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Benefiting from Economic Growth in India Background, Outlook and Investment Opportunities

August 27, 2014


About Empirical Foresights Our Mission: “Enable organizations to improve productivity, overcome

constraints and develop resilience by using data-driven analysis, forward-looking ideas and efficient guidance.” Our Principles: • Impeccable Research. • Pragmatic Solutions. • Effective Outcomes. Analysis. Ideas. Guidance.

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Indian Economy: An incredible story • 6.6% avg. for 23 yrs. • 2.5 times faster than Canada • Easier to grow if small • Singapore, South Korea

• Speed as well as Momentum • 3rd largest economy (PPP) • 3 times Canadian Economy • $5 Trillion vs. $1.5 Trillion Analysis. Ideas. Guidance.

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Driven By Domestic Demand • Contrast with China: • Pvt. Consumption=60% vs. 36% • Investment=33% vs. 46%

• Smaller investment base/level • Marginal return still high

• Govt. consumption small (11%) • Canada=28%

• Linked with Global Value-Chains. Analysis. Ideas. Guidance.

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Sectors: Where is Growth coming from? • Service Sector • • • •

Fastest growing sector Biggest sector Increasing-returns Labor-driven

• FIRB + THTC Services • 2/3 of growth in 2013 Finance,Insurance,RealEstate,Business Trade,Hotel,Transport,Communications

Analysis. Ideas. Guidance.

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Investment: A lot left to be desired • Decent growth: 5.6% annually • GDP grew at rate of 6.8% • Not enough to account for: • Depreciation • Increasing Labor-force

• (K/L) and (K/Y) ratios

• ICT investments picking up.

Analysis. Ideas. Guidance.

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Inflation & Policy interest rates • Price rise a constant worry. • 7% average inflation. • Hard to anchor expectations. • Important for FDI, outsourcing. • Less so for other investments.

• RBI Governor’s renewed focus. • Transparency/ forward guidance. Analysis. Ideas. Guidance.

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Public Finances • Consistent Budget Deficit • Under-control (5%) • China=2%, Canada=3%.

• Reforms & divestment schemes • New govt. less welfare-oriented

• Debt not an issue: • Japan=214%, Italy=112%

Analysis. Ideas. Guidance.

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Trade & Balance of Payments • 1991 BoP crisis & IMF bailout. • Oil major import item. • Central Bank Reserves ↑ • Consumption Growth: Imports ↑ • Can fund imports for few months Analysis. Ideas. Guidance.

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Exchange Rate: Fundamental Analysis • Twin deficits (Current + Budget) • Short-run impact on (X-M) • Exports more competitive • Import substitution

• Balassa–Samuelson effect • Productivity ↑: Exchange Rate ↑ Analysis. Ideas. Guidance.

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Financial Markets: Attractive Returns • Last 10 yrs. • TSX: 87% • Sensex: 422% • INR_CAD: -35%

• Arbitrage doesn’t equate returns. • High premiums for various risks.

• Liquid & mature markets. • Improvements in SEBI regulations. • Active Foreign Institutional Investors. Analysis. Ideas. Guidance.

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3 channels of continued growth • Unlike OECD countries, India still has “low-hanging fruits”. 1. Catch-up • Productivity gains by just following Western models/ technologies • Unit labour costs led Outsourcing & Trade.

2. Churning • Less efficient firms die. Increasing overall efficiency.

3. Structural Change • For India, Lewisian turning point still far away. • Can still expand Manufacturing without upwards pressure on wages. Analysis. Ideas. Guidance.

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Variance across states Rankings

• Various Trade-offs • More developed states. • More potential to develop.

• Skills availability. • Labour laws. • Infrastructure. • Institutions.

Analysis. Ideas. Guidance.

