Union Budget Analysis 2005-06February 28, 2005 Kotak Securities - Private Client Research Union Budget 2005-06 Please see the disclaimer on the last page For Private Circulation 2

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Union Budget Analysis FY2005-06

February 28, 2005 FOR PRIVATE CIRCULATION

Keeping the faith

Mr. Palaniappan Chidambaram, the Finance Minister, has courageously dealtwith a number of conflicting objectives of coalition politics before presentinga politically correct budget. The common minimum program demandsincreased spending on rural development and infrastructure, constrainedby the need to adhere to the fiscal responsibility targets. Tax reformsremained the key focus, as was an attempt to use the budget as an enablingtool towards capital formation. While the absence of any announcementson foreign direct investments or exclusion of any disinvestment targetscould be disappointing, it also shows political maturity to present auniversally acceptable statement of intent. To that extent the budget scoreshigh. While being optimistic in some of its revenue assumptions, overallthe minister has presented a pragmatic budget.

n No negative is the big positive

The budget has come as more of a relief to the market, which was actually fearing a far harshertax regime. The biggest positive in the budget, in our opinion, is that there are no major negativesin the budget that will impact the economy. It will allow the government to maintain the momentumand push the reform further.

n Key focus area

The thrust in the budget is on infrastructure, which is very positive. There are big spendinginitiatives on the social and infrastructure sectors, but clearly, the committed resources havenot kept pace with the aspirations. Aggregate plan spending on capital account is actually42.3% lower than that was budgeted last year, while plan expenditures on revenue accountis up 29.3%. Just 4% budgeted increase in FY2006 in plan expenditures on an aggregate isdisappointing, but with non-plan expenditures on revenue account, ex-interest payment, growing59% YoY, the government has a very few options left to keep fiscal deficit under check at 4.3%of GDP. The allocation towards highways is however, up 43%, where the spending has oneof the highest traction with one of the biggest multiplier effect. This will clearly sustain themomentum to industrial demand and employment that the road development program hasprovided over the last three or four years.

n GDP growth

The budget expects a nominal growth of 13.6% over the revised estimates of FY2004-05.Though the tax revenue is expected to increase by 21.1% and non-tax revenue by 3.5%, grossreceipts of the government are to remain largely flat at Rs.6.3 trillion. The tighter control onbudgetary deficits would maintain the fiscal deficit at 4.3%, however in absolute terms it isexpected to increase by 8.6% to Rs. 1.5 trillion. The government is needed to finance thisdeficit and the larger chunk is financed through market borrowing of Rs. 1.1 trillion, which isa whopping 140% higher than FY05RE. The underlying assumption on GDP growth of thebudget has been 13.6% in FY2006. Based on the Economic Survey, if we assume a 7.5% realGDP growth rate, the assumption of an average 6.1% inflation in FY2006 seems challenging,if oil prices remained high. Growth rate and average inflation for FY2005 has been 6.9% andover 5.9% respectively.

RESEARCH TEAM

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Company ReportUnion Budget 2005-06

Courageous pragmatic budget

No negative

Infrastructure thrust is positive

GDP growth assumption looksoptimistic

February 28, 2005 Kotak Securities - Private Client Research

Union Budget 2005-06 Please see the disclaimer on the last page For Private Circulation 2

n Higher borrowings to finance increased spending

Investors will remain worried as government debt is estimated to go up by 8.5% in FY2006.Massive borrowing programe will put pressure on interest rate. The combined central andstate government deficits will amount to 10% of GDP in the near term, leading the consolidateddebt of the central and state governments to rise gradually for the next few years from morethan 80% of GDP currently. The budget does not provide for any significant reduction in thefiscal deficit, aiming at 4.3% of GDP in FY2006, following a flat 4.5% in FY2005, as per therevised estimates in FY2005. However, deficit financing in an economy, which is solidly on agrowth path, is not necessarily bad, in our opinion. The solid 20.7% growth in taxation revenuein FY2005, and an expected 21% growth in FY2006, must be regarded positively in relationto the government's ability to service the debt burden. In FY2004, interest expense took up47% of government's revenue, while in FY2006 the ratio is expected to fall to 38%.

TAX REFORMS ARE THE JEWEL IN THE BUDGET

n Corporate tax reduced

The key focus of this budget has been on tax reforms. The step to reduce corporate tax from35% to 30%, without any elimination of exemptions, although expected, yet is bold enough tosurprise the market. Shorter-term corporate earnings will be up, but fiscal prudence clearlyadvocates tax rate reductions to be linked with phasing out of exemptions. The budget estimatesa 33% growth in corporate tax revenues, which is based on a 13.6% nominal GDP growth rate,which we believe is optimistic. The revised estimates for FY2005 for corporate tax collectionis 6.2% lower than budgeted. Given the expected buoyancy in earnings this year, the ratereduction should not result in a large revenue loss, if any, but in the event of an economicdownturn, investors would have liked to see a firm resolve to phase out exemptions, whichotherwise might upset the fiscal calculations significantly.

n Cut in effective personal tax rate

On direct taxes, there has been a significant streamlining of the personal tax regime. Thebudget is much more explicit in its strategic intent by removing the exemptions, while changingthe tax slabs, effectively reducing the tax rate. By changing the focus of personal tax from taxrebate to income, the finance minister has given individuals the flexibility to plan their savings.The tax breaks under section 88 have been abolished, thus removing the incentives to savein public provident fund and post offices. This is an indirect attempt to reduce small savingsrate, which in our opinion is the step in the right direction, as these savings do not add tocapital formation, but add to fiscal imprudence of the state. There has been a broad exemptionof Rs100,000 from income, which in many cases would consist of pension and provident fundcontribution, largely going to capital formation. Interest paid on housing loan remained untouchedto the ceiling of Rs150,000, which would keep the housing construction sector booming.

n Service tax remained unchanged

Contrary to apprehensions, the budget did not increase service tax, which remains unchangedat 10%, although a few new services have been brought under the service tax net. Market wasexpecting a rise in the service tax. The budgeted estimates of a 23.6% growth in service taxin FY2006, however, reflects an increasing contribution of the service sector in the GDP. Theminister has proposed a 10% service tax on transactions in the housing sector, which wouldhave a negative effect on realty sales.

Higher borrowing will putupward pressure on interest

rate

Shor-term positive for corporateearnings

Effective tax rate down

Service tax unchanged but taxnet expanded



SECURITIES TRANSACTION TAX (STT) INCREASED MARGINALLY

n Cushioned by likely increase in derivative volumeThe minister has been courageous in declaring profit or losses from derivatives trades as non-speculative and thus to be treated as business income, which should improve the derivativetrading volume further. Further, FIIs will be allowed to use collateral for derivative trades, whichwill add to flexibility and increase derivative volume. Both the moves will improve volume inthe derivative trade and can act to cushion any decline, as the share turnover tax increasesmarginally.

