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JM MORGAN STANLEY

Industry

Equity Research

Asia/Pacific

Market Commentary/Strategy March 3, 2003India Research Team

Playing it Safe; Equities Look Elsewhere for Comfort

MSCI COUNTRY INDIA

Asia Strategist Weight 3.5%

AC Asia MSCI (ex Japan) Weight 3.8%

• Treading carefullyIndia’s Finance Minister Jaswant Singh, in his first budget, was careful

not to upset the apple cart, by avoiding any tough reform measures.• On balance, we rate budget measures as marginally posi tive

The government announced two pro-growth measures, including anincrease in spending on infrastructure and a further cut in interest rates.

• Budget actions reflect little concern for r ising fiscal burden

Finance Minster maintained the familiar trend of a lot of noise aboutthe need for fiscal consolidation without reflecting it in the actionstaken.

• Near-term growth concerns remain

The positive measures announced in the budget are unlikely to turn thedecelerating growth cycle in the near term. We expect industrialgrowth to weaken further to 3-4% in F1Q04 from 5.1% in F3Q03 and6.5% in F2Q03.

• Budget will have mixed impact on three key drivers of equities, in our view.We estimate a small, 60 bps improvement in corporate earnings growthdue to tax cuts. We also expect that an aggressive, 100 bps rate cut onsmall savings rates will cause a revival in otherwise contractingliquidity. However, reform initiatives, particularly in direct taxes, fallshort of potential. The budget fails to create the tactical impetus foroverall equity performance. Continue to focus on stock/sector picking.We are selling our high-beta picks – i.e., NIIT and Zee Telefilms – andadding to growth stocks trading at reasonable valuations – i.e., Infosysand Dr. Reddy’s

India Budget F2004



India Budget F2004 – March 3, 2003


JM MORGAN STANLEY

Page 2

Morgan Stanley India Team

Director of Research

Robert Vaudry, Hong Kong +852 2848 [email protected]

Head of Indian Research

Ridham Desai, Mumbai +9122-2209-7790Ridham.Desai @morganstanley.com

Strategist Analysts

Ridham Desai, Mumbai +9122-2209-7790Ridham.Desai @morganstanley.com

Economist

Chetan Ahya, Mumbai [email protected]

Database

Ben Godinho, Mumbai [email protected]

Cement

Sachin Sheth, [email protected]

Commercial Vehicles /Two -Wheeler/Engineering

Satish Jain, Mumbai +9122-2209-7809

[email protected]

Consumer/Media

Rajesh Mayani, [email protected]

Financial Services

Amit Rajpal, Hong Kong [email protected]

Sachin Sheth, Mumbai [email protected]

Nonferrous Metals & Mining/Steel

Chetan Ahya, Mumbai [email protected]

Oil & Gas/Telecommunications

Vinay Jaising, CFA, Mumbai +9122-2209-7780

Vinay.Jaising @morganstanley.com

Petrochemicals

Ridham Desai, Mumbai+9122-2209-7790Ridham.Desai @morganstanley.com

Pharmaceuticals

Sameer Baisiwala, [email protected]

Software

Anantha Narayan, Mumbai+9122-2209-7161

[email protected]

Research Associates

Akshay Soni, Mumbai [email protected]

Amit Puri, Mumbai [email protected]

Anil Agarwal, Mumbai [email protected]

Anirudh Gangahar, [email protected]

Nimit Tanna, Mumbai [email protected]

Vijay Chugh, [email protected]





JM MORGAN STANLEY

Page 3

Playing it Safe; Equities Look Elsewhere for Comfort

Economics

Chetan Ahya

Summary

Much unlike the style of his predecessors, Finance Minister

Jaswant Singh, last Friday, presented an annual budget

lacking the spice of poetic statements. Nevertheless, he

maintained the familiar trend: a lot of noise about the need

for fiscal consolidation without taking any action that would

impart confidence about the government’s seriousness in

addressing this critical macro issue. Nonetheless, we rate

the budget as marginally positive for the economy. Itannounced two pro-growth measures, including an increase

in spending on infrastructure and a further cut in interest

rates.

What We Liked About the Budget

Construction spending on infrastructure: The government

has announced a US$12.6 billion investment plan for roads,

airports, seaports and a convention centre. The most

important of these is the new, 10,000-km road project for

US$8 billion. However, the government plans to construct

these roads by way of build/operate/transfer (BOT) with theparticipation of private players. We believe this would

result in a delay in implementation; finalizing the terms for

awarding the contracts may be more complicated than the

National Highway Development Authority, which manages

golden quadrilateral projects, has experienced. Therefore,

we believe that it will take 9-12 months for the benefits of

this spending to start flowing into the real economy.

Savings rate cut: The thrust on cutting interest rates on

government sponsored savings schemes continued in the

budget. The rate on the small savings scheme (public

provident funds scheme) was reduced by 100 basis points to8.0%. Following the government’s cut in the small savings

rate, the central bank also reduced by 50 basis points each

the repo rate to 5% and the savings bank deposit rate to

3.5%. The resultant downward bias in banks’ lending ratesshould help maintain momentum in retail loan growth,

lending some support to weakening household

consumption.

State Level VAT: The VAT (Value Added Tax) scheme is

finally moving towards the action phase of the POTA

(Proposition, Opposition, Treaty-Consensus, Action) cycle.

The Finance Minister confirmed in the budget that the VAT

system will be effective from April 1, 2003. Migration to

the new tax system may face many hitches. Over the next

2-3 years, however, once the national level VAT system is

fully implemented, manufacturing productivity shouldincrease significantly from economies of scale and the

creation of a national market.

What We Did Not Like About the Budget

No action on fiscal consolidation again: The budget

reflects little government concern to reduce the fiscal

deficit. There was no reference to the status of the fiscal

responsibility bill, which has been awaiting the approval of

the Parliament for more than 2 years.

Direct tax laws further entangled : The budget has gone

against the grain of the recently released Kelkar committee

recommendations, which aimed to reduce the cost of risk

capital – i.e., equity – and treating all factors of production

on a par. Instead of simplifying the direct laws, as

suggested by Kelkar Committee, the budget has only added

to the complexities by announcing more direct tax sops.

Bottom Line: Near-term Growth Concerns Remain

We believe the positive measures announced in the budget

are unlikely to turn the decelerating economic growth cycle

in the near term in any significant way. We maintain our

view that industrial growth will continue weaken through to

F1Q04, to 3-4% from 5.1% in the quarter ended inDecember 2002.





JM MORGAN STANLEY

Page 4

Fiscal Deficit: Customary Missing of Target

Fiscal Deficit on Consistent UptrendFor the last five years, the central government’s fiscal

deficit has been on a consistent uptrend. The new finance

minister has been able to do little to address the issue. The

fiscal deficit for F2003, which was budgeted at 5.3%, is

now estimated to reach 5.9% of GDP compared with 4.1%

in F1997.

