Index

Strategy Sector-wise Expectations Automobile Banking Capital Goods Cement FMCG Infrastructure f Information Technology Media Metals & Mining Oil & Gas Pharmaceutical Power Telecom 20 22 25 27 29 31 3 34 36 38 40 42 45 47 1

Union Budget 2013-14 Preview

Fiscal discipline to regain focus
Budget FY2014 Key themes g y Fiscal consolidation is expected to remain priority in the budget as macroeconomic stability and attracting capital inflows gain focus Populist measures are likely to come later during the year, closer to the general elections p y g y , g Markets to be watchful for credibility of FY2014 fiscal deficit target Incentives to boost savings and channelize households savings in financial assets and away from non-productive physical assets such as gold (since it is also adding to the current account deficit) Sops for exporters likely as weakness in export performance persists More clarity on implementation of GST and DTC, telecom policy (revenue from spectrum auction), divestment targets, policies regarding land acquisition and mining Lowering of fiscal deficit to provide headroom for monetary policy easing, and to provide boost to investment in infrastructure sector to revive the investment cycle in the economy

Union Budget 2013-14 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 Status quo on excise duty, higher disposable income in the hands of consumers to boost demand Fiscal consolidation, measures to encourage financial savings and capital infusion in PSUs. Fund allocation for various programs including the APDRP and RGGVY expected to continue. Status quo on excise d duty, infrastructure spending f d Higher disposable income in the hands of consumers to boost demand, roadmap for implementation of GST 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 Exemption of import duty on Set Top Boxes, roadmap for implementation of GST Lower export duty on low-grade iron ore fines, increase in import duty on manganese ore Clarity on subsidy sharing formula, customs duty on import of crude oil Expected Overall Impact Neutral Positive Positive Positive Positive Positive Neutral Neutral Neutral Positive

Higher budgetary allocation for healthcare Positive Budgetary allocation towards restructuring of state power discoms, extension of tax benefits under 80-1A for power Positive plants beyond FY2013 Rationalization of multiple levies Neutral

Union Budget 2013-14 Preview

Budget FY2014 amidst macroeconomic challenges
The twin deficits in the economy current account deficit and fiscal deficit continue to pose a challenge to the macroeconomic outlook. Amongst these we believe that the current account deficit (CAD) is more worrisome since it reached a record-high level of US$22.4bn or 5.4% of GDP in 2QFY2013, owing to an elevated merchandise trade deficit. Going forward, in FY2013, the CAD is expected to touch ~5.0% of GDP (as against 4.2% of GDP witnessed in FY2012). Thus attracting strong capital inflows is imperative to finance the large CAD. Although the government has stepped up momentum on positive reforms since September 2012, we believe that it cannot afford any adverse economic developments at this juncture on the back of the still-looming threat of sovereign ratings downgrade by credit rating agencies. Stability in the macro-economic environment is imperative to preserving the sovereign ratings and attracting healthy capital flows to plug the CAD. Risking a rating downgrade from the lowest investment grade to junk status could adversely impact capital inflows, the currency, and availability of cheaper overseas finance for the corporate sector; thus affecting business confidence and market sentiments as well.

Union Budget 2013-14 Preview

Widening CAD poses challenge to macro stability
(USD bn) 25.0 20.0 15.0 10.0 5.0 0.0 Current account deficit Current account deficit/GDP (RHS) (% of GDP) 6.0 6 5.0 4.0 3.0 2.0 1.0 0.0

Election Calendar
State Meghalaya Tripura Nagaland Karnataka Madhya Pradesh Mizoram NCT Delhi Rajasthan Chhattisgarh Lok Sabha End of term Mar-13 Mar-13 Mar-13 Jun-13 Dec-13 Dec-13 Dec-13 Dec-13 Jan-14 May-14 Ruling Party g y UPA/Congress CPI (M) NPF NDA/BJP NDA/BJP UPA/Congress UPA/Congress UPA/Congress NDA/BJP UPA/Congress Seats in Lok Sabha S bh 2 2 1 28 29 1 7 25 11 545 Seats in Rajya Sabha S bh 1 1 1 12 11 1 3 10 5 245

1Q Q2009

2Q Q2009

3Q Q2009

4Q Q2009

1Q Q2010

2Q Q2010

3Q Q2010

4Q Q2010

1Q Q2011

2Q Q2011

3Q Q2011

4Q Q2011

1Q Q2012

2Q Q2012

3Q Q2012

4Q Q2012

1Q Q2013

Source: RBI, Angel Research

2Q Q2013

Source: Election Commission of India, Angel Research

Given this backdrop, we expect fiscal consolidation to regain focus in the forthcoming FY2014 Union Budget despite a heavily laden election calendar In our view any populist measures such as the national calendar. view, food security bill are likely to be implemented in the latter part of the year, closer to the general elections, rather than in the budget itself.

Union Budget 2013-14 Preview

Fiscal consolidation efforts so far
The Finance Minister outlined a five-year roadmap five year for fiscal consolidation in October 2012 aimed at eventually bringing down the fiscal deficit by about 50bp 60bp every year to 3.0% of GDP in FY2017 so that the economy can return to the path of high investment, higher growth, lower inflation and long-term sustainability.
Roadmap for fiscal consolidation
FY2013 Fiscal deficit as a % of GDP 5.3 53 FY2014 4.8 48 FY2015 4.2 42 FY2016 3.6 36 FY2017 3.0 30

Source: Finance Ministry, Angel Research

p y / , g The fiscal consolidation measures taken so far include hike in diesel prices by `5/litre, restricting subsidized LPG cylinders per household to 9 (the cap was eventually raised from 6 cylinders), thrust on PSU disinvestment, hike in railway fares after almost a decade, curtailing plan expenditure, aligning diesel prices for bulk users (accounting for 18.0% of volumes) to market prices and letting oil marketing p p y y p companies hike prices every month by 40-50ps/litre to eliminate under-recoveries.

