BUDGET Impact Analysis 205

8/3/2019 BUDGET Impact Analysis 205

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India Infoline Ltd, 15th

Floor, P.J. Towers, Dalal Street, Mumbai- 01. Tel: +(91 22) 6749 1700

Union Budget 2007-08

Post Budget Impact Analysis

February 28, 2007

The union budget 2007-08 focuses on agriculture which had an estimated average growth rate during the tenth five

year plan of 2.3%, much below the desired level of 4% pa. It emphasizes agriculture to be at the top of agenda and has

given initiatives for agriculture growth.

Key Positives

Fiscal deficit under control and on course to meet FRBM targets.

Infrastructure spending increased across the board.

Reduction in peak customs duty from 12.5% to 10%

Increase in spending on education and healthcare.

Extended TUF scheme for textile companies.

Key Negatives

Efforts to manage cement prices.

Removal of 80IA benefits for construction companies.

Partial removal of tax exemptions for several sectors-IT, pharmaceuticals.

Dividend distribution tax increased from 12.5% to 15%

Market OutlookThe market was surprised negatively with the budget changes which hit immediate profitability of companies

However, we feel the long term direction for growth has been maintained. The key sectors which have taken a beating

are construction, IT and cement sectors. The global factors have also accentuated the fall.

Going ahead, we feel the market is attractively priced at current levels and we do not see major downside to the

markets. Sectors like construction, cement, power equipment and IT offer growth at attractive valuations.

OUR TOP PICKS

Large Caps Mid Caps

Bank of India Bharat Bijlee

Bharti Airtel Gayatri Projects

Nagarjuna Construction Dishman Pharma

Satyam Computers Kesoram Industries

Shree Cements D S Kulkarni

Sun Pharma Opto Circuits


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Key Highlights

Agriculture

Farm credit likely to reach Rs1.9trn as against targeted Rs1.8trn by 2007.

Irrigation outlay for 2007-08 increased to Rs110bn, an increase of 54% yoy.

Fertilizer subsidies for 2007 likely to be Rs225bn against budgeted Rs173bn.

NABARD provided with rural bonds up to Rs50bn for refinance.

Budget Estimates

Revenue deficit for 2006-07 expected at 2.0% (against BE of 2.1%) and fiscal deficit at 3.7% (against BE of3.8%).

Plan expenditure for 2007-08 seen at Rs2.05trn or 32% of total expenditure (net of the SBI share acquisition)

Non-Plan expenditure in 2007-08 (net of SBI share acquisition) is estimated at Rs4.4trn, an increase of 6.5% over2006-07.

Defence expenditure increased to Rs960bn which includes Rs419bn for capital expenditure.

Budget Estimates for Total expenditure for 2007-08 is estimated at Rs6.8trn (including Rs400bn for SBIacquisition)

Total revenue receipts are projected at Rs4.9trn and revenue expenditure to be Rs5.6trn

Revenue deficit is estimated at 1.5% of GDP while fiscal deficit is estimated at 3.3%

Tax Proposals

Indirect Taxes

Peak custom rates for non-agricultural products reduced from 12.5% to 10.0%.

Ad-valorem component of excise duty on petrol and diesel reduced from 8% to 6%.

Excise duty on cement reduced to Rs350/ton from Rs400/ton on cement which is sold in retail at not more thanRs190/bag. On higher MRP, excise duty would be Rs600/ton.

Service tax net extended to:

Rent on immovable commercial property.

Development and supply of content for use in telecom and advertising purposes

Services outsourced for mining of mineral, oil or gas.

Asset management services provided by individuals.

Design services


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Direct Taxes

Threshold limit for all tax payers increased by Rs10,000 to Rs110,000, while for women it would be Rs145,000and senior citizens Rs195,000.

Surcharge on income tax removed for all firms with taxable income of Rs10mn or less.

Dividend distribution tax raised to 15% from 12.5%: negative for all dividend paying companies

Dividends distributed by money market mutual funds and liquid mutual funds will now be paying dividenddistribution tax at 25%.

