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Union Budget: FY2014On the path of fiscal consolidation
March 2013
Union Budget: Credible given macro and political challengesTargets fiscal consolidation; Subsidy slippages likely but not alarming
Positives
• Realistic: Nominal GDP growth of 13.4% appears realistic and backs tax collection estimates
• Fiscal consolidation: Back in focus; Aim to bring down fiscal deficit to 3.6% by FY16
• Intended target: Revival of infrastructure growth; Dependent on interest rate and policy environment
• Inflation: Indirect tax rates unchanged - positive for inflation
• Markets: Lower securities transaction tax; easier access to foreign investors; more retail participation in equities
• Subsidy: Gradual move towards a direct benefit transfer system based on the Unique Identification (UID)
• Reform calendar: Goods and Services Tax (GST) and Direct Tax Code (DTC) - To be tabled; Expected shortly
Challenges
• Government borrowing: Net market borrowing remains unchanged but gross borrowing higher
• Higher surcharge: To reduce earnings growth by ~2% in FY14
•Reliance on non-recurring sources of income: Divestments, Spectrum, Service tax amnesty, PSU dividends
Kotak 2
Fiscal deficit to influence long-term interest rate directionNet market borrowing unchanged; higher gross borrowing is a worry
Tax revenue projectionsrealistic
Net tax revenue growth at19%
Growth led by highersurcharge and service taxamnesty
Non tax revenue includesspectrum allocation feesand auction fees of Rs40000 crore
Disinvestment receipts
Rs 55814 crore (includingstake sale in non governmentowned companies)
Expenditure:
-Plan expenditure over non-plan
-Reduction in fuel subsidieson the back of lower dieselsubsidies
- Food subsidy bill atRs90000 crore
Fiscal consolidation
Fiscal deficit includeshigher disinvestmentlower subsidy; grossmarket borrowing higherthan expected; borrowingat the longer end
Source: Budget documents
Kotak 3
Fiscal discipline: Key for sovereign ratings and RBI action on ratesMedium Term Fiscal Policy Statement amended
Realignment of the fiscal consolidation path for the centreMedium term fiscal policy statement (as % of GDP)
FY12 FY13BE FY13RE FY14E FY15E FY16E
Revenue deficit- Centre 4.4 3.4 3.9 3.3 2.7 2.0
Fiscal Deficit-centre 5.9 5.1 5.2 4.8 4.2 3.6
Effective Revenue deficit 2.9 1.8 2.7 1.8 0.9 0.0
Source:budget documents
Effective Revenue Deficit= Revenue Deficit- grants for creation of capital assets
Union Budget highlights: Focus on re-alignment of fiscal targets• Growth: FY14 nominal growth projected at 13.4%
• Taxes: Higher corporate tax surcharge and service tax rates; service tax amnesty scheme to increase tax mop up
• Tax reforms:• DTC: Referred to the standing committee; To be brought back to the house before the end of the budget
session
• GST: A draft bill on Constitutional Amendment and GST to be tabled in a few months
Kotak 4
Government Borrowing Program: Gross borrowing higher than expected
Gilt yields now a function of RBI policy - Key driver of valuations
Budgeted gross market borrowings higher; net largely unchanged
Net borrowing in line with expectations
Rs Crore FY10 FY11 FY12 FY13BE FY13RE FY14BE
Net market borrowings 398411 335414 436414 479000 467384 484000
Short term borrowings(T-Bills) -3908 10000 116084 9000 45764 19844
Gross market borrowing 451093 447000 510000 569616 560000 629009
Net market borrowing toFiscal deficit 96% 84% 84% 93% 90% 89%
Source: Budget documents
