Union Budget 2013-2014

Institutional Research Team Email: vihari.p@tatacapital.com Tel: +91 22 6745 9157

Table of Content
Economy impact

Key takeaways Tax Summary of Budget Summary of Receipts

3 4 5 6

Sector impact
Automobiles Banking & Financial Services Capital goods Cement FMCG/ Media Infrastructure IT Services Oil & Gas Pharmaceuticals Power Telecom
2

9 10 11 12 13 14 15 16 17 18 19

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Economy - Key takeaways

A missed opportunity overall; market is disappointed with the lack of imaginative measures. Fiscal deficit target set at 4.8% (down from 5.2%) of GDP for FY14, as per expectations, is likely to be missed in a pre-election year we expect actual deficit to be ~5.2%. Gross borrowing at Rs6.29trn includes Rs950bn (FY14) and Rs500bn (part FY15) refinancing requirement for maturing securities continued pressure on liquidity. There is little relief for individual tax payers no changes in slabs, no increase in exemption limits Negative for discretionary consumption. New inflation-indexed securities to be introduced to help divert household savings away from gold. Amnesty scheme for errant service tax payers (on lines of the highly successful voluntary disclosure income scheme) success highly uncertain, service tax collection estimates may disappoint greatly. Disinvestment target g set at an ambitious Rs558bn ( (up p from Rs240bn mop-up p p in FY13), ), sell-offs in SUUTI holdings, HZL and Balco are likely to form bulk of the amount. Proceeds from telecom auctions, excess spectrum charges are kept at a reasonable Rs250bn. Slippages are likely in subsidy allocation Allocation under food likely to be the chief stress area. Plan expenditure targeted to grow @29.4% to Rs5.5trn. Infrastructure remains a focal point IIFCL-ADB to provide credit enhancement, tax-free bonds issuance of Rs500bn on need-basis, independent authority to govern road sector. GST, DTC roadmaps continue to be vague.

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Tax
Direct Tax

There are no changes in overall slab structure. There is a tax credit of Rs2,000 for individuals earning less than Rs0.5mn p.a. Negative for discretionary consumption in a high inflation, low growth environment. Additional deduction of Rs0.1mn Rs0 1mn for interest paid on housing loans less than Rs2.5mn. Rs2 5mn Threshold for RGESS scheme raised to Rs1.2mn Low traction expected. Super-rich tax 10% surcharge on income above Rs10mn, aimed to part offset aforementioned tax credit. Hike in surcharge g on corporation p tax domestic companies p earning g above Rs100mn p profit to p pay y 10% ( (from 5%), ), foreign companies to pay 5% (from 2% prior). Surcharge on dividend distribution tax increased to 10% (from 5%). All additional surcharges are applicable for only FY14. Investment allowance @15% for investments in Plant and Machinery over Rs1bn between FY14-15 FY14 15 small boost to investment demand. STT reduced, CTT introduced for non-agricultural commodities. Modified GAAR to come into force from April 1, 2016.

Indirect Taxes There are no major changes in excise/custom/service tax structure overall. Amnesty scheme for errant service tax payers (on lines of the highly successful voluntary disclosure income scheme) success highly uncertain. Higher custom duties on imported vehicles, yachts.
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Summary of Budget
(Rs bn) 1 Revenue Receipts 2 3 4 5 6 7 8 9 Tax Revenue (net to Centre) Non-tax Revenue Recovery of Loans PSU disinvestment Borrowings and other Liabilities of which: Cash drawdown FY12 7,514 6,298 1,217 5,529 189 181 5,160 (160) 13,044 8,920 8,120 2,732 799 4,124 3,337 786 13,044 11,458 1,586 3,943 (4.4) 5,160 (5.7) FY13BE 9,357 7,711 1,646 5,552 117 300 5,136 14,909 9,699 8,656 3,198 1,043 5,210 4,205 1,005 14,909 12,861 2,048 3,504 (3.4) 5,136 (5.1) FY13RE 8,718 7,421 1,297 5,590 141 240 5,209 (52) 14,308 10,016 9,197 3,167 819 4,292 3,434 858 14,308 12,631 1,678 3,912 (3.9) 5,209 (5.2) FY14BE 10,563 8,841 1,723 6,090 107 558 5,425 16,653 11,100 9,929 3,707 1,171 5,553 4,433 1,121 16,653 14,362 2,291 3,798 (3.3) 5,425 (4.8) Growth (%) 21.2 19.1 32.8 8.9 -24.3 132.6 4.1 16.4 10.8 8.0 17.1 42.9 29.4 29.1 30.6 16.4 13.7 36.6 -2.9 4.1 -