Additional cess of 1% on all taxes to fund secondary education and higher education.


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Sectoral Impact

Banking and Finance

Cement

FMCG

Healthcare

IT/Software

Infrastructure & Construction

Oil and Gas, Petrochemicals

Pipes

Power

Real Estate

Steel

Telecom


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Banking and Finance

No mention of lowering the 5 year maturity ceiling on tax free Bank deposits

Impact NeutralThe budget has no mention on lowering maturity from the existing 5 years ceiling on tax free bank deposits. The said

lowering in maturity would have made Bank deposits more attractive leading to higher deposit mobilization and

thereby improving liquidity situation.

Scheduled Co-Operative Banks allowed deduction on provision for bad debts

Impact- Positive (In line with what Scheduled commercial banks avail)

Co-Operative Banks now would be able to avail deduction under Sec 36 (1) (viia) for provision made for bad and

doubtful debts up to 7.5% of their total income and 10% of the advances made by rural branches of these Banks. The

government has proposed to amend this Act to include Co-Operative Banks under this Act. This has corrected the

situation for Co-Operative Banks who are liable to pay tax on profits after the withdrawal of deduction under Sec 80P.

Service tax levy on asset management and portfolio management companies promoted other than a Bank or

Financial Institution

Impact- Negative

Asset management and Portfolio management business has been a thriving business for many NBFCs engaged in

providing capital market services. Service tax levy on AMC fees provided by these companies is not likely to impac

their business as it would be passed on to the customers, though the incidence of service tax on profits shared would

have to be borne by the AMC as the customer would not be willing to pay for.

Only limited sector specific venture capital funds/ companies to avail 100% tax exemption

Impact- NegativeCurrently under the existing provisions of Clause (23FB) of Sec 10, any venture capital company is exempt from Tax

The union budget has amended this section to include only those Venture capital funds/ Companies which earn profits

from investment in selected businesses like nanotechnology, information technology relating to hardware and

software development, seed research and development, bio-technology, research and development of new chemica

entities in the pharmaceutical sector, production of bio-fuels, or building and operating composite hotel-cum-

convention centre with seating capacity of more than 3000, or engaged in the dairy industry or poultry industry. The

amendment will take effect from 1st April, 2008 and will apply in relation to the assessment year 2008-09 and

subsequent years.

Company level Impact- Banks like ICICI Bank, IDBI Bank has Venture capital financing subsidiaries.

However, we estimate very little impact on parent company valuations as these contribute a very small

proportion to consolidated values. (ICICI Venture Fund contributes mere Rs3 to the consolidated Value. IDBIBank- Not rated)


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EPS FY08E Impact change Target Price Revision Rating

State Bank of India 97.6 NIL 1250 NIL HOLD

Punjab National Bank 65.2 NIL 545 NIL BUY

Bank of Baroda 37.9 NIL 326 NIL BUY

Canara Bank 36.2 NIL 240 NIL HOLD

Bank of India 22.2 NIL 235 NIL BUY

Union Bank of India 19.2 NIL 122 NIL BUY

Andhra Bank 13.0 NIL 100 NIL BUY

Corporation Bank 42.5 NIL 356 NIL HOLD

ICICI Bank 46.3 NIL 1200 NIL BUY

HDFC Bank 47.9 NIL 921 NIL SELL

UTI Bank 29.1 NIL 575 NIL HOLD


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Cement:

Excise duty for cement has been increased from Rs400 to Rs600 per ton for a bag of 50kg where the retail price is

above Rs190 and for price below Rs190 excise duty has been reduced from Rs400 to Rs350.

This is against the expectation of the industry to reduce the excise duty across the table. Average cement price is

below Rs190 in Andhra Pradesh, Orissa, Rajasthan and Madhya Pradesh and marginally above Rs190 in Gujarat andTamil Nadu. As the price in other states is above Rs190 we expect higher excise duty would be applicable for sales in

these states.

