Strictly Private and Confidential

Union Budget FY11 – Balancing the fisc, enhancing growth (First Cut)

Edelweiss Research Team

+91-22- 4040 7505
research@edelcap.com

26th February 2010

 Salient features of the budget
Path to fiscal prudence
Announcement of gross fiscal deficit (GFD) for FY11 at 5.5% of GDP – in line with expectation
Net borrowing of INR 3.45 tn (gross central government borrowing INR 4.59 bn in that case) – at the lower end of
the market expectation
Fiscal roadmap also charted out: 4.8% deficit target for FY12 and 4.1% deficit target for FY13
Conscious effort not to issue bonds to meet oil/fertilizer subsidies – an effort towards making fiscal accounts more
transparent
Firm date (April 1, 2011) announced for implementation of the Direct Tax Code (DTC)
Likelihood of implementation of Goods and Services tax (GST) with effect from the same date
Withdrawal of stimulus only gradual
Roll-back in excise only partial – in line with market expectation (and thus not jeopardizing growth)
No change in service tax rate; service tax net expansion to enhance tax revenue
Efforts to support both consumption and investments
Income tax slabs redefined to leave more money at the hands of consumers – an individual with income of INR
800,000 or above will save ~INR 50,000 p.a. on income tax. Additionally, investment in infrastructure bonds of
upto INR 20,000 will lead to further tax savings
Thrust on infrastructure continues; allocation of 47% of total capital outlay for FY11, in addition to allowance of
issue of tax-saving infrastructure bonds
Increase in plan expenditure for social sectors at ~10% to 15% - social sector continue to benefit but not at the
cost of messing up the fiscal arithmetic
Disinvestment revenue figures seen at ~ Rs.40,000 cr. (Vs Rs. 25,000 cr. in FY10)
However, proposed hike in duties on petro-prices are potentially inflationary
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 Major direct tax proposals

N h
No change i h
in dli
headline t ttax rate
corporate t

Surcharge for domestic companies reduced to 7.5% from 10% — Largely positive

MAT hiked from 15% to 18% — Negative for MAT paying companies

Personall tax slab

l b rationalization
l — More favorable
f bl for
f individual
d d l tax payers

Old slabs Tax rate New slabs Tax rate

0 -1.6 lacs Nil 0-1.6 Lacs Nil
1.6 lacs - 3.0 Lacs 10% 1.6 Lacs - 5.0 lacs 10%
3.0 lacs - 5.0 lacs 20% 5.0 lacs - 8.0 lacs 20%
Above 5.0 lacs 30% Above 8.0 lacs 30%

Deduction based on specified Deduction based on specified

investments 1 Lacs investments 1 Lacs

Additional deduction based on

investment in specified
infrastructure bonds 20000

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Sector Specific Announcements
 Sector Specific Announcements — Oil & Gas

Oil & G
Oil & Gas
Industry/Market wishlist Edelweiss expectation Announcement in the budget Impact on Sector/Company

Petroleum product pricing of Kirit

Clarity on tax benefits to the natural gas Parikh committee to be implemented
None Neutral
production from NELP/CBM blocks in due course of time after discussion
with the MOPNG.
MOPNG
No oil bonds in future. OMCs to be Positive for OMCs as they do not
given in cash. have to incur 0.5% costs of selling
Positive for cash flow for OMCs. the bonds and better cash flow
management
MAT increase from 15% to 18% Negative for RIL, Cairn India
Reduction in surcharge from 10% to
Positive for all companies
7.5%

- Positive for ONGC/OIL as

protection of crude increases
(2.5% of 5.0% increase in duty
flows to revenues of ONGC/OIL)
- Neutral for standalone refineries
Import duty increases:
as refining protection remains
Crude oil - from NIL to 5%
same
Petrol/Diesel - from 2.5% to 7.5%
- Negative for OMCs as the under-
Other products increased from 5% to
recovery for the sector increases.
10%
Petrol and diesel prices to increase
Naphtha, LPG, LNG, Petroleum gases,
by INR 2.7-2.8/lt and INR 2.5-
Petcoke continue to attract 5%
2.6/lt, respectively (to incorporate
import duty
both custom and excise duty
increases) It becomes difficult for
increases).
the government to pass on further
price increases in the sector.

