The document summarizes the current state of the Indian economy and key industries based on a presentation by the President of CRISIL Research. It finds that (1) domestic and global macroeconomic conditions remain weak, though recent reforms provide hope; (2) industry profit margins have stabilized after declining for several quarters; and (3) capital investments are expected to decline for the second straight year, especially among private sector companies, due to policy inaction on land acquisition, mining, and other issues according to a poll of companies.

1. CII Associations’ Council
Outlook on Indian Economy and Industry
Mukesh Agarwal
President, CRISIL Research
November 21, 2012
11

2. Economy Overview
2

3. Current macroeconomic scenario
 Global risks on the rise
– Eurozone officially in recession in 2012 with 40% probability of it continuing in 2013
– US faces a fiscal cliff – automatic tax increases and spending cuts, which, unless halted,
will drag it into recession in 2013 (25% probability)
– Reflected in weak exports and rupee volatility
 Domestic macro environment weak
– 2012-13 GDP growth expected at 5.5%, inflation at 8.0%
– Investments and industrial output at standstill (0.1% growth in H1) and exports shrink
(-6.2% growth in April-October)
– Fiscal and monetary policies constrained to revive growth
– Inflation begins to ease but to stay way above RBI’s comfort-level of 5%
 Recent reform measures lift mood and raise hopes
– Swift implementation/execution critical for material impact on growth
3

4. India Outlook: 2012-13
2010-11 2011-12 2012-13F
Real GDP factor cost (y-o-y % growth) 8.4 6.5 5.5
Agriculture 7.0 2.8 0.0
Industry 7.2 3.4 3.6
Services 9.3 8.9 7.6
WPI inflation (average) 9.5 8.8 8.0
Interest rate (10-year G-sec March end) 7.8 8.8 8.0-8.2
Exchange rate (Rs-$ March end) 44.8 51.2 53.0
Fiscal deficit (% of GDP) 5.1 5.8 6.2
Note: F- Forecast
Source: Central Statistical Organization
4

5. Industry Overview
5

6. Profit margins stabilise in Q2 FY13
Slowdown in revenue growth in 2012-13 However, trend reversal seen for margins
Per cent Per cent Per cent
25 18 18
15.7 15.3
16 16 14.3 14.0 14.1
13.4 13.5
20 14 14
12 12
15 10
10
8 8
10 9.1
6 6 8.1 7.7 7.8 8.0
6.1 6.6
5 4 4
2 2
0 0 0
FY 09 FY 10 FY 11 FY 12 H1 FY13 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13
Revenue growth (LHS) Operating margin (RHS)
Net margin (RHS) Operating margin Net margin
Source: CRISIL Research, Company reports, based on unaudited interim financials of 2748 companies excluding BFSI and PSU oil marketing companies
 Overall revenue growth has been tepid at 9 per cent y-o-y in H1 of 2012-13
– Volume pressure in sectors such as automobiles, capital goods, metals and hotels
– Sharper increase in realisations has benefited FMCG and cement, while depreciation in the rupee
helped IT sector, despite slowdown in volumes
 Declining trend in EBITDA margins arrested with margins improving 60 bps q-o-q in
Q2 2012-13; margins almost stable on a y-o-y basis
– Margins have stabilised either because of lower input costs or improvement in realisations (sectors
such as cement, sugar, and tea)
6

7. Capital investments to dip for the second year in a row
Public sector Private sector Growth in fixed asset base
(Rs trillion) 3.3
3.1
2.7 2.7 2.7 26%
-2%
2.12 -35% 20% 21%
1.19 2.07 1.35
1.83 16%
12%
1.48 27%
1.14 -6% 1.35
0.92 1.07
2009-10
2008-09
2010-11
2011-12E
2012-13P
2010-11
2008-09
2009-10
2011-12E
2012-13P
E: Estimated; P: Projected
Source: Company reports, CRISIL Research
 Poll of 200 companies (together accounting for around 70 per cent of market cap of
S&P CNX 500 excluding BFSI cos.) indicates that investment sentiment is depressed
 Aggregate capex expected to decline by 14 per cent in 2012-13, with investments by
private sector (170 companies) projected to decline by a steep 35 per cent
 Corporate also seem to be less willing to commit investments into fresh projects
– Only about one-fourth of investments planned in 2012-13 is towards new projects
– 94 companies do not intend to invest in new projects
7

