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Thematic Report

Economy

Macro: India grasps the ‚Hand of God‛

Cover Illustration of ‚The Creation of Adam‛


by Michelangelo. Courtesy: Wikipedia

Sachchidanand Shukla Swaminathan B Praveen Agarwal


SVP - Economist - Institutional Equity Research VP – Banking & Economy Executive Director - BFSI
sachchidanand.shukla@axiscap.in swaminathan.balasubramaniam@axiscap.in praveen.agarwal@axiscap.in
October 20, 2014
1
91 22 4325 1108 91 22 4325 1126 +91 22 4325 1102
20 OCT 2014 Thematic Report
Executive Summary
ECONOMY

 The ‘Hand of God’ is visibly helping turn around Indian macro …


1. Crude oil and other commodity prices have fallen to 4 year lows despite geopolitical concerns – this will alter India’s its
twin deficits favourably given that India is a net commodity importer and also help quell inflation
2. GDP base year is going to be revised early next year – this will be a one-time prop for the denominator (GDP) making some
of the numerators (ie Fiscal deficit, CAD etc) a bit easier on the eye
3. Rainfall deficit collapsed from 43% to 12% through the monsoon season, Importantly, the areas worst impacted by rain
deficit are the ones that are well irrigated.

 The government beginning to seize this opportunity through a new reformist karmic cycle? The govt has kicked off
significant procedural reforms in Labour & Deregulated diesel and hiked gas prices
 What next? With thumping wins in recent state elections (which will help BJP increase its Rajya Sabha tally by
7 seats) and the fact that there few state elctions in 2015 should mean a productive reform time period. We expect
Coal, power resolution steps (early Nov), GST/DTC & fiscal consolidation (Budget Feb 15) and other pending
structural reforms (land, Infra & financial sector). These steps could manifest in:

 10 year G-Sec yield to softening by ~150 bps over the next 12-18 months even as RBI cautiously restricts Repo rate
cuts to 25-50 bps (H1 CY 15). Gsec yields may pre-empt any delay in RBI rate cuts: as:
1. Govt borrowings decline (yields closely linked to GoI borrowings), and
2. Global commodity & domestic agri prices (MSPs & rural wages subside) exert downward pressure on ~70% of the
inflation basket.
 Interest sensitive sectors’ earnings (banking/ auto) could go up by ~30% YoY in FY16: PSU Banks stand to benefit
significantly from MTM treasury gains IF yields decline. CVs (85-90% sold on finance) and cars (75%) will benefit vs.
two-wheelers (~40%).

 Risks to call: Reforms traction, global growth, crude price trends

2
20 OCT 2014 Thematic Report
The moving finger* writes a multi-fold recovery
ECONOMY

Hand of God & policy action to bring ~70% of inflation CPI target of 6% likely to be met….
under control
12 CPI YoY
(%) Jan 2016
RBI target = 6%
~72% of inflation will 10 Our estimate = 5.7%
cool-off on softer commodity
prices + lower agri inflation 8
Jan 2015
Weights (%) CPI WPI 6 RBI target = 8%
Our estimate = 7.4%
Agri inflation 50 26 4
Imported inflation 23 47

Jul-12

Jul-14

Jul-15
Jul-13
Oct-12

Oct-13

Oct-14

Oct-15
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16
Apr-12

Apr-13

Apr-15
Apr-14
Domestic inflation 28 27

Source: Axis Capital, Bloomberg Source: Axis Capital, Bloomberg

Contained fisc will lower market borrowings G-Sec tracks market borrowings; Will ease

5 (%) Sep-04 Sep-07 Sep-09


(%)
Sep-11 Sep-13 Sep-14 12
4
4.6 0.1 9
3 1.0 0.2
0.1 0.1
3.1 3.1
2 6
FY15 Fiscal

Base year
Tax reforms

DBT- kerosene
reduction

FY17E Fiscal
diesel subsidies

DBT- PDS

Rates in shorter end will


(GST, DTC)

leakage

revision
Elimination of

reduction

move in tandem with 3


deficit

leakage

deficit

the repo

0
TB-3mth Gsec-1yr Gsec-3yr Gsec-5yr Gsec-10yr
Source: Axis Capital, Bloomberg Source: Axis Capital, Bloomberg

*The Moving Finger writes; and, having writ, Moves on: nor all thy Piety nor Wit Shall lure it back to cancel half a Line, 3
Nor all thy Tears wash out a Word of it. — Rubáiyát of Omar Khayyám
20 OCT 2014 Thematic Report
Our rate sensitivity matrix
ECONOMY

Correlation vs 10 year G-Sec

- ve
Banks

Health Care Power


Auto*

FMCG
Consumer Durables - ve
Y oY P AT g rowth

IT
Capital Goods
+ve
Oil & Gas
Realty

INR has depreciated


concurrently with high
interest rates Metal Commodity prices have
been high concurrently
+ve with high interest rates

Stock p rice returns

Source: Bloomberg, Axis Capital


* Excluding 2 wheelers and Tata Motors
Correlation calculated between 1. Change in G-Sec (YoY) and PAT growth (YoY)
2. Log stock returns and Log of 10 year G-Sec prices

4
Our top-down model suggests 30%+ YoY PAT growth for Rate 20 OCT 2014 Thematic Report
sensitives* in FY16
ECONOMY

Relation with GDP Relation with interest rates Relation with inflation
Rate sensitive's YoY PAT growth Rate sensitive's Rate sensitive's
GDP YoY (RHS) G-Sec YoY (bps) WPI YoY (RHS)
80 15 80 (%) 0
(%) (%) 80 (bps) (300) (%)
60 (%) 60 2
60 (200)
40 10 40 40 4
20 (100) 20 6
20
0 5 0 0 8
0
(20) (20) 100 (20) 10
(40) 0 (40) 200 (40) 12
Jun-10
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09

Jun-11
Jun-12
Jun-13
Jun-14

Jun-08

Jun-14
Jun-05
Jun-06
Jun-07

Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-06

Jun-08

Jun-10
Jun-05

Jun-07

Jun-09

Jun-11
Jun-12
Jun-13
Jun-14
Source: Axis Capital, Bloomberg

Fundamentally dependent on Demand/margins negatively Higher inflation and thus lower real
growth opportunities – usually a correlated with interest rates returns leads to lower financial
multiplier to GDP growth savings. Especially impacts BFSI.

