Union Budget: FY2014

On the path of fiscal consolidation

March 2013

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

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

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 Revenue deficit- Centre 4.4

FY13BE 3.4

FY13RE 3.9

FY14E 3.3

FY15E 2.7

FY16E 2.0

Fiscal Deficit-centre
Effective Revenue deficit

5.9
2.9

5.1
1.8

5.2
2.7

4.8
1.8

4.2
0.9

3.6
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

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 Net market borrowings Short term borrowings (T-Bills) Gross market borrowing Net market borrowing to Fiscal deficit
Source: Budget documents

FY10 398411 -3908 451093 96%

FY11 335414 10000 447000 84%

FY12 436414 116084 510000 84%

FY13BE 479000 9000 569616 93%

FY13RE 467384 45764 560000 90%

FY14BE 484000 19844 629009 89%

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

Indias 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)
12

Tax (gross)-GDP (%): higher tax rates and wider service tax net
12

10 8 State 6 4 Centre 2 0

10 8 6 4 2 0

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

Fy04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13RE

FY14BE

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

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

FY94
Kotak

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13RE

FY14BE

Source: Budget Documents

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) Growth on account of nominal growth (Rs crore) 23047 22090 17781 48089 27617 139097 Estimates of increase due to new initiatives 29663 12577 13927 58736 18400 30000 22000

Receipts (Rs Crore) Excise duty Customs duty Service tax Corporate tax Income tax Total gross tax revenue Dividend receipts Disinvestment Telecom related

FY13BE 194350

FY13RE 171996

FY14BE 197554

% growth 15%

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

186694
124000 373227 195786 1077611

164853
132697 358874 206095 1038037

187308
180141 419520 247639 1235870

14%
36% 17% 20% 19%

50153
30000

55443
24000

73866
55814

33%
133%

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

Expenditure: Composition/efficiency to decide long-term growth Calibrated 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

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%

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

FY03

FY04

FY05

FY06

FY07

Rev Exp

FY08

FY09

Cap Exp

FY10

FY11

FY12

FY13RE

FY14BE

0.00% FY07 FY08 FY09 FY10 plan exp FY11 FY12 non plan exp FY13RE FY14BE

Source: Budget Documents

Kotak

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 Total subsidy As % of GDP -Food subsidy -Fertilizer subsidy -Petroleum subsidy - Interest subsidy 131025 2.1% 56002 52980 14954 2719

FY11 164153 2.1% 60599 54977 38386 5223

FY12 216297 2.4% 72823 67199 68481 5791

FY13BE 190015 1.9% 75000 60971 43580 2493

FY13RE 257654 2.6% 85000 65974 96879 2384 7415

FY14BE 231083 2.0% 90000 65971 65000 2050 8061

Petroleum subsidy includes under recoveries for FY13 to the tune of Rs38500 crore

-Other subsidy
Source: Budget documents

4369

4968

2002

2493

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

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

Retail prices reqd to break-even (Rs)

LPG (Rs/cyl) Kerosene (Rs/lt) Diesel (Rs/lt)

USD 90 689 39.6 54.2

USD 100 747 43.1 57.8

USD 110 805 46.7 61.4

USD 120 863 50.2 64.9

Current retail price (Rs) 435 14.4 53.7

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)
*Assuming Rs50bn net under-recovery burden on OMCs

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

Source: Kotak MF estimates

Kotak 10

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
Source: Budget documents
Kotak 11

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

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 Individual incom e tax Individual tax rates 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 Exemption limit - Rs2,50,000 Exemption limit - Rs5,00,000 3% Nil 30% 5% 3% 18.5% of book profits 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% Tax credit of Rs 2,000 for individuals w ith income upto Rs5,00,000 Exemption limit - Rs2,50,000 Exemption limit - Rs5,00,000 3% 10% surcharge if total income exceeds Rs10 mn 30% 10% 3% 18.5% of book profits

Exemption Senior Citizen (60 years-80 years) Very senior citizen (80 years+) Education cess Super-rich Corporate incom e tax Tax rates Surcharge rate Education cess Minimum Alternative Tax
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 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

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

FY14 Union Budget: Sectoral Impact

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

Kotak

16

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

Kotak

17

Union Budget FY14: Sectoral Impact Oil and metals: Largely neutral

NELP- National Exploration Licensing Policy

Kotak 18

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

Kotak

19

Union Budget FY14: Sectoral Impact Midcaps- Largely positive

Kotak

20

What has changed in India?