Maintaining the Ritual of Missing the Target

Every year, India’s actual budget deficit is significantly

higher than projected (Exhibit 2). As an example, for

F2002, the estimated budget deficit (announced in

February 2001) was 4.7% of GDP. Later, this was revised(in February 2002) to 5.7%. In a second revision after the

completion of financial year, the estimate was raised

further to 6.1%. Similarly, the fiscal deficit for F2003 was

budgeted to be 5.3%, but the first revised forecast is

already at 5.9% (Exhibit 2). We believe that the

government is too optimistic in its projections of indirect

taxes for February-March 2003 (Exhibit 1). We expect the

F2003 deficit to be revised further to 6.1% of GDP.

Exhibit 1

India’s Indirect Taxes: Ambitious Projections for F2003

Fiscal Year 1Q03 2Q03 3Q03 Jan-03 Feb-Mar

YoY Growth Implied Est.

Indirect Taxes 15.7% 14.5% 14.1% 13.2% 32.9%

Excise 21.6% 15.8% 14.5% 10.8% 34.6%

Customs 7.5% 12.5% 13.3% 4.8% 25.1%

Source: Budget Documents, Morgan Stanley Research.

Revenue Expenditure Continues to Mount

Revenue expenditure rose to 13.8% of GDP in F2003,

from 11.6% in F1997. The increase was due to higher

subsidy, defence and interest costs. This rise in revenueexpenditure has been at the cost of capital outlays. Capital

expenditure has fallen to 2.5% of GDP in F2003 from

3.1% in F1997 (Exhibit 3).

Debt Burden at New Peak

The central government’s internal debt burden has risen

further to 58.9% of GDP in F2003, as per budget estimates,

compared with 55.7% in F2002 and 45.4% in F1997. The

average growth in debt in the last three years has been

14.9%, compared with nominal GDP growth of 8.5%.

Bailouts for States Will Increase the BurdenThe central government has offered state governments the

opportunity to swap their high-cost debt with lower cost

borrowings at current market rates, to help reduce their

interest burdens. The Finance Minister announced in the

budget that 26 states have agreed to this swap. This is

expected to save Rs810 billion in interest costs over the

residual maturity of the loans. We believe the exchange

should have been allowed only on condition that the states

agreed to initiate fiscal reforms. The reduction in interest

burdens may actually lessen the pressure on state

governments to undertake fiscal reforms.

No Sign of Efforts to Correct the Problem

The F2004 budget showed little concern for addressing the

problem of the fiscal deficit. While the privatization of

some of the large public-sector companies may help

contain the deficit, expenditure management is still

neglected.

Exhibit 2

India’s Fiscal Performance: Statement of Intent vs. Actions

Year Finance Minister Statement made during budget Deficit as % of GDP

Budget Actual

F1997 Mr. P Chidambaram We are committed to bring the fiscal deficit below 4% of GDP 5.0 4.1

F1998 Mr. P Chidambaram Unwavering commitment to continue on the course of fiscal correction 4.5 4.8

F1999 Mr. Yashwant Sinha Given the state of the economy, no further compression warranted 5.6 5.1

F2000 Mr. Yashwant Sinha Launching a medium-term strategy to reduce deficit 4.0 5.4

F2001 Mr. Yashwant Sinha We must squarely confront and overcome the critical challenge posed by a weakening fiscal situation 5.1 5.6

F2002 Mr. Yashwant Sinha Inadequate fiscal management has remained the most intractable problem over the past decade 4.7 6.1

F2003 Mr. Yashwant Sinha Expressed my deep concern at the poor fiscal situation of the central and state governments 5.3 5.9

F2004 Mr. Jaswant Singh Fiscal consolidation through tax reforms 5.6

Source: Budget Documents, Morgan Stanley Research.





JM MORGAN STANLEY

Page 5

Exhibit 3

F2004 Budget: Central Government Finances

Rs. Billion F2002 F2003BE F2003RE F2004BE

Gross Tax Revenue 1,871 2,358 2,219 2,515

As % of GDP 8.1% 9.5% 9.0% 9.2%

Indirect Taxes 1,128 1,366 1,329 1,461

As % of GDP 4.9% 5.3% 5.4% 5.3%

Excise 726 914 874 968

As % of GDP 3.2% 3.7% 3.5% 3.5%

Customs 403 452 455 494

As % of GDP 1.8% 1.8% 1.8% 1.8%

Direct Taxes 688 911 820 956

As % of GDP 3.0% 3.7% 3.3% 3.5%

Share of states 528 612 561 638

As % of GDP 2.3% 2.5% 2.3% 2.3%

Net 1,337 1,730 1,642 1,842

As % of GDP 5.8% 6.8% 6.6% 6.7%

Non Tax Revenues 678 721 728 698 As % of GDP 3.0% 2.9% 2.9% 2.5%

Total revenue receipts 2,014 2,451 2,369 2,539

As % of GDP 8.8% 9.6% 9.6% 9.3%

Capital Receipts 1,610 1,652 1,671 1,849

As % of GDP 7.0% 6.5% 6.7% 6.7%

--Privatization 36 120 34 132

As % of GDP 0.2% 0.5% 0.1% 0.5%

---Others 1,574 1,532 1,637 1,717

As % of GDP 6.9% 6.0% 6.6% 6.3%

Expenditure

Plan 1,012 1,135 1,141 1,210

As % of GDP 4.4% 4.4% 4.6% 4.4%

- - - -

Non Plan 2,613 2,968 2,899 3,178 As % of GDP 11.4% 11.6% 11.7% 11.6%

Interest 1,075 1,174 1,160 1,232

As % of GDP 4.7% 4.6% 4.7% 4.5%

Subsidies 312 398 446 499

As % of GDP 1.4% 1.6% 1.8% 1.8%

Defense 543 650 560 653

As % of GDP 2.4% 2.5% 2.3% 2.4%

Others 619 694 659 703

As % of GDP 2.7% 2.7% 2.7% 2.6%

Total Expenditure 3,625 4,103 4,040 4,388

As % of GDP 15.8% 16.0% 16.3% 16.0%

Revenue Expenditure 3,016 3,405 3,416 3,662

As % of GDP 13.1% 13.3% 13.8% 13.3%

Capital Expenditure 608 698 624 726

As % of GDP 2.6% 2.7% 2.5% 2.6%

Fiscal Deficit 1,410 1,355 1,455 1,536

As % of GDP 6.1% 5.3% 5.9% 5.6%

Revenue Deficit 1,002 954 1,047 1,123

As % of GDP 4.4% 3.7% 4.2% 4.1%

Primary Deficit 335 181 295 304

As % of GDP 1.5% 0.7% 1.2% 1.1%

Source: Budget Documents, Morgan Stanley Research

RE = Revised Estimates, BE= Budget Estimates.

This seems to be on thehigh side as theFinance minister hasgiven some sops fordirect taxes.

The actual figures arelikely to be higher thanbudgeted especially forLPG and Kerosene.

Deficit could again beslightly higher thanbudget estimates.

This target may beachieved only if theGovernment is able toprivatize companieslike HPCL, BPCL andMaruti Udyog Ltd.