INDIRECT TAX

n Custom duty collection leveraged to crude priceThe budget has reduced peak customs duty by 500 basis points to 15%. Customs duty oncrude has been halved from 10% to 5%. Inspite of that overall year-on-year decline in customduty, collection has been projected at 4.5%. We believe the custom duty target has high leverageto the firm crude prices. Although a 4.5% fall in customs duty seems realistic, in case of a fallin crude prices government may find the custom duty collection target challenging.

n Excise collection target is optimisticSimilarly there were some attempts to normalize excise duties, mainly in petro-products. Thefinance minister has informed in the parliament that all the states have agreed to implementthe state-level value added tax (VAT) by April 2005. While the minister remains committed tomake good any shortfall to states from value added tax, excise duty collection, have beenbudgeted at Rs1215.3bn, a 20.6% YoY rise in FY2006, which given the circumstance, looksoptimistic. We believe, shorter term, excise collections will be lower in VAT regime. Overallindirect tax proposals are in line with expectations, except in the automobiles, while the exciseduty remained unchanged, although the market clearly expected a spur in automobile demandfrom a fall in excise duty.

MARKET OUTLOOK: POSITIVE

Overall, this is a bold and politically matured budget that finds the fine balance between fiscaland political compulsions. Clearly investors will remain interested in implementation of variousproposals, including ushering in value added tax regime from April. Along with the budget, theminister has submitted a detailed summary of achievements against proposals in his last budget.We believe the market will rate the budget as a positive enabler and going forward liquidity,Q42005E results and relative valuation of India against other emerging markets will be the keyfactors for the market to remain buoyant.

n Joker in the packThe budget did not factor in any receipt from disinvestment as against Rs.40bn last year. Anypotential disinvestment could compensate revenue shortfall, which is likely, in our opinion.

n Short-to-medium term impact of the budget on the market.We expect the market to be enthused with the budget. The great sense of relief will be the keyto move the investors’ sentiment. Budget is positive on the infrastructure, engineering, capitalgoods, power distribution, sugar, tea and banking industry. Increase in disposable income willentice consumers to upgrade white-goods, which coupled with reduction in excise duty wouldbe positive for television and air-conditioner manufacturers. Budget is positive on cement andconstruction sector, as irrigation projects have been given a big push in the budget, while itis marginally positive for the oil & gas sector. Duties on manmade fibre has been reducedwhich is positive for the textiles sector.

Budget is neutral to negative on auto, where the expected cut in excise duty did not materialize.There is no specific proposal for the shipping sector as well as for the auto component sector.

n Our top picks

SBI, ICICI Bank, Thermax, L&T, Crompton Greaves, Hitachi, Williamson Tea, JayshreeTea, Balarampur Chini, BPCL, Reliance, Indian Rayon and Century Textiles.

Positive: Rico Auto, AmtekAuto, SBI, ICICI Bank, HDFC,

HDFC Bank, Thermax, L&T,Crompton Greaves, Hitachi,

Warren Tea, Williamson Tea,Jayshree Tea, Balarampur

Chini, Sesa Goa, BPCL,ONGC, Ranbaxy, Aventis,

Reliance, Indian Rayon, NTPC

Negative: Tata Motors, AshokLeyland, Bajaj Auto, TVS

Suzuki, Eicher Motors

Marginal hike in STT wasexpected

High leverage to crude price

VAT to be implemented by 1stApril 2005



CENTRAL GOVERNMENT FINANCES

Central Government Finances (Rs bn)FY 04 FY 05 BE FY 05 RE FY 06 BE

REVENUETax Revenue

Corporation Tax 629.86 884.36 830.00 1,105.73

Income Tax 402.69 509.29 509.29 662.39

Excise Duty 923.79 1,091.99 1,007.20 1,215.33

Import Duty 493.50 542.50 562.50 531.82

Service Tax 83.00 141.50 141.50 175.00

Other Taxes 16.39 7.69 9.72 9.98

Gross Tax Revenue 2,549.23 3,177.33 3,060.21 3,700.25

Less: States’ share 673.84 838.27 802.17 965.59

Net Tax Revenue 1,875.39 2,339.06 2,258.04 2,734.66

Net Non-tax Revenue 754.88 754.16 751.00 777.34

Total Revenue Receipts 2,630.27 3,093.22 3,009.04 3,512.00

Recovery of Loans 646.25 271.00 615.65 120.00

Privatisation 145.00 40.00 40.91 -

Non Debt Capital Receipts 791.25 311.00 656.56 120.00

Gross Receipts 3,421.52 3,404.22 3,665.60 3,632.00

EXPENDITURERevenue Expenditure

Interest 1,245.55 1,295.00 1,259.05 1,339.45

Defense 433.94 435.17 435.17 486.25

Subsidies 447.07 435.16 465.14 474.32

Admn & Sockal Services 721.31 771.17 804.60 1,005.28

Plan Expenditure 781.00 918.43 896.73 1,159.82

Total Revenue Expenditure 3,628.87 3,854.93 3,860.69 4,465.12

Capital Expenditure

Defense 169.06 334.83 334.83 343.75

Plan Expenditure 434.00 537.47 477.14 275.15

Loans 510.62 51.06 385.25 59.42

Total Capital Expenditure 1,113.68 923.36 1,197.22 678.32

Plan Expenditure on Rev & Cap a/c 1,215.07 1,455.90 1,373.87 1,434.97

Non-plan Expenditure on Rev & Cap a/c 3,527.48 3,322.39 3,684.04 3,708.47

Total Expenditure 4,742.55 4,778.29 5,057.91 5,143.44

Source:

DEFICITS FY 04 FY 05 BE FY 05 RE FY 06 BE

Fiscal Deficit 1,321.03 1,374.07 1,392.31 1,511.44

% of GDP 4.80 4.40 4.50 4.30

Revenue Deficit 998.60 761.71 851.65 953.12

% of GDP 3.63 2.50 2.70 2.70

Primary Deficit 75.48 79.07 133.26 171.99

% of GDP 0.27 0.30 0.40 0.50

Source: Government of India, Annual Budget FY2005-06

Excise duty expectations areoptimistic

Service tax to increase by 24%

FRBM imposes strict fiscal &revenue deficit targets

The government has no targetsfor divestment



ECONOMIC DATA CHARTS

Where the rupee comes from Where the rupee goes

Fiscal deficit (Rs bn) Market borrowing (Rs bn)

Tax to GDP ratio (%) GDP growth (%)

