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Overview and Analysis of Union Budget 2013

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Get an insight into the key aspects of the Union Budget 2013 and how they will impact the Indian Economy

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Overview and Analysis of Union Budget 2013

  1. 1. Union Budget: FY2014 On the path of fiscal consolidation March 2013
  2. 2. Union Budget: Credible given macro and political challenges Targets 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
  3. 3. Fiscal deficit to influence long-term interest rate direction Net market borrowing unchanged; higher gross borrowing is a worry Tax revenue projections realistic Net tax revenue growth at 19% Growth led by higher surcharge and service tax amnesty Non tax revenue includes spectrum allocation fees and auction fees of Rs 40000 crore Disinvestment receipts Rs 55814 crore (including stake sale in non government owned companies) Expenditure: -Plan expenditure over nonplan -Reduction in fuel subsidies on the back of lower diesel subsidies - Food subsidy bill at Rs90000 crore Fiscal consolidation Fiscal deficit includes higher disinvestment lower subsidy; gross market borrowing higher than expected; borrowing at the longer end Source: Budget documents Kotak 3
  4. 4. Fiscal discipline: Key for sovereign ratings and RBI action on rates Medium Term Fiscal Policy Statement amended Realignment of the fiscal consolidation path for the centre Medium 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
  5. 5. 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 to Fiscal 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
  6. 6. India’s consolidated fiscal deficit remains high Focus on improving Tax-GDP for achieving fiscal consolidation targets Fiscal consolidation: Decline in combined fiscal deficit (as % of GDP) Tax (gross)-GDP (%): higher tax rates and wider service tax net 12 12 10 10 8 State 6 8 6 4 4 Centre 2 2 0 0 Source: Budget documents; From FY10 -oil and fertilizer bonds are above the line 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
  7. 7. Improving tax collections: Key driver of fiscal consolidation Net tax revenue growth largely realistic; service tax growth to be watched Net tax revenue growth at 19% in FY14 Composition of key components of receipts -FY14 (Rs crore) FY13BE FY13RE FY14BE % growth Growth on account of nominal growth (Rs crore) 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 1077611 1038037 1235870 19% 139097 58736 50153 55443 73866 33% 18400 133% 30000 Receipts (Rs Crore) Total gross tax revenue Dividend receipts Disinvestment 30000 24000 55814 Estimates of increase due to new initiatives Telecom related 22000 Tax revenue projections realistic Of the total Service tax growth, Rs 29663 crore on account of wider tax net and amnesty scheme Corporate tax growth includes ~Rs 13000 crore on account of increase in surcharge Non tax revenue includes spectrum allocation fees and auction fees of Rs 40000 crore Disinvestment target of Rs 40000 crore, stake sale in non Govt. Cos at Rs 14000 crore 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
  8. 8. Expenditure: Composition/efficiency to decide long-term growth Calibrated focus on plan over non-plan spend; capital spend rising Higher growth in plan expenditure in FY13 Trends in total expenditure (Rs Cr) Composition of plan and non plan expenditure (% of total expenditure) 1600000 80.00% 1400000 70.00% 1200000 60.00% 1000000 800000 50.00% 600000 40.00% 400000 30.00% 200000 20.00% 0 10.00% 0.00% FY07 Rev Exp FY08 FY09 FY10 FY11 plan exp Source: Budget Documents FY12 FY13RE FY14BE Cap 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
  9. 9. Subsidy management, a politically sensitive subject Target to bring down subsidy to 2% of GDP by FY14 Lower subsidy burden estimated for FY12 Key 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 60599 72823 75000 85000 90000 -Fertilizer subsidy 52980 54977 67199 60971 65974 65971 -Petroleum subsidy 14954 38386 68481 43580 65000 5223 5791 96879 2493 7415 8061 - Interest subsidy 2719 -Other subsidy 4369 4968 2002 2493 2384 Petroleum subsidy includes under recoveries for FY13 to the tune of Rs38500 crore 2050 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