We expect the higher excise duty to be passed on, as the demand is high but the upside is limited for improvement in

realization.

There are some positives like increase in allocation for Bharat Nirman by 31.6% to Rs246bn and increase in provision

for National Highway Development Programme by 7.3% to Rs107bn

We have reduced our EPS estimates as we expect appreciation in cement prices to be muted going forward. We have

reduced our 5% price improvement for FY08 to 3% which reflects the current realization for cement companies. We

have also reduced our target PE estimates for all the companies to reflect the realization cap.

We find the recent fall (10-24% in one month) in cement company stocks has made these stocks attractive and with

demand supply balance still favouring the producers for another 12-18 months the fall is overdone. We are upgrading

our rating on India Cements from HOLD to BUY with a lower target. We are retaining our BUY rating on Kesoram

Industries, Madras Cement and Shree Cement and retaining HOLD on ACC, Chettinad Cement Corporation and

Ultratech Cement.

The key concerns of rising inflation and interest rates however remain.

Company Old EPS Revised EPS Change (%)

FY08P FY09P FY08P FY09P FY08P FY09P

ACC* 76.6 71.8 73.5 68.6 (4.0) (4.5)

Chettinad Cement Corp 51.6 49.5 48.3 45.9 (6.4) (7.3)

India Cements 25.5 22.6 23.8 20.8 (6.7) (8.0)

Kesoram Industries 66.7 71.4 64.0 67.2 (4.0) (5.9)

Madras Cement 340.5 355.9 321.1 330.6 (5.7) (7.1)

Shree Cement 143.8 160.1 136.5 150.3 (5.1) (6.1)

Ultratech Cement 86.6 90.1 81.2 78.3 (6.2) (13.1)* For ACC CY07 and CY08

Target Change PE CMP

Company Old Revised (%) Old Revised (Rs) Rating

ACC* 1077 960 (10.8) 15 14.0 900 HOLD

Chettinad Cement Corp 584 482 (17.5) 11.8 10.5 438 HOLD

India Cements 271 218 (19.4) 12 10.5 179 BUY

Kesoram Industries 668 538 (19.5) 10 8.0 400 BUY

Madras Cement 4270 3637 (14.8) 12 11.0 2875 BUY

Shree Cement 1726 1503 (12.9) 12 10.0 1147 BUY

Ultratech Cement 1212 1018 (16.0) 14 13.0 891 HOLD


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FMCG Industry

Key announcements

Packed biscuits of maximum retail sale price (MRP) not exceeding Rs50 per kg fully exempted from excise duty. Excise duty on food mixes (including instant food mixes) fully exempt from excise duty.

Customs duty on food processing machinery has been reduced from 7.5% to 5%.

Crude as well as refined edible oils exempt from the additional CV duty of 4%.

Customs duty on crude sunflower oil has been reduced from 65% to 50% and on refined sunflower oil from 75%to 60%.

A Special Purpose Tea Fund launched for re-plantation and rejuvenation of tea. Similar financial mechanisms tobe announced for coffee.

Excise duty on parts of footwear reduced from 16% to 8%.

Impact

Positive for Marico, Bata, organized biscuit manufacturers like Britannia, ITC and food-processing companieslike ITC, Nestle, HLL, Dabur, MTR Foods.


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Cigarette industry

Key announcements

Specific excise duty on cigarettes increased by 5%. No change in AED.

Excise duty per thousand sticks on man-made bidis increased from Rs7 to Rs11 while, duty on machine madebidis increased from Rs17 to Rs24.

To reduce the understatement of production of bidis by manufacturers in order to avail duty exemption (2mn bidisper year currently fully exempt from excise), there will be an increased audit.

Pan masala containing tobacco will continue to bear an excise duty of 66%. However, in the case of pan masalanot containing tobacco, the duty will be reduced from 66% to 45%.

