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Anagram Research Team The Union Budget is an event that is anticipated with anxiety,fear and hope
every year, although to a large extent this has become a non event in the
true sense. However the forthcoming Union Budget for 2011-12 this time,
will be seen as a important policy indicator from the ruling government,
against the backdrop of high inflation, a huge current account deficit,
slowdown in industrial output and tight liquidity conditions.

Sky rocketing price levels, particularly of food prices is the biggest

macroeconomic challenge against which the country is battling for almost
two years. With an elevated current account deficit and uncertainties around
Rising food prices have been the future FII flows and increased crude oil prices, the overall balance of
biggest macro economics challenge payments looks weaker in the recent months. Equally reducing public debt
and ensuring sustainability of capital flows and stability of the currency are
vital to medium-term economic stability. More importantly we expect the
forthcoming budgetary policies this time would focus more strongly on
inflation control, corruption and governance issues and continuation of

We believe that amid the manifold macroeconomic challenges coupled with

upcoming elections in some of the major states, the government will be
prompted to be extra-populist in this budget. Reducing avenues for
corruption in tax administration and in government clearances would be
Monthly Inflation YoY (%)
the other key areas which are likely to be addressed in this budget. Also
Agriculture reforms are likely to be announced so as to ensure that domestic
food production levels do take in to account the rising needs of a growing
population and largely address the supply side constraints of fuelling inflation.

More so because, the inflation rate, unlike in the past has not moderated
during the winter months and is stubbornly inflexible downwards, attributed
to both unseasonal rains and poor supply management. The rising food and
Source: CMIE, Anagram Research fuel prices have not only been a major cause of rising prices, but have also
severely impacted the living conditions of the poor.

Moreover, the global economic environment remained uncertain. Commodity

prices are rising and anything from an uprising in Cairo to a cyclone in
Australia is able to push global inflation up. The RBI recently in its policy
review revised the inflation forecast for the current fiscal year to 7% from
an earlier estimate of 5.5%.

Also fiscal consolidation would be the top agenda in the budget as the
Government has to follow the path charted by the 13th Finance Commission.
For attining a sub 5% Fiscal deficit Attaining the sub-5% fiscal deficit target in 2011-12, as prescribed by FRBM
target for FY12, control on looks a difficult task considering the fact that nearly 60% of the total spending
government expenditure has to be is being incurred on interest payments, subsidies, defense, wages and social
excercised. sector schemes.

In fact, subsidies can also spring an upside surprise with elevated oil, fertilizer
and food prices. Interest outgo is also expected to go up faster with rising
interest rates and a larger pile of debt. Despite higher than budgeted subsidy
payments, fiscal deficit has actually improved during the current year on
account of largesse from spectrum auction but there is no low-hanging fruit
anymore. The Government would have to rely mostly on borrowings and
tax collections to fund its expenditure that may dampen the private
investments which, in turn will raise doubts about growth sustainability.


18th February 2011


Enhancing infrastructure and supply responsiveness to the growing demand

are some of the core issues that need to be addressed to ensure the
sustainable growth.

With the GDP growing at 8.9% in the first half of the current fiscal, there is
a near possibility that the government may further withdraw the stimulus
Fiscal Deficit (%) in the coming budget with a view to reduce the fiscal deficit, which is expected
to be about 5.5% of the GDP in 2010-11 and 4.8% for 2011-12. For FY12,
India's economy is projected to grow at 8.6% in the fiscal year that ends in
March, powered by mainly domestic factors and the budget has to give
clear signals for ensuring stable and sustained long term growth so as to
uphold the public confidence.

High interest rates and increasing input costs have emerged as headwinds
for industrial growth. India's industrial output has vacillated since May when
it registered a 12.2% expansion, touched to 15.1% in July and then slid to
Source: Union Budget, Anagram Research
1.6% in December. The pace of growth will remain subdued for the remaining
months of the current year on account of high base effect. The investment
cycle is likely to be further impacted if the RBI raises interest rates in its
upcoming reviews.

