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Please see the important disclosures at the end of this report.
JM MORGAN STANLEY
Industry
Equity Research
Asia/Pacific
Market Commentary/Strategy March 3, 2003India Research Team
Playing it Safe; Equities Look Elsewhere for Comfort
MSCI COUNTRY INDIA
Asia Strategist Weight 3.5%
AC Asia MSCI (ex Japan) Weight 3.8%
• Treading carefullyIndia’s Finance Minister Jaswant Singh, in his first budget, was careful
not to upset the apple cart, by avoiding any tough reform measures.• On balance, we rate budget measures as marginally posi tive
The government announced two pro-growth measures, including anincrease in spending on infrastructure and a further cut in interest rates.
• Budget actions reflect little concern for r ising fiscal burden
Finance Minster maintained the familiar trend of a lot of noise aboutthe need for fiscal consolidation without reflecting it in the actionstaken.
• Near-term growth concerns remain
The positive measures announced in the budget are unlikely to turn thedecelerating growth cycle in the near term. We expect industrialgrowth to weaken further to 3-4% in F1Q04 from 5.1% in F3Q03 and6.5% in F2Q03.
• Budget will have mixed impact on three key drivers of equities, in our view.We estimate a small, 60 bps improvement in corporate earnings growthdue to tax cuts. We also expect that an aggressive, 100 bps rate cut onsmall savings rates will cause a revival in otherwise contractingliquidity. However, reform initiatives, particularly in direct taxes, fallshort of potential. The budget fails to create the tactical impetus foroverall equity performance. Continue to focus on stock/sector picking.We are selling our high-beta picks – i.e., NIIT and Zee Telefilms – andadding to growth stocks trading at reasonable valuations – i.e., Infosysand Dr. Reddy’s
India Budget F2004
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India Budget F2004 – March 3, 2003
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Morgan Stanley India Team
Director of Research
Robert Vaudry, Hong Kong +852 2848 5939Robert.Vaudry@morganstanley.com
Head of Indian Research
Ridham Desai, Mumbai +9122-2209-7790Ridham.Desai @morganstanley.com
Strategist Analysts
Ridham Desai, Mumbai +9122-2209-7790Ridham.Desai @morganstanley.com
Economist
Chetan Ahya, Mumbai +9122-2209-7940Chetan.Ahya@morganstanley.com
Database
Ben Godinho, Mumbai +9122-2209-7059Ben.Godinho@morganstanley.com
Cement
Sachin Sheth, Mumbai+9122-2209-7915Sachin.Sheth@morganstanley.com
Commercial Vehicles /Two -Wheeler/Engineering
Satish Jain, Mumbai +9122-2209-7809
Satish.Jain@morganstanley.com
Consumer/Media
Rajesh Mayani, Mumbai+9122-2209-7925Rajesh.Mayani@morganstanley.com
Financial Services
Amit Rajpal, Hong Kong +852-2848-1951Amit.Rajpal@morganstanley.com
Sachin Sheth, Mumbai +9122-2209-7915Sachin.Sheth@morganstanley.com
Nonferrous Metals & Mining/Steel
Chetan Ahya, Mumbai +9122-2209-7940Chetan.Ahya@morganstanley.com
Oil & Gas/Telecommunications
Vinay Jaising, CFA, Mumbai +9122-2209-7780
Vinay.Jaising @morganstanley.com
Petrochemicals
Ridham Desai, Mumbai+9122-2209-7790Ridham.Desai @morganstanley.com
Pharmaceuticals
Sameer Baisiwala, Mumbai+9122-2209-7830Sameer.Baisiwala@morganstanley.com
Software
Anantha Narayan, Mumbai+9122-2209-7161
Anantha.Narayan@morganstanley.com
Research Associates
Akshay Soni, Mumbai +9122-2209-7151Akshay.Soni@morganstanley.com
Amit Puri, Mumbai +9122-2209-7730Amit.Puri@morganstanley.com
Anil Agarwal, Mumbai +9122-2209-7062Anil.Agarwal@morganstanley.com
Anirudh Gangahar, Mumbai+9122-2209-7820Anirudh.Gangahar@morganstanley.com
Nimit Tanna, Mumbai +9122-2209-7171Nimit.Tanna@morganstanley.com
Vijay Chugh, Mumbai+9122-2209-7810Vijay.Chugh@morganstanley.com
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India Budget F2004 – March 3, 2003
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Playing it Safe; Equities Look Elsewhere for Comfort
Economics
Chetan Ahya
Summary
Much unlike the style of his predecessors, Finance Minister
Jaswant Singh, last Friday, presented an annual budget
lacking the spice of poetic statements. Nevertheless, he
maintained the familiar trend: a lot of noise about the need
for fiscal consolidation without taking any action that would
impart confidence about the government’s seriousness in
addressing this critical macro issue. Nonetheless, we rate
the budget as marginally positive for the economy. Itannounced two pro-growth measures, including an increase
in spending on infrastructure and a further cut in interest
rates.
What We Liked About the Budget
Construction spending on infrastructure: The government
has announced a US$12.6 billion investment plan for roads,
airports, seaports and a convention centre. The most
important of these is the new, 10,000-km road project for
US$8 billion. However, the government plans to construct
these roads by way of build/operate/transfer (BOT) with theparticipation of private players. We believe this would
result in a delay in implementation; finalizing the terms for
awarding the contracts may be more complicated than the
National Highway Development Authority, which manages
golden quadrilateral projects, has experienced. Therefore,
we believe that it will take 9-12 months for the benefits of
this spending to start flowing into the real economy.
Savings rate cut: The thrust on cutting interest rates on
government sponsored savings schemes continued in the
budget. The rate on the small savings scheme (public
provident funds scheme) was reduced by 100 basis points to8.0%. Following the government’s cut in the small savings
rate, the central bank also reduced by 50 basis points each
the repo rate to 5% and the savings bank deposit rate to
3.5%. The resultant downward bias in banks’ lending ratesshould help maintain momentum in retail loan growth,
lending some support to weakening household
consumption.
State Level VAT: The VAT (Value Added Tax) scheme is
finally moving towards the action phase of the POTA
(Proposition, Opposition, Treaty-Consensus, Action) cycle.
The Finance Minister confirmed in the budget that the VAT
system will be effective from April 1, 2003. Migration to
the new tax system may face many hitches. Over the next
2-3 years, however, once the national level VAT system is
fully implemented, manufacturing productivity shouldincrease significantly from economies of scale and the
creation of a national market.
What We Did Not Like About the Budget
No action on fiscal consolidation again: The budget
reflects little government concern to reduce the fiscal
deficit. There was no reference to the status of the fiscal
responsibility bill, which has been awaiting the approval of
the Parliament for more than 2 years.
Direct tax laws further entangled : The budget has gone
against the grain of the recently released Kelkar committee
recommendations, which aimed to reduce the cost of risk
capital – i.e., equity – and treating all factors of production
on a par. Instead of simplifying the direct laws, as
suggested by Kelkar Committee, the budget has only added
to the complexities by announcing more direct tax sops.
Bottom Line: Near-term Growth Concerns Remain
We believe the positive measures announced in the budget
are unlikely to turn the decelerating economic growth cycle
in the near term in any significant way. We maintain our
view that industrial growth will continue weaken through to
F1Q04, to 3-4% from 5.1% in the quarter ended inDecember 2002.
