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` Union Budget 2010-11

February 20th 2010

Higher Spending Plan in Key areas, Divestment Road Map and Tax Reforms
The Budget for F2010-11 will be announced by the Finance Minister on February 26. We believe investors will be watching the
budget closely for the government’s commitment on implementing key pending reforms. We think the budget for F2011 could
focus on the following themes:

(a) Clear plan to improve health of public finances- Over the last two years, several factors have pushed the fiscal deficit to
unsustainably high levels. Some of these factors include: (a) large increase in government expenditure prior to the general
elections in May 2009, (b) sharp rise in oil and fertilizer subsidy due to the rise in commodity prices, and (c) fiscal stimulus. The
high level of fiscal deficit is weighing on longer-term growth potential. We believe the government will take the first step
towards reducing the deficit to more sustainable levels in the February 2010 budget.

(b) Acceleration in infrastructure spending, particularly in roads and power- With focus on improving infrastructure and
developing road network across India, we expect that the momentum of issuing new road contracts and in implementation
of electricity projects likely to pick up further.

(c) Confirm its plan to initiate meaningful steps toward divestment of the government’s stakes in PSUs - The current high
level of fiscal deficit will likely make it difficult for the government to increase its spending on rural infrastructure and other
development expenditure. We believe that in such an environment, the government will need to augment its financial
resources though divestment of stakes in government companies.

(d) Social/rural sector push- Higher allocation towards the social and rural sectors has been the key feature of the UPA
government over the last few years. The government gave a big rural sector push under the National Rural Employment
Guarantee Act (NREGA) with spending under this scheme increased to US$8.1 billion in F2010. In this year’s budget, we
expect the central government to continue its push increasing expenditure on social welfare such as education, health and
rural support.

(e) Direct tax reforms - The Ministry of Finance has already put out a draft of new code for direct taxation. Still in the
consultation stage, finance minister will lay a roadmap for implementation, Key measure of the new code that markets will
focus on are : Lowering of corporate tax rate.

(f) Roadmap for implementation of the Goods and Services Tax system - The current system taxes production whereas the
GST will aim to tax consumption. Current law levies tax on movement of goods from one state to another, effectively creating
borders within borders. Transition to GST will be an important milestone from a macro perspective. While the government
had earlier announced its intention to implement it from April 1, 2010, it appears that it will be delayed and we expect the
government to provide clear a guideline regarding the timing and implementation of GST in the upcoming Union Budget.

In addition, we expect the government to hike excise duty rates by 2 percentage points on almost all products and announce
other tax measures in the February 2010 budget. Overall, we expect the central government deficit to reduce to 5.5% of GDP
in F2011 from 6.8% of GDP in F2010. We expect building in robust economic growth of 8.5-9% is likely to lead the government
to project a lower deficit (of 5.5%).

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2010 Budget Expectations and Impact on the various Sectors and Stocks

Sector Expectations Stocks Impact

Automobile Excise duty roll back by 2% or more. Hero Honda, Tata Motors,Ashok Leyland – Negative. Positive, if
excise duty rates are kept unchanged.
IT Services Positive - STPI tax exemption beyond FY12 (31st If extended,Material earnings revision for smaller companies in FY12
March 2011) (around 10% EPS accretion for Mid Cap IT companies); For top 3,
modest EPS accretion. If not extended, no impact on earnings, but
Negative in terms of sentiment for the sector
Financials Positive if market believes lower deficit; Positive Basket of bank stocks with a bias towards PSU banks. Positive for
as interest rates likely to rise; Positive if higher Union Bank, HDFC Bank. PSU bank stocks could outperform if deficit
tax rates are applied on dividend distribution at surprises positively; However, if it is a negative surprise, then earlier-
mutual funds; Negative for insurers on removal than-anticipated RBI action could lead to a correction across the
of tax exemptions for life insurance products, but sector in the near term, but positive over the next 12 months as
low probability growth & margins expand.
Construction & Positive- Deemed asset status for Highways; Major beneficiary- IRB. Other beneficiaries - L&T, Reliance Infra,
Engineering Positive - Increased allocation to the road IVRCL, NCC and HCC; Punj Lloyd & Simplex; Voltas- Positive
development sector; Positive- Clarity on Project
financing; Positive- Higher expenditure budgets
for infrastructure development schemes
Oil & Gas Positive - tax holiday on city gas distribution; GAIL - Positive, Essar Oil, IOCL – Positive, BPCL, HPCL, IOCL - Negative
Positive - extension of tax holiday on new
refineries; Negative - Govt may share subsidy
burden with OMCs
Real Estate Positive- Increase in income tax deduction under Overall budget impact is expected to be Neutral to Positive.
Sec 80 C on home loan principal re-payment
from INR0.1m to INR0.2-0.3m; Positive- Re-
introduction of tax holiday for housing projects
under Sec 80 IB (10)
Cement Positive - providing abatement on excise duty to Negative for south based companies given their limited ability to raise
industry, however seems unlikely given possible prices namely ACC, India Cements and Madras Cements.
revenue loss to government
Negative - Raising excise duties back to 12%.
Power & Capital Positive: Increased allocation to APDRP/RGGVY; BHEL, ABB, Crompton Greaves - Positive; All developers - marginally
Goods Negative - Increase in excise duty for power Negative
equipment for non mega power projects
Sugar Negative - Increase in MAT; Positive -Income Tax Bajaj Hindusthan, Balrampur Chini – Negative if MAT increases, Bajaj
Exemption for cogeneration projects to Increase Hindustan, Balrampur Chini - Positive
for 5 years.
FMCG Increase in excise duty - Neutral / marginally Across the sector
Negative. Companies will be able to pass on
increase to consumers. There may be a short lag
before the pass through is effected
Transmission Positive - Fund allocation for APDRP and Jyoti Structures, Kalpataru Power and KEC Int'l- Positive
lines RGGVY and Transmission and distribution fund
Pipes Positive - Infrastructure status to the sector will Jindal SAW, Welspun Gujarat and PSL Ltd – Positive
lead to tax benefits under 80 IA
Negative - Removal of DEPB ( Duty entitlement
pass book) scheme benefit on seamless pipes
exports which is currently 6%.

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` Union Budget 2010-11

Analyst Disclaimer
This document has been prepared by Ksema Fincon Ltd, Bombay. This report is the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice
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referred to in this report.
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Disclosure of Interest
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2. The analysts/ Directors of the company might hold position in the some of the above mentioned company’s stock, as on the date of release.
3. Neither the company nor an affiliate company of KSEMA Fincon ltd has received a mandate from the subject company.
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