Budget Analysis FY2004-05

8/6/2019 Budget Analysis FY2004-05

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July 8, 2004 FOR PRIVATE CIRCULATION

Union Budg et Analys i s FY2004-05

Budget juggles political priorities

Honouring people's verdict, Mr Palaniappan Chidambaram, in his first budget

speech as the finance minister in the UPA government, concentrated mainly

on rural sector reforms. His was a great trapeze artist's act, trying to balance

between the onerous task of implementing the national common minimum

program and finding ways to fund those objectives. In our opinion, the direction

of the budget is towards growth, stability and equality. The aim is to achieve

a sustainable 7-8% GDP growth over the next 5 years and containment of the

fiscal deficit at 4.4% in FY2005.

We believe the FM has presented a political ly mature budget, which meets the need of thehour. Since the UPA government was formed, with the critical support from the Left, fears and

concerns were raised that these politically diverse interests might derail the reform process forshort-term political gain. There were doubts whether the reform process would be allowed tocontinue, given the coalition politics compulsions. The FM has exploited this overhang of

negative expectations. Broadly there are no surprises in the budget and that was expected.

In the event, the budget did nothing to indicate that the reform agenda was being derailed. Onissues that might have been touchy to the coalition partners including foreign investments and

privatization, there has been no visible rollback. FDI limits in telecom and airlines have beenincreased and the FM has surprised the market raising FDI limit in the insurance sector to49%. The FM has also taken Rs.40 bn credit as the 'touchy' disinvestment proceeds. These

steps indicate the FM's firm resolve to draw a line, as far as rollbacks and reversals in thereform process are concerned.

The main positive, in our opinion, is that there are no sign of policy reversal. We believe thebudget has played safe, as the macroeconomic situation did not warrant any dramatics. Thereare only seven months left until the next budget. We see signs of more substantial changesto come in February 2005, not just for agriculture but across all fronts.

Our optimism stems from the number of task forces/committees/commissions that the FM hasannounced. We cannot wish away these committees, as the issues covered -subsidies,investment and competitiveness are fundamental to growth and fiscal management. With Mr

Montek Singh Aluwahalia as the chairman of the planning commission, one can expect thesebodies to provide the government with a set of feasible recommendations, which will form the

core of the Budget speech next February 2005.

n A sustainable growth of 7-8%

In order to have a sustainable growth of 7-8% of GDP, the FM has focused on agriculture andrural sector growth by providing easy and enhanced credit, creating an environment for healthy

growth of micro-financing and rural infrastructure. Reduction in import duties, moderation andstability in the tax structure, introduction of VAT, creating irrigation facilities and generation ofemployment opportunities gives us reason to believe that such a growth of 7-8% is achievable

in the longer term.

n Fiscal Discipline

Despite maintaining the commitment of investments across the various programs, thegovernment is hopeful to contain the fiscal deficit at 4.4% of GDP. Revenue deficit is estimated

to be at 2.5%, which is to be eliminated by FY 2008-09 under the FRBM Act. The eliminationof revenue deficit will open up fiscal space up to 3% of GDP for enhanced public investment

without undermining fiscal prudence.

Budget 2004-05

Registered Office: Kotak Securities Limited, Bakhtawar, 1st floor, 229 Nariman Point, Mumbai 400021 India.

THERESEARCH TEAM

Politically mature budget

Reform agenda continues

No sign of policy reversal

We remain optimist for apossible big bang budget in

February 2005


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July 8, 2004 Kotak Sec ur i t i es

Budget 2004-05 Please see the disclaimer on the last page For Private Circulation 2

n Turnover Tax: Party dampener

The finance minister has imposed a hefty transaction tax of 0.15% on all buy side transactions

in securities on the stock exchanges. The transaction tax has come in lieu of long-term capitalgains tax and the reduction of short-term capital gains tax to 10%. Such a blanket tax on allequity and bond market transactions, including futures and options is going to throw a spanner

in the works. The turnover tax would reduce the participation of arbitrageurs and speculatorswho not only provide liquidity to the market but also help the price discovery mechanism.

n Mighty Agriculture

Agriculture has got a never-before thrust in the budget. Excise duty has been waived on farminputs like tractors, farm-machinery, dairy-machinery, farm-tools etc. Focus on micro-financing,doubling the agri-credit in the next 3 years, accelerated irrigation benefit program and promotion

of agro-processing industries set up to process, preserve and package fruits and vegetableswould boost the rural sector income.

n Dividend Distribution Tax

The finance minister has withdrawn the concession given to the mutual fund industry in terms

of dividend distribution tax. Now mutual funds would require to withhold tax on dividends ontheir debt-schemes at the rate of 12.5% for individuals & HUF and 20% for corporates. Also,

benefits on bonus stripping and dividend stripping would be plugged by suitable changes inthe IT Act.

n FDI cap released

Raising the foreign direct investment (FDI) cap on telecom, civil aviation and insurance have

come as a pleasant surprise to the industry. It would boost the confidence of various multinationalinvestors and MNCs who were waiting for a clear signal from the UPA government to gaugeits friendliness to FIIs and FDIs.

FDI cap

Sector FDI Limit

Telecom Increased from 49% to 74%

Civil Aviation Increased from 40% to 49%

Insurance Increased from 26% to 49%

n Raising Income Tax Limit

The finance minister has given great relief to the common man by raising the taxable limit to

Rs. 1 lakh. This would relieve 1.4 crores of taxpayers, who have a taxable income of less thanRs.1 lakh.

n Short to medium term impact of the budget on the stock market

The imposition of turnover tax at a substantially higher rate of 0.15% on all kinds of transactions(to the buyer) is a major dampener for the stock market. Though this has come in place of long-

term capital gains tax and by reducing short-term gain to 10%, it is going to have a verynegative impact on day-traders, arbitrageurs and speculators. This would not only reduce theliquidity in the market, but also works against the fair price discovery mechanism besides

increasing the cost of capital. The quest to raise Rs.4-5,000 crores from the capital market

would negate the benefits of a level-playing field created for domestic players, who will havea disadvantage over FIIs as FIIs use the double taxation treaty route to avoid any long-termor short-term gains.

Increased expenditure on infrastructure investments, lowering of import duties and taking

measures to boost rural income would benefit the market marginally.

Excise duty hike on steel from 8 to 12%, imposition of cess across taxes at the rate of 2% and

increasing service tax from 8% to 10% would make stocks dearer against their earnings. Theimposition of dividend distribution tax puts the mutual fund industry at a disadvantageousposition; this would put pressure on the bond market as well.

