least in this budget (as against the next budget, which will be the last before general elections). A 50-100bp reduction in fiscal deficit in FY2013 (aided by 2G re-auctioning and stepped-up p ( y g pp p disinvestments, apart from tax increases) would significantly improve the outlook on inflation, interest rates, monetary policy and private investments a key positive for interest-sensitive sectors. Also, pick-up in infrastructure ordering activity by government bodies in roads, ports and power transmission, among others, is one of the low-hanging fruits that the government needs to grab hold of. Any measures , g g g g y incentivizing private investment in infrastructure and capex would also be welcome. On the flip side could be sectors on the receiving end of higher taxes such as FMCG and auto. In our view, one of the most visible areas of policy inaction though not necessarily in the ambit of the budget but h b d t b t where any f form of clarity or roadmap would b welcome are mining and l d acquisition. f l it d ld be l i i d land i iti As evident from the significant negative contribution to overall GDP growth in recent quarters, supply issues in coal, iron ore etc. are currently literally holding the economy to ransom. Any positive developments on this front could prove to be a bonus in this budget.
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Union Budget 2012-13 - Preview

Sector wise - Key expectation from the budget and expected overall impact
Sector Automobile Banking Capital Goods Cement FMCG Infrastructure IT Media Metals & Mining Oil & Gas Pharmaceuticals Power Telecom Key expectation from the budget Hike in excise duty, with additional diesel tax of up to `80,000 per vehicle Capital infusion in PSUs and fiscal consolidation Imposition of import duty on power generation equipment Hike in excise d k duty and waiver of import d d f duty on coal and petcoke l d k Hike in excise duty rates Higher budgetary allocation, channelizing low-cost, long-term funding for projects and introducing measures to remove bottlenecks Incremental allocation under schemes to digitize various departments Waiver of custom duty on set top boxes Increase in import duty on manganese ore and waiver of import duty on coal Increase in prices of petroleum products and waiver of custom duty on LNG Higher budgetary allocation for healthcare and increase in tax sops on R&D deduction Imposition of import duty on power generation equipment and waiver of import duty on coal Increase in tax sops under Sec. 80-IA Expected Overall Impact Negative Positive Positive Neutral N l Negative Positive Neutral Positive Neutral Positive Positive Neutral Neutral

Union Budget 2012-13 - Preview

Fiscal consolidation is the need of the hour
Government finances under pressure: Government finances are estimated to have come under severe strain in 2011-12. Up to January 2012, the accumulated fiscal deficit of the central government reached `434,933cr, 105.4% of the budgeted amount, and made the task of containing revenue and fiscal deficit at the levels indicated in the budget impossible in our view, there could be as much as 100-125bp slippage on the fiscal deficit front from budgeted levels. This is despite contained spend on flagship schemes and other expenditure heads within budgeted levels, mainly due to the higher subsidy burden (effect of lower estimates, higher crude prices and rupee depreciation) and lower disinvestment (weak equity market conditions) on one hand and lower direct tax collection due to GDP slowdown on the other. Measu es a e e pec ed o c ease eve ue Measures are expected to increase revenue: Fiscal consolidation can be achieved without compressing sca co so da o ca ac eved w ou co p ess g expenditure on much-needed social and physical infrastructure and populist flagship schemes by significantly increasing tax revenue and reducing subsidies. For this, in the medium term, it is of prime importance that the government implements global benchmarks of taxation such as GST. However, in the near term, at least in this budget, we would expect the government to a) increase excise duties and service , g , p g ) tax by 200bp and further broaden service tax net and b) achieve high mobilization from albeit one-time items such as re-auctioning of 2G licenses and stepped-up disinvestments. Also, while the government may, from a populist point of view, make announcements on Food Security Bill, in our view this bill may find it hard to get implemented as it seeks to replace states own schemes something that the current g p p g political landscape may not allow so easily. So, we do not expect the bill to materially alter FY2013 fiscal calculations.

Union Budget 2012-13 - Preview

FY2011-12 Budgeted Public Finances vis--vis Actual up to January 2012
Particulars Budget Estimates 2011-12 (` cr) 789,892 664,457 125,435 55,020 15,020 40,000 844,912 816,182 , 733,558 267,986 82,624 397 441,547 363,604 77,943 16,754 1,257,729 , , 412,817 307,270 144,831 Actual upto % of actual Remarks January 12 to Budget (` cr) 549,133 458,567 90,566 17,968 15,225 2,743 567,101 708,073 , 634,984 205,035 73,089 16,892 293,961 248,532 45,429 13,624 1,002,034 , , 434,933 334,383 229,898 69.5 Direct taxes are expected to drag the performance here 69.0 Direct taxes collections are expected to fall short on account of slippage in corporate taxes and higher refunds 72.2 Non-tax revenue is expected to be in-line on account of higher dividends from PSUs 32.7 Shortfall in disinvestment is expected to affect the performance here

1 2 3 4 5 6 7 8 9

Revenue Receipts Tax Revenue (Net) Non-Tax Revenue Non-Debt Capital Receipts Recovery of Loans Other Receipts Total Receipts (1+4) Non-Plan Expenditure p On Revenue Account (i) of which Interest Payments On Capital Account (i) of which Loans Disbursed Plan Expenditure On Revenue Account On Capital Account (i) of which Loans Disbursed Total Expenditure (8+11) p ( ) Fiscal Deficit (14-7) Revenue Deficit (9+12-1) Primary Deficit {15-9(i)}

101.4 6.9 67.1 86.8 On the expenditure side, the major problem would be the inability to contain subsidies p , j p y 86.6 76.5 High domestic interest scenario coupled with early borrowing is expected to push up the governments interest cost 88.5 4254.9 66.6 68.4 58.3 81.3 79.7 105.4 Overall, fiscal deficit is likely to be overshot by 100125bp over budgeted levels 108.8 158.7

