Railway Budget 2007-08: Sharekhan Railway Budget Special dated February 26, 2007

Railway Budget 2007-08

Railway minister Lalu Prasad Yadav continues to guide the Indian Railways (IR) on a profitable growth path. Announcing his fourth budget for the IR today, he indicated that the capital expenditure (capex) binge of IR would continue. In a move to boost IR’s key revenue stream (ie freight), the minister also extended major concessions on the freight rate front. He also reduced the passenger fares in a bid to increase the passenger traffic. The other salient features of the Railway Budget 2007-08 are an impressive reduction in the operating cost of IR, significant policy shifts to turn around the loss-making businesses of the national carrier, continued freight rationalisation and an increase in the capex of IR to make the railways more competitive.

The major beneficiaries of these moves are likely to be Texmaco, Kalindee Rail Nirman Engineers (Kalindee Rail) and Stone India. A few days back, in our special note “Turnaround Express going strong”, dated February 22, 2007, we had mentioned how we expected companies like Hind Rectifiers, Simplex Casting, Stone India and Texmaco to show a healthy growth in their earnings on the back of the growing capex of IR.

Besides these companies, oil refiners, cement, steel and iron ore companies would benefit from the railway budget due to the reduction announced in the freight rates, though the impact on earnings is expected to be marginal.

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Deutsche Bank - Reliance Industries

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Goldman Sachs - Curtain Raiser to Indian Budget

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Citigroup - Flash: India Banks - CRR Returns - Some Concessions, Not Structural

Summary

• Banks get a little gain in FY07, and going forward — The RBI made a few changes to the returns it offers to banks on their CRR balances. This should add about 5bp in margins for FY07 (back-ended in 4Q07), and about 3bp going forward, across the sector. Supports profitability, to a limited extent.
• But, CRR remains a fundamental drain on bank profitability — Raised returns do not materially change the drain that is the CRR. We estimate an opportunity cost, and effective loss, of 55-60bp of margin for banks. This is estimated at current market rates, and the increased returns only provide an offset of about 3bp.
• Two changes - retrospective and prospective — RBI had announced 0% returns on CRR in June 06. Since the notification has only been effected in January 07, RBI is a) Compensating banks over the June – Feb 07 period, at a higher rate (350-200bp) level; b) Raising returns from 0% to 1%, prospectively. The effective yield for banks is substantially lower – they do not get any returns on the first 3% of CRR, and so effective returns are only 0.5% on 6% CRR assets.
• The concession – Likely driven by rising P&L impact of CRR — We would believe RBI has made a slight concession to its June 06 change as the financial impact of the CRR has increased since June 06 as a) CRR itself has been raised to 6% from 5% since; and b) the cost of funding the CRR has risen by 150-200bp since. This is only a mild concession, but potentially reflects some cognizance of onerous regulatory requirements on the banking system.
• Positive, but only a mild one — This does come as a slight positive for banks – private and Government, against a slew of more onerous regulatory developments in the recent past. However, not structural or meaningfully directional.

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Budget 2007-08: Real Estate: black of white ! there are many demands here !

Industry expectations are as follows:

Continuation of section 801B of the income tax which gives tax relief to the builders for construction of units, which are less than 1000 square feet built up in metros. Special incentives for making small houses i.e. one BHK apartments less than 400 square feet carpet area especially in Mumbai. --> Really the FM has little love for Mumbai though it is the place which gets in the biggest revenue. Cheaper housing certainly could go a long way with the Common Man Theme.

Increase in exemption limit under section 24 of the Income Tax act which is regarding the exemption of the interest alone on the home loan should go up from the present Rs 1.5 lakh to Rs 3 lakh effective from the date of Booking and not from the date of Possession. This is hope really but with the FM looking to reduce exemptions this would mean asking for the moon.

TDS to be brought down from 16.83% to 10% especially for NRIs and a flat slab of 15% should be considered on rental income for NRIs, as this is their only income against the property. --> With bursting Forex reserves the reason to appease NRIs seems unreasonable.. We dont think this will happen.

