Union Budget Union Budget 2012-13 2012-13

Along expected lines!!!

Table of Content
Along expected lines!!! .................................................... 1 How have finances stacked up in FY12............................ 3 Whats in store for FY13??? ............................................. 4 Borrowings/disinvestment: Critical .................................. 5 Subsidy and allocation to schemes.................................. 7 Trends in fiscal performance ............................................ 8 Crude key for petroleum subsidy................................. 11 Hits and Misses ............................................................. 12 Sectoral Expectations .................................................... 13

ICICI Securities Ltd | Retail Equity Research

Page ii

Along expected lines!!!

Budget 2012-13 has been an honest Budget bringing together ground realities with continued focus on fiscal consolidation. The expected fiscal deficit of 5.1% and full rollback of impetus by hiking excise duty and service tax rate will help in achieving the targeted fiscal deficit in 2012-2013. This seems achievable given oil prices do not surprise on the negative side and the government is able to hike petroleum product prices. Also, through small steps, the Budget has focused on issues in the infrastructure sector (coupled with focus on promoting avenues for infrastructure funding [doubling the corpus of tax free bonds], hiking FII limits in the debt segments and initiatives for enhancing retail investor participation). On the whole, the government is banking on tax revenue buoyancy to bring fiscal deficit under control without derailing the focus on expenditure (plan and non plan expenditure to rise 22% and 9% YoY, respectively). There has been a rollback of excise and service tax rates by 2% each, coupled with broadening of the net for a range of services. The government has budgeted a rise of 29% and 30% in the excise and service tax collections, respectively. For FY12, excise collections saw a decline of 8% over FY12BE figures while service tax figures exceed FY12BE by ~16% In terms of tax collections, the government has budgeted total receipts growth of 13.1% over FY12RE. Growth in corporation tax is budgeted in line with 14% nominal GDP growth rate for FY13E The government has also taken baby steps to get aligned to the template of DTC and GST, even though a definite timeline for implementation of the same has not been mentioned Disinvestment proceeds for FY12 stood at | 14000 crore, in line with expectations. For FY13E, the government has built in | 30000 crore of receipts from the same. Though realistic, a positive global equity environment can help in achieving the same Total major subsidies budgeted for FY13E stands at ~| 1,80,000 crore, down 13.8% compared to the revised subsidy for FY12. The decline mainly came due to a 36% decline in accounting of petroleum subsidy for FY13E vis--vis FY12 revised subsidy. Our calculation shows that at $115/ barrel assumption for crude prices, a | 5 hike in diesel prices and 49% government share in under-recoveries, the given subsidy figure looks feasible. If the government is unable to pass on the desired price hike, the fiscal deficit would reach 5.5% (other things remaining constant). On the other hand, the government has budgeted for ~| 61000 crore and | 75000 crore for fertiliser and food subsidy, respectively, for FY13E

ICICI Securities Ltd | Retail Equity Research

Page 1

Initiatives like permitting two way fungibility in IDRs to encourage wider foreign participation in Indian capital market and enhancing limits for FII participation in debt instruments would provide robust channel for funding capex of infrastructure creation. Further, new initiatives like Rajiv Gandhi Equity Scheme have been proposed to encourage direct equity participation from retail investors Though the government has pegged a 5.1% deficit target for FY13E, better than our estimates of 5.3%, we believe the direction of oil prices will play a crucial role in determining the achievability of the target. Also, the net borrowing figure is a tad higher than expected and will keep bond yields at elevated level for H1FY13 at least.

ICICI Securities Ltd | Retail Equity Research

Page 2

How have finances stacked up in FY12?

Exhibit 1: FY12 Budget performance
Paticulars (| crore) FY11 FY12BE % YoY FY12RE FY12IE* % YoY Deviation Deviation from from our Budgetd Est (%) Est (%) 9.5 13.9 15.6 4.4 -1.8 -1.5 0.4 -1.6 -1.9 Direct tax revenue missed budgeted estimates due to lower corporate tax collection on the back of -0.6 subduded corporate earnings 0.3 -2.4 -2.5 -2.6 -0.3 Indirect tax collection missed by 2.1% due to due to -3.0 lower excise duty collection agianst budgeted -36.5 estimates -2.7 11.8 0.2 0.5 Disinvestment budgeted target missed by ~| -4.3 26000 crore, in line with expectations. Non plan expenditure saw a rise of ~| 75000 crore mainly on account of higher food, fuel and fertiliser subsidy. This was better than estimates on account of lower sharing ratio (49%) of government in oil -0.8 underrecoveries 2.9 0.4 Fiscal deficit increased from Budgeted estimates of 4.6% to 5.9% of GDP mainly due to lower 0.5 disinvestment proceeds and higher subsidies 0.1 Comments