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 Sector Specific Announcements — Oil & Gas

Oil & G (C td )
Oil & Gas (Contd.)
Industry/Market wishlist Edelweiss expectation Announcement in the budget Impact on Sector/Company

- Negative for OMCs as under-

recoveries for products increases
- Petrol and diesel prices to
Specific excise increased by INR
increase by INR 2.7-2.8/lt and INR
1.0/lt on petrol/diesel
2.5-2.6/lt, respectively (to
Petrol from INR 13.35/t to INR
incorporate both custom and
14.35/lt
excise duty increases).
Diesel from INR 3.60/t to INR 4.60/lt
- Pass-on of prices is marignally
negative as it makes further price
increases difficult

Neutral for Indian pipe companies,

Excise duty hiked to 10% for non-
as can be passed to domestic
petro products
customers.
No allocation for oil subsidy for FY11.
Sector (OMCs/OIL/ONGC/GAIL)
No incremental allocation for oil
may face uncertainties
sbsidy in FY10.

Benefits for Section 35AD for cross-

Positive for companies putting up
country natural
petroleum product pipelines as the
gas or crude or petroleum oil pipeline
common-carrier has reduced from
network aligned along with those
33% earlier to 25%
suggested by the PNGRB

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 Sector Specific Announcements — BFSI
BFSI
Industry/Market wish list
Agricultural debt waiver and debt relief
scheme: Prepayment period to be
extended further from December 31,
2009
Interest subvention for pre-shipment
credit and short term crop loan extended
in last budget is expected to be rolled
back
Refinancing from IIFCL upto 60% of
commercial bank loans for PPP projects in
critical sectors is expected to continue
this year as well
Increasing tax breaks provided to
Housing finance/Infrastructure lending
companies which currently is allowed up
to 20% of profits derived from projects
may be increased back to 40%
To allow power financing companies to
float tax free bonds
Edelweiss expectation
Will be extended till June 2010
Stimulus provided last year will be
rolled back
Investment requirement in infra is
huge and this facility is expected
to continue
Has been a point of discussion
since last few years
Move important to improve flow of
funds to power sector and reduce
cost of funds for power financing
companies
Announcement in the budget Impact on sector/company
Positive for PSU bank (particualrly PNB and
Extended by six months to June
BOB that have already provided in
2010
Q3FY10)
Partially rolled back
Refinancing to banks will be doubled Positive for banks in infrastructure lending
from INR 30 bn to INR 60 bn in FY11 to manage ALM
Not implemented
Deduction of INR 20,000 allowed for
investments in long term infra bonds Positive for infrastructure finance
over and above INR 0.1 mn limit companies like PFC, REC, IDFC
available
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 Sector Specific Announcements — BFSI, Cement

BFSI (Contd.)
(Contd )
Industry/Market wish list Edelweiss expectation Announcement in the budget Impact on sector/company

RBI considering providing banking Positive for companies like IDFC, IFCI,
license to private players and NBFCs Shriram Group

Capital infusion of INR 160 bn by

FY11E foro PSUU banks
ba to
o maintain
a a Tier Positive
o for
o PSU
U banks
ba
I ratio of 8%

Net market borrowings annouced at

INR 3.45 tn…below expectations of Positive for banks largely PSU Banks
around INR 3.8 tn

Negative for Reliance Capital, SREI etc that

MAT increased from 15% to 18%
are under MAT currently
Deduction of INR 20,000 allowed for
Positive for infrastructure finance
investments in long term infra bonds
companies like PFC, REC, IDFC and banks
over and above INR 0.1 mn limit
issuing infra bonds
available

Service tax will be levied only on Service charge taxation for insurance
fund management charges (against policies will now be at par with mutual
all charges collected earlier) under funds; neutral impact on business
ULIP policies valuations

Cement
Industry/Market wishlist Edelweiss expectation Announcement in the budget Impact on sector/company

Increase in excise duty from 8% Increase in excise duty from 8% to Neutral to marginally positive as
Excise duty to cut to 4%
to 10% 10% companies will hike prices to the
Reduction in import duty imposed on
Unlikely to happen No announcement Neutral
imported coal

Neutral. Will marginally increase

Increase in diesel prices freight cost by INR 0.5 per bag.
This is likely to be passed on

IIncreased
d allocation
ll ti ffor iinfra/rural
f / l
Positive
development schemes

