Market Outlook April 2018 1
Equity Markets 2
Key Events – March 2018 • India's GDP for the third quarter of 2017-18 grew at 7.2%. • The government unveiled a Rs 2.88 lakh crore market borrowing roadmap for the first half of FY19 , which would be 22.6 % lesser than Rs 3.72 lakh crore raised during the same period last financial year. • India’s Industrial Production data for the month of Jan stayed strong at 7.5% which was higher than consensus estimates of 6.4%. This was led by capital goods which was up 14.6% and Consumer Non- Durables which was up 10.5% similar to what we have seen in the Oct-Dec period • CPI inflation eased for the second consecutive month to 4.4% in Feb (from 5.1% in Jan). This was partly led by a decline in vegetable prices along with normalization in the underlying CPI ex of the outliers (ie vegetables, pulses, transportation and housing) from 4.3% to 4% • During the month, one of BJPs’ key allies TDP pulled out of the NDA alliance over the issue of granting special status to the state of Andhra Pradesh. • Election results for 3 bye-polls – 2 in the state of UP and 1 in the state of Bihar came out during the month and the BJP lost out in all 3 of them. • Capital market activity saw a pickup in Mar with 27 deals totaling $6.4bn during the month. Among the key ones were the IPOs and large $1.4bn block deal in TCS where Tata Sons sold part of their stake. • Indian equities (-3.6%) saw deepening of the YTD correction in March as concerns over a global trade war escalated during the month and the BJP suffered political setbacks in by-polls as well as with its erstwhile ally TDP in Andhra on the domestic front. 3
Performance of Sensex and Nifty Indices 4 Source: Bloomberg, Kotak Institutional Equities
Trade Wars Unlikely To Impact India Directly… India’s Net (of Imports) Exports India’s Net Exports (goods + services ) to US (ex oil, ex gold and jewellery) + Net Services India’s net exports are a small proportion of its overall GDP 5 Source: CLSA, BEA
What Does India Export Who does India export to – overall (goods only)? What does India export – overall? India’s FY 17 export Composition (Goods India’s FY 17 export Composition : US $ 439bn only) by Country/ Region The engineering and electronics goods basket, likely Only 15% of India’s goods exports head to targeted more by US govt, is about 20% of India’s total the USA exports 6 Source: CLSA, CME, Ministry of Commerce
Domestic Flows Hold Up – A Relief LTCG Tax Impact Concerns Alleviated Net Flows* Into Domestic MF Equity Schemes Vs Quarterly Net Flows* Into Domestic MFs Annual Monthly Nifty Returns Total Gross Household Savings Monthly Flows Into MFs Via SIP SIP flows at US$1.0bn/mth Total household savings at 19% of GDP 7
Domestic Inflows To Absorb Equity Supply; FPIs Hold The Key Flows Estimate For FY19 8 Source: Bloomberg, AMFI, CLSA
…Critical Elections Are Ahead Karnataka Elections In May-18 A Crucial Test State Election Calendar for remainder of 2018 Karnataka : 2013 Assembly Election results and current projections 9 Source: CLSA, Election Commission of India, Media reports
GST collections have stagnated assumptions for FY19 are optimistic… Trends In GST Collections GST Collection Trend FY19 Target Is a Long Climb CGST/SGST (Post Settlement) Run Rate For FY 18 Vs Budgeted For FY 19 10 Source: CLSA, Ministry of Finance
…Fiscal deficit risks due to weak GST Collections ? Central Government Fiscal Deficit To GDP Ratio 11 Source: CLSA, Ministry of Finance
… Can it likely to be met through higher disinvestment? List Of PSUs (Ex- financial) With Gov’t Stake Sale Headroom( ie Value Of Stake > 51% Of US$0.5bn The gov’t has ample potential to keep disinvesting through its existing listed companies. More companies may also be added to this list Source: CLSA, Capitaline, Bloomberg