Also an uneven global recovery, continued buoyancy and high demand for
imports have raised the current account deficit (CAD) to an unsustainable
level of about 3.7% of GDP in the first half of this year from 2.2% a year

On the resources front however there is good news to speak about with
Tax Collections revenues from both direct and indirect taxes likely to exceed earlier set
targets. Direct tax collections between April and January in the current
Tax Nature Apr-Dec YoY Gr
financial year crossed Rs 3 lakh crore, at Rs 3,17,501 crore, against Rs
(Rs. Cr) 2009-10 2010-11 %
2,63,765 crore in the same period a year ago.
Corporate 168299 202615 20.4

Income 79484 89928 13.1

The government had budgeted an overall tax mop-up of Rs 7,46,000 crore
Customs 58611 97149 65.8
in the current financial year, which was revised to Rs 7,82,000 crore last
Excise 63045 86074 36.5
month. Elevated price levels will indirectly lead to increase overall tax
Service Tax 37056 44341 19.7
collections in FY 2011-12; ultimately boost up the government revenue.
Gross Tax 416094 527782 26.8 But at the moment, there is no clear avenue in sight that can generate
Source: CMIE, Anagram Research game-changing revenues such as the 1 lakh crore bonanza earned from
the sale of 3G and broadband spectrum in the coming fiscal.

There is also a strong deadlock on key reforms where in efforts are on to

organize required political consensus to go ahead with the eventual
introduction of a goods and services tax (GST). The government has also
not put a date on GST while on DTC it is hopeful to have this implemented
from April 2012 onwards.

Overall, we believe that although a GDP growth of 8.5% is quite achievable,

macro hinders such as inflation, current account deficit and fiscal
management would be under scrutiny. The budget must sound confident
enough to tackle all these macro challenges effectively along with a
sustainable long term economic growth. Simultaneously the measures to
boost up the priority sectors such as agricultural, SME and Infra should not
be ignored. Hence we expect bold steps from the goverment to address the
corruption and corporate governance issues, so as to buttress public
confidence. Contd...

18th February 2011 2


More importantly there is very little doubt that another year of high food inflation will be politically disastrous for
the ruling alliance.

We hence believe that delivering non inflationary growth will require a special set of reforms which have become
politically critical now. On these will depend the smooth survival of the UPA government over the remaining three
years of its tenure.


(Amt in Rs Cr) Actual BE Actual Change % of Actual
Apr-Dec09 2010-11 Apr-Dec10 YoY % to BE
Revenue Receipts 389271 682212 584268 50.1 85.6
Tax Revenue 307591 534094 391148 27.2 73.2
Non-Tax Revenue 81680 148116 193120 136.4 130.4

Non-Debt Capital Receipts 8289 45129 31335 278.0 69.4

Recovery of Loans 3983 5129 8591 115.7 167.5
Other Receipts 4306 40000 22744 428.2 56.9

Total Receipts 397560 727341 615603 54.8 84.6

Non-Plan Expenditure 497381 735657 536898 7.9 73.0

On Revenue Account 460970 643599 487692 5.8 75.8
(i) of which Interest Payments 130005 248664 146304 12.5 58.8
On Capital Account 36411 92058 49206 35.1 53.5
(i) of which Loans disbursed 980 1050 2964 202.4 282.3

Plan Expenditure 210159 373092 249954 18.9 67.0

On Revenue Account 179555 315125 212885 18.6 67.6
On Capital Account 30604 57967 37069 21.1 63.9
(i) of which Loans disbursed 9363 16760 13166 40.6 78.6

Total Expenditure 707540 1108749 786852 11.2 71.0

Fiscal Deficit 309980 381408 171249 -44.8 44.9

Revenue Deficit 251254 276512 116309 -53.7 42.1
Primary Deficit 179975 132744 24945 -86.1 18.8

Source : Minsitry of Finance, Union Budget 2010-11


¾ There is a demand to raise income tax exemption limit to Rs 2 lakh from existing Rs 1.6 lakh in the 2011-12
Budget to provide relief to inflation-hit households.
¾ India Inc has also sought a reduction in corporate tax from 30% to 25% and the abolition of surcharge and cess
so that more funds are released for investment.
¾ There is a strong case for waiving octroi and local taxes, which impede the smooth movement of essential
¾ On excise duty, it is not expected that the rate of 10% will be brought down to 8%.
¾ On the central sales tax, it is expected that the rate could be reduced to 1% from the existing rate of 2%, prior
to the introduction of the already delayed Goods and Service Tax.
¾ With respect to exemptions and thresholds, it is expected that the product specific central excise exemption list
would be trimmed, in order to broaden the base of the tax, and that the threshold exemption limit under the
central excise could be lowered from the current level of Rs. 1.50 crore (Rs. 15 million).
¾ Service tax rate hike, along with broadening the net, cannot be ruled out as the likely GST rate would be higher
than the prevailing rate.