GDP per capita Goa Delhi Sikkim Maharashtra Haryana Gujarat Tamil Nadu Uttarakhand Kerala Himachal Pradesh Punjab

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Growth (since 2004) Sikkim Uttarakhand Goa Delhi Bihar Gujarat Tamil Nadu Maharashtra Mizoram Haryana Andhra Pradesh

GDP (2012) Maharashtra Tamil Nadu Uttar Pradesh Andhra Pradesh Gujarat West Bengal Karnataka Rajasthan Kerala Delhi Madhya Pradesh

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Ways to implement India strategy • Trade • Market entry • FDI (Direct investment) • Partnership (Joint ventures) • Portfolio investment • Equity • Fixed Income

Analysis. Ideas. Guidance.

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Special Economic Zones • Designed to encourage investment (foreign & domestic). • Benefits • Duty free imports. • No sales tax. No service tax. • Income Tax exemption of exports • 100% for 5 yrs. Then 50% for next 5 yrs.

• Single window clearance/ project approval.

• Operating & Newly Approved: • 116 in Andhra, 120 in Maharashtra, 77 in TamilNadu, 53 in Gujrat, 62 in Kartnataka Analysis. Ideas. Guidance.

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Dept. of Industrial Policy & Promotion • Responsible for FDI, technology collaboration & partnerships. • Schemes • • • •

Industrial Infrastructure Upgradation Delhi-Mumbai Industrial Corridor Chennai-Bengaluru Industrial Corridor Bengaluru-Mumbai Economic Corridor

• Various Intellectual Property Rights (IPR) initiatives. • Invest India portal ( http://www.investindia.gov.in/ ) Analysis. Ideas. Guidance.

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SEBI & RBI rules • Foreign Portfolio Investor (FPI) Regulations, 2014 • FII (Foreign Institutional Investor). • NRIs. PIOs. • Individuals can register as Qualified Foreign Investors.

• Caps on specific industries (ownership %) • Debt markets. Government/ infrastructure bonds. • Foreign Exchange Management Act (FEMA)

• Money has to route through Depository Participants. NRE/FCNR or Escrow account.

• INR has almost full capital account convertibility.

• Some Quantitative Restrictions. • Way better than China and other countries like Brazil, Russia.


Government & Corporate Bonds • Domestic rating agencies. • CRISIL (S&P). ICRA (Moody’s). CIBIL.

• Bloomberg & Reuters provide detailed data/ coverage. • Can plot Yield Curve or perform Strategy Back-Testing

• Current 10 yr. India Govt. bond generic bid yield: 8.5% • Corporate Bankruptcy laws are cumbersome. • SARFAESI Act. • Asset Reconstruction Companies. Analysis. Ideas. Guidance.

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Individual Stocks: Searching for deals • Sensex has jumped in recent months.

• PE ratios still low compared to other markets.

• India uses international accounting standards (IFRS) • Big 4 have significant presence.

• Capital and ownership structure are complex. • Large Family-owned Conglomerates.

• Runner-up or size discounts

• Investment Banks, Hedge Funds already have industry-leaders in their portfolios. • Each sector has few nice mid-sized companies with good Financials.

Analysis. Ideas. Guidance.

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Attractive areas of investment • • • • • • • • • •

Agriculture & Food-processing Energy Transportation Healthcare Education E-Governance R&D/ Technology Transfers Insurance Urban Development Services (Process Consulting/ Institution Building)

* We have detailed industry analysis available for each of these sectors and their sub-sectors. Analysis. Ideas. Guidance.

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Conclusion • Even though China is bigger economy, India has more room to grow. • Diminishing marginal return.

• Investing in India is challenging. • Information costs & imperfect markets.

• Data & verifiable model driven analysis can identify opportunities. • Plenty of avenues for risk-averse, passive investors as well. Analysis. Ideas. Guidance.

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Thank You ! • Contact us for detailed analysis of the industry-sectors mentioned.

• We offer research & consulting services in many areas.

abhayg@EmpiricalForesights.com

Analysis. Ideas. Guidance.

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Indian Economy: Background, Outlook and Investment Potential  

Indian Economy: Background, Outlook and Investment Potential. A presentation by Empirical Foresights

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