JM MORGAN STANLEY

Page 6

Exhibit 2

Central Government Finances

Fiscal Deficit Trends (% of GDP)

8%

10%

13%

15%

18%

20%

F 1 9 9 2

F 1 9 9 3

F 1 9 9 4

F 1 9 9 5

F 1 9 9 6

F 1 9 9 7

F 1 9 9 8

F 1 9 9 9

F 2 0 0 0

F 2 0 0 1

F 2 0 0 2

F 2 0 0 3 R E

F 2 0 0 4 B E

2%

3%

4%

6%

7%

Fiscal Deficit Receipts (LS) Expenditure

Tax Revenues (Direct and Indirect) (% of GDP)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

F 1 9 9 2

F 1 9 9 3

F 1 9 9 4

F 1 9 9 5

F 1 9 9 6

F 1 9 9 7

F 1 9 9 8

F 1 9 9 9

F 2 0 0 0

F 2 0 0 1

F 2 0 0 2

F 2 0 0 3 R E

F 2 0 0 4 B E

Direct Tax Indirect Tax

Expenditure Trends (% of GDP)

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

F

1 9 9 2

F

1 9 9 3

F

1 9 9 4

F

1 9 9 5

F

1 9 9 6

F

1 9 9 7

F

1 9 9 8

F

1 9 9 9

F 2

0 0 0

F 2

0 0 1

F

2 0 0 2

F 2 0 0

3 R E

F 2 0 0

4 B E

2.0%

2.6%

3.2%

3.8%

4.4%

5.0%

Revenue Expendi ture (LS) Capital Expendi ture (RS)

Interest Cost as % of Revenue Receipts

35%

39%

43%

47%

51%

55%

F 1 9 9 2

F 1 9 9 3

F 1 9 9 4

F 1 9 9 5

F 1 9 9 6

F 1 9 9 7

F 1 9 9 8

F 1 9 9 9

F 2 0 0 0

F 2 0 0 1

F 2 0 0 2

F 2 0 0 3 R E

F 2 0 0 4 B E

Non-Plan Expenditure (% of GDP)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

F 1 9 9 2

F 1 9 9 3

F 1 9 9 4

F 1 9 9 5

F 1 9 9 6

F 1 9 9 7

F 1 9 9 8

F 1 9 9 9

F 2 0 0 0

F 2 0 0 1

F 2 0 0 2

F 2 0 0 3 R E

F 2 0 0 4 B E

Defense Expd Subsidies Interest payments Others

Privatization Proceeds (Rs. Billion)

0

20

40

60

80

100

120

140

F 1 9 9 3

F 1 9 9 4

F 1 9 9 5

F 1 9 9 6

F 1 9 9 7

F 1 9 9 8

F 1 9 9 9

F 2 0 0 0

F 2 0 0 1

F 2 0 0 2

F 2 0 0 3 R E

F 2 0 0 4 B E

Source: Budget Document, Economic Survey, Morgan Stanley Research





JM MORGAN STANLEY

Page 7

Exhibit 4

Select Budget Measures

Direct Taxes

• 5% tax surcharge levied last year for country's security halved to 2.5% for corporates, completely waived for individuals earning less than Rs. 850,000

per year and doubling it to 10% for individuals earning more than that amount.• Increase in standard deductions for salaried individuals earning greater than Rs. 500,000 pa

• Government to maintain tax concessions on housing interest loans at Rs. 150,000 pa.

• Dividend tax at the hands of the shareholders removed. However, dividend distribution tax of 12.5% imposed on corporates

• Abolition of long term capital gains for all listed equity purchased after 1st April 2003.

• Exemption on capital gains for 1 year on buybacks.

• Tax free status of software export companies reinstated

Indirect Taxes

• Introduction of state level VAT system from 1st April 2003

• 3-tier excise structure 8%, 16% and 24% introduced.

• Additional levy of 50 paise in diesel and motor spirit collecting, Rs. 26 billion. This amount will be used for road projects.

• Peak customs duty reduced by 5%

• Services tax increased to 8% from 5%

Government finances• Government proposes to buy back high-interest government bonds from banks who volunteer.

• Government to introduce debt swap scheme with the states. This is expected to lead to a saving of Rs 810 Biliion for the states over the residual

maturity of the loan.

• Issue price of urea fertiliser to be raised by Rs 12 per 50 kilogram bag.

• Premature repayment of loan of $3 billion from World Bank and Asian Development Bank.

Interest Rates

• Small saving rates was reduced by 1%. Following this announcement, the central bank reduced the repurchase and bank saving deposit rates by 50

basis points each.

Foreign Direct Investment

• FDI in private banks increased from 49% to 74%, voting right limitations to be amended.

• Overseas investment limit for corporates hiked to 100% of net worth.

Infrastructure Spending

• Government plans to invest around Rs 600 bil lion in 48 new road projects, modernisation of airports and seaports.

Source: Budget Document, Economic Survey, Morgan Stanley Research





JM MORGAN STANLEY

Page 8

Strategy

Ridham Desai

F2004 Budget:

Equities Look Elsewhere for Sympathy

Leaving the Glass Half Full, or Is it Half Empty?

Indian Finance Minister Jaswant Singh’s systematic and

detailed budget presentation for F2003-2004 recognizes the

political limitations of a coalition government and an

election year and thus avoids adventurous moves.

However, Mr. Singh did complete the annual ritual with the

panache he is known for. The focus on health, education

and infrastructure (although the benefits will accrue only in

the long term) are welcome moves. But the finance

minister paid lip service to direct tax reforms. The budgetseems to have disregarded the equitable tax regime

philosophy and reduction in the cost of risk capital mooted

by the Kelkar Committee. That said, the budget does not

contain any big shock.

From the stock market’s perspective, the budget influences

three key drivers of equities: earnings, liquidity and macro

(pace of reforms and growth). This budget will, in our

view, produce a limited earnings boost (arising from a

slightly lower corporate tax rate) and a marginal increase in

liquidity (due to lower interest rates). However, the reform

initiatives seem to have fallen short of expectations and

immediate growth outlook remains a question.

Slew of indirect tax reform: The budget continued to

pursue indirect tax reform, as in recent years. These

reforms included rationalization of excise duties,

progression to value-added tax (VAT) including a cutback

in the central sales tax rate to 2%, a reduction of 5% in the

peak customs tariff and the extension of service tax to more

sectors (service tax was also increased from 5% to 8%).

Lip service to direct tax reform: In contrast, the effort on

direct taxes was limited. While the tax on dividends has

been abolished, the budget has introduced a 12.5% taxincidence on profits distributed by corporates. We think

this defeats the purpose of removing the dividend tax. A

key rationale for the removal of the tax on dividends, as

suggested by the Kelkar Committee, was equitable tax

regime for all factors of production. (See our note titled

“Tax Reform and Dividend Debate – Anybody Listening,”

dated January 27, 2002.) Capital (read profits) as a factor of

production is still receiving stepmotherly treatment. The

removal of tax on long-term capital gains applies only to

listed equities acquired over the next 12 months – which

looks fairly inexplicable. The complicated tax exemption

regime was left more or less intact, although tax

administration was simplified. If anything, the budgetactually increases the list of exemptions.