10 11 12 13 14 15 16 17

Source: Controller General of Accounts, Angel Research

Union Budget 2012-13 - Preview

Imminent increase in tax revenue to ease fiscal pressures
Indias total tax revenue (Centre and State) to GDP in 2011-12 is expected to be around 15%, much lower than i own peak of 17.6% achieved i 200 08 and significantly l h its k f 6% hi d in 2007-08 d i ifi l lower than other major economies. I h h j i In the near term, this ratio could be given the necessary fillip by increasing excise and service tax rates and higher services tax net, as there is no headroom available for increasing direct taxes. In fact, we expect the government to refrain from increasing corporate taxes, considering the current stressed environment. In h I the medium term, this ratio could b i di hi i ld be improved b GST i l d by implementation ( i (we expect the b d h budget to throw h some clarity on the roadmap for implementing GST), as the tax base would be enlarged under the same. Meanwhile, in this budget, we expect the government to increase excise duties and service tax by 200bp and further broaden service tax net.
Total tax revenue (Centre + States) as a % to GDP
(%) 18.0 17.5 17.0 16.5 16.0 15.5 15.0 14.5 14.0 13.5

Government revenue as a % to GDP

(%) Developing Economies Developed World

17.6 16.9 15.6 15.0 16.6 15.4

15.1

15.1

2011-12E

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 50 0.0
Indonesia Russia United Kingdom China Mexico United States Germany South Africa Brazil India

Source: RBI, Angel Research

Source: IMFWEO, Angel Research

Union Budget 2012-13 - Preview

High time to contain subsidies
Subsidy-related spends form a significant part of our total expenditure and are a major hurdle in achieving fiscal consolidation. Subsidy bill for the current fiscal is likely to overshoot the budgeted amount on account of lower initial estimates, higher crude prices and rupee depreciation. Current high crude prices will further increase the burden on the exchequer unless pass-through policy is implemented by hiking prices of petroleum products. There is also an imminent need to rationalize fertilizer subsidies by decontrolling urea prices, which will promote investment apart from curbing fertilizer imports. As far as food subsidy is concerned, we remain skeptical of passage of the Food Security Bill in the near term and, hence, do not see its impact on food subsidies in the coming fiscal, as state governments are not ready to accept the bill in its current form, which replaces their food-related populist sops with a single o eady o accep e b s cu e o , w c ep aces e ood e a ed popu s w s ge nationalized food scheme. The budget may also guide a roadmap for improving the food subsidy distribution mechanism via UID or similar technology-related mechanism, which apart from ensuring payment to the right person will also reduce the burden on the exchequer.

One-time revenue to aid fiscal calculations

On the non-tax revenue front, we expect the government to clarify its policy guidelines for monetization of its cash cows such as cancelled 2G spectrum and BWA spectrum Disinvestment is also expected to see spectrum. increased momentum in FY2013.

Union Budget 2012-13 - Preview

Infrastructure boost also required
Currently, th i f t t C tl the infrastructure sector h b t has been plagued b severe h d i d d l ti l d by headwinds depleting order b k hi h d books, high interest rates, policy paralysis resulting in execution slowdown and shrinking bottom line of most infrastructure companies. Although last year the exchequer allocated 48.5% of the total planned expenditure to infrastructure, 23.3% higher on a yoy basis, new projects could not take off due to delays in approval appro al and decision making Moreo er new project la nches ha e dropped b 32% in 2011 12 owing making. Moreover, launches have by 2011-12, to lack of clearances and no clarity on policy reforms for various sectors. Land acquisition and environment clearances continue to remain the two major bottlenecks hampering the timely execution of projects. However, it is quite apparent that in order to achieve sustainably healthy GDP growth, a proportionate increase in investment in infrastructure is required. The government can ensure this by allocating higher funds for the sector in the budget and simultaneously introducing measures for facilitating PPP investments (such as improving the clearances mechanism providing tax sops/benefits and channelizing long term mechanism, long-term, low-cost funding for infrastructure projects via measures like creation of corporate debt market, dedicated infrastructure debt fund, tapping insurance and pension funds or attracting foreign investment). Although Land Acquisition Bill is the right step in the direction of ensuring faster execution of projects but, on account of ongoing deliberations on the same we do not expect it to become a reality in the near term same, term.

Union Budget 2012-13 - Preview

Beyond the budget Much-needed reforms
Mining Despite having the worlds fourth largest coal reserves and fifth largest iron ore reserves, it is unfortunate that India ends up importing coal and steel (though in small amounts). The government needs to address this mismatch by fast tracking policy reforms such as Mining Bill and Land Acquisition Bill (in the short term, these bills are expected to hit the bottom line of some listed companies; but in the long term, these , p p ; g , will go a long way in accelerating mining growth), speeding up coal and iron ore mine auctions/allocations and smoother environmental clearances. All these measures will enable India to sustainably grow at a higher overall GDP rate, as mining GDP growth has been the biggest drag on overall GDP growth of late. g
Sector-wise yoy growth in quarterly GDP for the past two years
Period 4QFY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 Q 1QFY2012 2QFY2012 3QFY2012 GDP (%) 9.4 8.5 7.6 8.3 7.8 7.7 6.9 6.1 Agri 1.1 3.1 4.9 11.0 7.5 3.9 3.2 2.7 Mining 8.9 6.9 7.3 6.1 1.7 1.8 (2.9) (3.1) Mfg 15.2 9.1 6.1 7.8 5.5 7.2 2.7 0.4 Components of GDP (%) Elec. Constr. 7.3 9.2 2.9 8.4 0.3 6.0 3.8 8.7 7.8 8.2 7.2 1.2 9.8 4.3 9.0 7.2 Trade 13.7 12.7 10.8 9.8 9.3 12.7 9.8 9.2 Fin/Ins 6.3 6 10.0 10.4 11.2 9.0 9.0 10.5 9.0 Services 8.3 4.4 4.5 (0.8) 7.0 5.6 6.6 7.9