For the equity market, we rate the budget as disadvantageous in the short-to-medium term,however, in the long-term we believe the budget has a neutral to positive impact as the market

assimilates the positives of the budget recommendations. Our top picks are Mahindra &

Mahindra, Punjab Tractor (excise duty exemption), Bharti Televenture (FDI limit increasedto 74%), ITC (no increase in excise), Biocon (exemption to bio-tech research), Indian Rayon

(FDI in insurance increased to 49%), BEL (increased defence spending),Vardhaman/MahavirSpinning, Super Spinning (new excise structures).

Trading volume will drop

substantially...

... impacting price discovery

Positive:multiplier from

infrastructure spending

Negative:Cost of production ofmanufacturing goods to

increase

Our picks


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B UDGET H IGHLIGHTS"Tax rates will be stable and conducive to growth, compliance and investment."- FM during hisspeech during presenting the budget FY04-05.

Objectives of the taxation policy

q To keep tax rates moderate and stable.

q To increase revenue from direct taxes and excise duty.

q To expand the service tax net.

Changes in direct taxes

q Turnover tax of 0.15% introduced. Long-term capital gains tax abolished. Short-

term capital gains tax to be at 10%.

q Personal taxable income raised to Rs.1,00,000.

q Withdrawal of tax exemption on foreign currency NRE and NRO accounts.

q Gifts from unrelated persons above Rs.25,000 will be taxed as income.

qNew agro-processing industries set up to process, preserve and package fruits andvegetables will be tax exempted for 5 years.

q R&D in automobiles to fetch deductions up to 150%.

q Shipping companies will now have an option to pay either tonnage tax or normalcorporate tax on profits.

q Mutual funds to withhold dividend tax of 12.5% and 20% for individuals and corporatesrespectively, on debt schemes; equity schemes continue to remain under exemptions

q Stripping of bonus or dividends will be taxed after amendment in the act

Changes in indirect taxes

q Service tax increased from 8% to 10%.

qLevy of 2% cess for education on all direct and indirect taxes.

q Excise on steel increased from 8% to 16%.

q Customs duty on non-alloy steel reduced from 15% to 10%.

q Reduction of peak duty on alloy steel, copper, lead, zinc and base metals to 15%.

q Excise duty on tractors and dairy machinery reduced from 16% to 0%.

q Excise duty on computers reduced from 8% to 0%.

q The mandatory cenvat duty on handloom and power loom sector has been withdrawn.

Seven economic objectives of the budget

q Maintaining a growth rate of 7-8% per year for a sustainable period,

q Providing universal access to quality basic education and health,

q Generating gainful employment in agriculture, manufacturing and services andpromoting investment,

q Assuring 100 days' employment to the breadwinner in each family at the minimum

wage,

q Focusing on agriculture and infrastructure,

q Accelerating fiscal consolidation and reform, and

q Ensuring higher and more efficient fiscal devolution.


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ECONOMICDATACHARTS

Central Government Finances (Rupess in billions)

FY2001 FY2002 FY2003 FY2004RE FY2005BE

REVENUE

Tax revenue

Corporation tax 357.0 366.1 461.7 629.9 884.4

Income tax 317.6 320.0 368.6 402.7 509.3

Excise duty 685.3 725.6 823.1 923.8 1,092.0

Import duty 475.4 402.7 448.5 493.5 542.5

Service tax 26.1 33.0 41.2 83.0 141.5

Other taxes 24.6 23.2 19.5 16.4 7.7

Gross tax revenue 1,886.0 1,870.6 2,162.7 2,549.2 3,177.3

Less: States share 519.5 535.3 568.4 673.8 838.3

Net tax revenue 1,366.6 1,335.3 1,594.3 1,875.4 2,339.1

Net non-tax revenue 559.5 677.7 723.2 754.9 754.2

Total revenue receipts 1,926.1 2,013.1 2,317.5 2,630.3 3,093.2

Recovery of loans 120.5 164.0 341.9 646.3 271.0

Privatisation 21.3 36.5 31.5 145.0 40.0Non debt capital receipts 141.7 200.5 373.4 791.3 311.0

Gross receipts 2,067.8 2,213.6 2,690.9 3,421.5 3,404.2

EXPENDITURE

Revenue expenditure

Interest 993.1 1,074.6 1,178.0 1,245.6 1,295.0

Defense 372.2 380.7 407.1 433.9 435.2

Subsidies 268.4 312.1 435.2 447.1 435.2

Admn & sockal services 633.7 630.3 660.0 721.3 771.2

Plan expenditure 511.0 617.0 716.0 781.0 918.4

Total revenue expenditure 2,778.4 3,014.7 3,396.3 3,628.9 3,854.9

Capital expenditure

Defense 124.0 162.0 149.5 169.1 334.8

Plan expenditure 316.0 395.0 399.0 434.0 537.5

Loans 37.5 51.4 59.2 510.6 51.1

Total capital expenditure 477.5 608.4 607.7 1,113.7 923.4

Plan expenditure on rev & cap a/c 826.7 1,011.9 1,114.6 1,215.1 1,455.9

Non-plan expenditure on rev & cap a/c 2,429.2 2,611.2 2,889.4 3,527.5 3,322.4

Total expenditure 3,255.9 3,623.1 4,004.0 4,742.6 4,778.3

DEFICITS

Fiscal deficit 1,188.2 1,409.6 1,313.1 1,321.0 1,374.1

% of GDP 5.6 6.1 5.3 4.8 4.4

Revenue deficit 852.3 1,001.6 1,078.8 998.6 761.7

% of GDP 4.0 4.3 4.4 3.6 2.5

Primary deficit 195.0 335.0 135.0 75.5 79.1

% of GDP 0.9 1.4 0.5 0.3 0.3

Sectoral real growth rates in GDP (at factor cost)

1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04

Agriculture (2.4) 6.2 0.3 (0.1) 6.5 (5.2) 9.1

Industry 4.3 3.7 4.8 6.5 3.4 6.4 6.5

Services 9.8 8.4 10.1 5.5 6.8 7.1 8.4

Total GDP at factor cost 4.8 6.5 6.1 4.4 5.8 4 8.1


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800

1000

1200

1400

1600

FY2000 FY2001 FY2002 FY2003 FY2004RE FY2005

BE

3

4

5

6

7

Fiscal Deficit (Rs bn) % of GDP

244.9268.4

312.1

435.2 447.1 435.2

-

100.0

200.0

300.0

400.0

500.0

FY2000 FY2001 FY2002 FY2003 FY2004RE FY2005

BE

ECONOMICDATACHARTS

Where the rupee comes from Where the rupee goes

Income Tax

9%

Corporation Tax16%

Borrowings24%

Other Taxes

0%

Service Tax

3%

Net Non-tax

Revenue

13%Excise Duty

19%

Customs Duty

10%

Non Debt

Capital Receipts

6%

Defence

14%

Interest

23%

Plan Expenditure

25%

Loans

1%

State share of

tax & duties15%

Subsidies

8%

Admn & social

Services

14%

Fiscal deficit Subsidies

Capital expenditure on defence Market borrowing

702.8

729.3

877.2

975.9

858.0

903.7

600.0

700.0

800.0

900.0

1000.0

FY 00 FY 01 FY 02 FY 03 FY 04RE FY 05 BE

100.0124.0

169.1

334.8

162.0

149.5

-

100.0

200.0

300.0

400.0

FY 00 FY 01 FY 02 FY 03 FY 04RE FY 05 BE


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INTRADAYPRICEMOVEMENT (ON THEBUDGETDAY)