Capital Receipts

Total Receipts 11 12 13 15 16 18 19 On Revenue Account of which: Interest Payments On Capital Account On Revenue Account On Capital Account Revenue Expenditure Capital Expenditure as percentage of GDP

10 Non-plan Expenditure

14 Plan Expenditure

17 Total Expenditure

20 Revenue Deficit 21 Fiscal Deficit as percentage of GDP

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Summary of Receipts
1 (Rs bn) Net Tax Revenue Gross Tax Revenue Corporation Tax Income Tax Other taxes and duties Customs Union Excise duties Service Tax Taxes of Union territories Less - National Calamity Contingency Fund/National Disaster Response Fund Less - State State's s share Non-tax Revenue Interest Receipts Dividends and Profits External Grants Other non-tax revenue Receipts of Union Territories Total Revenue Receipts Non-debt Receipts Recoveries of Loans Misc Capital Receipts Debt Receipts Market Loans Short term borrowing E t External lA Assistance i t ( (net) t) Securities issued against Small Savings State Provident Funds Other Receipts Total Capital Receipts Drawdown of cash balance Total Receipts Financing of Fiscal Deficit Receipts under MSS (Net)
6

FY12 6,298 8,892 3,228 1,703 8 1,493 1,456 975 28 40 2,554 2 554 1,217 203 506 30 468 10 7 514 7,514 189 181 4,362 1,269 124 (103) 108 (440) 5,689 (160) 13,044 5,160

FY13BE 7,711 10,776 3,732 1,958 12 1,867 1,944 1,240 23 46 3,019 3 019 1,646 192 502 29 912 11 9 357 9,357 117 300 4,790 90 101 12 120 22 5,552 14,909 5,136 200

FY13RE 7,421 10,380 3,589 2,061 9 1,649 1,720 1,327 27 44 2,915 2 915 1,297 166 554 28 538 11 8 718 8,718 141 240 4,674 457 22 86 100 (79) 5,641 (52) 14,308 5,209

FY14BE 8,841 12,359 4,195 2,476 10 1,873 1,976 1,801 28 48 3,470 3 470 1,723 178 739 15 780 12 10 563 10,563 107 558 4,840 198 106 58 100 123 6,090 16,653 5,425 200

Growth (%) 19.1 19.1 16.9 20.2 9.7 13.6 14.9 35.8 3.8 9.7 19.0 19 0 32.8 7.0 33.2 (47.3) 45.0 3.8 21 2 21.2 (24.3) 132.6 3.6 (56.6) 377 0 377.0 (32.8) 0.0 (255.8) 7.9 16.4 4.1

3 A

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Summary of expenditure
(Rs bn) Total Non- Plan Expenditure Revenue Expenditure C i lE Capital Expenditure di Total Plan Expenditure Revenue Expenditure Capital Expenditure Budgetary Support for Central Plan Total Central Assistance FY12 8,920 8,120 799 4,124 3,337 786 3,084 1 040 1,040 FY13BE 9,699 8,656 1 043 1,043 5,210 4,205 1,005 3,910 1 300 1,300 FY13RE 10,016 9,197 819 4,292 3,434 858 3,172 1 120 1,120 FY14BE 11,100 9,929 1 171 1,171 5,553 4,433 1,121 4,191 1 363 1,363 Growth (%) 10.8 8.0 42 9 42.9 29.4 29.1 30.6 32.1 21 7 21.7

Plan outlay by broad heads

(Rs bn) Agriculture and Allied Activities Rural Development Irrigation and Flood Control Energy Industry and Minerals Transport Communications Science Technology & Environment General Economic Services Social Services General Services Grand Total
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Subsidies
FY13BE 177 408 13 1,548 572 1 254 1,254 154 166 248 1,889 87 6,515 FY13RE 160 356 4 1,482 392 1 030 1,030 83 121 210 1,665 59 5,562 FY14BE 188 428 12 1,583 480 1 335 1,335 124 176 316 2,067 93 6,801 Growth (%) 17.6 20.2 180.5 6.8 22.4 29 6 29.6 49.9 45.1 50.4 24 2 24.2 58.8 22.3 (Rs bn) Food Fertliser Interest Oil Others Total FY12 728 700 50 685 16 2,113 FY13BE FY13RE 750 850 610 80 436 25 1,796 660 74 969 24 2,479 FY14BE 900 660 81 650 21 2,210 Growth (%) 5.9 0.0 8.7 (32.9) (14.0) (10.8)