Union Budget 2013-14 Preview

Trends in April December 2012: Having breached the budgeted fiscal deficit target by over 1.0% of GDP in FY2012, the government has sought to contain the fiscal deficit in FY2013 to its revised estimate of ( g g ) p p , 5.3% of GDP (as against the budgeted estimate of 5.1% of GDP). In the April December 2012 period, total receipts garnered by the government stood at 60.0% of the budgeted estimate, lagging behind total receipts (61.0% of budgeted estimate) in the corresponding period of the previous year. On the other hand, the government has successfully reined in plan and non-plan expenditure to 56.8% and 71.7% g p y p gy g of the budgeted estimate respectively. Correspondingly it has restricted the fiscal deficit during the period at 78.8% of the budgeted estimate as compared to 92.3% of the budgeted estimate in April December 2011.
Trends in FYTD revenue, expenditure and deficit
FY2013 B.E (` crore) Tax Revenue (Net) Non-Tax Revenue Non-Debt Capital Receipts Total Receipts Plan expenditure Non-plan expenditure Total Expenditure Fiscal Deficit Revenue Deficit
Source: CGA, Angel Research

FYTD (Apr Dec 2012) (` crore) 484,156 86,380 15,888 586,424 295,890 695,233 991,123 404,699 298,037

Apr - Dec 2012 (% of B.E) 62.8 52.5 38.1 60.0 56.8 71.7 66.5 78.8 85.1

Apr - Dec 2011 (% of B.E) 63.3 62.2 30.6 61.0 62.7 75.9 71.3 92.3 93.1

771,071 164,614 41,650 977,335 521,025 969,900 1,490,925 513,590 350,424

Union Budget 2013-14 Preview

Continued reliance on one-off revenues
We expect reliance on one-off revenues, particularly proceeds from disinvestment in PSUs and the telecom p , g p spectrum auction, to continue contributing to the total receipts in FY2014 as well. Disinvestment: Since April 2012, the Cabinet Committee on Economic Affairs has approved stake sale in 10 PSUs, namely - SAIL, NALCO, Hindustan Copper, MMTC, Oil India, NMDC, Hindustan Aeronautics, NTPC, RCF and Engineers India. So far, the government has offloaded 5.58% stake in Hindustan Copper, 10% stake in NMDC 10% stake in Oil India and 9 5% stake in NTPC and garnered over `21 000cr ie 70% of the NMDC, 9.5% NTPC, `21,000cr, budgeted divestment target of `30,000cr. Telecom spectrum auction: The FY2013 budget targeted `40,000cr as revenue from the telecom spectrum auction. So far, the first round of the auction has managed to fetch the exchequer about `9,400cr while the yet to b announced second round of the auction process i expected to f h over `40 000 be d d d f h i is d fetch `40,000cr. Special dividends from cash-rich PSUs: The government has already directed cash-rich PSUs to use their surplus cash toward capex activity or declare special dividends. We believe that dividend distribution is likely to g p p , y pp g aid the government to shore up its receipts, with the fiscal year deadline fast approaching and cash-rich PSUs (such as Coal India, NMDC, ONGC, Oil India, etc) having cash in excess of their annual investment needs. SUUTI stake sale: Furthermore, the government may also consider selling shares of blue-chip companies held by Specified Undertaking of the Unit Trust of India (SUUTI) which is the restructured unit of UTI. SUUTI holds 11.54% 11 54% in ITC 23 6% in Axis Bank and 8 3% in L&T and although it is unlikely to wind up the entire stake ITC, 23.6% 8.3% simultaneously the total value of these holdings amounts to over `40,000cr. We believe that buoyancy in the capital markets is fundamental to fetch these one-off revenues for the government.
7

Union Budget 2013-14 Preview

Curtailing the subsidy burden in FY2014
Trend in Subsidies
FY2009 Subsidies (` '000 cr) % yoy % to GDP Major subsidies Food (` '000 cr) % yoy % of total subsidy ( ) Fertilizer (` '000 cr) % yoy % of total subsidy Petroleum (` '000 cr) % yoy % of total subsidy 44 39.7 33.7 77 135.8 59.1 3 1.1 2.2 58 33.6 41.3 61 (20.0) 43.3 15 424.2 10.6 64 9.2 36.8 62 1.7 35.9 38 156.6 22.1 73 14.1 33.7 67 7.9 31.1 68 78.5 31.7 75 3.0 39.5 61 (9.3) 32.1 44 (36.4) 22.9 130 82.9 2.3 FY2010 141 9.0 2.2 FY2011 173 22.7 2.2 FY2012RE 216 24.7 2.4 FY2013BE 190 (12.2) 1.9

Source: Budget documents, Angel Research; Note: RE refers to Revised estimate, BE refers to Budget estimate

Petroleum subsidy: Petroleum subsidies have increased manifold from 2.2% of the total subsidies in y FY2009 to 31.7% of the total subsidy burden in FY2012. In FY2013 the petroleum subsidy was budgeted to decline steeply by 36.4% yoy but in the April December 2012 period itself 93.0% of the budgeted estimate has already been exhausted.

Union Budget 2013-14 Preview

The recent reform measures taken to curtail the petroleum subsidy are positive and we expect the petroleum under-recoveries to decrease by 18% in FY2014 and even more post FY2014. We anticipate governments subsidy burden to decline to `75,000cr in FY2014 compared to `100,000cr in FY2013. Moreover, in terms of the subsidy sharing burden we expect the government to be the largest beneficiary given the fiscal consolidation imperatives, i.e. compared to the subsidy sharing ratio of 60:40 between the government and upstream companies in FY2012, the government is likely to bring down its share the most. Upstream companies are also likely to be beneficiaries due to lower under-recoveries during FY2014 and this is likely to lead to an increase in their capex on exploration and acquisition of energy assets. Food subsidy: The food subsidy constitutes the largest proportion of the subsidy bill at 33.7% of the total subsidy i FY2012 I addition, th government h ti b id in FY2012. In dditi the t has time and again i di t d it commitment t i t d d i indicated its it t to introduce the National Food Security Bill (NFSB). The Parliamentary Standing Committee has recommended coverage of 67% of the total population under the NFSB. It seeks to guarantees a uniform entitlement to the beneficiaries of 5kg of food grain per person per month at low cost (rice at `3/kg, wheat at `2/kg etc). We belie e e believe enacting the le i l ti i likel t i fl te the f d subsidy bill t over `100 000 cr and i view ti legislation is likely to inflate food b id to e `100,000 d in ie of the present fiscal challenges the government is unlikely to table the NFSB in the budget session, rather it is likely to time the bill closer to the 2014 general election for enhanced electoral benefits.