• Net market borrowing in line with expectations while gross market borrowing is higher despite lower fiscal deficit
• Higher gross market borrowings of dated securities to keep long-term yields firm
• Short term borrowings: T-bills financing smaller part of fiscal deficit in FY14; Buy-back of Rs500bn
• RBI likely to cut policy rates by 75bps in FY14
Kotak 5
India’s consolidated fiscal deficit remains highFocus on improving Tax-GDP for achieving fiscal consolidation targets
Fiscal consolidation: Decline in combined fiscal deficit (as % of GDP)
12
10
8S
tate6
4C
entre2
0
Source: Budget documents; From FY10 -oil and fertilizer bonds are above the line
Tax (gross)-GDP (%): higher tax rates and wider service tax net
12
10
8
6
4
2
0
Source: Budget Documents
• Net tax revenue growth of 19% budgeted for FY14 led largely by service and income tax collection estimates
• Tax revenues: betting on increase surcharge and amnesty scheme for service tax
• Gross tax to GDP improves; Still remains comparatively low at 10.9%
• Corporate tax: No change in rates; surcharge raised from 5% to 10% on domestic companies
Kotak 6
Improving tax collections: Key driver of fiscal consolidationNet tax revenue growth largely realistic; service tax growth to be watched
Net tax revenue growth at 19% in FY14Composition of key components of receipts -FY14 (Rs crore)
Growth on
Receipts (Rs Crore)
Excise duty
Customs duty
Service tax
Corporate tax
Income tax
Total gross tax revenue
Dividend receipts
Disinvestment
Telecom related
FY13BE FY13RE
194350 171996
186694 164853
124000 132697
373227 358874
195786 206095
1077611 1038037
50153 55443
30000 24000
%FY14BE growth
197554 15%
187308 14%
180141 36%
419520 17%
247639 20%
1235870 19%
73866 33%
55814 133%
account of Estimates ofnominal increase
growth (Rs due to newcrore) initiatives
23047 -
22090 -
17781 29663
48089 12577
27617 13927
139097 58736
18400
30000
22000
Tax revenue projectionsrealistic
Of the total Service taxgrowth, Rs 29663 crore onaccount of wider tax net andamnesty scheme
Corporate tax growthincludes ~Rs 13000 croreon account of increase insurcharge
Non tax revenue includesspectrum allocation feesand auction fees of Rs40000 crore
Disinvestment target of Rs40000 crore, stake sale innon Govt. Cos at Rs 14000crore
Source: budget documents, Kotak estimates
Net tax revenue growth of 19% budgeted for FY14
• No changes in the tax rates
• Service tax: Introduction of amnesty scheme for assesses between 2007-2012
• Imposition of 10% surcharge on persons whose taxable income exceeds Rs1 crore per year
• Surcharge on corporate tax raised from 5% to 10%
Kotak 7
Expenditure: Composition/efficiency to decide long-term growthCalibrated focus on plan over non-plan spend; capital spend rising
Trends in total expenditure (Rs Cr)
1600000
1400000
1200000
1000000
800000
600000
400000
200000
0
Rev Exp Cap Exp
Source: Budget Documents
Higher growth in plan expenditure in FY13
Composition of plan and non plan expenditure (% of total expenditure)
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
FY07 FY08 FY09 FY10 FY11 FY12 FY13RE FY14BE
plan exp non plan exp
Source: Budget Documents
• Focus on increasing share of plan expenditure to total expenditure
• Plan expenditure targeted to rise to 33% of total expenditure from 30% (FY13)
• Subsidy targets: the key to ensure there is no overshoot on non plan expenditure
• Revenue expenditure still forms 86% of total expenditure
Kotak 8
Subsidy management, a politically sensitive subjectTarget to bring down subsidy to 2% of GDP by FY14