FY12 162 376 5 1,219 362 1 075 1,075 66 117 197 1,454 53 5,086

S t i Sector impact t

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Automobiles
Speed-breakers ahead

The Budget 2013-14 has not brought any good news for the auto sector per se. Although the standard rate of excise duty has not been increased, excise duty on SUVs has been hiked from 27% to 30%. However, there is no announcement about levying additional taxes on diesel cars, cars which is a positive for the industry. industry Increase in rural spending will give a boost to disposable income in rural regions. It is marginally positive for two-wheeler and tractor sales. Basic customs duty on motorcycles of capacity of >800cc has been increased from 60% to 75%. Co. Announcements Excise duty on SUVs increased from 27% to 30%. However, SUV registered solely for use as taxis will not suffer additional excise hike. Excise duty on truck chassis reduced by 1% to 13%. Significant increase in JNNURM spending di t to R 148b Rs148bn, majority of which will be used for procurement of buses in hilly regions. Customs duty on cars with CIF > $40k and/or >3000c for petrol and >2500cc for diesel increased from 75% to 100%. Comments Negative Increase in excise duty on SUV. Positive No additional taxes on diesel cars, higher allocation to defense. Both the positive. announcements are Overall impact Marginally negative

Impact on each Company M&M

Ashok Leyland, Tata Motors

Positive

Tata Motors

Price will increase for JLR cars imported into India.

Marginally negative

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Banking & Financial Services

No big-bank measures

Additional Rs0.1mn Rs0 1mn interest reduction for self occupied first house of loan value below Rs2.5mn. Rs2 5mn Impact on each Company
Co. PSU banks Announcements Section 36(i) (vii) of IT act. Comments Existing differential tax treatment between rural and urban advances, henceforth this differential will not be available. There will be an increase in operating expenses of PSU banks. Overall Impact Negative for banks who have higher bad debts in rural areas.

Recapitalisation of PSU banks by Rs140bn. Changes to Section 36 (i) (vii) of Income Tax Act on bad debts write-off and rural advances. All PSU bank branches need to have an ATM. All towns with >10,000 population to have a LIC office and an office of a general insurance company. Banks are permitted to act as insurance brokers.

PSU banks

All branches ATMs.

to

have

Negative as costs increase. It is unlikely that there is going to be a change in the investments cycle. Hence, slippages in asset quality could continue for some more time. Negative for the banks.

Housing finance companies

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Additional Rs0.1mn interest deduction.

No major impact.

Neutral for companies.

housing

finance

Capital Goods
Promoting investment in sector

The capital goods sector has been witnessing a fragile growth for a long time now. The Budget 2013-14 plans to boost investment in the sector. There will be an investment allowance of 15% to companies on investments of more than Rs1bn. This is over and above p provisions of accelerated depreciation p of 20% in the first y year. The companies will be able to claim allowance in the year in which amount exceeds Rs1bn. Hence, apart from incentivising companies to spend on plant and machinery, it also provides for preponement of the spending (to the extent possible). There is an increase in allocation for capital expenditure in defence services to Rs867bn from Rs795bn.

Impact on each Company Co. All capital goods companies Announcements Investment allowance of 15% to companies on investments of more than Rs1bn during April 2013 to March 2015. Increase in capital expenditure for defence services. Comments It would incentivise the capex incurred by companies and thereby increasing order inflows in medium term. Increased order flows from the defence sector. Overall Impact Marginally positive

L&T, Bharat Electronics

Marginally positive

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Cement
Gets the cold shoulder

The current slowdown is taking its toll on the cement sector as well. However, no big-bang announcements have been made for the sector in the Budget 2013-14. St t quo is Status i maintained i t i d on excise i duty d t structure. t t The custom duty on imported thermal coal has been increased from nil to 2% plus a CVD of 2%. There is an investment allowance of 15% for investment in Plant & Machinery over Rs1bn to encourage capex .