Standard deduction of 30% towards maintenance should be increased to 40% for local residents and 50% for NRIs. Again a hope and demand for more.. However if this is allowed against bills, it would improve demand for cement. Currently demand for Cement is driven by new house construction and big way by reconstruction / repairs. Its a guess whether this will happen.

Abolition of service tax on builders when a builder hires an outside contractor to build the units. --> With service tax having a pass through, its unlikely this will be agreed to.

Reduction in Stamp Duty from the existing 5% to 2.5% More steps to curb Black money. ---> Really it would be a step in the right direction however this revenue goes to the States who are already fighting the centre for the loss in sales tax. Unlikely to be agreed we think. Most houses have a cash and chq component when they are sold. Really, tough to curb it unless the stamp duty is lowered. The real estate market is quite illiquid.

Complete scrapping of Urban Land Ceiling Act. Rationalizing Property tax on both Residential as well as Commercial properties. and there are more demands.

Close: A seesaw ride - and a positive finish

The Railway budget was on expected lines. There was the aura of reforms of digitisation and also the populism. Passenger fares have been cut across the board. This is to compete with airlines. There is no direct increase in freight rates and rationalisation has been done with regards to freight in an attempt to become more competitive. The idea is to sweat the assets more. The positive is from the East West dedicated Freight corridor which is expected to commence in 2007-08 at a cost of Rs 30,000 cr. There is a focus to use IT to increase efficiency ! - Its hats off to the Railway Minister as he has done which no other Railway Minister has done. Lower fares and increase profitability.

Coming back to markets it was a seesaw ride and a volatile one at that. Sugar, Cement, Steel stocks saw some buying but it was the banks which were the big gainers. Reliance was volatile post the Friday announcement of promoters intending to increase stake on profit selling once the news was out.

Sensex closed up 17 points at 13649.52 helped up by gains in Guj Ambuja (127.55, ACC (945.9) Tata Motors (839.6, Grasim (2341.14) and Satyam (461.45) Restricting the gains were Bharti Tele (732.4,), RCVL (425.9,), BHEL (2258.75,), Ranbaxy (351.2,) and Wipro (614,).

Banks made a smart come back. They were part of our hunters pick. Clearly they have been on the receiving end. However, the RBI offered them a largesse post close on Friday. They would be eligible for some interest income retrospectively on the CRR balances and that will help the bottomlines. SBI closed up and so did PNB and other banks.

Sesa Goa was one of the winnders today. The talk is that the buyer countries have agreed to a price hike of of ore by about 10%. Companies having their own ore will certainly do well and Sesa gets the direct benefit.

Rayban was smashed. The Italian Partner has asked the company for No objection to start a 100% subsidiary for doing business in India. Its likely to have been bitten by the Sebi rule of takeover which has asked it to give an open offer when it acquired Rayban's sunglasses business globally. We are positive on the business but these developments have negative implications.
Technically Markets: Sensex is poised for a pullback which could happen upto 14030. Resistance will be found at 13710 and 13830. On the lower side 13440 seems to be a good support. Below which we could fall upto 13330 and 13040.

Sensex exhibits resilience

The Sensex began the trading session with a positive gap of 52 points at 13685 and touched an intra-day high of 13723 amid considerable volatility in early trades. However the market slipped and in the first half of the session exhibited a range-bound trend with alternate bouts of buying and selling. A sharp bout of selling towards the close saw the Sensex slip into the red and touch a low of 13384, but renewed buying at lower levels in several front-line stocks saw the index erase its losses and end the session with gains of 17 points at 13650. The Nifty advanced three points and closed at 3942. The breadth of the market was negative. Of the 2,593 stocks traded on the BSE, 1,227 stocks advanced, 1,319 stocks declined and 47 stocks ended unchanged.

The sectoral indices were mixed. The BSE Metal index, the BSE FMCG index, the BSE Bankex, the BSE PSU index, the BSE Auto index and the BSE HC index ended in positive territory. On the other hand the BSE Teck index, the BSE CD index, the BSE IT index, the BSE Oil & Gas index and the BSE CG index exhibited weakness.