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India Budget F2004 – March 3, 2003
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Fiscal Deficit: Customary Missing of Target
Fiscal Deficit on Consistent UptrendFor the last five years, the central government’s fiscal
deficit has been on a consistent uptrend. The new finance
minister has been able to do little to address the issue. The
fiscal deficit for F2003, which was budgeted at 5.3%, is
now estimated to reach 5.9% of GDP compared with 4.1%
in F1997.
Maintaining the Ritual of Missing the Target
Every year, India’s actual budget deficit is significantly
higher than projected (Exhibit 2). As an example, for
F2002, the estimated budget deficit (announced in
February 2001) was 4.7% of GDP. Later, this was revised(in February 2002) to 5.7%. In a second revision after the
completion of financial year, the estimate was raised
further to 6.1%. Similarly, the fiscal deficit for F2003 was
budgeted to be 5.3%, but the first revised forecast is
already at 5.9% (Exhibit 2). We believe that the
government is too optimistic in its projections of indirect
taxes for February-March 2003 (Exhibit 1). We expect the
F2003 deficit to be revised further to 6.1% of GDP.
Exhibit 1
India’s Indirect Taxes: Ambitious Projections for F2003
Fiscal Year 1Q03 2Q03 3Q03 Jan-03 Feb-Mar
YoY Growth Implied Est.
Indirect Taxes 15.7% 14.5% 14.1% 13.2% 32.9%
Excise 21.6% 15.8% 14.5% 10.8% 34.6%
Customs 7.5% 12.5% 13.3% 4.8% 25.1%
Source: Budget Documents, Morgan Stanley Research.
Revenue Expenditure Continues to Mount
Revenue expenditure rose to 13.8% of GDP in F2003,
from 11.6% in F1997. The increase was due to higher
subsidy, defence and interest costs. This rise in revenueexpenditure has been at the cost of capital outlays. Capital
expenditure has fallen to 2.5% of GDP in F2003 from
3.1% in F1997 (Exhibit 3).
Debt Burden at New Peak
The central government’s internal debt burden has risen
further to 58.9% of GDP in F2003, as per budget estimates,
compared with 55.7% in F2002 and 45.4% in F1997. The
average growth in debt in the last three years has been
14.9%, compared with nominal GDP growth of 8.5%.
Bailouts for States Will Increase the BurdenThe central government has offered state governments the
opportunity to swap their high-cost debt with lower cost
borrowings at current market rates, to help reduce their
interest burdens. The Finance Minister announced in the
budget that 26 states have agreed to this swap. This is
expected to save Rs810 billion in interest costs over the
residual maturity of the loans. We believe the exchange
should have been allowed only on condition that the states
agreed to initiate fiscal reforms. The reduction in interest
burdens may actually lessen the pressure on state
governments to undertake fiscal reforms.
No Sign of Efforts to Correct the Problem
The F2004 budget showed little concern for addressing the
problem of the fiscal deficit. While the privatization of
some of the large public-sector companies may help
contain the deficit, expenditure management is still
neglected.
Exhibit 2
India’s Fiscal Performance: Statement of Intent vs. Actions
Year Finance Minister Statement made during budget Deficit as % of GDP
Budget Actual
F1997 Mr. P Chidambaram We are committed to bring the fiscal deficit below 4% of GDP 5.0 4.1
F1998 Mr. P Chidambaram Unwavering commitment to continue on the course of fiscal correction 4.5 4.8
F1999 Mr. Yashwant Sinha Given the state of the economy, no further compression warranted 5.6 5.1
F2000 Mr. Yashwant Sinha Launching a medium-term strategy to reduce deficit 4.0 5.4
F2001 Mr. Yashwant Sinha We must squarely confront and overcome the critical challenge posed by a weakening fiscal situation 5.1 5.6
F2002 Mr. Yashwant Sinha Inadequate fiscal management has remained the most intractable problem over the past decade 4.7 6.1
F2003 Mr. Yashwant Sinha Expressed my deep concern at the poor fiscal situation of the central and state governments 5.3 5.9
F2004 Mr. Jaswant Singh Fiscal consolidation through tax reforms 5.6
Source: Budget Documents, Morgan Stanley Research.
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India Budget F2004 – March 3, 2003
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Page 5
Exhibit 3
F2004 Budget: Central Government Finances
Rs. Billion F2002 F2003BE F2003RE F2004BE
Gross Tax Revenue 1,871 2,358 2,219 2,515
As % of GDP 8.1% 9.5% 9.0% 9.2%
Indirect Taxes 1,128 1,366 1,329 1,461
As % of GDP 4.9% 5.3% 5.4% 5.3%
Excise 726 914 874 968
As % of GDP 3.2% 3.7% 3.5% 3.5%
Customs 403 452 455 494
As % of GDP 1.8% 1.8% 1.8% 1.8%
Direct Taxes 688 911 820 956
As % of GDP 3.0% 3.7% 3.3% 3.5%
Share of states 528 612 561 638
As % of GDP 2.3% 2.5% 2.3% 2.3%
Net 1,337 1,730 1,642 1,842
As % of GDP 5.8% 6.8% 6.6% 6.7%
Non Tax Revenues 678 721 728 698 As % of GDP 3.0% 2.9% 2.9% 2.5%
Total revenue receipts 2,014 2,451 2,369 2,539
As % of GDP 8.8% 9.6% 9.6% 9.3%
Capital Receipts 1,610 1,652 1,671 1,849
As % of GDP 7.0% 6.5% 6.7% 6.7%
--Privatization 36 120 34 132
As % of GDP 0.2% 0.5% 0.1% 0.5%
---Others 1,574 1,532 1,637 1,717
As % of GDP 6.9% 6.0% 6.6% 6.3%
Expenditure
Plan 1,012 1,135 1,141 1,210
As % of GDP 4.4% 4.4% 4.6% 4.4%
- - - -
Non Plan 2,613 2,968 2,899 3,178 As % of GDP 11.4% 11.6% 11.7% 11.6%
Interest 1,075 1,174 1,160 1,232
As % of GDP 4.7% 4.6% 4.7% 4.5%
Subsidies 312 398 446 499
As % of GDP 1.4% 1.6% 1.8% 1.8%
Defense 543 650 560 653
As % of GDP 2.4% 2.5% 2.3% 2.4%
Others 619 694 659 703
As % of GDP 2.7% 2.7% 2.7% 2.6%
Total Expenditure 3,625 4,103 4,040 4,388
As % of GDP 15.8% 16.0% 16.3% 16.0%
Revenue Expenditure 3,016 3,405 3,416 3,662
As % of GDP 13.1% 13.3% 13.8% 13.3%
Capital Expenditure 608 698 624 726
As % of GDP 2.6% 2.7% 2.5% 2.6%
Fiscal Deficit 1,410 1,355 1,455 1,536
As % of GDP 6.1% 5.3% 5.9% 5.6%
Revenue Deficit 1,002 954 1,047 1,123
As % of GDP 4.4% 3.7% 4.2% 4.1%
Primary Deficit 335 181 295 304
As % of GDP 1.5% 0.7% 1.2% 1.1%
Source: Budget Documents, Morgan Stanley Research
RE = Revised Estimates, BE= Budget Estimates.
This seems to be on thehigh side as theFinance minister hasgiven some sops fordirect taxes.