1 Total Receipts (2+13+14) 2 Net Tax receipts (3-12) 3 Tax revenue (Gross) (4+7)

1198919 1257729 572790 664457 795063 932440

4.9 1318720 1313002 16.0 642252 652397 17.3 901664 918869

4 Direct Tax Revenue (5+6) 5 Corporation Tax 6 Income tax 7 Indirect Tax Revenue (8+9+10+11) 8 Customs Duty 9 Excise Duty 10 Service Tax 11 Others 12 (-) Share of States 13 Non-tax revenue 14 Capital Receipts (15+16) 15 Borrowings 16 Others

439090 299942 139148 356493 136058 138372 71309 10754 216333 221487 404642 369043 35599

524516 359990 164526 407924 151700 164115 82000 10109 267983 125435 467837 412817 55020

19.5 20.0 18.2 14.4 11.5 18.6 15.0 -6.0 23.9 -43.4 15.6 11.9 54.6

499559 327680 171879 406103 153000 150696 95000 7407 259412 124737 551730 521980 29750

502709 326786 175923 416161 156991 151186 97875 10109 266472 110000 550604 519571 31033

8.9 8.9 26.4 16.7 15.4 9.3 37.3 -6.0 23.2 -50.3 36.1 40.8 -12.8

-4.2 -9.2 6.9 2.0 3.5 -7.9 19.4 0.0 -0.6 -12.3 17.7 25.9 -43.6

17 Non-plan expenditure 18 Plan expenditure 19 Total expenditure (17+18)

821569 816182 377350 441547 1198919 1257729

-0.7 892116 898972 17.0 426604 414030 5 1318720 1313002

9.4 9.7 9.5

10.1 -6.2 4.4

20 Fiscal deficit (21-2-13-16) 21 Fiscal Deficit as % of GDP 22 Nominal GDP (| trillion)

369043 5.1 7.9

412817 4.6 8.9

11.9 12.7

521980 5.9 8.9

519571 5.8 8.9

40.8 14.5 12.7

25.9 0.0

Source: Budget documents, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 3

Whats in store for FY13???

Exhibit 2: FY13 - Government estimates
Paticulars (| crore) FY12BE FY12RE FY13BE YoY % FY13IE Deviation from our Est (%) 1460000 755709 1064379 570747 373555 197192 493632 178952 181354 122344 10982 308670 127280 2.1 2.0 1.2 -0.3 -0.1 In line with our estimates as government has built in a 14% nominal GDP growth rate for FY13E. Comments

1 2 3 4

Total Receipts (2+13+14) Net Tax receipts (3-12) Tax revenue (Gross) (4+7) Direct Tax Revenue (5+6)

1257729 664457 932440 524516 359990 164526 407924 151700 164115 82000 10109 267983 125435

1318720 642252 901664 499559 327680 171879 406103 153000 150696 95000 7407 259412 124737

1490925 771071 1077612 569013 373227 195786 513219 186694 194350 124000 8174 306541 164614

13.1 20.1 19.5 13.9 13.9 13.9 26.4 22.0 29.0 30.5 10.4 18.2 32.0

5 Corporation Tax 6 7 8 9 10 11 Income tax Indirect Tax Revenue Customs Duty Excise Duty Service Tax Others

12 (-) Share of States in revenues 13 Non-tax revenue

-0.7 4.0 4.3 7.2 The government has built in higher service tax and excise 1.4 duty by 2% each and widening the base of services to be -25.6 taxed. Therefore, the goverment has budgeted a growth of 29% and 31% in excise and service tax, respectively. -0.7 29.3 The government has provided for spectrum proceeds worth ~| 40,000 crore in non-tax revenues, which explains the difference from our estimates -3.8 -3.5 Though fiscal defict target is better than our expecations, the net borrowing figure (front loaded borrowing programme) will put pressure on 10 year benchmark yileds The government has budgeted | 30000 crore, in line with -7.4 our estimates The lower non plan expenditure is mainly on account of lower than expected petroleum subsidy due reduced share of government in the same. Also, the estimates imply a hike in petroleum products, going ahead The government has substantially increased plannned expenditure on account of increased outlay in central plan

14 Capital Receipts (15+16) 15

467837

551730

555241

0.6 -1.6

577011

Borrowings 16 Others

412817 55020

521980 29750

513590 41650 40.0

532011 45000

17 Non-plan expenditure

816182

892116

969900

8.7

1000000

-3.0

18 Plan expenditure 19 Total expenditure (17+18) 20

441547 1257729

426604 1318720

521025 1490925

22.1 13.1

460000 1460000

13.3 2.1

Fiscal deficit (1-2-13-16) 21 Fiscal Deficit as % of GDP 22 Nominal GDP (| trillion)