Our analysis suggests that 1% 1% lower interest rates will lead to 1% lower inflation will lead to
higher GDP growth leads to PAT ~10% higher PAT growth YoY ~1.8% higher PAT growth YoY
growth multiplier of ~3.3x

Our multivariate model predicts ~30% YoY profit growth in FY16 for rate sensitive's based on our macro-
assumptions
* Banks and select auto companies

5
20 OCT 2014 Thematic Report
Banking and auto sectors will be prime beneficiaries
ECONOMY

Sensitivity of banks’ profitability to 100 bps fall in yields Car sales growth: High negative co-relation with rate hikes
AFS (~% of tota l Im p a ct of ~100 b p s f a ll in
YoY Car Growth SBI PLR (RHS)
invst) yield s on FY16E P B T 80% 15%
SBI# 22% 11% 60% 14%
BOB 28% 12% 40%
13%
PNB 26% 19% 20%
12%
BOI 28% 19% 0%
-20% 11%
Canara 26% 20%
OBC 22% 19% -40% 10%

Oct-06

Oct-07

Oct-08

Oct-09

Oct-12

Oct-13
Oct-10

Oct-11
Apr-06

Apr-07

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13
Apr-08

Apr-14
Union 23% 13%
Source: Company analyst presentations, Axis Capital
# Duration and AFS book size was disclosed in a quarterly analyst meet in FY14 Source: Bloomberg, Axis Capital

♦ PSU Banks stand to benefit significantly from MTM  Since ~85-90% of CVs and ~75% of cars are sold
treasury gains if yields decline. It will also help on finance (vs. ~40% of 2Ws), these segments will
them to shore up their coverage ratios benefit more.
 Our analysis suggests that even whiff of
♦ Moreover, recently RBI guidelines allows banks to improvement in macro (easing rates), rerates
shift their excess SLR holding from HTM to AFS multiples of car/CV players much before an actual
thrice in a year in CY15 (as compared to once uptick in volumes
earlier) - provides more leeway to banks for
capturing MTM gains from interest rate volatility

6
20 OCT 2014 Thematic Report
Macro: Easing rates will be a big swing factor
ECONOMY

Most key indicators moving in the right direction


Inflation: CPI expected to ease to 5.7% by Jan 16 vs RBI’s target
of 6%
Macro variables

Good
CAD
Fiscal Deficit:
 FY 15 to see 3.9% improvement : GDP base year revision. Inflation
GDP
 FY 16 & 17 to see 50 bps fillip: DBT, subsidy reforms and
GST. Expect excess G-Sec supply by FY16E

Future outlook
Reforms

Bad
Interest rates. Consumption
INR
 Yield curve will flatten while Bank SLR will reduce
 credit markets rates are tightly coupled to policy rates - will Capex
ease by ~ 50 bps in line with RBI rate cut.
IIP

Ugly
Growth:
 Incremental savings/liquidity will be deployed towards private
credit (lead indicator of GDP growth). Ugly Bad Good
 GDP likely to surprise positively in FY16
Source: Axis Capital

USD/INR Rs 58 - 62: Macro variables


 The course of QE tapering & US bond yield moves through
2015 may re-induce volatility. (%, Rs) FY14 FY15E FY16E FY17E
 However, lower commodity prices will ease pressures on CAD GDP growth 4.8 5.5 6.5 7.1
& INR Inflation (CPI avg) 9.5 7.4 7.0 6.5
10 year G-Sec (avg) 8.3 8.4 7.7 6.7
Fiscal Deficit/ GDP 4.6 4.1 3.5 3.0
INR avg 54.4 60.5 61 59
Source: CSO, RBI, Axis Capital

7
20 OCT 2014 Thematic Report
Contents
ECONOMY

Page

 India macro backdrop: Hand of God 9


 Commodity price pressures easing
 Rain deficit manageable
 GDP base revision

 Govt’s reformist karmic cycle 15


 Subsidy reforms and GST will contain fiscal deficit
 Market borrowing implication
 Savings and growth implications

 Interest rate implications & sensitivity 27

 Impact on Banks 30

 Impact on Autos 34

 Appendix 37

8
The ‚Hand of God‛
20 OCT 2014 Thematic Report
# Commodity prices slump finally after years of benign forecasts
ECONOMY

 Brent crude oil has fallen to four year low, narrowed Crude has now fallen to 4 year lows
its premium over WTI, after the IEA^ lowered demand
Crude 6 mma
forecasts 130 USD/bbl

120
 We expect commodity prices to remain range low-
110
range bound-given weakness in demand vs supply
100
 Saudi Arabian production cuts even as prices dip
90
MoMs hint at sustenance of lower crude prices

Mar-11

Mar-12

Mar-13

Mar-14
Sep-11

Sep-12

Sep-13
Dec-11

Dec-12

Dec-13
Jun-11

Jun-12

Jun-13

Jun-14
 Lower forecast error in recent past from WEO lends Source: Axis Capital, Bloomberg
higher confidence in subdued prices
Crude prices at 2 year lows Commodity prices at multi-year lows
(Yo Y gro wth % ) 2008 2009 2010 2011 2012 2013 2014 2015 CRB Metal CRB Food FAO Foodi
Oil p ric es 110 Rebased to 100
Projected 9.5 (6.3) 24.3 3.3 (3.1) (1.0) (3.0) (4.3)
Actuals 36.4 (36.3) 27.9 31.6 1.0 (0.9) 0.1 - 100
Deviation 26.9 (30.0) 3.6 28.3 4.1 0.1 3.1 -
90
No nfuel
Projected (6.7) (6.2) 2.4 (2.0) (4.7) (2.9) (4.2) (3.9) 80
Actuals 7.5 (18.7) 26.3 17.9 (10.0) (1.2) (1.7) -
Deviation 14.2 (12.5) 23.9 19.9 (5.3) 1.7 2.5 - 70

May-11
Jul-11

Jul-12

May-13
Jul-13

Jul-14
May-12

May-14
Mar-11

Mar-12

Mar-13

Mar-14
Sep-11

Sep-12

Sep-13
Jan-12

Jan-13

Jan-14
Nov-11

Nov-12

Nov-13
Source: Axis Capital, IMF

Median forecast Median forecast


error = 17% error = 1% Source: Axis Capital, Bloomberg ^IEA (International Energy Agency)

Falling commodity prices will alter India’s terms of trade favourably given that commodity imports as % of GDP are 3x of such exports

#: ‚Hand of God‛ 10
20 OCT 2014 Thematic Report
# Rain deficit manageable, & dispersion favorable too
ECONOMY

 By end of the season, rainfall deficit bridged Regional distribution


significantly to ~11% as compared to beginning of the
season June (-43%)

 Deficit in areas that are well irrigated

Rain deficiency Sep-14


India -11%
Rain deficient areas are not
South -5% critical to Kharif food grain
Central -6% production
North West -21%
East/North East -14%
Source: Axis Capital