Source: MOSPI, Angel Research

Union Budget 2012-13 - Preview

Beyond the budget Much-needed reformscontd.
FDI In the near term, we do not anticipate any major reforms in sector-specific FDI caps, apart from least contentious FDI limits in aviation, which may be raised. FDI in multi-brand retail, the much-hyped FDI, is not expected to go through anytime soon, considering the political implications of the recent state elections (more assertive state players are not expected to support UPA in its bid to push this long-stalled reform). FDI in insurance is also not expected to see the light of the day, as deliberations are going on to resolve the contention of the opposition that opening up the insurance sector will expose our till now safeguarded financial system to global market uncertainties. Conclusion: Fiscal discipline is the key expectation from this budget With inflation and interest rates expected to come down, Indian corporates are poised for a better performance in FY2013 over FY2012 which saw high inflation as well as high interest rates dragging the FY2012, bottom line. Markets will be more than happy even if the government is able to deliver only on the fiscal consolidation front in this budget, as it will lower interest rates and aid the declining trajectory of inflation. However, it will be a bonus for markets if the government takes some positive strides towards key policy reforms in the mining and infrastructure sectors which are vital for Indias sustainable and healthy growth sectors, India s growth.

Note: Stock Prices as of March 7, 2012

Sector-wise Expectations

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Automobile
Expected Impact: Negative
The automotive sector, especially the passenger vehicle segment, witnessed slowdown in demand during 9MFY2012 on account of rising interest rates and higher fuel prices. As a result, overall growth expectation for the automotive sector has been lowered to ~12% for FY2012E with passenger vehicles commercial FY2012E, vehicles, vehicles and two-wheelers expected to grow by ~5%, ~16% and ~14%, respectively. While interest rates are expected to moderate going forward, providing relief to automakers, the likely increase in excise duty to rein in the widening fiscal deficit presents challenges to demand growth and pricing power of automakers in FY2013. Rising petrol prices and widening price differential between petrol and diesel led to ~37% yoy growth in diesel car sales during 9MFY2012 With a significant increase in sales of diesel cars and demand for 9MFY2012. imposition of additional tax on diesel cars by the Oil Ministry and Centre for Science and Environment, we expect additional excise duty on diesel vehicles in Union Budget 2012-13. Kirit Parikh Committee has recommended additional excise duty of `81,000/vehicle on diesel vehicles. The sector, however, will stand to benefit from indirect sops such as higher outlay for the rural sector (driving consumer spending) and increased budgetary allocation for infrastructure spending (increase in road freight). Overall, we expect Union Budget 2012-13 to be Negative for the Automobile Sector.

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Budget Expectations
Head Excise duty E i d Item Small S ll cars, two-wheelers, h l three-wheelers, commercial vehicles Large cars and utility vehicles Additional excise duty on diesel vehicles Current Status Charged at 10% Ch d Expected Change To b hik d b T be hiked by 2% Potential Impact Negative f all OEMs; P N i for ll OEM Passenger vehicles likely to be the most impacted and two-wheelers to be the least affected Negative for all OEMs Negative for all OEMs, mainly Mahindra & Mahindra, Tata Motors and Maruti Suzuki

Charged at 22% + `15,000/vehicle NIL

To be hiked by 2% Diesel tax of up to `80,000/vehicle

Top Picks
Company Reco CMP (`) Ashok Leyland Mahindra and Mahindra Tata Motors* Buy Buy Buy 28 674 268 Target Price (`) 32 785 308 EPS (`) FY2012E 2.2 42.6 34.0 FY2013E 2.7 47.2 38.5 P/E (x) FY2012E 12.7 15.8 7.9 FY2013E 10.2 14.3 7.0 EV/EBITDA (x) FY2012E 6.8 9.1 5.0 FY2013E 6.8 9.1 5.0

Source: Company, Angel Research ; Note: * Consolidated

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Banking
Expected Impact: Positive
FY2012 has been tough for the Indian economy, more so for the banking sector, which faced concerns ranging from declining credit demand to rising NPAs. Persistent inflation pressures kept interest rates elevated and liquidity in deficit mode for the entire fiscal year Accordingly the most keenly watched outcome for the banking sector in the year. Accordingly, forthcoming budget would be the governments initiatives towards curbing the currently high fiscal deficit. Credible signs of fiscal consolidation are expected to boost the chances of early commencement of monetary easing and consequent lowering of interest rates in the system. The government, in light of capital constraints being faced by the banking sector and the upcoming Basel-3 norms, is expected to earmark a healthy allocation for capital funds in public sector banks. Capital infusion plans for public sector banks have already commenced, however more clarity on the process is expected to be provided in the budget. budget The recapitalization is expected to aid banks in shoring up their tier I ratios and maintain their pace of tier-I growth going into the next fiscal. Another positive that could emerge from the budget is the allowance of provisions for NPAs as an expense for calculating tax liability and not just full write-offs. Currently, tax benefits are restricted to the extent of 7.5% of gross write offs. total income and 10% of aggregate average rural advances made by banks. Amidst the backdrop of ongoing liquidity constraints, we also expect the banking sectors long-time budget wish list of reduction in lock-in period for tax-saving FDs to three years from five years, similar to an ELSS becoming a reality in the forthcoming budget. Further, Further the banking community has requested for interest income from fixed deposits with tenure of three years and above to be tax exempted, bringing them at par with fixed maturity plans with respect to tax treatment.