412817 4.6 8.9

521980 5.9 8.9

513590 5.1 10.2

-1.6

532011 5.3 10.1

-3.5

The lower than expected fiscal deficit has been budgeted despite higher planned expenditure on account of higher non-tax revenues and lower non plan expenditure due to lower fuel subsidy being accounted for

Source: Budget documents, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 4

Borrowings/disinvestment: Critical
Government borrowings to weight on G sec Yields
For FY13, gross borrowings are budgeted at | 5.69 lakh crore as against | 5.10 lakh crore in FY12RE. The borrowing number is higher than market expectation of approximately | 5.25 lakh crore. Net borrowings stand at | 4.79 lakh crore, which is a marginal decline from 4.9%of GDP in FY12RE to 4.8% of GDP in FY13BE. Unless the RBI resorts to interest rate cuts or continues to conduct OMOs (which it did last year), G-sec yields may further shoot up above 8.4% as continuous borrowing pressure will affect liquidity in the system.
Exhibit 3: Total 93% of fiscal deficit to be financed by market borrowings
During 2011-12, the market borrowing programme was revised twice. Accordingly, an additional amount of | 92,872 crore amounting to 1% of GDP was raised over and above the estimated net borrowing of | 3,43,000 crore in BE 2011-12. Further, borrowing through auction treasury bills was also increased by | 1.01 lakh crore during 201112. Increased borrowings and high interest rates pulled G sec yields close to average 8.30% in FY12 from average 7.91% in FY10

600000 500000 400000 (| Crore) 300000 200000 100000 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 RE FY13 BE 135394 80350 131000 146000 168101 246975 394371 325414 436414 479000

Source: Budget Document, ICICIdirect.com Research

Exhibit 4: High borrowing may lead to yields rising further.

8.6 8.4 8.2 8.0 7.8 7.6 7.4 7.2 7.0 1yr 31-Mar-11 3yr 5yr 15-Mar-12 10 yr

Exhibit 5: RBI will have to act to keep a check on yields

9.0 8.8 Yield (%) 8.6 8.4 8.2 8.0 7.8 Mar-11 May-11 Aug-11 Nov-11 Jun-11 Apr-11 Jan-12 Sep-11 Dec-11 Feb-12 Jul-11 Oct-11

Yield (%)

Benchmark 10 Yr G - Sec Yield

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 5

Disinvestment target needs to be achieved...

The disinvestment proceeds are estimated at | 30,000 crore for FY13BE. Healthy capital market conditions play a key role in aiding the government in garnering proceeds from disinvestments. The government had for the last year budgeted | 40000 crore but has achieved ~| 14000 crore for FY12RE. However, given the current buoyancy in global equities there is a reasonable probability that the target will get achieved.
Exhibit 6: Unlike last year, borrowing target has to achieved if fiscal balance has to be maintained
Domestic moderation and increased global uncertainty led to volatile capital markets, which slowed down the disinvestment programme largely

45000 40000 35000 30000 (| Crore)

38795 30000 25958 16953 22744 13895 4424

Disinvestment proceeds, therefore, are a meagre |13,895 crore in FY12RE as against budgeted | 40000 FY12BE

25000 20000 15000 10000 5000 0 2125 3646 3151 1581 534 566

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 RE RE BE

Source: Budget Document , ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 6

Subsidy and allocation to schemes

Exhibit 7: Subsidy structure
| crore Major Subsidies* Food Imported (Urea) fertilisers Indigenous (Urea) fertilisers Sale of decontrolled fertiliser with cons. Total Fertiliser Subsidy Petroleum Subsidy Interest Subsidies Other Subsidies FY11A 164516.3 63843.8 6453.9 15080.7 40766.6 62301.2 38371.3 4680.2 4223.1 FY12BE 134210.9 60573.0 6983.0 13308.0 29706.9 49997.9 23640.0 6868.5 2490.4 FY12RE 208502.9 72823.0 13883.0 19108.0 34207.9 67198.9 68481.0 5791.3 2002.5 FY13BE 179554.1 75000.0 13398.0 19000.0 28576.1 60974.1 43580.0 7967.7 2493.4 YoY -13.9 3.0 -3.5 -0.6 -16.5 -9.3 -36.4 37.6 24.5

Source: Budget Document , ICICIdirect.com Research *Major subsidies include food, petroleum and fertilizer subsidies

Exhibit 8: Trends in subsidy

The government has revised the estimates w.r.t. subsidies to |.2.16 trillion vs. |1.43 trillion budgeted earlier. For FY13, the government has budgeted total subsidies of | 1.9 trillion, which we believe is under provided

250000 200000 (| crore) 150000 100000 50000 0 FY05A Food FY06A FY07A FY08A FY09A FY10 A FY11A FY012RE FY13BE Other subsidies