8. Companies blame ‘policy inaction’ for slowdown in investments
Over half the companies believe that Policy inaction gets a weighted average
policy inaction is the biggest reason for the score of 1.8, indicating that it’s by far the
slowdown. most important factor impacting slowdown.
Most influential
Policy and administrative
Unavailability
of funds Demand Policy inaction 1.8
reforms required in key
slowdown
High interest areas:
3% 11%
rates 11% Global uncertainty 2.6
 Land acquisition
High interest rates 2.9
Global  Mining policy
uncertainty 20%
Demand
3.2
slowdown  Fuel linkages
Unavailability of
4.1
55% funds  Rollout of GST
Least influential
Policy inaction/ delay  Fiscal consolidation
in clearances
Source: Company reports, CRISIL Research
 Over 70 per cent of the companies have cited ‘policy inaction’ as one of the top 2
factors impacting slowdown in investments
 Close to 60 per cent companies felt that unavailability of funds had the least
impact on slowdown of investments
8

9. Risk-wise distribution of industries
CRISIL’s Credit Quality Vulnerability Matrix
Likelihood effect of demand slowdown / increased competition
 Crude Oil
 Petroleum Product Marketing  Natural Gas
Low
 Tea  Pharmaceuticals
 NBFC  Hospitals
 FMCG
 Automobiles and Auto-ancillaries
 Cement
 Infrastructure (Roads,
 Non-ferrous metals
Airports, Ports)
Medium
 Transport Operators  Petroleum Refining
 Power (excl. state discoms)
 Gems and Jewellery  Petrochemicals
 Consumer Durables
 IT/ITeS
 Telecom
 Steel
 Airlines
 Construction
 Real estate
 Capital Goods
 Power – State Distribution Utilities
High
 Hotels
 Textiles
 Shipping
 Sponge iron
High Medium Low
Consequent financial distress
9

10. Ratings Overview
No. of companies Rated amount Weighted % negative
Sector Median rating
rated* (Rs. Crore) average rating outlook
Power 47 127,608 BBB AA 15
Textiles 952 47,188 B BB 4
Real Estate 302 33,580 B BBB 3
Construction 701 154,444 BB A 4
Steel Products 534 22,405 BB BB 4
Steel
92 5,946 BB B 5
Intermediates
Cement 27 13,219 A AA 4
Roads 60 29,159 BBB BBB 8
Telecom 13 43,707 A A 8
Automobile 13 33,041 AA AA 8
Auto Ancillaries 320 16,659 BB BB 4
IT Services 29 752 BB B 7
Consequent financial distress
All 10,001 983,277 BBB AA 4
* As of September 30, 2012
Source: CRISIL Rating
10
10

11. Power: Fuel availability a key challenge
25%
Financial Stress Wt
Distribution of rated entities
20% avg. Median
Low High
15%
 New generation projects face high risks - 10%
domestic fuel linkage and inability to pass on
increase in cost of imported coal are key 5%
challenges
0%
AAA AA A BBB BB B C D
 Transmission and operational generation units Power 9% 23% 15% 13% 17% 13% 0% 11%
less vulnerable – based on fixed RoE model Percentage of Negative Rating Outlooks = 15%
Source: CRISIL Ratings, No. of rated entities: 47, rated amount : Rs 127,608 Cr
 Financial health of SEBs weak; outstanding short-
term liabilities stood at Rs. 1.9 trillion as on March Non-coking coal imports for power sector to rise
2012 (mn tonnes)
800 30%
 Most banks hitting exposure limits 700 23% 24%
25%
600 20%
17% 20%
Key drivers/monitorables 500
14%
400 15%
11%
300
Approvals 10%
Financial 200
Fuel & project 5%
Health of 100
availability implemen-
SEBs
tation 0 0%
2010-11 2012-13P 2014-15P
Demand Supply Imports Imports share (RHS)
P:Projected
Source: CRISIL Research
11