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Expected capital infusion in current fiscal

Tier 1 Ratio (%) Bank State Bank of India IDBI Bank Punjab National Bank Bank of India Indian Overseas Bank Bank of Baroda Allahabad Bank Union Bank of India Central Bank of India Bank of Maharashtra Syndicate Bank UCO Bank United Bank f India U it d B k of I di Dena Bank Vijaya Bank Punjab and Sind Bank
Source: Company Angel Research Company,

Amount (` cr) GOI 7,900 4,630 1,285 1,000 1,675 1,003 355 659 860 539 500 173 LIC 663 1,590 1,015 303 1,613 500 650 341 135 327 246 132 149 147 95 Total 7,900 5,293 2,875 2,015 1,978 1,613 1,503 1,005 1,000 995 866 746 305 149 147 95

( (9MFY2012) ) 7.6 7.5 7.9 7.7 6.7 9.3 8.9 8.0 7.8 7.1 8.4 7.8 8.4 84 8.5 9.0 7.9

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Budget Expectations
Head Tax-saving fixed deposits Current Status 5-year lock-in period `1lakh investment limit Expected Change 3-year lock-in period (like ELSS mutual funds) `2lakh investment limit Potential Impact Will put lock-in on tax-saving FDs at par with ELSS Will help increase deposit mobilization by the banking sector Will help increase deposit mobilization by the banking sector Regular budget feature for inclusive growth. N g v Negative for banks. Increase in deduction/full deduction allowed for calculating tax liability from provisions covering bad and doubtful debts

Fixed deposits with maturity of 3 years and above Priority sector Tax break on provisions

No tax benefits

Interest subvention, lending targets

Interest income to be treated as capital gains similar to income from FMPs Increasing benefits

Provisions for bad and doubtful Decreasing tax liability debts made by banks are allowed as a deduction to the extent of 7.5% of gross total income and 10% of aggregate average rural advances made by them

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Top Picks
Company Reco CMP (`) Axis Bank ICICI Bank Yes Bank St. Bank of India Bank of Baroda a o a oda Buy Buy Buy Buy Buy uy 1,166 861 338 2,141 793 Target Price (`) 1,671 1,193 478 2,587 95 951 EPS (`) FY2012E 101.7 54.6 28.1 172.8 117.6 76 FY2013E 115.4 63.9 33.2 202.8 126.0 60 PE (x) FY2012E 11.5 15.8 12.0 12.4 67 6.7 FY2013E 10.1 13.5 10.2 10.6 63 6.3 P/ABV (x) FY2012E 2.2 1.7 2.5 2.0 1.3 3 FY2013E 1.9 1.6 2.1 1.6 1.1

Source: Company, Angel Research

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Capital Goods
Expected Impact: Positive
During the past few quarters, the capital goods sector has been bearing the brunt of slowdown in global economies and sluggish domestic industrial growth. A number of factors have led to this domestic slowdown; these are structural (policy inaction and unavailability of resources like land and fuel) and cyclical (overcapacity (overcapacity, high interest rates, inflationary pressures and high commodity prices) in nature. Hence, the number of projects that have been stalled and cancelled has increased. Similarly, there has been an uptick in the number of shelved projects in recent times, thus leading to abysmal order inflow for capital goods companies. The slowdown in order inflows (especially in the BTG space) has led to downward revisions in order guidance from front-line companies. Besides, competition from Chinese players remains a threat in the already poor ordering scenario in the BTG space. Hence, domestic power equipment manufacturers have been demanding p y p y g p y g p imposition of customs duty to ensure a level playing field, while IPP developers have been lobbying for cheaper imports. At present, power generation equipment for projects below 1,000MW bears a duty of 5%, while there is nil duty on equipment for projects over 1,000MW. We expect the government to impose a duty of 14-19% on imported power equipment. Additionally, fund allocation to various programs, including APDRP and RGGVY, would continue to provide a fillip to transmission line players. Overall, we expect the Budget to be Positive for the Capital Goods Sector.

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Budget Expectations
Head Import duty on power generation equipment Current Status No import duty on foreign equipment for mega power projects. Charged at 5% for smaller projects Fund allocation for T&D Fund allocation for various programs including APDRP and RGGVY Expected to continue Positive for various transmission line players (including Jyoti Structures, KEC International and Kalpataru Power), as it provides a continuing business opportunity. Expected Change Increase in import duty Potential Impact Will reduce the price differential between domestic and overseas players (especially Chinese). Positive for BHEL, L&T and other new players planning to establish a domestic manufacturing base.

Top Picks
Company Jyoti Structures Reco Buy CMP ( ) (`) 44
Source: Company, Angel Research

Target Price ( ) (`) 54 11.9

EPS (`) FY2012E 0 FY2013E 0 3 10.9 3.7

P/E (x) FY2012E 0 FY2013E 0 3 4.1

EV/EBITDA FY2012E 0 3.6 FY2013E 0 3 3.0

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Cement
Expected Impact: Neutral
The cement sector is currently plagued with significant demand-supply mismatch, which has resulted in low utilization levels. However, in this oversupply scenario, companies have been successful in maintaining their margins by hiking prices (in-line with the increase in operating expenses) due to production discipline. Currently, the sector eagerly awaits demand pick-up, a hint of which was visible in 3QFY2012 when demand grew by 10.3% yoy, much better than 3.1% yoy growth recorded in 1HFY2012. Cement demand will get the much needed impetus if the government announces new schemes that would involve an additional spend on infrastructure projects. Other major announcements expected in the budget, which would affect the cement sector, include hike in excise duty from the current level and reduction in import duty on coal and petcoke. However, we believe the impact of these measures will ultimately be passed on to the end-consumer. Overall, we expect the Budget to be Neutral for the Cement Sector.

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Budget Expectations
Head Excise duty on y cement Current Status Excise duty charged at 10% ad y g valorem + `160/tonne for cement prices above `190/bag; and 10% ad valorem + `80/tonne for cement price below `190/bag. Import duty of 5% and 2.5% is currently 2 5% charged on thermal coal and petcoke, respectively. Expectation Duty to be hiked by 2% y y Potential Impact Hike in excise duty (if any) is expected to be passed on y( y) p p by manufacturers to the end-consumer. Neutral for all cement companies.

Import duty on coal and petcoke

Abolition of import duty on coal and petcoke

Elimination of import duty will result in reduced power and fuel cost. Positive for all cement companies.

Government spend on infrastructure

`214,000cr under various schemes in d h Union Budget FY2010-11.

h d Higher government spend on infrastructure

d d f ll h Increased government spend on infrastructure will push up cement demand. Positive for all cement companies.