Union Budget 2013-14 Preview

Sops for exporters likely; import duty hike possible
High trade deficit ex oil, ex gold (in USD bn)
FY2005 Trade d fi i T d deficit Ex oil Ex gold Ex oil, ex gold Trade deficit/GDP (%) CAD/GDP (%) 28.0 28 0 5.1 17.4 -5.4 4.7 0.4 FY2006 46.1 46 13.8 35.2 2.9 6.2 1.2 FY2007 59.3 93 21.0 44.9 6.5 6.5 1.0 FY2008 88.5 88 37.3 71.8 20.5 7.4 1.3 FY2009 118.4 84 52.3 97.7 31.6 9.7 2.3 FY2010 109.6 09 6 50.7 81.0 22.0 8.6 2.8 FY2011 118.6 86 54.1 78.1 13.6 7.6 2.7 FY2012 183.4 83 4 84.4 127.1 28.2 10.2 4.2 FYTD2012 137.7 3 68.7 96.0 27.0 FYTD2013 150.7 0 65.4 112.7 27.4

Source: RBI, DGCIS, Angel Research, Note: FYTD refers to the April December period

The economy is running a high trade deficit at 10.2% of GDP in FY2012 and we expect it to exceed US$200bn in FY2013 (as against US$183 4bn in FY2012) The surge in our trade deficit at 11 7% of GDP US$183.4bn FY2012). 11.7% in 2QFY2013 is the primary reason for a record-high current account deficit at 5.4% of GDP in 2QFY2013. In the April January FY2013 period, the trade deficit widened to US$167.2bn as against US$154.5bn in the corresponding period of the previous year, reporting a growth of almost 9.0%. The Commerce Ministry extended the interest subvention scheme on rupee-denominated loans f for export-oriented labor-intensive and small-scale industries as well as engineering sector until FY2014. The government also raised import duty on gold ahead of the budget from 4.0% to 6.0% aiming to curb demand to some extent. In the previous budget it was increased from 2.0% to 4.0%. Exports reported a marginal growth of 0.8% in January 2013 after eight straight months of contraction. Therefore, to l h f f h h h f h f augment export growth, we believe that this budget is likely to announce sops for exporters particularly in the manufacturing industry. Moreover, in view of the high CAD the government could possibly enhance import duty/ tariff hikes on certain items to discourage import demand.
10

Union Budget 2013-14 Preview

Goods and Services Tax Implementation likely post April 2014
The impending legislation on the Goods and Services Tax (GST) is aimed at creating a unified market for goods and services b replacing all i di t t d d i by l i ll indirect taxes on goods and services such as central as well as state l l d d i h t l ll t t level sales taxes, service taxes, VAT, excise duty and octroi. The implementation of GST is likely to broaden the tax base, simplify tax structure and increase the tax to GDP ratio. However, it is a contentious issue with the States who are concerned about revenue-sharing and loss of fiscal autonomy and has thus missed numerous deadlines since A il 2010 Th l li d dli i April 2010. The leveling of diff f differences i crucial since th C is i l i the Constitution (115th A tit ti Amendment) d t) Bill requires the approval of not less than two-thirds of the members present and voting in each House of Parliament and ratification of at least one-half of the states. Recent progress: The Centre and States recently discussed issues such as incorporating a floor rate with a narrow band instead of a single GST tax rate, compensation on Central Sales Tax (about `34,000cr for FY2011-13), exclusion of petroleum products from the bill so as to let states decide on their inclusion in GST, phased rollout and flexibility to exit, etc. In addition, three sub-committees with central as well as state government officials are expected to deliberate on further key issues. Consensus remains to be established on vital issues but owing to progress being made in deliberation, we expect the Finance Minister to unveil a credible timeline for roll out of the GST in this budget, which is likely to be post April 2014.

11

Union Budget 2013-14 Preview

Direct Tax Code Clarity on roadmap for rollout
The Direct Tax Code (DTC) seeks to replace the archaic Indian Income Tax Act, 1961 and simplify the tax ( ) p p y structure as well as increase tax compliance. The Parliamentary Standing Committee on Finance in its report recommended raising income tax exemption to `3 lakhs (from the present `2 lakhs) and modification in subsequent tax slabs, hiking the investment limit for tax saving schemes and wealth tax limit, and the abolition of the Securities Transaction Tax amongst others. g The Finance Ministry is likely to review the suggestion of the committee, after which the DTC bill would be tabled in Parliament. We expect clarity in the forthcoming budget on the roadmap for rolloutof the DTC. In the interim, to boost tax revenue, media reports suggest that a higher income tax rate on the super-rich or surcharge on t i th hi h t i h tax in the highest income b k t could b on th cards i thi b d t bracket ld be the d in this budget.

12

Union Budget 2013-14 Preview

Boost to savings likely by hiking tax saving deduction limit
Households rising preference for savings in physical assets
(%) 70.0 70 0 60.0 50.0 40.0 30.0 Financial Savings Physical Savings

Surge in growth of gold imports

(USD bn) 60.0 60 0 50.0 40.0 30.0 20.0 10.0 Gold imports % growth (RHS) (%) 75.0 75 0 60.0 45.0 30.0 15.0 -

FY Y2003

FY Y2004

FY Y2005

FY Y2006

FY Y2007

FY Y2008

FY Y2009

FY Y2010

FY Y2011

FY Y2012

0.0

(15.0)

FY Y2001

FY Y2002

FY Y2003

FY Y2004

FY Y2005

FY Y2006

FY Y2007

FY Y2008

FY Y2009

FY Y2010

FY Y2011

Source: RBI, Angel Research

FY Y2012

Source: RBI, Angel Research

The shift from savings in physical to financial assets is vital to improve the growth mix in a developing economy like India. Conversely, the savings rate in the economy has slowed down to 30.8% in FY2012 from 34.0% in the previous year and a hi h of 36 8% i FY2008 F th h i d high f 36.8% in FY2008. Further, households are i h ld increasingly preferring savings i physical i l f i i in h i l assets (such as gold, property etc) over financial assets. In FY2012, physical savings constituted about 64.1% of the total households savings and the share of financial savings decelerated to 35.9%. The banking system has also witnessed a persistent wedge between credit growth (16.0%) and deposit growth (13.1%) during the year. Akin to the Rajiv Gandhi Equity Savings Scheme announced in the previous budget, we expect the Finance Minister to take some measures to boost savings in financial assets, and thus discourage demand for gold, which is adversely impacting our CAD. This can be done by increasing the tax saving deduction limit in q g p investment instruments such as ELSS, equities, longer-duration fixed deposits, tax-free bonds etc.
13

Ap pr-Dec 2 2012

Union Budget 2013-14 Preview

Reviving the metals and mining sector
Growth of mining sector vis-a-vis GDP growth
(%) 12.0 8.0 4.0 0.0 (4.0) (8.0) GDP growth Mining and quarrying growth

Coal imports on the rise

(USD bn) 20.0 16.0 12.0 60.0 8.0 4.0 20.0 (20.0) Coal, coke and briquettes import % growth (RHS) (%) 140.0 100.0