12. Textiles: Credit profile likely to remain weak
Financial Stress 50%
Distribution of rated entities
45%
Low High 40%
35%
30%
Wt avg. Median
 Garment exports are expected to decline by 9-10% in 25%
20%
2012 (vs 19.2% growth in 2011). Domestic demand
15%
growth is also weak. Operating margins for RMG 10%
players to remain constrained 5%
0%
AAA AA A BBB BB B C D
 Power outages in South India pushing up yarn prices Textiles 0% 1% 2% 13% 25% 45% 2% 13%
 Margins for spinners are expected to improve in Percentage of Negative Rating Outlooks = 4%
2012-13 due to high yarn prices and lower cotton Source: CRISIL Ratings, No. of rated entities: 952, rated amount : Rs 47,188 Cr
prices High yarn prices and low cotton prices improve the
margins
 High leverage of spinners with gearing of over 2 300
times constrains the credit profile
250
 Capex plans are being postponed due to the 200
slowdown in demand 150
100
Key drivers/monitorables
50
0
Raw Demand
High
material from EU
leverage
costs and US Cotton Yarn Prices (Rs./kg) Cotton Prices (Rs./kg)
Source: CRISIL Research
12

13. Real Estate: Cash flow remains a concern
Financial Stress 45%
40%
Distribution of rated entities
Low High
35%
30%
Wt avg.
25% Median
 Developers (especially small and mid-sized 20%
players) facing cash flow problems due to decline 15%
in volumes 10%
5%
 High mortgage rates exacerbating demand 0%
AAA AA A BBB BB B C D
slowdown Real Estate 0% 3% 6% 7% 29% 43% 2% 9%
 Oversupply putting pressure on commercial lease Percentage of Negative Rating Outlooks = 3%
Source: CRISIL Ratings, No. of rated entities: 302, rated amount : Rs 33,580 Cr
rentals – of ~243 mn. sq ft space estimated by
2014, only 30% likely to be absorbed 300,000 Absorption/Actual offtake (no. of houses)
250,000
200,000
Key drivers/monitorables 150,000
100,000
50,000
Volume Liquidity & Asset
0
growth funding prices 2007 2008 2009 2010 2011E 2012P 2013P 2014P
* Absorption nos. correspond to Ahmedabad, Bengaluru, Chandigarh, Chennai, Hyderabad,
Kochi, Kolkata, Mumbai, NCR and Pune.
E: Estimated, P:Projected
Source: CRISIL Research
13

14. Steel: Weak demand to keep margins range bound
Financial Stress
40%
Low High 35% Wt
Distribution of rated entities
30% avg. Median
25%
 Demand growth to slow down further to 3-5 per 20%
cent in 2012-13 (5.5 per cent growth in 2011-12) 15%
 HRC prices expected to decline further by 5-7 per 10%
5%
cent in 2013 from around $590 per tonne in 2012 0%
due to: -5%
AAA AA A BBB BB B C D
– Weak demand and decline in raw material prices SteelProd 0% 0% 1% 16% 35% 29% 1% 17%
 Operating margins for domestic players, Percentage of Negative Rating Outlooks = 4%
Source: CRISIL Ratings, No. of rated entities: 534, rated amount : Rs 22,405 Cr
especially small and mid-sized players, expected
to remain under pressure due to:
Margin pressure to continue
– Limited availability and high prices of domestic iron Operating
ore and non-coking coal 2010-11 2011-12 2012-13E 2013-14P
margins (%)
– Limited pricing flexibility owing to demand With Mines 26 22 21-23 22-24
moderation
Without Mines 20 18 16-18 17-19
Key drivers/monitorables
Small Integrated 15 10 7-9 7-9
Small Non-integrated 5 3-4 1-3 1-3
Raw Domestic
Demand
material iron ore Re-rollers 4 3-4 1-3 1-3
growth
cost supply
E: Estimated; P: Projected
Source: CRISIL Research
14