18th February 2011 3



Over the last two months the markets have been falling everyday, mostly on limited volume, with the mid and
small-caps getting hit particularly hard. The markets are now down over 16% since there peak in Nov 10 and
India has being the worst performer among the EM universe. The markets are now approaching the levels of
January 2010, which effectively means that majority of the market gains seen in 2010 have vanished.

The reasons for the market fall are all well known, from inflation to interest rates, commodity prices and governance
and government scams. But going forward is it going to be worse or are we somewhere near a market bottom?
On a stock-specific basis, good investment values have already begun to emerge (many stocks are down 40-
50%). Even on the broader market, valuations are approaching reasonable levels at 14x FY12E (Consensus
earnings) considering the fact that Sensex earnings of around Rs 1,200-1,225 per share for the year ending
March 2012.

Hence we remain convinced that irrespective of all the inflation issues and high fiscal deficits, India will still grow
at between 7 and 8% for the next 3-5 years. The big question is are investors willing enough to pay 14-15x
earnings for the Indian markets. We believe that this is a fair value assumption as these valuation levels are
likely to be sustained ahead as most developed markets like US and Europe are not completely out of the woods.

Coming to the market mood, budget expectations are also running very low, and just maintaining basic fiscal
discipline and meeting the fiscal deficit road map will be seen as a positive by the markets. This has led to the
markets being highly oversold, expectations are very low, valuations are nearing attractive levels, and the
market perception is worse than the ground reality.

We believe that while current headwinds are negative in nature, there are likely to be of a temporary nature with
Inflation likely to come down to around 7-8% in FY12.

Also we would like to maintain that despite the FII's sell off amounting to $1.67bn till date sine Jan 2011 and
some more sell off expected, the medium to long term trend remains positive as FII's are undertaking a portfolio
reshuffling excercise from EM to developed markets and this is not a complete portfolio exit from Indian Markets.

Finally all concerns seem to have been factored in market valuations which have come off by almost 40-50%
since November 10 and hence any improvement in the above mentioned factores can lead to a sharp recovery in
the market.

We believe the India growth story looks strong and while index returns are likely to be moderate, investors are
likely to do better if they stock to quality and remain stock specific.

In sectors we like at the part of the included, Auto, IT, Pharma, Power Equipment, Banking and Agri Inputs.

Stock Recommended
Large Cap Small Cap Mid Cap
Tata Motors Deepak Fertilisers JB Chem
M&M Diamond Power Infra Kajaria Ceramics
Reliance Industries

* For specific stock details please refer to our report Pre-Budget Stock Picks

18th February 2011 4



18th February 2011 5




Positive Agriculture is core sector contributing more than 18% of India's

GDP. Rising prices would be in focus in near to medium term.
Increased production and higher productivity will help to secure
enough supply to curb prices. Agro input industry is very well placed.
There is huge scope for the expansion as only 39% of cultivated
land is under irrigation. Country is a net importer of fertilizer and
India is one of the lowest per hectare consumer of fertilizer and
pesticides. Some favorable policy changes will help to utilize huge
business potential in time to come.

We expect positive measures to be awarded to the Agri Inputs

sectors as the government would like to boost Agriculture growth
during the current fiscal. Therefore we expect some pro positive
measures to be announced in this forthcoming budget.