Among the gainers Gujarat Ambuja surged 3.83% at Rs128, ACC gained 3.30% at Rs946, Grasim jumped 3.08% at Rs2,341, Tata Motors added 3.07% at Rs840, SBI advanced 2.87% at Rs1,089, Satyam Computers was up 2.87% at Rs461, ITC advanced 2.59% at Rs170 and Tata Steel was up 2.29% at Rs470. Dr Reddy's, Maruti Udyog and Hindalco closed with steady gains. However, Bharti Airtel dropped 3.13% at Rs732, Reliance Communications shed 1.49% at Rs426 and Wipro dipped 1.48% at Rs614. Ranbaxy, L&T, Bajaj Auto, Infosys, BHEL, HDFC Bank and Reliance Industries closed with marginal losses.

Over 1.17 crore Power Finance Corporation shares changed hands on the BSE followed by Reliance Communications (32.93 lakh shares), IDBI (28.66 lakh shares) and Rolta India (23.07 lakh shares).

Value-wise Reliance Industries registered a turnover of Rs235 crore on the BSE followed by Reliance Communications (Rs138 crore) and Power Finance Corporation (Rs130 crore).

Market ekes out nominal gains amid volatility

The market pulled off an almost incredible rebound after a steep intra-day fall in mid-afternoon trade. The sharp fall came soon after the railway minister completed his budget speech in Parliament. Cement, banking, auto and steel shares were behind the Sensex’s rebound. The rise in cement and steel shares was due to a cut in rail freight rate on key raw materials in their manufacture. Index heavyweight, Reliance Industries (RIL), also recovered.

The 30-share BSE Sensex advanced 16.99 points (0.12%), to 13,649.52. It had come off the lower level after plunging 248.65 points, to 13,383.88, by 14:15 IST. The S&P CNX Nifty gained 3.05 points (0.08%), to 3,942. The Nifty March 2006 futures were at 3,969 compared to the spot Nifty closing of 3,942. On Friday (23 February), Nifty March futures had settled at a discount of 5.20 points.

The market was extremely volatile. The Sensex swung 1000 points, between some of the vital intra-day tops and bottoms of the day. The barometer index also swung 339.52 points between a low of 13,383.88 and a high of 13,723.40.

Railway Minister Lalu Prasad Yadav today announced a 5% cut in freight transportation rates for diesel-petrol, and a 6% reduction for all minerals, including iron ore and limestone. The lowering of freight rates is part of the rationalisation of tariffs announced by the minister even as he refrained from announcing any across the board increase in freight rates.

Lalu Yadav also introduced a commodity-based tariff policy, which will take effect from 1 April 2007, on an experimental basis for major commodities to provide a stronger base to the Railways' competitive capabilities. "We will introduce this new policy through an exclusive package for cement," he said.

The market-breadth evened out by the end of trading. Against 1,287 shares rising on BSE, 1,279 declined. Just 48 scrips were unchanged. In mid-afternoon trade, the ratio of losers to gainers was 1.8:1. The BSE Small-Cap Index lost 9.98 points (0.14%), to 6,894.45, while the BSE Mid-Cap Index advanced 31.82 points (0.5%), to 5,696.71.

The BSE Metal Index was the biggest gainer in percentage terms among BSE’s sectoral indices. It rose 201.61 points (2.2%), to 9,000.54. The BSE FMCG Index advanced 25.98 points (1.4%), to settle at 1,812.26. The BSE’s banking sector Index, the Bankex, advanced 42.87 points (0.6%), to 6,802.45. The BSE IT Index lost 16.42 points (0.3%), to 5,245.42.

The turnover on BSE was Rs 3793 crore, compared to Friday’s Rs 4552 crore.

Fears of nasty surprises in the Union Budget 2007-08, have caused a sharp correction on the bourses in the past few days. It plunged 723 points last week (week ended 23 February). At 13,649.52, it is off 6.8% from the lifetime high of 14,652.09 of 8 February 2007. It is down about 1% in calendar 2007 thus far.