Exemption from excise duty on pan masala containing tobacco and other tobacco products manufactured byspecified units in the North-East region has been withdrawn.

Impact

Given the sustained strong volume growth in cigarettes, ITC can easily pass on the increased excise duty burdenthrough price hikes. Also, the increase in excise duty on bidis augurs well for ITC.

Duty structure

Sr. No. DescriptionExcise duty

(Rs per 000 sticks)

Cigarettes 2006 2007

Non-filter Cigarettes

1 Not exceeding 60 mm in length 160 168

2 Exceeding 60 mm but not exceeding 70mm 520 546

Filter cigarettes

3 Not exceeding 70 mm in length 780 819

4 Exceeding 70 mm but not exceeding 75mm 1,260 1,323

5 Exceeding 75 mm but not exceeding 85mm 1,675 1,759

6 Other cigarettes 2,060 2,163

7 Cigarettes of tobacco substitutes 1,150 1,208

We maintain our BUY recommendation on ITC and Marico and HOLD on Nestle.

Company EPS FY08E Target Price Target PE CMP Upside % Rating

ITC 8.6 202 20.0 172 17.5 BUY

Marico 2.8 85 21.8 61 38.9 BUY

Nestle - F12/07E 44.9 1,123 21.6 970 15.8 HOLD


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Healthcare:

The government has proposed taxation of EOU units under MAT. This will impact companies who are currentlyunder MAT (Dishman Pharma, Sun Pharma, Biocon and Shasun Chemicals). Cadila Healthcare would be

impacted as intermediate supply for Pantoprazole to Altana is from an EOU. Cipla will also be affected negativelywith significant portion of production from EOU. Companies not under MAT full tax paying (Ranbaxy, Dr

Reddys, Jubilant Organosys and Nicholas Piramal) are unlikely to witness significant change in their effective

tax rates.

Company Old EPS New EPS% change

in EPS Revised Target Price Recommendation

Cadila Healthcare 22.1 21.9 (1) 394 Maintain BUY

Dishman Pharma 16.8 15.9 (5.4) 270 Maintain BUY

Divis Labs 128.2 124.7 (2.7) 2,744 HOLD

Jubilant Organosys 16 16 - 275 HOLD

Nicholas Piramal 14.8 14.8 - 266 Upgrade to BUY

Indoco Remedies 51.5 51.5 - 391 Maintain BUY

Ranbaxy Labs 22.2 22.2 - 444 Upgrade to BUY

Sun Pharma 45.2 44.1 (2.4) 1,105 Maintain BUY

Dr. Reddys Labs 36.6 36.6 - 893 Maintain BUY

* FY08 estimates

150% weighted average tax deduction for R&D expenses extended for 5 years is a positive for research drivenpharma companies-Ranbaxy, DRRL, Sun Pharma, Cadila Healthcare, Biocon, Glenmark.

The budget has proposed to increase healthcare allocation by 21.9% to Rs152.9bn, a positive for Apollo Groupand Max India.

HIV eradication to gain momentum a positive for MNC companies, Cipla, Wockhardt and Ranbaxy.

Medical insurance deduction u/s 80D increased to Rs15,000, a positive for Apollo Group, Max India as morepopulation would be covered by medical insurance.

The reduction of peak customs duty from 12.5% to 7.5% is likely to impact API manufacturing companiespositively.


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IT/Software:

Policy Initiatives

Non-extension of STP benefits beyond 2009 - Negative especially for all smaller & medium sized IT companieswhich will be forced to find relief under the SEZ scheme now.

MAT @ 11.2% on adjusted book profits extended to income u/s 10A & 10B Negative for all the players aseffective tax rate would increase (with MAT applicable on STP units) but impact could be severe for medium &

smaller players having all or majority units under STP scheme.

Effective Tax Rate (ETR) to go up for almost all companies as STP units u/s 10A & 10B would be taxed at 11.2% nowfor FY08 & FY09 (till the sunset clause gets over in 2009). Beyond FY09 these units will come out of the tax holiday

and would pay normal tax (full tax) on profits. MAT paid over the next two years would be allowed to be set-off postFY09 thereby lowering ETRs of those years to that extent.