Formulation of In budget 10-11 Govt. Implementation of nutreint Positive There are only 15 out of 40
Nutrient based announced to adopt based subsidy formula allows fertilizer products which are
subsidy policy nutrient based subsidy company to produce balanced covered under product based
from product base but and complex fertilizers which subsidy regime. Other products
its still on formulation were not competent under are not able to compete with
stage product subsidy regime the suvsidized products.This
policy will encourage farmers
to use balanced fertilizer and it
will reduce soil fatigue

Excise and 8% Excise Duty on Industry is expecting Excise Positive India is loosing 10 to 30% crop
Import cut on pesticides, 5% Import duty on pesticides to reduce to due to pest disease.
pesticides and Duty on Furnace oil and the level of 4% and duty cuts Government will encourage
rawmaterial. concessional custom on furnace oil is expected. usage of pesticides to improve
duty of 5% on specified Import duty exception on fuels effective production to control
agri. Machinery not like furnace oil & LSHS currently prices by increased production
manufactured in India levied 5%. efficiency

Tea Planters Land revenue rate for Tea association wants reduction Positive India has slided to the secound
need lower brahmaputra valley is in delayed penal interest rates plance in Tea production in
penal interest Rs 22 per bigha and Rs to 1% and Land revenue rates global tea market.These
rate and about 16 bigha at barak valley to 15 and 10% bigha for measures if awarded will boost
50% cut in garden.Penal interst brahmputra and barak valley tea production and
land revenue rate for delayed Tax respectively consumption in the medium
rate payment is 2% per term

OUR PREFERRED STOCKS : Meghmani Organics, Rallis India Ltd and PI Industries


18th February 2011 6




Neutral The Indian automobile sector has seen strong demand across
segments resulting in 25% YTD volume growth. The small car and
light commercial vehicle (LCV) segments is flooded with new
entrants and new launches which may hurt profitability given weak
pricing. While in two wheelers, M&HCVs and tractors-the competitive
landscape remains fairly benign, with limited new entrants. With
potential headwinds - an increase in interest rates and higher fuel
prices- coupled with a high base we expect growth rates across the
automobile sector to taper off, but will remain in double digits. Post
correction valuations have become reasonable for investors to enter
into quality Auto OEMs and component companies.


Excise duty General excise duty at To be kept unchanged Neutral With rising commodity prices
10% and higher interest rate,
rollback of excise will dent
margins and volume growth

Budget - Substantial budget allocation Positive Stocks with high rural exposure
Allocation towards rural housing, infra and will benefit, Herohonda, M&M
agri credit and Maruti

OUR PREFERRED STOCKS: We like Tata Motors, M&M, Bajaj Auto, Ashok Leyland and Exide Industries
from the Automobile Space.


18th February 2011 7



Amid the uncertainties of elevated price levels, liquidity crunch,
Positive delayed deposit growth and pressure of sustaining of margins, the
banking sector continued to record robust earnings growth in each
quarter. In terms of core activities, the sector has witnessed
accelerated growth in loan book as compared to deposit base driven
by infra, service and retail sectors. The Reserve Bank's decision to
raise key interest rates for seven times since March 2010 to tackle
the inflation issue, has raised the cost of funds for the banking sector.

On flip side the overall liquidity condition has remained in deficit

mode from the third quarter of current financial year, partly on
account of above-normal government cash balances.

The situation is expected to improve with the gradual spending by

the government, while the deposit growth is likely to pick up as a
result of recent round of deposit rate hike.

In such a rising interest rate scenario, the banks with higher level
of low cost deposits, prudent asset quality and sufficient capital to
fund the growth would get edge over its peers and sustain the


Issuance of Not allowed to issue To allow banks to issue tax free Positive It will help banks to meet infra
Ta x - f r e e such bonds bonds and keep this out of sector demand and to manage
Infrastructure reserve requirement asset liability mismatch

Tax Benefits on Allowed 7.5% deduction A full income tax waiver for the Positive Will reduce the tax liability and
Provisions from gross total income amount provided for NPAs will retain more profit

Tax Benefits on Subject to TDS Should not be subject to TDS Positive Will Increase profit that will
Other Income boost up lending

Voting Right 10% voting rights to Allowing foreign investors to Positive Will give confidence to
for Private foreign investors of have voting rights in proportion corpor ate houses that are
Banks Private Banks with their equity holding planning to start banks and
help to improve competition