Bharti Televentures

Wipro

HCL Technologies

ONGC

ITC

SAIL

Gainers Losers

Source: moneycontrol.com


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SECTORALANALYSISSNAPSHOT

Sector Budget impact Our top pick

Automobiles Positive Mahindra & Mahindra

Changes made in the budgetq Reduction of the peak rate on alloy steel,

copper, lead, zinc and base metals to 15%and increase in excise duty on steel from7% to 12%

q Tractors are fully exempt from excise duty

q Increase in tax benefit on R&D expenditureto 150%

Impact analysis:q Reduction in custom duty on steel will

benefit the industry to some extent. It willalso benefit from the reduction in excise dutyon various metals through the auto ancillaryroute.

q Exempting the entire tractor industry fromexcise duty has come as a major booster.

q Again, the non-inclusion of transportindustry under service tax will have apositive impact on commercial vehicle sales.

Impact on companies:q Very positive for Mahindra and Mahindra as

it gets the benefit of excise and also lowerraw material cost due to reduction in excise/customs duty on base metals.

q Tata Motors would benefit from the R&Dexpenditure benefit and also lower rawmaterial cost.


Capital goods Positive Siemens, ABB, L&T, BEL and Alfa Laval

Changes made in the budget

q A inter institutional group has beenconstituted to garner Rs400 bn. This wouldensure speedy conclusion of loanagreements and implementation ofinfrastructure projects.

Electricity for all, re-emphasized.

Accelerated completion of irrigation projectsand investing in rural infrastructure.

q Launching a nationwide water-harvestingscheme covering 1-lakh irrigation units at a

cost of Rs200 bn.q Sectoral cap for FDI to be raised from 40%

to 49% in civil aviation.

q Increased allocation towards Defensemodernization to Rs7700 bn from Rs6530bn in BE2003-04.

q Deduction of 100%of profit for 5 years and25% of profit for the next five years forfacilities set up to process, preserve andpackage fruits and vegetables.

q Dairy machinery, which attracts a 16%excise duty to be fully exempt.

Impact analysis:

q Thrust on infrastructure will result inincreased order inflows for the capital goodssector.

q Electricity for all and tax exemptions underSec 80IA would be positive for the powerequipment manufacturers.

q Emphasis on completing irrigation projectswould augur well for pump manufacturersand engine manufacturers catering to theagri requirement.

q

Increased defense modernizationallocation, positive for players supplyingequipment for defense needs.

q Special benefits announced for the agro-processing industry and dairy industry,positive for companies involved inmanufacturing and installing specializedmachinery for these sectors.

Impact on companies:

Positive

q Larsen & Toubro. Thrust on infrastructure.

q Siemens, ABB, BHEL, Thermax and JyotiStructures. Emphasis on building capacitiesand extension of the Sec80IA benefit for theT&D segment.

q BEL. Increased allocation towards defensemodernization fund.

q Alfa Laval. Benefits given to the agroprocessing and diary sector would result in

increased orders.


Banking Negative State Bank of India


q Thrust on agriculture, micro-credit andinfrastructure financing.

q Interest rate likely to go up due to theinflationary pressure.

q Securitisation act to be amended in favourof banks and financial institutions.

Impact analysis:

q Speedy recovery of NPA.

q Turnover tax to reduce the investmentportfolio profitability.

q Hike in insurance FDI to boost valuations.

q Fiscal deficit target is aggressive at 4.4%,which appears to be on the higher side.

q Higher interest rates would leave a hole inthe investment portfolio.


q Banks with insurance arms are to be highlybenefited e.g. HDFC, SBI, ICICI Bank, INGVysya.

q NPA recovery will speed up due toamendment in Securitisation Act

q High duration investment portfolio bankswould feel the heat most: PNB, BoI, UnionBank, BoB


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Fertilizers Positive Indo Gulf Fertilisers


q No direct remarks for the fertilizer sector

q Budget is farm sector friendly

Impact analysis:

q Increased farm credit would spill overtowards fertilizer

q Better irrigation facilities would increaseconsumption of fertilizers

q Balanced consumption towards NPK usagewould boost complex fertilizers sale


q Overall fertilizer consumption level to go upand help the industry but to benefit efficient

players like Indo Gulf, Tata Chemicals andCoromandel Fertilisers more

q Complex fertilizers would benefit more thanurea producers due to the balanced usageof NPK


Cement & Construction Neutral to positive Birla Corp, ACC, Guj. Ambuja,

Nagarjuna Construction


q The cement sector has remained unaffected by the current budget. The exciseduty and the import duty were un changed.

Impact analysis:

q The impact of this budget is Neutral toPositive for the cement industry. The thrustof this budget in creating agricultural

infrastructure such as dams, roads,irrigation projects, water management,coupled with thrust on education and healthinfrastructure along with emphasis oncapital formation augers well for the cementand construction industry.We expect thecement industry to grow by 6.5% to 7%during the year.


q Major cement companies such as ACC,Birla Corp, Gujarat Ambuja Cements willbenefit from the increased demand for

cement, as they will be able to commandbetter prices due to demand growth.

q Construction companies such as NagarjunaConstruction, JP Associates, and Larsen &Toubro will benefit due to increasedspending on infrastructure.


FMCG Positive ITC


q Nothing directly impacting FMCG

q Budget is rural sector friendly and increasesdisposable income of common man

Impact analysis:

q Sparing excise hike on tobacco hasenthused the general sentiment in FMCG

q Thrust on rural sector credit, increasing thedisposable income and supporting micro-

financing & SHGs would benefit the sectorq Implementation of VAT would make the

supply chain management more efficient


q ITC would be benefited most due to itsreach, network and rural focus. Sparing theexcise hike on tobacco is the icing on thecake for ITC

Impact analysis:

q The impact is neutral on the sector. Therelief of non-abolition of tax-break underSection 10 A/B would again make IT aformidable bet.