Corporation Tax18%

Excise Duty20%

Borrowings24%

Income Tax11%

Net Non-tax Revenue13%

Non Debt Capital Receipts

2%

Customs Duty9%

Service Tax3%

Other Taxes0%

Interest22%

Defence14%

Subsidies8%

Loans1%

Plan Expenditure23%

State share of tax & duties

16%

Admn & social Services

16%

400

800

1200

1600

FY 00 FY 01 FY 02 FY 03 FY 04 FY 05BE

FY 05RE

FY 06BE

0

2

4

6

8Fiscal Deficit % of GDP

703 729

877

976

858904

459

1103

0

300

600

900

1200

FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 BE FY 05 RE FY 06 BE

8.9

8.1

8.7

9.3

10.2

9.9

10.5

8.9

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

FY 00 FY 01 FY 02 FY 03 FY 04 FY 05BE

FY 05RE

FY 06BE

-8

-4

0

4

8

12

FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04

Agriculture & allied Industry

Services Total GDP at factor cost

Source: Government of India, Annual Budget FY2005-06, Economic Survey FY2004-05



BUDGET HIGHLIGHTS FY2005-06"The NCMP mandated the Government to maintain a growth rate of 7-8 percent ayear, to promote investment, to generate employment, to accelerate fiscalconsolidation, to ensure a higher fiscal devolution, and to focus on agriculture,manufacturing and infrastructure." FM during his speech presenting the budget FY05-06

Objectives of the taxation policy (similar to FY04-05)

q To keep tax rates moderate and stable

q To increase revenue from direct taxes and excise duty

q To expand the service tax net

Changes in indirect taxes

q Reduction in peak customs duty for non-agricultural products from 20%to 15%, in line with East Asian countries

q Reduction in customs duty rates on capital goods from 15% to 10% and5%

q Customs duty on machinery for leather and footwear reduced from 20%to 5%

q For textile machinery, customs duty reduced from 20% to 10%

q Machinery for pharmaceuticals and biotechnology equipments will nowattract customs duty at a reduced rate of 5%

q Customs duty on lead and coking coal with high ash content has beenreduced to 5%

q No reduction in customs duty on agricultural products except for cloveswhere it is reduced to 35%, on the contrary increased on cut-flowers from30% to 60%

q Reduction of excise duty on imitation jewellery from 16% to 8% andimposition of 2% excise duty on branded jewellery

q Tractors with engine capacity more than 1600 cc would attract exciseduty of 16%

q Surcharge on tea of Rs.1/kg, excise duty on edible oils of Rs.1/kg andvanaspati at Rs.1.25/kg has been abolished

q Excise duty on mechanized matches reduced from 16% to 12%

q Restoration of excise duty on steel at 16%

q Specific rate of 10% on cigarettes with further imposition of 10% ofsurcharge on ad valorem duties on tobacco products

q Customs duty on domestic LPG and subsidized kerosene is abolished

q Reduction of customs duty on motor spirit and diesel to 10%

q Service tax maintained at 10% and would be applicable only if the annualturnover is more than Rs. Four lakhs

q New services brought under the service tax net



Changes in direct taxes

q Tax slabs for income tax increased with minimum taxable income to beat Rs.One lakh. Surcharge to be applicable at the rate of 10% for incomeexceeding Rs.10 lakh

q Threshold limit for women and senior citizen are set at Rs.1.25 lakh andRs.1.50 lakh respectively

q Standard deduction is withdrawn; a consolidated limit of Rs.1 lakh forsavings for income tax rebate purpose

q Introduction of Fringe Benefit Tax at the rate of 30% to be paid by theemployer

q Corporate income tax get reduced to 30% coupled with a surcharge of10%. However, the depreciation rate is also reduced to 15% for generalplant and machinery except for initial depreciation rate to be at 20%

q Securities transaction tax has been increased by 0.5 basis points acrossall categories

q Withdrawal of cash on a single day of over Rs.10,000 in cash would nowattract a tax of 0.1%

Seven economic objectives of the budget carried over fromFY2004-05

q Maintaining a growth rate of 7-8% per year for a sustainable period,

q Providing universal access to quality basic education and health,

q Generating gainful employment in agriculture, manufacturing and servicesand promoting investment,

q Assuring 100 days' employment to the breadwinner in each family at theminimum wage,

q Focusing on agriculture and infrastructure,

q Accelerating fiscal consolidation and reform, and

q Ensuring higher and more efficient fiscal devolution.



Sector summarySector Budget Impact Top PicksAuto Components Neutral Bharat Forge, Rico Auto, Amtek Auto

Automobiles Neutral Mahindra & Mahindra, Punjab Tractors

Banking Positive SBI, ICICI Bank, HDFC Bank, HDFC

Capital goods Positive L&T, Thermax, Siemens, ABB

Cement & Construction Positive Birla Corp, Shree Cement, Grasim, Century, Unitech

Consumer Goods Positive Videocon International, MIRC, Hitachi

Fertilizer Positive Tata Chemical, Indo Gulf, Coramandal Fertilizer

Information Technology Neutral Infosys, Satyam, Hughes

Media Neutral Balaji Telefilms

Metal Neutral TISCO, Sesa Goa, Hindalco

Oil & Gas Positive ONGC, BPCL

Petrochemicals Neutral Reliance Industries

Pharmaceuticals Positive Ranbaxy, Aventis, Nicholas

Power Positive Tata Power, NTPC

Shipping Neutral -

Sugar Positive Balrampur Chini, EID Parry, Dhampur Sugar

Tea Positive Willamson Tea, Jayshree Tea

Telecom Positive VSNL

Textile Positive Reliance Industries, Indian Rayon

Source: Kotak Securities - Private Client Research

SECTOR SUMMARY



SECTOR IMPACT ANALYSIS



AUTOMOBILES

BUDGET HIGHLIGHTS

n Excise duty on passenger cars, two-wheelers & commercial vehicles remain unchanged.

n Tractors for farm applications continue to be fully exempt from excise duty. However, tractorsused for on road applications with semi-trailers having a engine capacity of 1800cc wouldattract excise duty of 16%

n Weighted deduction of 150% for R&D expenditure incurred by automobile companiescontinues till March 2007.

n Increase in excise duty on iron & steel from 12% to 16%.

n Excise duty for tyres reduced from 24% to 16% (applicable for the replacement segment)

n A cess of 50 paise per litre imposed on petrol & diesel imposed for raising additionalresources for National Highways Development Project.

IMPA C T ON THE SECTOR

n The increase in excise duty on steel from 12% to 16% might not impact OEMs negatively,as the increase in excise on inputs will be modvatable against the excise paid by companieson their final product. Also, the reduction in excise duty on tyres might not have anymaterial impact on OEMs since the duty cut is applicable to the replacement segment astyres in the OEM space continue to attract excise duty of 16% and there is no change here.

n The imposition of 16% excise duty on tractors for on road applications is also unlikely tobe detrimental for tractor players as core demand for tractors continues to be robust andduring FY05E, the industry is likely to grow by 26% to around 2.39 lakh nos.

n Overall, we believe that the budget is likely to have a neutral impact on OEMs. Alreadymost OEMs have started budgeting for further cost increases primarily coming in fromhigher steel prices and upgradation in emission norms which are likely to exert furtherpressure on EBIDTA margins in FY06E. We believe that the new emission norms wouldincrease manufacturing costs for OEMs from April 2005 onwards. (Trucks - 5-6%; Cars-- 6-7%; and two-wheelers 2-3%). Although a part of these costs are likely to be offset byprice increases, rising steel prices continue to remain a concern. However on the positiveside with volume growth still continuing to remain strong across product segments, webelieve that the increased cost pressures could still be handled comfortably by OEMs.