The actual figures arelikely to be higher thanbudgeted especially forLPG and Kerosene.
Deficit could again beslightly higher thanbudget estimates.
This target may beachieved only if theGovernment is able toprivatize companieslike HPCL, BPCL andMaruti Udyog Ltd.
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India Budget F2004 – March 3, 2003
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Page 6
Exhibit 2
Central Government Finances
Fiscal Deficit Trends (% of GDP)
8%
10%
13%
15%
18%
20%
F 1 9 9 2
F 1 9 9 3
F 1 9 9 4
F 1 9 9 5
F 1 9 9 6
F 1 9 9 7
F 1 9 9 8
F 1 9 9 9
F 2 0 0 0
F 2 0 0 1
F 2 0 0 2
F 2 0 0 3 R E
F 2 0 0 4 B E
2%
3%
4%
6%
7%
Fiscal Deficit Receipts (LS) Expenditure
Tax Revenues (Direct and Indirect) (% of GDP)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
F 1 9 9 2
F 1 9 9 3
F 1 9 9 4
F 1 9 9 5
F 1 9 9 6
F 1 9 9 7
F 1 9 9 8
F 1 9 9 9
F 2 0 0 0
F 2 0 0 1
F 2 0 0 2
F 2 0 0 3 R E
F 2 0 0 4 B E
Direct Tax Indirect Tax
Expenditure Trends (% of GDP)
11.5%
12.0%
12.5%
13.0%
13.5%
14.0%
F
1 9 9 2
F
1 9 9 3
F
1 9 9 4
F
1 9 9 5
F
1 9 9 6
F
1 9 9 7
F
1 9 9 8
F
1 9 9 9
F 2
0 0 0
F 2
0 0 1
F
2 0 0 2
F 2 0 0
3 R E
F 2 0 0
4 B E
2.0%
2.6%
3.2%
3.8%
4.4%
5.0%
Revenue Expendi ture (LS) Capital Expendi ture (RS)
Interest Cost as % of Revenue Receipts
35%
39%
43%
47%
51%
55%
F 1 9 9 2
F 1 9 9 3
F 1 9 9 4
F 1 9 9 5
F 1 9 9 6
F 1 9 9 7
F 1 9 9 8
F 1 9 9 9
F 2 0 0 0
F 2 0 0 1
F 2 0 0 2
F 2 0 0 3 R E
F 2 0 0 4 B E
Non-Plan Expenditure (% of GDP)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
F 1 9 9 2
F 1 9 9 3
F 1 9 9 4
F 1 9 9 5
F 1 9 9 6
F 1 9 9 7
F 1 9 9 8
F 1 9 9 9
F 2 0 0 0
F 2 0 0 1
F 2 0 0 2
F 2 0 0 3 R E
F 2 0 0 4 B E
Defense Expd Subsidies Interest payments Others
Privatization Proceeds (Rs. Billion)
0
20
40
60
80
100
120
140
F 1 9 9 3
F 1 9 9 4
F 1 9 9 5
F 1 9 9 6
F 1 9 9 7
F 1 9 9 8
F 1 9 9 9
F 2 0 0 0
F 2 0 0 1
F 2 0 0 2
F 2 0 0 3 R E
F 2 0 0 4 B E
Source: Budget Document, Economic Survey, Morgan Stanley Research
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India Budget F2004 – March 3, 2003
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Page 7
Exhibit 4
Select Budget Measures
Direct Taxes
• 5% tax surcharge levied last year for country's security halved to 2.5% for corporates, completely waived for individuals earning less than Rs. 850,000
per year and doubling it to 10% for individuals earning more than that amount.• Increase in standard deductions for salaried individuals earning greater than Rs. 500,000 pa
• Government to maintain tax concessions on housing interest loans at Rs. 150,000 pa.
• Dividend tax at the hands of the shareholders removed. However, dividend distribution tax of 12.5% imposed on corporates
• Abolition of long term capital gains for all listed equity purchased after 1st April 2003.
• Exemption on capital gains for 1 year on buybacks.
• Tax free status of software export companies reinstated
Indirect Taxes
• Introduction of state level VAT system from 1st April 2003
• 3-tier excise structure 8%, 16% and 24% introduced.
• Additional levy of 50 paise in diesel and motor spirit collecting, Rs. 26 billion. This amount will be used for road projects.
• Peak customs duty reduced by 5%
• Services tax increased to 8% from 5%
Government finances• Government proposes to buy back high-interest government bonds from banks who volunteer.
• Government to introduce debt swap scheme with the states. This is expected to lead to a saving of Rs 810 Biliion for the states over the residual
maturity of the loan.
• Issue price of urea fertiliser to be raised by Rs 12 per 50 kilogram bag.
• Premature repayment of loan of $3 billion from World Bank and Asian Development Bank.
Interest Rates
• Small saving rates was reduced by 1%. Following this announcement, the central bank reduced the repurchase and bank saving deposit rates by 50
basis points each.
Foreign Direct Investment
• FDI in private banks increased from 49% to 74%, voting right limitations to be amended.
• Overseas investment limit for corporates hiked to 100% of net worth.
Infrastructure Spending
• Government plans to invest around Rs 600 bil lion in 48 new road projects, modernisation of airports and seaports.
Source: Budget Document, Economic Survey, Morgan Stanley Research
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India Budget F2004 – March 3, 2003
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Page 8
Strategy
Ridham Desai
F2004 Budget:
Equities Look Elsewhere for Sympathy
Leaving the Glass Half Full, or Is it Half Empty?
Indian Finance Minister Jaswant Singh’s systematic and
detailed budget presentation for F2003-2004 recognizes the
political limitations of a coalition government and an
election year and thus avoids adventurous moves.
However, Mr. Singh did complete the annual ritual with the
panache he is known for. The focus on health, education
and infrastructure (although the benefits will accrue only in
the long term) are welcome moves. But the finance
minister paid lip service to direct tax reforms. The budgetseems to have disregarded the equitable tax regime
philosophy and reduction in the cost of risk capital mooted
by the Kelkar Committee. That said, the budget does not
contain any big shock.
From the stock market’s perspective, the budget influences
three key drivers of equities: earnings, liquidity and macro
(pace of reforms and growth). This budget will, in our
view, produce a limited earnings boost (arising from a
slightly lower corporate tax rate) and a marginal increase in
liquidity (due to lower interest rates). However, the reform
initiatives seem to have fallen short of expectations and
immediate growth outlook remains a question.
Slew of indirect tax reform: The budget continued to
pursue indirect tax reform, as in recent years. These
reforms included rationalization of excise duties,
progression to value-added tax (VAT) including a cutback
in the central sales tax rate to 2%, a reduction of 5% in the
peak customs tariff and the extension of service tax to more
sectors (service tax was also increased from 5% to 8%).
Lip service to direct tax reform: In contrast, the effort on
direct taxes was limited. While the tax on dividends has
been abolished, the budget has introduced a 12.5% taxincidence on profits distributed by corporates. We think
this defeats the purpose of removing the dividend tax. A
key rationale for the removal of the tax on dividends, as
suggested by the Kelkar Committee, was equitable tax
regime for all factors of production. (See our note titled
“Tax Reform and Dividend Debate – Anybody Listening,”
dated January 27, 2002.) Capital (read profits) as a factor of
production is still receiving stepmotherly treatment. The
removal of tax on long-term capital gains applies only to
listed equities acquired over the next 12 months – which
looks fairly inexplicable. The complicated tax exemption
regime was left more or less intact, although tax
administration was simplified. If anything, the budgetactually increases the list of exemptions.