Fertiliser subsidy

Petroleum Subsidy

Grants to NAFED for MS/PPS

Source: Budget Document , ICICIdirect.com Research

Exhibit 9: Growth rate in major government subsidies

450 350 250 (%) 150 50 -50 -150 Food Fertiliser subsidy Petroleum Subsidy FY05A FY06A FY07A FY08A FY09A FY10 A FY11A FY012RE FY13BE

Source: Budget Document , ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 7

Trends in fiscal performance

Exhibit 10: Gross tax to GDP ratio
14.0 12.0 10.0
The overall gross tax to GDP ratio will be at 10.1% in FY12RE. The same is expected to rise to 10.6% in FY13BE on account of a rise in indirect tax revenues

9.7

10.2

11.5

12.6

11.8 10.2

10.9

10.1

10.6

(%)

8.0 6.0 4.0 2.0 0.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12RE FY13BE

Gross Tax to GDP (%)

Source: Budget Document , ICICIdirect.com Research

Exhibit 11: Contribution of segment to gross tax revenue

100 90 80 70 60 50 40 30 20 10 0
0.7 4.7 32.5 2.6 6.3 30.3 2.7 7.9 24.8 18.2 15.9 3.2 8.6 20.8 17.6 17.3 2.7 10.1 17.9 16.5 17.5 2.0 9.4 16.5 13.3 19.6 1.4 9.0 17.4 17.1 17.5 1.0 10.5 16.6 17.0 18.5 0.9 11.5 18.0 17.3 17.6

Going ahead, in FY13BE, the share of indirect tax (custom, excise and service) is expected to rise by 336 has been pegged at 34.6% and 17.6%, respectively, for FY13BE bps to 46.8%. The share of income tax and corporate tax

(%)

18.9 16.2 27.1

17.7 15.2 27.6

30.5

32.5

35.3

39.2

37.7

36.3

34.6

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12RE

FY13BE

Corporate Tax Custom duty Service Tax

Source: Budget Document , ICICIdirect.com Research

Income Tax (Other than corporate tax) Excise duty Others

ICICI Securities Ltd | Retail Equity Research

Page 8

Exhibit 12: Non tax revenues trend

250000 200000 |. crore 150000 100000 50000 0 25867 22939 32387 FY05 29330 25451 22032 FY06 31372 29309 22524 FY07 44241 50250 21784 FY10 47992 19734 FY11 150877 46758 34499 21060 FY08 37616 38607 20717 FY09 54491 50122 20125 95230

The non-tax revenue for FY13BE is pegged at | 1,64,000 crore. The government is likely to mop up an additional | 40,000 crore from spectrum proceeds.

50153 19231

FY12RE FY13BE

Interest receipts

Dividends and profits

Economic and Other services

Source: Budget Document , ICICIdirect.com Research

Exhibit 13: Contribution of segments to total non-tax revenues

120 100 80 60 40 20 0 FY05 FY06 FY07 40 % 32 28 38 38 46 39 38 69 33 29 35 27 34 21 FY08 40 21 FY09 43 19 FY10 22 9 FY11 16 FY12RE 40 44 58

30 12 FY13BE

Interest receipts

Dividends and profits

Economic and Other services

Source: Budget Document , ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 9

Exhibit 14: Trend in gross fiscal deficit as percentage of GDP

8 7
The gross fiscal deficit for FY13BE has been pegged at

6 5 (%) 4 3 2 1 0 FY05 FY06 FY07 FY08 4.2 4.3

6.4

6.8 5.9 4.9 5.1

5.1%, which is better than our expectation (5.3%). The government is banking on tax revenue buoyancy to bring fiscal deficit under control without derailing the focus on expenditure (plan and non plan expenditure to rise 22% and 9% YoY, respectively)

3.6 2.8

FY09

FY10

FY11

FY12RE

FY13BE

Gross Fiscal deficit % of GDP

Source: Budget Document ,ICICIdirect.com Research

Exhibit 15: Plan and non-plan expenditure trend

The overall expenditure is set to rise by 13.1% for FY13BE on account of a 22% rise in plan expenditure due to higher allocation towards social schemes.

1200000 1000000 818298.6 379029.1 800000 (| crore) 608721 275235 600000 365485 140638 365390 132292 400000 200000 0 FY05A FY06A FY07A FY08A FY09A FY10 A FY11A FY12RE FY13BE 413527 169860 507589 205082 721096 303391 892115.6 426604.2 969900.3 521025
13.1 FY13BE

Non Plan Expenditure

Plan Expenditure

Source: Budget Document , ICICIdirect.com Research

Exhibit 16: Growth in total government expenditure

30.0
The government expenditure is set to increase by 13.1% vs. 10.1% last year

25.0 20.0 (%) 15.0 10.0 5.0 0.0 FY05A 5.7 1.7 FY06A FY07A 15.3

22.2

24.0 15.9 16.9 10.1

FY08A

FY09A

FY10 A

FY11A

FY12RE

Growth in total govt expenditure

Source: Budget Document , ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 10