PSU Dividend May Continue NMDC Example Subsequently, the decision was reversed At first , the board skipped the interim with 3.5% dividend yield – Netting Govt a Dividend $200 MN 13
Macro Indicators : Growth Heatmap High frequency data indicate some moderation in growth in Feb’18 as the favourable base effect begins to wane 15 Source: GOI, Spark Capital Research
Headwinds To Growth: PSU Banks Again Lack Capital Policy Challenge: Inertia In Banks’ Behavior Bond Holdings Have Eroded Capital 35% 200 SLR Holdings for Banks 150 30% 100 25% 50 - 20% (50) 15% (100) (150) 10% (200) 5% (250) 0% (300) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 SLR (%) SLR Required (%) Excess SLR (%) Banks' Treasury profit / (loss) (Rs bn) 15 Source: RBI, Company Data, Credit Suisse
Headwinds To Growth: New Loan Sanctions Likely To Slow Early Loss Recognition To Hurt Capital Availability Fear Of Fraud Investigation To Slow Sanctions Total Stressed Loans 4.5 15.8% Sector Wise Sanctions Rs tn 4.0 1.5 3.5% 3.5 1.8% 2.9 3.0 6.3% 2.5 Rs 1-1.5tn will 2.0 13.3 flow to IBC in the 5.3 Loans under RBI 1.5 next 6 months dispensation and 4.2% Watch list / SMA will 1.0 now flow to IBC at a faster pace 0.5 3.5 0.0 FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 NPAs under IBC Other NPAs RBI Watchlist/SMA-II Total Stress Power Telecom Textiles Metals Construction Others Dispensations 16 Source: RBI, Credit Suisse
But….Bottom -up Infrastructural Improvement Continues (1) Evidence Of Improvements In Electricity Availability Jan-2012 Dec-2016 Change 2012-2016 Areas showing increase in “brightness” from 2012-16 are in Blue 17 Source: NASA, ESRI, Credit Suisse
Bottom-up Infrastructural Improvement Continues (2) Price Of Data And Volumes Consumed Electronic Financial Transactions 180 6 0.3 UPI no. of txn (mn) Average of Bharti and Idea 160 5 0.3 140 120 4 0.2 100 3 0.2 80 Launch of 2 0.1 60 Google Tez 40 1 0.1 20 - 0.0 0 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Data Usage/subs/month (GBs) Avg Revenue per MB (Rs) Source: Company Data, RBI, Credit Suisse 18
Bottom-up Infrastructural Improvement Continues (3) Two-thirds Of HHs Used Primitive Fuels 35mn New LPG Connections; 80mn New Target Biogas Any other No cooking Others Karnataka Tamil Nadu 0% 1% 0% 5% 3% Uttar Pradesh 3% Assam Electricity 19% 0% 3% Jharkhand LPG 3% 29% Gujarat 4% Maharashtra 5% Firewood West Bengal 49% 14% Chhattisgarh 5% Kerosene 3% Coal, Lignite, Odisha Charcoal 6% 1% Cowdung cake Bihar Split of 247 mn 8% Rajasthan Madhya Crop residue 14% Households (2011) 7% 9% Pradesh 35 mn LPG cyclinders issued 9% 19 Source: Census 2011, Ujjwala, Credit Suisse
Low Inflation And Rising Financial Savings are Positive CPI Moderation Likely To Persist Financial Savings as a % Of GDP To Keep Rising 40% 18% % of GDP 16% 30% Sub-4%inflation for 12 14% steady months has only happened once in history 20% 12% 10% 10% 8% 0% 6% -10% 4% Jan-61 Jun-67 Nov-73 Apr-80 Sep-86 Feb-93 Jul-99 Dec-05 May-12 197619791982198519881991199419972000200320062009201220152018 CPI (% YoY) Gross Financial Savings Net Financial Savings Source: CMIE, Credit Suisse Estimates 20
Breaking Through The Fiscal Vicious Cycle Vicious Cycle: Small Government/High Informality Sharp Increase In The Number Of Taxpayers 90 1.8mn additional individual income tax filers over India and above usual trend post demonetisation Total Tax to GDP (2014) Mexico 85 mn Korea 80 No of Direct Tax Filers USA 75 Switzerland Australia 70 Turkey 65 India (Formal) 60 Japan UK 55 OECD 50 Germany France 45 Denmark 40 10% 20% 30% 40% 50% 60% Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 21 Source: World Bank, CBDT, Credit Suisse
Market Performance 22
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