  10. 10. Oil Subsidy: Slippages a function of oil prices Need to hike diesel prices to reduce the under recovery Large increase in retail prices required Gap between required market prices and current selling prices at various levels of crude oil USD 90 USD 100 USD 110 USD 120 Current retail 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 Retail prices reqd to break-even (Rs) Budget provision for fuel subsidy under provided Subsidy break down at various levels of crude oil price (Rs Bn) International oil price (US$/bbl) Exchange Rate (Rs/US$) Gross under-recovery for FY14E (Rs Bn) Total Govt. subsidy assuming upstream share at 50% (Rs Bn) Shortfall in provision (Rs Bn) USD100 54.5 785 342 113 USD105 54.5 963 431 202 USD110 54.5 1,141 520 291 USD115 54.5 1,319 609 380 USD120 54.5 1,497 698 469 *Assuming Rs50bn net under-recovery burden on OMCs Source: Kotak MF estimates Kotak 10
  11. 11. Infrastructure : On-going area of thrust Focus 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 in plant and machinery during the period FY14-15 • Plans for seven new cities have been finalised and work on two industrial cities at Dholera, Gujarat and Shendra Bidkin, Maharashtra will start. • Roads: 3000kms of road projects in Gujarat, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh to be 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 100 million 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 Atomic Energy Civil Aviation Communication & IT Drinking Water & Sanitation Education Power Transport Urban Development Water resources Railways Total FY12 4,290 1,357 4,208 9,993 50,655 5,809 22,360 6,152 576 23,013 128,413 FY13BE 5,600 4,500 8,600 14,000 61,407 11,025 26,172 7,012 1,500 24,000 163,816 FY13RE 3,175 6,200 4,693 13,000 56,208 5,858 18,795 5,837 650 24,265 138,681 FY14BE 5,880 5,200 9,600 15,260 65,857 11,161 26,706 7,567 1,500 26,000 174,731 Source: Budget documents Kotak 11
  12. 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 tax deduction 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 mutual funds 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 Upto Rs2,00,000 - Nil Above Rs2,00,000 - Rs5,00,000 - 10% Above Rs5,00,000 - Rs10,00,000 - 20% Above Rs10,00,000 - 30% Nil Upto Rs2,00,000 - Nil Above Rs2,00,000 - Rs5,00,000 - 10% Above Rs5,00,000 - Rs10,00,000 - 20% Above Rs10,00,000 - 30% Tax credit of Rs 2,000 f or individuals w ith income upto Rs5,00,000 Senior Citizen (60 years-80 years) Very senior citizen (80 years+) Education cess Super-rich Corporate income tax Tax rates Exemption limit - Rs2,50,000 Exemption limit - Rs5,00,000 3% Nil Exemption limit - Rs2,50,000 Exemption limit - Rs5,00,000 3% 10% surcharge if total income exceeds Rs10 mn 30% 30% Surcharge rate Education cess Minimum Alternative Tax 5% 3% 18.5% of book prof its 10% 3% 18.5% of book prof its Individual incom e tax Individual tax rates Exemption Source: Budget documents Kotak 12
  13. 13. Financials sector related announcements • Recapitalisation of PSU banks : PSU Bank recapitalization target set at Rs14000 crore in FY14 as compared to Rs12500 crore in FY13 . • Benefit for small home loan borrowers: Individual buying a new property and availing a loan up to Rs 25Lakh is 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 is facilitating financial institutions to securitize their assets would be exempt from tax. At the time of distribution of income, 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 to continue 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 tax deduction 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
  14. 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 tax residency 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 and asset backed securities • FIIs participation in currency derivatives: FIIs permitted to participate in exchange traded currency derivative segment to 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 KYC norms Kotak 14
  15. 15. ® FY14 Union Budget: Sectoral Impact
  16. 16. Union Budget FY14: Sectoral Impact Consumers: negative; Autos - mixed bag; media - marginally negative Kotak 16
  17. 17. Union Budget FY14: Sectoral Impact Mixed bag power, neutral telecom, capital goods-positive Kotak 17
  18. 18. Union Budget FY14: Sectoral Impact Oil and metals: Largely neutral NELP- National Exploration Licensing Policy Kotak 18
  19. 19. Union Budget FY14: Sectoral Impact Real estate-positive, Infra-positive, Cement- marginally positive Kotak 19
  20. 20. Union Budget FY14: Sectoral Impact Midcaps- Largely positive Kotak 20
  21. 21. ® What has changed in India?
