Capitalideasonline.com Budget Presentation By Chetan J Parikh.

capitalideasonline.com

Budget Presentation

ByChetan J Parikh


Investment Philosophy


Budget PresentationBudget Presentation

~Investment Philosophy

Buying with a ‘margin of safety’

Buying what we understand

Buying wealth creators (or potential wealth creators)

Buying sustainable businesses, not stocks

Identification of catalysts

Value Investing


Buying at a price – With a risk reward ratio greater than 3:1at a discount of 40% to intrinsic worth

What is ‘Margin of Safety’?




Intrinsic worth is the statistical expected value of the discounted free cash flows under three probabilistic scenarios:

• Pessimistic

• Neutral

• Optimistic

What is ‘Intrinsic Worth’ and How is it Computed ?




• Price bands based on a combination of:

- Historical metrics- Peer comparisons - DCF valuations

• Risk Reward Ratios computed as a ratio of probable

upside to probable downside at the current price

• Price bands will change every year or more frequently due to expectations based on real or market dynamics

What are Risk Reward Ratios?




Identifying Catalysts


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.


Internal Catalysts


~Identifying Catalysts

• New management

• New corporate stategy

• New product strategy

• Improved operational efficiencies

• Cutting costs

• New financial strategy

• Sustained tax rate deduction


Internal Catalysts… Contd


• Reducing working capital

• Share Buybacks

• Asset Sales



External Catalysts


• The presence of shareholder activists

• Industry merger activity

• Time



Budget 2003 - 04


Banking


~Sectors with specific stocks and price bands

• 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 M&As.

• Extending 72A benefits to the industry will 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.


Banking



Company Upside Downside Risk RewardIntrinsic Premium

State Bank of India 400 200 0.75 325 -3%

HDFC Bank 430 215 5.52 360 -31%

ICICI Bank 300 75 2 190 -21%

UTI Bank 100 32 4.23 58 -22%


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 present 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 with minimum export obligation of Rs 20 crore removed for duty exemption for import of equipment.


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 domestically for clinical trials will be exempt from customs and excise duties.

• Life saving drugs currently 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.


Health Care & Pharmaceuticals – Price bands




Dr. Reddys Ltd. 1575 650 3.07 1390 -37%

Wockhardt 1275 470 -39.33 950 -53%

Nicholas Piramal 635 260 -11.71 390 -42%

Pfizer 1125 450 -8.26 765 -53%


Hospitality



• Withdrawal of expenditure tax.

• Extension of 10(23G) and 72A benefits and non-imposition of service tax on the hotel industry.

• Continue the exemption for the hotel industry from the levy of service tax


Indian Hotels 300 150 2.75 340 -44%


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.


TELCO 195 80 0.39 110 48%

Mahindra & Mahindra 215 95 9 170 -37%


Cement



• Increased spending on infrastructure to drive demand for this sector.

• 48 new road projects worth Rs 40,000 crore to be launched, 25% of which will be cement concrete.

• Housing projects income for construction of residential projects up to March 31, 2005 to be exempt from tax.

• The increase in excise duty on cement ( Rs 50 per 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 from 32% to 25%.


Cement - Price Bands




Gujarat Ambuja Cements 220 110 1.29 135 17%

ACC 260 100 1.96 100 54%

India Cement 45 18 -14.5 40 -60%

Madras Cement 5400 2700 1.57 4600 -19%


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.


BSES 325 190 2 300 -22%

Tata Power Ltd. 275 100 6.95 160 -24%


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 duty.


FMCG – Price Bands




Tata Tea 300 150 3.69 270 -33%

HLL 235 130 1.5 200 -14%

Marico Industries 300 150 7.33 290 -42%

Nirma 390 185 2.42 380 -36%


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 provisions under sections 10A and 10B could provide a big boost the mergers and acquisitions in the sector.

• Customs duty on a number of capital 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.



Infosys 6000 1500 0.66 3750 12%

Satyam Computers 440 110 1.84 340 -34%

Polaris Software 345 60 2.39 200 -28%

Information Technology – 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 exchanges from their management; resulting in demutualisation

• Capital gains arising out the the process of demutualisation should be fully exempted from tax.


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 R&D companies established up to March 31, 2004

• Income tax concessions to pharma, biotech and IT at par • 10A/ 10B benefits to continue as originally envisaged • No loss of 10A/10B tax holiday on account of shareholding

change - M&A 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%





• Job workers in the textiles sector exempt from excise compliance

• Benefit of transfer of losses on merger extended to hotels - boost for M&A activity in hotel industry

• 10A/ 10B benefits extended to gems and jewellery sector • Tax benefits on mergers extended to nationalized banks

and hotels - significant boost for M&A activity • CST to be reduced to 2% from 4% to facilitate 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 restructuring, M&As • CST to be gradually phased out to achive destination

based VAT





• 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 warehousing period extension to 90 days to

help importers • Self-assessment scheme for imports to lower logistics

costs • Liberal valuation norms for excise duty to reduce disputes


Thank You

Capitalideasonline.com Budget Presentation By Chetan J Parikh.

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