india union budget fy14

7/28/2019 India Union budget fy14

1/33

Union Budget: FY2014On the path of fiscal consolidation

March 2013


2/33

Kotak 2

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


3/33

Kotak 3

Fiscal deficit to influence long-term interest rate directionNet market borrowing unchanged; higher gross borrowing is a worry

Fiscal consolidation

Fiscal deficit includeshigher disinvestmentlower subsidy; grossmarket borrowing higherthan expected; borrowingat the longer end

Tax revenue projectionsrealistic

Net tax revenue growth at19%

Growth led by higher

surcharge and service taxamnesty

Non tax revenue includesspectrum allocation feesand auction fees of Rs40000 crore

Source: Budget documents

Expenditure:

-Plan expenditure over non-plan

-Reduction in fuel subsidieson the back of lower dieselsubsidies

- Food subsidy bill atRs90000 crore

Disinvestment receipts

Rs 55814 crore (includingstake sale in non governmentowned companies)


4/33

Kotak 4

Fiscal discipline: Key for sovereign ratings and RBI action on ratesMedium Term Fiscal Policy Statement amended

FY12 FY13BE FY13RE FY14E FY15E FY16ERevenue deficit- Centre 4.4 3.4 3.9 3.3 2.7 2.0Fiscal 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

Realignment of the fiscal consolidation path for the centre

Medium term fiscal policy statement (as % of GDP)

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 budgetsession

GST: A draft bill on Constitutional Amendment and GST to be tabled in a few months


5/33Kotak 5

Government Borrowing Program: Gross borrowing higher than expectedGilt yields now a function of RBI policy Key driver of valuations

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


Rs Crore FY10 FY11 FY12 FY13BE FY13RE FY14BENet market borrowings 398411 335414 436414 479000 467384 484000Short term borrowings(T-Bills) -3908 10000 116084 9000 45764 19844

Gross market borrowing 451093 447000 510000 569616 560000 629009Net market borrowing toFiscal deficit 96% 84% 84% 93% 90% 89%

Budgeted gross market borrowings higher; net largely unchanged

Net borrowing in line with expectations


6/33Kotak 6

Indias consolidated fiscal deficit remains highFocus on improving Tax-GDP for achieving fiscal consolidationtargets

Source: Budget documents; From FY10 -oil and fertilizer bonds are above the line

Tax (gross)-GDP (%): higher tax rates and wider service tax net

Source: Budget Documents

0

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FY13RE

FY14BE

State

Centre

Fiscal consolidation: Decline in combined fiscal deficit (as % of GDP)

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

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7/33Kotak 7

Improving tax collections: Key driver of fiscal consolidationNet tax revenue growth largely realistic; service tax growth to be watched

Receipts (Rs Crore) FY13BE FY13RE FY14BE%

growth

Growth onaccount of

nominalgrowth (Rs

crore)

Estimates of

increasedue to newinitiatives

Excise duty 194350 171996 197554 15% 23047 -

Customs duty 186694 164853 187308 14% 22090 -

Service tax 124000 132697 180141 36% 17781 29663

Corporate tax 373227 358874 419520 17% 48089 12577

Income tax 195786 206095 247639 20% 27617 13927

Total gross tax revenue 1077611 1038037 1235870 19% 139097 58736

Dividend receipts 50153 55443 73866 33% 18400

Disinvestment 30000 24000 55814 133% 30000

Telecom related 22000

Source: budget documents, Kotak estimates

Net tax revenue growth at 19% in FY14

Composition of key components of receiptsFY14 (Rs crore)

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%

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


8/33Kotak 8

Expenditure: Composition/efficiency to decide long-term growthCalibrated focus on plan over non-plan spend; capital spend rising

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

Trends in total expenditure (Rs Cr) Higher growth in plan expenditure in FY13

Composition of plan and non plan expenditure (% of total expenditure)


0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

F

Y03

F

Y04

F

Y05

F

Y06

F

Y07

F

Y08

F

Y09

F

Y10

F

Y11

F

Y12

F

Y13RE

F

Y14BE

Rev Exp Cap Exp

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

FY07 FY08 FY09 FY10 FY11 FY12 FY13RE FY14BE

plan exp non plan exp



9/33Kotak 9

Subsidy management, a politically sensitive subjectTarget to bring down subsidy to 2% of GDP by FY14

FY10 FY11 FY12 FY13BE FY13RE FY14BETotal 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 60599 72823 75000 85000 90000

