Budget Presentation

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Budget Presentation

• By
• Chetan J Parikh

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Investment Philosophy
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Budget Presentation
Investment Philosophy
Value Investing
Buying with a margin of safety
Buying what we understand Buying wealth creat
ors (or potential wealth creators)
Buying sustainable businesses, not stocks Ide
ntification of catalysts
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Budget Presentation
Investment Philosophy
What is Margin of Safety?
Buying at a price With a risk reward ratio
greater than 31 at a discount of 40 to intrinsi
c worth

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Budget Presentation
Investment Philosophy
What is Intrinsic Worth and How is it Computed ?
Intrinsic worth is the statistical expected value
of the discounted free cash flows under three
probabilistic scenarios Pessimistic Neutral
Optimistic
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Budget Presentation
Investment Philosophy
What are Risk Reward Ratios?
Price bands based on a combination of
Historical metrics Peer comparisons DCF valua
tions Risk Reward Ratios computed as a ratio of
probable upside to probable downside at the
current price Price bands will change every yea
r or more frequently due to expectations based on
real or market dynamics
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Identifying Catalysts
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Budget Presentation
Identifying Catalysts
Catalysts are events that take place that
increase the value of the company, regardless of
how its stock reacts. The market will eventually
realise that value has been created, transferred
or unlocked by such an event and call it a
catalyst. Stock catalysts drive the share price
of a company without improving the value of the
firm.
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Budget Presentation
Identifying Catalysts
Internal Catalysts
      New management       New corporate stateg
y       New product strategy       Improved
operational efficiencies       Cutting costs
      New financial strategy Sustained
tax rate deduction
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Budget Presentation
Identifying Catalysts
Internal Catalysts Contd
      Reducing working capital

      Share Buybacks       Asset Sales
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Budget Presentation
Identifying Catalysts
External Catalysts
      The presence of shareholder activists