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

1Q2011

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

4Q2012

1Q2013

2Q2013

0.0

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

Source: MOSPI A S MOSPI, Angel R l Research h

Source: RBI A S RBI, Angel R l Research h

Despite having one of the largest coal reserves, Indias imports of coal and coke reported about 78% rise in FY2012. India is also the fourth largest producer of steel but about 10% of our requirements are being met by imports. These avoidable imports add to pressure on the current account deficit and currency woes. The steel sector is currently facing stress owing to issues such as availability of raw materials regulatory and environment clearances land acquisition materials, clearances, and infrastructure bottlenecks. We believe legislations such as the Mines and Minerals (Development and Regulation) Bill, the new Land Acquisition Bill as well as the new steel policy should seek to create a simple and transparent mechanism for grant of mining license through competitive bidding and fast-track clearances to attract investment (including foreign direct investment) and technology in the sector, thereby boosting growth. The potential foreign capital inflows from South Korean steel major POSCOs project alone are pegged at `54,000cr. Such projects would bring immediate benefit of precious foreign capital inflows in the economy and lasting benefits in the form of India becoming a major net exporter of steel. The Finance Minister could use his budget speech to bring clarity on these crucial issues. y
14

Apr-Dec 2012

Union Budget 2013-14 Preview

Banking on licenses to private players
The passage of the Banking Laws Amendment Bill by the parliament is positive for paving the way for issuance of th new b k li i f the bank licenses t private players. R to i t l Recent media reports suggest th t th R t di t t that the Reserve B k of Bank f India is closer to finalizing guidelines on new-bank licenses. In our view, the possible entry of large business conglomerates in the banking space could be a game-changer for the industry and could inject capital to the tune of `50,000cr, which would be leveraged further. In his budget speech, the Finance Minister could give greater clarity on th entry of corporates i th b ki t l it the t f t in the banking i d t and subsequently it i industry d b tl its impact on additional t dditi l credit creation for productive sectors of the economy.

Boost to infrastructure sector

In line with past trends we expect infrastructure to be a key focus area in this budget as well We expect the trends, well. Finance Minister to address the slowdown in investment and growth, by taking positive steps to strengthen the investment environment. Measures such as increasing budgetary allocation to the sector, improving the clearance mechanism, providing tax sops/benefits and channelizing long-term, low-cost funding for infrastructure projects, increase in tax saving limit for investment in tax-free bonds, etc are likely to boost growth in the infrastructure sector. We expect the Finance Minister to take some steps in this direction to revive growth in the sector. , vv v y v v , y Further, revival of the investment cycle also rests on a conducive interest-rate environment, and a credibly lower fiscal deficit could give the RBI some headroom to cut policy rates more meaningfully to support growth.

15

Union Budget 2013-14 Preview

Cash transfers to lead to efficiency in welfare delivery system
The objective of the Direct Benefit Transfer (DBT) scheme is to transfer cash directly to beneficiaries of existing government schemes such as scholarships, pensions, NREGA wages etc th t h h h l hi i t through an electronic payment h l t i t system linked with the Aadhaar platform, giving a unique identity number to each resident. We believe implementation of DBT is likely to improve targeting of intended beneficiaries, reduce leakages and corruption by eliminating middle-men and thus increase efficiency in the welfare delivery system. We further believe th t extending th scheme t subsidized goods and services i lik l t remove price di t ti b li that t di the h to b idi d d d i is likely to i distortions i th in the market and rationalize consumption. Coverage and Implementation: The government has identified 43 districts in 16 States on the basis of coverage of bank accounts and Aadhaar for the first round of Direct Benefits Transfer (DBT) under 26 selected schemes (mainly scholarship schemes and stipends). Of these 43 districts, 20 districts were identified to receive DBT from January 1, 2013; 11 more districts from February 1, 2013 and the remaining 12 districts from March 1, 2013. Going forward, 18 states are expected to be covered from April 2013 and the remaining states are expected to be covered for implementation of DBT from April 2014. The three pillars for successful implementation of cash transfer scheme are identification of intended beneficiaries, Aadhaar enrollment and banking infrastructure. So far, while almost 59% households have access to banking services according to census data, Aadhaar enrollment amounts to just about 270 million people, ie around 22% of the population. The Task Force on Direct Transfer of Subsidies on Kerosene LPG and Fertilizer recommended direct transfer Task Kerosene, Fertilizer of these subsidies to beneficiaries in a phased manner. The adoption of DBT in these cases is likely to depend on evaluation of the success of pilot projects in Alwar (for kerosene), Mysore (for LPG), and Jharkhand (for PDS). We expect clarity on inclusion of further schemes in DBT in the forthcoming budget.
16

Union Budget 2013-14 Preview

Global comparisons
Expenditure/GDP ratio in 2011
( ) (%) 50.0 40.0 30.0 20.0 10.0 0.0 Brazil China India Indonesia Russia United Kingdom United States 18.6 27.5 Expenditure/GDP 41.5 45.3

Trends in Indias fiscal position

( ) (%) 18.0 15.0 12.0 5.7
Fiscal deficit/GDP (RHS) Expenditure/GDP Tax Revenue/GDP

( ) (%) 7.0 6.0 5.0 4.0

6.2

5.9 4.5 4.0 3.3 2.5

6.0

6.5

5.9 4.9

36.8

37.6

3.9

23.9 23 9

9.0 6.0 3.0 0.0

FY0 01 FY0 02 FY0 03 FY0 04 FY0 05 FY0 06

3.0 2.0 1.0 0.0

FY0 07

FY0 08

FY0 09

FY1 10

FY1 11

FRBM Bill introcuced

FRBM Act passed

Fiscal stimulus to boost growth

Source: IMF, Angel Research

Source: Budget documents, RBI, Angel Research

We believe that even Indias combined (Centre + States) expenditure/GDP ratio is not as high as compared to other countries. The Centres expenditure to GDP ratio has in fact been on a declining trend, decelerating to 14.9% in FY2012 from 15.9% in FY2010. But the fiscal deficit has remained elevated on account of the slide in the tax revenue to GDP ratio, which stood at 10.2% in FY2012 as compared to 11.9% in FY2008, mainly owing to a deceleration in the gross direct taxes to GDP ratio. As growth recovers, we expect revenues (particularly tax revenues) to improve, abating the heightened fiscal deficit concerns.