Information Technology Neutral Infosys Technologies


q No mention of abolition of tax break underSection 10 A/B

q Computers are fully exempt from exciseduty.


q No direct impact on software companies.

q Hardware companies such as HCLInfosystem would be benefited the most.


Metals Neutral TISCO, JISCO, Hindalco, Sesa Goa


q Excise duty on steel increased from 8% to12%. Import duty on steel reduced to 10%from 15%.

q Import duty on copper, zinc, alloy steel andlead reduced by 5% to 15%.

Impact analysis:

q The impact of this budget is neutral for themetals sector.

q The rise in excise duty coupled with areduction in the import duty will marginallyimpact steel companies. The differencebetween the landed price and the domesticprice of steel, which till yesterday wasRs.2,500 per ton, will now stand reduced toRs.2,000 per ton. This will not impact steelcompanies in any negative manner as theyhave a cushion of Rs. 2,000 per ton.

q We do not expect any reduction in the priceof steel.

q The 5% reduction in import duty on copperwill marginally impact Hindalco's profits.


q Steel companies such as TISCO, SAIL andJISCO are not expected to be impacted inany manner.

q Hindalco will be marginally impacted dueto reduction of 5% in import duty on copper.


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Shipping Positive GE Shipping, Shipping Corporation


q Tonnage tax introduced to bring Indianshipping at par with the world shippingindustry as far as direct taxation isconcerned.The deduction U/S 33 AC of theincome tax act has been withdrawn and allshipping companies will have to decidewhether they want to follow the tonnage taxsystem or the corporate tax system.

Impact analysis:

q The introduction of tonnage tax system willhave a positive impact on the Indianshipping industry. It was a long-termdemand of the shipping industry and hasbeen finally heard by the finance minister.

q The impact of introduction of tonnage taxsystem is explained in our note "Tonnagetax: Implications for the Indian shippingindustry" which was released by us on July6, 2004. The same is attached along withthis document for your ready reference.


q Shipping Corporation of India (SCI) andGreat Eastern Shipping are expected to bepositively impacted from this new tonnagebased taxation system.

Impact analysis:

q The impact is neutral on the sector.However, we believe that thrust onagriculture, farm credit, micro finance andself-help groups would benefit the sectormarginally.


Sugar & Tea Neutral Balrampur Chini Mills


q No specific mention about the sugar or teaindustry.

q Tea industry is more insulated than sugar,as it does not have any excise and henceno cess.


q No direct impact other than the cess on theindustry.

Impact analysis:q Positive on the bio-technology and research

companies


Pharmaceuticals Neutral to positive Biocon, Wockhardt

Changes made in the budgetq R&D expenditure gets exemption

Impact on companies:q Positive

Impact analysis:

q The excise duty was maintained at the samelevel of 26% for motor spirit, 11% for high-speed diesel and 8% for LPG.

q The customs duties are being maintainedat the levels of the previous year.

q This measure will be neutral for the oil andgas industry.

q It will be positive, to some extent, for stand-alone refineries such as Kochi Refineries,Chennai Petroleum and BongaigaonRefineries, as it was widely expected thatthe customs duty would be lowered therebynegatively impacting their margins.


Oil & Gas Neutral ONGC, GAIL, IOC, Kochi Refineries,

Chennai Refineries, Reliance, Finolex Ind


q No changes in the excise duty and theimport duty structure for the oil and gassector.


q Stand alone refineries such as KochiRefineries and Chennai Refineries will standto benefit as the customs duty has not been

reduced, contrary to expectations. IOC, dueto its diverse operations, will continue toperform well.

q GAIL and ONGC will continue to performwell due to no change in the duty structure.


Power Utilities Neutral Tata Power & Power Trading Corporation


q Electricity for all, re-emphasized.

q Sec80IA benefit to be extended torenovation and modernization projects in theT&D segment, undertaken during the periodApril 1, 2004 to March 31, 2006.

q The EA2003 envisages unbundling ofgeneration, transmission and distribution.

Impact analysis:

q Infrastructure building in the power sectorwould get an impetus.

q The T&D segment would benefit due to theextension of tax exemption.

q No specific direction has been given interms of revising the EA2003 as expressedearlier.


Neutral

q Tata Power, Reliance Energy andJaiprakash Associates. Extension of the80IA benefit would be marginally positive,however, lesser clarity on the EA2003 frontwould result in an overall neutral impact on

these companies.Positive

q Power Trading Corporation. Capacityenhancement in the sector would result inhigher surplus availability for trading ofpower.


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Textiles Positive Arvind, Indian Rayon, Vardhman

Spinning, Mahavir Spinning.


q The cenvat chain as projected by us hasbeen broken. The mandatory cenvat dutyon handloom and power loom sector hasbeen withdrawn.

q No mandatory excise duty on pure cotton,wool and silk in any form be it fibre, yarn,fabric or garments.Blended textiles and non-cotton textiles such as polyester, viscose,

acrylic and nylon will have a different taxregime.

q New system of excise duty calculationintroduced for power loom, handloom andcomposite textile mills.

Impact analysis:

q The budget is Positive for cotton spinningand cotton textiles companies.


q Vardhman Spinning, Mahavir Spinning andsuper spinning are expected to benefitpositively.Integrated textile companies suchas Arvind Mills stand to benefit positively.

Impact analysis:

q This will facilitate Cellular companies needof investment to the tune of Rs.700 bn innext 5 years to reach the penetration levelof 10%


Telecom Positive Bharti Televentures


q FDI limit increased to 74%


q Positive


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AUTOMOBILES

Rating: Overweight Budget Impact: Positive

BUDGET HIGHLIGHTS

n Reduction of the peak rate on alloy steel, copper, lead, zinc and base metals to 15% and

increase in excise duty on steel from 7% to 12%

n Tractors are fully exempt from excise duty

n Increase in tax benefit on R&D expenditure to 150%

IMPACT ONTHE SECTOR

n Reduction in customs duty on steel will benefit the industry to some extent and will also

benefit from the reduction in excise duty on various metals through the auto ancillary route.Exempting the entire tractor industry from excise duty has come as a major booster for theindustry. Again, the non-inclusion of transport industry under service tax will have a positive

impact on commercial vehicle sales.

TOP PICKS

n Our top pick remains Mahindra & Mahindra & Tata Motors.