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

Growth to bottom in FY13; Likely to be ~6% in FY14 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

Inflation high: Supply-driven; Core inflation moderates

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

The changing face of India

A USD1.8Trn economy with USD1.2Trn market capitalization
The positives Mind-set change of entrepreneur/political leadership Capital Past Inward looking Risk-averse Regulatory driven Domestic; Constrained Asset-liability mis-match in funding Reliance on domestic banks Politics Privatization approach Capital markets Predominantly Centre dirven Public offer of government stakes in PSUs Narrow investable universe Present Global aspirations Focus on scale; FDI and M&A are emerging themes Market driven - Willing to embrace competition Global; Capital loses its nationality; in abundance Opening up long-term funding sources Banking on insurance, debt, private equity, FDI, FII, ECB/FCCBs Increased dominance of States Industry privatization; Competitive bidding Broad universe: 179 US$1Bn+ companies by market cap

The challenges

Present Elite model Services driven economy Physical infrastructure Focus on agriculture Focus on growth Leakages in social spend and revenue collection Resources: Allocation

Future Mass participation in growth Manfacturing+Services driven economy Physical+social infrastructure Focus on Rural GDP Focus on growth + environment + governance Direct Benefits Transfer Simplification/Unification of tax system Resources: Auctions
23

GDP

Policy

Kotak

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 Indias policy rates (%)
11 12 10 8 6 4 2 0 -2 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 7.2 7 6 5 4 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 6.7
Headline inflation Headline inflation (with diesel price hike) Reverse repo rate Repo rate CRR

10

9
8

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 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

24

Kotak

24

Sep-13

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Rupee to be range bound in the near term

Currency: a function of capital flows
INR movement: to remain range bound USD/INR movement
60

Financing the Current Account Deficit a key challenge Indias Balance of Payments position (USDbn) 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
Average exchange rate (USD/INR) Average Indian crude (USD/bbl)
Source: RBI, Kotak MF estimates

45 Jan-12 Jul-12 May-12 Sep-12 Nov-12 Mar-12 Jan-13

Source: Bloomberg

Indias high CAD on account of oil prices and gold imports CAD/GDP (%) across countries 8.0 6.0 4.0 2.0 0.0 (2.0) (4.0) (6.0) (8.0) Brazil China 2010 India 2011 2012 Russia 2013 South Africa

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 45.63 85.1

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) 47.96 111.7

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) 54.0 110.0

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

Source: IMF, Merrill Lynch Estimates, Kotak estimates

25

Kotak

25

Market Outlook: Valuations and Risks

Indian equities: A vast investable universe

Key attraction for global investors
India: Investable universe expands No of companies as per market capitalization
350 300 250 200 150 100 50 0
CY1999 CY2000 CY2001 CY2002 CY2003 CY2004 CY2005 CY2006 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013

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

>1bnUS$

>5bnUS$

>10bnUS$

Source: Capitaline

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) Promoters Indian non-Govt Foreign Govt 138 43 139 251 75 280 324 93 295 226 64 202 270 77 213

BSE 200: latest ownership pattern

Details on December 31, 2012 (BSE-30 Index: 19,427) Analyzed Mcap (BSE-200) US$ bn Rs bn Portfolio Promoters FIIs MFs BFI US$ bn 537 201 35 80 Rs bn 29,068 10,861 1,911 4,318 % of BSE-200 50.2 18.8 3.3 7.5 Source: BSE, NSE, Kotak Institutional Equities Individual 78 4,216 7.3

1,069 57,875 Others 76 4,094 7.1

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

FIIs MFs 85 20 187 41 252 46 162 32 225 37

BFI 36 77 100 68 83

Indivi dual Others 43 43 82 83 99 103 69 69 80 84

Total 548 1,076 1,313 893 1,069

LIC 23 52 67 44 56

27

Source: BSE, NSE, Kotak Instutional Equities

27

Kotak

Valuations - still within the historical trading range

Valuation of Indian Markets

21,000 17,000 13,000 9,000

Sensex

10X

12X

15X 28 24 20 16 12

12 months rolling forward P/E (X) 6

P/B (X)

RoE (% ) (RHS) 30

4 20 2

5,000 1,000

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-13

20 EV/EBITDA (X) 16 21,000 17,000 13,000 12 9,000 8 5,000 1,000 4

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

Feb-13

M3 adj P/E (X, RHS) 1.8

1.2

0.6

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-13

(3,000)

0.0

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-08

Jan-10

Jan-11

Jan-12

Source: BSE, RBI, Kotak Institutional Equities Past performance cannot be regarded as a guarantee or indicator of future performance

28

Kotak

Jan-13

Feb-13

10

28

Nifty valuation summary

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

Automobiles Banking Consumers Cement Diversified Energy Industrials Metals & Mining Property Pharmaceuticals Telecom Technology Utilities NIFTY NIFTY ex-Energy NIFTY ex-Energy ex Com