Sep – to date deficit

Source: IMD Source: IMD

#: ‚Hand of God‛ 11
Implication I: ~70% of inflation index will face downward pressure 20 OCT 2014 Thematic Report
as both agri and imported inflation will come off
ECONOMY

Unbridled money supply without productivity = high agri-flation Softening commodity prices will bring down imported inflation

Agri Productivity Increase Avg Agri wage growth Crude YoY CRB Metal YoY Imported WPI YoY (RHS)
20 150 (YoY %) 20
(%) (YoY %)
100 15
10
10 50
5
0
0
0 -50 (5)
-100 (10)

Oct-05

Oct-06

Oct-07

Oct-10

Oct-11

Oct-12

Oct-13
Oct-08

Oct-09
Apr-05

Apr-06

Apr-07

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14
Apr-08

Apr-09
(10)
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: CMIE, Finmin, Bloomberg, Axis Capital Source: Axis Capital, Bloomberg

MSP increases have been a lead indicator of agri-inflation Significant part of inflation contributors under control

MSP Wheat Food & beverages WPI (RHS) ~72% of inflation


40 25 Weights (%) CPI WPI
(YoY %) (%) will cool-off on
30 20 Agri inflation 50 26 softer commodity
15 Imported inflation 23 47 prices + diesel
20
10 Domestic inflation 28 27 dereg+ lower agri
10 5
inflation
0 0  USD 1 fall in oil prices lowers oil under-recoveries by Rs 11.5 bn)
 USD 1 fall in the India crude basket translates to 0.2% in CPI &
Mar-05

Mar-06

Mar-08

Mar-09

Mar-10

Mar-12

Mar-13
Mar-07

Mar-11

Mar-14

0.4% in WPI inflation with a lag, if completely passed through


Source: CMIE, Finmin, Bloomberg, Axis Capital Source: Axis Capital, Bloomberg

In India link between Inflation and fiscal polices ( ie MSPs & rural wages) is strong empirically: Every 1% hike in rural wages & MSPs raise
inflation by ~35 bps.

12
20 OCT 2014 Thematic Report
Hence ceteris paribus , CPI expected to dip below RBI targets
ECONOMY

CPI YoY
12
(%)

11

10
Jan 2015
RBI target = 8%
9 Our estimate = 7.4%

Jan 2016
5 RBI target = 6%
Our estimate = 5.7%

4
Nov-12

Nov-13

Nov-14

Nov-15
Jan-12

Jan-16
Jan-13

Jan-14

Jan-15

Jul-15
Jul-12

Jul-13

Jul-14

Sep-14
Mar-14

Mar-15
Sep-12

Sep-13

Sep-15
Mar-12

Mar-13
May-12

May-13

May-14

May-15
Source: Axis Capital, Bloomberg

13
# GDP base year revision will provide a one-time fillip and lower 20 OCT 2014 Thematic Report
Fiscal Deficit by 20 bps & CAD by 10 bps in FY15
ECONOMY

 CSO changes the base year on a periodic basis to 2004-05 revision increased nominal GDP by ~ 3-5%
incorporate structural changes in the economy
Old series Revised series
 Current revision expected in Feb 2015 10,000
(Rs bn)
 Likely to improve fiscal deficit to 3.9% (vs 4.1% est) 8,000
and CAD to 2.1% (vs 2.2%) 6,000

4,000
 Key changes appear to be the inclusion of more agri
products, construction materials and additional 2,000
services, apart from procedural changes 0
Real GDP Nominal
 Bigger than previously reckoned in absolute numbers
due to advent of new sectors Source: Axis Capital, Bloomberg

 Higher productivity among informal manufacturing Expect ~5% revision in nominal GDP; Will improve deficit ratios
and services firms is also expected Current Revised (E)
5
(Rs bn) 4.1
 Higher base will be an additional positive for deficit 3.9
4
targets and thus rating agencies outlook for India
3
2.3 2.2
2

0
Fiscal deficit CAD

Source: Axis Capital

#: ‚Hand of God‛ 14
Government’s reformist karmic cycle
20 OCT 2014 Thematic Report
Govt responds with its reformist karmic cycle
ECONOMY

 Government has deregulated diesel prices effective from 20 Oct 2014

 Modified the natural gas price formula Nov 1, 2014 resulting in prices going up from $4.2 to ~$5.6/ mmbtu

 Deregulation will reduce FY15E and FY16E gross under-recoveries to ~Rs 850 bn and ~Rs 500 bn respectively (vs.
Rs 1.4 trillion in FY14)
 Reduces burden on government finances as diesel contributes ~55% of overall under-recoveries

 However, similar step was undertaken by NDA govt in 2002 but reversed by UPA govt in 2004

 Government also kicked off significant central Labour reforms in a follow up to its 'Make in India' programme (aimed at
turning India into a global manufacturing hub) unveiled recently (Refer to our report on Labour Reforms: Beginning Of A
Long Journey For ‘Make In India’ dated 16 Oct 2014 and India: Labour Reforms dt 25th June 2014

Impact of diesel deregulation


FY14A (% of GDP) Impact (bps)
CAD 1.7 (60) Due to gas price hike, CNG
Fiscal deficit 4.6 (11) prices to increase by Rs 4.2 and
- Fertilizer subsidy 0.6 4 PNG by 2.6. Will also raise input
Retail inflation* 9.5 (12) costs for gas-based power plants
(~7% of total)
- Due to disel dergulation - (16)
- Due to gas price hike - 4
GDP growth 4.7 30
Source: Axis Capital, Finmin

16
20 OCT 2014 Thematic Report
Reform momentum key for India’s finances
ECONOMY

Events shaping India’s course over the next 2 years

Manufacturing
and labor Diesel
reforms deregulation Budget (GST
timeline) Coal block
allocation
GST & DTC Infrastructure
MAY’14 implementation reforms

Risk
MAR’16
MAR’15
Direct Benefit
Financial inclusion Transfer
implementation
Agri &
Please refer to our detailed report
imported
inflation falling
‚India Reforms Transformative or in
100 small doses?‛ dated
RBI rate cut 16 Oct 2014 for our expectations
on government reforms

We expect CY15 and CY16 to be the most fruitful years for reforms, given the respite from major state electoral calendar
(Refer Appendix for details)

17
20 OCT 2014 Thematic Report
DBT, subsidy reforms and GST will provide fillip to fiscal targets
ECONOMY