      Industry merger activity Time
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Budget 2003 - 04
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Budget Presentation
Sectors with specific stocks and price bands
Banking
The government buying back illiquid G-Secs will
provide a large one time income to write off
NPAs. Increasing FDI in private banks from 49
to 74 and removing the cap on voting rights at
10 will significantly boost capital flows and
MAs. Extending 72A benefits to the industry w
ill further pave the way for consolidation.
The 100 basis points reduction in small savings
rates will help reduce the cost of deposits for
banks. Saving bank account rates reduced by 50
basis points.
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Budget Presentation
Sectors with specific stocks and price bands
Banking
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Budget Presentation
Sectors with specific stocks and price bands
Health Care Pharmaceuticals
MNC pharma companies to have major benefit due to
sharp reduction in import duty of formulations
and alcohol based medication. Section 10 23(G)
of IT Act to apply for private hospitals with 100
beds or more. Rate of depreciation from the pre
sent 25 per cent to 40 per cent in respect of
life saving medical equipment.
Customs duty on specified life saving equipment
from 25 per cent to 5 per cent.
Biotechnology investments will get a big boost w
ith minimum export obligation of Rs 20 crore
removed for duty exemption for import of
equipment.
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Budget Presentation
Sectors with specific stocks and price bands
Health Care Pharmaceuticals
Biotechnology manufacturing plants will be exempt
from custom duty to the extent of 25 of
previous years export turnover.
All drugs and materials imported or produced dom
estically for clinical trials will be exempt from
customs and excise duties. Life saving drugs cu
rrently attracting nil or 5 per cent customs duty
will also be exempt from excise duty.
Basic customs duty on glucometers and glucometer
strips used by diabetics, will be reduced from
10 per cent to 5 per cent.
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Budget Presentation
Sectors with specific stocks and price bands
Health Care Pharmaceuticals Price bands
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Budget Presentation
Sectors with specific stocks and price bands
Hospitality
Withdrawal of expenditure tax.
Extension of 10(23G) and 72A benefits and non-im
position of service tax on the hotel industry.
Continue the exemption for the hotel industry fr
om the levy of service tax
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Budget Presentation
Sectors with specific stocks and price bands
Automobiles
The excise duty has been reduced for cars and
SUVs by 7 (net of 1 contribution to calamity
relief fund). Boost to infrastructure spending
will positively impact sale of commercial
vehicles. However this will be partially offset
by the Rs 0.5/litre of diesel.
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Budget Presentation
Sectors with specific stocks and price bands
Cement
Increased spending on infrastructure to drive
demand for this sector. 48 new road projects w
orth Rs 40,000 crore to be launched, 25 of which
will be cement concrete. Housing projects inco
me for construction of residential projects up to
March 31, 2005 to be exempt from tax.
The increase in excise duty on cement ( Rs 50 pe
r tonne) will impact directly on the bottomline
of the companies. However we feel that the surge
in volumes of cement sales will outweigh the
concerns on increased excise duty.
Customs duty on white cement will be reduced fro
m 32 to 25.
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Budget Presentation
Sectors with specific stocks and price bands
Cement - Price Bands
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Budget Presentation
Sectors with specific stocks and price bands
Power
The customs duty on specific equipment for high
voltage transmission projects has been reduced
from 25 per cent to 5 per cent for high voltage
transmission projects. The extension of fiscal
benefits accorded under the Mega Power Projects
scheme to all projects that fulfills the
conditions already prescribed for mega power
projects.
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Budget Presentation
Sectors with specific stocks and price bands
FMCG
Marginal positive impact on companies
manufacturing tea and coffee due to redirection
of excise fund (Re 1 per kg), which will benefit
integrated manufacturers in the long run.
Excise duties on biscuits brought down from 16
to 8, while abatement has come down from 40 to
35. Branded edible oils will incur 8 excise d
uty.
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Budget Presentation
Sectors with specific stocks and price bands
FMCG Price Bands
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Budget Presentation
Sectors with specific stocks and price bands
Information Technology
The benefits under sec 10A and 10B of the Income
Tax Act to be continued for units located in
Software Technology Park. The modification of p
rovisions under sections 10A and 10B could
provide a big boost the mergers and acquisitions
in the sector. Customs duty on a number of capi
tal goods used by the telecom and IT sector for
manufacture of components reduced from 25 per
cent to 15 per cent. Excise duty on pre-loaded
software exempted in the case of computers.
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Budget Presentation
Sectors with specific stocks and price bands
Information Technology Price Bands
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Budget Presentation
Sectors with specific stocks and price bands
Tax Treatment for dividends capital gains
Dividends tax free in the hands of the
shareholders 12.5 per cent dividend distribution
tax be levied on domestic companies
Equity oriented schemes be exempt from the
purview of the tax for one year
Equities that are acquired on or after March 1,
2003, and sold after the lapse of a year, or
more, exempt from the incidence of capital gains
tax. Separation of the ownership of stock exchang
es from their management resulting in
demutualisation Capital gains arising out the the
process of demutualisation should be fully
exempted from tax.
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Budget Presentation
Sectors with specific stocks and price bands
Other Budget Highlights
Additional excise duty reforms for VAT
implementation. Housing to get a boost from tax
exemption for income for residentialprojects
construction Fiscal benefits to provide impetus
to private medical investment
Tax holiday for RD companies established up to
March 31, 2004 Income tax concessions to pharma,
biotech and IT at par 10A/ 10B benefits to cont
inue as originally envisaged No loss of 10A/10B
tax holiday on account of shareholding change -
MA activity to get a boost Tax rebate to senior
citizens to be increased to Rs 20,000 from Rs
15,000 Excise duty on PFY reduced from 32 to 24
Excise duty on garments reduced from 12 to 10

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Budget Presentation
Sectors with specific stocks and price bands
Other Budget Highlights
Job workers in the textiles sector exempt from
excise compliance Benefit of transfer of losses
on merger extended to hotels - boost for MA
activity in hotel industry 10A/ 10B benefits ext
ended to gems and jewellery sector
Tax benefits on mergers extended to nationalized
banks and hotels - significant boost for MA
activity CST to be reduced to 2 from 4 to faci
litate VAT Core activity condition not to apply
in case of Overseas Direct Investments
Pre-payment limit of ECB upto 100 m to be
enhanced Income tax changes to spur restructurin
g, MAs CST to be gradually phased out to achive
destination based VAT
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Budget Presentation
Sectors with specific stocks and price bands
Other Budget Highlights
India, Inc effective income tax rate down from
36.75 to 35.875 - exemptions to stay
De-reservation of reserved SSI items to enhance
industrial efficiency andcompetitive strength
Alcohol based cosmetics excise duty cut to 16
Overseas investment norms eased - boost for
Indian IT, pharma sectors Interest free warehous
ing period extension to 90 days to help importers
Self-assessment scheme for imports to lower logi
stics costs Liberal valuation norms for excise d
uty to reduce disputes
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Thank You