Inclusion of ESOPs under the FBT net (rate & method of calculation not disclosed) - Negative for all players.

Higher education allocation by 34.2% to Rs32,352cr - Positive for IT education companies like EducompSolutions (Not Rated), NIIT (Not Rated), Aptech (Not Rated), etc.

Almost doubling of e-Governance outlays both at the Centre and State level Positive for companies likeVakrangee Software (Not Rated).

Impact Negative

Double Whammy!!! EPS estimates of FY08 and FY09 to be worst hit by combination of taxability on STP unitsand FBT on ESOPs.

Revised EPS Forecast & Rating

Company EPS FY08E Target Price Target P/E CMP Upside % Rating

Earlier Revised

Infosys 87.1 81.9 2,457 30 2,078 18.2 BUY

TCS 54.2 ~50.9* 1,477 29 1,188 24.4 BUY

Wipro 25.4 ~23.9* 692 29 561 23.4 BUY

Satyam 25.8 ~24.3* 558 23 413 35.1 BUY

HCL Tech 41.3 ~38.8* 815 21 596 36.8 BUY

Infotech 23.2 21.8 392 18 355 10.5 SELL

Allsec 25.9 23.1 370 16 311 18.8 HOLD

* Still to be finalized

Outlook

We believe the post Budget battering of 5-10% for most of the sector stocks has opened up attractive buying

opportunities into the large cap IT space. Though revising our 12-month target price downwards in line with reduction

in EPS forecast, we remain buyers for the Top 5 companies considering reasonable to significant upside potential

from current prices. Amongst other stocks, we downgrade Infotech to SELL in the light of limited medium term price

appreciation potential while we maintain HOLD on Allsec.


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Infrastructure & Construction

Near term: Long term:

80IA benefits withdrawn for pure contractors: The biggest negative for the ones claiming it

Our interpretation of the fine print suggests that section 80IA benefits will no longer apply to cash contracts. It is also

not applicable to a contractor, who has been sub-contracted work for building a BOT/infrastructure asset belonging to

another company or SPV. The amendment is with retrospective effect from April 2000.

Estimated one time tax outgo on withdrawal of 80IA

335

419

493

583

485

-

100

200

300

400

500

600

700

Gammon HCC NCC IVRCL Patel

(Rsm

n)

HCCs reserves include claims recoverable from IT department. to the tune of Rs420mn impact may be a non cash oneSource: India Infoline Research

Negative for: Gammon, HCC, NCC, IVRCL, Patel, Madhucon

No impact for: L&T, JPA, Simplex, Valecha, Gayatri (These have not availed of section 80IA)

Infrastructure thrust maintained

The thrust on infrastructure development was continued. The Finance Minister stated that the Golden Quadrilateral is nearly

complete, the targeted completion for NSEW is 2009 and NHDP phase-III, V and VI are in advanced stages.

key positives

National Highway allocation increased to Rs126bn from Rs99.55bn

Allocated Rs40bn for rural roads

Additional 2.4mn hectares of irrigated area to be created by FY08

Outlay for accelerated irrigation benefit programme at Rs110bn

Scheme to use forex reserves for infrastructure development

Mutual Funds allowed to launch dedicated infrastructure funds


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Revised EPS estimates and targets

Company Old EPS (Rs) Revised EPS (Rs) Change (%)

FY07E FY08E FY07E FY08E FY07E FY08E

Gammon 12.3 18.0 9.7 14.6 (21.2) (19.1)

HCC 3.6 4.5 3.3 3.7 (7.3) (17.4)

NCC 8.1 11.6 6.9 10.2 (14.1) (12.3)

IVRCL 10.5 15.1 8.8 13.8 (16.2) (8.4)

Patel 18.6 25.0 15.1 20.5 (18.5) (18.1)