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 Sector Specific Announcements — Construction
Construction
Industry/Market wishlist
Relaxation of MAT provisions on infra
projects under new Direct Tax code
Relaxation of ECB norms
Increase in central govt outlay for roads
and urban infra
Further clarity on refinancing/takeout
provisions for IIFCL funding
Edelweiss expectation
Likely to happen as infra is Govt
priority
Unlikely to happen as there is
ample liquidity in the domestic
markets
Likely to happen as infra is Govt
priority
Likely to happen but may not
result in immediate benefits
Announcement in the budget Impact on sector/company
No announcements on new Direct
Negative for all developers like
Tax Code; as per existing
IRB Infra, IVRCL, NCC, Gammon
regulations, MAT rate increased from
Infra, HCC etc
15% to 18%
No announcements Neutral
Positive for smaller road
Allocation for road development
gg,
contractors like Valecha Engg,
programme increased by 13%; will
Sadbhav Engg, Tantia
rise to INR 199 bn from last year's
Constructions, KNR Construction
allocation of INR 176 bn
etc.
No announcements Neutral
Tax exemption of INR 20,000 for
Positive for infra sector
investment in long term infra bonds
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 Sector Specific Announcements — Real Estate

Real Estate

Industry/Market wishlist Edelweiss expectation Announcement in the budget Impact on sector/company

Increase in tax slabs resulting in For an individual earning income

higher disposable income for tax ~INR 0.8 mn, the affordability to
payers purchase a house increases ~10%

Increase in exemption limit for interest

Nil Nil NA
payment and on loan repayments

Infrastructure status (leading to tax

Nil Nil NA
benefits) on affordable housing projects

Interest subvention extended by a

year on home loans less than Rs 1
Marginally positive for HDIL
mn, for houses costing less than Rs 2
mn

Extension by 1 year to complete

Marginally positive for DLF,
mass housing projects under section
Unitech & Parsvnath
80IB that are not completed till date

Infrastructure status (u/s 80IA) for all Infrastructure status likely to be

Investment linked deduction benefit Marignally positive for Anant Raj
hotels across India and across all accorded to all hotels across all
for 2 star and above hotels Industries
categories categories

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 Sector Specific Announcements — Information Technology

I f
Information
i T
Technology
h l

Industry/Market wishlist Edelweiss expectation Announcement in the budget Impact on Sector/Company

Already extension given for two

Extension of tax benefits under Section
10A/10B
years, may not continue. Full tax Neutral, as forecasts have
No announcement
regime post FY11 for all IT factored in full tax levy
companies
i

Negative across companies

Clarification on calculation of SEZ profits (where SEZ revenues are higher
Clarity to be provided on profits
to include full exemption of profits from No announcement e.g. TCS); Neutral for Infosys
from SEZ
SEZ (as it has provided for tax for
earlier years)

Negative for all IT companies as

MAT rate increased from 15% to
‐ ‐
18%
will result in higher cash outflow,
though due to credit entitlement it
will not impact profit and loss
account.

Greater impetus on e-Governance

projects (setting up of Technology Positive for tier 1 players (TCS,
‐ ‐ advisory group under Chairmanship Infosys, Wipro)
of Mr. Nandan Nilekani)

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 Sector Specific Announcements — Capital Goods, Auto

Capital goods

Industry/ Market wish list Edelweiss expectation Announcement in the budget Impact on sector/ company

We expect import duties to be

Increase in import duties on Chinese
power equipment imports
Sustained capex in flagship programmes
such as Bharat Niram, rural electrification
etc
No announcement on this was made
marginally increased on certain Neutral
in the budget
key power sector imports
Capex in rural electrification and
Allocation for Bharat Nirman at INR
distribution reforms likely to Neutral
480 bn in FY11E.
continue

Allocation to power sector increased

Neutral
from INR 22.3 bn to INR 51.3 bn
National Clean Energy fund to be
estab s ed to fund
established u d R&D
& in clean
c ea
energy. For this a cess of INR 50/ Negative
tonne to levied on domestic and
imported coal.
MAT increased from 15% to 18%. Negative for NTPC, NHPC, PGCIL

Excise duty increased across the

board from 8% to 10%. This will lead
Negative
to higher capital costs for the projects
to be executed in FY11E.