Export Credit Interest subvention of Extension up to Mar 12 Neutral Benefit to the Exporters
2% on export credit for
sectors, is scheduled to
expire on March 11

Farm Credit Interest subvention of Subvention of 3% wherein Positive Will increase the demand for
1.5% on short term crop private banks are also allowed farm loans
loans for PSU Banks to take benefit

Entry of New Discussion paper has Final guidelines are expected to Positive Will increase competition and
Private Banks been released by RBI come out coverage in banking sector

Service Tax for No Service Tax Govt. may introduce service tax Negative Will lower the earnings
A d v i s o r y on advisory services offered by
Services Banking & Financial companies.

krinal.shah@anagram.co.in / punit.chande@anagram.co.in Contd..

18th February 2011 8




C/F of Losses Allowed to carry forward Allowed to carry forward losses Positive Will support the industry by
losses up to 8 years up to 12 years providing more time to reach
at BEP

Benefit u/s Limit stands at Rs Separate limit for deductions u/ Positive Will encourage long term
80C 50,000, including tuition s 80C for long-term saving investment so as to fund the
fee and health instruments like life insurance business growth
insurance. and exempt exempt exempt
(EEE) treatment on the maturity

26 % FDI investment is To raise the limit to 49% Positive The move will help the private
FDI Limit allowed players to meet capital
requirements for expansion

OUR PREFERRED STOCKS : We have a positive on PNB, Bank of Baroda, HDFC Bank and Dena Bank

krinal.shah@anagram.co.in / punit.chande@anagram.co.in

18th February 2011 9



Construction & Infrastructure investment is the major driver for
India in attaining consistent 8-10% GDP growth. The importance of
infrastructure for a double digit growth is known to all; however,
there is a big gap between infrastructure targets and achievements
with slow execution in several sectors. Primary causes for the gap
are shortfall in awarding projects, time and cost overruns in
construction phase and funding potential shortfalls. It is about time
to take rigorous steps in addressing the bottlenecks in construction
& infrastructure space, if the government is serious about taking
relevant action.

Finance Minister's signal to the infrastructure sector was that the

sector should try to desist from asking for tax breaks and tax reliefs
as the budget has a limited ability to finance the country's
infrastructure needs. Hence, the sector this year restricts its
expectations from tax breaks and focuses on other crucial aspects
of enabling environment for raising capital and project development.


MAT increase 18% 20% Negative for Rollback of stimulus

infrastructure space as
it may hurt profitability

Infrastructure - Implementation and roll Positive, considerably Sufficient funding for the
Debt Market out of Rs. 50,000 Crore ease the funding projects would improve order
Infrastructure Fund, as shortfall in the flow & execution, hence reduce
suggested by Deepak c o n s t r u c t i o n / the gap between targets &
Parekh Committee Report, infrastructure space achievements
Percy Mistry Report and
Raghuram Rajan Report

Mobilization of - Infrastructure NBFCs Positive, as the budget Previous bond offerings by

retail savings offering market friendly has limited ability to NBFCs were not attractive
for infrastructure bonds with meet the infrastructure enough for the retail investors
infrastructure appropriate incentive to requirements of the and received a muted response
garner the response of country, channelization
retail investors of retail savings would
ease the pressure on
budget allocation

Annuity - Instead of market linked Positive, more private People in rural areas cannot
Schemes for BOT format, Annuity sector companies will pay for infrastructure services,
Rural format would be more come into rural hence a market linked model
Infrastructure suitable for rural infrastructure projects will not work
infrastructure resulting in higher rural

Setting up - Creation of genuinely Positive, restore public Recent public controversies

Independent independent regulatory confidence about lack of transparency and
Regulators bodies, led by people who good governance has raised
are judicially trained in the again, a demand for fresh
related field legislation to create truly
independent authoriti

Service tax Exemptions are Including power projects Positive, reduce the cost Making power projects more
exemption on granted on dev elopment in the of power generation, as profitable will attract further
building development of exemption list power producers are not power generation, reducing the
Power infrastructure entitled to credits on supply demand gap in the
Projects p r o j e c t s , taxes paid on power sector
including roads, procurements
railways, airport,
t r a n s p o r t
terminals and

OUR PREFERRED STOCKS: J. Kumar Infraprojects Limited and ManInfra Construction Limited


18th February 2011 10




Positive India is expected to have highest working age population over the
next 20-30 years which can propel economic growth in the country;
however, India will have the highest number of illiterate adults and
a large number of unemployed literate people. Education sector has
this big challenge of educating adults and also ensuring
employability. At the same time, this also serves as an opportunity
for the innovative and capable players in the industry, as education
sector along with infrastructure and agriculture is expected to draw
the focus of the budget and remain a top priority.

