India. Profit From An Idea Whose Time Has Come

Wealth Creation Through

Indian Equities

April 06

India. Profit From An Idea Whose Time Has Come

Assessment of India Opportunity

3

Size of opportunity

Size of Opportunity:

• India’s current GDP is $ 725 bn

• Current market cap is $ 550 bn (75% of GDP)

• Among the developed economies the GDP to Market Cap ratio is 100% to 150%

Now,

• Considering GDP growth of 7.5% p.a. and inflation at 4%

- Indian economy will reach $1.25trillion in 5 years ($725bn growing at 11.5% p.a.).

- At a Market Cap:GDP ratio of100%, the market cap at the end of 5 years will touch US$ 1.25 trillion

4

Quality of opportunity

Quality of Opportunity:

• Capital formation – wealth creation and rapid growth are favorable conditions for equity as an asset class vs. fixed income. Indian economy and businesses are putting their best foot forward in enhancing these conditions.

• Today, equity as an asset class is a very small proportion of household savings and therefore, the scope for it to grow.

• Low interest rate makes a favorable case for equity as an asset class as opposed to any other conventional investment avenue. It also increases the propensity to consume more and in turn help business and economy growth.

• Tax arbitrage is in the favor of the investor, thanks to the 2005 budget and therefore, increased participation by the retail investor in the capital market. The same direction continues with the recently announced budget proposals.

 

India. Profit From An Idea Whose Time Has Come

India and the BRIC Nations

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The future of India (BRIC Report)

• Indian economy will be the fastest growing economy over the next 3 - 5 decades*

• In $ terms, Indian economy will be one of the largest in the globe*• India’s per capita income in $ terms will grow by 35 times in the next 47

years ( i.e. 2050)*• Indian rupee is likely to appreciate by almost 300 % next 3 – 5 decades

*• India has a trade surplus with China**• India is a research hub to the world

*Quoted from Global economics paper 99 – Goldman Sachs** As per data sourced from Chinese government

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GDP Growth – BRIC vs G7

Source: World Wealth Report 2005 by Cap Gemini & Merrill Lynch

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Financial Wealth Forecast 2004-09

Source: World Wealth Report 2005 by Cap Gemini & Merrill Lynch

9

HNWI Population Growth

Source: World Wealth Report 2005 by Cap Gemini & Merrill Lynch

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Growth In Indian HNWIs

Source: World Wealth Report 2005 by Cap Gemini & Merrill LynchHNWI defined as one with US$ 1 mn in assets/wealth

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India – Market Cap:GDP Ratio

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India within Asia

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India - Best performing on 3/10 year period

India. Profit From An Idea Whose Time Has Come

India and The World

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India will add more wealth in next ten years than it has added in

the last fifty yearsIn sum, transforming economy poised

for sustained robust growth

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India at a glance

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India at a glance..2

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CSO pegs growth at 8.1 pc

Estimates of the Central Statistical Organization (CSO) surpass expectations of the Central Bank and Finance Minister

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Reservoir of intellectual capital

• A meritocratic education system – special focus on English, Science & Maths

• Success rate for admission to the top technology institutes - IITs 2%; Harvard 10%.

• 250 universities, 1,500 research institutions, 10,000 higher education institutes. Over a million graduates produced every year

• Pool of 23m professionals – doctors, graduates, masters, engineers – increasing by nearly half a million every year

• Historically, India a net exporter of talent – Indians makeup a significant proportion of Microsoft, IBM’s development teams or Intel’s scientist pool.

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Unmatched Demography

• One quarter of the world’s youth live in India• 54% of the Indian population is less than 25 yrs of age• By 2013, the net addition to the productive population (aged 25-44 yrs) will be 91

million or 33%

0100200300400500600

0102030405060Absolute population below 25 years (m)

Proportion of population below 25 (% RHS)

Today’s youth …

Source : www.childrendatabank.org

2001

108.5

239.1

199.0

156.6

121.6

85.7

101.7

0 50 100 150 200 250

0-4

5-14

15-24

25-34

35-44

45-54

55+ 2013

120.8

220.0

231.0

210.7

158.6

123.3

147.2

0 50 100 150 200 250

0-4

5-14

15-24

25-34

35-44

45-54

55+

…will drive tomorrow’s boom

Source : Statistical outline of India

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Fastest growing free market democracyIndia registered a growth rate of 8.2% in 2004-5. J P Morgan has revised its 2005/6 forecast to 8.0%; UBS to 7.9% and Morgan Stanley to 7.3%

According to Goldman Sachs, among Brazil, Russia, India and China, India will grow the fastest over the next 30 to 50 years by leveraging its demographic advantages and continued development. At its present rates of growth, `it would be adding nearly one France every three and a half years and one Australia every year.’