Market men fear that short-term capital gains tax on the sale of shares may be hiked from 10% to between 12.5%-15% in the budget. The securities transaction tax (STT) may also go up further. The STT was raised in the previous budget. The removal of 10% corporate surcharge may be offset by removal of certain open-ended exemptions. On the flip side, analysts also expect the finance minister to give a big impetus to agriculture and infrastructure in the budget.

FIIs have resorted to profit-taking over the past two days. Their net outflow was Rs 225.20 crore on Thursday (22 February) compared to an outflow of Rs 40.20 crore on Wednesday (21 February 2007). An intermittent surge in inflow has been witnessed this month following an upgrade in India’s rating to investment grade by foreign rating agency, Standard & Poor's, late in January 2007. The cumulative FII inflow for February 2007 stands at Rs 3950.20 crore (till 22 February) compared to their purchases of Rs 492 crore in January 2007.

Earnings growth for India Inc remains strong. Growth in recent years has hovered near the breakneck pace of more than 20%. The long term India growth story remains intact. India’s long-term growth drivers are a favourable demography (large share of young population), robust domestic consumption and acceleration in infrastructure creation.

In today’s trade, battered cement shares edged higher on bargain-hunting. ACC jumped 4% to Rs 952, Grasim gained 3.6% to Rs 2354 and Gujarat Ambuja Cements advanced 4.5% to Rs 128.40. Cement shares had tumbled over the past few days with the government keeping a close watch on cement prices. In late-January 2007, the Centre scrapped 12.5% import duty on cement to rein in domestic prices. The recovery in cement shares was also due to reduction in freight rate on limestone – a key input in cement making by 6%.

Buying was conspicuous in PSU banks after the Reserve Bank of India (RBI) said it will resume paying interest on eligible cash reserve ratio (CRR) balances it held. State Bank of India gained 4.4% to Rs 1105, Punjab National Bank gained 5.5% to Rs 459, Bank of India gained 5% to Rs 166, Canara Bank rose 3.9% to Rs 218, and Bank of Baroda rose 2.5% to Rs 219.

Auto shares recovered on expectations of an excise duty cut on cars. Tata Motors gained 3.8% to Rs 846, and Maruti Udyog rose 3% to Rs 889.50. Market expects excise duty on cars to be brought down to 16% from 24% in the Union Budget 2007-08. In the last budget, the government had slashed excise duty on small cars to 16% from 24%.

Steel shares were in demand on expectations that steel makers will raise prices by Rs 1000 per tonne after the budget due to firm global prices. Tata Steel rose 2.5% to Rs 470.95, while Steel Authority of India (Sail) gained 2% to Rs 114. The upmove in steel shares was also due to reduction in freight rate on iron ore – a key input in steel making by 6%.

Reliance Industries shed 0.7% to Rs 1402.20. The stock recovered from the lower level after losing as much as 2.7%, to Rs 1373.50, by 14:09 IST. Reliance Industries (RIL) on Saturday (24 February 2007) unveiled a plan for an integrated cracker and petrochemicals complex, with a total capacity of 2 million metric tonnes per annum in the special economic zone (SEZ) at Jamnagar.

RIL’s board also approved a preferential issue of 12 crore warrants, exercisable into equal number of equity shares of Rs 10 each, to promoters as per SEBI guidelines for preferential issues. On exercise of the rights, the paid-up capital of RIL will increase from Rs 1393 crore to Rs 1513 crore.

Iron ore exporter Sesa Goa jumped nearly 7% to Rs 2012, after freight rate on transport of iron ore was cut by 6% in the Railway Budget.

IT bellwether ended 0.2% to Rs 2232. The stock was quite volatile. It moved between a low of Rs 2161.10 and a high of Rs 2248.70. Satyam Computer Services gained 2.8% to Rs 461.45 on market talk that the company may soon announce a large outsourcing deal.

C & C Constructions settled at Rs 239.90. The stock today debuted at Rs 350 compared to the IPO price of Rs 291.

Copper producer Sterlite Industries rose 1.5% to Rs 508.05, after Shanghai futures rose by their 4% limit on Monday, following sharp gains in the metal on the London Metal Exchange (LME).

