Budget Presentation

By
Chetan J Parikh

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Investment Philosophy

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Budget Presentation

~Investment Philosophy

Value Investing

Buying with a margin of safety

Buying what we understand

Buying wealth creators (or potential wealth

creators)

Buying sustainable businesses, not stocks

Identification of catalysts

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~Investment Philosophy

What is Margin of Safety?

Buying at a price With a risk reward ratio greater than 3:1

at a discount of 40% to intrinsic worth

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~Investment Philosophy

What is Intrinsic Worth and How is it Computed ?

Intrinsic worth is the statistical expected value of the

discounted free cash flows under three probabilistic
scenarios:

Pessimistic

Neutral

Optimistic

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~Investment Philosophy

What are Risk Reward Ratios?

Price bands based on a combination of:

- Historical metrics
- Peer comparisons
- DCF valuations

Risk Reward Ratios computed as a ratio of probable upside

to probable downside at the current price

Price bands will change every year or more frequently due

to expectations based on real or market dynamics

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Identifying Catalysts

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Budget Presentation

Identifying Catalysts

Catalysts are events that take place that increase the value of
the company, regardless of how its stock reacts. The market
will eventually realise that value has been created, transferred
or unlocked by such an event and call it a catalyst. Stock
catalysts drive the share price of a company without
improving the value of the firm.

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~Identifying Catalysts

Internal Catalysts

New management

New corporate stategy

New product strategy

Improved operational efficiencies

Cutting costs

New financial strategy

Sustained tax rate deduction

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~Identifying Catalysts

Internal Catalysts Contd

Reducing working capital

Share Buybacks

Asset Sales

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~Identifying Catalysts

External Catalysts

The presence of shareholder activists

Industry merger activity

Time

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Budget 2003 - 04

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Budget Presentation

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Banking

The government buying back illiquid G-Secs will provide a

large one time income to write off NPAs.

Increasing FDI in private banks from 49% to 74% and

removing the cap on voting rights at 10% will significantly
boost capital flows and M&As.

Extending 72A benefits to the industry will further pave the

way for consolidation.

The 100 basis points reduction in small savings rates will

help reduce the cost of deposits for banks.

Saving bank account rates reduced by 50 basis points.

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Banking

Company Upside Downside Risk Reward Intrinsic Premium

State Bank of India 400 200 0.75 325 -3%
HDFC Bank 430 215 5.52 360 -31%
ICICI Bank 300 75 2 190 -21%
UTI Bank 100 32 4.23 58 -22%

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Health Care & Pharmaceuticals

MNC pharma companies to have major benefit due to

sharp reduction in import duty of formulations and alcohol
based medication.
Section 10 23(G) of IT Act to apply for private hospitals
with 100 beds or more.
Rate of depreciation from the present 25 per cent to 40 per
cent in respect of life saving medical equipment.
Customs duty on specified life saving equipment from 25
per cent to 5 per cent.
Biotechnology investments will get a big boost with
minimum export obligation of Rs 20 crore removed for
duty exemption for import of equipment.

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Health Care & Pharmaceuticals

Biotechnology manufacturing plants will be exempt from

custom duty to the extent of 25 % of previous years export
turnover.

All drugs and materials imported or produced domestically

for clinical trials will be exempt from customs and excise
duties.

Life saving drugs currently attracting nil or 5 per cent

customs duty will also be exempt from excise duty.

Basic customs duty on glucometers and glucometer strips

used by diabetics, will be reduced from 10 per cent to 5
per cent.
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Health Care & Pharmaceuticals Price bands

Company Upside Downside Risk Reward Intrinsic Premium

Dr. Reddys Ltd. 1575 650 3.07 1390 -37%
Wockhardt 1275 470 -39.33 950 -53%
Nicholas Piramal 635 260 -11.71 390 -42%
Pfizer 1125 450 -8.26 765 -53%

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Hospitality

Withdrawal of expenditure tax.

Extension of 10(23G) and 72A benefits and non-imposition

of service tax on the hotel industry.

Continue the exemption for the hotel industry from the

levy of service tax
Company Upside Downside Risk Reward Intrinsic Premium
Indian Hotels 300 150 2.75 340 -44%

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Automobiles

The excise duty has been reduced for cars and SUVs
by 7% (net of 1% contribution to calamity relief fund).

Boost to infrastructure spending will positively impact

sale of commercial vehicles. However this will be
partially offset by the Rs 0.5/litre of diesel.