-Fertilizer subsidy 52980 54977 67199 60971 65974 65971

-Petroleum subsidy 14954 38386 68481 43580 96879 65000

- Interest subsidy 2719 5223 5791 2493 2384 2050

-Other subsidy 4369 4968 2002 2493 7415 8061


Lower subsidy burden estimated for FY12

Key components of subsidy (Rs cr)

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

Petroleum subsidyincludes underrecoveries for FY13 tothe tune of Rs38500crore


10/33Kotak 10

Oil Subsidy: Slippages a function of oil pricesNeed to hike diesel prices to reduce the under recovery

Budget provision for fuel subsidy under provided

Subsidy break down at various levels of crude oil price (Rs Bn)

Large increase in retail prices required

Gap between required market prices and current selling prices at various levels of crude oil

Source: Kotak MF estimates

Retail prices reqd to break-even (Rs)USD

90USD100

USD110

USD120

Current retailprice (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

*Assuming Rs50bn net under-recovery burden on OMCs

International oil price (US$/bbl) USD100 USD105 USD110 USD115 USD120

Exchange 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


11/33Kotak 11

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 5,880Civil Aviation 1,357 4,500 6,200 5,200Communication & IT 4,208 8,600 4,693 9,600Drinking Water & Sanitation 9,993 14,000 13,000 15,260Education

50,655

61,407

56,208

65,857

Power 5,809 11,025 5,858 11,161Transport 22,360 26,172 18,795 26,706Urban Development 6,152 7,012 5,837 7,567Water resources 576 1,500 650 1,500Railways 23,013 24,000 24,265 26,000Total 128,413 163,816 138,681 174,731


12/33Kotak 12

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 slabs

Income tax slabs for FY14 remains the same as in FY13

FY2013 FY2014

Individual income 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 for individuals w ith income upto Rs5,00,000

Senior Cit izen (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 profits 18.5% of book profits


13/33Kotak 13

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 ofCommodity Transaction Tax (CTT) on non-agri products to the tune of 0.01%


14/33

Kotak 14

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% (plus

surcharge 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


15/33

FY14 Union Budget: Sectoral Impact

U i B d t FY14 S t l I t


16/33

Kotak 16

Union Budget FY14: Sectoral ImpactConsumers: negative; Autos mixed bag; media marginally negative

Union Budget FY14: Sectoral Impact


17/33

Kotak 17

Union Budget FY14: Sectoral ImpactMixed bag power, neutral telecom, capital goods-positive



18/33

Kotak 18

Union Budget FY14: Sectoral ImpactOil and metals: Largely neutral

NELP- National Exploration Licensing Policy



19/33

Kotak 19

Union Budget FY14: Sectoral ImpactReal estate-positive, Infra-positive, Cement- marginally positive



20/33

Kotak 20

Union Budget FY14: Sectoral ImpactMidcaps- Largely positive


21/33

What has changed in India?

India: Macro snapshot


22/33

Kotak 22

GDP growth : Bottoming out

Inflation high: Supply-driven;

Core inflation moderates

Currency: A battle between thecurrent account and the capitalaccount

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

Growth to bottom in FY13; Likely to be ~6% inFY14

Gradual recovery in GDP to aid macro ratios

Inflation

WPI Inflation sticky at ~7%

Fiscal deficit 5.2% of GDP in FY13; 4.8%in FY14BE

RBI policy to focus on core inflation

Food inflation: structural and partly cyclical

Fuel inflation policy driven

USD/INR likely to range between 53-57 inFY14

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

Interest rates: Easing cycle

Headroom to cut CRR and policy rates

Lower policy rates to transmit to lowerlending rates

ROCE and WACC spread to expand

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

The changing face of India


23/33

Kotak 23

The changing face of IndiaA USD1.8Trn economy with USD1.2Trn market capitalization

The positives Past Present

Mind-set change ofentrepreneur/politicalleadership

Inward 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 Opening up long-term funding sources

Reliance on domestic banksBanking on insurance, debt, private equity, FDI, FII,ECB/FCCBs

Politics Predominantly Centre dirven Increased dominance of States

Privatization approach

Public offer of government stakes in

PSUs Industry privatization; Competitive bidding

Capital markets Narrow investable universe Broad universe: 179 US$1Bn+ companies by market cap

The challenges Present Future

GDP

Elite model Mass participation in growth

Services driven economy Manfacturing+Services driven economy

Physical infrastructure Physical+social infrastructure

Focus on agriculture Focus on Rural GDPFocus on growth Focus on growth + environment + governance