Change in corporate tax rates: The silver lining to direct

taxes came in the form of a reduction in the corporate tax

surcharge by 2.5%. This will likely reduce the average tax

rate for corporates by around 60 bps, resulting in an

equivalent improvement in earnings growth (in the ensuing

12 months). Earnings for the software services sector may

improve by a higher number (around 3%), given the change

in tax laws relating to software services companies.

Aggressive rate cut: The finance minister boldly reduced

interest rates on small savings by a whopping 100 bps. This

prompted the central bank to react immediately, with a 50

bps cut to the interest rate on bank savings accounts to 3.5%

and to the repo rate to 5%. The bond market followed suit,

with the benchmark 10-year bond yield falling by 47 bps to

5.85%. While central bank liquidity has been compressing

over the past few weeks (not at all helped by rising crude oil

prices), this significant reduction in rates should abate the

fall in liquidity.

Fiscal deficit remains alarmingly high: The biggest reform

that needs to be pursued, in our view, is fiscal consolidation,

and that seems to be missing in this budget. Although thefinance minister has made fiscal consolidation a focal point

(the debt-swapping scheme for state governments and banks

is an important step in that context), the budget continues to

target an unreasonably high level of fiscal deficit (5.6% of

GDP for F2004). This, in our view, impedes long-term

growth recovery and thus caps the upside to equities

(Exhibit 4). That said, the numbers in the budget

presentation look realistic and bear a higher probability of

being achieved, unlike the slippage in recent years.

Financials gain from the budget, and we retain our large

overweight position: The financial sector has receivedimpetus from the budget in the form of both tax breaks for

restructuring and acquisition and foreign direct investment.

We believe the budget impact is neutral for most other key

sectors.

Market Continues to Appear Range-bound

We think the budget is unlikely to provide the macro

environment for improved equity performance over the next

six months. Thus, we continue to look at range-bound







JM MORGAN STANLEY

Page 10

Automobiles

Satish Jain

Positive for cars/SUVs

Neutral for two-wheelers

Negative for commercial vehicles

Lower duties for cars/SUVs: The proposed reduction in

the excise duty, from 32% to 24% is, in our opinion,

positive for the car/SUV segment, which has shown

sluggish growth for the past three years. It also reduces the

pressure on companies, reeling under the burden of rising

steel and fuel prices. The reduction is positive, in our view,

for companies like Tata Engineering and Mahindra &

Mahindra.

Special National Calamity Duty: All two-wheeler and

cars/SUV companies would be marginally affected by a 1%

duty – called a national calamity contingency duty.

Considering the intense competition and pricing pressure

they face, most companies may have to absorb this cost.

Lower duties on tires: Excise duties on tires have also

been reduced, to 24% from 32%, which should help all auto

companies and the transport operators.

Additional duties on chassis for body builders: To

promote body-building by commercial vehicle (CV)

companies as a measure of road safety, the duty on the

chassis has been increased to 16% +Rs10,000. While

attempting to bring the unorganized sector, which does not

pay any excise duties, onto a level playing field with the

organized sector, the additional duty has made body-

building for light commercial vehicles (LCVs) and smaller

trucks unviable for the unorganized sector. Until the

companies add capacity to build bodies, the customers

would have to bear the burden of the additional duties of

Rs10,000. The average cost of vehicles would rise between

1% and 3%, depending upon the type. We consider this a

significant burden on freight operators, which are alreadyreeling under the burden of rising fuel prices and low freight

rates.

Lower duties on electric vehicles: Duties on electric

vehicles are being reduced from 16% to 8%. This could

serve as an incentive for some companies to introduce such

vehicles.

Marginal gains from lower steel duties: The reduction in

import duties on CR (cold rolled steel) from 30% to 25%

should cause some relief to auto companies that are or

would be affected by the rising price of steel.

Road infrastructure to trigger growth: The auto sector is

a direct beneficiary of road construction. The proposal to

undertake 48 new road projects, involving an expenditure of

Rs400 billion, should be a long-term growth driver for the

auto sector, especially for CVs and cars.

Reduction in surcharge: The reduction in the tax

surcharge from 10% to 5% benefits all auto companies as

most now have high tax rates.

Exhibit 8

Automobiles: Key Excise Rates2001-02 2002-03E

Two Wheelers & Three Wheeler 16% 16%

Tractors 16% 16%

Commercial Vehicles 16% 16%

Motorcars/ Utility Vehicles 32% 24%

Source: Budget Documents, Morgan Stanley Research

Banks and Financial Services:Positive

Amit Rajpal / Sachin Sheth

The budget, in our view, is largely neutral for the banking

and finance sector, with a positive bias. However, for the

State Bank of India (SBI.BO, Rs285.75, Overweight, Price

Target Rs350) the foreign investment limit was unchanged,

which was disappointing. As a result, the stock closed on

February 28 at Rs285.75 – 5.7% lower in a day. We believe

that this is a good level to add to positions in the shares.

Key measures include:

Higher foreign direct investment in private banks - positive

The limit on foreign direct investment in private banks has

been raised from 49% to 74%, effectively providing an

opportunity for foreign banks to acquire majority control.

In addition, the budget promises to consider raising the

voting right limits, currently capped at 10%, which we

believe also acted as a stumbling block for mergers and

acquisitions. However, given the paucity of “attractive”

targets (implying banks without excess branches and

employees) as well as the relative inflexibility in branch





JM MORGAN STANLEY

Page 11

restructuring and labour laws, we expect limited M&A

action.

Central bank cuts savings deposit rates to 3.5% –- Positive

With the government indicating a soft bias on rates by

reducing rates on the longer-tenored small savings schemes,

the central bank has taken the cue by cutting shorter-end

savings bank rates from 4% to 3.5%. This should help

maintain the marginal steepness in the yield curve, as short

end rates would decline along with the longer end. This

benefits most banks with longer investment horizons and

shorter funding duration. As mentioned in our recent note

on rising rates, we believe SBI will be a greater beneficiary

of any steepening in the yield curve.

Buyback of high-yield debt by the government – Neutral

The government has indicated that it would encourage

banks facing liquidity problems in their high-yield trading

investment portfolios of government securities to sell these

back to the government to reduce their debt servicing

burden and to enable the banks to realize gains on their

high-yield portfolios. However, this has been

recommended entirely on a voluntary basis. It is unlikely

that SBI would voluntarily sell such securities, as it has

historically been conservative in booking treasury gains and

has demonstrated a preference for playing the gain through

its margins.

Impact on HDFC – Positive

Two steps were announced in the budget that should be

positive for HDFC (HDFC.BO, Rs375, Overweight, Price

Target Rs445):

• Tax exemptions on housing loans were retained in full,

contrary to the Kelkar committee recommendations.

• The tax on dividends at the shareholder level is removed.

This is likely to be positive for high-growth andreasonably high dividend yield companies like HDFC.