Simplex 11.7 15.2 11.7 15.2 - -

Gayatri 29.5 51.5 24.5 41.7 (17.1) (18.9)

CompanyCMP(Rs)

P/E (x)*FY08E

Revised targetprice (Rs)

Upside(%) Rating

Gammon 318 16.2 365.7 15.0 BUY

HCC 103 19.9 107.2 4.6 SELL

NCC 156 11.2 246.6 58.2 BUYIVRCL 291 17.1 331.1 13.9 HOLD

Patel 348 12.0 489.1 40.7 BUY

Simplex 338 22.2 301.9 (10.7) SELL

Gayatri 282 4.8 517.0 83.3 BUY

* P/E adjusted for value of investments and BOTsEPS excluding extraordinary items

Source: India Infoline Research

Our view and recommendation

We spoke to 6-7 construction managements post the budget. While the verdict on section 80IA is seen as a negative,

all reiterated their bullish outlook for the industry for the long term. Rise in cement prices too, at worst would affect

margins by 20bps as many have escalations in place. EPS impact on account of withdrawal of section 80IA tax

benefits for some construction majors is in the region of 7-22% during FY07E and FY08E. While the sentiment seems

affected in the near term, we believe that most of the bad news is factored in the price as many construction counters

declined by 10-20% on budget day-more than the reduction in profitability of the companies due to the tax issue

Taxation benefits for the construction industry was a hanging sword and the worst seems over. The amount of one

time outgo of tax for previous years seems manageable given the current sizes of these companies. With enhanced

budget allocation, we strongly recommend NCC, Patel and Gammon among the bigger players and Gayatri Projects

among the mid caps.


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Oil and Gas, Petrochemicals

Reduction in excise duty on Petrol and DieselThe finance minister with an objective to partly offset the reduction in petrol and diesel prices earlier in the month

decreased the ad valorem excise duty on the two fuels from 8% earlier to 6%. The gains will however reduce withadditional 1% education cess and effective benefit would be 25paise per litre for petrol and 37paise per litre for

diesel. We anticipate a total benefit of around Rs25bn for the entire industry.

This would be EPS accretive for Oil Marketing Companies IOC, BPCL and HPCL. However, we continue to

have an Avoid rating to the companies as uncertainty for future continues to persist. The petroleum ministry,

post the budget announcement, has also indicated that as against earlier estimates of Rs283bn bond issue, only

Rs245.6bn worth of bonds will be issued to these companies. So, on a net basis, the under recovery estimates

could be higher by Rs13.2bn considering excise benefits, lowering of bonds issue and other things being equal.

A 1% reduction in the central sales tax to 3% would mean reduced under-recovery on LPG and SKO of Rs2.50

per cylinder and Rs0.08 per litre, respectively. Current under recoveries on the two products are Rs150/cylinder

for LPG and Rs8/litre for Kerosene. This would translate into a miniscule reduction in under recoveries of OMCs.

Impact on Under recoveriesVolumes FY07 E

(000 tons)Savings from Excise

Cuts(Rs mn) FY07E Bonds Issue (Rs mn)Net

Impact

Petrol Diesel Petrol Diesel Earlier Revised Impact (Rs mn)

HPCL 2,536 11,598 856 5,107 67,920 58,944 (8,976) (3,013)

BPCL 2,591 11,850 875 5,218 73,580 63,856 (9,724) (3,632)

IOCL 5,183 23,700 1,749 10,435 141,500 122,800 (18,700) (6,516)

Total 10,310 47,149 3,480 20,760 283,000 245,600 (37,400) (13,161)

Infrastructure status to cross-country gas pipeline projects has been provided for distribution of gas, which means

a 10 year tax holiday for companies such as GAIL and Reliance Industries Ltd. Apart from income tax holiday, project costs would also be reduced. There is opaqueness as to whether the status is extended to distribution

companies such as Gujarat Gas Company Ltd, Indraprastha Gas Ltd and Gujarat State Petronet Ltd. If extended

these companies would benefit in a similar fashion.