Change in corporate tax rates: The silver lining to direct
taxes came in the form of a reduction in the corporate tax
surcharge by 2.5%. This will likely reduce the average tax
rate for corporates by around 60 bps, resulting in an
equivalent improvement in earnings growth (in the ensuing
12 months). Earnings for the software services sector may
improve by a higher number (around 3%), given the change
in tax laws relating to software services companies.
Aggressive rate cut: The finance minister boldly reduced
interest rates on small savings by a whopping 100 bps. This
prompted the central bank to react immediately, with a 50
bps cut to the interest rate on bank savings accounts to 3.5%
and to the repo rate to 5%. The bond market followed suit,
with the benchmark 10-year bond yield falling by 47 bps to
5.85%. While central bank liquidity has been compressing
over the past few weeks (not at all helped by rising crude oil
prices), this significant reduction in rates should abate the
fall in liquidity.
Fiscal deficit remains alarmingly high: The biggest reform
that needs to be pursued, in our view, is fiscal consolidation,
and that seems to be missing in this budget. Although thefinance minister has made fiscal consolidation a focal point
(the debt-swapping scheme for state governments and banks
is an important step in that context), the budget continues to
target an unreasonably high level of fiscal deficit (5.6% of
GDP for F2004). This, in our view, impedes long-term
growth recovery and thus caps the upside to equities
(Exhibit 4). That said, the numbers in the budget
presentation look realistic and bear a higher probability of
being achieved, unlike the slippage in recent years.
Financials gain from the budget, and we retain our large
overweight position: The financial sector has receivedimpetus from the budget in the form of both tax breaks for
restructuring and acquisition and foreign direct investment.
We believe the budget impact is neutral for most other key
sectors.
Market Continues to Appear Range-bound
We think the budget is unlikely to provide the macro
environment for improved equity performance over the next
six months. Thus, we continue to look at range-bound
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India Budget F2004 – March 3, 2003
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JM MORGAN STANLEY
Page 10
Automobiles
Satish Jain
Positive for cars/SUVs
Neutral for two-wheelers
Negative for commercial vehicles
Lower duties for cars/SUVs: The proposed reduction in
the excise duty, from 32% to 24% is, in our opinion,
positive for the car/SUV segment, which has shown
sluggish growth for the past three years. It also reduces the
pressure on companies, reeling under the burden of rising
steel and fuel prices. The reduction is positive, in our view,
for companies like Tata Engineering and Mahindra &
Mahindra.
Special National Calamity Duty: All two-wheeler and
cars/SUV companies would be marginally affected by a 1%
duty – called a national calamity contingency duty.
Considering the intense competition and pricing pressure
they face, most companies may have to absorb this cost.
Lower duties on tires: Excise duties on tires have also
been reduced, to 24% from 32%, which should help all auto
companies and the transport operators.
Additional duties on chassis for body builders: To
promote body-building by commercial vehicle (CV)
companies as a measure of road safety, the duty on the
chassis has been increased to 16% +Rs10,000. While
attempting to bring the unorganized sector, which does not
pay any excise duties, onto a level playing field with the
organized sector, the additional duty has made body-
building for light commercial vehicles (LCVs) and smaller
trucks unviable for the unorganized sector. Until the
companies add capacity to build bodies, the customers
would have to bear the burden of the additional duties of
Rs10,000. The average cost of vehicles would rise between
1% and 3%, depending upon the type. We consider this a
significant burden on freight operators, which are alreadyreeling under the burden of rising fuel prices and low freight
rates.
Lower duties on electric vehicles: Duties on electric
vehicles are being reduced from 16% to 8%. This could
serve as an incentive for some companies to introduce such
vehicles.
Marginal gains from lower steel duties: The reduction in
import duties on CR (cold rolled steel) from 30% to 25%
should cause some relief to auto companies that are or
would be affected by the rising price of steel.
Road infrastructure to trigger growth: The auto sector is
a direct beneficiary of road construction. The proposal to
undertake 48 new road projects, involving an expenditure of
Rs400 billion, should be a long-term growth driver for the
auto sector, especially for CVs and cars.
Reduction in surcharge: The reduction in the tax
surcharge from 10% to 5% benefits all auto companies as
most now have high tax rates.
Exhibit 8
Automobiles: Key Excise Rates2001-02 2002-03E
Two Wheelers & Three Wheeler 16% 16%
Tractors 16% 16%
Commercial Vehicles 16% 16%
Motorcars/ Utility Vehicles 32% 24%
Source: Budget Documents, Morgan Stanley Research
Banks and Financial Services:Positive
Amit Rajpal / Sachin Sheth
The budget, in our view, is largely neutral for the banking
and finance sector, with a positive bias. However, for the
State Bank of India (SBI.BO, Rs285.75, Overweight, Price
Target Rs350) the foreign investment limit was unchanged,
which was disappointing. As a result, the stock closed on
February 28 at Rs285.75 – 5.7% lower in a day. We believe
that this is a good level to add to positions in the shares.
Key measures include:
Higher foreign direct investment in private banks - positive
The limit on foreign direct investment in private banks has
been raised from 49% to 74%, effectively providing an
opportunity for foreign banks to acquire majority control.
In addition, the budget promises to consider raising the
voting right limits, currently capped at 10%, which we
believe also acted as a stumbling block for mergers and
acquisitions. However, given the paucity of “attractive”
targets (implying banks without excess branches and
employees) as well as the relative inflexibility in branch
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restructuring and labour laws, we expect limited M&A
action.
Central bank cuts savings deposit rates to 3.5% –- Positive
With the government indicating a soft bias on rates by
reducing rates on the longer-tenored small savings schemes,
the central bank has taken the cue by cutting shorter-end
savings bank rates from 4% to 3.5%. This should help
maintain the marginal steepness in the yield curve, as short
end rates would decline along with the longer end. This
benefits most banks with longer investment horizons and
shorter funding duration. As mentioned in our recent note
on rising rates, we believe SBI will be a greater beneficiary
of any steepening in the yield curve.
Buyback of high-yield debt by the government – Neutral
The government has indicated that it would encourage
banks facing liquidity problems in their high-yield trading
investment portfolios of government securities to sell these
back to the government to reduce their debt servicing
burden and to enable the banks to realize gains on their
high-yield portfolios. However, this has been
recommended entirely on a voluntary basis. It is unlikely
that SBI would voluntarily sell such securities, as it has
historically been conservative in booking treasury gains and
has demonstrated a preference for playing the gain through
its margins.
Impact on HDFC – Positive
Two steps were announced in the budget that should be
positive for HDFC (HDFC.BO, Rs375, Overweight, Price
Target Rs445):
• Tax exemptions on housing loans were retained in full,
contrary to the Kelkar committee recommendations.
• The tax on dividends at the shareholder level is removed.
This is likely to be positive for high-growth andreasonably high dividend yield companies like HDFC.
Cement – Negative
Sachin Sheth
While the budget aims to boost medium term demand in
core sectors like cement and steel through highway and
housing-related measures, the 14% increase in excise duties
on cement in a weak pricing environment is likely to have
an immediate dampening effect on profits, more than
offsetting any potential benefits, including the recent rail
freight rate reduction.