Top Picks
Company Reco CMP (`) JK Lakshmi Cement Buy 59 Target Price (`) 79 P/E (x) FY2012E 5.2 FY2013E 4.3 EV/EBITDA (x) FY2012E 3.7 FY2013E 2.5 EV/Tonne (US $) FY2012E 33 FY2013E 27

Source: Company, Angel Research

20

FMCG
Expected Impact: Negative
FMCG players posted improved financial performance in 9MFY2012, led by volume growth and price hikes, which offset higher cost pressures to a large extent. Further, acquisitions made over the past few years have b h boosted performance of FMCG players. t d f f l Major announcements expected in the budget affecting the FMCG sector are (i) hike in overall excise duty rates from the current 10%; (ii) hike in excise duty on cigarettes. Overall, we expect the Budget to be Negative for the FMCG Sector. Budget Expectations
Head Rural employmentoriented schemes such as NREGA and Bharat Nirman Excise duty Current Status Bharat Nirman had an allocation of `53,000cr in FY2012 Currently at 10% Expectation No major increase in allocation of resources towards the mentioned schemes Increase in excise duty by ~200bp Potential Impact Neutral for the sector.

Increase in excise duty would be negative for FMCG players as it would negatively affect demand. However, FMCG players are expected to pass on the increase in excise duty. Negative for the sector as a whole. A hike of 5-6% in excise duty on cigarettes would be Neutral for ITC, as it will be able to pass on the increase. Neutral for ITC

Excise duty on cigarettes

Duty varies as per the length Marginal hike of 5-6% of cigarette sticks

21

Infrastructure
Expected Impact: Positive
In the past 12 months, the infrastructure sector has been plagued by severe headwinds depleting order books, high interest rates and policy paralysis, resulting in execution slowdown and shrinking bottom line of most infrastructure companies. Although the past year started with a renewed focus on infrastructure spending (48.5% of the total planned expenditure was allocated to infrastructure in 2011-12 Budget, 23.3% d f h l l d d ll d f d higher on a yoy basis), new projects could not take off due to delays in approval and decision making. Moreover, new project launches have dropped by 32% in 2011-12, owing to lack of clearances and no clarity on policy reforms (in particular the power sector) for various sectors. Hence, expectations from the budget, which marks the b b d h h k h beginning of the Twelfth Five Year Plan, are h h f h lf h l high. It is quite evident that in order to sustain a healthy GDP growth rate, equivalent investment in infrastructure is required. Hence, the government will continue to focus on higher spending on the sector, and we expect some announcements to come through viz higher allocation to flagship programs of Bharat Nirman through, viz. Nirman, JNNURM, APDRP AIBP and NHDP Land acquisition and environment clearance continue to remain the two , . major bottlenecks hampering the timely execution of projects. Hence, any further clarity on Land Acquisition Bill would lend a fillip to the sector. Besides allocating higher funds for the sector, the budget should also focus on funding for infrastructure projects by channelizing long-term, low-cost funds into the sector. Sources of these funds could be creation of corporate debt market, dedicated infrastructure debt fund, tapping insurance and pension funds and attracting foreign investment, which would solve the current asset-liability mismatch problem faced by g g v , w w v y p y banks. Further, incentives and tax breaks would enhance infrastructure investment. Overall, we expect the Budget to be Positive for the Infrastructure Sector.

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Budget Expectations
Head Dedicated infrastructure debt funds Current Status N.A. NA Wish List Should become operational Potential Impact Speeding up the implementation of infrastructure debt funds (announced in 2011-12 Budget) would help fuel infrastructure projects with low-cost, long-term funds Channelizing a large pool of domestic savings into infrastructure will give impetus to the sector

Tax benefit on investments made in infrastructure bonds

Deduction of additional `20,000 is allowed over and above the `1 lakh limit prescribed for investment in tax saving schemes N.A.

Extending this window and enhancing this limit to `50,000-1,00,000

Regulatory bodies for sectors Increased allocation to the sector

Appropriate body for each sector for better handling Taking infra spend to 8-9% 8 9% of GDP

To ensure a healthy pipeline of projects to meet Twelfth Plan targets and to clear the path of currently struck projects owing to policy logjams It will help India to achieve 8%-plus economic growth, as currently physical infrastructure has emerged as the biggest constraint in achieving the desired economic growth

Current infra spend of 6.5-7.0% 6 5 7 0% of GDP is much below the requirement

23

Top Picks
Company Reco CMP (`) L&T Sadbhav Engg. Buy Buy 1,237 135 Target Price (`) 1,607 157 EPS (`) FY2012E 63.5 9.3 FY2013E 70.7 9.2 P/E (x) FY2012E 19.5 14.6 FY2013E 17.5 14.7 EV/EBITDA (x) FY2012E 12.9 9.2 FY2013E 11.6 8.5

Source: Company, Angel Research

24

Expected Impact: Neutral

Union Budget 2012-13 is likely to be a non-event for the Indian IT sector as the wish list remains extremely small. In the last budget, MAT was imposed on SEZ units. As per media reports, industry body NASSCOM's wish list includes removal of MAT on SEZ units; however we do not expect any material change to the however, current tax structure. The budget can clarify issues related to dual levy of VAT and service tax on licensing of software . In addition the Indian government has started focusing on e governance lately with its various initiatives addition, e-governance lately, such as RAPDRP UIDAI and Sarva Shiksha Abhiyan; this is also a space to look out for if the government , decides on increasing the outlay related to these schemes towards modernization. A few of the Indian IT companies have bagged some crucial deals under these schemes and have started setting up SBUs to tap the domestic market Also increased emphasis on PPP in education and incremental allocation for ICT market. Also, implementation in schools would benefit companies catering to the K-12 segment, including Educomp Solutions, NIIT and Everonn Education. Overall, Overall we expect the Budget to be Neutral for the IT Sector Sector.