Hindustan Zinc jumped nearly 8% to Rs 668, after the company raised zinc prices by 4.2% Saturday (24 February 2007) onwards.

Gas transporter, Gujarat Gas Company, ended flat at Rs 1300. The company said on Friday its net profit jumped 67% to Rs 18.23 crore (Rs 10.90 crore). Net sales for the same quarter surged 46.5% to Rs 234.49 crore (Rs 159.96 crore).

Indiabulls Financial Services ended flat at Rs 438. The company said on Friday three Merrill Lynch units acquired 2.93 million shares in the company, raising its stake to 5.13%.

Sugar shares edged higher following reports that some sugar companies have started hedging their risks in the futures market at a time when sugar prices are falling. Bajaj Hindustan jumped nearly 6% to Rs 169.75, and Balrampur Chini Mills gained 2.3% to Rs 57.80.

IFCI rose 1.2% to Rs 28.15. Volumes in the stock were a huge 1.3 crore shares on BSE. The stock has been consistently clocking huge volumes over the past few days.

Power Finance Corporation jumped 5% to Rs 117.15. The stock debuted at Rs 105 on Friday (23 February 2007) compared to the IPO price of Rs 85.

Civil engineering firm, McNally Bharat Engineering, jumped 5% to Rs 168.90 after the company said on Monday it had secured a Rs 556 crore order from Rashtriya Ispat Nigam, to construct a new sinter plant at Visakhapatnam.

Great expectations

Besides addressing the inflation problem, the Budget is likely to focus on infrastructure and agriculture.

It is once again that time of the year when the focus of everyone—be it the common man or the industrialist--shifts from Mumbai to Delhi, from Dalal Street to the Parliament, as the Finance Minister unveils the Budget.

But this year’s Budget is going to be tough for Finance Minister P Chidambaram. The economy is growing at a scorching pace, but inflation levels are also hitting multi-year highs.

Thus, a balance between sustaining growth and controlling inflation is going to be a Herculean task. This is also evident from the behaviour of the market last week, which tanked by 723 points or 5 per cent as there is a growing concern how the finance minister would be able to balance both.

Though there are high expectations among industry players, sectors like automobiles, cement, infrastructure, power, banking, oil and gas, agro-based, textiles, sugar and paper are expected to be in focus.

“We broadly expect the government to deploy more money in agriculture and in the development of agriculture infrastructure,” says, Raamdeo Agrawal, managing director, Motilal Oswal Securities.

“Today, 65 per cent of the population is leaving in rural areas and most of them are directly and indirectly involved in agriculture business. With rising revenues, the government can afford to focus on the agriculture sector,” adds Dinesh Thakkar, CMD, Angel Broking.

Here is a closer look at what industries and analysts expect from the Union Budget 2007-08.

Automobiles The industry demands rationalising excise duty of 16 per cent for all cars and not just small cars (at present all cars except small cars attract a duty of 24 per cent). However, this seems unlikely.

Industry players need more clarification on the definition of a small car as in the last Budget, it was defined both in terms of length (ie under 4,000 mm) and engine size (1,200 cc for petrol-1,500 cc for diesel), while the Auto Mission Plan has defined small cars only by length (under 3,800 mm).

Two- and three-wheeler players have been hankering for lowering the excise duty from the current 16 per cent to 8 per cent though analysts feel it is unlikely that the government would go the full length.

The extension of R&D tax benefits beyond March 31, 2007 is a strong possibility and will be a positive given the accelerated rate of product launch in a fiercely competitive market.

Key policy pronouncements could also be made regarding the macro environment in line with the Auto Mission Plan. The emphasis on auto parks and specially designated SEZs for automobiles reflected in the mission plan could see some fiscal sops on this front.

Concessions for exports of components, small cars and multi-utility vehicles and tractors could also be a key positive for volume growth. Some movement on the demand increase in the motor vehicle depreciation rate from 15 per cent to 25 per cent should also prove a key positive for industry.