Impact on each Company Co. India Cement, Ul Ultratech h and d others Shree Cement, Ultratech and others Announcements Custom duty on thermal coal i increased d from f nil il to 2% plus l CVD of 2%. Capex of more than Rs1bn in Plant & Machinery to entitle for a 15% investment allowance. Comments Companies with higher share of i imported d coal l to be b marginally i ll impacted. Companies undergoing capex cycle to benefit from the 15% investment allowance for plants commissioned during FY14-15. Overall Impact Negative India C Cement would ld see a decline of 2.5-3% of PBT. Positive for Cement Ultratech. Shree and

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FMCG/ Media
A mixed bag

There is an increase in specific excise duties on cigarettes by 18%. However, it excludes cigarettes of length below 65mm. Excise duty on branded readymade apparel has been restored to nil from 3.5% (12% less 70% abatement) earlier. Basic customs duty on set-top box has been increased from 5% to 10%.

Impact on each Company Co. ITC Announcements Excise duty increased by 18%, except on cigarettes of length of less than 65mm. 65mm Comments Overall, the hike was slightly ahead of estimates. However, the key positive is that the rates remain specific in nature and cigarettes with length <65mm have been spared of any hike. We expect ITC to increase prices by ~10% in a staggered manner. Abolishment Ab li h t of f excise i duties d ti is i a positive iti for f the sector. However, the current macro economic environment is a major challenge. It will increase the landed cost of the set top box for the industry as more than 80% of boxes are imported. Overall Impact Marginally negative

Sh Shoppers St Stop

Excise E i d ti duties on readymade d d garments restored to zero. Basic customs duty on set-top box increased from 5% to 10%

P iti Positive

Dish TV

Marginally negative

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Infrastructure
Placing the building block of a better tomorrow

A regulatory authority for the road sector will be constituted. Road projects totaling 3,000kms shall be awarded during 1HFY14 in Gujarat, MP, Maharashtra, Rajasthan & UP. Various measures have been taken to promote long term low-cost investment in infrastructure space: To encourage Infrastructure Debt Funds (IDF). This would promote investments through take out financing and credit enhancement schemes. IIFCL to provide credit enhancement to infrastructure companies. Select institutions can raise a max. of Rs500bn as tax-free infrastructure bonds.

Work on DMIC projects will start during FY14 with work on one city each in Gujarat and Maharashtra.

Impact on each Company Co. IRB Infra, ITNL, Sadbhav, L&T Sadbha L&T, etc All companies Announcements Constitution of road regulator. Comments It would enable quick resolution of disp tes and e disputes expedite pedite road construction process. This would reduce interest cost pressure. Overall Impact Marginally positi e positive

Various measures to promote long term low-cost investment.

Positive

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IT Services
Increase in tax burden-That is IT

The Budget 2013-14 was a non-event for the IT sector; no major announcements were made. There is an increase in tax surcharge from 5% to 10%. Rs5bn have been allocated to Indian Post IT project in FY14.

Impact on each Company Co Co. All companies Announcements Increase in tax surcharge. Comments The tax rate is likely to increase for all IT companies. Infosys won an Indian Post project in FY13. Overall Impact Negative EPS of companies under coverage likely to decline 1-2%. Positive for Infosys. Infosys

Infosys

Allocation of Rs5bn to Indian Post.

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Oil and gas

Fueling uncertainty

The oil and gas sector continues to suffer from lack of clarity on natural gas pricing policy. Although shale gas exploration will be encouraged, there is no further clarity on the same. Bids for oil and gas blocks will be based on revenue sharing rather than production sharing. There will be provision of Rs650bn for oil subsidies in FY14. This is inclusive of subsidy overflow of FY13. Revised estimate for FY13 stands at Rs969bn against initial estimate of Rs437bn. There will be an investment allowance of 15% on capex in Plant & Machinery above Rs1bn during FY14-15.

Impact on each Company Co. E&P companies Announcements Revenue sharing instead of production sharing in bids for O&G blocks. Provision of Rs650bn of subsidies for FY14. Comments It would be applicable only for new biddings, and will prevent gold plating of cost. Includes carryover amount of FY13. of undisbursed Overall Impact Positive

OMCs, ONGC, Oil India, GAIL

Neutral

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Pharmaceuticals
No medicinal value

Investment Allowance: The budget proposal to re-introduce investment allowance at 15% for expenditure on Plant and Machinery exceeding Rs1bn during FY14-15 is a positive; all pharma companies under coverage are likely to avail this benefit. benefit Surcharge: The tax credit accruing from the investment allowance may be offset (partly, or in some instances wholly) in FY14 by the increase in surcharge on income tax from 5% to 10%. Companies, which have a large planned capex (in comparison to their PBT for the year), will benefit more.