Auto
Industry/Market wishlist Edelweiss expectation Announcement in the budget Impact on sector/company

No excise duty hikes for small cars/ two Excise duty hike of between 2%-
Excise duty hike of 2% -ve
ve for the sector
wheelers/ CVs 4%
No change in excise duty Differential with small cars
Lower excise duties for large cars -ve M&M, TTMT
differential for large cars maintained at 12%
Increased deduction for R&D to +ve Tata Motors, Ashok Leyland,
200% from 150% M&M, Bajaj Auto
Higher infrastructure expenditure + ve commercial vehicles
I
Income tax
t reduction
d ti + ve ffor the
th sector
t
+ve for the entire sector
Higher rural expenditure
particularly M&M, HH
Hike in petrol/ diesel prices -ve for the sector

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 Sector Specific Announcements — FMCG

FMCG

Industry/Market wishlist Edelweiss expectation Announcement in the budget Impact on sector/company

Allocation on NREGA increased to INR

410 bn in FY11; total rural
development spending planned to be
INR 661 bn. Government to allocate
INR 480 bn to Bharat Nirman Yojna
to allocate INR 223 bn to health
ministry. Total social sector spending
is projected to be at INR 1,380 bn.
25% of plan allocation is to be given
o development
for d op of
o rural
u a infra.
a In
addition to these, crop loan interest
subvention for timely repayment is Positive for FMCG as disposable
Rural initiatives on income generation
We expect this to continue raised to 2% (from 1%) and period incomes will go up for rural
continue to remain a priority
of repayment is extended to June 30, consumers
2010 for Agri waiver. Government
has revised the farm credit target to
INR 3,750 bn and INR 3 bn will be
allocated to Rashtriya Krishi Vikas
Yojna. Government will provide INR 2
bn to launch Climate resilient Agri
initiatives and will also provide INR 4
bn to boost farm output in eastern
India. 5 more mega, state of the art
food processing plants to be
introduced.
introduced

We do not expect complete

rollback for FMCG as food inflation
Not much impact as most of the
continues to remain high and will As predicted by us there has been a
Rollback of excise cuts production is done in excise free
get adversely impacted. However partial rollback
o es
zones
we do
d nott rule
l outt partial
ti l rollback
llb k
to the tune of 200-300 bps

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 Sector Specific Announcements — FMCG, Retail
FMCG (Contd.)
(Contd )
Industry/Market wishlist
Excise duty increase for cigarettes
Excise duty increase for non - cigarettes
MAT rate can be increased
Change in Income tax slabs
Retail
Industry/Market wishlist
FDI norms get liberalised for different
retail formats
Change in Income tax slabs
Edelweiss expectation Announcement in the budget Impact on sector/company
Overall impact is negative -
Company will have to take a price
On the regular size filter, excise has
We expect excise to increase by 5- increase of 8-9% which will lead
gone up by 17-18% - wtd average
8% for cigarettes as there was no to impact on volumes. New
impact of 14
14-15%.
15%. Filter cigarettes
i
increase iin fil
filter cigarettes
i llast segment at 60 mm is i positive
ii as
of length not exceeding 60 mm will
year this will help ITC to launch a low
be taxed at INR 509/1000 sticks.
end filter cigarette which has been
a demand.
Marginally positive for ITC as
Raised excise duty on all non
- some shift might happen from non-
smoking tobacoo
cigarettes
c ga ettes to cigarettes
c ga ettes
Negative for Dabur and Godrej
This has happened as we had Consumer. However the impact
This may happen as it could be a predicted and MAT has been will be lowered because of
step towards direct tax code increased to 18 per cent of book initiatives for increasing disposable
profits from 15 per cent income of rural and urban
consumers
Income tax slabs modified – more
Positive for FMCG as disposable
relief for tax payers; infra bonds
- incomes for urban consumers will
investments upto INR 20,000 to offer
go up
additional tax savings for tax payers
Edelweiss expectation Announcement in the budget Impact on sector/company
This is unlikely to happen as retail
Government to take a firm view on Will wait for more clarity on
is a sensitive sector impacting the
opening of Retail trade precise measures
neibourhood Kirana store
Income tax slabs modified – more
Positive for Modern retail as
relief for tax payers; infra bonds
- disposable incomes for urban
investments upto INR 20,000 to offer
consumers will go up
additional tax savings for tax payers
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 Sector Specific Announcements — Media

Media

Industry/Market wishlist Edelweiss expectation Announcement in the budget Impact on Sector/Company

This may happen as the

FDI norms get liberalised for some of the
recommendations have been None None
segments like radio, DTH and cable
made by the regulator TRAI

Rationalisation and parity in the service

This seems unlikely to happen as
tax paid by TV and radio broadcasters
this demand has been pending None None
on revenues accrued by them from
now for many years
advertisements.