Impact on EPS

Company FY2004 FY2005 Recommendation

Pre Budget Post Budget

Mahindra & Mahindra 30.0 39.8 43.0 Very positive as tractor goes exexcise - BUY

Tata Motors 21.9 31.4 31.4 Will benefit from the lower costof raw materials and higherR&D benefit - BUY

DETAILEDIMPACT ANALYSIS


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BANKING

Rating: Underweight Budget Impact: Negative

BUDGET HIGHLIGHTS

n Thrust on agriculture credit, to double it in the next 3 years.

n Micro-financing and self help groups to get a boost. Indicative target of credit linking 5.85

lakh SHGs during the period up to March 31, 2007 has been set for NABARD, SIDBI,banks and other agencies.

n Withdrawal of tax exemption on foreign currency Non-Resident External/ Non-Resident

Ordinary Account.

n Fiscal deficit to remain at 4.4% of GDP.

n Formation of Inter-Institutional Group (IIG) for accelerated investment in infrastructure.

n Raising FDI in insurance from 26% to 49%.

n SSIs to be encouraged for credit rating and will receive higher benefits under capital subsidy

scheme.

n Securitisation Act to be amended in favour of banks and financial institut ions for speedy

recovery.

n Turnover tax on bonds trading.

IMPACT ONTHE SECTOR

n The Securitisation Act amendment would help banks control their NPAs.

n Turnover tax on bonds trading would reduce trading profits on the back of diminution of

values due to increasing interest rates.

nRaising FDI in insurance from 26% to 49%, will boost the valuation of banks/ companieshaving an insurance arm.

n Fiscal deficit target is very aggressive at 4.4% and appears to be difficult to meet, which

would raise the general interest level in the economy. This would widen the hole in theinvestment portfolio.

TOP PICKS

n Our top picks are State Bank of India, Oriental Bank of Commerce and HDFC Bank for

their robust financials, manageable investment portfolio and better risk-management

processes.

Impact on EPSCompany FY2004 FY2005 Recommendation


State Bank of India 68.5 80.0 78.5 SBI is our top pick basedon valuations - Buy

Oriental Bank of Commerce 32.0 40.0 39.0 OBC is highly insulated interms of investment portfolioand business risks - Buy

HDFC Bank 17.4 21.5 21.5 Likely to be least impactedof the entire banking sector- Buy.

Punjab National Bank 41.8 46.5 40.0 Likely to be worst impactedboth on agriculture creditand investment portfolio

losses - SellCorporation Bank 35.2 40.0 38.0 Middle path bank and

profits sustainable in theworst of times - Sell

Securitisation act amendmentwould boost NPA recovery

Withdrawal of tax exemptionon NRE/NRO

Agriculture credit boost mayimpact the profitability and

return on average assets

Insurance to set a big boost.

Favorites: max India, IndianRayon, HDFC, ICICI Bank


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CAPITAL GOODS


BUDGET HIGHLIGHTS

n An inter institutional group (IIG) has been constituted involving IDBI, IDFC, ICICI Bank,SBI, LIC, Bank of Baroda and Punjab National Bank to garner Rs40,000 crore. This is toensure speedy conclusion of loan agreements and implementation of infrastructure projects.

n The finance minister has reiterated "Electricity for all" programme announced by the NDA

government.

n Doubling agricultural credit in three years, accelerating the completion of irrigation projects

and investing in rural infrastructure.

n Launching a nationwide water harvesting scheme to cover 1 lakh irrigation units at a cost

of Rs.20,00crore.

n Sectoral cap for FDI to be raised from 40% to 49% in civil aviation.

n Increase in allocation towards Defense modernization to Rs.77,000crore fromRs.65,300crore in BE2003-04.

n Deduction of 100% of profits for 5 years and 25% of profits for the next five years to be

allowed in the case of new agro-processing industries set up to process, preserve and

package fruits and vegetables.

n Dairy machinery, which attract a 16% excise duty, to be fully exempt.

IMPACT ONTHE SECTOR

n Considering thrust on infrastructure be it road, irrigation projects, ports, airports, power,

etc, we believe the overall impact of the budget on the capital goods sector is positive.

n Electricity for all and tax exemptions under Sec 80IA would be positive for the power

equipment manufacturers.

n Emphasis on completing irrigation projects would augur well for pump manufacturers and

engine manufacturers catering to agri requirement.

n Increased allocation towards defense modernization will result in higher orders for companies

involved in supplying equipment for defense needs.

n Special benefits announced for the agro-processing industry and dairy industry would

translate into higher revenue for companies involved in manufacturing and installingspecialized machinery for these sectors.

TOP PICKS

n Siemens, ABB, L&T, BEL and Alfa Laval

Impact on EPS



BEL 39.5 44.5 44.5 BUY

Larsen & Toubro 42.7 54.0 54.0 BUY

Alfa Laval^ 35.8 44.2 44.2 BUY

Siemens* 50 60 60 BUY

ABB^ 29.3 34.5 34.5 BUY

BHEL 30.0 38.0 38.0 HOLD

Thermax 30.1 36.7 36.7 BUY

Jyoti Structure 4.6 14.0 14.0 HOLD

* September ending; December ending

IIG to garnerRs.40,000 crore

Thruston infrastructurepositive for capital goods


14/28



CEMENT & CONSTRUCTION

Rating: Overweight Budget Impact: Neutral to Positive

BUDGET HIGHLIGHTS

n No changes in the excise duty and import duty structure for the cement industry.

IMPACT ONTHE SECTOR

n The impact of this budget is Neutral to Positive for the cement industry.

n We had anticipated a rise in excise duty of Rs.50 to Rs. 100 per ton of cement. No increase

in the excise duty is welcome relief to the cement industry.

n The thrust of this budget in creating agricultural infrastructure such as dams, roads, irrigation

projects, water management, coupled with thrust on education and health infrastructurealong with emphasis on capital formation augers well for the cement and constructionindustry.

nWe expect the cement industry to grow by 6.5% to 7% during the year.

TOP PICKS

n Birla Corporation, ACC, Gujarat Ambuja Cements and Nagarjuna Construction.

Impact on EPS



ACC 11.7 15.0 15.0 Buy

Gujarat Ambuja Cements* 14 19.5 19.5 Buy

Birla Corp 5.6 18.5 18.5 Buy

Shree Cement 3.75 18.4 18.4 Not ratedGrasim 83.2 90 90 Not rated

Nagarjuna Construction 26.4 38.8 38.8 Buy

* June ending data for year ended June '03 & estimates for June '04.

No change in excise

Thrust on infrastructure willincrease demand for cement

and construction companies


15/28



FERTILISER


BUDGET HIGHLIGHTS

n Though there is no direct hint of any benefit given to the fertilizer industry and the overallsubsidy has also not been increased, we believe that the thrust on agriculture and irrigationalfacilities would benefit fertilizer companies in the long run. The sell-off of loss making

fertilizer companies is not ruled out, which would facilitate efficient companies to capturecontrol. The easy access of agricultural credit will make fertilizers more affordable to farmers,

who balance consumption of NPK.