BUDGET IMPACT: NEUTRAL



TOP PICKS

n Our top pick within the auto sector remains Mahindra & Mahindra. We believe that despitecost pressures, M&M is likely to benefit significantly in the next 12 months considering thestrong volume momentum it has built in both the automotive & tractor business. The Unionbudget for FY06 being largely rural focused has further vindicated our view.

Impact on EPSCompany FY2005E FY2006E Remarks

Pre Budget Post Budget

M & M 37.27 43.46 43.46 Strong volume growth in both tractors & UVs to continue. Consolidated earningslook even more attractive. BUY

Tata Motors 30.29 34.65 34.65 Tougher macro environment in the domestic CV market going ahead.Fresh steel price hike is likely to excert pressure on EBIDTA margins. SELL

Maruti Udyog 30.27 34.93 36.24 Strong domestic growth in the passenger car market to continue. MUL to specificallybenefit from reduction in excise duty on car A/Cs to 16% from 24%. HOLD

Ashok Leyland (ALL) 2.02 2.32 2.32 Has recently recovered from labour problems which had affected volume growth.Going forward, the CV market will grow at a slower rate on a higher base at 1415% in FY06E. ALL to record moderate growth in volumes in FY06E and unlikelyto outperform Tata Motors on the volume growth front. ALL has achieved our targetprice of Rs.24. With no fresh drivers ahead, and industry dynamics getting tougher,we suggest a SELL.

Hero Honda 41.25 44.26 44.49 Motorcycle market to grow by 15% in FY06E. However, margin pressuresto continue. HOLD

Bajaj Auto 77.35 89.44 91.44 Volume growth in motorcycles for Bajaj Auto has come at the cost of EBIDTAmargins. Going ahead, margin pressure to continue. Valuations look fairly valued.SELL

TVS Motors 5.72 7.70 8.18 Has underperformed the motorcycle market in FY05E. Valuations look expensiverelative to both Hero Honda & Bajaj Auto. SELL.

Eicher Motors 20.77 26.36 27.57 CV market to grow at 14-15%. Stock has rallied recently on news reports of possiblesell-off of the tractor and engine business. We would be taking a fresh review onthe stock soon. HOLD.

Swaraj Mazda 27.03 33.03 33.79 CV market to grow at 14-15% in FY06E . Valuations for Swaraj Mazda look fair.HOLD

Punjab Tractors (PTL) 12.90 15.67 15.67 Tractor market in FY05E are expected to grow by 30% plus. PTL is expectedto gain positively. Valuations look attractive at 12x FY06E on a long term basisconsidering the improved industry dynamics. BUY.



AUTO COMPONENTS

BUDGET HIGHLIGHTS

n Excise duty on auto ancillaries at 16% remains unchanged.

n Peak customs duty reduced to 15% from 20% earlier

n Excise duty on steel increased from 12% to 16%

n Weighted deduction of 150% for R&D expenditure to continues till March 2007

n Reduction in import duty on lead to 5% from 15% earlier.


n The increase in excise duty on steel from 12% to 16% and reduction in peak customs to15% from 20% earlier is unlikely to have any significant impact on auto component majors.

n Overall, we believe that the budget is likely to have a neutral impact on auto ancillaries.Cost pressures are likely to rise significantly for auto component players after April 2005since steel prices are likely to go up further. Our discussions with several auto componentplayers indicate that they are likely to get partly compensated in steel costs while theuncovered cost increase would continue to be compensated via increased volume growthand cost cutting initiatives. The reduction in import duty on lead would specifically benefitExide Industries as it imports a significant portion of its lead requirements. While it is likelythat a part of the duty benefits would be passed on to OEMs, we expect the balance tobe retained by Exide.

n We continue to be positive on auto component players, which have a large export presenceas this would adequately provide a buffer for cost pressures since exports continue to begenerally more profitable.

TOP PICKS

n Our top pick within the auto component sector remains Bharat Forge, Rico Auto, LumaxIndustries, Gabriel, Dynamatic Technlogies, Exide Industries and Amtek Auto.




Bharat Forge 48.76 66.81 70.92 We continue to remain positive on Bharat Forge and expect the growth momentumto get reflected faster from now . The stock is likely to be re-rated following a newacquisition expected in the near term. BUY for long term.

Rico Auto 33.06 43.32 44.25 We believe that FY06E would be a takeoff year for Rico as the export ramp upis likely to see a sharper momentum. The company has already given a guidanceof yearly exports of over Rs. 1bn plus every year after FY07 onwards. At the currentvaluations of 13x FY06E consolidated earnings, BUY .

Lumax Industries 13.58 19.49 20.22 We believe that Lumax's topline and EBIDTA growth will largely be driven by sharpvolume upsurge expected in the domestic passenger car and exports. BUY

Gabriel India 21.30 26.30 27.27 We continue to remain positive on Gabriel and believe that a market leader likeGIL trading at just 3x cash FY06 earnings and a market cap to sales ratio of 0.26xlooks significantly undervalued. BUY

Dynamatic Tech 21.53 30.61 32.78 Dynamatic continues to enjoy a robust business model with each of its businessenjoying a strong growth drivers ahead. With an expected ROCE and RONW of25% and 41% respectively for FY06E, and a strong EPS growth averaging around30% between FY05E and FY07E makes us believe that the stock is headed forbig times ahead. However despite impeccable growth prospects, the stock hasrallied sharply in a short time. Hence we suggest a HOLD.

Exide Ind 12.56 15.23 16.00 We maintain a BUY on Exide Industries.

Amtek Auto 15.8 19.8 19.80 We believe that AAL's manufacturing scale and client profile now positions itstronglyfor capitalising on the auto component outsourcing opportunity both withinIndia andexport markets. Valuations also look attractive relative to market leaderBharat Forge. BUY.



BANKING

The banking sector has got a thrust in the budget by way of an indication thatthere would be a change in the Banking Regulation Act and the RBI Act to givebanks more flexibility. The spillover effect of the thrust on infrastructure,investments and agriculture credit would be highest in the banking sector. Weremain positive on the prospects of the banking sector in the long term.