17

FY1 12

Union Budget 2013-14 Preview

To sum up
FY2013 fiscal deficit likely at 5.5% of GDP
(in ` 000 cr) Revenue Receipts Tax Revenue (net to centre) Non-tax Revenue Non debt capital receipts Total Receipts Revenue expenditure Capital C i l expenditure di Total expenditure Gross Fiscal Deficit Revenue Deficit GFD/GDP / RD/GDP FY2010 573 457 116 33 1,024 912 113 1,024 418 339 6.5% 5.2% FY2011 788 570 219 35 1,197 1,041 157 1,197 374 252 4.8% 3.2% FY2012RE 767 642 125 30 1,319 1,162 157 1,319 522 395 5.8% 4.4% FY2013BE 936 771 165 42 1,491 1,286 205 1,491 514 350 5.1% 3.4% FY2013E 902 739 164 36 1,452 1,301 188 1,490 552 399 5.5% 4.0%

Source: Budget documents, Angel Research; Note: RE refers to Revised estimate, BE refers to Budget estimate, FY2013E to Angel Researchs estimate

We expect the fiscal deficit to stand at 5.5% of GDP in FY2013. However, if the government tightens expenditure further than anticipated, adopts a more aggressive strategy towards garnering one-off revenues, revenues defers the petroleum subsidy payment or retains the largest share of gain through the diesel price hikes; then the fiscal deficit for FY2013 could be brought down to 5.3% of GDP For FY2014 we . expect the government to stick to its fiscal deficit target of 4.8% of GDP . We believe that calibrating fiscal policy by means of reduction in subsidies and boosting the investment environment through meaningful capital expenditure i a pre-requisite f getting the economy on a virtuous i h h i f l i l di is i i for i h i growth path. In addition, alleviating supply-side constraints in the economy through structural reforms in the mining and power sectors, enabling land acquisition policy etc are essential to unlock the growth potential in the economy.
18

Sector-wise Expectations

19

Automobile
Expected Impact: Neutral
FY2013 has been a challenging year for the Indian automobile industry as slowdown in economic activity coupled with high interest rates and rising fuel and vehicle prices have dampened consumer sentiments. As a result the domestic industry growth has slowed down to ~5% YTD in FY2013 The medium and result, FY2013. heavy commercial vehicle and passenger car segments have been severely impacted by the ongoing slowdown and have registered a de-growth of ~21% (FYTD) and ~2% (FYTD) respectively. Nonetheless, easing of interest rates in CY2013 is expected to revive demand going ahead and provide relief to the automakers. automakers Considering the current environment we expect status quo to be maintained on the excise duty front. However, in light of the ongoing clamor for imposing higher taxes on diesel vehicles, whose sales continue y ; p y to defy the slowdown; we do not rule out a possibility of an additional tax on diesel vehicles in the Union Budget. The sector however, will stand to benefit from indirect sops such as higher outlay for the rural sector (driving consumer spending), increased budgetary allocation for infrastructure spending (increase in road freight) and increase in income tax b f h) d benefits. f Overall, we expect the Budget to be broadly Neutral for the Automobile sector.

20

Budget Expectations
Head Excise Duty E i D Item Small S ll cars, two-wheelers, h l three-wheelers, tractors and commercial vehicles Large cars and utility vehicles Additional duty on diesel vehicles Diesel cars and utility vehicles Current Status Charged at 12% Ch d Expected Change No h N change Potential Impact Status quo with respect to excise d S ih i duty will be positive for the sector Status quo with respect to excise duty will be positive for the sector Negative for Mahindra & Mahindra, Maruti Suzuki and Tata Motors

Charged at 24% to 27% NIL

No change Either a diesel tax of upto `80,000/vehicle or hike in excise duty

Top Picks p
Company Reco CMP (`) Ashok Leyland Mahindra and Mahindra Tata Motors* Buy Accumulate Accumulate 23 892 304 Target Price (`) 28 1,019 326 EPS (`) FY2013E 1.5 55.3 28.0 FY2014E 2.2 64.3 36.3 P/E (x) FY2013E 15.3 16.1 10.8 FY2014E 10.2 13.9 8.4 EV/EBITDA (x) FY2013E 6.2 9.4 4.7 FY2014E 5.1 7.6 3.9

Source: Company, Angel Research ; Note: * Consolidated

21

Banking
Expected Impact: Positive
Indias savings rate has reduced substantially from the highs of around 37% to barely 30% in the last few years, which is reflecting in the faltering deposit growth and high interest rates for banks. Simultaneously savings in physical assets like gold and property has increased Lowering gold imports has become vital from the viewpoint of increased. improving the precarious current account deficit. Simultaneously, there is a need to increase savings and investments in order to revive GDP growth. Hence, from several angles it has become important for the budget to encourage financial savings and discourage savings in gold. Possible ways to do this would be to increase the limit for tax deductions i respect of fi d d ti in t f financial i i l investments such as b k d t t h bank deposits, ELSS and equities. Al it d iti Also, b k may b allowed banks be ll d to issue tax-free infra bonds. In general, the budget has always been important for banks, from the perspective of the credible fiscal deficit initiatives and corresponding implications for market borrowings by the government Credible signs of fiscal government. consolidation would be positive for banks from the point-of-view of lower government bond yields and interest rates. In light of capital constraints being faced by the banking sector and the imminent implementation of stiffer Basel-III norms from 1 April 2013, the government might earmark a healthy sum for capital infusion in public sector banks and provide clarity on the creation of a holding company structure for public sector banks, which would be able to raise money globally on its own. Currently, the banks are allowed tax deduction in respect of full write-offs from book and additionally, provisions made f rural advances over and above the actual write-offs i also eligible, subject to li i I li h of i d for l d d b h l i ff is l li ibl bj limits. In light f increased d credit costs, considering persistent asset quality stress, bankers are pressing hard for the allowance of provisions made for non rural advances as a tax expense and/or increasing limits for provisioning based deductions on rural advances.
22

Budget Expectations
Head Tax-saving Tax saving fixed deposits Current Status 5-year lock-in 5 year lock in period; `1lakh investment limit Expected Change 3-year lock-in 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 lock-in tax-saving ELSS Will help increase deposit mobilization by the banking sector Will help increase deposit mobilization by the banking sector Will help banks to counter asset liability mismatch Regular budget feature for inclusive growth. Negative for banks Decreasing tax liability

Fixed deposits with maturity of 3 years and Above Tax free Infra bonds

No tax benefits

Interest income to be treated as capital gains, similar to income from FMPs Commercial banks to be allowed to issue tax-free infrastructure bonds. Increasing benefits

Currently some state-run NBFCs are allowed to issue such bonds Interest subvention, lending targets