IMPACT ONTHE SECTOR

n Overall impact on the sector is positive due to higher allocation towards agriculture and

farm credit. We believe that to increase yield, fertilizer consumption would increase. Increasein irrigation facilities would further augment the consumption of fertilizers.

TOP PICKS

n Our top picks within the sector remains Indo Gulf Fertilisers, Tata Chemicals and Coromandel

Fertilisers. Chambal Fertilisers is a good play on dividend rather than growth within the

sector.

Impact on EPS



Indo Gulf Fertilisers 20.0 13.1 13.1 Outlook remains positive for thecompany- BUY

Tata Chemicals 11.8 13.4 13.4 Will benefit from the sell-off

of PSUs - BUYCoromandel Fertilisers 17.0 18.4 19.2 Consolidation and balanced

usage of NPK would boost salesfor the company- BUY

RCF 3.04 3.67 3.67 To benefit from the boost insales due to better farm credit-Not Rated

GNFC 7.98 9.5 9.5 Needs capital infusion -Not Rated


16/28



FMCG


BUDGET HIGHLIGHTS

n The absence of a much awaited excise hike in tobacco products has made the FMCGsector jubilant. Thrust on rural credit, infrastructure in the hinterlands and gainful employmentin agriculture and the rural economy, besides boosting micro-finance, would revive growth

in the sector. Though there was no direct mention relating to FMCG, the undertone wouldput FMCG on a fast track.

IMPACT ONTHE SECTOR

n We believe that the focus of the budget would set a northward pace in the rural economy.

Growth in the rural economy, along with the higher disposable income due to lowering of

income taxes, would make FMCG again a sector to depend on. Companies with strongnetwork and deeper reach in rural and semi urban areas would get an immediate benefi t.

TOP PICKS

n Our top pick in the sector remains ITC, due to its strong network, reach and growing product

portfolio. The reality of non-hike in excise duty on tobacco relieved ITC and increased its

earnings visibility.

Impact on EPS



ITC 61.8 73.4 75.0 Higher disposable income in thehands of rural and semi urbanpopulation would be beneficialfor the company- BUY

HLL 8.0 6.8 7.0 Will be impacted positively dueto better affordability- Not Rated


17/28



INFORMATION TECHNOLOGY

Rating: Overweight Budget Impact: Neutral

BUDGET HIGHLIGHTS

n No mention of abolition of tax break under Section 10 A/B.

n Computers are fully exempted from excise duty.

IMPACT ONTHE SECTOR

n The impact is neutral on the sector. The relief of non-abolition of tax-break under Section

10 A/B would again make IT a formidable bet.

TOP PICKS

n Our top pick is Infosys Technologies

Impact on EPS



Infosys Technologies 42.5 61.2 61.2 Budget neutral- BUY

Wipro 35.6 60.4 60.4 Budget neutral- BUY


18/28



METALS


BUDGET HIGHLIGHTS

n Excise duty on steel increased from 8% to 12%. Import duty on steel was reduced to 10%from 15%.

n Import duty on copper, zinc, alloy steel and lead was reduced by 5% to 15%.

IMPACT ONTHE SECTOR

n The impact of this budget is neutral for the Metals sector.

n The rise in excise duty coupled with a reduction in the import duty will marginally impact

steel companies. The difference between the landed price and the domestic price of steel,which till yesterday was Rs.2,500 per ton, will now stand reduced to Rs.2,000 per ton. Thiswill not impact steel companies in a negative manner as they have a cushion of Rs. 2,000

per ton.

n We do not expect any reduction in the price of steel.

n The 5% reduction in import duty on copper will marginally impact Hindalco's profits.

TOP PICKS

n Our top picks in the steel industry are Tata Iron and Steel (TISCO) Jindal Iron & Steel

Company (JISCO), Hindalco and Sesa Goa.

Impact on EPS



TISCO 47.3 55 55 Buy

SAIL 6.1 4.5 4.3 Not Rated

Jindal Iron and Steel 35 54 54 Buy

Jindal Steel and Power 104 113 113 Buy

Sesa Goa 66 114 114 Buy

Hindalco 110 126 122 Buy


19/28



O IL & PETROCHEMICALS


BUDGET HIGHLIGHTS

n No changes in the excise duty and the import duty structure for the oil and gas sector.

n The excise duty was maintained at the same level of 26% for motor spirit, 11% for high-

speed diesel and 8% for LPG. Customs duties are being maintained at previous year'slevels.

IMPACT ONTHE SECTOR

n The announcement that petroleum companies will not be given pricing freedom is a

dampener, as it probably indicates that the government will continue to shift the subsidy

burden to the petroleum companies and ONGC.

n This measure will be neutral to the oil and gas industry.

n It will be positive, to some extent, for stand-alone refineries such as Kochi Refineries,Chennai Petroleum and Bongaigaon Refineries, as it was widely expected that the customs

duty was expected to be lowered thereby negatively impacting their margins.

n Positive for Reliance, IPCL, Finolex Industries, Indorama as price protection continues

and PVC users increases with government thrust in irrigation and water management.

TOP PICKS

n Our top picks in the oil industry are ONGC, GAIL, Kochi Refineries, Indian Oil Corporation

(IOC), and Chennai Petroleum.

Impact on EPSCompany FY2004 FY2005 Recommendation


ONGC 60.8 73.5 73.5 Buy

Chennai Petroleum 26.9 29.0 29.0 Buy

Kochi Refineries 40.1 37.4 37.4 Buy

Indian Oil Corp 60.0 55.0 55.0 Buy

GAIL 22.2 22.7 22.7 Buy

HPCL 56.2 50.0 50.0 Not rated

BPCL 56.5 48.5 48.5 Not rated


20/28



PHARMACEUTICALS

Rating: Overweight Budget Impact: Neutral to Positive

BUDGET HIGHLIGHTS

n Increased focus on health insurance and extention of the terminal date to avail of 100 percent tax deductions for research companies till March 2005.

IMPACT ONTHE SECTOR

n Positive

TOP PICKS

n Biocon, Wockhardt

Impact on EPS



Ranb axy 38.7 45.3 45.3 Buy

Dr. Reddys Lab 37.7 41.6 41.6 Buy

Cipla 9.3 11.0 11.0 Buy

Sun Pharma 19.2 21.2 21.2 Sell

Biocon 13.9 18.9 18.9 Buy

Glaxo 25.0 29.7 29.7 Buy

Novartis 21.5 23.2 23.3 Buy

Aventis 32.2 35.0 35.0 Buy

Wockhardt 12.5 17.6 17.6 Buy

Cadila 22.7 29.3 29.3 Buy

Nicholas Piramal 50.1 59.8 59.8 BuyDivis Lab 56.8 88.1 88.1 Buy


21/28



POWER UTILITIES


BUDGET HIGHLIGHTS

n The finance minister has reiterated "Electricity for all" programme announced by the NDAgovernment.

n In order to promote renovation and modernization of the existing Transmission and

Distribution (T&D) lines, benefit under 80IA would be extended to the projects undertakenduring the period April 1, 2004 to March 31, 2006.

n The Electricity Act 2003 (EA) envisages unbundling of generation, transmission and

distribution.