IT

25

Budget Expectations
Head Exemption of MAT on E ti f units operating under SEZ e-Governance initiatives Current Status MAT i imposed on SEZ units d it Wish List Removal of MAT on SEZ units R l f it Potential Impact Will b an advantage for all IT companies operating i be d t f ll i ti in various SEZ units; however, the likelihood of this getting announced in the budget is almost nil. Will benefit large companies such as Infosys, TCS, Wipro and HCL Tech, which have strong system p , g y integration capabilities, and niche, focused players such as Infotech Enterprises for GIS. Will benefit companies with offerings related to K-12 such as Educomp, NIIT and Everonn.

The government has been g g focusing on digitalization of various departments The government is proactively drawing a roadmap for PPP in the education sector

Increased allocation under schemes such as RAPDRP, UIDAI , and N-eGP Increased allocation for the ICT segment

Education allocation

Top Picks
Company Mahindra Satyam Reco Buy CMP (`) 66
Source: Company Angel Research Company,

Target Price (`) 87 8.5

EPS (`) FY2012E FY2013E 8.0 7.7

P/E (x) FY2012E FY2013E 8.2

EV/EBITDA (x) FY2012E 5.5 FY2013E 4.2

26

Media
Expected Impact: Positive
According to FICCI-KPMG 2011 report, the Indian media and entertainment sector is slated to post a CAGR of 14% through CY2010-15 to `1,27,500cr and is braced for promising times ahead with growth expected from regional markets, di iti ti push and i f i l k t digitization h d increasing mobile and b db d penetration. i bil d broadband t ti Key expectations of the media sector from this budget include the increase in FDI limit for cable, DTH and radio sectors, as they are capital intensive in nature, and increased FDI limits in these sectors are expected to ti l t t stimulate growth with f h i fl th ith fresh inflow of f d providing auxiliary b f funds, idi ili benefits such as t h l fit h technology k know-how h and expertise. Although FDI in radio has been raised recently to 26% from 20%, it is not adequate, considering the expected roll-out of phase-III radio reforms. Another thing that the sector will keenly watch is the roadmap for implementation of GST, which will enable companies to benefit from uniform, simplified and single-point t d i l i t taxation across product categories. Al ti d t t i Also, exemption of i ti f import d t on set t t duty t top b boxes (currently at 5%) will reduce the cost burden on DTH and cable industries and will pave way for rapid digitization. Overall, we expect th B d t t b P iti f th M di S t O ll t the Budget to be Positive for the Media Sector.

27

Budget Expectations
Head FDI Current Status Varied limits for different sectors; Radio - 26% under government route; DTH - 49% under government route; Cable - 49% under government route Set top boxes are subject to customs duty of 5% Entertainment tax (subsumed under GST) levied by various states at different rates Expectations Raise FDI limits in radio, DTH and cable Potential Impact Raised FDI limits will spur investment in these sectors; Positive for all media companies

Customs duty on set top boxes GST

Removal of customs duty

Removal of customs duty on set top boxes would aid rapid progress on the impeding digitization agenda; Positive for the DTH and cable industry Positive for all companies if a uniformity is created in the tax structure instead of multiple taxes

Roadmap for implementation of GST

Top Picks
Company Jagran Prakashan HT Media DB Corp Reco Buy Buy Buy CMP (Rs) 102 140 206 Target Price (Rs) 137 170 274 EPS (Rs) FY2012E 6.7 8.6 13.0 FY2013E 7.6 9.5 15.0 P/E (x) FY2012E 15.3 16.3 15.9 FY2013E 13.4 14.8 13.7 EV/EBITDA (x) FY2012E 8.5 6.9 9.1 FY2013E 7.6 6.1 7.5

Source: Company, Angel Research

28

Metals & Mining

Expected Impact: Neutral
Union Budget 2012-13 is likely to be neutral for the metals and mining sector. Although an increase in import duty on manganese ore will benefit manganese ore producers such as MOIL and Adhunik Metaliks, it will be marginally negative for the steel industry industry. We expect the decrease in export duty of low-grade (<55% Fe) iron ore fines to benefit iron ore exporters such as Sesa Goa. Further, there is a possibility that the government may abolish 5% import duty on imported coal which will marginally benefit aluminium steel and power producers coal, aluminium, producers. We believe fund-raising plans by the government through disinvestment are likely to resume in FY2013. We believe FY2013 budget is likely to expedite the disinvestment process for SAIL. Overall, we expect the Budget to have a Neutral impact on Metal companies.

29

Budget Expectations
Head Import duty on manganese ore Export duty on iron ore Customs duty on coal C t d t l Current Status 2% on imports of manganese ore 20% duty on lumps and fines 5% on imported coal i t d l Expected change Increase to 5 0% 5.0% Decrease in duty for low-grade fines Abolish th duty Ab li h the d t Potential Impact Positive for manganese ore producers such as MOIL and Adhunik Metaliks Positive for iron ore exporters such as Sesa Goa Positive for l i i P iti f aluminium, steel and power producers t l d d

Top Picks
Company Reco CMP (`) Tata Steel Monnet Ispat NMDC Buy Buy Accum. Accum 425 450 182 Target Price (`) 558 663 202 EPS (`) FY2012E 40.8 46.8 18.0 18 0 FY2013E 52.5 71.0 18.8 18 8 P/E (x) FY2012E 10.4 9.6 10.1 10 1 FY2013E 8.1 6.3 9.7 97 EV/EBITDA (x) FY2012E 7.1 10.1 5.6 56 FY2013E 5.3 6.0 5.0 50

Source: Company, Angel Research

30

Oil & Gas

Expected Impact: Positive
Rising crude prices have resulted in mounting under-recoveries for oil marketing companies (OMCs), which are expected to be over `130,000cr in FY2012. The burden on OMCs could be higher in FY2013 if crude stabilizes at current l l W expect b d t t bili t t levels. We t budgetary measures t b f to be focused on addressing th d dd i these b d burdens b by way of increasing prices of diesel, kerosene and LPG. The increase in diesel, kerosene and LPG prices would reduce under-recoveries and, hence, would be positive for OMCs (HPCL, BPCL and IOC) and upstream companies (ONGC, Oil India and GAIL). Also, we expect the government to abolish import duty on LNG which will l LNG, hi h ill lower costs f some sponge i t for iron, power and f tili d fertilizer producers. d Hence, the Budget is expected to be Positive for the Oil and Gas Sector.