15. Steel Intermediates: Rising input costs hitting margins
Financial Stress 45%
Median
Distribution of rated entities
40%
Low High 35%
30%
25%
20% Wt avg.
 Sponge iron demand forecast to grow at 2-3 per 15%
cent CAGR during 2011-12 to 2016-17 10%
5%
– Increased long steel production by large integrated 0%
players using blast furnace route -5%
AAA AA A BBB BB B C D
SteelInt 0% 0% 1% 12% 39% 15% 1% 32%
 Weak demand, intense competition and limited
domestic availability of key inputs – iron ore and Percentage of Negative Rating Outlooks = 5%
Source: CRISIL Ratings, No. of rated entities: 92, rated amount : Rs 5,946 Cr
coal – will exert pressure on utilisation levels
Iron ore and coking coal prices to remain firm
– Forward integrated sponge iron manufacturers better
(Rs. per tonne)
placed compared to standalone manufacturers
~6,900
6,500 ~6,400
 Profitability is likely to remain under pressure 4,800
3,602 ~3,350 ~3,650
Key drivers/monitorables 2,505
2,383 ~2,500 ~2,400
Demand 1,667
Input from end- 2010-11 2011-12 2012-13 P 2013-14P
costs user
segments Iron ore fines (62% Fe) Iron ore lumps
E-auction non-coking coal
P: Projected
Source: CRISIL Research
15

16. Cement: Sharp price rise to offset escalation in input costs
Financial Stress 25%
Medi
Distribution of rated entities
Low High 20% Wt avg. an
15%
 Cement demand to grow moderately at 7-8 per 10%
cent in 2012-13 but operating rates to remain 5%
under pressure at 73 per cent
0%
AAA AA A BBB BB B C D
Cement 15% 19% 22% 7% 4% 11% 0% 22%
 Pan-India average cement price to register sharp
Percentage of Negative Rating Outlooks = 4%
Source: CRISIL Ratings, No. of rated entities: 27, rated amount : Rs 13,219 Cr
increase of 16-17 per cent y-o-y in 2012-13
 Industry operating margins to improve by 400 bps Incremental supply to continue to outpace demand
to 25 per cent in 2012-13 as steep price rise 94%
88% 84%
offsets escalation in input costs 76% 73% 73%
38
40
32
Key drivers/monitorables 26 24
19 17
16 14 14
Demand growth 10 8
Capacity driven by Energy &
additions infrastructure and freight costs
housing growth FY08 FY09 FY10 FY11 FY12 FY13E
Incremental demand … Incremental supply …
E: Estimated
Source: CRISIL Research
16
16

17. Construction: Growth to slow down in the near term
Financial Stress 40%
Distribution of rated entities
35%
Low High Wt avg.
30%
25%
Media
n
20%
 In 2012-13, revenue growth to be sluggish due to 15%
slow pace of order execution; profitability to 10%
decline 5%
0%
 Working capital requirements have shot up due to AAA AA A BBB BB B C D
Construction 0% 1% 4% 19% 36% 28% 4% 8%
increasing debtor days
Percentage of Negative Rating Outlooks = 4%
 Huge opportunity in the long term – construction Source: CRISIL Ratings, No. of rated entities: 701, rated amount : Rs 154,444 Cr
opportunity to nearly double over the next 5 years,
driven by infrastructure investments
– Roads, irrigation and urban infrastructure to be the Construction opportunity to double
major drivers
Rs 19.2 tn
Key drivers/monitorables Rs 10.9 tn 86%
81% 1.8 x
Working
Govt. capital Input 19% 14%
policy manage- prices 2007-08E to 2011-12E 2012-13P to 2016-17P
ment
Industrial Infrastructure
E: Estimated, P:Projected
Source: CRISIL Research
17