Priority sector

Tax break on provisions

For non-rural advances, deduction in respect of b d d bt i allowed when t f bad debt is ll d h the advances are actually written off in the books of accounts. Whereas for rural advances, deduction based on provisioning is eligible, subject to limits

Provisions made on non-rural d b ll d advances be allowed as deduction, subject to limits and/or existing limits be raised for provisioning-based deductions on rural advances

23

Top Picks
Company Reco CMP (`) Axis Bank ICICI Bank Buy Buy 1,445 1,123 Target Price (`) 1,753 1,404 EPS (`) FY2013E 119.2 72.0 FY2014E 139.0 84.6 PE (x) FY2013E 12.1 15.6 FY2014E 10.4 13.3 P/ABV (x) FY2013E 2.3 2.0 FY2014E 1.9 1.8

Source: Company, Angel Research

24

Capital Goods
Expected Impact: Positive
The capital goods sector has been bearing the brunt of slowdown in investments across various sectors owing to the deteriorating macro environment and sluggish domestic industrial growth. The number of projects that have been stalled and cancelled has increased If the budget addresses some of the power increased. sector issues such as poor financial position of state power distribution companies and delays in land acquisition and forest clearances, among others, it would be beneficial for the capital goods sector. y, p g g Additionally, fund allocation to the various programs including the R-APDRP and RGGVY would continue to provide a fillip to the transmission line players. Overall, we expect the Budget to be Positive for the Capital Goods sector.

25

Budget Expectations
Head Budgetary provision towards restructuring of state power distribution companies Current Status Expected Change Potential Impact Budgetary allocation of It will be positive for capital goods companies with deteriorating `1,200cr working capital cycle, as it will minimize the delay in payments by state power distribution companies Also, improvement in financial health of state power distribution companies will enable them to plan further investment in improving their transmission and distribution (T & D)) network. It will thus be positive for T & D companies Fund Allocation for T & D. Funds are allocated for various programs including the APDRP and RGGVY RGGVY. Expected to continue. It will be positive for various transmission line players, as it provides a continuing business opportunity

26

Cement
Expected Impact: Positive
The cement sector is currently facing a problem of low demand with dispatches growth in the current financial year expected to be ~5-6%. The low demand scenario has resulted in a fall in cement prices. y p v , p Efforts by cement manufacturers to increase prices have not succeeded, as price hikes could not be absorbed due to low demand. The industry is also facing cost pressures due to hike in diesel prices. The hike in diesel prices has pushed up both, the rail and road freight charges. This has affected the profitability of cement manufacturers. The cement sector would hope that there is no increase in excise duty on cement in the budget. As the industry is currently facing low demand, it would be difficult to pass on the hike in excise duty to customers. Status quo with respect to excise duty on cement will be a positive for the sector. The cement sector wo ld also be hoping for some anno ncements on infrastr ct re projects s ch as road would announcements infrastructure such road, freight corridor, irrigation etc, which would boost cement demand. Overall we expect the Budget to be Positive for the Cement sector.

27

Budget Expectations
Head Current Status Expectation Potential Impact Status quo with respect to excise duty on cement will be q p y a positive for the sector. y p y , g Excise duty on As per the current duty structure, excise No change cement duty on cement cleared from mini cement plants in packaged form is 6% along with an additional charge of `120/tonne. Duty on cement cleared from other than mini cement plants is 12%, 12% along with additional charge of `120/ton. The duty will be charged on the retail selling price with an abatement of 30%. Infrastructure spending

Government plans to spend `50lakh cr Announcement of major Announcements on new infrastructure projects would be on infrastructure in the 12th Plan. infra projects related to positive as it would boost cement demand. highways, freight corridor and irrigation

28

FMCG
Expected Impact: Positive
The overall slowdown in the economy has began to affect the FMCG sector with companies posting deceleration in volume growth in the recent quarterly results. Discretionary spending has been hit severely due to the d t th ongoing slowdown. Th prevailing hi h i fl ti l l i also a cause of concern f th sector. i l d The ili high inflation level is l f for the t In the upcoming budget, the FMCG sector would be hoping for announcements that would boost demand, such as higher allocation to rural employment schemes, lowering of personal taxes etc which would boost the disposable income in the hands of cons mers consumers. The sector would also keenly await concrete announcements regarding the long awaited implementation of Goods and Services Tax (GST). Implementation of GST would result in uniform taxation for products and services across the country and also abolish the cascading effect of tax GST would also result in reducing tax. the overall tax burden on products and services, thereby propelling demand. Cigarette makers would be hoping for no hike or just a marginal hike in excise duty on cigarettes as the same was hiked by ~22% in the 2012 13 budget 22% 2012-13 budget. Overall, we expect the Budget to be Positive for the FMCG sector.

29

Budget Expectations
Head Rural employment employmentoriented schemes such as NREGA GST Implementation Current Status Expectation Potential Impact Higher allocation towards these schemes would increase the disposable income in the hands of consumers, which would be a positive for the sector. Implementation of GST would result in uniform taxation for products and services across the country and also b l h h d ff f ld l abolish the cascading effect of tax. GST would also result in reducing the overall tax burden on products and services, thereby propelling demand. Cigarette makers would be hoping for no hike or marginal hike in excise duty on cigarettes as the same was hiked by ~22% in the 2012-13 budget. NREGA had an allocation of Expect increase in allocation `33,000cr in 2012-13 of resources towards NREGA and Bharat Nirman Multiple taxes such as excise Concrete announcement duty charged by Union regarding roll-out of GST Government and Value d l Added Tax (VAT) charged by state governments. Currently varying rates of No hike or marginal hike excise duty are charged on cigarettes. The rate of duty varies depending on the size of cigarette (such as 65mm, 70mm, 75mm and 85mm) and type of cigarettes (filter and non filter).

Taxation on Cigarettes

30

Infrastructure
Expected Impact: Positive
The sector has underperformed over the last twelve months relative to the BSE Sensex on the back of persistent headwinds faced by the industry in the form of slower-than-anticipated revival in industrial p , v q , w g capex, environment clearances and land acquisition issues. Further, a stretched balance sheet and working capital on the back of investment in subsidiaries and delays in payment from clients continue to pose a problem. Moreover, the inflationary pressures, spiraling commodity prices and high interest rates are also hurting overall profitability of the companies. 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 to flagship programs of Bharat Nirman, JNNURM, APDRP AIBP and NHDP for the sector in the , budget. Land acquisition and environment clearance are the two major bottlenecks hampering timely execution of projects. Hence, roll out of policies to expedite these procedures would lend a fillip to the sector. Further, we expect the government to look at more avenues of long-term financing for the sector including creation of corporate debt market dedicated infrastructure debt fund and attracting foreign investment market, investment, which would solve the current asset-liability mismatch problem faced by the banks. However, creation of these funds would require regulatory changes. Overall, we expect the Budget to be Positive for the Infrastructure sector.