Fiscal defcit will reduce significantly


5
(%) Contraction in
fiscal deficit by
4 ~150 bps

4.6 1.0 0.1


0.2
3 0.1 0.1
3.0 3.0

2
FY15 Fiscal deficit Tax reforms (GST, DTC) Elimination of diesel DBT- PDS leakage DBT- kerosene leakage Base year revision FY17E Fiscal deficit
subsidies * reduction reduction
Source: Axis Capital * Including negative impact of fertilizer subsidies due to gas price hike

Fuel subsidy reforms underway


(R s b n) F Y14 E F Y15E F Y16E F Y17E
Diesel 664 118 - -
LPG 436 441 305 283
Kerosene 307 280 214 201
Subsidies can decline
T o tal 1, 4 07 839 519 4 84 from 1.2% to 0.4% of
Brent crude price ($/bbl) 108 100 90 90 GDP in 3 years
INR/USD 60 60 59 59
Govt share (%) 50% 42% 28% 0%
F uel sub sidies as % o f F Y14 GDP 1. 2 0. 7 0. 5 0. 4
Source: Axis Capital, Finmin

(ref appendix for details on GST/ subsidies)


18
DCT in full throttle could yield at least 2% savings on government 20 OCT 2014 Thematic Report
expenditure
ECONOMY

Schem e Su b sid y/ a lloca tion Estim a ted B enef it f rom DCT P lu g g ing of g host b enef icia ries
FY15B E (Rs b n) lea ka g e (Rs b n)
P u b lic d istrib u tion Food 1,150 30.0% 173
system (P DS)

Kerosene 280 12% 34 Total diversion of ~30% can be wiped out


over next 5 yrs
M NREG S 340 12% 31 5% of leakages can be plugged through
wage disbursement using Aadhaar-enabled
bank accounts and 7% through automation
of muster rolls.
Ed u ca tion - SSA 282 10% 28 Inflated enrollment data for the mid-day
meal scheme and the problem of teacher
absenteeism in the SSA scheme

Fertiliser 730 10% 73


GoI reducing the no of cylinders to 9/HH/pa
LP G 450 10% 45
(vs 12 now)
IAY 170 10% 17
3,402 400 Government expenditure can be lowered by
~2% when DCT is implemented
Source: Axis Capital

19
Implication II: Market borrowings will decline significantly over the 20 OCT 2014 Thematic Report
next 2 years
ECONOMY

 Shortfall in demand for funds to come down Market borrowings will decline steeply
sharply due to (Rs bn) F Y15E F Y16E F Y17E
Fiscal deficit 5,245 5,312 5,037
 Contained fiscal deficit (target of 3% by
% to GDP 4.6 4.1 3.5
FY17)
Demand fo r funds
 Higher credit/deposit growth on improved Net Govt borrowings 4,610 4,533 4,391
macro State govt borrowings 1,600 1,700 1,700
Total govt requirement 6,210 6,233 6,091
Net govt requirement (centre + state) 6,210 6,233 6,091
 India’s benchmark 10-year bond G-Sec is
S o urc e o f funds
now at its lowest yield in last 12 months on
Bank SLR 2,942 4,055 4,760
expectations of lower market borrowings Insurance 1,800 1,944 2,138
MFs, PFs & FIIs 1,000 1,150 1,323
 RBI governor Rajan has hinted at SLR cuts in Availability for govt 5,500 7,149 8,221
tandem with the government’s action on Net sho rtfal l 710 (916) (2,130)
fiscal deficit Source: Axis Capital, Finmin; Note: Data estimated on current GDP series

 SLR has already been cut twice in his tenure


so far, thus easing liquidity for private sector Maturity pattern of dated securities
Year of maturity Maturity % of o/s
FY15 637 1.8
FY16 1,819 5.0 ~25% of
FY17 2,311 6.4 outstanding govt
FY18 2,568 7.1 borrowings will
mature in FY16 -19
FY19 2,435 6.7
Total 3 6,3 71 100
Source: Axis Capital, Finmin

20
20 OCT 2014 Thematic Report
Implication III: G-Sec will soften...
ECONOMY

 G-Sec rates closely track market borrowings in India G-Sec rates discount future market borrowings

 Policy rates have been largely uncoupled to G-Sec Market Borrowing (6 lmma) G-sec 10 yr (RHS)
rates – both long term and short term 1,000
(Rs bn)
(%) 8
800 7.5
7
 Credit markets (lending and deposit rates) on the 600
6.5
other hand have been tightly coupled to policy rates 400
6
200 5.5
 Although policy rate cuts may be sometime away, 0 5

May-05

May-07

May-09

May-11

May-13
we expect G-Sec to soften by ~ 150 bps by FY16

Sep-04

Sep-06

Sep-08

Sep-10

Sep-12
Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

Jan-14
Source: Axis Capital, Bloomberg

Credit market rates tightly coupled to policy rates.. While money market has been uncoupled vs. policy rates

Repo rate SBI PLR SBI 1 yr FD Repo rate G-sec 10 yr (RHS) TB-3mth
11
20.0 (%) R 2 = 25% (for both)
(%) R = 55%
2 9
15.0
R 2 = 68% 7
10.0

5.0 5

0.0 3

Jul-07

Jul-14
May-13
May-06

Mar-12
Mar-05
Oct-05

Oct-12
Sep-08
Feb-08
Jan-04

Jan-11
Dec-06

Dec-13
Jun-10
Nov-09
Apr-09
Aug-04

Aug-11
May-06

Jul-07

May-13

Jul-14
Mar-05

Mar-12
Sep-08
Feb-08
Oct-05

Oct-12
Jan-04

Dec-06

Jan-11

Dec-13
Jun-10
Apr-09
Nov-09
Aug-04

Aug-11

Source: Axis Capital, Bloomberg


Source: Axis Capital, Bloomberg

Money market rates track market borrowings, credit markets rates are tightly coupled to policy rates

21
20 OCT 2014 Thematic Report
Implication III (Cont’d): Yield curve will steepen & bank SLR will reduce
ECONOMY

 Premium for long tenured bonds had narrowed Premium for 10 yr bonds vs 3 month is at inflexion point
significantly, in negative territory during early part
G-Sec: 10 yr - 3month 10 yr G-Sec (RHS)
of the year 6 (%) 10
(%)
 While this may be reflective of low demand, high 4 8
absolute interest rates have played a role 2 6
0 4
 Difference between long tenured- short tenured (2) 2
~1.5% premium Premium turning
rates turns positive in advance of expansion for 10 yr G-Sec positive
(4) 0
 Flat yield curve lowers risk taking by banks towards

Jul-07

Jul-14
May-06

May-13
Mar-05

Mar-12
Oct-05

Sep-08

Oct-12
Feb-08
Jan-04

Jan-11
Dec-06

Dec-13
Jun-10
Nov-09
Apr-09
Aug-04

Aug-11
long tenured risky lending
Source: Axis Capital, Bloomberg
 Deposit rates trending down: Softening of rates in
the short end has already started with few banks
lowering deposit rates Expect yield curve to flatten