  22. 22. India: Macro snapshot Silver lining: GDP growth bottoming out; core inflation moderating; monetary policy easing GDP growth • GDP growth likely to be 5-5.5% in FY13 from 6.2% in FY12 • Infrastructure bottle necks persist GDP growth : Bottoming out Inflation • WPI Inflation sticky at ~7% • Fiscal deficit 5.2% of GDP in FY13; 4.8% in FY14BE Inflation high: Supply-driven; Core inflation moderates • Growth to bottom in FY13; Likely to be ~6% in FY14 • 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 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 Interest rates: Easing cycle • Headroom to cut CRR and policy rates • Lower policy rates to transmit to lower lending rates • ROCE and WACC spread to expand 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 Currency: A battle between the current account and the capital account • USD/INR likely to range between 53-57 in FY14 Kotak 22
  23. 23. The changing face of India A USD1.8Trn economy with USD1.2Trn market capitalization The positives Past Inward looking Risk-averse Present Global aspirations Focus on scale; FDI and M&A are emerging themes Regulatory driven Market driven - Willing to embrace competition Domestic; Constrained Global; Capital loses its nationality; in abundance Asset-liability mis-match in funding Opening up long-term funding sources Reliance on domestic banks 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 in PSUs Industry privatization; Competitive bidding Capital markets Narrow investable universe Broad universe: 179 US$1Bn+ companies by market cap Present Elite model Future Mass participation in growth Services driven economy Physical infrastructure Focus on agriculture Focus on growth Manfacturing+Services driven economy Physical+social infrastructure Focus on Rural GDP Focus on growth + environment + governance Leakages in social spend and revenue collection Direct Benefits Transfer Mind-set change of entrepreneur/political leadership Capital The challenges GDP Policy Resources: Allocation Kotak Simplification/Unification of tax system Resources: Auctions 23
  24. 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 FY14E WPI inflation (YoY change), 2007-14E (%) Policy rates have started moderating India’s policy rates (%) 11 Headline inflation 12 Reverse repo rate Repo rate CRR Headline inflation (with diesel price hike) 10 10 9 8 6.7 8 7.2 6 7 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
  25. 25. Rupee to be range bound in the near term Currency: a function of capital flows INR movement: to remain range bound USD/INR movement Financing the Current Account Deficit - a key challenge India’s Balance of Payments position (USDbn) 60 Current account CAD/GDP (%) Trade balance - Exports - Imports o/w Oil imports o/w Non-oil imports - gold Invisibles (net) Capital account % of GDP -Foreign investment -Banking capital -Short-term credit -ECBs Overall balance 45 Source: Bloomberg India’s high CAD on account of oil prices and gold imports CAD/GDP (%) across countries 8.0 6.0 Average exchange rate (USD/INR) 4.0 2011 (45.9) (2.7) (130.6) 250.0 381.0 105.0 276.0 34.0 85.0 62.1 3.7 39.7 5.0 11.0 12.5 13.1 2012 (78.2) (4.2) (189.8) 310.0 500.0 155.0 345.0 56.0 112.0 67.8 3.7 39.2 16.2 6.7 10.3 (12.8) 2013E (83.4) (4.5) (195.4) 294.3 489.7 170 319.7 50.0 112.0 78.0 4.2 45 13 9 11 (5.4) 45.63 47.96 54.0 85.1 111.7 110.0 2.0 0.0 Average Indian crude (USD/bbl) (2.0) Source: RBI, Kotak MF estimates (4.0) (6.0) (8.0) Brazil China 2010 India 2011 2012 Russia South Africa • INR likely to range between USD/INR 53-57 in FY14 2013 Source: IMF, Merrill Lynch Estimates, Kotak estimates Kotak 25
  26. 26. ® Market Outlook: Valuations and Risks
  27. 27. Indian equities: A vast investable universe Key attraction for global investors 125 new Billion Dollar companies added between FY00-11 No of companies as per market capitalization India: Investable universe expands No of companies as per market capitalization 350 >1bnUS$ >5bnUS$ >10bnUS$ 300 250 200 150 100 50 0 Source: Capitaline Source: BCG BSE 200: latest ownership pattern 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) Details on December 31, 2012 (BSE-30 Index: 19,427) Analyzed Mcap (BSE-200) US$ bn Rs bn Portfolio US$ bn Rs bn % of BSE-200 Promoters 537 29,068 50.2 Promoters FIIs 201 10,861 18.8 M Fs BFI 35 80 1,911 4,318 3.3 7.5 Source: BSE, NSE, Kot ak Inst it ut ional Equit ies Kotak Indian 1,069 57,875 Individual Others 78 76 4,216 4,094 7.3 7.1 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Indivi non-Govt Foreign Govt 138 43 139 251 75 280 324 93 295 226 270 64 77 202 213 FIIs MFs 85 20 187 41 252 46 162 225 32 37 BFI 36 77 100 68 83 dual Others 43 43 82 83 99 103 69 80 69 84 Total 548 1,076 1,313 LIC 23 52 67 893 1,069 44 56 Source: BSE, NSE, Kotak Instutional Equities 27