31

Budget Expectations
Head Dedicated infrastructure debt funds Current Status N.A. Wish List Should become operational Potential Impact It will be positive for all players in the sector as it provides long-term funding for projects and will remove the major concern of asset-liability mismatch faced by the banks in the current scenario Channelizing a large pool of domestic savings into infrastructure will give impetus to the sector i f t t ill i i t t th t

Tax benefit on investments made i i t t d in infrastructure bonds

N.A

Deduction of additional `20,000 to b ll `20 000 t be allowed over d and above the `1 lakh limit prescribed for investment in tax saving schemes Appropriate body for each pp p y sector for better handling Taking Infra spend to 9-10% of GDP

g y Regulatory bodies for sectors Increased allocation to the Sector

N.A.

To ensure a healthy pipeline of projects to meet Twelfth y pp p j Plan targets and to clear the path of currently stuck projects owing to policy paralysis It will help India to achieve 9%-plus economic growth in the long run, as currently physical infrastructure has emerged as the biggest constraint in achieving the desired economic growth

Current Infra spend of 6% of GDP is much below the requirement

32

Top Picks
Company Reco CMP (`) Sadbhav Eng Buy 113 Target Price (`) 160 EPS (`) FY2013E 7.4 FY2014E 7.7 P/E (x) FY2013E 15.4 FY2014E 14.8 EV/EBITDA (x) FY2013E 10.3 FY2014E 7.9

Source: Company, Angel Research

33

Expected Impact: Neutral

Union Budget 2013-14 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 continued 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 current tax structures. 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 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 to move towards modernization. Some 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 implementation in schools would benefit companies catering to the K-12 segment, including Educomp Solutions and NIIT. Overall, we expect the Budget to be Neutral for the IT Sector.

IT

34

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 f all IT companies operating i be d t for 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, who 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 and NIIT.

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 Hexaware Tech Mahindra Buy Accumulate Reco CMP (`) 82 996 Target Price (`) 113 1,110 1 110 10.9 95.8 95 8 EPS (`) FY2013E FY2014E 10.1 110.7 110 7 P/E (x) FY2013E 7.5 10.4 10 4 FY2014E 8.1 9.0 90 EV/EBITDA (x) FY2013E 4.8 9.4 94 FY2014E 4.4 8.6 86

Source: Company, Angel Research

35

Media
Expected Impact: Neutral
According to a report by FICCI-KPMG released in 2012, the Indian media and entertainment sector is slated to post a strong CAGR of 14.9% through CY2011-16 to `1,45,700cr from regional markets, digitization push and increasing mobile and broadband penetration penetration. One of the key developments is Phase 3 Radio auction which is expected to add 839 new frequencies and extend the reach of private FM stations to about 227 new cities. However, the logjam in telecom spectrum allocation is expected to delay the Phase 3 radio auctions auctions. Key expectations of the media sector from this budget include: 1) Exemption of import duty on STBs: facilitating rapid digitalization. It will reduce the cost burden of DTH and cable companies companies,

2) Uniformity in taxation under GST: Currently, the entertainment industry is paying multiple taxes including service tax entertainment tax among others Moreover high rates of entertainment tax and tax, tax, others. Moreover, lack of uniformity in tax rates across different states add to their woes. A uniform, simplified and single-point taxation across product categories under the ambit of GST will benefit the entertainment sector. Hence, a roadmap for implementation of GST which brings entertainment tax under its ambit would be positive for the sector sector. Overall, we expect the Budget to be Neutral for the Media sector.

36

Budget Expectations
Head Import duty on set top boxes Current Status C rrent Stat s The set top boxes are subject to a import duty of 5% Expectations E pectations Removal of import duty Potential Impact Removal of import duty on set top boxes would reduce cost burden on DTH and cable companies, facilitating rapid digitization. Positive for DTH and cable industry. Positive for h P i i f the sector if a uniformity is created i the tax if i i d in h structure instead of multiple taxes.

Uniformity i U if i in taxation under GST

Entertainment tax l i d b various states at E i levied by i different rates

Roadmap for implementation R d f i l i of GST (bringing entertainment tax under its ambit)

Top Picks
Company DB Corp Reco Buy CMP (`) 238
Source: Company, Angel Research

Target Price (`) 275 11.8

EPS (`) FY2013E FY2014E 14.5 20.1

P/E (x) FY2013E FY2014E 16.4

EV/EBITDA (x) FY2013E 2.6 FY2014E 2.3

37

Metals & Mining

Expected Impact: Neutral
Union Budget 2013-14 is likely to be broadly neutral for the metals and mining sector. We expect the government to likely lower the export duty on export of low-grade (<55% Fe) iron ore fines low grade which is likely to benefit iron ore exporters such as Sesa Goa and NMDC. Further, the government may raise the duty on import of manganese ore to 5% from the current level of 2%. We believe fund-raising plans by the government through disinvestment are likely to continue in FY2014. We believe FY2014 budget to likely consider further stake sale in Coal India and divestment of Rashtriya Ispat Nigam Ltd. Overall, we expect the Budget to be Neutral for Metal companies.

38

Budget Expectations
Head Import duty on manganese ore Export duty on iron ore Current Status 2% on imports of manganese ore 30% duty on lumps and fines Expected change Increase to 5.0% Decrease in duty for low-grade fines Potential Impact Positive for manganese ore producers such as MOIL and Adhunik Metaliks Positive for iron ore exporters such as Sesa Goa

Top Picks
Company C Reco R CMP (`) Hindustan Zinc Tata Steel NMDC Buy Buy Buy 122 376 150 Target Price T tP i (`) 149 443 181 EPS (`) FY2013E 14.7 7.2 72 16.0 FY2014E 16.3 34.7 34 7 18.6 P/E ( ) (x) FY2013E 8.3 52.4 52 4 9.4 FY2014E 7.5 10.8 10 8 8.1 EV/EBITDA ( ) (x) FY2013E 4.8 5.6 56 5.3 FY2014E 3.4 4.8 48 4.1

Source: Company, Angel Research

39

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 `166,224cr in FY2013. We expect the budgetary measures to be focused on addressing oil under-recoveries b way of providing clarity on subsidy sharing f dd i il d i by f idi l it b id h i formula f upstream oil l for t il companies. A concrete subsidy sharing formula would provide visibility over earnings of upstream oil companies and hence, it would be positive for them (ONGC, Oil India and GAIL). The government is likely to re-introduce 5% customs duty on import of crude oil which will be positive for Cairn India. Hence, the Budget is expected to be Positive for the Oil and Gas Sector.