Sep-04 Sep-07 Sep-09 Sep-11 Sep-13 Sep-14


(%) 12

0
TB-3mth Gsec-1yr Gsec-3yr Gsec-5yr Gsec-10yr

Source: Axis Capital, Bloomberg

22
20 OCT 2014 Thematic Report
India’s financial savings pool will grow
ECONOMY

 Savings rate will rise due to a fall in Dependency ratio: Historically, every 1% fall in dependency ratio has boosted
savings rate by almost a similar magnitude

 Even if 10% of financial savings (US$ 200 bn pa) trickles back, US$100 bn will flow into equities by 2020

 Annual gold Imports of US$ 200 bn in the last 5 yrs had been higher than the value of total Equity AUMs currently held
by Indian MFs – this anomaly will correct as savings catch up and the lure of gold abates

 Local retail investors who typically invest based on recent (say past 1 year) performance of the market to continue
investing in equities now. PSU divestments which are targeting retail investors will add to the retail investment pool

Currency and insurance worst hit, deposits gain. Overall savings Significant MF inflows lately
stagnant

% o f Gro ss F in. S av ing (R s b n) MF equity inflow #REF! BSE 500 (RHS)


F Y11 F Y14 F Y11 F Y14 80 70 12,000
60 (Rs bn) 51
C hange in F in. Assets 42 11,000
100 100 10,518 11,741 33
(Gro ss F in. S av ing) 40 10,000
20 0
Currency 13 8.7 1,371 1,018 9,000
0
Deposits 49.9 58.8 5,248 6,908 (20) 8,000
Shares and Debentures (MFs) -0.4 2.9 (43) 337 (40) (25) (13) 7,000
(27)
Claims on Govt. (Small savings) 2.7 0.4 287 46 (60) (37) 6,000

May-14

Jul-14
Mar-14

Sep-14
Feb-14
Jan-14

Jun-14
Apr-14

Aug-14
Life Insurance Funds 20.0 17.0 2,101 1,996
C hange in F in. L iab il ities 2, 804 3, 555
Net F in. S av ing o f H o useho l d S ec to r 7, 713 8, 186

Source: RBI, Axis Capital Source: MFI Explorer, Bloomberg, Axis Capital

23
20 OCT 2014 Thematic Report
Incremental savings will be deployed towards private credit..
ECONOMY

 Our analysis suggests that private credit is a lead Private credit is a lead indicator of GDP in expansionary phase
indicator of GDP growth in expansionary phase
(%) India Real GDP Private Credit/GDP YoY (Lead 1 Yr)

 SLR cut will shift lending towards private sector 12.0 Weak 5.0
relationship 4.0
10.0
in downturn
 Higher deposit growth and increasing private 8.0
3.0
sector CD ratio will propel private sector leverage 6.0
2.0
Private credit is a lead 1.0
4.0 indicator of GDP in 0.0
 However, credit demand from private sector 2.0 expansionary phase (1.0)
contingent on policy action from the government
0.0 (2.0)

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13
Source: Axis Capital, Bloomberg

Steady SLR cuts have driven lending towards private sector Private credit /GDP vs Real GDP: Scope for India to leverage further

Year S L R R atio Priv ate c redit/GDP India private credit to gdp China private credit to gdp
India Real GDP (RHS) China Real GDP (RHS)
FY94 35 23
60 400
FY04 25 31 150 500
50 (Rebased to 100) (Rebased to 100)
300 400
FY14 22 52 40
100
Source: Axis Capital, Bloomberg 30 200 300

20 200
100 50
10 100
0 0 0 0

Mar-05
Sep-99

Sep-10
Dec-07
Dec-96

Jun-02

Jun-13

Mar-05
Sep-99

Sep-10
Dec-96

Dec-07
Jun-02

Jun-13
Source: Axis Capital, Bloomberg

Growth in private credit has been a lead indicator of expansionary cycles

24
20 OCT 2014 Thematic Report
Much awaited shift of money towards productive assets will be now!
ECONOMY

Money supply and GDP India’s ‘Marshallian K’, the ratio of money to GDP^

M2 M3 GDP 8 Stable K in
1,000 (x) expansionary phase
(Rebased to 100)
800 6

600 4
Liquidity has grown 2.5x
400 with rising rates!
2
200
0 0

Mar-01

Mar-04

Mar-07

Mar-10

Mar-13
Sep-02

Sep-05

Sep-08

Sep-11
Dec-01

Dec-04

Dec-07

Dec-10

Dec-13
Jun-00

Jun-03

Jun-06

Jun-09

Jun-12
Mar-07

Mar-10

Mar-13
Mar-01

Mar-04
Sep-02

Sep-05

Sep-08

Sep-11
Dec-01

Dec-04

Dec-07

Dec-10

Dec-13
Jun-00

Jun-03

Jun-06

Jun-09

Jun-12
Source: Axis Capital, Bloomberg Source: Axis Capital, Bloomberg

Mature economies have Marshallian K < 3


 In India, the ‘Marshallian K’, i.e. the ratio of money to
GDP has shown an increasing trend US UK Japan
4
(x)
 This refers to the abundance of liquidity, which has not 3

been put to productive use (measured by the real GDP) 2


contributed to fuelling inflation instead 1

0
 Global liquidity (as measured by Marshallian K) has

01-Aug-04

01-Aug-11
01-Apr-09
01-Jul-07
01-May-06

01-May-13
01-Mar-05

01-Mar-12
01-Oct-05

01-Oct-12
01-Feb-08
01-Sep-08
01-Dec-06

01-Dec-13
01-Jan-04

01-Jan-11
01-Jun-03

01-Jun-10
01-Nov-09
remained largely stable despite unconventional
monetray policies (QEs etc)
Source: Axis Capital, Bloomberg

 Lower interest rates will shift money towards productive ^ measure of the tightness of money supply: a fall indicates the possibility of an economic
contraction due to a shortage of money; a rise opens the possibility of an economic expansion
investment owing to an abundance of money

25
A virtuous rate cycle & shift to productive assets to catalyze GDP 20 OCT 2014 Thematic Report
growth
ECONOMY

 India is amongst the few geographies which has NOT Expect India’s GDP forecast to be revised higher
seen a downward revision in recent multi lateral
Differenc e fro m
agency (IMF, ADB ) as well as private forecasts Pro jec tio ns
p rio r p ro jec tio ns
(Yo Y)
(Yo Y)
 With proactive policy decisions over the next 12-15
C Y14 / C Y15/ C Y14 / C Y15/
months we expect growth to surge F Y15E F Y16E F Y15E F Y16E