Mkt cap. (US$ mn) 52,244 127,344 68,344 24,946 2,832 122,239 28,927 57,601 8,881 34,934 21,642 110,646 39,018 699,597 577,358 519,757

EPS grow th (%) 2012 2013E 2014E 30.5 (11.8) 25.4 26.1 24.0 32.4 (51.5) 16.0 10.5 (3.1) (22.1) (17.5) (29.6) 19.9 (1.5) 13.0 12.0 15.2 16.3 21.1 20.0 40.7 5.6 (2.9) (4.8) 79.7 74.0 (36.0) 25.5 18.2 9.5 10.9 13.7 7.2 16.4 14.8 149.0 (0.5) (2.1) 20.9 33.1 3.8 84.8 9.0 11.3 10.3 13.8 12.8

PER (X) 2012 2013E 2014E 11.8 13.3 10.6 16.0 38.1 18.4 24.8 10.9 12.9 11.8 40.2 36.3 27.6 22.3 14.2 16.0 17.8 18.9 13.8 31.4 15.4 17.6 10.3 13.3 12.4 22.4 20.9 43.1 17.8 12.0 14.6 16.1 16.6 12.9 27.0 13.4 7.1 10.3 13.6 10.3 16.8 20.1 23.3 16.3 10.8 13.3 14.1 14.7

EV/EBITDA (X) 2012 2013E 2014E 8.7 8.1 6.3 28.4 10.9 12.8 5.9 10.3 7.6 18.5 18.7 7.8 15.4 11.6 10.2 12.3 13.5 23.6 8.6 10.0 5.9 10.3 8.1 14.0 13.0 7.2 12.4 9.7 9.4 10.9 11.5 19.9 7.1 6.9 5.5 9.8 6.9 10.8 12.7 6.0 11.0 8.2 8.2 9.2 9.7

Price/BV (X) 2012 2013E 3.9 3.2 2.7 14.8 2.8 1.3 1.5 2.6 2.1 1.8 5.6 2.3 5.9 1.6 2.7 3.2 3.4 2.4 13.3 2.5 1.2 1.4 2.2 1.9 1.7 4.6 2.2 4.8 1.5 2.4 2.8 3.0

Div yield (%) 2012 2013E 1.4 1.6 1.4 1.5 1.1 1.9 1.6 2.7 0.9 0.5 1.5 2.1 1.6 1.5 1.4 1.6 2.3 1.1 2.3 1.5 2.1 1.1 0.6 0.5 1.8 2.5 1.8 1.7 1.6

RoE (%) 2012 2013E 2014E 33.0 23.9 24.2 16.7 38.9 15.3 5.4 14.0 20.0 17.6 4.4 15.5 8.4 26.4 11.1 16.8 18.1 18.2 17.5 42.4 16.1 6.9 13.4 16.4 15.0 7.4 21.8 5.2 27.2 12.2 16.4 17.7 18.2 16.8 43.9 16.0 14.9 12.2 14.1 16.0 9.2 18.9 8.8 25.0 12.4 16.1 17.7 18.0

Notes: (a) Following companies are excluded: Kotak Mahindra Bank.

Source: Company, Kotak Institutional Equities estimates

29

Kotak

29

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)
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 Earnings grow th (% ) 2012 2013E 2014E (23.9) 23.3 9.7 0.6 10.2 11.6 (5.2) 6.5 11.5 18.7 (5.4) 12.8 (12.1) 10.5 10.2 10.2 14.9 15.0 5.4 14.4 15.6 (28.1) 35.7 44.9 30.0 15.9 12.7 11.2 7.4 9.6 30.9 16.6 15.0 14.3 10.8 11.1 (12.4) 0.7 3.8 5.9 3.0 8.9 5.0 25.9 13.1 12.9 18.4 11.6 (9.1) 6.4 9.5 6.4 7.7 11.7 1.7 13.1 10.9 11.1 14.5 12.5 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

Country Brazil China France Germany Hong Kong India Indonesia Japan Korea Malaysia Mexico Philippines R ussia Singapore Taiw an Thailand UK US EM EM Asia

Index MSCI BR AZIL MSCI CHINA MSCI FR ANCE MSCI GER MANY MSCI HONG KONG MSCI INDIA MSCI INDONESIA MSCI JAPAN MSCI KOR EA MSCI MALAYSIA MSCI MEXICO MSCI PHILIPPINES MSCI R USSIA MSCI SINGAPOR E MSCI TAIWAN MSCI THAILAND MSCI UNITED KINGDOM MSCI UNITED STATES MSCI EM (EMERGING MARKETS) MSCI 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

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

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

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

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Key risks to Indias 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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