Positive measures include the following:
• The tax exemption on housing finance is retained, thus
ruling out any potential decline in demand due to its
withdrawal/reduction.
• The government plans to build another 10,000 km of
rural roads, a quarter of which would be concrete.
While the intention is to start work on a quarter (or
about 3,000 kms) of this in the current year, the
increment to demand is not likely to be significant.
Even assuming that the entire 10,000 kms would becompleted in 3 years, which appears ambitious based
on the progress of the Golden Quadrilateral program,
the annual increment in demand would be on the order
of 1.6 million tons, or approximately 1.5% – not
significant enough, in our view, to drive a secular
increase in cement prices.
• The recent, 3.6% reduction in freight rates for cement is
positive to the extent that companies rely on rail freight
– mainly ACC (ACC.BO, Rs154.05, Underweight,
Price Target Rs120), for which the impact would be
approximately 5% added to F2004E earnings, andnegligible for Gujarat Ambuja (GACM.BO, Rs161.15,
UnderWeight, Price Target Rs142).
The main negative measure is the increase in excise duty
from Rs17.5 per 50kg bag to Rs20 per bag. We believe
that, in the current weak pricing environment, it would be
difficult for average company realizations to increase by the
Rs2.5 per bag needed to pass this on to the customer.
Accordingly, we believe that the impact on F2004E profits
is significantly adverse, as highlighted below – especially
for ACC – more than offsetting any potential benefits of the
positive measures announced.
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• The rural income group will gain from several new
benefit schemes but will likely be hurt by a 4-5%
reduction in fertilizer subsidy (urea and DAP).
• The higher income group will be the most affected
on account of the higher income tax as well as a
higher service tax. However, this group’s
sensitivity to consumption is low, in our view.
Higher-income households are likely to be affected by a
higher tax surcharge. Also, the reduction in the small
savings rate will reduce future income on savings.
Key changes in the indirect tax proposals for the consumer
sector are as follows:
1) Excise duty on biscuits reduced from 16% to 8%,with the abatement reduced from 40% to 35%.
2) Excise duty on refined edible oil/vanaspati
(branded and packed) increased from 0% to 8%.
3) No increase in excise duty on cigarettes.
4) Excise duty on tea (Rs1/kg) converted to a cess of
Rs1/kg.
5) Excise duty on hard-boiled sugar confectionery
reduced from 16% to 8%, with the abatementreduced from 40% to 35%.
6) Excise duty on aerated soft drinks reduced from
32% to 24%, with abatement cut from 50% to
45%.
7) Excise duty on toilet preparations containing
alcohol reduced from 50% to 16%, with 40%
abatement.
8) Reduction in peak import duty from 30% to 25%.
Hindustan Lever (HLL.BO, Rs168.35, Equal-Weight,
Price Target Rs180)
HLL will benefit primarily from the reduction in excise
duty on alcohol-based toilet preparations, hard-boiled sugar
confectionery and biscuits and the cut in import duty on raw
materials. However, the company will likely be hurt by the
imposition of an 8% excise duty on refined edible
oil/vanaspati. We believe the lower duty on personal care
products will be passed on to consumers to accelerate
volume growth. HLL’s earnings should benefit from the
decrease in the surcharge on corporate tax, albeit
marginally, as its effective tax rate is 21% on account of
backward-area benefits. Overall, the impact on HLL’s
pretax profit from the key budget proposals will likely bearound +0.7% (Exhibit 10).
Our price target of Rs180 is based on a 45% P/E premium
to the sector multiple excluding HLL (10-year average)
compared with HLL’s 5-year average of 64%. We assign a
lower premium because of the company’s declining growth
rate relative to the sector. At the price target the stock
would trade at a P/E of 21 based on our new 2003 earnings
estimates. Key risks to our price target are: 1) a significant
change in consumption demand growth; 2) loss of market
share in key product categories; 3) significant material cost
inflation; and 4) any large acquisition.
Exhibit 10
HLL: Budget Impact
Existing Proposed Gain/(Loss) Rs m
Excise Duty on toilet preparations
containing alcohol 50.0% 16.0% 308
Custom duties (peak) 30.0% 25.0% 250
Corporate tax surcharge 5.0% 2.5% 113
Excise duty on biscuits
and confectionery 16.0% 8.0% 22
Service tax on advertising 5.0% 8.0% (253)
Excise Duty on Edible Oils Nil 8.0% (285)
Tax on Tea Re 1 Re 1 Neutral
Dividend tax Nil 12.50% Neutral
Total Gain/Loss 155Profit before Tax 2002 22,357
% of PBT 0.7%
Source: Budget Documents, Morgan Stanley Research Estimates
ITC (ITC.BO, Rs 650.7, Equal-Weight, Price Target
Rs700)
A specific excise duty has been retained. Excise comprises
60% of ITC’s total cigarette turnover and is the largest cost
element. The budget does not increase the excise duty on
cigarettes. However, the government will amend the
Additional Excise Duty Act to allow state governments to
impose a maximum 4% sales tax on cigarettes. This implies
that ITC will have to raise its prices an average of 4-5% to
cover the additional excise burden. Implementation of the
sales tax may take a few months, which would benefit ITC,
in our view. We believe that, while price increases will hurt
volumes in the near term, profitability may not be
significantly dampened on account of price hikes and an
improvement in product mix.
ITC benefits from the reduction in excise duty from 16% to
8% on biscuits and sugar confectionery, albeit marginally.
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Page 14
The company’s hotel business should gain significantly
from the withdrawal of the expenditure tax, the continued
exemption on service tax and the benefit of setting-off
unabsorbed losses and depreciation on amalgamation,among others. ITC’s earnings will benefit from the
decrease in the surcharge on corporate tax, as the
company’s effective tax rate is 33.6%.
We retain our price target of Rs700, which is based on 7.1x
EV/EBIDTA (12% premium to global average) on our
F2004 estimates. We use EV/EBITDA as the valuation
measure because it captures the earnings of the core
cigarette business. We believe that a 15-20% premium to
the global tobacco sector average multiple is justified by
ITC’s higher forecast earnings growth rate and ROE. The
key risks we see to achievement of our price target for ITC
are the operating fundamentals for domestic tobacco, any
adverse outcome of pending litigation with government
authorities, and a significant change in investment in the
company’s non-tobacco businesses.
Britannia Industries (BRIT.BO, Rs519.9, Equal-Weight,
Price Target Rs601)
Britannia should be the biggest gainer from the Finance
Bill, 2003 (Exhibit 11). The excise reduction for biscuits
from 16% to 8% should substantially boost its core bakery
business. We believe that the company will decrease the
price of its brands to pass on the lower excise duty to the
consumer. This should accelerate its volume growth andease pressure on operating margins. The latter should also
be helped by the reduction in the peak import duty on
refined edible oil costs, its key input. While the gain
appears to be huge, price decreases will likely be traded for
volume increases.
We arrive at our price target of Rs601 by applying a
F2004E P/E of 14. Based on our price target, the stock
would trade at a 15% discount to the sector earnings
multiple, which we believe is a fair valuation. The main
risks we see to achievement of our price target for Britannia
are: 1) a significant change in consumption demand growth;2) a meaningful shift in market shares in biscuits and major
brands; 3) substantial material cost inflation; 4) lack of
success in the dairy business; and 5) utilization of surplus
cash.