31

Budget Expectations
Head Elimination of customs duty on LNG Current Status 5% customs duty imposed on imported LNG Available for refineries that h h have b been commissioned before March 2012 Low prices resulting in losses to OMCs, upstream companies and governments Expected Change Complete elimination of customs duty on LNG Potential Impact This will benefit importers of LNG including power, sponge iron and fertilizer companies

Tax holidays for upcoming refineries fi i

Extension of tax holidays for i fi i beyond M h d March upcoming refineries b 2012

This will benefit refinery companies that are setting fi ld j up greenfield projects

Prices of diesel, LPG and kerosene

Increased prices of diesel, LPG and kerosene

Positive for ONGC, OIL, GAIL and OMCs

32

Top Picks
Company Reco CMP (`) GAIL ONGC RIL Buy Buy Buy 350 279 761 Target Price (`) 440 324 923 EPS (`) FY2012E 31.1 30.2 64.2 FY2013E 35.4 33.7 64.7 P/E (x) FY2012E 11.3 9.2 11.9 FY2013E 9.9 8.3 11.8 EV/EBITDA (x) FY2012E 5.8 4.0 6.8 FY2013E 5.1 3.4 6.8

Source: Company, Angel Research

33

Pharmaceutical
Expected Impact: Positive
The Union Budget 2012-13 is unlikely to have any major announcement for the pharma sector. However, if R&D sops continue, it will be positive for the sector as a whole. The government could, however, continue to increase budgetary allocation for healthcare spending, which would be an overall positive for the sector. Indian pharma companies have been investing on the R&D front to tap opportunities both in the domestic and global markets. Although the government has increased the weighted deduction on R&D expenditure to 200% (in-house research), the industry expects an extension on the tenure of deduction, which is currently available only until FY2012. It is also expected to cover patent litigation costs under weighted deduction and widen the scope by including research work carried outside the R&D facility in India and outside India India. Overall, we expect the Budget to be Positive for the Pharmaceutical Sector.

34

Budget Expectations
Head Increase in budget allocation to healthcare schemes Increase in R&D deduction and widening the scope Current Status Expected Potential Impact Positive for pharma and healthcare companies In the last budget, allocation Further increase in allocation to the National Rural Health expected Mission was increased to `2,200cr from `2,800cr Currently, the weighted deduction stands at 200%, applicable to only in-house research. Further, the deduction is available until FY2012 only. The scope of research work done outside R&D facilities that are in India or outside India should be widened. Extension of deduction for another 10 years. Al Also, costs for t f defending patents should be included under the weighted deduction.

Positive for pharma and healthcare companies

35

Top Picks
Company Reco CMP (`) Lupin Cadila Healthcare Aurobindo Pharma Buy Buy Buy 501 696 112 Target Price (`) 593 866 166 EPS (`) FY2012E 22.3 33.5 11.8 FY2013E 29.7 43.3 13.8 P/E (x) FY2012E 22.4 20.8 9.5 FY2013E 16.9 16.1 8.1 EV/EBITDA (x) FY2012E 16.9 16.4 7.3 FY2013E 12.7 13.3 6.5

Source: Company, Angel Research

36

Power
Expected Impact: Neutral
The power sector is currently beset with a plethora of problems such as fuel shortage (both coal and gas), elevated prices of imported coal largely due to the Indonesian regulation (with retrospective effect), which mandated that coal supplied from the country based on long term agreements should be at market linked long-term market-linked prices, and poor financial position of SEBs (resulted in low offtake and weak merchant power prices). Coal shortage, which is currently the biggest issue faced by the sector, is due to insufficient coal production by Coal India which accounts for 80% of domestic coal production As mining in India has to be carried out India, production. in accordance with stringent environment regulations, Coal India has not been able to ramp up its production due to delays in obtaining environment and other clearances. However, recent announcements by the Central Government, aimed at resolving the issue of coal shortage, have enthused the power sector. The government is also expected to make positive announcements regarding the other demands of the sector, such as higher gas allocation to the power sector. Some of the anticipated announcements pertaining to the power sector are 1) extension of benefits under 80-IA 80 IA beyond FY2012 2) increase in the duty on imported power equipment and 3) waiver of duty on FY2012, imported coal. In all, we expect the Budget to be Neutral for the Power Sector.

37

Budget Expectations
Head Deduction under Section 80-IA Current Status Available for project developers only until FY2012. Expected Extension of the scheme beyond FY2012. Potential Impact As per Section 80-IA, power generation companies are eligible for 100% deduction of the profits for 10 consecutive years during the first 15 years of operations. The benefit under this section is available only until FY2012. Extension of the benefits beyond FY2012 will be f b of a major advantage t project d l j d t to j t developers, as it will ill substantially reduce their tax burden. Positive for private power generation companies. Duty on import of power Nil duty equipment Import duty to be increased to 19% f power projects above 9% for b 1,000MW This move, if implemented, will favor domestic power f hiking import d duty equipment manufacturers. However, h k would increase the cost of power generation. In turn, power generation companies would try to pass on the increase in generation costs to consumers. Marginally negative for generation companies setting g y g g p g up plants with imported equipment like Reliance Power and Adani Power. Waiver of import duty on coal Import duty of 5% is levied No duty Neutral for regulated business; Positive for competitive bid-based merchant capacities using imported coal.