BUDGET HIGHLIGHTS

n Tax benefit on carry forward losses in case of mergers.

n Focus on competition, consolidation and convergence in the banking sector.

n Amendment in the Banking Regulation Act, 1949, and also the Reserve Bank of India Act,1934, to facilitate banks and provide them more flexibility.

n Removal of the lower and upper bounds to the statutory liquidity ratio (SLR) and provisionof flexibility to RBI to prescribe prudential norms.

n Allowing banks to issue preference shares, since preference share capital can be treatedas regulatory capital under specified circumstances as per Basel norms.

n Removal of CRR limits to facilitate more flexible conduct of monetary policy.

n Enabling RBI to lend or borrow securities by way of repo, reverse repo or otherwise.

n Thrust on agriculture credit, to double it in the next three years. Disbursement of Rs.108,500cr in FY06.

n Micro-financing and self help groups (SHGs) to get a boost. Indicative target of creditlinking 585,000 SHGs in the period up to 31 March, 2007, has been set for NABARD,SIDBI, banks and other agencies. A total of 2.5 lakh SHGs to be covered during FY06.Micro financing to double from Rs.100 cr to Rs.200 cr.

n Tax exemption to continue on Non-Resident Account.

n Fiscal deficit to remain at 4.5% of GDP.

n Banks would be encouraged to lend 5 mn new borrowers in he rural sector & agriculture


n Assets are expected to grow at a faster pace as thrust is on investment in infrastructure,agriculture, public health and education.

n Banks would be able to raise preferential capital to augment capital adequacy withoutmuch dilution of equity.

n Banks would be able to become more flexible in operations and be competitive, particularlythe PSU banks.

n Fiscal deficit target is aggressively budgeted at 4.5% and appears to have been met withmarginal difficulty. However, a general rise in interest rate cannot be ruled out.

n Insurance penetration would be an area of thrust and banks are expected to play a big rolein the same.

n Directed lending towards the uneconomical projects could create delinquencies.

n Operational cost to increase marginally due to the newly imposed cash transaction taxover withdrawal of more than Rs.10,000.

BUDGET IMPACT: POSITIVE





State Bank of India 79.0 94.3 98.6 Benefit from lower corporate tax, asset growth and change in RBI Act, 1934

ICICI Bank 25.0 32.4 33.9 Benefit from lower corporate tax, asset growth, Insurance penetration and changein Banking Regulation Act, 1949

HDFC Bank 21.9 27.1 28.3 Benefit from lower corporate tax, asset growth and change in Banking Act

HDFC 40.1 49.1 51.3 Benefit from lower corporate tax and insurance penetration. However,marginally negative due to extension of service tax to builders havingmore than 12 dwelling units projects and ceiling of Rs.100,000 on tax rebate

UTI Bank 13.4 18.2 19.0 Benefit from lower corporate tax, asset growth and change in Banking Act

Union Bank 14.6 25.2 26.4 Benefit from lower corporate tax, asset growth and change in Banking Act

LIC Housing Finance 20.8 26.0 27.2 Benefit from lower corporate tax. However, marginally negative due toextension of service tax to builders having more than 12 dwelling unitsprojects and ceiling of Rs.100,000 on tax rebate

TOP PICKS

n Our top pick remains State Bank of India, ICICI Bank, HDFC Bank, UTI Bank, IDBI, UnionBank of India, Syndicate Bank and HDFC for their robust financials, growing assets,manageable investment portfolio and better risk management processes.



CAPITAL GOODS

BUDGET HIGHLIGHTS

n To cover 1.25 lakh villages in five years; focus to be on deficient States; creation of a ruralelectricity distribution backbone envisaged, with a 33/11 KV substation in each block andat least one distribution transformer in each village; Rs.1,100 crore provided in 2005-06.

n To promote investment, customs duties on selected capital goods and parts thereof to bereduced to below 15%, to 10% in some cases and to 5% in some others.

n Duty on textile machinery and refrigerated vans to be reduced from 20% to 10%.

n Customs duties on primary metals to be reduced from 15% to 10%. Excise duty on ironand steel to be increased from 12% to 16%.

n Hike in investment for Accelerated Irrigation Benefit Programme in 2005-06 to Rs 48 bnfrom Rs 28 bn in 2004-05.

n Increase in defence expenditure to Rs 830 bn

n Removal of 10% increase in capacity for availing benefit of initial depreciation


n Rural electrification is expected to open a major opportunity for distribution transformermanufacturing companies. Reduction in import duties on selected capital goods may nothave a significant impact as India is cost-competitive and continues to be a exporter ofTransformers, diesel engines and boilers etc. Reduction in customs duty on aluminiumand copper should benefit machinery manufacturing companies and to some extent rectifythe inverted duty structure.

TOP PICKS

n Our top picks are Thermax, L&T, BEL and Crompton Greaves




BHEL 40.0 51.0 53.0 BUY - Reduction in custom duties on metals and components

L&T 52.0 61.0 63.4 BUY - Thrust on roads and irrigation projects

Thermax 31.0 45.0 46.4 BUY - Financial package for sugar sector and reduction in duty on metal inputs

Siemens 60.0 83.0 83.0 BUY - Rural electrification to create demand for T&D equipments

ABB 46.0 57.5 57.5 BUY - Rural electrification to create demand for T&D equipments

Bharat Electronics 40.0 51.0 53.0 BUY - Greater defence spending and duty reduction on inputs

Crompton Greaves 21.0 27.0 27.2 BUY - Rural electrification to create demand for T&D equipments

Cummins 6.9 8.1 8.1 Hold - Duty reduction on inputs



CONSUMER GOODS

BUDGET HIGHLIGHTS

n An additional excise duty has been imposed on cigarettes at specific rates ranging fromRs 15 to Rs 180 per thousand cigarettes. The increase is unlikely to affect cigarettecompanies, as they will be able to pass on the hike to consumers, in our opinion.

n The reduction in the customs duty on CPTs is expected to lower input costs, which islikely to have a marginally positive impact on CTVs (particularly the flat and large-sizedCTV segments). Players are expected to pass on a part of the cost benefits to consumers.

n AC players are expected to pass on the reduction in excise benefits to consumers. Thiswill result in higher demand, as ACs have displayed significant price elasticity in the past.

n The reduction in the customs duty on consumer durables will have a negligible impacton the domestic industry.


n Budget proposals are marginally positive for the sector. Demand for consumer durablesis price elastic and would increase.

TOP PICKS

n Our top picks are Videocon International, Mirc Electronics, Hitachi, ITC, HLL




Asian Paints 17.7 19.9 20.7 Hold: Positive outlook in paints industry

Colgate 7.1 8.2 8.6 Buy

Glaxo Consumer 17.2 21.1 21.9 Hold: Vulnerable to agri - production, malt and hence monsoon

Godrej Consumer Products 14.7 16.8 17.7 Hold: Concentrated product portfolio, soap and hair color

HLL 5.8 6.1 6.3 Buy: value unlocking from corporate initiatives

ITC 73.8 83.8 88.3 Buy: We believe hike in excise duty could be fully passed on

Tata Tea 37.8 38.9 40.8 Buy: Budget is Positive for tea plantation and tea industry



CEMENT & CONSTRUCTION

BUDGET HIGHLIGHTS

n No changes in the excise duty and import duty structure for the cement industry exceptthat excise duty on clinker increased from Rs. 250 per ton to Rs.350 per ton.