40

Budget Expectations
Head Prices of diesel, LPG and kerosene Current Status No clarity over subsidy sharing mechanism by OMCs, upstream companies and governments No customs duty currently Expected Change Potential Impact Clarity over subsidy sharing Positive for ONGC, OIL, GAIL and OMCs mechanism; hint on potential increase in prices of diesel, LPG and kerosene Introduction of 5% customs duty on crude oil Positive for Cairn India

Introduction of 5% customs duty on crude oil

Top Picks
Company Reco CMP (`) Petronet LNG ONGC Buy B Accumulate 149 322 Target Price (`) 179 357 EPS (`) FY2013E 15.4 15 4 28.6 FY2014E 15.6 15 6 34.4 P/E (x) FY2013E 9.7 97 11.1 FY2014E 9.6 96 9.4 EV/EBITDA (x) FY2013E 7.0 70 5.5 FY2014E 5.7 57 4.4

Source: Company, Angel Research

41

Pharmaceuticals
Expected Impact: Positive
The Union Budget 2013-14 is likely to be positive for the pharma sector. The last budget provided a big boost and consent to the biggest wish list of the industry, ie it approved the proposal to extend weighted deduction of 200% f R&D expenditure i an i h d d ti f for dit in in-house f ilit f a f th period of fi years b facility for further i d f five beyond d March 31, 2012. Going into this Budget, the other demands by the sector are: a) Incentives for units engaged in the business of R&D or contract manufacturing, b) Incentives for units engaged in the business of R&D and contract manufacturing by way of profit-linked incentives, c) Exemption of income generated from the utilization of IP should also be provided in order to provide an incentive for R&D in India, d) An amendment should be brought into effect that entire expenditure in/for the purpose of an approved R&D facility, which is eligible for weighted deductions and clinical trials carried out in approved hospitals and institutions outside the R&D unit, be covered within the ambit of expenditure eligible for weighted deduction. Among th other t A the th tax i incentives d ti demanded i th t all lif d d is that ll life-saving d i drugs (i l di (including medical d i ) b di l devices) be exempted from customs duty on import into India. Apart from these demands, the budget could, however, continue to increase budgetary allocation for healthcare spending spending. Overall, we expect the Budget to be Positive for the Pharmaceutical Sector.

42

Budget Expectations
Head Increase in budget allocation to healthcare schemes Tax incentives for R&D carried out by the companies in the Contract Manufacturing and Research unit. Current Status Expectation 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 `20,822cr from `18,115cr Currently weighted tax deduction of 200% is available only for in-house research by pharmaceuticals companies Should be given to encourage the CRAMS industry, though it might not get through.

Positive for CRAMS companies companies.

R&D i income generated C t d Currently tl IP generated Sh ld b given to encourage P iti f pharma companies t d Should be i Positive for h i through IP should be income gets taxed at the R&D efforts of the Indian exempted from tax normal income tax rates. companies All life-saving drugs Not all life saving drugs are Some additional drugs from Positive for pharma and healthcare companies (including medical exempt from import duty the current coverage might devices) should be get the exemptions. exempted from customs duty on import into India.

43

Top Picks
Company Reco CMP (`)
Aurobindo Pharma* Cadila Healthcare IPCA Labs Lupin Accumulate Accumulate Buy Buy 185 751 466 587

Target Price (`)

208 817 559 655

EPS (`) FY2013E

12.4 26.3 29.9 24.8

P/E (x) FY2013E

14.9 28.5 15.6 23.7

EV/EBITDA (x) FY2013E

10.3 17.6 11.1 15.7

FY2014E
14.0 39.5 37.3 31.4

FY2014E
13.2 19.0 12.5 18.7

FY2014E
8.9 12.8 9.1 12.2

Source: Company, Angel Research; Note: *Recurring EPS

44

Power
Expected Impact: Positive
The Power sector in India is facing many headwinds such as shortage of domestic fuel (both coal and gas), poor financial position of state power distribution companies and delays in land acquisition and forest clearances, clearances among others However recent announcements by the Central Government such as approving others. However, Government, imported coal price pooling to tackle domestic coal shortage, and framing of SEB restructuring policy to improve their financial health, have enthused the Power sector. Some of th anticipated announcements pertaining t th P S f the ti i t d t t i i to the Power sector are : t 1) 2) Extension of tax benefits under 80-IA beyond FY2013 Budgetary allocation of `1,200cr towards restructuring of state power distribution companies

Overall, we expect the budget to be Positive for the Power Sector.

45

Budget Expectations
Head Deduction under Section 80-IA Current Status Available for project p j developers only until FY2013. Expected Extension of the scheme beyond FY2013. Potential Impact As per Section 80-IA, power generation companies are p , p g p 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 FY2013. Extension of the benefits beyond FY2013 will be of a major advantage to project developers, as it will substantially reduce their tax burden burden. This move, if implemented, will improve the financial position of state distribution companies, enabling them to invest more in improving their transmission and distribution network It will also be positive for power companies, with deteriorating working capital cycle as it will minimize the delays in payment by state distribution companies

Budgetary provision towards restructuring of state power distribution companies

Budgetary allocation of `1,200cr

46

Telecom
Expected Impact: Neutral
The telecom sector is currently facing a number of challenges on the regulatory front, relating to spectrum allocation, license fee, spectrum charges, tariffs and M&As. We expect Budget 2013-14 to be a non-event for the telecom sector as the National Telecom Policy / Spectrum Enactment Act is expected to be announced soon this year, which will address most of the abovementioned issues. The budget could pencil in the expected revenue to be generated from the upcoming auction of 2G spectrum Last year the government penciled in `40 000cr to be raised through 2G spectrum. `40,000cr spectrum auction but has been able to garner just ~ `9,400cr till now. 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 charges. costs, 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 this budget. Overall, we expect the Budget to be Neutral for the Telecom Sector.

47

Budget Expectations
Head Rationalization of multiple levies to put a simple industry-friendly tax structure. Current Status Currently, Currently the telecom industry is subject to service tax, license fees and spectrum charges, all of which work out to ~30% of total revenue as against 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. Wish List Rationalization of multiple levies currently imposed on telecom companies. Potential Impact Favorable for the sector as it will reduce the cost of services. However, any announcement regarding this is highly unlikely in the budget.

48

Research Team Tel: 022 - 3935 7800 DISCLAIMER

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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