Lower subsidy burden estimated for FY12Key components of subsidy (Rs cr)
FY10 FY11 FY12 FY13BE FY13RE FY14BE
Total subsidy 131025 164153 216297 190015 257654 231083
As % of GDP 2.1% 2.1% 2.4% 1.9% 2.6% 2.0%
-Food subsidy 56002
-Fertilizer subsidy 52980
-Petroleum subsidy 14954
- Interest subsidy 2719
60599 72823 75000
54977 67199 60971
38386 68481 43580
5223 5791 2493
85000 90000
65974 65971
96879 65000
2384 2050
Petroleum subsidyincludes underrecoveries for FY13 tothe tune of Rs38500crore
-Other subsidy 4369 4968 2002 2493 7415 8061
Source: Budget documents
Lower subsidies budgeted in FY12
- Food subsidy:Rs10000 crore provided for Food Security Bill
- Petroleum subsidy: Under recoveries not fully provided for but not alarming
- Key risk: Higher oil prices can upset fiscal deficit calculations
Kotak 9
Oil Subsidy: Slippages a function of oil pricesNeed to hike diesel prices to reduce the under recovery
Large increase in retail prices requiredGap between required market prices and current selling prices at various levels of crude oil
USD USD USD USD Current retailRetail prices reqd to break-even (Rs) 90 100 110 120 price (Rs)
LPG (Rs/cyl) 689 747 805 863 435
Kerosene (Rs/lt) 39.6 43.1 46.7 50.2 14.4
Diesel (Rs/lt) 54.2 57.8 61.4 64.9 53.7
Budget provision for fuel subsidy under providedSubsidy break down at various levels of crude oil price (Rs Bn)
International oil price (US$/bbl) USD100 USD105 USD110 USD115 USD120Exchange Rate (Rs/US$) 54.5 54.5 54.5 54.5 54.5
Gross under-recovery for FY14E (Rs Bn) 785 963 1,141 1,319 1,497
Total Govt. subsidy assuming upstream share at 50% (Rs Bn) 342 431 520 609 698
Shortfall in provision (Rs Bn) 113 202 291 380 469
*Assuming Rs50bn net under-recovery burden on OMCs
Source: Kotak MF estimates
Kotak 10
Infrastructure : On-going area of thrustFocus on financing; Execution contingent on policies
• Infrastructure Debt Funds (IDF) to be encouraged, Infrastructure tax-free bond of Rs50,000 crore in 2013-14,
• Investment allowance at the rate of 15 percent to manufacturing companies that invest more than Rs100cr inplant and machinery during the period FY14-15
• Plans for seven new cities have been finalised and work on two industrial cities at Dholera, Gujarat andShendra Bidkin, Maharashtra will start.
• Roads: 3000kms of road projects in Gujarat, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh tobe awarded in the first six months of 2013-14. A regulatory authority for road sector.
• Ports: Two new major ports will be established in Sagar, West Bengal and in Andhra Pradesh to add 100million tonnes of capacity
• Industrial corridor: Mumbai-Bengaluru and Bengaluru Chennai
• Rs5,000 crore to NABARD to finance construction for warehousing.
Infrastructure thrust to continue, execution is key
Plan Expenditure FY12 FY13BE FY13RE FY14BEAtomic Energy 4,290 5,600 3,175 5,880
Civil Aviation 1,357 4,500 6,200 5,200
Communication & IT 4,208 8,600 4,693 9,600
Drinking Water & Sanitation 9,993 14,000 13,000 15,260
Education 50,655 61,407 56,208 65,857
Power 5,809 11,025 5,858 11,161
Transport 22,360 26,172 18,795 26,706
Urban Development 6,152 7,012 5,837 7,567
Water resources 576 1,500 650 1,500
Railways 23,013 24,000 24,265 26,000
Total 128,413 163,816 138,681 174,731Source: Budget documents
Kotak 11
Consumption: Positive for bottom of the consumption pyramid
• Positive for Consumption: Headline tax rates unchanged; Direct Benefit Transfer positive
• Tax credit of Rs2,000 to every person who has a total income upto Rs5lakh.