Government has not been successful in educating young India; hence

the way forward is setting up a platform of private participation, an
environment of funding and development of the sector. The adoption
of public-private partnership (PPP) model in the education sector
could go a long way in establishing success and creating a
sustainable momentum in long-term. While the government’s role
could be that of funding the projects, it is the execution ability of
the private sector which needs to be banked upon for the ultimate
delivery of the model. We see a huge long term opportunity in this
sector for private players.


Budget Budget allocation may increase Positive Better environment for the
Allocation to 5.5-6% of GDP from 3-4% growth in industry

FDI in FM may consider allowing FDI Positive Positive for the long term
education in education sector health of the Sector

Tax Govt. may allow certain tax sops Positive Encourage better participation,
exemptions to to the private players in make the business model more
private players education segment profitable

OUR PREFERRED STOCKS : In the Education sector we remain positive on Everonn Education and
Educomp from a long term perspective


18th February 2011 11




Netural The FMCG sector witnessed a spate of new launches and acquisitions
in 2010 contributing to the sector's phenomenal topline growth of
15% led largely by volumes. Robust GDP growth estimated at 8.75%
in FY11, increased income in rural areas, growing urbanisation and
changing lifestyle of consumers would be key growth drivers for
companies. The sector is likely to continue in the same manner in
medium to long term as favourable demand scenario. Though there
are some near term challenges like inflation and irregular monsoon
during the year for sector companies. we are expecting this situation
will be reversed after harvesting of Rabi crop.With demand shifting
from need based to want based we believe personal care and home
care categories would lead the growth momentum with 20% and
15% growth, respectively, in CY11.


Rapid multiple indirect taxes Rapid implementation of the Positive GST would lead to uniform,
implementation currently levied on proposed goods and service simplified and single- point
of GST FMCG products tax(GST) taxation and reduce
prices.Consumption growth
and improved tax compliance
will result in an increase in tax

Excise cut roll Excise cut roll back by The industry is not expecting Netural Rising commodity prices, any
back 2% to 10% from 8% any major cut, although some increase in duties would further
cut can happen as food inflation add to the cost so only partial
continues to remain high rollback of excise duty is likely.

Hike in excise Excise duty ranges Rs There is a 8-10% excise duty Negative Any increase beyond 10% is
for cigarettes 659 to Rs 1424 per hike is expected negative for ITC and other
thousand on filter cigarette companies.5-8% can
cigarettes be easily passed to the
consumer with some margin

MAT Rate 18% Increase may happen as it could Negative It this gets implemented, it will
be a step towards direct tax be negative for MAT paying
code companies like Dabur andGCPL

Dairy The Govt, is providing Industry is expecting export of Positive Incentiving the dairy sector will
Products duty drawbacks facility milk power in bulk should be help the Skimmed milk power
at varying rates for provided duty drawback at par and full cream milk power
some of the dairy with Casein which is14% producers

OUR PREFERRED STOCKS : Marico Ltd, HUL Ltd and Dabur India Ltd


18th February 2011 12




Positive The Indian IT industry showed remarkable resilience during the

recessionary period and global downturn, now expected to deliver
approximately 20% in FY10. Demand for IT Services exports is
expected to continue with the recovery in developed countries like
US & Europe and rising discretionary spend on IT infrastructure by
consumers. According NASSCOM reports exports are expected to
dominate the Indian IT industry, which account for $59 billion out
of the $76 billion software industry.

However, the industry has its share of concerns. Fear of slower than
expected recovery in US and other developed markets, pricing
pressure due to competitive domestic markets, higher wage inflation
and attrition and protectionist stance by the US government have
forced a neutral outlook on the industry. On the backdrop of such
mixed scenario, the industry is eagerly awaiting the Government's
proposals in the budget.