18. Roads: Investment to double over next 5 years
Financial Stress 45%
40%
Distribution of rated entities
Low High Media
35%
n
30%
25% Wt avg.
 Speed bumps in national highway awarding in 20%
2012-13 15%
10%
– Poor awarding in H1 2012-13 due to funding
5%
constraints & relatively less attractive projects
0%
AAA AA A BBB BB B C D
– Project awarding to pick up in H2 2012-13; larger Roads 3% 3% 8% 42% 28% 8% 0% 7%
share expected to be bid on EPC basis Percentage of Negative Rating Outlooks = 8%
Source: CRISIL Ratings, No. of rated entities: 60, rated amount : Rs 29,159 Cr
 Investment growth to be driven by national
highways National highway awarding declines
– We expect an investment of Rs. 7 trillion over next 5 (km) 7,406
years in roads 6,417
5,143
Key drivers/monitorables
3,214
Govt. Land Traffic
policy acquisition growth 2009-10 2010-11 2011-12 2012-13
CRISIL Research
estimate
Source: NHAI, CRISIL Research
18

19. Automobiles: Margins to remain stable in 2012-13
Financial Stress 45% Median
40%
Distribution of rated entities
Low High 35%
Wt avg.
30%
25%
 Sales growth to moderate further to 7-8 per cent in 20%
15%
2012-13 from ~13% in 2011-12 10%
5%
– Car sales to grow at a sedate pace due to high cost of 0%
ownership and production disruptions; UVs to -5%
AAA AA A BBB BB B C D
continue high growth driven by new model launches Auto 15% 38% 8% 15% 8% 15% 0% 0%
and higher availability of diesel models
Percentage of Negative Rating Outlooks = 8%
Source: CRISIL Ratings, No. of rated entities: 13, rated amount : Rs 33,041 Cr
– Scooters will continue to drive two-wheeler demand
– Sluggish MHCV sales due to economic slowdown to Auto growth rate to moderate further in 2012-13
be offset by continuing growth momentum in LCVs (in per
cent)
37
40
 Lower input cost in 2012-13 to be offset by lower 30 26
29
25
30
capacity utilisation and higher marketing expenses 20 14
8-10 9
13-15
8-10 5
10
Key Drivers/Monitorables 0
-10
-20 (12)-(15)
Extent of Two wheelers Passenger MHCV goods LCV goods
Fuel Interest
economic vehicles
Prices rates 2010-11 2011-12 2012-13P
slowdown
P:Projected
Source: CRISIL Research
19

20. Auto ancillaries: Growth to moderate in line with slowing OEM
demand
Financial Stress 35%
Distribution of rated entities
Low High 30%
Wt avg.
25%
Media
20%
n
 Growth to slow further to 9-11 per cent in 2012-13,
15%
in line with deceleration in growth across all OEM 10%
5%
segments
0%
AAA AA A BBB BB B C D
 Export growth to remain healthy with increasing AutoAnci 0% 3% 11% 31% 26% 19% 1% 9%
Percentage of Negative Rating Outlooks = 4%
penetration of domestic players Source: CRISIL Ratings, No. of rated entities: 320, rated amount : Rs 16,659 Cr
 Margins to remain stable in 2012-13
OEMs to weigh down auto component growth
– Lower input costs will be offset by low OEM demand (Rs billion)
and limited pricing flexibility in replacement market. 2500 2,355
2,146
2000 1,868
Key Drivers/Monitorables
1500
1000
Moderation
in 500
Input costs
automobile
0
demand 2010-11E 2011-12E 2012-13P
OEM Replacement Exports
E: Estimated, P:Projected
Source: CRISIL Research
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www.crisil.com
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