Crude key for petroleum subsidy

The government has budgeted for | 43580 crore of petroleum subsidy in FY13BE with a crude price assumption of | 115/$ barrel throughout FY13BE. Given the above assumptions, we believe the government has to hike petroleum products (diesel price hike of | 5 per litre) to match the subsidy it has budgeted. If the government is unable to hike the cost of diesel as per our estimates, the fiscal deficit in that case would go up by 0.42% to 5.5% in FY13BE.
Exhibit 17: Implied oil price at | 43580 crore of oil subsidy without hike in petroleum price hike
Assuming Government subsidy share at | 43580 crore at 49% share Exchange Rate 46 48 Brent Crude Oil Prices 100.7 96.0 50 91.8 52 87.8 54 84.2

Source: ICICIdirect.com Research

Exhibit 18: Hike in diesel needed to match government estimates for oil subsidy
Assuming Exchange rate at |50/$ and Government share at 49% Brent Crude Oil Prices ($/barrel) 95 100 105 110 115 120 125 Under Recoveries at current prices (| crore) 93670 112246 130822 149398 167973 186549 205125 Diesel Price Hike Needed (|/litre) 0.72 1.83 2.95 4.06 5.17 6.28 7.40 Pressure on WPI inflation (%) 0.08 0.21 0.34 0.47 0.59 0.72 0.85 If no hike in diesel price increase in subsidy 5898 15000 24103 33205 42307 51409 60511 Increase in fiscal deficit (%) 0.06 0.15 0.24 0.33 0.42 0.51 0.60 Base Case Deficit (%) 5.1 5.1 5.1 5.1 5.1 5.1 5.1 Fiscal Deficit without diesel price hike (%) 5.2 5.2 5.3 5.4 5.5 5.6 5.7

Source: ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 11

Hits and Misses

Hits Fiscal deficit estimated for FY12-13 at 5.1% better than our estimates of 5.3% Disinvestment target estimated at | 30000 crore in line with our estimates Increase in excise from 10% to 12% as per expectation Indias GDP is expected grow at 7.35-7.85%, in line with the Economic Survey The sunset date for tax exemption in the power sector extended by one year for claiming 100% deduction of profits for 10 years Government subsidy assumption towards petroleum products has been reduced from | 68481 crore in FY12 to | 43580 crore in FY13 on the back of an increase in petroleum product prices Increase in cess on crude oil produced from | 2500 per tonne to | 4500 per tonne to increase revenue collection of ~ | 8000 crore The Budget proposes to tax all services except those in the negative list, which includes 17 services. Simultaneously, service tax has been increased from 10% to 12% resulting into additional collection of ~| 27000 crore.

Misses Income tax deduction of | 20000 under Section 80CCF (over and above | 1 lakh) related to infrastructure bonds is not extended Plan expenditure at | 521025 crore against our estimate of | 460000 crore Income tax slab increased to | 2 lakh against our estimates of | 2.5 lakh No specific guideline given for allowing 51% FDI in branded retail

ICICI Securities Ltd | Retail Equity Research

Page 12

Sectoral Expectations
Auto and auto ancillary
Key Announcement Excise duty raised to 12%/22% Impact Neutral Our View In line with industry expectations, an excise duty hike from 10% to 12% across the board came through. This rise would be passed through and not severely affect demand. However, this would reduce pricing flexibility for segments (twowheelers, tractors) where price elasticity among buyers remains high The excise duty for large PV has been raised to 27% ad valorem from the earlier 22%+ | 15000. This move would impact OEMs like M&M (product portfolio>1500 cc) leading to an effective rise of~3-4% in excise duty. This could lead to~100 bps decline in our sales estimates. The impact for MSIL/TML would be limited

Ad-valorem duty hike on large passenger vehicles to 27%

Negative

Aviation
Key Announcement Impact Direct import of aviation turbine fuel Long term allowed Positive Our View In line with industry expectations, the direct import of ATF has been permitted for Indian carriers as actual users. This is a long term positive move for the industry as a whole. However, over the medium term, the sector is unlikely to benefit This would help airline companies to get cheaper funds from overseas for their working capital requirements

ECB to be permitted for working Positive capital requirement of airline industry for one year, subject to a total ceiling of US$ 1 billion Rate of withholding tax on interest Positive payments on external commercial borrowings reduced from 20 % to 5 % for three years

This would further enable airline companies to lower their debt servicing on ECBs. The major beneficiary would be Jet Airways and Kingfisher Airlines