Extension of Expiring 31st March, Extend the scheme for atleast Positive, Attract investments in the
the tax holiday 2011 another year, until 31st March, as the tax industry
scheme for 2012 benefits
Software w i l l
Technology continue
Parks (STP)

MAT increase 18% 20% Negative, In order to align with DTC

as it may proposal
h u r t

Clarification of Software sometimes is Clear guidelines on taxation Positive This would avoid any
software double taxed discrepancies

R&D tax Current incentives only Incentives to include broader Positive To pro vide much required
incentives to available to software industry participants thrust for innovation and R&D
include IT developers in the industry

OUR PREFERRED STOCKS : TCS, Inofsys, Infinite Computer Soultion Polaris Software and Persistant


18th February 2011 13




The outlook for the Indian Pharmaceutical Market remains mixed
with the Generic companies seeing stupendous growth while growth
of the CRAMS companies remain muted. With innovator drugs worth
$160 bn going off patent over the next five years, high growth in
the domestic market which has been registering strong growth rates
of 15-16% and is expected to reach $20 billion by 2015 and
increasing focus on low cost generics in order to reduce the high
medication cost in the developed countries. We believe companies
having a strong hold in the domestic market along with Niche/FTF
opportunities would continue to trade at a premium. We remain
bullish on the sector more specifically on the Generic Companies.


Excise Duty Excise duty currently for Excise duty on API may be Positive The higher rate of duty paid on
Pharmaceutical rationalized and made at par inputs has led to accumalation
formulations and Buld with Pharma goods, while the of Cenvat Credit in the books
Drugs at 4% and 10% list of life saving durgs exempt as the complete amount of duty
respectively, while some from tax may be expanded. paid on inputs cannot be set off
samples of durgs given Further Pharma samples should against the output tax liability.
to doctors are taxed at be exempted from exice duty Further ther is no provision to
normal rates. since its given free to doctors. recover the accumulated
Cenvat Credit, which is a cost
to such Pharma Manufacturer.

Custom Duty Abatement limit of 35% Abatement limit raised to 45% Positive An higher abatement would
of the Product value of the product value enable Pharma industry to
cover its costs while calculating
the Excise duty payable.

R&D Customs duty on some Increase the list of life saving Positive To reduce the cost of life saving
Life saving drugs are drugs exempt from tax drugs and thus reduce
currently at 5% while healthcare cost.
many drugs are fully

Incentives Weighted deduction of Should cover the cost incurred Positive Would help promote higher
200% on expenditure outside the approved R&D R&D spending by the industry,
incurred on inhouse facility by the pharma also would encourage new
R&D companies (i.e. in overseas or companies towards R&D to
outsourced) take the benefits of deduction

Tax Holidays Currently Tax holiday on Increase the same to 10 years Positive A healthcare provider takes 4-
Health care 5 years to breakeven thus is
infrastructure in tier-2 not able to take advantage of
and tier-3 cities are the benefit of the tax holiday
available for 5
consecutive years.

OUR PREFERRED STOCKS : Glenmark Pharmaceuticals Ltd, JB Chem & Pharm Ltd and IPCA LAB


18th February 2011 14



Power capacity addition has been sluggish and is expected to achieve
2/3 of the revised capacity addition target of 62000MW. We prefer
companies with strong execution capabilities, financial closure in-
place , secured fuel supply and less merchant sales.

We expect higher allocation to reforms like R-ADARP, RGGVY, and

Bharat Nirman to continue. This will also contribute positively to
the sectors long term growth. Our long term outlook on the
Engineering and Capital Goods sectors remains positive. Higher
allocation to infrastructure will benefit companies like, L&T, BHEL,
Crompton etc, as they command a higher market share and have
excellent execution track records.


Import duty 15-20% Expectation of increase Positive Will help domestic players to
on power fight Chinese competition

Plan allocation - Expectation of increase Positive Will be positive for power

for power ancillary

Plan allocation - Expectation of increase Positive Positive for Suzlon, Moser Baer
for renewable

Policy for coal - To accelerate the pace of award Positive This will provide on time
mines and commissioning of power plant
coal linkages with better PLF

OUR PREFERRED STOCKS: BHEL, L&T and Diamond Power Infra.