Petrochemicals

Custom duties on plastics reduced to 7.5%

Custom duties on PSF reduced from 10% to 7.5%

Custom duty of polyester filament yarn reduced from 10% to 7.5%

Customs duty on DMT, PTA and MEG also reduced from 10% to 7.5%.

Impact: Marginally negative for Reliance Industries


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Pipes and pumps segment

35 more projects are to be completed during FY07 leading to an additional irrigation potential of 900,000 hectareto be created. The government increased the outlay to Rs110bn from the earlier Rs71.2bn, including grant

component of Rs35.8bn to state government up from Rs23.5bn.

In the budget the government has assigned infrastructure status to cross country pipeline projects, which could bea major booster for pipe manufacturing companies as they could witness improvement in order flows.

We expect PSL (NOT RATED) to be a major beneficiary as it will not only benefit from the above but also fromexemption on excise duty to pipes with outer diameter exceeding 20cm, as they form an integral part of the water

supply project.

The other companies in the sector viz. Man Industries (NOT RATED), Jindal Saw (NOT RATED), Welspun Gujara

Stahl Rohren (NOT RATED) and Kirloskar Brothers Ltd (NOT RATED) should also benefit.

Power:

The government aims to award two more Ultra Mega Power Projects by July 2007, in addition to the twoSasan and Mundra, which were awarded recently.

Allocation of coal blocks to government companies and approved end users will enable faster execution ofnew power generation plants.

With infrastructure status being awarded to natural gas cross-country pipelines, gas-based power plants lyingidle could be revived over a period of time.

Other initiatives include facilitating setting up of merchant power plants by private developers and alsoprivate participation in transmission projects.

APDRP is restructured to cover all districts and town (with population above 50,000) coupled with increase inbudgetary support to Rs8bn from Rs6.5bn.

The government has also increased the allocation under Rajiv Gandhi Grameen Vidyutikaran Yojana toRs39.8bn from Rs30bn.

This will add to the robustness of the sector and players in transmission and distribution and transformers wilstand to benefit.

There is no revision in EPS estimates for our coverage companies. We reiterate BUYon Indo Tech Transformers

EMCO, RPG Transmission and Apar Industries. We revise our recommendation for Genus Overseas to HOLD

from BUY. We upgrade our recommendation forBharat Bijlee and Voltamp toBUYfrom HOLD.


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Players in the capital goods space viz. BHEL, ABB and Alstom Projects India Ltd could also benefit with thrust being

laid on Ultra Mega Power Projects

EPS (Rs) P/E (x) Reco

TargetPrice

(Rs)

Upside

(%)FY06 FY07P FY08P FY09P FY06 FY07P FY08P FY09P

Indo Tech 10.4 19.6 24.1 37.5 26.5 14.1 11.4 7.4 BUY 375 36.1

EMCO 25 41.1 62.8 88.9 32.2 19.6 12.8 9 BUY 1,067 32.6

Bharat Bijlee 59.6 75.1 94.7 124.4 17.5 13.9 11.1 8.3 BUY 1,661 35.8

Voltamp 22.7 36.4 51.5 68 25.6 16 11.3 8.6 BUY 816 40.3

RPGTransmission 6.4 13.1 17.8 21.9 29.3 14.4 10.6 8.6 BUY 231 23.2

GenusOverseas 14.7 19.6 28.9 - 18.1 13.5 9.1 - HOLD 318 20.3

Apar Industries 20.1 14.9 19.7 - 7.3 9.8 7.4 - BUY 197 34.8

Source: India Infoline Research


17/20





Real Estate

Impact of change in Sec 80 IA only on construction companies and not on real estate developers

Impact- Neutral

The government has amended the long debated 100% tax deduction under Sec80 IA for developers of infrastructure

facility, Industrial park and Special Economic Zones. However, most construction companies to whom the

construction work has been sub contracted were claiming the deduction as well. The government has removed

ambiguity in the Act by excluding construction companies executing the sub contracted works on such projects.