Cement – Negative

Sachin Sheth

While the budget aims to boost medium term demand in

core sectors like cement and steel through highway and

housing-related measures, the 14% increase in excise duties

on cement in a weak pricing environment is likely to have

an immediate dampening effect on profits, more than

offsetting any potential benefits, including the recent rail

freight rate reduction.

Positive measures include the following:

• The tax exemption on housing finance is retained, thus

ruling out any potential decline in demand due to its

withdrawal/reduction.

• The government plans to build another 10,000 km of

rural roads, a quarter of which would be concrete.

While the intention is to start work on a quarter (or

about 3,000 kms) of this in the current year, the

increment to demand is not likely to be significant.

Even assuming that the entire 10,000 kms would becompleted in 3 years, which appears ambitious based

on the progress of the Golden Quadrilateral program,

the annual increment in demand would be on the order

of 1.6 million tons, or approximately 1.5% – not

significant enough, in our view, to drive a secular

increase in cement prices.

• The recent, 3.6% reduction in freight rates for cement is

positive to the extent that companies rely on rail freight

– mainly ACC (ACC.BO, Rs154.05, Underweight,

Price Target Rs120), for which the impact would be

approximately 5% added to F2004E earnings, andnegligible for Gujarat Ambuja (GACM.BO, Rs161.15,

UnderWeight, Price Target Rs142).

The main negative measure is the increase in excise duty

from Rs17.5 per 50kg bag to Rs20 per bag. We believe

that, in the current weak pricing environment, it would be

difficult for average company realizations to increase by the

Rs2.5 per bag needed to pass this on to the customer.

Accordingly, we believe that the impact on F2004E profits

is significantly adverse, as highlighted below – especially

for ACC – more than offsetting any potential benefits of the

positive measures announced.







JM MORGAN STANLEY

Page 13

• The rural income group will gain from several new

benefit schemes but will likely be hurt by a 4-5%

reduction in fertilizer subsidy (urea and DAP).

• The higher income group will be the most affected

on account of the higher income tax as well as a

higher service tax. However, this group’s

sensitivity to consumption is low, in our view.

Higher-income households are likely to be affected by a

higher tax surcharge. Also, the reduction in the small

savings rate will reduce future income on savings.

Key changes in the indirect tax proposals for the consumer

sector are as follows:

1) Excise duty on biscuits reduced from 16% to 8%,with the abatement reduced from 40% to 35%.

2) Excise duty on refined edible oil/vanaspati

(branded and packed) increased from 0% to 8%.

3) No increase in excise duty on cigarettes.

4) Excise duty on tea (Rs1/kg) converted to a cess of

Rs1/kg.

5) Excise duty on hard-boiled sugar confectionery

reduced from 16% to 8%, with the abatementreduced from 40% to 35%.

6) Excise duty on aerated soft drinks reduced from

32% to 24%, with abatement cut from 50% to

45%.

7) Excise duty on toilet preparations containing

alcohol reduced from 50% to 16%, with 40%

abatement.

8) Reduction in peak import duty from 30% to 25%.

Hindustan Lever (HLL.BO, Rs168.35, Equal-Weight,

Price Target Rs180)

HLL will benefit primarily from the reduction in excise

duty on alcohol-based toilet preparations, hard-boiled sugar

confectionery and biscuits and the cut in import duty on raw

materials. However, the company will likely be hurt by the

imposition of an 8% excise duty on refined edible

oil/vanaspati. We believe the lower duty on personal care

products will be passed on to consumers to accelerate

volume growth. HLL’s earnings should benefit from the

decrease in the surcharge on corporate tax, albeit

marginally, as its effective tax rate is 21% on account of

backward-area benefits. Overall, the impact on HLL’s

pretax profit from the key budget proposals will likely bearound +0.7% (Exhibit 10).

Our price target of Rs180 is based on a 45% P/E premium

to the sector multiple excluding HLL (10-year average)

compared with HLL’s 5-year average of 64%. We assign a

lower premium because of the company’s declining growth

rate relative to the sector. At the price target the stock

would trade at a P/E of 21 based on our new 2003 earnings

estimates. Key risks to our price target are: 1) a significant

change in consumption demand growth; 2) loss of market

share in key product categories; 3) significant material cost

inflation; and 4) any large acquisition.

Exhibit 10

HLL: Budget Impact

Existing Proposed Gain/(Loss) Rs m

Excise Duty on toilet preparations

containing alcohol 50.0% 16.0% 308

Custom duties (peak) 30.0% 25.0% 250

Corporate tax surcharge 5.0% 2.5% 113

Excise duty on biscuits

and confectionery 16.0% 8.0% 22

Service tax on advertising 5.0% 8.0% (253)

Excise Duty on Edible Oils Nil 8.0% (285)

Tax on Tea Re 1 Re 1 Neutral

Dividend tax Nil 12.50% Neutral

Total Gain/Loss 155Profit before Tax 2002 22,357

% of PBT 0.7%

Source: Budget Documents, Morgan Stanley Research Estimates

ITC (ITC.BO, Rs 650.7, Equal-Weight, Price Target

Rs700)

A specific excise duty has been retained. Excise comprises

60% of ITC’s total cigarette turnover and is the largest cost

element. The budget does not increase the excise duty on

cigarettes. However, the government will amend the

Additional Excise Duty Act to allow state governments to

impose a maximum 4% sales tax on cigarettes. This implies

that ITC will have to raise its prices an average of 4-5% to

cover the additional excise burden. Implementation of the

sales tax may take a few months, which would benefit ITC,

in our view. We believe that, while price increases will hurt

volumes in the near term, profitability may not be

significantly dampened on account of price hikes and an

improvement in product mix.

ITC benefits from the reduction in excise duty from 16% to

8% on biscuits and sugar confectionery, albeit marginally.





JM MORGAN STANLEY

Page 14

The company’s hotel business should gain significantly

from the withdrawal of the expenditure tax, the continued

exemption on service tax and the benefit of setting-off

unabsorbed losses and depreciation on amalgamation,among others. ITC’s earnings will benefit from the

decrease in the surcharge on corporate tax, as the

company’s effective tax rate is 33.6%.

We retain our price target of Rs700, which is based on 7.1x

EV/EBIDTA (12% premium to global average) on our

F2004 estimates. We use EV/EBITDA as the valuation

measure because it captures the earnings of the core

cigarette business. We believe that a 15-20% premium to

the global tobacco sector average multiple is justified by

ITC’s higher forecast earnings growth rate and ROE. The

key risks we see to achievement of our price target for ITC

are the operating fundamentals for domestic tobacco, any

adverse outcome of pending litigation with government

authorities, and a significant change in investment in the

company’s non-tobacco businesses.

Britannia Industries (BRIT.BO, Rs519.9, Equal-Weight,

Price Target Rs601)

Britannia should be the biggest gainer from the Finance

Bill, 2003 (Exhibit 11). The excise reduction for biscuits

from 16% to 8% should substantially boost its core bakery

business. We believe that the company will decrease the

price of its brands to pass on the lower excise duty to the

consumer. This should accelerate its volume growth andease pressure on operating margins. The latter should also

be helped by the reduction in the peak import duty on

refined edible oil costs, its key input. While the gain

appears to be huge, price decreases will likely be traded for

volume increases.