Company Upside Downside Risk Reward Intrinsic Premium

TELCO 195 80 0.39 110 48%
Mahindra & Mahindra 215 95 9 170 -37%

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Cement

Increased spending on infrastructure to drive demand for

this sector.
48 new road projects worth Rs 40,000 crore to be
launched, 25% of which will be cement concrete.
Housing projects income for construction of residential
projects up to March 31, 2005 to be exempt from tax.
The increase in excise duty on cement ( Rs 50 per tonne)
will impact directly on the bottomline of the companies.
However we feel that the surge in volumes of cement sales
will outweigh the concerns on increased excise duty.
Customs duty on white cement will be reduced from 32%
to 25%.
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Cement - Price Bands

Company Upside Downside Risk Reward Intrinsic Premium

Gujarat Ambuja Cements 220 110 1.29 135 17%
ACC 260 100 1.96 100 54%
India Cement 45 18 -14.5 40 -60%
Madras Cement 5400 2700 1.57 4600 -19%

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Power

The customs duty on specific equipment for high voltage

transmission projects has been reduced from 25 per cent
to 5 per cent for high voltage transmission projects.

The extension of fiscal benefits accorded under the Mega

Power Projects scheme to all projects that fulfills the
conditions already prescribed for mega power projects.

Company Upside Downside Risk Reward Intrinsic Premium

BSES 325 190 2 300 -22%
Tata Power Ltd. 275 100 6.95 160 -24%

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FMCG

Marginal positive impact on companies manufacturing

tea and coffee due to redirection of excise fund (Re 1
per kg), which will benefit integrated manufacturers in
the long run.

Excise duties on biscuits brought down from 16% to

8%, while abatement has come down from 40% to
35%.

Branded edible oils will incur 8% excise duty.

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FMCG Price Bands

Company Upside Downside Risk Reward Intrinsic Premium

Tata Tea 300 150 3.69 270 -33%
HLL 235 130 1.5 200 -14%
Marico Industries 300 150 7.33 290 -42%
Nirma 390 185 2.42 380 -36%

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Information Technology

The benefits under sec 10A and 10B of the Income Tax Act
to be continued for units located in Software Technology
Park.

The modification of provisions under sections 10A and 10B

could provide a big boost the mergers and acquisitions in
the sector.

Customs duty on a number of capital goods used by the

telecom and IT sector for manufacture of components
reduced from 25 per cent to 15 per cent.

Excise duty on pre-loaded software exempted in the case

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of computers.
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Information Technology Price Bands

Company Upside Downside Risk Reward Intrinsic Premium

Infosys 6000 1500 0.66 3750 12%
Satyam Computers 440 110 1.84 340 -34%
Polaris Software 345 60 2.39 200 -28%

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Tax Treatment for dividends & capital gains

Dividends tax free in the hands of the shareholders

12.5 per cent dividend distribution tax be levied on
domestic companies
Equity oriented schemes be exempt from the purview of
the tax for one year
Equities that are acquired on or after March 1, 2003, and
sold after the lapse of a year, or more, exempt from the
incidence of capital gains tax.
Separation of the ownership of stock exchanges from their
management; resulting in demutualisation
Capital gains arising out the the process of
demutualisation should be fully exempted from tax.

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Other Budget Highlights

Additional excise duty reforms for VAT implementation.

Housing to get a boost from tax exemption for income for
residential
projects construction
Fiscal benefits to provide impetus to private medical
investment
Tax holiday for R&D companies established up to March 31,
2004
Income tax concessions to pharma, biotech and IT at par
10A/ 10B benefits to continue as originally envisaged
No loss of 10A/10B tax holiday on account of shareholding
change - M&A activity to get a boost
Tax rebate to senior citizens to be increased to Rs 20,000
from Rs 15,000
Excise duty on PFY reduced from 32% to 24%
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Other Budget Highlights

Job workers in the textiles sector exempt from excise

compliance
Benefit of transfer of losses on merger extended to hotels -
boost for M&A activity in hotel industry
10A/ 10B benefits extended to gems and jewellery sector
Tax benefits on mergers extended to nationalized banks
and hotels - significant boost for M&A activity
CST to be reduced to 2% from 4% to facilitate VAT
Core activity condition not to apply in case of Overseas
Direct Investments
Pre-payment limit of ECB upto $100 m to be enhanced
Income tax changes to spur restructuring, M&As
CST to be gradually phased out to achive destination
based VAT
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Other Budget Highlights

India, Inc effective income tax rate down from 36.75% to

35.875% - exemptions to stay
De-reservation of reserved SSI items to enhance industrial
efficiency andcompetitive strength
Alcohol based cosmetics excise duty cut to 16%
Overseas investment norms eased - boost for Indian IT,
pharma sectors
Interest free warehousing period extension to 90 days to
help importers
Self-assessment scheme for imports to lower logistics costs
Liberal valuation norms for excise duty to reduce disputes

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 Thank You

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