IMPACT ONTHE SECTOR

n The overall impact on the sector on account of these announcements would be neutral.

All the announcements like emphasis on electricity for all and extension of a tax holidayunder Section 80IA would ensure continued investment in capacity expansion in the power

sector. The government appears committed towards building power infrastructure, however,there was no specific mention of the revision proposed in the EA 2003 earlier.

TOP PICKS

n Tata Power and Power Trading Corporation

Impact on EPS



Tata Power 23.6 24.5 24.5 BUYReliance Energy 24.2 28.0 28.0 HOLD

JaiPrakash Associates 9.9 13.8 13.8 HOLD

Power Trading 2.3 3.5 3.5 BUY

Electricity for all

No mention of revision in the

EA 2003


22/28



SHIPPING


BUDGET HIGHLIGHTS

n Tonnage tax introduced to bring the Indian shipping industry at par with the world shippingindustry, as far as direct taxation is concerned.

n The deduction U/S 33 AC of the income tax act has been withdrawn and all shipping

companies will have to decide whether they want to follow the tonnage tax system or thecorporate tax system.

IMPACT ONTHE SECTOR

n The introduction of tonnage tax will have a positive impact on the Indian shipping industry.

It was a long-term demand of the shipping industry and has been heard by the financeminister.

n The impact of introduction of the tonnage tax system is explained in our note "Tonnage tax:

Implications for the Indian shipping industry" which was released by us on July 6, 2004.

The same is attached, along with this document, for your quick reference.

TOP PICKS

n Our top picks are Shipping Corporation of India (SCI) and Great Eastern Shipping.

Impact on EPS



Shipping Corp 22.2 30.0 32.5 Buy

Great Eastern Shipping 26.4 29.4 30.5 BuyEssar Shipping 4.3 5.3 5.8 Not rated


23/28



SUGAR & T EA


BUDGET HIGHLIGHTS

n No specific mention about the sugar or tea industry.

n Tea industry is more insulated than sugar, as it does not have any excise and hence no

cess.

IMPACT ONTHE SECTOR

n The impact is neutral on the sector. However, we believe that thrust on agriculture, farm

credit, micro finance and self-help groups would benefit the sector marginally.

TOP PICKS

n Our top pick remains Balrampur Chini Mil ls, Bajaj Hindustan and Tata Tea

Impact on EPS



Balrampur Chini 31.9 40.3 40.3 No impact of budget, wecontinue to recommend BUY

Bajaj Hindustan 5.3 7.5 7.5 No impact of budget, wecontinue to recommend BUY

Bannari Amman 28.9 48.7 48.7 No impact of budget, wecontinue to recommend BUY

EID Parry 24.2 38.3 38.3 No impact of budget, SELL

Tata Tea 39.3 40.5 40.5 No direct budget impact.

We continue to maintain BUY


24/28



T ELECOM

Rating: Neutral Budget Impact: Positive

BUDGET HIGHLIGHTS

n Increase in foreign direct investment limit from 49 percent to 74 percent.

n Tax holiday under section 80-IA extended for one more year.

n Mobile switching centre import duty waived.

n Special package for ITI

IMPACT ONTHE SECTOR

n The increase in the foreign direct investment (FDI) limit from 49 per cent to 74 per cent is

a positive for the sector, which is expected to require investments to the tune of Rs 700-900 billion over the next 5 years. Bharti Tele-Ventures, Hutchison-Essar and Idea Cellular

are expected to be the major beneficiaries of the decision.

n The extension of the tax holiday under section 80-IA for 1 more year, up to March 31, 2005,

is positive for investments in the sector.

n The customs duty exemption given on imports of mobile switching centres imports by

universal access service providers is expected to result in lower capital costs for RelianceInfocomm, Tata Teleservices and BSNL

n The Rs 5.08 billion package for Indian Telephone Industries (ITI) will help the company

restructure its operations and strengthen its technological capabilities.

TOP PICKS

n Bharti Televentures

Impact on EPS



Bharti Televentures 3.1 4.6 4.6 Buy

MTNL 19.3 20.0 20.0 Trading Buy

VSNL 11.0 Sell


25/28



TEXTILES


BUDGET HIGHLIGHTS

n The cenvat chain, as projected by us, has been broken. The mandatory cenvat duty onhandloom and power loom sector has been withdrawn.

n No mandatory excise duty on pure cotton, wool and silk in any form be it fibre, yarn, fabric

or garments.

n Blended textiles and non-cotton such as polyester, viscose, acrylic and nylon will have a

different tax regime.

n Rates For Excise Duty On Man Made Fibres. Mandatory excise duty on manmade fibre

at 16% (increased from 12%), on polyester filament yarn at 24% (no change), other man

made filament yarn at 16% (increased from 12%).

n New System Introduced For Excise Calculations.New system of excise duty calculation

introduced for power loom, handloom and composite textile mills.Under this new system, the players will have to choose between two routes of excise

taxation:

l Exemption route or

l Cenvat route

When the player chooses the exemption route, no excise duty will have to be paid at anystage except on man made fibre and filament yarn.

or

When the player chooses the cenvat route then the player can take credit for all the exciseduty paid at the earlier stages.

For the purpose of optional excise duty the rates of excise are:

l 4% for pure cotton sector be it yarn, fabrics, garments or made ups

l 8% for blended textiles sector and all non-cotton sectors.

The garment exporters concerns if any will be addressed through the DEPB mechanism.

IMPACT ONTHE SECTOR

n The budget is Positive for cotton spinning and cotton textiles companies.

TOP PICKS

n Arvind Mills, Mahavir Spinning, Vardhman Spinning

n Indian Rayon (likely to be benefited due to increase in the FDI limit in insurance businessfrom 26% to 49% as Indian Rayon holds 74% stake in Birla Sun Life Insurance, but negative

to some extent as excise duty on viscose yarn increased from 12% to 16%).

Impact on EPS



Arvind Mills 4.8 6.0 6.0 Buy

Raymonds 21.6 18.5 18.5 Not rated

Indian Rayon 18.6 19.5 19.5 Buy

Bombay Dyeing 13.9 15.0 15.0 Not rated

Mahavir Spinning 22.9 24.0 24.0 Buy

Vardhman Spinning 20.7 22.0 22.0 BuySuper Spinning 18.9 20.0 20.0 Buy

Cenvat chain broken

New system for excise

calculation introduced


26/28



A NNEXURE

Tonnage tax : Imp l ic a t ions fo r the sh ipp ing indus t ry

A corporate entity in the shipping industry in India is taxed at the maximum

rate applicable under the Income Tax Act. The shipping industry, however,

enjoys a special deduction U/S 33 AC of the Income Tax Act.

