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10thJuly, 2014

More than a BudgetBudget, the first voice from the new government was clear in itsintentions and did well by meeting many expectations but not all.Clearly it is more than budget voice which we are likely to hear overthe near term. Positively budget lowered taxes, excise and proposed tochange retrospective rule, transfer price, FDI and subsidy. We look atsectors like Realty, Power, Metal and Infra very positively. Hence in thenear term, governments new initiatives and planning will be clearly

watched, as we had very high expectation on the budget. But we arevery positive about the new governments steps in the near terms.

Good NewsBalancing growth, reforms and fiscalThe first voice by the new government clearly indicates growth and fiscalconsolidation, and tells we are in a bull run for a long time. As far asreforms and fiscal measures go, we will see them outside the budget. It isclear that, food and oil subsidies will be lower over the time. We arelooking at healthy 7-8% GDP growth in the next 3-4 years. Hence in thenear 1-2yrs it will be a mix of growth and fiscal. But more measures onreforms will be positive for valuations. Currently Sensex fairs at 16x P/E1yr Fwd.

Bad News GST and Subsidy later

Expectation was very high. Many were looking to hear about GST andsubsidy. But the truth is nothing has come now, though it is unfair toexpect such norms in the union budget. Government expenditure forFY15 will be in control before undergoing subsidy reforms. GST outcomecan impact 1-2% in GDP growth.

Positive Sector ImpactsRealty, Power and InfraThe new budget is clearly positive in terms of lower individual taxes,positive for many sectors like Realty, Power and Infra. More than lowertaxes, interest on house claim has increased from Rs1.5lac to Rs2lac.Power and Infra are also likely to be important driver for growth over thelong-term.

Negative Sector ImpactsGold, PSBs, Retail and CigarettePSU banks are likely to need higher capital for new Basel and capitalrequirement. PSU banks will especially lean on secondary market forequity dilution. Gold sector has got no reforms in the current budget, butthe sector had done well in the near term on lower customs dutyexpectation. FDI is not likely to come to the retail sector hence negativein the near-term. Cigarette excise has increased by 11-72%.

Budget - Buy Picks & Sell PicksTop Buys Tata Steel, ICICI, Tata Power, Prestige and GMR

Top Sells Titan, SBI, BoB, ITC

RETAIL EQUITY RESEARCH

BUDGET 2014-15SENSEX: 25,373

Budget Plan (Rsbn) FY13 FY14 FY15E YoY

Tax Revenue 7,419 8,360 9,773 17%

Non Tax Revenue 1,374 1,932 2,125 10%

Capital receipts 5,311 5,612 6,051 8%

Incld. Borrowing 4,902 5,245 5,312 1%

Total inflow 14,104 15,904 17,949 13%

Non Plan Exp 9,967 11,149 12,199 9%

Plan Exp. 4,136 4,755 5,750 21%

Total Exp 14,104 15,904 17,949 13%

Fiscal Deficit % -4.9% -4.6% -4.1%

Budget receipts FY13 FY14 FY15E YoY

Corporate Tax 3,563 3,937 4,510 15%

Income Tax 2,015 2,417 2,843 18%

Wealth Tax 08 10 10 0%

Customs 1,653 1,751 2,018 15%

Excise 1,765 1,795 2,071 15%

Service Tax 1,326 1,649 2,160 31%

Tax on UT 31 31 34 11%

Less: NCCDs transferto national funds 28 47 51 9%

Less: State Funds 2,915 3,182 3,822 20%

Net Tax Revenue 7,419 8,360 9,773 17%

Non Tax Revenue 1,374 1,932 2,125 10%

Total Revenue 8,792 10,293 11,898 16%

Non Debt Receipts

Capital receipts 5,822 5,462 5,557 2%

Draw-Down fromCash Balance

(510) 150 172 14%

Total Receipts 14,104 15,904 17,262 11%

Fundamental Research Team

GEOJIT BNP PARIBAS ResearchDGET ANALYSIS

POSITIVE

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Key Reforms Ahead

Roadmap on implementing GSTGST is an ambitious tax reform that removes most indirect taxes such as excise duty, service tax and VAT

paving way for an efficient system. Introduction of GST would add as much as 1%-2% of GDP growthand help in creating a pan-India market for goods and services. Though implementation is likely to be inFY15/16, the union budget 2014-15 is expected to lay a roadmap. Contentious issues like takingpetroleum products and entry tax out of GSTs ambit and GST compensation to be a part of ConstitutionalAmendment Bill, remain to be worked out. Given that, the ruling coalition is short of two-third majorityneeded for amendment in Lok Sabha and BJP way short of 160 seats in Rajya Sabha, indicate a long drawnout process.