• Tax benefit for first time home buyer: First time buyer of new property and availing a loan up to Rs 25Lakh is given an income taxdeduction of Rs1Lakh over and above the existing Rs 1.5Lakh for a home bought in FY14
• Rajiv Gandhi Equity Savings Scheme: Threshold limit of income for eligibility under RGESS raised to Rs12Lakh from Rs10Lakh.Under this scheme income tax deduction of 50% to new retail investors for investment upto Rs50,000 directly in equities or mutualfunds in 3 successive years (lock in of 3 years)
• Surcharge on rich: Imposition of 10% surcharge on persons whose taxable income exceeds Rs1 crore per year
No changes in tax slabsIncome tax slabs for FY14 remains the same as in FY13
FY2013 FY2014Individual incom e tax
Individual tax rates Upto Rs2,00,000 - Nil Upto Rs2,00,000 - Nil
Above Rs2,00,000 - Rs5,00,000 - 10% Above Rs2,00,000 - Rs5,00,000 - 10%
Above Rs5,00,000 - Rs10,00,000 - 20% Above Rs5,00,000 - Rs10,00,000 - 20%
Above Rs10,00,000 - 30% Above Rs10,00,000 - 30%
Exemption Nil Tax credit of Rs 2,000 f or individuals w ith income upto Rs5,00,000
Senior Citizen (60 years-80 years) Exemption limit - Rs2,50,000 Exemption limit - Rs2,50,000
Very senior citizen (80 years+) Exemption limit - Rs5,00,000 Exemption limit - Rs5,00,000
Education cess 3% 3%
Super-rich Nil 10% surcharge if total income exceeds Rs10 mn
Corporate income tax
Tax rates 30% 30%
Surcharge rate 5% 10%
Education cess 3% 3%
Minimum Alternative Tax 18.5% of book prof its 18.5% of book prof its
Source: Budget documents
Kotak 12
Financials sector related announcements
•Recapitalisation of PSU banks : PSU Bank recapitalization target set at Rs14000 crore in FY14 as compared toRs12500 crore in FY13 .
• Benefit for small home loan borrowers: Individual buying a new property and availing a loan up to Rs 25Lakhis given an income tax deduction of Rs1Lakh over on the interest component and above the existing Rs 1.5Lakh.This is applicable only in FY14
• Double taxation issue on securitization transactions : Income of the securitization trust (SPV) which isfacilitating financial institutions to securitize their assets would be exempt from tax. At the time of distribution ofincome, SPV will pay tax at 30% and income received will be tax free in the hand of investors.
• Interest rate subvention extended to private banks : Subvention at 4% on timely repayment of crop loans tocontinue and now will be extended to private banks as well
• Clarification for amount to be eligible for deduction for write-off in case of banks: Clarification that taxdeduction under section 36(I) (vii) available on both rural and urban loans.
• Insurance related announcements :
• Insurance amendment and pension Bills are likely to be tabled in the parliament in this budget session.
• Branch opening in tier 2 cities and below without IRDA approval
• Permission to banks to act as an insurance agent.
• Introduction of Commodity Transaction Tax (CTT) on non-agri products to the tune of 0.01%
Kotak 13
Proposals related to capital markets
Budget focus on capital market. Key provisions include:
• Tax residency certificates: Proposal to amend sections 90 and 90A in order to provide that submission of a taxresidency certificate is a necessary but not a sufficient condition for claiming benefits under the agreements referred to in
sections 90 and 90A
•Securities Transaction Tax:
• STT on equity futures reduced from 0.017% to 0.01%
• STT on redemption of MF/ ETF units at fund house/ exchange reduced from 0.2% to 0.001%
•Commodities Transaction Tax: introduced on non-agricultural commodities at 0.01%
•Surcharge on Dividend Distribution Tax:
• increased from 5% to 10%
• DDT on debt fund investments (other than liquid funds) for individual investors increased from 12.5% to 25% (plussurcharge and cess)
• Eligible securities: List of eligible securities for Pension and Provident funds to include ETFs, debt mutual funds andasset backed securities
•FIIs participation in currency derivatives: FIIs permitted to participate in exchange traded currency derivative segmentto the extent of their INR exposure
• Stock exchanges allowed to introduce a dedicated debt segment
•Inflation linked instruments to be introduced - a first in India. To be used to wean away investors from gold
• Uniform KYC norms to make it easier for foreign investors such as sovereign wealth funds etc
• Depository participants authorized by SEBI will be free to register different classes of portfolio investors subject to KYCnorms
Kotak 14
®
FY14 Union Budget: Sectoral Impact
Union Budget FY14: Sectoral ImpactConsumers: negative; Autos - mixed bag; media - marginally negative
Kotak 16
Union Budget FY14: Sectoral ImpactMixed bag power, neutral telecom, capital goods-positive
Kotak 17
Union Budget FY14: Sectoral ImpactOil and metals: Largely neutral
NELP- National Exploration Licensing Policy
Kotak 18
Union Budget FY14: Sectoral ImpactReal estate-positive, Infra-positive, Cement- marginally positive
Kotak 19
Union Budget FY14: Sectoral ImpactMidcaps- Largely positive
Kotak 20
®
What has changed in India?