The Act allows a 100% deduction of profits derived from the shipping business,

provided that the amount is transferred to a reserve account. The amount

transferred to this reserve under section 33AC is to be utilised by the shipping

company for acquisition of new ships only.

Tonnage tax: the preferred option

World over, and particularly in the major shipping nations, there has been a shift from the

corporate tax regime to the tonnage based tax system. Under the tonnage-based system,shipping companies have to make a choice whether they want to be taxed as per the corporatetax system or the new system of tonnage based tax. Once a company makes its choice, it has

to adhere to it for 10 years. This system helps reduce the incidence of taxation on shippingcompanies and brings taxation at par with other countries that have already adopted this duel

system. Shipping companies also derive income from chartering of ships. The general law inall the shipping nations is that: if the total gross tonnage moved by chartered ships exceedsthe total gross tonnage moved by the company's own ships with more than a 4:1 ratio, this

income from chartering will be taxed as ordinary income.

Obligation to train new cadets

This tonnage based tax system comes with one rider: a training commitment. Worldover (except

in the UK where it can be waived off by paying a lumpsum amount in lieu of its training obligations)a company adapting to the tonnage tax regime has an obligation to train new cadet officers.This is a primary requirement and any company failing to do this automatically forgos all the

benefits derived from having adopted the new tonnage tax system.

Benefits of tonnage tax

q Tonnage tax offers a new, simple, fixed rate, low tax regime for shipping.

q Companies opting into the regime will enjoy a certainty on the level of taxes that will beimposed on their shipping activities.

q In case of pure shipping companies, it will reduce the amount of effort required to computeannual tax returns and result in cost savings.

q Listed companies will derive more advantages from this regime in that the deferred taxliability in respect of shipping will be phased out. This will result in higher earnings per

share and at the same time strengthen the balance sheet.

q Tonnage tax system will lead to ending of the benefit U/S 33 AC of the Income Tax Act

1961. This will greatly benefit shipping companies as they will be able to sell ships as andwhen they want and not get constrained by the provisions of the said section wherein itis stated that if any ship acquired is sold within eight years of purchase, the entire revenuewill be added back as profits in the year of sale. As a result of the tonnage tax regime only

capital gains will get taxed.

q The tonnage tax-training requirement will increase the availability of trained seafarers tothe shipping industry.

A shift to tonnage tax willreduce taxes of Indian

shipping companies andbring it on par with its

international counterparts

Listed companies will

derive more advantages asdeferred tax liability will be

phased out, resulting inhigher earnings

The new tax regime will allow

shipping companies to sellships anytime and tax only the

capital gains accruing out of the

sale


27/28



How taxes are calculated in Europe

Moreover, the law in EU stipulates that all expenses related to the shipping business concerningtonnage income will be non-deductible and assets included in the calculation of tonnage tax

cannot be depreciated.

q Capital gains on sale of ships will continue to be taxed at corporate tax rates.

q Income from non-shipping business will be taxed at the applicable corporate tax rate.

q The deferred tax liability of the company will stand abolished.

q The tonnage tax is based on the tonnage of a ship and also on the age of the ship. Theolder the ship, the higher is the incidence of tonnage tax.

q Among the main aims of tonnage tax is to encourage shipping companies to acquire new

ships to replace older ones as also to provide better training to cadets and officers in theshipping industry.

Tax structure in different countries is as follows:

Comparative tax structure (Net ton per day)

Ship Size Denmark Germany Finland Ireland Netherlands Spain UK India (Rs)*

< 1000 DWT 0.94 0.92 1.38 1.00 0.91 0.90 0.97 50.0

1000 DWT > 10000 DWT 0.67 0.69 1.03 0.75 0.67 0.70 0.73 35.010000 DWT > 25000 DWT 0.40 0.46 0.69 0.50 0.46 0.40 0.48 30.0

25000 DWT > 0.27 0.23 0.57 0.25 0.23 0.20 0.24 20.0

Note: * estimated; Currency Euro except for India; Euro: Rs.56.28; Source: Kotak Securities

The rates given above are per day rates. The shipping company will be taxed per ship and for

the days the ship was in operation only. If the ship is not operating due to repairs or otherwiseit will not be taxed for that period.

Moreover, the age of the ship can also be a deciding factor and an index can be used to

determine the taxation level.

Older ships will be taxed more than new ships.

Implication of tonnage tax on shipping companies

The implications of tonnage tax on Indian shipping companies will have to be understood inthe light of the deduction U/S 33AC and the compulsion on shipping companies to get 100%deduction by transferring profits to the reserve created under the said section. At present,

shipping companies, after availing deduction U/S 33 AC, are paying 5 % to 7% tax on theirreported profits. Also, there is a rider that any ships acquired from this reserve, if sold within

eight years will be taxed for the total revenue. The introduction of tonnage tax will see shippingcompanies paying only 1.5 % to 2% of their net profits as tax. Under the new tonnage taxsystem, the constraint on sale of ships will go and shipping companies will be taxed only for

the capital gains, if any, on sale of ships.

Impact of tonnage tax on valuationsPBT FY04 Taxation % of PBT Tonnage tax % Impact Recommendation

(Rs mn) @ 2% of PBT on EPS

Shipping Corporation 7135 865 12.1 143 2.60 BUY

GE Shipping 4918 270 5.5 98 0.90 BUY

Essar Shipping 1510 220 14.6 30 0.60 NOT RATED

Source: Kotak Securities


28/28


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Research Team

Name Sector Tel No E-mail id

Amitabh Chakraborty, CFA, FRM Head of Research +91 22 5634 1509 [email protected]

Jay Prakash Sinha Agro-Industry, Banking +91 22 5634 1207 [email protected] Karani Cement, Construction, Shipping, Textiles, Mid Cap +91 22 5634 1209 [email protected] Yadav Capital Good, Engineering, Power +91 22 5634 1522 [email protected]

Mitesh Thacker Technical analyst +91 22 5634 1417 [email protected] Chouhan Technical analyst +91 22 5634 1439 [email protected]

Nilay Dani Derivatives +91 22 5634 1428 [email protected]

Shankri Basu Editor +91 22 5634 1535 [email protected]. Kathirvelu Production +91 22 5634 1567 [email protected]

Budget Analysis FY2004-05

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Transcript of Budget Analysis FY2004-05