The auto-ancillary segment too has its own wishlist of revising the abatement of parts and components at higher levels (currently 33.5 per cent) and maintaining customs duties at the present level.

A reduction in the peak customs duty on components from the current 12.5 per cent, which appears probable in the light of the government's resolve to move towards Asean rates, could mean that while OEMs could source cheaper imported components, domestic components makers would face increased competition especially from their east Asian peers.

Banking and finance In order to ensure greater availability of resources to meet the rising demand for credit, analysts feel that the lock-in period of the investment in the term deposits eligible for tax deduction under section 80C may be reduced from five to three years.

There are expectations that the earlier 80L tax exemption on interest income may be restored and that the limit for tax deducted at source may be increased to Rs 10,000 from Rs 5,000.

Kotak Securities expects that perpetual non-cumulative and redeemable cumulative preference shares in Tier I and II capital respectively should be allowed in order to improve the capital adequacy ratio ahead of Basell II norms.

Cement, construction and infrastructure With government donning its anti-inflation gear, the tight cement price situation has come under the scanner in recent times. However, little action is expected on this front as the import duty on cement was removed only last month.

The cement sector feels that it is highly taxed with excise alone equivalent to at least 32 per cent of the ex-factory price. Hence, the key industry demand is to reduce the specific excise duty of Rs 408 per tonne at present to Rs 250 per tonne. While it is unlikely that the government will meet the demand entirely, there could be some reduction given the government’s concerns over the price situation.

There is a strong likelihood of a reduction or even a phase-out of import duties of 10 per cent on pet coke-a key alternative to coal. There could also be cut in import duties on coal.

Other key expectations include a reduction of royalty on limestone, presently at Rs 45 per tonne, in line with other commodities and excise duty exemption for cement supplied to SEZs and a phase-out in the levy on captive power generation.

The strong focus on infrastructure could see some action on the customs duty front for construction equipment.

The key industry demand for increasing the proportion of Viable Gap Funding, which is a one-time or deferred grant, provided with the objective of making a project commercially viable, presently at 40 per cent could be increased, which will mean entry of more private players in infrastructure projects.

The other key demand is to extend tax benefits for infrastructure projects other than power and BOT projects (like pipelines) as also the exemption from application of minimum alternative tax applicable to infrastructure companies.

Fertilisers The fertiliser sector is expecting simplification of rules for claiming duty exemption on input such as naphtha, fuel oil and ammonia. It also expects concessional duty of 5 per cent on import of urea to manufacture complex fertilisers.

FMCG In the processed food and ready-to-eat food category, the industry is expecting the exemption of duty which is currently about 8 per cent.

The industry also demands a tax break and other incentives for setting up food processing industry in the form of 100 per cent tax deduction in first 10 years. The paints industry expects a cut of 2.5 per cent in the import duty on titanium dioxide, which is the single largest raw material.

There are expectations that cigarettes will come under the value added tax regime this year.

At present, there is a 4 per cent additional excise duty on cigarettes, which could be removed and VAT implemented. As long as the excise duty or VAT increases by up to 5 per cent, cigarette companies should be fine. But if the VAT rate is 12.5 per cent, it could affect cigarette volumes negatively.

Hospitality The hotel industry expects the Budget to give it infrastructure status as that would entail hotel projects to attract a 10-year tax holiday.

Analysts expect the current 10 per cent rate of depreciation to be raised to 20 per cent, which will result in lower taxes for hotels.

In a drive toward rationalisation of service tax, Kotak Securities expects hotels to be exempted from paying service tax on services received from foreign tour operators and travel agents, whose services are received outside India.

There are expectations that the luxury tax is made uniform across all states, and that it should be charged on the actual billed amount. Emkay expects luxury tax to be capped at 10 per cent.

Information technology Software exports from units located in SEZs are exempt from taxes for ten years in the following manner: for the first five years, 100 per cent of income from export, while for the next five years, 50 per cent of income from export is deductible from taxable income.

Software exports are also exempt from tax until FY09 under section 10A/10B, a provision, which the industry expects to be extended for another 10 years. However, analysts believe this may not come through.