No Change in Sec 80 (IB) 10 phase out

Impact- Neutral

Only those projects valid under this segment*, which have received approval from the local authority before March

2007 can avail 100% tax deduction provided the project is completed within 4 years. Eligible projects approved post

March 2007, will not receive any tax deduction under this section. Removal of this section would bring most of the real estate developers in the industry tax bracket of around 30%

from the existing 12-15%.

*1:- Minimum developable area of 1 acre and 2:- 1000sq ft built up area within Mumbai and Delhi or within 25kms from the municipal limits of

these cities, while 1500sq ft area in all other areas. 2000 sq ft built up area or maximum 5% of aggregate built up area for shops andcommercial developments included in the housing projects.

Tax holiday on for building, owning and operating hotels and convention centres in the NCR region under new

Sec 80 ID

Impact- Positive

Many NCR based real estate developers are in the process of developing 3-4-5 star hotels over the next 2-3 years. Thegovernment has provided a 5 year tax holiday for companies developing 2-3-4 star hotels and convention centres with

minimum sitting capacity of 3000 persons and constructed and operational between 1 April 2007 and 31st March 2010

in the NCR region. The amendment will be effective from 1st April 2008 and apply to assessment year 2008-09.

Company level impact- Positive for Anant Raj Industries (not rated)

Service tax on commercial space rentals

Impact- Negative more from a demand perspective

The Union Budget has among other services included rentals paid by commercial property users like Retail

Multiplexes, Advertisers etc under the Service Tax net.

We do not foresee a direct impact on real estate developers for two reasons:

Developers would be able to pass on the service tax to the end users.

Most developers of commercial property keep commercial property on their books for 18-24 months and sell outonce demand picks up.

However, this is likely to hurt demand for commercial property which has already grown by 20-25% over the past one

year and are currently at life time highs. Eg. Many commercial properties in Metros like Mumbai and Delhi quotecommercial rentals of Rs300-350 per sq ft per month.


18/20





Company level impact- Negative for all real estate developers as most have around 10-20% commercial

component in their projects

SEZ tax exemptions applicable for only new units- Provisions simplified

Impact- Positive and on expected lines improving clarity in policy

Considering the fact that the special economic zones are intended to promote new industry and new investment and

not to facilitate migration of existing industries to avail of tax concessions, the Union Budget has proposed to

substitute sub-section (4) of section 10AA so as to provide that section 10AA is applicable to any undertaking, being

the unit, which fulfils all the following conditions, namely:-

It has begun or begins to manufacture or produce articles or things or provide services during the previous yearrelevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone;

It is not formed by splitting up, or reconstruction of business already in existence except for companies whereSec33B is applicable

It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

The rush for SEZ approvals were on the rise before the government stopped further approvals as it feared that there

could be business migration from existing locations. The clarification was in line with our expectations and would

help improve clarity on the SEZ policy.

Company level impact- Real estate developers would not be hampered by this provision.

EPS FY08E Impact change NAV Revision Rating

Ansal API 51.8 NIL 817 NIL BUY

Ansal Housing 38.3 NIL 344 NIL BUY

Arihant Foundation 52.6 NIL 570 NIL BUY

DS Kulkarni Developers 45.1 NIL 519 NIL BUY

Prajay Engineering 35.7 NIL 304 NIL BUY


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Steel

Policy Initiatives

Custom duty unchanged at 5% on prime steel - On expected lines

Custom duty on second and defective steel reduced from 20% to 10%

Custom duty fully exempt on all coking coal imports irrespective of the ash content No impact for steelmanufacturers as almost all of them import coking coal of


20/20



Published in February 2007. India Infoline Ltd 2006-7.

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be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness andauthenticity of the information contained herein, but do not represent that it is accurate or complete. IIL or any of its subsidiaries or associates oremployees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the informationcontained in this publication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors,

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