Review of Land Acquisition Bill and labour lawsThe new land law has made it difficult for companies to acquire land for large infrastructure and realestate projects at reasonable rate and implement projects within intended timeframes. The law has

increased land costs to 40% of project. Considering the impetus given to infrastructure and affordablehousing, government is expected to review. Also, expectations on revamping the obsolete labour laws aresought for, as companies have cited them a key hurdle for doing business in India. The expectation alsofits in with BJPs promise to ease the process of doing business in India.

Reforming subsidy regimeReduction of subsidy to achieve fiscal consolidation should be prioritised as it eats up substantial portionof tax revenues.Food: Food subsidy is the largest subsidy head and substantial reduction isnt possible as it is linked toNational Food Security Act. But adopting responsible policy on minimum support prices, makingprovisions in NFSA to allow gradual increase in issue price linked to economic cost, indication on

restructuring FCI and addressing leakage in PDS can contribute to considerable savings.Fuel: Fuel subsidy is the second largest head. De-controlling diesel price, reduction of subsidised cylinderper person and better targeting of subsidies are measures that can be taken to reduce the subsidy bill.Fertilizer: Better targeting of fertilizer subsidies, increase of Urea prices and reduction of phosphate andpotash subsidy can reduce fertilizer subsidy.

FDI in Defence & InsuranceDefence: Composite FDI cap in defence sector is increased to 49% from 26%. Further opening is likelyover the next few years. Department of Industrial Policy and Promotion (DIPP) had in a discussion paperproposed 49% FDI in cases where there is no technology transfer, 74% with tech transfer and 100% whenit came to state of-the-art technology.

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DIRECT TAXOutcome

Tax Rates- Individuals No change in tax rates, but the tax exemption limit has been increased by Rs50,000.

Also the limits on deductions on investments u/s 80C increased by Rs50,000.

Interest on housing loan increased by Rs50,000 to Rs2lac..

Tax Incentives - Corporate

Provided investment allowance at the rate of 15% to a manufacturing company investing>Rs25cr for investments up to 31.03.2017, in any year for new plant and machinery.

Tax on Dividends -foreignsubsidiaries

The concessional rate of tax at 15% on dividends received by Indian companies from theirforeign subsidiaries to continue without any sunset date.

Tax incentives on Bonds

Tax incentive to all types of bonds instead of only infrastructure bonds.Concessional tax rate of 5 % oninterest payments

Extended the eligible date of borrowing in foreign currency from 30.06.2016 to 30.06.2017 for aconcessional tax rate of 5 % on interest payments.

Tax on long term capital gains ontransfer of units of Mutual Fund

Increased the rate of tax on long term capital gains from 10%t to 20% on transfer of units ofMutual Funds (other than equity oriented funds) and to increase the period of holding from12months to 36months.

INDIRECT TAXOutcome

Excise Duty Reduced excise duty on specified food processing and packaging machinery from 10% to 6%.

Reduce the excise duty on footwear between Rs500 and Rs1000.

Increase the specific excise duty on cigarettes in the range of 11% to 72%.

Exemption from excise duty on products related to solar power generation, such as EVAsheets, Solar tempered glass etc.

Customs duty Reduced Basic customs duty for steel grade limestone and steel grade dolomite and increasedthe basic customs duty on imported flat-rolled products of stainless steel.Positive for SteelIndustry.

Reduced Basic customs duty on inputs of Chemicals and Petrochem products.

Increased basic customs duty to 2% from zero for cut and polished diamonds and colouredgemstones.

GAAR General Anti Avoidance

Rule

Government has not changed the ruled on retrospective Taxation and assured a stable taxationregime. New cases since 2012 amendment of I-T Act will be looked into by a high level CentralBoard of Direct Taxes (CBDT) committee.

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SECTOR-WISE EXPECTATIONS & OUTCOMEExpectations Outcome Impact

Oil &Gas: Intent to accelerate production E&P of CoalBed methane Reserves Benefit Coal India

Usage of PNG (Piped natural gas) to be

scaled up.Additional 15000Km of gas pipeline system

in the country through PPP models.

Positive

Benefiting Coal India

Benefits GAIL, IGL,

Petronet LNG.Gas price will review

over 3months.

Auto:

Extension of reduced excise duty (8% for CV, small PV and20% & 24% for mid-size PV, large PV resp.) beyondDecember 2014.

Higher Govt outlay on infrastructure to augment CVdemand.

Increase in customs duty of CV imports to 25% from 15%.

Government had recently reduced andextended the excise duties and no furtherchanges were made in the budget.

Higher infra spends on road and highways.

Changes have been proposed to reducethe excise duty on chassis and trailers.

Basic customs duties on battery waste andbattery scrap were reduced from 10% to 5%.Companies reuse in the range of 10% to 30%,

and this is likely to improve their efficiency.

Neutral

Benefits all CVmanufacturers AshokLeyland, Tata motors.

Benefits ExideIndustries, Amara RajaBatteries.

FMCG:

Higher excise duty on cigarettes.