Impact on each Company Co. Cipla, GSK Announcement Comments Cipla has recently commissioned a large facility at Indore and GSK has only ~Rs1.25bn of capex planned for CY13. They may not be able to offset higher tax rate with the rebate. There is significant capex relative to estimated PBT in FY14. Marginal net impact of proposals is expected. Overall Impact Negative impact of 3-6% 3 6% on FY14 earnings.

Dr. Reddys, Biocon

Net impact of rebate on investment allowance and higher surcharge.

Positive impact of 1-2% on FY14 earnings. Neutral

Cadila, Divis, Glenmark, Lupin, Ranbaxy, Sun

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Power
A no-show

As expected, tax holidays under section 80-IA have been extended by a year to March 31, 2014 for claiming 10-year tax holidays for power projects. Basic customs duty on steam coal is being increased from nil to 2% and CVD from 1% to 2%

Impact on each Company Co. All utilities Announcements Extension of benefit under 80-IA 80 IA by a year. Comments Plants getting commissioned before Mar 31, 14 14 can claim 10-year tax holidays. However, our estimates and valuations already factor the same. No impact for offtake under competitive bid as tariff will be adjusted for change in law. RoE to be grossed up by 33.99% instead of 32.45%. Overall Impact Marginally positive

Adani Power, JSW Energy NTPC

Basic customs duty on steam coal is being increased from nil to 2% and CVD from 1% to 2%. Surcharge on corporate tax increased from 5% to 10%

Negative for JSW Energy Only marginal Energy. negative for Adani Power. Marginally positive as NTPC enjoys tax arbitrage arbitrage.

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Telecom
A low tone Budget

Regulatory uncertainty has been weighing on the telecom sector in India. Revenue growth is also expected to moderate. Despite that, there were no major announcements for the telecom sector in Budget 2013-14. There is an increase in tax surcharge from 5% to 10%. There has been a hike in duties on mobile phones priced greater than Rs2,000 from 1% to 6%. Provision of Rs408.5bn from communication services.

Impact on each Company Co. All companies Announcements Increase in tax surcharge. surcharge Comments The tax rate is likely to increase for all telecom companies. The higher duties will lead to an increase in Smartphone prices. Higher Smartphone prices is one of the reasons for lower 3G penetration Overall impact Negative EPS of companies under coverage likely to decline 0.5-2%. Mildly negative as the expansion of 3G/4G services will be somewhat impacted.

All mobile companies and operators

Increase in duties on mobile phones phones.

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Disclaimer
Tata Securities Limited
One Forbes, Dr V.B. Gandhi Marg, Fort, Mumbai 400 001 Tel: 91 22 6745 9000 Fax: 91 22 6610 6722 Web: www.tatasecurities.com
SEBI Registration Number BSE INB010664150 INF011207954 NSE INB/F/E231288730 Portfolio Manager INP000003872 Depository Participant of CDSL IN-DP-CDSL-450-2008 Depository Participant of NSDL: IN-DP-NSDL-298-2008 Merchant Banker INM 000011302 Compliance Officer: Mr. Umesh Maskeri : 022 - 61827805 email:umesh.maskeri@tatacapital.com

DISCLAIMER
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Disclaimer
Tata Securities Limited
One Forbes, Dr V.B. Gandhi Marg, Fort, Mumbai 400 001 Tel: 91 22 6745 9000 Fax: 91 22 6610 6722 Web: www.tatasecurities.com
SEBI Registration Number BSE INB010664150 INF011207954 NSE INB/F/E231288730 Portfolio Manager INP000003872 Depository Participant of CDSL IN-DP-CDSL-450-2008 Depository Participant of NSDL: IN-DP-NSDL-298-2008 Merchant Banker INM 000011302 Compliance Officer: Mr. Umesh Maskeri : 022 - 61827805 email:umesh.maskeri@tatacapital.com

DISCLAIMER
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Thank You