Wo rl d Outp ut 3. 4 4.0 - 0. 3 0
 Our estimates of ‘policy paralysis’ impact is ~ 1.5%;
Adv anc ed
expect higher growth on ‘business as usual’ Ec o no mies
1. 8 2. 4 - 0. 4 0. 1

United States 1.7 3 -1.1 0.1


Euro Area 1.1 1.5 0 0.1
Japan 1.6 1.1 0.3 0.1
United Kingdom 3.2 2.7 0.4 0.2
Revival of business as usual will add ~ 1.5% to GDP growth
Canada 2.2 2.4 -0.1 0
Emerging M ark et 4.6 5. 2 - 0. 2 - 0. 1
Paralyzed sectors India GDP World GDP Russia 0.2 1 -1.1 -1.3

15.0 Impact of Global GDP overtakes sector China 7.4 7.1 -0.2 -0.2
YoY Growth (%)
policy woes affected by policy paralysis! Brazil 1.3 2 -0.6 -0.6
10.0
South Africa 1.7 2.7 -0.6 0
5.0 India 5.4 6.4 0.0 0.0
0.0

(5.0)
‛In India .. activity is projected to pick up gradually..
(10.0)
offsetting the effect of an unfavorable monsoon on
Mar-09

Mar-14
Sep-06

Sep-11
Dec-07

Dec-12
Jun-05

Jun-10

agricultural growth‛
Source: Axis Capital, Bloomberg
Source: Axis Capital, IMF - WEO

26
Interest rate implications & sensitivity
Our top-down model suggests 30%+ YoY PAT growth for Rate 20 OCT 2014 Thematic Report
sensitive's in FY16
ECONOMY

Relation with GDP Relation with interest rates Relation with inflation
Rate sensitive's YoY PAT growth Rate sensitive's Rate sensitive's
GDP YoY (RHS) G-Sec YoY (bps) WPI YoY (RHS)
80 15 80 (%) 0
(%) (%) 80 (bps) (300) (%)
60 (%) 60 2
60 (200)
40 10 40 40 4
20 (100) 20 6
20
0 5 0 0 8
0
(20) (20) 100 (20) 10
(40) 0 (40) 200 (40) 12
Jun-10
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09

Jun-11
Jun-12
Jun-13
Jun-14

Jun-08

Jun-14
Jun-05
Jun-06
Jun-07

Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-06

Jun-08

Jun-10
Jun-05

Jun-07

Jun-09

Jun-11
Jun-12
Jun-13
Jun-14
Source: Axis Capital, Bloomberg

Fundamentally dependent on Demand/margins negatively Higher inflation and thus lower real
growth opportunities – usually a correlated with interest rates returns leads to lower financial
multiplier to GDP growth savings. Especially impacts BFSI.

Our analysis suggests that 1% 1% lower interest rates will lead to 1% lower inflation will lead to
higher GDP growth leads to PAT ~10% higher PAT growth YoY ~1.8% higher PAT growth YoY
growth multiplier of ~3.3x

Our multivariate model predicts ~30% YoY profit growth in FY16 for rate sensitive's based on our macro-
assumptions

28
20 OCT 2014 Thematic Report
… partly corroborated by bottom up FY16 Nifty PAT contribution
ECONOMY

Sector-wise contribution to growth – FY16E Nifty PAT

1,900
(Rs bn)

1,800 7 2 0
12 11
14 13
15
22 21
1,700 25
31
109
1,600

1,500

1,400

1,499 1,781
1,300
Metals

Pharma
Cement
FY15E

FY16E
Engg
IT

Media
FMCG

Power
Auto*

Realty
BFSI

Telecom
Oil

Source: Axis Capital; *: Excluding Tata Motors

Banking and Auto sectors contribute ~45% to FY16E Nifty PAT growth (vs. 34% for FY14)

29
Impact on Banking sector
20 OCT 2014 Thematic Report
Impact on bank’s treasury book from a 100 bps decline in yields
ECONOMY

Sensitivity of banks’ profitability to 100 bps fall in yields


AFS (~% of tota l Im p a ct of ~100 b p s f a ll in ♦ PSU Banks stand to benefit significantly from MTM
invst) yield s on FY16E P B T treasury gains if yields decline as it will help them to
SBI# 22% 11% shore up their coverage ratios
BOB 28% 12%
♦ Moreover, recently RBI guidelines allows banks to
PNB 26% 19% shift their excess SLR holding from HTM to AFS thrice
BOI 28% 19% in a year in CY15 (as compared to once earlier) -
Canara 26% 20% provides more leeway to banks for capturing MTM
OBC 22% 19% gains from interest rate volatility
Union 23% 13%
Source: Company analyst presentations, Axis Capital
# Duration and AFS book size was disclosed in a quarterly analyst meet in FY14

 PSU Banks are likely to be key beneficiaries of a change in interest rate cycle (mainly due to the large bond book)

 However, the entire BFSI space will benefit from an improved liquidity situation that will bring down the cost of funds
for the system and improve credit demand

 Moreover, stressed asset book also benefits as the servicing ability of corporates improve with a decrease in interest
cost

 Currently, we have not factored in any direct benefit out of interest rate reduction in our estimates. However, we may
revise our estimates going ahead as and when the cycle shows clear trend. Currently, we maintain our preference for
large private banks and select PSU Banks (PNB) based on risk return trade-off

31
20 OCT 2014 Thematic Report
Abundant liquidity has put downward pressure on yields
ECONOMY

 Banks have started reducing deposit rates as liquidity is surplus and credit demand is muted
 Lending rates to follow

 Banks have reduced deposit rates by ~25 -100 bps across various maturities
 SBI reduced rates on deposits between 1 and 3 years by 25 bps from 9% to 8.75% and on deposits between 7 and 45
days by 100 bps from 7% to 6%
 PNB also reduced deposit rates on select maturities by 25 bps (for 30-45 days from 6.5% to 6.25%; for 46 to 90 days from
7.25% to 7% and for 271 days to 1 year from 8.75% to 8.5%)
 ICICI Bank has reduced short term bulk deposit rates (bulk deposits = Rs 100 mn and above) by 25 bps to 8% for maturities
between 46 days and 120 days. Even OBC has reduced bulk deposit rates by 25-50 bps for select maturities
 IndusInd Bank also reduced rates on savings deposits below Rs 0.1 mn from 5.5% to 4.5%.