Provision for doubtful debt be allowed as

Looks unlikely None None
expense in MAT profit calculation

To grant project import status for

setting up of digital headends, a
To grant project import status for setting concessional customs duty of 5% with
- Positive for digital cable, HITS
up of digital headends full exemption from special additional
duty to the initial setting up of such
projects

News agencies (that meet certain

Incentive to News agencies - criteria)which provide news feed Positive for news agencies
online to be exempt from service tax

Income tax slabs modified ; infra

Positive for DTH as disposable
Change in Income tax slabs, Rural bonds investments upto INR 20,000
- incomes for urban and rural
initiatives on income generation to offer additional tax savings for tax
consumers will go up
payers, Many rural initiatives taken

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 Sector Specific Announcements — Pharma, Hotels
Pharma
Industry/Market wish list
Increase in weighted average for R&D
deduction
Excise duty structures to remain
Direct tax code changes
Concessional rates for certain categories
of life saving medicines
SEZ policy
Hotels
Industry/Market wishlist
To be included under Sec 80 IA
(Infrastructure status) for all hotels
across India and across all categories
Edelweiss expectation
Not expected
Likely harmonised to other sectors
Not expected
Likely to be announced
More clarity based on changes in
proposed direct tax code
Edelweiss expectation
Considering the demand supply
mismatch and the interest of
global hotel chains into India, we
believe this is the right time for
the acceptance of this wish.
Announcement in the budget
Increased from 150% to 200%
Maintain status quo
Proposed roadmap to April 2011
Not announced
Not announced
MAT increased to 18% from 15%
Surcharge reduced to 7.5% from
10%
Expansion of Rashtriya Swastha
Bima Yojana to NREGA participants
Announcement in the budget
Investment linked deduction benefit
for 2 star and above hotels anywhere
in India.
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Impact on sector/company
Positive for all R&D pharma
companies
Neutral
Neutral
Neutral
Current ambiguity remains for non
notified SEZs
Negative for most domestic
pharma companies
Positive for most full tax paying
pharma companies especially MNC
companies
Structural positive as increases
potential pool
Impact on sector/company
Positive for Indian Hotels (due to
large ongoing capex), marginal
positive for EIH and Hotel Leela.
The investment linked deduction is
in the place of profit linked
deduction (Sec 80 IA) which the
industry was seeking.
 Sector Specific Announcements — Telecom, Metals & Mining

Telecom

Industry/Market wishlist Edelweiss expectation Announcement in the budget Impact on sector/company

Extension of 100% tax exemption

benefits under Section 80IA from current
Unlikely - -
5 years to 10 years (at par with other
infrastructure sectors)
Section
S ti 80IA benefits
b fit to
t be
b made
d
Unlikely; expect M&A norms to be
available to companies undergoing
framed in consultation with sector - -
amalgamation or demerger after
regulator
31.3.2007

Unlikely; expect license fee norms

Implementation of a uniform licence fee
to be framed in consultation with - -
regime
g
sector regulator

Marginal Negative for the sector

MAT rate increased to 18% from 15%
(Bharti, Idea and Rcomm)

Metals & Mining

Industry/Market wishlist Edelweiss expectation Announcement in the budget Impact on sector/company

Retaining excise duty Increase from 8% to 10% Increase from 8% to 10% Marginal negative for demand
No change in customs duty structure for No change in customs duty No change in customs duty structure
Neutral
the sector structure for the sector for the sector
Retaining thrust on rural and Continued. Allocations for several
Likely to continue Positive
infrastructure spend schemes increased by 10-15%
Marginal negative for JSPL and
- - Increase in MAT from 15% to 18%
Monnet Ispat
- - Cess of INR 50/t (USD 1.1/t) on coal Negative but not material

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