Exhibit 11
Britannia Industries: Budget Impact
Existing Proposed Gain/(Loss) Rs m
Excise duty on biscuits 16.0% 8.0% 514
Custom duties (Peak)- edible oils 30.0% 25.0% 43
Corporate tax surcharge 5.0% 2.5% 13
Dividend tax Nil 12.50% Neutral
Total Gain/Loss 571
Profit before Tax 2002 1362
% of PBT 42%
Source: Budget Documents, Morgan Stanley Research Estimates.
Energy
Vinay Jaising
F2004 Budget – Marginally Positive for Indian Oil & Gas
The Union Budget for F2004 has five major proposals
relevant to the Indian oil & gas industry. The overall
impact, in our view, is marginally positive.
Surcharge on corporate tax reduced by 2.5%
As all the Indian oil & gas companies fall under the highest
corporate tax slab, lowering the surcharge from 5% to 2.5%
would reduce their effective tax rate by around 1.3%, and
consequently lower their tax burdens.
Increase in government subsidy on kerosene & LPG
The government has increased the petroleum subsidy fromRs62.65 billion in F2003 to Rs81.16 billion for F2004, a
rise of 30%. We believe this is primarily to compensate the
R&M companies (IOCL, BPCL and HPCL) for existing
subsidies on LPG and kerosene sales. According to our
calculations, while the estimated subsidy on kerosene has
been maintained at Rs3/liter, the estimated subsidy on LPG
has increased 77.5% to Rs71/cylinder. In our view, this is
positive for the Indian R&M companies.
Instead of increasing the subsidy, the government could
have increased LPG and kerosene prices to enable the
R&Ms to realize prices close to the fair market value. Ourdiscussion with various industry officials and the Indian
R&M companies lead us to believe that, within this
financial year, the government will have to issue oil bonds
worth Rs82.5 billion as compensation to the R&Ms for prior
periods.
Advantage for LNG Regassification plants
The government has reduced import duty on capital goods
required for LNG regassification units, from 25% to 5%.
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Page 15
This will lower the capital expenditure to set up LNG
projects.
Additional duty on crude oil
A Natural Calamity Contingency Duty of Rs50/ton has been
imposed on crude oil – both indigenous and imported – for
one year. This will result in a 0.5% reduction in the
weighted average tariff protection for the Indian refiners,
translating to a reduction of about Rs5 billion in the
cumulative profits of the industry
Additional cess of Rs0.5 per liter on motor fuels
Additional duty on motor spirit (petrol) and high-speed
diesel oil has been increased from Rs1/liter to Rs1.5/liter.
Excise duty on light diesel oil has also risen by Rs1.5/liter.
Engineering
Satish Jain
Budget positive for power generation companies
Negative for equipment manufacturers like BHEL
Positive for infrastructure construction companies
The budget mentioned that the Electricity Bill introduced in
Parliament should be taken up for consideration at an early
date. In our view, political considerations may delay
passage of the bill, which could also delay benefits to
companies like BHEL in the form of lower receivables andgreater demand for generation equipment after a lag of 1-2
years.
Customs duties on equipment for high-voltage transmission
equipment have been reduced from 25% to 5%. While this
is obviously positive for the power sector, equipment
manufacturers like BHEL may be negatively affected by the
threat of imports or pricing parity with imports.
The government emphasized power generation and has
decided allow benefits like 10-year tax holidays and a
complete waiver of import duties, previously available onlyto “Mega power projects” (capacity above 1000MW) to all
power projects. This should give a boost to additions of
larger power generation capacity.
Infrastructure construction companies should benefit from
more orders with the government’s proposed increase in
investments in infrastructure projects like road construction,
seaports, airports and power.
Media
Rajesh Mayani
Overall, the budget looks neutral to negative for the media
sector. The proposal that we believe will affect the industry
most is the increase in the service tax from 5% to 8%.
Advertising revenue has been sluggish, and an incremental
3% service tax will likely hurt broadcasters. While cable
operators may be able to pass on the higher tax to consumer
households, the broadcasters may find it difficult to pass on
the entire burden to advertisers.
Advertising revenue comprises nearly 61% of total revenue
for Zee TV (ZEE.BO, Rs84, Overweight, Price Target
Rs118).
We estimate that the maximum impact on the company’s
earnings will be Rs197 million, or 7% of pre-tax profits, if
we assume that Zee TV will have to bear the total
incremental cost. In our view, the company will be able to
pass on at least 50% of the incremental cost to advertisers.
Also, it will benefit from lower tax rate, albeit marginally.
Metals
Chetan Ahya
Non Ferrous and Precious Metals
We view the budget as marginally positive for the non-
ferrous metal sector, as customs tariffs for important non-
ferrous metals like aluminium and copper are unchanged in
the budget. We were expecting a 5% reduction in the
copper tariff from 25% to 20%.
The following are some of the other changes that affect the
industry:
a) Gold arising from smelting copper and zinc has been
exempted from excise duty.
b) Customs duty on serially numbered gold bars has been
reduced from Rs250 to Rs100 per 10 grammes.
On the direct tax side, the reduction in the corporate tax
surcharge from 5% to 2.5% is positive for high marginal tax
rate payers like Hindalco.
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Page 16
Hindalco (HALC.BO, Overweight, Rs587, Price Target
Rs766)
Budget proposals to retain the tariff on non-ferrous metals
like copper, exempting gold arising from smelting copper
from the excise duty and the reduction in the corporate tax
surcharge are positive for Hindalco’s earnings. We have
increased our earnings forecast by 4% for F2004 and F2005.
We retain our Overweight rating and our target price of
Rs766 on the stock. Our price target is conservatively
based on a 12-month forward EV/EBITDA multiple of 3.5.
We prefer to use EV/EBIDTA in setting the price target, as
it is not influenced by the varying capital intensity and
leverage cost of the different players in the mining industry.
We believe risks to our price target include: (a) sharp
declines in non-ferrous metal prices; (b) a longer-than-
expected weak cycle in copper treatment and refiningcharges, and (c) higher-than-expected cuts in tariff
protection.
Steel
The budget proposals left the tariff on hot rolled coils intact
at 25%. This was a pleasant surprise, as we had expected
that high international prices, which had caused domestic
prices to increase, would prompt the government to cut the
tariff by 5%.
The 5% reduction in tariffs on cold rolled coils, galvanized
sheets and structurals was, however, in line with ourexpectation. Amongst the other positives for the sector
were the government’s emphasis on infrastructure and
housing and the reduction in excise duty for end-user
segments like automobiles. The rail budget announced
earlier also had some benefits for the steel sector, with a
reduction in freight on iron and steel of nearly 5.3%.
Incorporating the budget measures outlined above, we have
raised our earnings forecast by 7% for F2004.
Tata Iron & Steel Co. (TISC.BO, Rs149.05, Underweight,
Target Rs154)
We maintain our Underweight rating on Tata Iron & SteelCo. (TISCO), as we believe there would be little investor
tolerance for a decline in steel prices. Our 12-month price
target of Rs154 is based on a 12-month forward
EV/EBITDA of 5.4 times, which is a 10% discount to the
past five year’s average. We prefer to use EV/EBIDTA in
setting the price target, as it is not influenced by the varying
nature of capital intensity and the leverage cost of different
players in the mining sector. The key risk we see to our
price target is continued resilience of or an increase in steel
prices. TISCO is highly leveraged to steel prices, and
changes in those quotes affect EBIDTA and operating
profits significantly.