G-Sec yields have started trending downwards Liquidity situation has been improving

10 year G -Secs G-secs have come off by


Net LAF Borrowing s ignifying s urplus liquidity
~35 bps from the peak
8.9 even though repo has 500
(%) (Rs bn)
remained unchanged
8.8 0
8.7 (500)
8.6 (1,000)
8.5 (1,500)

Jul-13

Jul-14
May-13

May-14
Mar-13

Mar-14
Sep-13

Sep-14
Jan-13

Jan-14
Nov-13
8.4
May-14

Jul-14
Mar-14
Sep-13

Sep-14
Feb-14
Oct-13

Dec-13

Jan-14

Jun-14
Apr-14
Nov-13

Aug-14

Source: Bloomberg Source: Bloomberg Liquidity measured as borrowing by banks under LAF from RBI

32
20 OCT 2014 Thematic Report
SLR holdings can be re-deployed in higher yielding assets
ECONOMY
• As against SLR requirement of 22% of NDTL, PSU banks
maintained an average SLR of ~ 27% (based on FY14 PSU Banks generally carry excess SLR
numbers); while private banks maintain SLR closer to the
regulatory norms E xcess SLR (above 22% of NDTL)
10%
• The excess SLR is largely a function of credit demand, loan v/s 8%
investment yield differential, liquidity and investment avenues
6%

• We do not expect banks to alter their SLR holding in the near 4%


term until there is additional clarity on Liquidity Coverage 2%
Ratio (LCR) requirements
0%
SBI BOB PNB BOI Canara Union
• RBI allowed banks to consider 5% of existing SLR to quality for
HQLA (High Quality Liquid Assets) - banks (esp PSU’s) will For SBI, excess SLR is calculated based on G-Secs, Deposits and borrowings as reported in
have a scope for reducing existing SLR book further FY14. For other PSU banks, we have taken it from the quarterly presentations as on Q1FY15

Credit demand is the weakest since Oct’09 Credit demand is the weakest since Oct’09

M inim u m LCR % of HQLA 80% C/D Ratio (LHS) Credit growth (RHS) 25%
 LCR is a new regulation
Req u irem ents
applicable to banks 78% 20%
1-Jan-15 60% under Basel III 15%
1-Jan-16 70% 76%
 LCR = HQLA/Net Cash 10%
1-Jan-17 80% Outflows over 30 days
74% 5%
1-Jan-18 90% where HQLA = High
Quality Liquid Assets 72% 0%
1-Jan-19 100%

Jul - 2012

Jul - 2013
May - 2012

May - 2013

May - 2014
Mar - 2012

Mar - 2014
Mar - 2013
Sep - 2012

Sep - 2013

Sep - 2014
Jan - 2013

Jan - 2014
Nov - 2012

Nov - 2013

July - 2014
Source: RBI  Net Cash Outflows =
Cash Outflows over 30
days – minimum (Cash
Inflows, 75% of
Outflows) Source: RBI

33
Impact on Auto sector
20 OCT 2014 Thematic Report
Easing rate cycle bodes better for cars/CVs…
ECONOMY

 Since ~85-90% of CVs and ~75% of cars are sold on Car sales growth: High negative co-relation with rate hikes
finance (vs. ~40% of 2Ws), these segments will benefit
YoY Car Growth SBI PLR (RHS)
more. 80% 15%

 Analyzing data spanning over the past few cycles, we 60% 14%
40%
infer a negative co-relation between car sales growth 13%
20%
and interest rates and it is much higher than that for 12%
0%
two-wheeler sales growth 11%
-20%
-40% 10%

Oct-06

Oct-07

Oct-08

Oct-09

Oct-12

Oct-13
Oct-10

Oct-11
Apr-06

Apr-07

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13
Apr-08

Apr-14
Source: Bloomberg, Axis Capital

Cars/2Ws: Volume co-relation with previous rate cycles 2Ws: Almost oblivious to interest rates

Car Sales 2W Sales


YoY 2W growth SBI PLR (RHS)
0.4
80% 15%
0.2
60% 14%
0.0 40% 13%
-0.2 20% 12%
-0.4 0% 11%
-0.6 -20% 10%

Oct-06

Oct-07

Oct-08

Oct-09

Oct-11

Oct-12

Oct-13
Oct-10
Apr-06

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13
Apr-07

Apr-08

Apr-14
-0.8
10-Year 7-Year 5-Year 1-Year
Source: Bloomberg, Axis Capital Source: Bloomberg, Axis Capital

35
20 OCT 2014 Thematic Report
…which is also rewarded by the market
ECONOMY

 Our analysis suggests that even whiff of improvement Maruti Suzuki P/E: Negative co-relation with SBI PLR
in macro (easing rates), rerates multiples of car/CV
Maruti P/E SBI PLR (RHS)
players much before an actual uptick in volumes 25 16%
(x)

 While there are always anomalies to these strong co- 20


14%
relations and quite often, multiples could be affected 15
by several other factors besides rates 12%
10

 Maruti, for example, has been through many other de- 5 10%
rating catalysts - hyper competitive pressures, royalty

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14
Apr-06

Apr-07

Apr-10

Apr-11
Apr-08

Apr-09

Apr-12

Apr-13

Apr-14
increase by Suzuki, etc.), the expectation of rates
Source: Bloomberg, Axis Capital
peaking or bottoming-out is one of the most accurate
macro variables on chart
Ashok Leyland: Negative co-relation apparent

Ashok leyland P/B SBI PLR (RHS)


4.0 16%
(x)
3.0
14%
2.0
12%
1.0

0.0 10%

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14
Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14
Source: Bloomberg, Axis Capital

36
Appendix
20 OCT 2014 Thematic Report
India’s state election calendar
ECONOMY

Sta te Tenu re Assem b ly Ra jya Sa b ha Sta te Tenu re Assem b ly Ra jya Sa b ha