We arrive at our price target of Rs601 by applying a

F2004E P/E of 14. Based on our price target, the stock

would trade at a 15% discount to the sector earnings

multiple, which we believe is a fair valuation. The main

risks we see to achievement of our price target for Britannia

are: 1) a significant change in consumption demand growth;2) a meaningful shift in market shares in biscuits and major

brands; 3) substantial material cost inflation; 4) lack of

success in the dairy business; and 5) utilization of surplus

cash.

Exhibit 11

Britannia Industries: Budget Impact

Existing Proposed Gain/(Loss) Rs m

Excise duty on biscuits 16.0% 8.0% 514

Custom duties (Peak)- edible oils 30.0% 25.0% 43

Corporate tax surcharge 5.0% 2.5% 13

Dividend tax Nil 12.50% Neutral

Total Gain/Loss 571

Profit before Tax 2002 1362

% of PBT 42%

Source: Budget Documents, Morgan Stanley Research Estimates.

Energy

Vinay Jaising

F2004 Budget – Marginally Positive for Indian Oil & Gas

The Union Budget for F2004 has five major proposals

relevant to the Indian oil & gas industry. The overall

impact, in our view, is marginally positive.

Surcharge on corporate tax reduced by 2.5%

As all the Indian oil & gas companies fall under the highest

corporate tax slab, lowering the surcharge from 5% to 2.5%

would reduce their effective tax rate by around 1.3%, and

consequently lower their tax burdens.

Increase in government subsidy on kerosene & LPG

The government has increased the petroleum subsidy fromRs62.65 billion in F2003 to Rs81.16 billion for F2004, a

rise of 30%. We believe this is primarily to compensate the

R&M companies (IOCL, BPCL and HPCL) for existing

subsidies on LPG and kerosene sales. According to our

calculations, while the estimated subsidy on kerosene has

been maintained at Rs3/liter, the estimated subsidy on LPG

has increased 77.5% to Rs71/cylinder. In our view, this is

positive for the Indian R&M companies.

Instead of increasing the subsidy, the government could

have increased LPG and kerosene prices to enable the

R&Ms to realize prices close to the fair market value. Ourdiscussion with various industry officials and the Indian

R&M companies lead us to believe that, within this

financial year, the government will have to issue oil bonds

worth Rs82.5 billion as compensation to the R&Ms for prior

periods.

Advantage for LNG Regassification plants

The government has reduced import duty on capital goods

required for LNG regassification units, from 25% to 5%.





JM MORGAN STANLEY

Page 15

This will lower the capital expenditure to set up LNG

projects.

Additional duty on crude oil

A Natural Calamity Contingency Duty of Rs50/ton has been

imposed on crude oil – both indigenous and imported – for

one year. This will result in a 0.5% reduction in the

weighted average tariff protection for the Indian refiners,

translating to a reduction of about Rs5 billion in the

cumulative profits of the industry

Additional cess of Rs0.5 per liter on motor fuels

Additional duty on motor spirit (petrol) and high-speed

diesel oil has been increased from Rs1/liter to Rs1.5/liter.

Excise duty on light diesel oil has also risen by Rs1.5/liter.

Engineering

Satish Jain

Budget positive for power generation companies

Negative for equipment manufacturers like BHEL

Positive for infrastructure construction companies

The budget mentioned that the Electricity Bill introduced in

Parliament should be taken up for consideration at an early

date. In our view, political considerations may delay

passage of the bill, which could also delay benefits to

companies like BHEL in the form of lower receivables andgreater demand for generation equipment after a lag of 1-2

years.

Customs duties on equipment for high-voltage transmission

equipment have been reduced from 25% to 5%. While this

is obviously positive for the power sector, equipment

manufacturers like BHEL may be negatively affected by the

threat of imports or pricing parity with imports.

The government emphasized power generation and has

decided allow benefits like 10-year tax holidays and a

complete waiver of import duties, previously available onlyto “Mega power projects” (capacity above 1000MW) to all

power projects. This should give a boost to additions of

larger power generation capacity.

Infrastructure construction companies should benefit from

more orders with the government’s proposed increase in

investments in infrastructure projects like road construction,

seaports, airports and power.

Media

Rajesh Mayani

Overall, the budget looks neutral to negative for the media

sector. The proposal that we believe will affect the industry

most is the increase in the service tax from 5% to 8%.

Advertising revenue has been sluggish, and an incremental

3% service tax will likely hurt broadcasters. While cable

operators may be able to pass on the higher tax to consumer

households, the broadcasters may find it difficult to pass on

the entire burden to advertisers.

Advertising revenue comprises nearly 61% of total revenue

for Zee TV (ZEE.BO, Rs84, Overweight, Price Target

Rs118).

We estimate that the maximum impact on the company’s

earnings will be Rs197 million, or 7% of pre-tax profits, if

we assume that Zee TV will have to bear the total

incremental cost. In our view, the company will be able to

pass on at least 50% of the incremental cost to advertisers.

Also, it will benefit from lower tax rate, albeit marginally.

Metals

Chetan Ahya

Non Ferrous and Precious Metals

We view the budget as marginally positive for the non-

ferrous metal sector, as customs tariffs for important non-

ferrous metals like aluminium and copper are unchanged in

the budget. We were expecting a 5% reduction in the

copper tariff from 25% to 20%.

The following are some of the other changes that affect the

industry:

a) Gold arising from smelting copper and zinc has been

exempted from excise duty.

b) Customs duty on serially numbered gold bars has been

reduced from Rs250 to Rs100 per 10 grammes.

On the direct tax side, the reduction in the corporate tax

surcharge from 5% to 2.5% is positive for high marginal tax

rate payers like Hindalco.





JM MORGAN STANLEY

Page 16

Hindalco (HALC.BO, Overweight, Rs587, Price Target

Rs766)

Budget proposals to retain the tariff on non-ferrous metals

like copper, exempting gold arising from smelting copper

from the excise duty and the reduction in the corporate tax

surcharge are positive for Hindalco’s earnings. We have

increased our earnings forecast by 4% for F2004 and F2005.

We retain our Overweight rating and our target price of

Rs766 on the stock. Our price target is conservatively

based on a 12-month forward EV/EBITDA multiple of 3.5.

We prefer to use EV/EBIDTA in setting the price target, as

it is not influenced by the varying capital intensity and

leverage cost of the different players in the mining industry.

We believe risks to our price target include: (a) sharp

declines in non-ferrous metal prices; (b) a longer-than-

expected weak cycle in copper treatment and refiningcharges, and (c) higher-than-expected cuts in tariff

protection.

Steel

The budget proposals left the tariff on hot rolled coils intact

at 25%. This was a pleasant surprise, as we had expected

that high international prices, which had caused domestic

prices to increase, would prompt the government to cut the

tariff by 5%.