India: Macro snapshotSilver lining: GDP growth bottoming out; core inflation moderating; monetary policy easing
GDP growth
• GDP growth likely to be 5-5.5% in FY13from 6.2% in FY12
• Infrastructure bottle necks persist
Inflation• WPI Inflation sticky at ~7%
• Fiscal deficit 5.2% of GDP in FY13; 4.8%in FY14BE
Monetary policy• CRR cut by 200bps since Jan ‘12
• Policy rate cut by 75bps since Jan ‘12
• CRR at 4% and repo rate at 7.75%
• SLR reduced to 23%; cut of 100bps
Currency• INR volatility on low import cover
• BOP dependent on capital flows
• USD 24bn FII inflows in CY12;USD8.8Bn in CYTD13
• Forex reserves at USD293bn
Kotak
GDP growth : Bottoming out
Inflation high: Supply-driven;Core inflation moderates
Interest rates: Easing cycle
Currency: A battle between thecurrent account and the capitalaccount
• Growth to bottom in FY13; Likely to be ~6% inFY14
• Gradual recovery in GDP to aid macro ratios
• RBI policy to focus on core inflation
• Food inflation: structural and partly cyclical
• Fuel inflation policy driven
• Headroom to cut CRR and policy rates
• Lower policy rates to transmit to lowerlending rates
• ROCE and WACC spread to expand
• USD/INR likely to range between 53-57 inFY14
22
The changing face of IndiaA USD1.8Trn economy with USD1.2Trn market capitalization
The positives
Mind-set change ofentrepreneur/politicalleadership
Past PresentInward looking Global aspirations
Risk-averse Focus on scale; FDI and M&A are emerging themes
Regulatory driven Market driven - Willing to embrace competition
Capital Domestic; Constrained Global; Capital loses its nationality; in abundance
Asset-liability mis-match in funding
Reliance on domestic banks
Opening up long-term funding sources
Banking on insurance, debt, private equity, FDI, FII,ECB/FCCBs
Politics Predominantly Centre dirven Increased dominance of States
Privatization approach Public offer of government stakes inPSUs
Industry privatization; Competitive bidding
Capital markets Narrow investable universe Broad universe: 179 US$1Bn+ companies by market cap
The challenges Present FutureElite model Mass participation in growth
Services driven economy Manfacturing+Services driven economyGDP Physical infrastructure Physical+social infrastructure
Focus on agriculture Focus on Rural GDPFocus on growth Focus on growth + environment + governance
Policy Leakages in social spend and revenuecollection
Direct Benefits Transfer
Simplification/Unification of tax system
Resources: Allocation Resources: Auctions
Kotak 23
Inflation likely to stabilize at ~7-7.5%Room for RBI to cut policy rates as aggregate demand moderates
Inflation likely to average ~7-7.5% in FY13; 6.5-7% in FY14E Policy rates have started moderatingWPI inflation (YoY change), 2007-14E (%) India’s policy rates (%)