38

Top Picks
Company Reco CMP (`) NTPC CESC GIPCL Buy Buy Buy 170 268 70 Target Price (`) 199 302 93 EPS (`) FY2012E 11.6 8.5 38.9 38 9 FY2013E 12.7 10.5 40.9 40 9 P/E (x) FY2012E 14.7 6.9 8.2 82 FY2013E 13.4 6.6 6.6 66 EV/EBITDA (x) FY2012E 10.9 5.3 4.7 47 FY2013E 10.3 4.8 3.9 39

Source: Company, Angel Research

39

Real Estate
Expected Impact: Neutral
The real estate sector has been witnessing a slump since the past year, evident from the fact that absorption (demand) volume in Indias top seven cities has either been flat or declined over the same period. The banking sector has also pulled the plug on the sector and lending is slowing down, creating a liquidity crunch. Demand may witness further slowdown with increased stamp duty. Further, RBIs proposal to exclude stamp duty and other registration charges while calculating value of property would affect affordability. However, we believe absorption and not price appreciation will drive residential growth over the next six quarters. New launches have not been rewarding for developers despite launching projects at 10-15% discount to ongoing market rates due to high interest rates and a weak demand scenario. Further, high inventory continues to hamper commercial recovery. Although absorption levels have witnessed some uptick in the commercial segment, new launches are expected to be higher than absorption, keeping vaca cy eve s g . vacancy levels high. We expect rentals to remain at current levels with an uptick over the next 12-15 e pec e a s o e a a cu e eve s w a up c ove e e 5 months. For 2012-13 Union Budget, we expect the government to increase the tax limit under Sec 80c from `1lakh to `3lakhs, which will lend a boost to the housing segment. Re-introduction of tax holiday for housing , g g y g projects under Sec 80-IB and for relaxation of end-use restrictions on the use of External Commercial Borrowings (ECBs) is on the developers wish list. Further, tax benefits or appropriate subsidies for promoting green projects also appear in their wish list. Overall, we do not expect these measures to have a significant near-term impact on our estimates. Hence, we expect the Budget to be Neutral for the Real Estate Sector.

40

Budget Expectations
Head Tax holiday under Sec 80-IB (10) Current Status Tax-free profits earned by developers and builders from housing projects (<1,000sq. ft.) started on or before March 31, 2007, and executed within four years Income tax exemption on home loan principal re-payment up to `1akh Exemption limit under Sec. 24 currently capped at `1.5lakhs No provision Wish List Re-instate the provision for current projects and extend the same in DTC, when implemented Potential Impact Will boost the mid-income housing segment , thereby improving cash flow for developers. It would also enable the government to reduce a potential shortage of 24mn sq. ft. in the housing sector. Developers like HDIL, DLF and Unitech will be the key beneficiaries.

Income Tax Deduction under Sec 80-C

Increase exemption limit to `3.0lakhs

Improving affordability will induce end-users to buy property, thereby boosting the housing segment. Developers like DLF, Unitech, Sobha and HDIL will be the key beneficiaries. Improved affordability for the residential segment to augur well for developers having exposure to the residential segment. Would encourage developers to undertake large-scale urban development projects (>1,000 acres) p p j ( , )

Interest paid on home loans Tax benefits to large p townships

Increase in exemption limit to `3.0lakhs A provision similar to 80-IA, which provides100% tax p benefit on income from infrastructure development Extension of the subvention scheme to housing loans of up to `40lakhs. p Relax FDI up to 51% into multi-brand retailing

Extension of interest subvention FDI in multi-brand retail

1% interest subvention on housing loans of up to `20lakhs No provision

Could lend support to the low-income housing segment in an increasing interest rate scenario. Developers like y HDIL will be the key beneficiaries. Could lend support to the retail segment. Developers like DLF will be the key beneficiaries.

41

Top Picks
Company Reco CMP (`) HDIL ARIL DLF`
Accumulate

Target Price (`) 115 78 -

EPS (`) FY2011E 16.8 5.4 8.6 FY2012E 21.8 8.4 8.9

P/E (x) FY2011E 6.1 10.7 14.0 FY2012E 4.7 6.8 12.1

EV/EBITDA (x) FY2011E 8.6 11.1 10.8 FY2012E 6.5 7.7 10.2

102 57 200

Buy Neutral

Source: Company, Angel Research

42

Telecom
Expected Impact: Neutral
The telecom sector is currently facing a number of challenges on the competitive and regulatory fronts, relating to spectrum allocation, license fee, spectrum charges, tariffs and M&As. We expect Union Budget 2012-13 would be a non-event for the telecom sector as the National Telecom Policy 2012 is expected to be announced this year, which will address most of the above-mentioned issues. The budget could pencil in the expected revenue to be generated from the auction of 2G spectrum. The telecom sector is among the heavily taxed sectors in India, attracting various levies such as license fees and spectrum charges. A uniform tax structure would help in reducing operational costs, in turn increasing profitability, which is highly important right now for telecom companies, which are facing high interest costs and amortization charges However the probability of some announcement in this space is highly unlikely in charges. However, this budget. Overall, we expect the Budget to be Neutral for the Telecom Sector.

43

Budget Expectations
Head 100% tax exemption under Sec. 80-IA Current Status The existing period during which 80IA exemption can be claimed is 15 years; 100% exemption over successive five years. Currently, the telecom industry is subject to service tax, license fees and spectrum charges, all of which work out to be ~30% of total revenue as against g Malaysia, Sri Lanka and China, where it is < ~10%. Besides, the state levies additional taxes such as Octroi, VAT, stamp duty and entry tax on towers towers. Wish List Extend exemption from 15 years to 20 years 100% exemption for 10 years out of 20 years. Potential Impact Favorable for the sector, which is currently reeling under regulatory challenges. It would also provide a boost to the sector due to the sectors long gestation period.

Rationalization of multiple levies to put a simple industry-friendly tax structure.

Rationalize multiple levies currently imposed on telecom companies.

Favorable for the sector as it will reduce the cost of services. However, any announcement regarding this is highly unlikely in this budget.

44

Research Team Tel: 022 - 3935 7800 DISCLAIMER

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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