The information technology (IT) industry expects the concessions given to software exports from special economic zones (SEZs) to be extended to software technology parks (STPs), as per Man Financial.

According to Sharekhan, if the tax exemption on STP units is not extended to SEZs, the effective tax rate is expected to increase to 18-24 per cent range, up from 11-17 per cent depending upon the proportion of income from exports and contribution from the domestic business. This would result in lower net margins to the extent of 150-300 basis points.

Kotak Securities expects an exemption of genuine business expenditure from the fringe benefit tax. The industry also expects a withdrawal of service tax on the maintenance or repair of software.

Media Sharekhan expects a reduction of customs duty on import of capital goods in line with the reduction in peak customs duty, which is currently up to 36 per cent. This would be beneficial to the entire media industry as it would reduce set-up costs.

According to Kotak Securities, such a move would encourage growth of segments like digital exhibition, which would in turn reduce revenues losses incurred due to piracy and boost tax collections.

Man Financial expects the print media to come under the service tax net, in order to bring parity between print and electronic media, as the latter pays service tax on advertisement revenues of 12.24 per cent per cent tax.

The industry expects a reduction in excise duty levied on equipment like set-top boxes (STBs) from a normal rate of 16 per cent to nil, which would bring the rates applicable on broadcasting equipment on par with telecommunication equipment, and encourage domestic production of STBs.

Further, Kotak Securities expects a correction of this anomaly created last year as there was a reduction in customs duty from 15 per cent to nil on STBs but there was no corresponding reduction in import duties on inputs used in the manufacture of STBs.

Metals Broking houses do not expect any significant measures for the industry as duties on many were recently reduced on January 23, 2007. Customs duty for most of the key metal products like aluminium, zinc, copper, tin and ferro-alloy stainless steel was reduced to 5 per cent from 7.5 per cent.

However, they expect reduction in the excise duty in general in order to rein in inflation. If the duty on on copper concentrate is reduced, copper manufacturers will do better.

Oil and Gas In a bid to reduce fuel prices, the oil ministry is seeking cuts in taxes and duties levied on retail petroleum products as well as energy exploration.

Gas pipelines and exploration activities are expected to be granted an infrastructure status, which would entail them to income tax benefits.

Kotak Securities also expects a concession in service tax on companies offering drilling, surveying and offshore vessels services.

Add to this, a reduction in project import duty structure for infrastructure projects in petroleum sector would help curb inflation of project costs of refineries due to taxation, given the fact that petroleum product exports are the largest commodity exports from the country.

Further, the industry expects a rationalisation of customs duty structure, which currently varies across different petroleum products. A 5 per cent customs duty is levied on crude oil, 7.5 per cent on petrol and diesel, 10 per cent on air turbine fuel and 5 per cent on naphtha, at present.

Rationalisation of excise duty on petrol and diesel is sought as well, from a structure of a percentage of cost plus fixed rate to a specific duty of Rs 15.92 a litre for petrol and Rs 6.08 a litre for diesel, according to Kotak Securities.

Man Financial expects a cut in excise duty on naphtha and fuel oil from the current level of 16 per cent. Again, there is a scope for making the sales tax structure uniform at a rate of 4 per cent, which is up to 29 per cent for diesel and up to 20 per cent for petrol in a number of states at present.

Petrochemicals and chemicals There is a possibility of a cut in import duties on purified terephthalic acid and mono ethylene glycol t o 5 per cent and that on polymer to reduce from the current 5 per cent.

Analysts also expect a cut in the excise duty on polymers (15 per cent now), fibre intermediaries (15 per cent) and polyester (currently at 8 per cent) to around 5-10 per cent.

As regards chemicals, analysts expect a review of the excise and customs duty of 16 per cent and 10 per cent respectively on caustic soda and soda ash.

Pharmaceuticals One of the key demands of the sector includes reduction of MRP based excise from 16 per cent to 12 per cent and increase in abatement to 52 per cent. The latter seems unlikely as the government recently increased the abatement from 40 per cent to 42.5 per cent.