Banking
Key Announcement Capital allocation for PSU banks Impact Positive Our View Capital allocation of | 15888 crore for PSU banks, regional rural banks and other financial institutions is a positive move. SBI, IDBI, BoI and IOB are likely to be the major beneficiaries. The government is also considering the possibility of creating a financial holding company, which will raise resources to meet the capital requirements of public sector banks Net market borrowings have been planned at | 479000 crore (gross - | 513950 crore). The net borrowings are higher than expected. This may keep yields sticky at 8.2-8.4%, thereby limiting the profit on the bond book Deduction up to | 10,000 on interest from savings bank to support saving balance growth. Banks with high SA proportion like SBI and HDFC Bank would benefit from this move Doubling of issue of tax-free bonds for infrastructure financing to | 60,000 crore in 2012-13 would be beneficial for infra financing companies like IDFC

Government's borrowing programme will keep G-Sec yields sticky

Neutral

Interest from savings bank accounts Positive deductible up to | 10,000

Limit for tax-free bonds for financing Positive infrastructure projects increased to | 60,000 crore

ICICI Securities Ltd | Retail Equity Research

Page 13

Capital Goods
Key Announcement Imposition of duty on import of power equipment by 15-19% Impact Negative Our View Will affect all domestic manufacturing companies as the current duty will not offer a level playing field to Indian companies vis--vis global peers

Capital Markets
Key Announcement Securities transaction tax (STT) reduced by 20% Impact Positive Our View STT has been reduced by 20% from 0.125% to 0.1% on cash delivery transactions. Positive for equity investments by investors as it reduces cost and may spur volumes for brokerages It has been proposed to make it mandatory for companies to issue IPOs of | 10 crore and above in the electronic form through nationwide broker network of stock exchanges. This is positive for brokerage houses as it will help generate fee based income Under the scheme, income tax deduction of 50% to new retail investors, who invest up to | 50,000 directly in equities for a three year lock-in period and having annual income below | 10 lakh. This may lead to increased participation in the market from retail, which will benefit brokerage houses

IPOs of | 10 crore and above in electronic form

Positive

Deduction of 50% to new retail investors under the Rajiv Gandhi Equity Saving Scheme

Positive

Cement
Key Announcement Impact Uniform excise duty rate of 12% + Neutral | 120/tonne is announced, which will be levied on the MRP less abatement of 30%. Previously, excise duty was charged on ex factory price as 10% ad valorem + | 160/tonne if MRP exceeds | 190/bag and 10% ad valorem + | 80/bag if MRP was less than | 190/bag Abolition of import duty on coal Positive Our View The new excise duty structure will have no impact on the cement manufacturers as the total duty is expected to remain same. For example, if the MRP is | 300/bag, the total duty levied earlier was ~| 31/bag (calculated on ex factory price) and it is expected to remain same post the new structure (calculated on MRP). The new duty structure is announced as against the industry expectations of 12% ad valorem + | 160/tonne whcih could have an impact of | 4-5 /bag. Thus, this is expected to have a neutral to positive impact on the cement companies. The abolition of 5% import duty on coal will have a positive impact on cement players, which import coal for their cement kilns and power plants. Major beneficiaries would be Ambuja Cement, UltraTech Cement and India Cement, which import ~35%, ~40% and ~60% of the total fuel requirement, respectively Increased thrust on PPP projects in infrastructure sector would help cement companies to increase its sales volumes

Increase in allocation towards infrastructure

Positive

ICICI Securities Ltd | Retail Equity Research

Page 14

FMCG
Key Announcement Increase in overall excise duty from 10% to 12%. Increase in excise duty on filtered cigarettes by 5%, hand rolled bidis, pan masala, gutka, chewing tobacco, unmanufactured tobacco and zarda scented tobacco Impact Neutral for FMCG companies; Positive for ITC Our View We expect the overall increase in excise duty to be passed on to the consumers by all the companies. However, we believe that a 5% hike of excise duty on cigarettes (against our expectation of ~10%) and a rise in excise duty of other tobacco products could lead to a shift in consumption to cigarettes and hence would be positive for cigarette companies.

Reduction in cutom duty on titanium Positive for Slight relief for paint manufacturing companies that are dioxide (raw material for paint Asian Paints, already burdened with the increasing prices of the commodity companies) from 10% to 7.5% Kansai Nerolac due to supply shortages. Positive Increased the agricultural credit target by 17.4% and allocation towards Rashtriya Krishi Vikas Yojna by 17.2%. Also, an increase of 34% for National Rural Livelihood Mission (NRLM) and 33% in the corpus of Women's SHG's Development Fund. Increasing income in the hands of rural population would help in keeping the rural consumption growth sustained. Positive for companies, Dabur, Marico, ITC and HUL, that have high penetration in rural markets.

Hospital
Key Announcement Deduction in respect of capital expenditure for setting up 100 bed hospital increased from 100% to 150%. Impact Positive Our View Benifitial for both Apollo hospitals and Fortis Healthcare as both of them have aggressive growth plans.