SERVICE TAX

n Service tax of 10% is being imposed on construction of residential complexes having moretan twelve residential houses or apartments together with common area and otherappurtenances.

n This move of the finance minister is negative for the construction industry particularly tohousing construction companies, but we believe that that this additional burden on thesecompanies will be passed on to the end consumer.


n The impact of this budget is Neutral to Positive for the cement industry.

n We had anticipated a rise in excise duty of Rs.50 per ton of cement and clinker. As per ourexpectation there has been an increase in the excise duty on clinker by Rs.100 per ton.

n The thrust of this budget in creating agricultural infrastructure such as dams, roads, irrigationprojects, water management, coupled with thrust on education and health infrastructurealong with emphasis on capital formation augers well for the cement and constructionindustry.

n We expect the cement industry to grow by 6.5% to 7% during FY 06.

TOP PICKS

n Birla Corporation, ACC, Gujarat Ambuja Cements, Grasim,Century Textiles, Shree CementUnitech, JP Associates.




ACC 17.5 26.0 27.0 Thrust on infrastructure creation - Positive

Century textiles 14.9 23.1 24.0 Thrust on infrastructure creation - Positive

Gujarat Ambuja Cements* 18.8 27.1 28.2 Thrust on infrastructure creation - Positive

Birla Corp 10.9 21.8 22.7 Thrust on infrastructure creation - Positive

Shree Cement 21.3 27.5 28.6 Thrust on infrastructure creation - Positive

Grasim 102 116 121.5 Thrust on infrastructure creation - Positive

Nagarjuna Construction 31 41 42.6 Book profits

Unitech 28.5 36.0 37.8 Thrust on infrastructure creation - Positive

n As projected by us the government has created a SPV for infrastructure development inIndia.

n The government proposes to create a special purpose vehicle (SPV) to fund largeinfrastructure projects. The foreign exchange resources could be drawn for financingnecessary imports. Projects in the roads, ports airports and tourism sector are likely to bethe ones that will be funded through the SPV.The government proposes to fix the borrowinglimit of Rs.10,000 crore for the SPV for 2005-06.

INFRASTRUCTURE -SPV



FERTILISER

BUDGET HIGHLIGHTS

n The budget has increased the subsidy on fertiliser to Rs.16,254cr. However, the governmentis expected to look at the restructuring of the subsidy regime. The new pricing regimewould start from 1 April, 2006, which is expected to tackle the issue of replacing naphthaand fuel oil with natural gas.


n Overall impact on the sector is positive due to higher allocation towards agriculture andfarm credit. We believe that to increase yield, fertiliser consumption would increase. Increasein irrigation facilities would further augment the consumption of fertilisers. Rationalisationof subsidies, however, would put non-natural gas plants on a lower playing field.

TOP PICKS

n Our top picks within the sector remain Indo Gulf Fertilisers, Tata Chemicals and CoromandelFertilisers. Chambal Fertilisers is a good dividend yield stock.

IMPACT ON EPS

n No significant impact on earnings except for the reduction in corporate tax structure.




Tata Chemicals 12.7 13.6 14.2 Would benefit from the overall growth of agriculture and higher demand as wellas subsidy allocation to fertlisers

Indo Gulf Fertilisers 13.1 16.7 17.5 Would benefit from the overall growth of agriculture and higher demand as wellas subsidy allocation to fertlisers

RCF 2.1 3.2 3.3 Would benefit from the overall growth of agriculture and higher demand aswell as subsidy allocation to fertlisers



INFORMATION TECHNOLOGY

BUDGET HIGHLIGHTS

n No mention of abolition of tax break under Section 10 A/B

n Reduction in marginal tax rate from 36.6% to 33.7%

n Introduction of Fringe Benefits Tax at 30% vide section 115W of the Income Tax act 1961


n With status quo having been maintained on tax-breaks under Section 10 A/B, the sectoris largely unaffected by the budget. We believe that the focus will now once again shift tothe fundamentals of the industry, which remain pretty strong barring the potential rupeeappreciation

n Reduction in marginal tax rate to benefit high tax paying companies

n Fringe Benefits Tax, in its present form, could impact the profitability of companies adversely

TOP PICKS

n Our top picks are Infosys, Satyam and Hughes Software




Infosys 69.2 90.0 90.0 Proxy for the sector. Cushions for margin protection

Satyam 22.7 28.1 28.1 Valuation discount to Infosys could narrow

Hughes Software 31.3 40.1 40.1 Potential upside from Flextronics, products business

Infotech Enterprises 18.1 27.0 27.0 Attractive valuations. Reduced tax rate to benefit most

Aztec Software 4.0 6.9 6.9 Expected high growth. Operating in niche areas

Zensar 10.1 13.7 13.7 Levers for margin expansion exist.



MEDIA

BUDGET HIGHLIGHTS

n Marginal rate of tax reduced from 36.6% to 33.7%

n Service tax on charges recovered by broadcasting companies from multi-system operators(MSOs) and provision of Direct To Home (DTH) signals to customers

n Service tax on income accrued on recording of sound on any media

n No change in FDI, FII investment limits


n Reduction in marginal rate of tax will be positive for companies as almost all of the revenuescome from domestic operations

n We expect that service tax will be a pass through for broadcasting companies and MSOswill now start recovering the tax from end users.

n Service tax on sound recording companies will impact companies operating on third partyrecording basis.

n Status quo on FII / FDI investment limits

TOP PICKS

n Our top pick is Balaji Telefilms




Balaji Telefilms 6.2 7.8 8.2 Strong cash reserves. Potential upsides from Star association



METALS

BUDGET HIGHLIGHTS

n Excise duty on iron and steel increased from 12% to 16%. Import duty on steel maintainedat 5%.

n Import duty on aluminum, copper, zinc, alloy steel reduced by 5% to 10%.

n Import duty on lead reduced to 5%, on articles of lead from% 20% to 10% and batteryseparators from 20% TO 5%.

n Import duty on inputs for manufacture of steel such as refractories and graphite electrodesreduced from 15% to 10%.


n The impact of this budget is neutral for the Metals sector.

n We expect the increase in excise duty on iron and steel to be passed on to the end consumerby all the steel companies..

n The 5% reduction in import duty on copper will marginally impact Hindalco's and sterliteprofits.

TOP PICKS

n Our top picks in the steel industry are Tata Iron and Steel (TISCO), Steel Authority of India(SAIL), Jindal Steel and Power, Hindalco, Sterlite and Sesa Goa.




TISCO 63.8 71 73.5 Buy

SAIL 12.9 15.5 16.1 BUY

Jindal Steel and Power 160 175 182 Buy

Sesa Goa (ex bonus) 79 130 135 Buy

Hindalco 106 115 122 Buy



OIL & GAS

Budget impact: Positive for integrated refineries, marginally negative forupstream & stand alone refineries.