The 5% reduction in tariffs on cold rolled coils, galvanized

sheets and structurals was, however, in line with ourexpectation. Amongst the other positives for the sector

were the government’s emphasis on infrastructure and

housing and the reduction in excise duty for end-user

segments like automobiles. The rail budget announced

earlier also had some benefits for the steel sector, with a

reduction in freight on iron and steel of nearly 5.3%.

Incorporating the budget measures outlined above, we have

raised our earnings forecast by 7% for F2004.

Tata Iron & Steel Co. (TISC.BO, Rs149.05, Underweight,

Target Rs154)

We maintain our Underweight rating on Tata Iron & SteelCo. (TISCO), as we believe there would be little investor

tolerance for a decline in steel prices. Our 12-month price

target of Rs154 is based on a 12-month forward

EV/EBITDA of 5.4 times, which is a 10% discount to the

past five year’s average. We prefer to use EV/EBIDTA in

setting the price target, as it is not influenced by the varying

nature of capital intensity and the leverage cost of different

players in the mining sector. The key risk we see to our

price target is continued resilience of or an increase in steel

prices. TISCO is highly leveraged to steel prices, and

changes in those quotes affect EBIDTA and operating

profits significantly.

Pharmaceuticals

Sameer Baisiwala

The government has emphasized health care as one of its

five priorities and, accordingly, announced several

incentives for the pharmaceutical, health care facilities and

biotechnology industries. The Finance Minister stressed the

need to improve the country’s health care infrastructure. To

this end, the benefits of Section 10 (23G) of the Income Tax

Act have been extended to financial institutions for

providing capital to private hospitals with more than 100beds. The budget proposes a community-based universal

health insurance scheme for the less advantaged citizens at a

nominal premium of Rs1 per day for medical

reimbursement up to Rs30,000.

We believe that the budget is a mild positive for the

pharmaceutical industry and may result in 2-3% higher

profitability for the prominent pharmaceutical companies,

including Ranbaxy (RANB.BO, Rs613.9, Overweight, Price

Target Rs790), Dr Reddy’s (REDY.BO, Rs876.9,

Overweight, Price Target Rs1,149), Cipla (CIPL.BO,

Rs769.25, Equal-Weight, Price Target Rs1,050), Sun

(SUN.BO, Rs280.05, Overweight, Price Target Rs420) and

Wockhardt (WCKH.BO, Rs453.75, Equal-Weight). The

key benefits we see for these companies are as follows:

• Reduction in customs duty by 5 percentage

points to 25% for pharmaceutical-related imports.

The impact of this announcement is calculated in

Exhibit 12.

• Halving of the surcharge on corporate tax to

2.5%. This would affect the companies across all

sectors.

• Several indirect tax/depreciation benefits (1)

Increase in the depreciation rate by 15 percentage

points to 40% for life-saving medical equipment;

2) 20 percentage-point lower customs duty to 5%

and CVD (countervailing duty) exemption

specified for life-saving equipment; 3) broadening

of the list of life-saving drugs, which attract nil/5%

customs duty and exempting those drugs from

excise duty; 4) exempting all material/drugs used





JM MORGAN STANLEY

Page 17

for clinical trials from customs and excise duty;

and 5) 20 percentage-point reduction in the

Reference Standards to 5%.

The precise impact on individual companies can be assessed

only once the fine-print is available. However, we believe,

that the above-mentioned benefits will result in 2-3% higher

profitability for the prominent pharmaceutical companies.

The probable enforcement of VAT (value added tax) is

likely to benefit the organized pharmaceutical sector and

facilitate supply chain efficiencies. The proposed VAT rate

(12.5%) is likely to be higher than the present average rate

of around 8%. According to the companies, the additional

tax is likely to be passed on to the consumers.

Exhibit 12

Indian Prominent Pharmaceutical Companies: Effect of

Lower Customs Duty (F2002 data, Rs mn)

Company Imports Impact (PBT)* Impact as a % of

Profits

Cipla 1,630 63 2.7%

Dr Reddy's Lab 1,493 57 1.2%

Glaxo 1,164 45 5.9%

Ranbaxy ** 4,004 154 6.1%

Sun 570 22 1.3%

Wockhardt 513 20 1.9%

Source: Morgan Stanley Research Estimates

*Under the best-case scenario, assuming all imports qualify for lower customs

duty **Impact is amplified for Ranbaxy since profits have risendisproportionate to imports over the last 15 months

Technology

Anantha Narayan

Three proposals contained in the F2004 budget affect the

software services sector, in our view. As we have discussed

before (see “Budget Possibilities” dated February 21, 2003),

income tax is the only significant budget variable that

affects the sector.

Income Tax Change: Last year, the Income Tax Act

inserted a proviso that restricted exemptions to 90% of

profits, specifically for F2003. (Previously 100% of profits

were exempt.) In our view, the market was expecting the

status quo to be maintained. However, since there was no

specific mention of this in the F2004 budget, it seems that

the restriction has been lifted, and 100% of profits are

exempt once again. Thus, we regard this as marginally

positive for the sector.

We reproduce in Exhibit 13 part of an exhibit from our

February 21, 2003, note, discussing the approximate likely

effect of this change on various companies in our coverage.

Since we do not view the impact as significant, we are notchanging our earnings estimates at this stage.

Exhibit 13

India Software Services: Approximate Impact of

Reinstatement of 10% Tax Exemption

Company F04E F04E F04E Likely F04E Likely

Tax Rate EPS (Rs) Tax Rate Likely EPS EPS Change

Digital 11% 41.1 7.8% 42.6 3.6%

HCLT 11% 13.7 8.1% 14.1 3.1%

Hughes 20% 17.1 17.8% 17.6 2.7%

i-flex 12% 63.4 9.1% 65.5 3.3%

Infosys 17% 193.6 14.7% 199 2.8%

Satyam 10% 17.1 6.9% 17.7 3.4%

E = Morgan Stanley Research Estimates Source: Morgan Stanley Research

Clarification on change of ownership: The government

has clarified that tax exemptions will continue, even if

majority ownership changes hands. This would aid M&A

and restructuring activity.

Changes in dividend distribution and marginal tax rate:

The government has imposed a dividend distribution tax of

12.5% on all companies in India but has made it exempt of

tax in the hands of shareholders. We think companies may

adjust their payouts to neutralize the tax – the shareholder

should still be a net beneficiary. The marginal tax rate hasgone down slightly from 36.75% to 35.88%. This will have

a negligible impact on the software services industry, in our

view.

Telecom

Vinay Jaising

F2004 Budget Rings a Positive Tone

Reduction in customs duty on certain telecom equipment

should aid growth

The India Union Budget F2004 reduced customs duty on

optical fiber cables from 25% to 15%; on routers, modems

and fixed wireless terminals from 15% to 10%, and on

certain specified equipment from 25% to 15%. The budget

also extended the low import duty rates of 5% for wireline

and wireless customer premises equipment (CPE) for

F2004. All the telecom operators, including Bharti Tele-





JM MORGAN STANLEY

Page 18

Ventures and Reliance Infocomm, should benefit from the

implied reduction in their overall capital expenditure.