According to a Manpower Employment Outlook survey for the first quarter of 2006, India leads other countries with a positive overall net employment outlook of +27%.

Disposable incomes have multiplied five times between 1995 and 2005, leading to three-fold increase in consumption.

Today, India’s growing 400mn strong middle class is driving demand, competition and productivity like never before.

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Consumption led growth to continue

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Reformist regimes propels growthIndia Inc raised a total of US$ 32.14bn in 2005, up 50% over the US$ 21.31 bn raised in 2004. At least US$ 17.8bn (56%) of the money raised was foreign money according to Bloomberg data.

India now has eight competing carriers and is the world’s second largest commercial aircraft market. On-time performance and service levels have risen dramatically and fares have dropped. Passenger traffic is expected to grow by 20% annually over next five years.

In the automotive sector, deregulation-sparked competition has led to rapid all round growth. Total annual car sales have increased from around 150,000 in 1991 to more than 1,000,000 today while employment has trebled in the industry.

Extensive reforms has also affected India’s capital markets, corporates and individual tax regimes and judiciary.

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Size And Scale

• India the 4th largest economy in the world– PPP adjusted GDP of US$1.7 trillion

• Positive work ethics, conservative attitude towards spending – Household savings to GDP – 25%– Retail debt to GDP – 6%– Only 5m credit cards, versus 170m bank accounts

9.8

5.1

3.2 2.92.1

1.4 1.4 1.4

0

2

4

6

8

10

12

Unite

dSt

ates

Chin

a

Japa

n

Indi

a

Germ

any

Italy

Unite

dKi

ngdo

m

Fran

ce

(US$ tn)

Source: World Bank

4th Largest economy (in PPP terms)

0

20

40

60

80

100

India Thailand Indonesia Korea Malaysia

Total household borrowings as a % of bank deposits

Indian households - scope to leverage

Source : Asian Development Bank, OECD

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Corporate capex & infrastructure

Capacity utilization in key sectors (%) & capex trends

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World in terms of Purchasing Power Parity

India. Profit From An Idea Whose Time Has Come

Indian Corporates, Markets and Risks

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Essential corporate statistics

• India displaces US, is No.2 in FDI flows after China (AT Kearney Report)• Bharat Forge, world’s second largest forging company attains No.1 status in China• Twenty of India’s top 100 companies ranked by market capitalization, generate 50% or more

revenue from global sales– Notable being Reliance Industries, JSW Steel, Sesa Goa, Arvind Mills, Cummins India and

Hindalco• Sixty of the top 100 Indian companies earn at least 10% of their revenue from global sales• Top 300 firms commit about US$ 60bn, with 50% each for greenfield and brownfield projects to

be funded at least 50% from internal accruals– Telecom and power 20%, Oil and Gas 15%, Metals 12% and Steel 7%

• Indian companies (1,115) distributed 28% of net profits in FY04 (Rs 33,517 cr) and FY05, highest since FY 01

• India stands no.1 in three wheelers, no.2 in two wheelers after China, no.5 in trucks and buses and no.12 in cars and utility vehicles; India to clock 10 mn mark in automobiles sales for FY06

• IT-ITes revenues to touch US$ 28bn by March 06 against US$ 22bn in FY05, says NASSCOM

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Corporates charging ahead

Source: Business Standard 2005 Outlook – December 2005 edition

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• A significant trend is the expansion of mindset and horizons• Indian companies being globally cost competitive

– Tisco, Guj. Ambuja, Tata Motors, Hindalco• Indian companies acquiring companies globally