11 Reverse repo rate Repo rate CRR12 Headline inflation Headline inflation (with diesel price hike)
10
109
8 6.7 87.2
67
4 6
2 5
0 4
-2 3
Source: RBI, Kotak estimates Source: RBI, Kotak estimates
Average WPI inflation at 8.4% in FY2012; FY13E average inflation likely at ~7-7.5% assuming hike in fuel prices
Core inflation (non-food manufacturing inflation) has moderated to 4.1% in Jan’13; likely to range between ~4.1-4.3% in March’13;
Pass through of oil price hikes remains an upside risk
Headroom to cut repo rate by another 75bps in CY13
Expect RBI to cut repo rate to 7% from the current level of 7.75%
CRR and Open Market Operations (OMOs) to be tools used by RBI to manage liquidity in the system
Kotak 24
Rupee to be range bound in the near termCurrency: a function of capital flows
INR movement: to remain range boundUSD/INR movement
60
45
Source: Bloomberg
India’s high CAD on account of oil prices and gold importsCAD/GDP (%) across countries
8.0
6.0
Financing the Current Account Deficit - a key challengeIndia’s Balance of Payments position (USDbn)
2011 2012 2013ECurrent account (45.9) (78.2) (83.4)CAD/GDP (%) (2.7) (4.2) (4.5)Trade balance (130.6) (189.8) (195.4)- Exports 250.0 310.0 294.3- Imports 381.0 500.0 489.7
o/w Oil imports 105.0 155.0 170o/w Non-oil imports 276.0 345.0 319.7
- gold 34.0 56.0 50.0Invisibles (net) 85.0 112.0 112.0Capital account 62.1 67.8 78.0% of GDP 3.7 3.7 4.2-Foreign investment 39.7 39.2 45-Banking capital 5.0 16.2 13-Short-term credit 11.0 6.7 9-ECBs 12.5 10.3 11Overall balance 13.1 (12.8) (5.4)
Average exchange rate4.0
2.0
0.0
(2.0)
(4.0)
(6.0)
(USD/INR)
Average Indian crude (USD/bbl)
Source: RBI, Kotak MF estimates
45.63 47.96 54.0
85.1 111.7 110.0
(8.0)Brazil China India
2010 2011 2012
Source: IMF, Merrill Lynch Estimates, Kotak estimates
Russia South
Africa
2013
• INR likely to range between USD/INR 53-57 in FY14
Kotak 25
®
Market Outlook: Valuations and Risks
Indian equities: A vast investable universeKey attraction for global investors
India: Investable universe expandsNo of companies as per market capitalization
350 >1bnUS$ >5bnUS$ >10bnUS$
300
250
200
150
100
50
0
Source: Capitaline
BSE 200: latest ownership pattern
Details on December 31, 2012 (BSE-30 Index: 19,427)
Analyzed Mcap (BSE-200)US$ bn 1,069
Rs bn 57,875
Portfolio Promoters FIIs M Fs BFI Individual OthersUS$ bn 537 201 35 80 78 76
Rs bn 29,068 10,861 1,911 4,318 4,216 4,094
% of BSE-200 50.2 18.8 3.3 7.5 7.3 7.1
Source: BSE, NSE, Kot ak Inst it ut ional Equit ies
125 new Billion Dollar companies added between FY00-11No of companies as per market capitalization
Source: BCG
BSE-200 ownership over the last 20 quarters
Analysis done for BSE-200 stocks taking market cap. at the end of each quarter (US$ bn)