sea t sea t sea t sea t
Arunachal Pd. Dec-14 60 1 Gujarat Jan-18 182 11

Jharkhand Dec-14 81 6 Himachal Pradesh Jan-18 68 3

Jammu & Kashmir Jan-15 87 4 Meghalaya Mar-18 60 1

Bihar Nov-15 243 16 Nagaland Mar-18 60 1


Kerala May-16 140 9 Tripura Mar-18 60 1

Tamil Nadu May-16 234 18 Karnataka May-18 224 12


West Bengal May-16 294 16 Mizoram Dec-18 40 1

Assam Jun-16 126 7 Nct Delhi Dec-18 70 3


Puducherry Jun-16 30 1 Chhatisgarh Jan-19 90 5

Goa Mar-17 40 1 Madhya Pradesh Jan-19 230 11

Manipur Mar-17 60 1 Rajasthan Jan-19 200 10

Punjab Mar-17 117 7 Sikkim May-19 32 1

Uttarakhand Mar-17 70 3 Andhra Pradesh^ Jun-19 294 18

Uttar Pradesh May-17 403 31 Odisha Jun-19 147 10

Source: Election Commission, Media reports ; ^ Includes Telengana

38
20 OCT 2014 Thematic Report
Assumptions for market borrowings
ECONOMY

(Rs bn) F Y15E F Y16E F Y17E


Fiscal deficit 5,245 5,312 5,037
% to GDP 4.6 4.1 3.5
Demand fo r funds
Net Govt borrowings 4,610 4,533 4,391
State govt borrowings 1,600 1,700 1,700
Total govt requirement 6,210 6,233 6,091
Net govt requirement (centre + state) 6,210 6,233 6,091
S o urc e o f funds
Bank SLR 2,942 4,055 4,760
Insurance 1,800 1,944 2,138
MFs, PFs & FIIs 1,000 1,150 1,323
Availability for govt 5,500 7,149 8,221
Net differenc e 710 (916) (2,130)
Key assump tio ns
Net govt borr as % fiscal deficit 87 90 90
Bank Dep gwth (%) 14 18 19
Credit gwth (%) 14 18 19
Banking multiplier 2.6 2.7 2.7
LIC insurance AUM growth 0 8 10
Source: Axis Capital

39
20 OCT 2014 Thematic Report
Revenues foregone may flow back, albeit gradually
ECONOMY

Tax & Revenues

Indirect tax Direct Tax

♦ A singular tax rate at 16 Revenues foregone Direct Tax Code


-18% will raise centre’s (Rs bn) FY13 % of total FY14 % of total ♦ Will bring about simplicity
revenues by ~1% taxes taxes
and stability to the tax
♦ Leakages will be plugged
Corporate tax 687 7 761 7 regime and shield it from
♦ Overall price levels will
annual tinkering
come down in the LT. Income Tax 336 3 404 3
♦ Will weed plethora of
However, prices tend to Excise 2,099 20 1,956 17 exemptions etc (Ref
rise in the ST
Customs 2,540 25 2,607 22
revenues forgone)
♦ Could dramatically ♦ Buoy overall revenues
enhance volume growth Total 5,662 55 5,728 49
for corporates
Source: Axis Capital, Finmin

40
20 OCT 2014 Thematic Report
Non-tax revenues continue to hold the key to FY15 deficit target
ECONOMY

C hange Ac tual Yo Y
vs Yo Y F Y15 C hange C hange
F Y14 F Y14 14 R E/ 14 R E/ Interim F Y15 v s Interim 15BE/
With ~13.4% nominal GDP growth, buoyancy of 1.4x
(R s b n) BE RE 14 BE (% ) 13R E (% ) BE BE BE (% ) 14 R E
is highly levered to growth. Largely contingent on non
Gr oss Tax Re ve n u e 1 2 ,3 5 9 1 1 ,5 8 9 (6 ) 12 1 3 ,7 9 2 1 3 ,6 4 5 (1 ) 18 tax revenues divestment (430 bn) + HZL/ Balco
Corporation tax 4,195 3,937 (6) 10 4,510 4,510 0 15 (150 bn) & spectrum auction (Rs 450 bn)
Income tax 2,476 2,417 (2) 20 3,065 2,843 (7) 18
Slightly optimistic. Largely contingent on some ind
Customs 1,873 1,751 (7) 6 2,013 2,018 0 15
growth pick up & mop up from tax on cigarettes &
Union Excise Duties 1,976 1,795 (9) 2 2,006 2,071 3 15 aerated drinks with sugar
Service Tax 1,801 1,649 (8) 24 2,155 2,155 0 31
Aggressive assumption. Addition of few services to the
Ne t Tax Re ve n u e 8 ,8 4 1 8 ,3 6 0 (5 ) 13 9 ,8 6 4 9 ,7 7 3 (1 ) 17 negative list
Non - Tax Re ve n u e 1 ,7 2 3 1 ,9 3 2 12 41 1 ,8 0 7 2 ,1 2 5 18 10
Tot al Re ve n u e Re ce i p t 1 0 ,5 6 3 1 0 ,2 9 3 (3 ) 17 1 1 ,6 7 1 1 1 ,8 9 8 2 16
Exp e n di t u r e
Interest Payments 3,707 3,801 3 21 4,270 4,270 0 12 Borrowings to remain elevated
Defence 1,169 1,248 7 12 1,344 1,344 0 8
FY15 Fuel subsidy provided for = Rs 250 bn. This is
Subsidies 2,311 2,555 11 (1) 2,557 2,607 2 2 excluding Rs 350 bn allocation for subsidy spillover
Non P l an Exp e n di t u r e 9 ,9 2 9 1 0 ,2 7 7 4 12 1 1 ,0 7 8 1 1 ,1 4 6 1 8 from FY14. Incremental allocation on a/c of Food
Subsidy Bill pegged at Rs 115 bn. However, there
Non P l an Cap i t al Exp 1 ,1 7 1 872 (2 6 ) 6 1 ,0 0 1 1 ,0 5 3 5 21
could be a saving assuming that implementation will be
P l an Exp e n di t u r e 5 ,5 5 3 4 ,7 5 5 (1 4 ) 15 5 ,5 5 3 5 ,7 5 0 4 21 for only a part of the year
Tot al Exp e n di t u r e 1 6 ,6 5 3 1 5 ,9 0 4 (4 ) 13 1 7 ,6 3 2 1 7 ,9 4 9 2 13
Re ve n u e De fi ci t 3 ,7 9 8 3 ,7 0 3 - - 3 ,8 2 9 3 ,7 8 3 - -
% of GDP (3 .3 ) (3 .3 ) - - (3 .0 ) (2 .9 ) - -
Fi scal De fi ci t 5 ,4 2 5 5 ,2 4 5 - - 5 ,2 8 6 5 ,3 1 2 - - Deficit correction in FY15 largely revenue driven and
% of GDP (4 .8 ) (4 .6 ) - - (4 .1 ) (4 .1 ) - - could be negated by any shortfall in non-tax revenues
Source: Axis Capital, Finmin

Nominal GDP growth at ~13.4% assumption is realistic. Govt spending increase of 13% YoY with lower Rev
expenditure growth & a much higher capital expenditure is a much needed qualitative change

41
Axis Capital Limited
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Tel:- Board +91-22 4325 2525; Dealing +91-22 2438 8861 - 69;
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advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. The intent of this document is not in
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information and opinions contained in this document

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subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval

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the Company may or may not subscribe to all the views expressed therein

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