Infrastructure
Key Announcement Impact ECB to be alowed on capex on Positive maintenance and operation (MMR) of tolled roads and highways Allocation for Ministry of Road & Positive Transportation has been increased by 14% to | 25,360 crore. The NHAI awarding for FY13 pegged at 8800 km. Tax free infra bond limit to be raised Postive to | 60,000 crore in FY13 from | 30,000 crore in FY12. For the FY12, Infrastrcture debt fund amounting to ~ | 8000 crore have been launched. Rationalisation of DDT by removing Positive cascading effect of Dividend Distribution tax Investment of |20,000 core infrastructure bonds us/80 CCF Negative Our View This will be positive for Road developers as they would be able to avail low cost ECB for MMR expenditure that they need to incur on a stretch after every 5 years. The increase in allocation and awarding target would lead to higher expenditure and higher opportunity for the road developers respectively.

The move will lead to higher mobilisation of savings to the infrastructure funding and as such will be beneficial for the industry as a whole.

This would be positive for conglomerates with various subsidiaries structure such as GVK, GMR & JP Associate as they would pass on subsidiaries cash flow to parent through dividiend The industry was expecting in the rise in the limit to |50,000. Additionally, the budget does not mention about extension of |20,000 by one more year indicating this |20,000 may go away

ICICI Securities Ltd | Retail Equity Research

Page 15

Information Technology
Key Announcement Increase in UID spend by 13% to | 14,232 crore Increase in budgeted educational spend to | 61,427 crores from | 43,514 crores.Establishing 6,000 schools under the 12th five year plan,2,500 of them through PPPs. Establishment of Credit Guarantee Fund for skill development Impact Positive Our View We expect that allocated spend could improve the revenues of IT companies to whom the contracts have been awarded.Wipro and TCS being among them We expect educational space to benefit by the increase in education spend.NIIT could also benefit from the skill development initatives through its JV with National Skill Development Corporation

Positive

Logistics
Key Announcement Impact Investment linked deduction of Positive capital expenditure incurred in the Cold chain facility is proposed at the enhanced rate of 150 per cent, as against the current rate of 100 per cent Container freight station and inland Positive container depots are proposed to be added for the purposes of investment linked deduction Our View This would benefit company like Gateway Distriparks which is expanding in its cold chain business

Logistics sector companies like Gateaway Distriparks, Allcargo, etc would be key beneficiaries

Media
Key Announcement Copyrights relating to recording of cinematographic films have been exempted from service tax Impact Positive Our View The move will benefit companies which are into movie production like UTV Software, Shree Ashtavinayak Cine Vision, Eros International, Mukta Arts etc

Metals and Mining

Key Announcement Impact Basic customs duty on non-alloy, Positive flat rolled steel has been increased from 5% to 7.5% Basic customs duties on plant and Positive machinery imported for setting-up of iron ore pellet plants or iron ore beneficiation plants reduced from 7.5% earlier to 2.5% Excise duty raised from 10% to 12% Negative Our View This is likely to encourage the growth of the domestic steel sector. Flat steel producers like Tata Steel, JSW Steel, etc are expected to be the key beneficiaries This is positive for companies setting up / ramping up pellet capacity. Usha Martin, etc are expected to be key beneficiaries

The increase in excise duty is marginally negative for the steel sector. However we believe that the steel players would be able to pass through the hike on the end users. The reduction in basic custom duty of steam coal is expected to result in lower price of imported coal. It is expected to benefit steel and aluminium producers.

The basic custom duty on steam coal has been reduced from 5% earlier to nil.

Positive

ICICI Securities Ltd | Retail Equity Research

Page 16

Oil and Gas

Key Announcement Increase in cess on crude petroleum oil produced in India to | 4500 per MT from | 2500 per MT under the COIL Industries Development Act Natural gas (LNG) gets full exemption from customs duty this year From the estimated government subsidy of | 68481 crore and | 43580 crore for FY12E and FY13E, respectively provided in the budget, it is implied that the PSU upstream companies' share would increase. Impact Negative Our View Increase in cess would have ~US$ 5.6 per barrel impact on expenditure for domestic oil production companies like Cairn India, ONGC, Oil India, RIL, etc. The percentage impact on EPS for PSU companies would greater than in private companies This would have short term positive impact for Petronet LNG and other gas utility companies due to increased demand for natural gas We believe it would have a negative impact on the PSU upstream companies (45% subsidy share against 38.7% in FY11). However, a diesel hike would offset the negative impact caused by increased share in under-recoveries.

Positive

Negative

Pharmaceuticals
Key Announcement Increase in excise duty on APIs from 10% to 12% and Formulation from 5% to 6% 200% Weighted deduction for in house R & D spend to continue for five more years The budget has brought Limited liabilities partnerships (LLPs) under the MAT ambit. Impact Neutral Our View We expect companies to pass increase in excise duty to customers. This will encourage domestic pharma players to increase R & D spent.