PromotersIndian Indivi
non-Govt Foreign Govt FIIs MFs BFI dual Others Total LICDec-08 138 43 139 85 20 36 43 43 548 23
Dec-09 251 75 280 187 41 77 82 83 1,076 52
Dec-10 324 93 295 252 46 100 99 103 1,313 67
Dec-11 226 64 202 162 32 68 69 69 893 44
Dec-12 270 77 213 225 37 83 80 84 1,069 56
Source: BSE, NSE, Kotak Instutional Equities
Kotak 27
Valuations - still within the historical trading range
Valuation of Indian Markets
21,000 Sensex 10X 12X 15X28
17,000 24
13,000 20
169,000
12
5,000 8
1,000 4
20EV/EBITDA (X)
16
12
8
4
Source: BSE, RBI, Kotak Institutional Equities
12 months rolling forw ard P/E (X)6
4
2
0
SensexPoly. (M3 adj
P/E (X, RHS))21,000
17,000
13,000
9,000
5,000
1,000
(3,000)
P/B (X) RoE (% ) (RHS)30
20
10
M3 adj P/E (X, RHS)
1.8
1.2
0.6
0.0
Past performance cannot be regarded as a guarantee or indicator of future performance
Kotak 28
Nifty valuation summary
Valuation summary of Nifty sectors, Feb 22, 2013, March fiscal year-ends, 2012-14E
Mkt cap. EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Div yield (%) RoE (%)
(US$ mn) 2012 2013E 2014E 20122013E2014E 20122013E2014E 2012 2013E 2012 2013E 2012 2013E2014E
Automobiles 52,244 30.5 (11.8) 25.4 11.8 13.3 10.6 8.7 8.1 6.3 3.9 3.2 1.4 1.6 33.0 23.9 24.2
Banking 127,344 26.1 16.3 7.2 16.0 13.8 12.9 — — — 2.7 2.4 1.4 1.6 16.7 17.5 16.8
Consumers 68,344 24.0 21.1 16.4 38.1 31.4 27.0 28.4 23.6 19.9 14.8 13.3 1.5 2.3 38.9 42.4 43.9
Cement 24,946 32.4 20.0 14.8 18.4 15.4 13.4 10.9 8.6 7.1 2.8 2.5 1.1 1.1 15.3 16.1 16.0
Diversified 2,832 (51.5) 40.7 149.0 24.8 17.6 7.1 12.8 10.0 6.9 1.3 1.2 — — 5.4 6.9 14.9
Energy 122,239 16.0 5.6 (0.5) 10.9 10.3 10.3 5.9 5.9 5.5 1.5 1.4 1.9 2.3 14.0 13.4 12.2
Industrials 28,927 10.5 (2.9) (2.1) 12.9 13.3 13.6 10.3 10.3 9.8 2.6 2.2 1.6 1.5 20.0 16.4 14.1
Metals & Mining 57,601 (3.1) (4.8) 20.9 11.8 12.4 10.3 7.6 8.1 6.9 2.1 1.9 2.7 2.1 17.6 15.0 16.0
Property 8,881 (22.1) 79.7 33.1 40.2 22.4 16.8 18.5 14.0 10.8 1.8 1.7 0.9 1.1 4.4 7.4 9.2
Pharmaceuticals 34,934 (17.5) 74.0 3.8 36.3 20.9 20.1 18.7 13.0 12.7 5.6 4.6 0.5 0.6 15.5 21.8 18.9
Telecom 21,642 (29.6) (36.0) 84.8 27.6 43.1 23.3 7.8 7.2 6.0 2.3 2.2 — 0.5 8.4 5.2 8.8
Technology 110,646 19.9 25.5 9.0 22.3 17.8 16.3 15.4 12.4 11.0 5.9 4.8 1.5 1.8 26.4 27.2 25.0
Utilities 39,018 (1.5) 18.2 11.3 14.2 12.0 10.8 11.6 9.7 8.2 1.6 1.5 2.1 2.5 11.1 12.2 12.4
NIFTY 699,597 13.0 9.5 10.3 16.0 14.6 13.3 10.2 9.4 8.2 2.7 2.4 1.6 1.8 16.8 16.4 16.1
NIFTY ex-Energy 577,358 12.0 10.9 13.8 17.8 16.1 14.1 12.3 10.9 9.2 3.2 2.8 1.5 1.7 18.1 17.7 17.7
NIFTY ex-Energy ex Com519,757 15.2 13.7 12.8 18.9 16.6 14.7 13.5 11.5 9.7 3.4 3.0 1.4 1.6 18.2 18.2 18.0
Notes:
(a) Following companies are excluded: Kotak Mahindra Bank.