  28. 28. Valuations - still within the historical trading range Valuation of Indian Markets 21,000 Sensex 10X 12X 15X 12 months rolling forw ard P/E (X) 28 17,000 RoE (% ) (RHS) 20 30 24 13,000 P/B (X) 6 4 16 20 9,000 2 12 5,000 8 1,000 4 0 20 EV/EBITDA (X) 16 21,000 Sensex Poly. (M3 adj P/E (X, RHS)) 10 M3 adj P/E (X, RHS) 1.8 17,000 13,000 1.2 12 9,000 8 5,000 0.6 1,000 4 (3,000) 0.0 Source: BSE, RBI, Kotak Institutional Equities Past performance cannot be regarded as a guarantee or indicator of future performance Kotak 28
  29. 29. 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) 2012 2013E 2014E 2012 2013E 2014E (US$ mn) 2012 2013E 2014E 52,244 30.5 (11.8) 25.4 11.8 13.3 10.6 8.7 8.1 127,344 26.1 16.3 7.2 16.0 13.8 12.9 — — Consumers 68,344 24.0 21.1 16.4 38.1 31.4 27.0 28.4 23.6 Cement 24,946 32.4 20.0 14.8 18.4 15.4 13.4 10.9 2,832 (51.5) 40.7 149.0 24.8 17.6 7.1 122,239 16.0 5.6 (0.5) 10.9 10.3 Industrials 28,927 10.5 (2.9) (2.1) 12.9 Metals & Mining 57,601 (3.1) (4.8) 20.9 8,881 (22.1) 79.7 Pharmaceuticals 34,934 (17.5) Telecom 21,642 Price/BV (X) Div yield (%) RoE (%) 2012 2013E 2012 2013E 2012 6.3 3.9 3.2 1.4 1.6 33.0 23.9 24.2 — 2.7 2.4 1.4 1.6 16.7 17.5 16.8 19.9 14.8 13.3 1.5 2.3 38.9 42.4 43.9 8.6 7.1 2.8 2.5 1.1 1.1 15.3 16.1 16.0 12.8 10.0 6.9 1.3 1.2 — — 5.4 6.9 14.9 10.3 5.9 5.9 5.5 1.5 1.4 1.9 2.3 14.0 13.4 12.2 13.3 13.6 10.3 10.3 9.8 2.6 2.2 1.6 1.5 20.0 16.4 14.1 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 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 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 (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 8.8 110,646 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 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 Automobiles Banking Diversified Energy Property Technology 2013E 2014E Notes: (a) Following companies are excluded: Kotak Mahindra Bank. Source: Company, Kotak Institutional Equities estimates Kotak 29
  30. 30. India: Valuation premium over regional markets reasonable Re-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) Country Brazil China France Germany Hong Kong India Indonesia Japan Korea Malaysia Mexico Philippines Russia Singapore Taiw an Thailand UK US EM EM Asia Index M SCI BRAZIL M SCI CHINA M SCI FRANCE M SCI GERM ANY M SCI HONG KONG M SCI INDIA M SCI INDONESIA M SCI JAPAN M SCI KOREA M SCI M ALAYSIA M SCI M EXICO M SCI PHILIPPINES M SCI RUSSIA M SCI SINGAPORE M SCI TAIWAN M SCI THAILAND M SCI UNITED KINGDOM M SCI UNITED STATES M SCI EM (EM ERGING M ARKETS) M SCI EM ASIA 2012 13.2 11.2 12.1 10.6 17.6 15.8 16.8 26.8 10.1 15.3 21.2 21.0 5.4 14.8 18.9 14.6 12.4 15.0 12.2 12.8 P/ E (X) 2013E 10.7 10.2 11.4 11.2 15.9 13.8 14.7 19.8 8.7 14.2 18.2 19.0 5.3 14.3 15.0 12.3 11.6 13.9 10.8 11.2 2014E 9.8 9.1 10.2 10.0 14.4 12.0 12.7 13.7 7.6 13.0 15.8 17.8 5.2 13.2 13.3 11.1 10.6 12.5 9.7 9.9 Earnings grow th (% ) 2012 2013E (23.9) 23.3 0.6 10.2 (5.2) 6.5 18.7 (5.4) (12.1) 10.5 10.2 14.9 5.4 14.4 (28.1) 35.7 30.0 15.9 11.2 7.4 30.9 16.6 14.3 10.8 (12.4) 0.7 5.9 3.0 5.0 25.9 12.9 18.4 (9.1) 6.4 6.4 7.7 1.7 13.1 11.1 14.5 2014E 9.7 11.6 11.5 12.8 10.2 15.0 15.6 44.9 12.7 9.6 15.0 11.1 3.8 8.9 13.1 11.6 9.5 11.7 10.9 12.5 2012 1.4 1.6 1.2 1.5 1.4 2.5 3.7 1.2 1.2 2.0 2.1 3.5 0.8 1.5 1.8 2.4 1.8 2.3 1.6 1.7 P/ B (X) 2013E 1.3 1.5 1.2 1.4 1.3 2.2 3.2 1.2 1.1 1.9 1.9 2.9 0.7 1.5 1.7 2.2 1.7 2.1 1.5 1.5 2014E 1.2 1.3 1.1 1.3 1.3 1.9 2.7 1.1 1.0 1.8 2.6 2.9 0.7 1.4 1.6 1.9 1.6 1.9 1.3 1.4 Source: Bloomberg Past performance cannot be regarded as a guarantee or indicator of future performance Kotak 30
  31. 31. 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 • • A USD1/bbl increase in oil prices expands India’s current account deficit by ~USD700m •  While oil price risks have abated for the time being, the correlation with Current Account Deficit (CAD) remains high 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 • Kotak 31
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