Pharmaceuticals
Sameer Baisiwala
The government has emphasized health care as one of its
five priorities and, accordingly, announced several
incentives for the pharmaceutical, health care facilities and
biotechnology industries. The Finance Minister stressed the
need to improve the country’s health care infrastructure. To
this end, the benefits of Section 10 (23G) of the Income Tax
Act have been extended to financial institutions for
providing capital to private hospitals with more than 100beds. The budget proposes a community-based universal
health insurance scheme for the less advantaged citizens at a
nominal premium of Rs1 per day for medical
reimbursement up to Rs30,000.
We believe that the budget is a mild positive for the
pharmaceutical industry and may result in 2-3% higher
profitability for the prominent pharmaceutical companies,
including Ranbaxy (RANB.BO, Rs613.9, Overweight, Price
Target Rs790), Dr Reddy’s (REDY.BO, Rs876.9,
Overweight, Price Target Rs1,149), Cipla (CIPL.BO,
Rs769.25, Equal-Weight, Price Target Rs1,050), Sun
(SUN.BO, Rs280.05, Overweight, Price Target Rs420) and
Wockhardt (WCKH.BO, Rs453.75, Equal-Weight). The
key benefits we see for these companies are as follows:
• Reduction in customs duty by 5 percentage
points to 25% for pharmaceutical-related imports.
The impact of this announcement is calculated in
Exhibit 12.
• Halving of the surcharge on corporate tax to
2.5%. This would affect the companies across all
sectors.
• Several indirect tax/depreciation benefits (1)
Increase in the depreciation rate by 15 percentage
points to 40% for life-saving medical equipment;
2) 20 percentage-point lower customs duty to 5%
and CVD (countervailing duty) exemption
specified for life-saving equipment; 3) broadening
of the list of life-saving drugs, which attract nil/5%
customs duty and exempting those drugs from
excise duty; 4) exempting all material/drugs used
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Page 17
for clinical trials from customs and excise duty;
and 5) 20 percentage-point reduction in the
Reference Standards to 5%.
The precise impact on individual companies can be assessed
only once the fine-print is available. However, we believe,
that the above-mentioned benefits will result in 2-3% higher
profitability for the prominent pharmaceutical companies.
The probable enforcement of VAT (value added tax) is
likely to benefit the organized pharmaceutical sector and
facilitate supply chain efficiencies. The proposed VAT rate
(12.5%) is likely to be higher than the present average rate
of around 8%. According to the companies, the additional
tax is likely to be passed on to the consumers.
Exhibit 12
Indian Prominent Pharmaceutical Companies: Effect of
Lower Customs Duty (F2002 data, Rs mn)
Company Imports Impact (PBT)* Impact as a % of
Profits
Cipla 1,630 63 2.7%
Dr Reddy's Lab 1,493 57 1.2%
Glaxo 1,164 45 5.9%
Ranbaxy ** 4,004 154 6.1%
Sun 570 22 1.3%
Wockhardt 513 20 1.9%
Source: Morgan Stanley Research Estimates
*Under the best-case scenario, assuming all imports qualify for lower customs
duty **Impact is amplified for Ranbaxy since profits have risendisproportionate to imports over the last 15 months
Technology
Anantha Narayan
Three proposals contained in the F2004 budget affect the
software services sector, in our view. As we have discussed
before (see “Budget Possibilities” dated February 21, 2003),
income tax is the only significant budget variable that
affects the sector.
Income Tax Change: Last year, the Income Tax Act
inserted a proviso that restricted exemptions to 90% of
profits, specifically for F2003. (Previously 100% of profits
were exempt.) In our view, the market was expecting the
status quo to be maintained. However, since there was no
specific mention of this in the F2004 budget, it seems that
the restriction has been lifted, and 100% of profits are
exempt once again. Thus, we regard this as marginally
positive for the sector.
We reproduce in Exhibit 13 part of an exhibit from our
February 21, 2003, note, discussing the approximate likely
effect of this change on various companies in our coverage.
Since we do not view the impact as significant, we are notchanging our earnings estimates at this stage.
Exhibit 13
India Software Services: Approximate Impact of
Reinstatement of 10% Tax Exemption
Company F04E F04E F04E Likely F04E Likely
Tax Rate EPS (Rs) Tax Rate Likely EPS EPS Change
Digital 11% 41.1 7.8% 42.6 3.6%
HCLT 11% 13.7 8.1% 14.1 3.1%
Hughes 20% 17.1 17.8% 17.6 2.7%
i-flex 12% 63.4 9.1% 65.5 3.3%
Infosys 17% 193.6 14.7% 199 2.8%
Satyam 10% 17.1 6.9% 17.7 3.4%
E = Morgan Stanley Research Estimates Source: Morgan Stanley Research
Clarification on change of ownership: The government
has clarified that tax exemptions will continue, even if
majority ownership changes hands. This would aid M&A
and restructuring activity.
Changes in dividend distribution and marginal tax rate:
The government has imposed a dividend distribution tax of
12.5% on all companies in India but has made it exempt of
tax in the hands of shareholders. We think companies may
adjust their payouts to neutralize the tax – the shareholder
should still be a net beneficiary. The marginal tax rate hasgone down slightly from 36.75% to 35.88%. This will have
a negligible impact on the software services industry, in our
view.
Telecom
Vinay Jaising
F2004 Budget Rings a Positive Tone
Reduction in customs duty on certain telecom equipment
should aid growth
The India Union Budget F2004 reduced customs duty on
optical fiber cables from 25% to 15%; on routers, modems
and fixed wireless terminals from 15% to 10%, and on
certain specified equipment from 25% to 15%. The budget
also extended the low import duty rates of 5% for wireline
and wireless customer premises equipment (CPE) for
F2004. All the telecom operators, including Bharti Tele-
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Page 18
Ventures and Reliance Infocomm, should benefit from the
implied reduction in their overall capital expenditure.
Eligibility of startup services for 10-year tax holiday
extended for F2004
The government has decided to extend the eligibility of
startup telecom services for a 10-year tax holiday (100% tax
exemption for first five years, 30% exemption for the next
five years) to those operators commencing operations up to
March 31, 2004. Reliance Infocomm would be a direct
beneficiary.
Increase in service tax from 5% to 8% is the sole negative
The proposed increase in service tax in F2004 would
increase the effective ARPU (and in turn, the cost to the
consumer) of all wireline and wireless operators by 2.8%.
MTNL and VSNL should benefit from 2.5% reduction in
corporate tax surcharge. Bottom lines could improve 1.3%
for of MTNL and 1% for VSNL due to reduction in the tax
burden.
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Page 19
Global Stock Ratings Distribution
(as of February 28, 2003)
Coverage Universe Investment Banking Clients (IBC)
Stock Rating Category Count
% of
Total Count
% of
Total IBC
% of Rating
CategoryOverweight 616 33% 239 38% 39%
Equal-weight 883 47% 289 46% 33%
Underweight 390 21% 104 16% 27%
Total 1,889 632
Data include common stock and ADRs currently assigned ratings. For disclosure purposes(in accordance with NASD and NYSE requirements), we note that Overweight, our most
positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and
Underweight most closely correspond to neutral and sell recommendations, respectively.