BUDGET HIGHLIGHTS

n Customs duty on crude petroleum reduced from 10% to 5%.

n Customs duty on LPG and SKO reduced to nil from the existing levels of 8% and 12%respectively.

n Customs duty on other petroleum products such as ATF and other industrial fuels hasbeen reduced from 20% to 10%.

n Customs duty on motor spirit (MS) and diesel (HSD) reduced from 15% to 10%.

n Excise duties on motor spirit (MS) and diesel (HSD) to be fixed as a combination of advalorem and specific duties.

n In case of MS the ad valorem portion has been brought down to 8% from 23% but aspecific duty of Rs 5/ litre was introduced.

n In case of HSD a specific duty of Rs 1.25/litre was introduced, while the ad valorem portionwas retained at 8%.

n For both MS and HSD an additional cess of Rs 0.5/litre were introduced to finance theexpansion of national highways.

n Excise duties on LPG and SKO were abolished. Previously, LPG and SKO used to attractan excise duty of 12% and 8% respectively.

n The budget did not address the subsidy or the pricing issues.

n Service tax of 10% is being imposed of transport of goods through pipeline and conduit.


n ONGC's realization on crude will be negatively impacted. We had already factored in a 5%import duty on crude in our earnings model for ONGC. ONGC will gain due to 22% yoylower subsidy burden.

n Due to cut in the customs duty on the petroleum products to a greater extent than the crudeprices, will lead to a marginal decline in the refining margin. Post budget, we estimate atariff protection of 3% (as compared with 3.8% previously).

n Gross refining margins can be negatively impacted by $0.2 - $0.25/bbl. Stand alone refinerieslike Chennai Petro, Kochi Refineries and Bongaigaon Refineries will be negatively impacteddue to the change in duty structure. However, we believe, that the strong regional refiningmargin will offset those losses.

n Due to abolishment of both customs duty and excise duty on LPG and SKO, the subsidylosses will be contained. We have estimated a 20% reduction in subsidy losses on LPGand that of 25% on SKO. Overall, we expect subsidy loss to decline by 22% to Rs.12.5bn.

n Marketing margin on MS and HSD is expected to witness substantial decline over the Jan-Feb 2005 margins due to hike in specific duties. The marketing margin of Rs 3/litre seenduring Jan-Feb 2005 was not sustainable in our opinion.

n Overall, we expect a marketing margin (blended) of Rs 1.3/litre during FY05E and Rs.1.5/litre during FY06E.

n Service tax of 10% may impact GAIL (55% of EBIDTA come from pipeline transmission)and IOC (20% of EBIDTA comes from pipeline charges) negatively.

n In the absence of specific road map for elimination of subsidy or pricing of petroleumproducts, this sector will continue to be plagued by uncertainties caused by internationalprice fluctuations.






ONGC 90.0 92.0 98.0 ONGC is our top pick due to firm crude prices, lower share of subsidy andimminent partial de-control of gas prices.

BPCL 48.0 57.0 61.0 BPCL is among our top picks due to containment of subsidy loss and highermarketing throughput.

IOC 52.0 53.5 56.0 Positive impact muted due to higher refining capacity and impositionof service tax on pipeline transportation.

HPCL 38.0 45.0 48.0 Positive impact due to the budget. The company remains most vulnerableamong OMCs to crude price movements.

Chennai Petroleum 36.0 39.2 36.6 Negatively impacted due to duty cut on petro products. Strong regionalrefining margin can offset the losses.

Bongaigaon Refinery 23.6 23.5 23.0 Least impacted owing to duty cut due to relatively smaller capacity andhigher equity base.

TOP PICKS

n Our top picks are BPCL and ONGC.



PETROCHEMICALS

BUDGET HIGHLIGHTS

n Customs duty on polymers of ethylene and propylene (PE and PP) has been reduced from15% to 10%.

n Customs duty on ethylene, propylene, benzene, toluene, and styrene has been reducedfrom 10% to 5%.

n Customs duty on fibre intermediaries like PTA and MEG has been cut from 20% to 15%.

n Customs duty on polyester (PSF, POY) has also been cut to 15% from 20%.

n Excise duty on PFY, including polyester textured yarns has been reduced from 24% to16%.


n The cracker margin is expected to decline due to decline in tariff protection.

n Integrated players to benefit from the excise duty cut in PFY.

TOP PICKS

n Reliance Industries continues to be our top pick. The strong regional cracking margin canoffset for the loss due to tariff protection. Reliance to gain due to excise duty cut on PFY.




Reliance Industries 51.0 57.0 57.0 Reliance is our top pick from the sector due to strong regional margins, excisecut on PFY and expected upside from gas/ telecom business.



PHARMACEUTICALS

BUDGET HIGHLIGHTS

n The government has increased its focus on healthcare by increasing the allocation fromRs 84.2 billion to Rs 102.8 billion under the National Rural Health Mission.

n The last date to avail of 150 per cent tax deductions for research companies as well as 100per cent deduction of profits of companies carrying on scientific research and developmentand approved by the Department of Scientific and Industrial Research has been extendedto March 31, 2007.

n The government has announced reduction in imports duty on a list of nine capital goods.

n The government has announced formation of a corpus fund of Rs5 billion called the SMEGrowth Fund through the Small Industries Development Bank of India (SIDBI) to provideequity support for small and medium units in pharmaceuticals and biotech firms.


n Budget proposals are marginally positive for the sector. Industry was fearing withdrawalof tax break on R&D. Also the thrust on R&D in biotech firms will be long-term positive onthe sector.

TOP PICKS

n Our top picks are Ranbaxy, Aventis Pharma, Nicholas Piramal




Aventis Pharma 59.8 64.7 68.1 Buy: Best bet in MNC pharma

Biocon 19.5 24.8 26.1 Reduce: Beneficiary from the budget, business outlook negative

Cadila 25.3 32.3 34.4 Hold: Valuation challenging

Dr Reddy 21.8 24.4 25.7 Reduce: Poor earnings visibility

Glaxo 30.8 33.3 35.1 Hold: Steep valuation

Nicholas Piramal 8.8 11.3 11.9 Buy: Positive view on manufacturing services opportunity

Novartis 23.6 24.1 25.3 Hold: Valuation challenging

Ranbaxy 40.0 45.5 47.9 Buy: R&D tax benefit



POWER

BUDGET HIGHLIGHTS

n To cover 1.25 lakh villages in five years; focus to be on deficient States; creation of a ruralelectricity distribution backbone envisaged, with a 33/11 KV substation in each block andat least one distribution transformer in each village; Rs.1,100 crore provided in 2005-06.

n To promote investment, customs duties on selected capital goods and parts thereof to bereduced to below 15%, to 10% in some cases and to 5% in some others.

n Reduction in customs duties on non-ferrous metals (copper and aluminium) from 15% to10%.


n Reduction in customs duties on capital goods should benefit companies setting up powerT&D infrastructure like Reliance Energy and Tata Power.