18th February 2011 15



Global dry bulk fleet capacity is 464 million dwt and an additional
285 million dwt i.e. 61.4% of the existing fleet is likely to be added
over the next two years. Global crude and product carrier capacity
is 382 million dwt and an additional 170 million dwt i.e. 44.5% of
the existing fleet is likely to be added over the same period. Hence,
there will be a substantial overhang from the large fleet addition
over the next couple of years. Freight rates are expected to be under
constant pressure on account of demand moderation and supply
overhang. Hence, the operating performance of shipping companies
is expected to be subdued. Companies with high debt could also
report a negative bottomline. However, the offshore shipping
segment offers the best play in the entire shipping space on account
of firmness in crude oil prices. Utilisation levels have inched up with
semi-sub and jack up utilization levels at 85% and 75%,
respectively. Vessel day rates are also expected to rise in the near
to medium term


Dispute in the Capital goods need to be Timely refund of credit balance Positive Will be benifical for the
CENVAT credit installed within the on CENVAT account, making exporters
policy premises of the ports work round the clock to
company make them inline

Easy - Seeking for separate shipping Positive will be benifical for the shipping
avalability of fund from Indian bank to help companies
loans buying ships

Service tax & - Exemption from service tax for Positive Will encourage more ship
Custom Duty use of vessels outside India on building company to grow at
time charter by Indian shipping the faster pace with less burden
company to another Indian of debt.
entity, service tax exemption on
all input services availed by
shipping companies and custom
duty exemption on bunkers
consumed by coastal ships

OUR PREFERRED STOCKS : Mercator Line, ABG Shipyard and Great Offshore


18th February 2011 16




Positive The telecom sector is reeling under overcapacity leading to stagnant

revenue, high operating cost and huge debt resulting in dwindling
earnings and regulatory uncertainty led contracting multiples. While
subscribers have grown at 10.1% CQGR, revenue has grown by a
mere 0.4% CQGR over Q1FY10-Q2FY11. Impending 3G launch and
MNP introduction may be an immediate impetus. With an abating
rate of decline in key metrics, telecom companies are expected to
fare better in FY12E than in FY11E. Companies with exposure in
foreign markets, like Bharti Airtel and OnMobile Global may see
higher growth than the industry. Telecom stocks may remain
subdued during most of FY12 while towards the end of FY12E we
may see a narrowing of discounts to the broader markets once
regulatory concerns are put to rest.


Single Taxation Taxes/levies include To have a single unified tax on Positive Makes the tax structure
Regime service tax,spectrum revenue investor friendly and hassle
charges,license free.Reduction in tax
fee,ex cise duty, administrative procedures.
customs duty, etc

Extension of Available for services TO extend it for services Positive This would help the new
tax holiday launched till 31st March launched till 31st March 2011 entrants in the telecom sector
available under 2005 compete with the established
section 80IA majors

3-G Rollout Nil Industry awaits more clarity on Positive This would benefit the telecom
matters related to 3G auction companies in the long run with
winners higher data usage through
faster telecom services

MAT charges 18% MAT may be raised to 20% from Negative Higher tax outgo
18% in line with New Delhi Tax

Import Duty Nil No Import duty to be imposed Negative If Import duty is not imposed
on handsets on handsets, then local
manufacturing companies will
have to face competion with the
foreign players.

Benefit to claim The telecom service SAD should be exempted or Positive This will help to reduce cost
credit of 4% provider is liable to pay made creditable against VAT and will help in faster rollout of
S p e c i a l 4% SAD on imported new networks
Additional Duty network equipment
of Customs
(SAD) against

OUR PREFERRED STOCKS : Bharati Airtel ltd

18th February 2011 17

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Tel.: -91-22-42198100
Email: avinash.gorakshakar@anagram.co.in


BUY Expected to appreciate more than 20% over a 12-month period

Accumulate Expected to appreciate up to 20% over a 12-month period
Neutral Expected to remain in a narrow range
SELL Expected to depreciate more than 10% over a 12-month period

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18th February 2011 18