However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral,
and sell but represent recommended relative weightings (see definitions below). An investor's
decision to buy or sell a stock should depend on individual circumstances (such as the
investor's existing holdings) and other considerations. Investment Banking Clients arecompanies from whom Morgan Stanley or an affiliate received investment banking
compensation in the last 12 months.
ANALYST STOCK RATINGS
Overweight (O). The stock’s total return is expected to exceed the total return of the relevant country MSCI index, on a risk-adjusted basis,over the next 12-18 months.
Equal-weight (E). The stock’s total return is expected to be in line with the total return of the relevant country MSCI index, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock’s total return is expected to be below the total return of the relevant country MSCI index, on a risk-adjustedbasis, over the next 12-18 months.
More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month,based on a quantitative assessment of historical data, or in the analyst’s view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile(unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner.
Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts.
ANALYST INDUSTRY VIEWS
Attractive (A). The analyst expects the performance of his or her industry coverage universe to be attractive vs. the relevant broad marketbenchmark over the next 12-18 months.
In-Line (I). The analyst expects the performance of his or her industry coverage universe to be in line with the relevant broad marketbenchmark over the next 12-18 months.
Cautious (C). The analyst views the performance of his or her industry coverage universe with caution vs. the relevant broad marketbenchmark over the next 12-18 months.
Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts.You may also request this information by writing to Morgan Stanley at 1585 Broadway, 14th Floor (Attention: Research Disclosures), NewYork, NY, 10036 USA.
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For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to
achieving these targets, please refer to the latest published research on these stocks. Research is available through your sales representative
or on Client Link at www.morganstanley.com and other electronic systems.
This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial
circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. MorganStanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the adviceof a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances andobjectives.
The information and opinions in this report were prepared or are disseminated by Morgan Stanley Dean Witter Asia Limited and/or MorganStanley Dean Witter Asia (Singapore) Pte. and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd and/or Morgan Stanley & Co.International Limited, Taipei Branch and/or Morgan Stanley & Co International Limited, Seoul Branch, and/or Morgan Stanley Dean WitterAustralia Limited (A.B.N. 67 003 734 576, a licensed dealer, which accepts responsibility for its contents), and/or JM Morgan StanleySecurities Private Limited (collectively or individually, as the case may be, "Morgan Stanley").
The following analyst, strategist, or research associate (or a household member) owns securities in a company that he or she covers orrecommends in this report: Ridham Desai - ITC Ltd. (common stock), Hindustan Lever (common stock); Sachin Sheth - ICICI Bank (common stock), Grasim Industries (common stock); Anantha Narayan - Infosys Technologies (common stock).
Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their MSCI sub industry.Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other
involuntary acquisition.
This report is not an offer to buy or sell any security or to participate in any trading strategy. Morgan Stanley, Morgan Stanley DW Inc.,affiliate companies and/or their employees may have investments in securities or derivatives of securities of companies mentioned in thisreport, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associatedpersons.
An employee or director of Morgan Stanley, Morgan Stanley DW Inc. and/or their affiliate companies is a director of Gujarat AmbujaCements, Britannia Industries, Ranbaxy Laboratories.
Within the last 12 months, Morgan Stanley, Morgan Stanley DW Inc. or an affiliate managed or co-managed a public offering of securities of i-flex Solutions Ltd.
Within the last 12 months, Morgan Stanley, Morgan Stanley DW Inc. or an affiliate has received compensation for investment bankingservices from Reliance Industries, Britannia Industries, ITC Ltd., Tata Iron & Steel Co, Bharti Tele-Ventures Ltd., Digital GlobalSoftLimited, Sun Pharmaceutical Industries, Wockhardt Limited.
In the next 3 months, Morgan Stanley, Morgan Stanley DW Inc. or an affiliate expects to receive or intends to seek compensation for
investment banking services from NIIT Limited, Dr. Reddy's Lab, State Bank of India, Reliance Industries, ITC Ltd., Bharat Petroleum Corp.,Hindalco Industries, Tata Iron & Steel Co, Bharti Tele-Ventures Ltd., Mahanagar Telephone Nigam, Videsh Sanchar Nigam, DigitalGlobalSoft Limited, HDFC, HCL Technologies, Infosys Technologies, Cipla Ltd., Ranbaxy Laboratories, Sun Pharmaceutical Industries.
As of January 31, 2003, Morgan Stanley, Morgan Stanley DW Inc. and/or their affiliate companies beneficially owned 1% or more of a classof common equity securities of the following companies covered in this report: NIIT Limited, State Bank of India, Gujarat Ambuja Cements,Britannia Industries, Hindalco Industries, Tata Iron & Steel Co, Mahanagar Telephone Nigam, HDFC, Infosys Technologies, RanbaxyLaboratories.
Morgan Stanley, Morgan Stanley DW Inc. and/or their affiliate companies make a market in the securities of Reliance Industries, ITC Ltd.,Videsh Sanchar Nigam, Infosys Technologies, GlaxoSmithKline Pharma.
The research analysts, strategists, or research associates principally responsible for the preparation of this research report have receivedcompensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firmrevenues and investment banking revenues.
Morgan Stanley has no obligation to tell you when opinions or information in this report change. Morgan Stanley and its affiliate companiesare involved in many businesses that may relate to companies mentioned in this report. These businesses include market making and
specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking.
This report is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make norepresentation that it is accurate or complete.
This report has been prepared by Morgan Stanley research personnel. Facts and views presented in this report have not been reviewed by, andmay not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.
The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices ormarket indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options orother rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of futureperformance are based on assumptions that may not be realized.
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To our readers in the Republic of China: Information on securities that trade in Taiwan is distributed by Morgan Stanley & Co. InternationalLimited, Taipei Branch (the "Branch") and has been authored or reviewed by Dickson Ho, Head of Research. Such information is for yourreference only. The reader should independently evaluate the investment risks. This publication may not be distributed to the public media orquoted or used by the public media without the express written consent of Morgan Stanley. Information on securities that do not trade in
Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. TheBranch may not execute transactions for clients in these securities.
Certain information in this report was sourced by employees of the Shanghai Representative Office of Morgan Stanley Dean Witter AsiaLimited for the use of Morgan Stanley Dean Witter Asia Limited.
This publication is disseminated in Japan by Morgan Stanley Japan Limited, in certain provinces of Canada by Morgan Stanley CanadaLimited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Spain by MorganStanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) andstates that this document has been written and distributed in accordance with the rules of conduct applicable to financial research asestablished under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., whichaccept responsibility for its contents; and in the United Kingdom, this publication is approved by Morgan Stanley & Co. InternationalLimited, solely for the purposes of section 21 of the Financial Services and Markets Act 2000 and is distributed in the European Union byMorgan Stanley & Co. International Limited, except as provided above. Private U.K. investors should obtain the advice of their MorganStanley & Co. International Limited representative about the investments concerned. In Australia, this report, and any access to it, is intendedonly for "wholesale clients" within the meaning of the Australian Corporations Act.
The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warrantiesor representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for anydamages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusiveproperty of MSCI and S&P.
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Additional information on recommended securities is available on request.
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