PolicyLeakages in social spend and revenuecollection

Direct Benefits Transfer

Simplification/Unification of tax system

Resources: Allocation Resources: Auctions

Inflation likely to stabilize at ~7-7.5%


24/33

Kotak 24

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 FY14EWPI inflation (YoY change), 2007-14E (%)

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 Jan13; likely to range between ~4.1-4.3% in March13;

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

Source: RBI, Kotak estimates

Policy rates have started moderatingIndias policy rates (%)

24

7.2

-2

0

2

4

6

8

10

12

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

Headline inflation Headline inflation (with diesel price hike)

6.7

Source: RBI, Kotak estimates

3

4

5

6

7

8

9

10

11

Mar-01

Sep-01

Mar-02

Sep-02

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

Sep-12

Mar-13

Sep-13

Reverse repo rate Repo rate CRR

Rupee to be range bound in the near term


25/33

Kotak 25

Rupee to be range bound in the near termCurrency: a function of capital flows

INR likely to range between USD/INR 53-57 in FY14

INR movement: to remain range bound

USD/INR movement

Source: IMF, Merrill Lynch Estimates, Kotak estimates

(8.0)

(6.0)

(4.0)(2.0)

0.0

2.0

4.0

6.0

8.0

Brazil China India Russia South Africa

2010 2011 2012 2013

Indias high CAD on account of oil prices and gold imports

CAD/GDP (%) across countries

Source: Bloomberg

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 105.0 155.0 170

o/w Non-oil imports 276.0 345.0 319.7

- gold 34.0 56.0 50.0

Invisibles (net) 85.0 112.0 112.0

Capital 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 11

Overall balance 13.1 (12.8) (5.4)

Average exchange rate(USD/INR)

45.63 47.96 54.0

Average Indian crude (USD/bbl) 85.1 111.7 110.0

Source: RBI, Kotak MF estimates

Financing the Current Account Deficit a key challengeIndias Balance of Payments position (USDbn)

25

45

60

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13


26/33

Market Outlook: Valuations and Risks

Indian equities: A vast investable universe


27/33

Kotak 27

Key attraction for global investors

India: Investable universe expandsNo of companies as per market capitalization

Source: Capitaline

BSE 200: latest ownership pattern

27

Details on December 31, 2012 (BSE-30 Index: 19,427)

Analyzed M cap (BSE-200)

US$ bn 1,069Rs bn 57,875

Portfolio romoters FIIs MFs BFI Individual Others

US$ 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, Kotak Institutional Equities

BSE-200 own ership over the last 20 quart ers

Analysis done for BSE-200 stocks taking market cap. at t he end of each quarter (US$ bn)

Indiannon-Govt Foreign Govt MFs

Individual Others Total LIC

Dec-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

BFIFIIs

Promoters

0

50

100

150

200

250

300

350

CY1999

CY2000

CY2001

CY2002

CY2003

CY2004

CY2005

CY2006

CY2007

CY2008

CY2009

CY2010

CY2011

CY2012

CY2013

>1bnUS$ >5bnUS$ >10bnUS$

125 new Billion Dollar companies added between FY00-11No of companies as per market capitalization

Source: BCG

Valuations - still within the historical trading range


28/33

Kotak 28

Valuations - still within the historical trading range

Source: BSE, RBI, Kotak Institutional Equities

Past performance cannot be regarded as a guarantee or indicator of future performance

Valuation of Indian Markets

28

4

8

12

16

20

24

28

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-13

12 months rolling forward P/E (X)

0

2

4

6

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-13

10

20

30P/B (X) RoE (%) (RHS)

4

8

12

16

20

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-13

EV/EBITDA (X)

1,000

5,000

9,000

13,000

17,000

21,000

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-13

Sensex 10X 12X 15X

(3,000)

1,000

5,000

9,000

13,000

17,000

21,000

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-08

Jan-10

Jan-11

Jan-12

Jan-13

0.0

0.6

1.2

1.8

Sensex M3 adj P/E (X, RHS)Poly. (M3 adj P/E (X, RHS))

Nifty valuation summary


29/33

Kotak 29

Nifty valuation summary

Valuation summary of Nifty sectors, Feb 22, 2013, March fiscal year-ends, 2012-14E

Source: Company, Kotak Institutional Equities estimates

29

Mkt cap. EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Div yield (%) RoE (%)

(US$ mn) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2012 2013E 2012 2013E 2014EAutomobiles 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

Utilit ies 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 Com 519,757 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.