Eligibility of startup services for 10-year tax holiday

extended for F2004

The government has decided to extend the eligibility of

startup telecom services for a 10-year tax holiday (100% tax

exemption for first five years, 30% exemption for the next

five years) to those operators commencing operations up to

March 31, 2004. Reliance Infocomm would be a direct

beneficiary.

Increase in service tax from 5% to 8% is the sole negative

The proposed increase in service tax in F2004 would

increase the effective ARPU (and in turn, the cost to the

consumer) of all wireline and wireless operators by 2.8%.

MTNL and VSNL should benefit from 2.5% reduction in

corporate tax surcharge. Bottom lines could improve 1.3%

for of MTNL and 1% for VSNL due to reduction in the tax

burden.





JM MORGAN STANLEY

Page 19

Global Stock Ratings Distribution

(as of February 28, 2003)

Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count

% of

Total Count

% of

Total IBC

% of Rating

CategoryOverweight 616 33% 239 38% 39%

Equal-weight 883 47% 289 46% 33%

Underweight 390 21% 104 16% 27%

Total 1,889 632

Data include common stock and ADRs currently assigned ratings. For disclosure purposes(in accordance with NASD and NYSE requirements), we note that Overweight, our most

positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and

Underweight most closely correspond to neutral and sell recommendations, respectively.

However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral,

and sell but represent recommended relative weightings (see definitions below). An investor's

decision to buy or sell a stock should depend on individual circumstances (such as the

investor's existing holdings) and other considerations. Investment Banking Clients arecompanies from whom Morgan Stanley or an affiliate received investment banking

compensation in the last 12 months.

ANALYST STOCK RATINGS

Overweight (O). The stock’s total return is expected to exceed the total return of the relevant country MSCI index, on a risk-adjusted basis,over the next 12-18 months.

Equal-weight (E). The stock’s total return is expected to be in line with the total return of the relevant country MSCI index, on a risk-adjusted basis, over the next 12-18 months.

Underweight (U). The stock’s total return is expected to be below the total return of the relevant country MSCI index, on a risk-adjustedbasis, over the next 12-18 months.

More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month,based on a quantitative assessment of historical data, or in the analyst’s view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile(unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner.

Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts.

ANALYST INDUSTRY VIEWS

Attractive (A). The analyst expects the performance of his or her industry coverage universe to be attractive vs. the relevant broad marketbenchmark over the next 12-18 months.

In-Line (I). The analyst expects the performance of his or her industry coverage universe to be in line with the relevant broad marketbenchmark over the next 12-18 months.

Cautious (C). The analyst views the performance of his or her industry coverage universe with caution vs. the relevant broad marketbenchmark over the next 12-18 months.

Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts.You may also request this information by writing to Morgan Stanley at 1585 Broadway, 14th Floor (Attention: Research Disclosures), NewYork, NY, 10036 USA.




JM MORGAN STANLEY

Page 20

For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to

achieving these targets, please refer to the latest published research on these stocks. Research is available through your sales representative

or on Client Link at www.morganstanley.com and other electronic systems.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial

circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. MorganStanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the adviceof a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances andobjectives.

The information and opinions in this report were prepared or are disseminated by Morgan Stanley Dean Witter Asia Limited and/or MorganStanley Dean Witter Asia (Singapore) Pte. and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd and/or Morgan Stanley & Co.International Limited, Taipei Branch and/or Morgan Stanley & Co International Limited, Seoul Branch, and/or Morgan Stanley Dean WitterAustralia Limited (A.B.N. 67 003 734 576, a licensed dealer, which accepts responsibility for its contents), and/or JM Morgan StanleySecurities Private Limited (collectively or individually, as the case may be, "Morgan Stanley").

The following analyst, strategist, or research associate (or a household member) owns securities in a company that he or she covers orrecommends in this report: Ridham Desai - ITC Ltd. (common stock), Hindustan Lever (common stock); Sachin Sheth - ICICI Bank (common stock), Grasim Industries (common stock); Anantha Narayan - Infosys Technologies (common stock).

Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their MSCI sub industry.Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other

involuntary acquisition.

This report is not an offer to buy or sell any security or to participate in any trading strategy. Morgan Stanley, Morgan Stanley DW Inc.,affiliate companies and/or their employees may have investments in securities or derivatives of securities of companies mentioned in thisreport, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associatedpersons.

An employee or director of Morgan Stanley, Morgan Stanley DW Inc. and/or their affiliate companies is a director of Gujarat AmbujaCements, Britannia Industries, Ranbaxy Laboratories.

Within the last 12 months, Morgan Stanley, Morgan Stanley DW Inc. or an affiliate managed or co-managed a public offering of securities of i-flex Solutions Ltd.

Within the last 12 months, Morgan Stanley, Morgan Stanley DW Inc. or an affiliate has received compensation for investment bankingservices from Reliance Industries, Britannia Industries, ITC Ltd., Tata Iron & Steel Co, Bharti Tele-Ventures Ltd., Digital GlobalSoftLimited, Sun Pharmaceutical Industries, Wockhardt Limited.

In the next 3 months, Morgan Stanley, Morgan Stanley DW Inc. or an affiliate expects to receive or intends to seek compensation for

investment banking services from NIIT Limited, Dr. Reddy's Lab, State Bank of India, Reliance Industries, ITC Ltd., Bharat Petroleum Corp.,Hindalco Industries, Tata Iron & Steel Co, Bharti Tele-Ventures Ltd., Mahanagar Telephone Nigam, Videsh Sanchar Nigam, DigitalGlobalSoft Limited, HDFC, HCL Technologies, Infosys Technologies, Cipla Ltd., Ranbaxy Laboratories, Sun Pharmaceutical Industries.

As of January 31, 2003, Morgan Stanley, Morgan Stanley DW Inc. and/or their affiliate companies beneficially owned 1% or more of a classof common equity securities of the following companies covered in this report: NIIT Limited, State Bank of India, Gujarat Ambuja Cements,Britannia Industries, Hindalco Industries, Tata Iron & Steel Co, Mahanagar Telephone Nigam, HDFC, Infosys Technologies, RanbaxyLaboratories.

Morgan Stanley, Morgan Stanley DW Inc. and/or their affiliate companies make a market in the securities of Reliance Industries, ITC Ltd.,Videsh Sanchar Nigam, Infosys Technologies, GlaxoSmithKline Pharma.

The research analysts, strategists, or research associates principally responsible for the preparation of this research report have receivedcompensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firmrevenues and investment banking revenues.

Morgan Stanley has no obligation to tell you when opinions or information in this report change. Morgan Stanley and its affiliate companiesare involved in many businesses that may relate to companies mentioned in this report. These businesses include market making and

specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking.

This report is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make norepresentation that it is accurate or complete.

This report has been prepared by Morgan Stanley research personnel. Facts and views presented in this report have not been reviewed by, andmay not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.

The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices ormarket indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options orother rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of futureperformance are based on assumptions that may not be realized.




JM MORGAN STANLEY

Page 21

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