The extension of the income tax benefits on R&D expenditure (150 per cent weighted deduction) beyond March 2007 for another five years is a strong possibility.

Others demands include a reduction in customs duty on raw materials for molecules from the current 12.5 per cent to 5 per cent and tax concessions on milestone payments received on new chemical entity out-licensing.

Service tax exemption on clinical trials and other scientific services for foreign clients is also another demand if fulfilled which would boost domestic companies wanting to take advantage of the contract research opportunity. On the customs duties front, an exemption on life-saving drugs looks a strong possibility.

Power and engineering Broking houses expect a lot from the Budget for the power sector. Emkay Shares and Stock Brokers feels that power equipment players will gain if duty on raw materials on power generation, transmission and distribution are reduced from the current 16 per cent to 14 per cent.

Kotak Securities expects duties on project imports to be reduced from 12.5 per cent to 7.5 per cent and the Accelerated Power Development and Reform Programme (APDRP) scheme to be continued.

Edelweiss Securities says that if the concessional zero customs duty structure is extended to transmission projects associated with mega power projects, power transmission players will benefit.

If the Budget provides infrastructure status to the power generation and distribution sector, power equipment players and even companies in the capital goods and engineering sectors will gain.

The engineering and capital goods industry, which was reeling under pressure of rising input costs, had benefited in the previous Budget as customs duty of major inputs like aluminium and copper had reduced.

Thus, broking houses don't expect any measures on this front except increased allocation of government spending on infrastructure, which is positive for the industry. Emkay Shares and Stock Brokers feels that excise duty on earth moving and construction equipment may be reduced from 16 per cent to 8 per cent.

Sugar Depressed by supply and compressed by margins, the Indian sugar industry is expecting this Budget to announce some sweet initiatives.

Indian Sugar Mills Association (ISMA), the apex body representing the sugar industry, has proposed to reduce the excise duty on molasses and to be levied at 8 per cent of the selling price of the molasses.

Sugar companies pay excise duty on a fixed basis of Rs 750 per tonne of molasses, compared with the final prices of molasses at about Rs 1000 in some states.

Besides expectations of a quicker implementation of ethanol blending at 10 per cent in fuel, the industry wants ethanol to get infrastructure status.

Telecommunications The telecom industry expects a rationalisation of license fee revenue sharing which varies from 6-10 per cent in different circles to a uniform rate of 6 per cent across the country. However, this is unlikely.

Analysts also expect an increase in service tax levied from telecom operators from the current level of 12 per cent. These changes however, may not impact the revenues of the operators, as they would be passed on to the consumer.

Mobile handsets attract an additional customs duty of 4 per cent at present, which the industry expects to be removed.

Textiles In order to make the Indian textile industry more competitive in the global market, Kotak expects the deadline for Technology Upgradation Fund to be extended to March 2012 from the current March 2007.

It also recommends that the excise duty on man-made fibre to be reduced from 8 per cent to 4 per cent to bring parity with cotton yarn, and that on mono ethylene glycol (key input for man-made fibre) from 12 per cent to 8 per cent to make it the same as on purified terephthalic acid.

Sharekhan Highnoon dated February 26, 2007

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Kotak - Zensar + Weekly Tech Update

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Thanks Dunbaka

Anand Rathi - Weekly Reports

Anand Rathi - Weekly Technical ReportAnand Rathi - Weekly Strategist NoteAnand Rathi - Weekly Wrap NoteThanks Yash

Edelweiss - PCG DAILY MARKET CALL 26-FEB-2007

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Sharekhan Daring Derivatives for February 26, 2007

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PowerYourTrade Trading Calls

Ashwani Gujral
Sell Ranbaxy Labs with stop loss of Rs 375 for target of Rs 250
Sell Century Textiles with stop loss of Rs 586 for target of Rs 350.

Deepak Mohoni

Short sell IndusInd Bank above Rs 48.25 with stop loss of Rs 49.25. This is a day-trading recommendation
Buy Sesa Goa below Rs 1900 with stop loss of Rs 1860. This is a day-trading recommendation.