India: Valuation premium over regional markets reasonableRe rating depends on policy momentum


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Regional Valuations

P/E, Earnings growth, P/B of global indices, Calendar year-ends, 2011-13E (as of Feb 21, 2013)

Re-rating depends on policy momentum

Past performance cannot be regarded as a guarantee or indicator of future performance

Source: Bloomberg

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Country Index 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E

Brazil MSCI BRAZIL 13.2 10.7 9.8 (23.9) 23.3 9.7 1.4 1.3 1.2

China MSCI CHINA 11.2 10.2 9.1 0.6 10.2 11.6 1.6 1.5 1.3

France MSCI FRANCE 12.1 11.4 10.2 (5.2) 6.5 11.5 1.2 1.2 1.1

Germany MSCI GERMANY 10.6 11.2 10.0 18.7 (5.4) 12.8 1.5 1.4 1.3

Hong Kong MSCI HONG KONG 17.6 15.9 14.4 (12.1) 10.5 10.2 1.4 1.3 1.3

India MSCI INDIA 15.8 13.8 12.0 10.2 14.9 15.0 2.5 2.2 1.9

Indonesia MSCI INDONESIA 16.8 14.7 12.7 5.4 14.4 15.6 3.7 3.2 2.7

Japan MSCI JAPAN 26.8 19.8 13.7 (28.1) 35.7 44.9 1.2 1.2 1.1

Korea MSCI KOREA 10.1 8.7 7.6 30.0 15.9 12.7 1.2 1.1 1.0Malaysia MSCI MALAYSIA 15.3 14.2 13.0 11.2 7.4 9.6 2.0 1.9 1.8

Mexico MSCI MEXICO 21.2 18.2 15.8 30.9 16.6 15.0 2.1 1.9 2.6

Philippines MSCI PHILIPPINES 21.0 19.0 17.8 14.3 10.8 11.1 3.5 2.9 2.9

Russia MSCI RUSSIA 5.4 5.3 5.2 (12.4) 0.7 3.8 0.8 0.7 0.7

Singapore MSCI SINGAPORE 14.8 14.3 13.2 5.9 3.0 8.9 1.5 1.5 1.4

Taiwan MSCI TAIWAN 18.9 15.0 13.3 5.0 25.9 13.1 1.8 1.7 1.6

Thailand MSCI THAILAND 14.6 12.3 11.1 12.9 18.4 11.6 2.4 2.2 1.9

UK MSCI UNITED KINGDOM 12.4 11.6 10.6 (9.1) 6.4 9.5 1.8 1.7 1.6

US MSCI UNITED STATES 15.0 13.9 12.5 6.4 7.7 11.7 2.3 2.1 1.9

EM MSCI EM (EMERGING MARKETS) 12.2 10.8 9.7 1.7 13.1 10.9 1.6 1.5 1.3

EM Asia MSCI EM ASIA 12.8 11.2 9.9 11.1 14.5 12.5 1.7 1.5 1.4

P/E (X) Earnings grow th (% ) P/B (X)

Key risks to Indias macro story


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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 Indias 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 Indias 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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Disclaimer:This material should not be construed as an offer to sell or the solicitation of an offer to buy any Security in any jurisdiction where suchan offer or solicitation would be illegal. We are not soliciting any action based on this material and is for general information only. Thismaterial is relevant only to clients who qualify as eligible counterparties. Emerging markets securities may be less liquid and morevolatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability ascompared to developed markets. The price and value of the investments referred to in this material and the income from them may godown as well as up, and investors may realize losses on any investments. Future returns are not guaranteed and a loss of the wholecapital may occur. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for theirparticular circumstances and, if necessary, seek professional advice. Clients may read relevant offer document or prospectus beforeinvesting. Past performance is not a guide for future performance. Investments in mutual funds are subject to market risk. The KotakMahindra group does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisersregarding any potential investment.

Kotak Securities Limited. Regd. Office: Bakhtawar, 1st Floor, 229, Nariman Point, Mumbai - 400021.Tel No 022-66341100. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp Film City Road, A K Vaidya Marg, Malad (East), Mumbai400097. Tel no: 66056825. SEBI Reg No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, OTC INB 200808136,MCXSX INE 260808130. AMFI ARN 0164. Investments in securities are subject to market risk; please read the SEBI prescribedCombined Risk Disclosure Document prior to investing. Derivatives are a sophisticated investment device. The investor is requested to

take into consideration all the risk factors before actually trading in derivative contracts. Mutual Fund Investments are subject to marketrisks, please read the offer document carefully prior to investing. Kotak Securities Limited is a distributor of IPO and Mutual Fund. Ourresearch should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take intoconsideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professionaladvice before investing. Compliance Officer Details: Mr. Sandeep Chordia. Call: 022 6605 6825, or Email: [email protected]
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