TOP PICKS

n Our top picks are Tata Power and NTPC




Tata Power 24.5 24.7 25.7 BUY- Reduction in custom duties on metals and components

Reliance Energy 23.6 26.2 27.3 Hold - Reduction in custom duties on metals and components

NTPC 5.5 5.9 6.1 BUY



SHIPPING

BUDGET HIGHLIGHTS

n No changes announced in the budget.


n As no changes have been announced in the budget there is no change in our rating.

TOP PICKS

n We continue to be negative on the shipping sector in the long run.

DREDGING

Income tax

n Dredging companies to qualify under the tonnage tax regime from 1st April 2006. As perthe previous budget dredging companies were not qualified as shipping companies andthat is why they were not given the benefit under tonnage tax regime.

n The current budget has changed the qualification and now the dredgers will also qualifyas shipping companies for the purpose of taxation under the tonnage tax regime. This levywill be in lieu of income tax at the option of the tax payer.

Impact

n The move to put dredgers under the tonnage tax regime is a positive move and will bebeneficial to Dredging Corporation of India as it will save a substantial amount of moneywhich it now pays as corporate tax.

Service tax

n Service tax of 10% is being imposed on dredging services of rivers, ports, harbours,backwaters and estuaries.

n This move to levy service tax on dredging services is negative for Dredging Corporationof India.




Shipping Corp 35.4 27.5 27.5 -

Great Eastern Shipping 36.8 29.1 29.1 -

Essar Shipping 7.8 5.5 5.5 -



SUGAR

BUDGET HIGHLIGHTS

n Moratorium of two years in terms of restructuring of debt for both principal and interest formills those were operational in FY2002-03

n Extension of two percentage point reduction in interest rate towards all outstanding loansas on 31 October, 2004, in line with the reduction in interest rate on Sugar DevelopmentFund.

n Increase on excise duty on molasses from Rs. 500 to Rs.1,000 per ton


n The budgetary impact on the sugar mills are extremely positive from the interest cost pointof view. As the nature of the industry is to carry large amount of debt, sometimes as highas D/E of 3x, such relief has come at a time when sugar prices are ruling firm. The industrywould not only gain from the reduction of corporate tax, but also from the reduction ofinterest cost besides enjoying higher sugar & molasses prices.

TOP PICKS

n Our top pick remains Balrampur Chini Mills, EID Parry and Dhampur Sugar.




Balrampur Chini 49.5 60.6 65.8 Benefit from low interest cost and low corporate tax

EID Parry 57.2 45.4 49.1 Benefit from low interest cost and low corporate tax

Dhampur Sugar (standalone) 14.7 16.5 18.2 Benefit from low interest cost and low corporate tax



TEA

BUDGET HIGHLIGHTS

n The Government will examine ways and means of introducing a program for massivereplantation and rejuvenation of tea.

n Surcharge of Rs 1/kg on tea has been abolished.


n The impact is positive on the sector. The realization of the tea plantation companies canmove up due to abolishment of the surcharge.

TOP PICKS

n Our top picks are Williamson Tea and Jayshree Tea.




Williamson tea 12.0 14.0 15.0 Positive impact due to budget.

Jayshree tea 10.0 12.0 12.8 Positive impact due to budget.



TELECOM

BUDGET HIGHLIGHTS

n Customs duty exemption to specified telecom network equipment and parts thereof extendedwithout any time limit

n The customs duty on optical fibres / bundles and optical fibre cables of heading 9001reduced from 20% to 10%


n This will help in reduction of cost of all service providers

n Reduction of customs duties on optical fibres and optical fibre cables will put local cablecompanies at a disadvantage, while proving beneficial for service providers

TOP PICKS

n VSNL




Bharti Televentures 6.3 10.3 10.4 Fall in ARPU may not be compensated by volume growth

VSNL 12.5 8.1 8.4 Opportunity new businesses



TEXTILES

BUDGET HIGHLIGHTS

Custom duty

n Import duty on textile machinery raw materials reduced from 20% to 10%.

n Import duty on polyester and nylon chips, textile fibers, yarns and intermediates, fabricsand garments reduced from 20% to 15%.

Capital subsidy

n A 10% capital subsidy scheme for the textile processing sector in addition to normal benefitsavailable under Textile Upgradation Fund (TUF) has been introduced.

Impact

n The capital subsidy will have a positive impact on the entire textiles industry. The capitalsubsidy will be available to companies those are undertaking expansion of their capacities.

Excise duty

n The cenvat chain, as projected by us last year, which was broken has been maintained fornatural fibers.

n The CENVAT exemption route for natural fibers will continue to remain in force as per thelast budget

n The excise duty on polyester filament yarn including polyester textured yarns reducedfrom 24% to 16%.

n Optional duty prescribed for processed filament yarns (including polyester filament yarn)manufactured from yarn procured from outside by independent processors. Such yarnwould attract Nil excise duty without availment of CENVAT credit or pay 8% excise dutywith credit for CENVAT.

n New System Introduced For Excise Calculations. New system of excise duty calculationintroduced for processed filament yarns and texturizers.

n Under this new system, the players will have to choose between two routes of excisetaxation:

l Exemption route or

l Cenvat route

n When the player chooses the exemption route, no excise duty will have to be paid at anystage or

n When the player chooses the cenvat route then the player can take credit for all the exciseduty paid at the earlier stages.

n For the purpose of optional excise duty the rates of excise are:

l 8% with credit for CENVAT paid.


n The budget is Positive for man made fibers industry. As the benefits under natural fiberhave been maintained, we continued to remain positive on cotton textiles.

TOP PICKS

n Reliance Industries, Indian Rayon.




Reliance Industries 51.0 57.0 57.0 Reliance is our top pick from the sector due to strong regional margins, excisecut on PFY and expected upside from gas/ telecom business.

Indian Rayon 19.3 26.3 27.4 -



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Research TeamName Sector Tel No E-mail idAmitabh Chakraborty, CFA, FRM Head of Research +91 22 5634 1509 [email protected]

Avinash Gorakshakar Auto, Auto Ancillary, Metal +91 22 5634 1522 [email protected] Shah IT, Media, Telecom, Mid Cap +91 22 5634 1376 [email protected] Prakash Sinha Agro-Industry, Banking, FMCG +91 22 5634 1207 [email protected] Karani Cement, Construction, Shipping, Textiles, Mid Cap +91 22 5634 1209 [email protected] B Bakshi Gupta Oil & Gas, Petrochemical, Power, Mid Cap +91 22 5634 1535 [email protected] Zarbade Capital Goods, Engineering +91 22 5634 1258 [email protected] Gandhi Research associate +91 22 5634 1382 [email protected]

Shrikant Chouhan Technical analyst +91 22 5634 1439 [email protected]

Ajoy Pathak Commodities +91 22 5634 1506 [email protected]

Sunil Singh Editor +91 22 5634 1223 [email protected]. Kathirvelu Production +91 22 5634 1567 [email protected]

Documents

Union Budget Analysis 2005-06February 28, 2005 Kotak Securities - Private Client Research Union Budget 2005-06 Please see the disclaimer on the last page For Private Circulation 2