Increase in excise duty on cigarettes, cigars,cheroots and cigarillos in the range of 11% to72%, on pan masala from 12% to 16%, onunmanufactured tobacco from 50% to 55%and on gutkha and chewing tobacco from60% to 70%.

Reduce the basic customs duty (BCD) on rawmaterial of soaps -Fatty acids, crude palmstearin, RBD and other palm stearin,specified industrial grade crude oils to Nilfrom 7.5% and crude glycerin from 12.5% toNil. Reduce excise duty on specified food

processing and packaging machinery to 6%from 10%.

Reduce the excise duty on footwear of retailprice in the range of Rs500-Rs1000 per pair to6% from 12%. Footwear of retail price up to`500 per pair will continue to remainexempted.

Mixed

Impacts cigarettemanufacturers.ITC,Godfrey Phillips, VSTIndustries.

Will reduce the rawmaterial cost andmanufacturing capexfor FMCG. HUL,Godrej Consumerproducts.

Reduce the excise duty

on footwear of retailprice in the range ofRs500-Rs1000 per pairto 6% from 12%.Footwear of retail priceup to Rs500 per pairwill continue to remainexempted.

Power:

Extension of 10yrs tax holiday to power plants.

Improve domestic coal availability.

Extension of 10yrs tax holiday to power costhat start power generation by 31stMar, 2017.

To ensure availability of coal to power plantscommissioned before March 2015.

Positive

Benefits Tata power,JSPL, Adani Power,JSW Energy Ltd.

Realty and Infra:

Increase in government infrastructure spending.

Single window clearance system for large infrastructureprojects.

Tax incentives and clarity over tax benefits for REITs andinfrastructure investment Trusts and debt securities.

Increase in income tax exemption limit for interest paid onhome loan from Rs1.5lakh to Rs2lakh.

Allocation of Rs37,880cr for highways androads, and development of airports underPPP model in Tier II & III cities.

Incentives for REITs and IITs having passthrough for taxation purposes.

Increased tax deduction limit in interest onhousing loan from Rs1.5lakhs to Rs2lakhs.

Banks permitted to raise long term funds forlending to infrastructure sector withminimum regulatory pre-emption such asCRR,SLR and Priority sector lending

Positive

IRB Infra, GMR, GVK.

Easier access tofinance, benefitingDLF, Prestige estates,Indiabulls Real Estate.

Incentivise homebuyers benefiting DLF,Unitech, PrestigeEstates.

Benefits all infra sectorcompanies enablingaccess to cheaperfinance.

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SECTOR-WISE EXPECTATIONS & OUTCOME contd...Expectations Outcome Impact

Banking & Financial Services:

FDI in Insurance increase from 26% to 49%.

Capital commitments for troubled PSB.

Schemes to promote affordable housing.Tax incentives for increasing domestic savings- Increase

deduction under 80C on long and short term investmentsin Pension funds, provident funds, life insurance and ELSSfrom Rs1lakh to Rs2lakh.

The composite cap in the Insurance sector tobe increased up to 49% from 26%, with fullIndian management and control, through

FIPB route.

Proposed divestment for capital requirementof PSBs but no budget allocation. Inprinciple approval to consolidate PublicSector Banks.

To increase the allocations for the year 2014-15 to Rs 8,000 crore for National HousingBank (NHB) to support Rural Housing andRs4,000cr for NHB for affordable housing tothe urban poor/EWS/LIG.

Banks permitted to raise long term funds forlending to infrastructure sector withminimum regulatory pre-emption such as

CRR,SLR and Priority sector lendingIncrease personal income tax exemption

limit to Rs 2.5lakh for individual andRs3lakh for senior citizens. Increase theinvestment limit under section 80C of theIncome-tax Act from Rs1lakh to Rs1.5lakh.

Increase the deduction limit on account ofinterest on loan in respect of self occupiedhouse property from Rs1.5lakh to Rs2lakh.

Negative for PSBs

Positive for Insurancecompanies to attract

potential globalplayers invest. Positivefor Max India, Reliancecapital, Aditya BirlaNuvo, Religare.

Dilution in PSBs willbe negative for themedium term.

Will help housingfinance companiesprovide cheaper homeloans. Repco homefinance, GIC Housing

Finance.Positive for banks

engaged ininfrastructurefinancing. IDFC &PSBs.

Will improve domesticsavings and willbenefit banks inmobilising deposits.

Will make home loansmore attractive. Benefitfor all Banks, Housingfinance NBFCs.

Agriculture and Fertilizer:

Incentivise storage facilities to minimise post harvestlosses.

Warehousing capacity to be increased andhas allocated 5000Cr in order to minimizepost harvest losses.

Credit to farmers to be available at 7% andfurther reduction of interest of 3% onrepayment on timely basis.

Long term positive forfertilizer and agri.

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