Positive

Negative for We believe overall tax outgo for Sun Pharma and Cadila Cadila and Sun Healthcare would go up as these companies derives major Pharma portion of profits through LLPs.

Power
Key Announcement Impact Reduction in customs duty on coal Positive Our View Will bring down power cost by 5%. Biggest beneficiaries would be merchant IPPs based on imported coal Will benefit CPSUs and IPPs, which would add generating capacity over the next year

Extension of Section 80IA (Tax concessions given by the government to infrastructure developers) Repatriation of dividends from foreign subsidiaries status quo at 15% ECB loans to part finance rupee debt for Existing Power plants Non - Imposition of duty on import of power equipment by 15-19% Additional depreciation of 20% of new assets acquired by Power companies Withholding tax on interest payments on external commercial borrowings to be reduced from 20 per cent to 5 per cent for three years

Positive

Neutral

It would be neutral on Tata Power. For FY13, it was expected at 20% IPPs which have operational plants like NTPC, Tata Power, Lanco Infra, NHPC, Neyveli Lignite Will allow cheaper capital equipment for Power companies

Positive Positive

Positive

Under coverage universe , NTPC, Lanco, NHPC, Tata Power, Neyveli Lignite whose power plants will come up in FY13 Marginal positive for Power companies ( improvement in working capital) whose foreign borrowings are higher

Positive

ICICI Securities Ltd | Retail Equity Research

Page 17

Real Estate
Key Announcement 1% TDS on property transaction Impact Positive Our View 1% of income tax on transaction in excess of |50 lakh in specified areas & |25 lakh in areas other than specified areas to be collected by trasfereror & paid to govt. This should improve transperancy in the sector in the long run Apparently positive for affordable housing space but neutral overall as there is no clear definition of low cost housing in listed space.

ECB for low cost affordable housing Neutral projects

Retail
Key Announcement Roll out of GST by August 2012 Impact Positive Our View Positive for retailers like Pantaloon Retail, Shoppers Stop, Provogue, Trent etc as implementation of GST will do away with multiple duties that retailers are expected to pay currently. However, we will need to wait for the structure of taxes to ascertain the exact impact. Negative for listed jewellery players like Titan Industries, Gitanjali Gems, Shree Ganesh Jewellery, etc as the 2% duty increase will negatively impact demand for gold (as this will be fully passed on to the customers). Negative as this will further raise the cost of the jewellery being sold

Increase in Import duty on gold from Negative 2% to 4%

Imposed 2% customs duty on gems Negative & coloured stones

Shipping
Key Announcement Reduction in quantum of Shipbuilding subsidy from | 542 crore in Budget 2011-12 to | 400 crore in Budget 2012-13. Impact Negative Our View The budget did not make any announcement related to resumption of the shipbuilding subsidy scheme that had expired in August 2007. Inspite of huge subsidy arrears due to shipyards, the shipbuilding subsidy quantum in the current budget has been lowered. We expect that the pace of receipt of subsidy by shipyards will remain slow negatively affecting the working capital of shipyards.

Telecom
Key Announcement Impact The fixed network for telecom and Positive telecom towers have been included to the list of sectors eligible for Viability Gap Funding. Our View Principally, the move is expected to benefit tower compnaies like GTIL, Indus Towers, Reliance Infratel, Bharti Infratel etc. However, we expect the imapct to be marginal as telecom industry is already overcapacitated and is not looking at expanding their network aggresively. However, it will support rural expansion as density of towers in rural areas is not very high

ICICI Securities Ltd | Retail Equity Research

Page 18

Textiles
Key Announcement Impact Increase in excise duty on branded Positive apparel and made-ups from 10% to 12%. However, abatement rate has been increased from 55% to 70%. Our View With the increase in the rate of abatement, the effective excise duty has come down from 4.5% of MRP to 3.6% of MRP thereby reducing the burden on branded apparel makers. We expect this move to be positive for branded apparel players like Kewal Kiran Clothing, Welspun, Shoppers Stop, Pantaloon Retail, Page Industries, Lovable Lingerie, Raymond, Provogue, Zodiac etc Demand for polyester related products is already lower considering cotton prices have been lower. Further increase in the excise duty will either lower demand (if impact is passed on) or impact the company's margins further. We expect this move to negatively impact players like JBF Industries, Alok Industries, IndoRama Synthetics etc

Increase in excise duty on polyester Negative products from 10% to 12%

ICICI Securities Ltd | Retail Equity Research

Page 19

Budget review 2012-13

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

Disclaimer
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities Ltd (I-Sec). The author of the report does not hold any investment in any of the companies mentioned in this report. ISec may be holding a small number of shares/position in the above-referred companies as on date of release of this report. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This report may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. I-Sec may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject I-Sec and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

ICICI Securities Ltd | Retail Equity Research