Source: Company, Kotak Institutional Equities estimates
Kotak 29
India: Valuation premium over regional markets reasonableRe-rating depends on policy momentum
Regional Valuations
P/E, Earnings growth, P/B of global indices, Calendar year-ends, 2011-13E (as of Feb 21, 2013)
P/ E (X) Earnings grow th (% ) P/ B (X)Country Index 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014EBrazil M SCI BRAZIL 13.2 10.7 9.8 (23.9) 23.3 9.7 1.4 1.3 1.2China M SCI CHINA 11.2 10.2 9.1 0.6 10.2 11.6 1.6 1.5 1.3
France M SCI FRANCE 12.1 11.4 10.2 (5.2) 6.5 11.5 1.2 1.2 1.1Germany M SCI GERM ANY 10.6 11.2 10.0 18.7 (5.4) 12.8 1.5 1.4 1.3Hong Kong M SCI HONG KONG 17.6 15.9 14.4 (12.1) 10.5 10.2 1.4 1.3 1.3India M SCI INDIA 15.8 13.8 12.0 10.2 14.9 15.0 2.5 2.2 1.9Indonesia M SCI INDONESIA 16.8 14.7 12.7 5.4 14.4 15.6 3.7 3.2 2.7
Japan M SCI JAPAN 26.8 19.8 13.7 (28.1) 35.7 44.9 1.2 1.2 1.1Korea M SCI KOREA 10.1 8.7 7.6 30.0 15.9 12.7 1.2 1.1 1.0Malaysia M SCI M ALAYSIA 15.3 14.2 13.0 11.2 7.4 9.6 2.0 1.9 1.8Mexico M SCI M EXICO 21.2 18.2 15.8 30.9 16.6 15.0 2.1 1.9 2.6Philippines M SCI PHILIPPINES 21.0 19.0 17.8 14.3 10.8 11.1 3.5 2.9 2.9Russia M SCI RUSSIA 5.4 5.3 5.2 (12.4) 0.7 3.8 0.8 0.7 0.7
Singapore M SCI SINGAPORE 14.8 14.3 13.2 5.9 3.0 8.9 1.5 1.5 1.4Taiw an M SCI TAIWAN 18.9 15.0 13.3 5.0 25.9 13.1 1.8 1.7 1.6Thailand M SCI THAILAND 14.6 12.3 11.1 12.9 18.4 11.6 2.4 2.2 1.9UK M SCI UNITED KINGDOM 12.4 11.6 10.6 (9.1) 6.4 9.5 1.8 1.7 1.6US M SCI UNITED STATES 15.0 13.9 12.5 6.4 7.7 11.7 2.3 2.1 1.9
EM M SCI EM (EM ERGING M ARKETS) 12.2 10.8 9.7 1.7 13.1 10.9 1.6 1.5 1.3EM Asia M SCI EM ASIA 12.8 11.2 9.9 11.1 14.5 12.5 1.7 1.5 1.4
Source: Bloomberg
Past performance cannot be regarded as a guarantee or indicator of future performance
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Key risks to India’s macro story
US policy: sequestration
Euro-zone issues to keep markets guessing
• Fiscal union seems to be the only way out, but still some time away
• Stability depends on the full support of the ECB
Global oil prices
• While oil price risks have abated for the time being, the correlation with Current Account Deficit (CAD) remains high
• A USD1/bbl increase in oil prices expands India’s current account deficit by ~USD700m
• Geo-political tensions can push oil prices higher
Local issues
• Politics outweighs economics; General elections in 2014 can create uncertainty
• Reform progress to address India’s triple deficits (Fiscal, current account, governance)
• Key constraints for infrastructure build-out: land, coal and declining domestic financial savings rate
• Rising CAD and high gold imports weighing on external finances
•
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