– Ranbaxy, Tata Motors, Tisco, Bharat Forge, Kirloskar Brothers, Amtek, Sun Pharma, etc

• Indian companies gearing up to global size– Infosys, Tata Motors, Bharat Forge

• Indian companies becoming global sourcing hubs– Sundaram Fasteners, Kirloskar, Cummins, Moser Bear, Bharat

Forge• Indian companies expanding through internal accruals and focusing

on superior cash flows

Visible paradigm shift in Indian firms

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Indian Corporates – efficient & healthy

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Buoyant profit growth in quarter III

(USD - Millions)Total no. of Cos 1932 Quarter ended Quarter ended

December-05 December-04Sales 87,219.2 73,510.4 Other Income 3,429.0 3,109.5 Expenditure 70,346.7 58,400.3 PBIDT 20,301.5 18,901.5 Interest 7,017.9 5,849.7 Gross Profit 13,283.6 13,051.8 Depreciation 3,432.1 3,656.5 Tax 2,595.5 2,526.4 Net Profit 7,289.5 6,894.0 OPM% 23.3 25.5 GPM% 15.2 17.6 NPM% 8.4 9.3 Source Economic Times 06/02/06

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Investor Investee Deal Size ($ mn) Stake (%)Temasek Holdings Tata Teleservices 330.00 10.00 Morgan Stanley Mantri Developers 68.00 NAGeneral Atlantic Hexaware Technologies 68.00 15.00 3i Sonalika Group 44.44 10.00 Warburg Pincus Dainik Bhaskar Group 33.33 7.00 Indopark Holdings Scandent Solutions 30.00 5.50 ADAE Group, HSBC, Kotak Viceroy Hotels 25.55 30.00 Actis Dalmia Cement 25.00 11.00 3i Sonalika Group 22.22 10.00 Bessmer Venture Shriram EPC 22.22 33.00 Carlyle Group Claris Lifesciences 20.00 NALNM India Internet Ventures Indiabulls Credit Services 20.00 8.20 ChrysCapital Redinton India 15.00 11.00 IL&FS Godrej Tea 13.00 40.00 SAIF Partners Jindal Poly Films 12.44 6.66

Top 15 Private Equity and Venture Capital Deals

Source: Business World (BW Grant Thornton Tally)

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Acquirer Target Deal size Deal type% stake bought

Suzlon Energy Hansen Transmissions 565.0 Acquisition - Ranbaxy Terapia SA 324.0 Acquisition - Sterling Infotech Tata Teleservices 300.0 Minority Stake 8.00 RR Donnelley Office Tiger 250.0 Acquisition - Scorpio and TII Hutchison Essar 226.0 Increase Stake 8.30 Telekom Malasiya Spice Communications 178.9 Stake 49.00 Oracle Global I-Flex Solutions 87.0 Stake upto 4% 47.08 Tata Chemicals Brunner Mond 64.4 Stake to 100% 36.50 ROCA Group Parryware 60.0 Majority Stake 50.00 Kotak Mahindra Group Kotak Mahindra Group 47.0 Stake to 100% 25.00 Federal Mogul Holding Goetze India 30.0 Stake to 50.1% 24.64 Kotak Mahindra Group Kotal Securities 27.0 Stake to 100% 25.00 C Bay Group 2US Patient Fin Services 25.0 Acquisition - Rain Commodities GLC Carbon 20.0 Minority Stake 20.22 Teledata Informatics Alphasoft Services 14.2 Acquisition -

Source: Business World (BW Grant Thornton Tally)

Top 15 Merger & Acquisition Deals

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12 month forward target for Sensex

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From being undervalued to fairly valued

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Trends in mutual fund and FII net investments

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Concerns remain..

India’s deficit highest in the region Deficits likely to remain intractable

India’s Tax – GDP ratio is low While interest payments as a % of total expenditure are high

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Present Scenario• Sensex is EVA positive

• Markets reasonably fairly valued

• Warrants astute stock-picking ability

• Earnings yield higher than bond yields

• Secular growth ahead….

…but be ready for intermittent volatility

Summing up

India. Profit From An Idea Whose Time Has Come

Thank You