india market strategy - research-doc.credit-suisse.com
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13 March 2013
Asia Pacific/India
Equity Research
Investment Strategy
India Market Strategy STRATEGY
India: The silent transformation
Figure 1: Self-sustaining, productivity-driven job creation transforming India
Source: Credit Suisse research
The CS India team undertook numerous field trips and significant secondary
research to assess sustainability of economic growth from a new perspective.
■ Productivity growth at the bottom of the pyramid is at unprecedented levels,
with dramatic improvements in rural roads, electrification, cellphones, cooking
gas and water. Better choice, improved wage discovery and new opportunities
are driving significant wage growth. As 40% of urban services are low-skilled,
this growth is not just rural, but across the bottom of the income pyramid.
■ Rural land price not a bubble. Low rental yields, the oft-quoted concern,
have been falling for more than a century, and not just in India. Supporting
land prices: (1) agricultural yields are rising; (2) improved road access is
cutting price disparity and encouraging alternative use of land; (3) clear land
titles are making land more monetisable; and (4) land in rural areas is a form
of saving, given few alternatives.
■ India transforming. These changes have wide-ranging implications for the
society, economy and politics. We highlight with observed examples how
these changes are becoming sustainable: poultry, for example, has created
more person days of work than NREGA. We flag six liquid bottom-up stories
to benefit from this theme: ITC, Shriram Transport, Emami, ACC, HDFC
Bank and Dish TV. We also have a basket to play the theme (CSAPINDR).
Research Analysts
Neelkanth Mishra
91 22 6777 3716
Ravi Shankar
91 22 6777 3869
Arnab Mitra
91 22 6777 3806
Jatin Chawla
91 22 6777 3719
Ashish Gupta
91 22 6777 3895
Sunil Tirumalai
91 22 6777 3714
Anubhav Aggarwal
91 22 6777 3808
Akshay Saxena
91 22 6777 3825
Chunky Shah
91 22 6777 3872
Prashant Kumar
91 22 6607 3639
Kush Shah
91 22 6777 3862
13 March 2013
India Market Strategy 2
Focus charts Figure 2: 80% of India’s households have <2 acres of land Figure 3: Agri. land and rent prices in Punjab (1890-2010)
0
20
40
60
80
100
0.005 0.5 1 2 5 7 10 15 20 25 30 49 All
% o
f Hou
seho
lds
Land Area owned by Household (acre), scale non-linear
10% of HH have <215sq ft of land
60% of HH have <1 acre of land
-5%
0%
5%
10%
15%
20%
25%
30%
1900 1910 1920 1930 1940 1972 1988 1990 1995 2005 2010
Land Price CAGR, Punjab (%) Rent CAGR (%)
Source: NSSO (2003), Credit Suisse estimates Source: Hirashima (1978 and 2008), 99acres.com, Credit Suisse estimates
Figure 4: Horticulture more productive for land Figure 5: Significant progress in clear land titles
1
5
7
7
9
10
14
32
42
0 10 20 30 40
Wheat
Tomato
Watermelon
Turmeric
Brinjal
Sugarcane
Cauliflower
Chrysanthemum
Banana
Net income per hectare (x times of wheat)
States: 20
Area: 82%
17
78%
14
72%
11
61%
8
60%
States that havecompleted records modernization
Started digitzation of cadastral maps (likely to take time till 2017)
Provided legal sanctitiy to RoRs
Hosted RoR data online for citizen access
8 major states: AP, TN, KA, MP, MH, OR, RJ, UP
Source: TN Agriculture University, Credit Suisse estimates Source: Ministry of Rural Development, Credit Suisse estimates
Figure 6: Rural wage growth at multi-decade highs Figure 7: Increase in new habitations connected by road
0
2
4
6
8
1983-94 1994-2000 2000-05 2005-08 2008-13
Real Wage Growth (%)
0
20
40
60
80
100
120
140
160
180
Pre-2004 2006 2008 2010 2012 2014 2016
Hab
itatio
ns C
onne
cted
('00
0)
Source: Labour Bureau, NSSO, Credit Suisse estimates Source: PM Gram Sadak Yojana, Ministry of Road Transport
Figure 8: Jobs created in animal farming (chicken/fish) Figure 9: Number of years to transition one decile
11.1
14.9
1.3
1.6
0
5
10
15
2005 2010
People employed in animal farming in rural (mn) Urban (mn)
3.8 mn jobs created in rural areas
0
1
2
3
4
5
6
7
1 2 3 4 5 6 7 8
# of years to transition at 5% real wage growth at 7.6%
Decile:
Source: NSSO, Dept. of Animal Husbandry, Credit Suisse estimates Source: NSSO, Labour Bureau, Credit Suisse estimates
13 March 2013
India Market Strategy 3
India: The silent transformation The sharp economic slowdown has raised several fundamental questions: (1) How can the
economy keep growing without productivity boosting investments? (2) Shouldn’t rural
wage growth be the next to roll over? (3) Aren’t land prices in the bubble territory? To find
answers, the CS India team undertook numerous field trips. Further, fully aware that given
India’s diversity, individual anecdotes may not be representative, we also extensively
surveyed academic research and some less-used but fascinating data sets.
Structural productivity drivers
About 80% of India’s households own less than 2 acres of land, and are therefore wage
dependent. Given labour mobility, the multi-decade high ~20% rural wage growth in the last
five years has also affected urban wages, as 40% of urban services jobs are low/un-skilled.
Conventional belief that the jobs guarantee programmes are driving this growth couldn’t be
further from the truth, in our view. It is actually (1) rural roads: we saw large wage gaps
between villages that have roads and those that do not—commuting, and possibility of
alternative activities (e.g. poultry, vegetables) were the reasons; (2) electrification increases
the number of hours worked in a day, and also household automation; (3) cellphones have
been demonstrated to improve price discovery/stability in fish and agricultural produce: we
believe this also applies to wages for unskilled workers. Further, improving cooking gas and
water availability are also freeing up critical time for workers, especially women.
Most of these schemes still have some way to go and spending on them is likely to
accelerate at least until 2017: the rural roads construction programme is only 60-65% done,
and a third of India’s households still do not have electricity connections, for example.
The economics of land prices
Some 40% of Indian households own at least an acre of land: land price trends are
therefore important for consumer confidence. Sharp increases in land prices in the last few
years are widely considered to be a bubble: rental yields have fallen, and many believe the
farmer would be better off selling the land than farming it. This ignores history: (1) rental
yields on agricultural land have halved even in the US in the past 45 years; and (2) rental
yields in the state of Punjab have been falling for well over a century.
We see four reasons why land prices may continue to rise: (1) farming yields as well as
prices of agricultural produce have been going up steadily; (2) improving road connectivity
brings down the arbitrage in land prices between locations, and also allows land to be put
to more productive uses such as horticulture, floriculture and poultry; (3) the move towards
conclusive titling and electronic land records reduces friction in land transactions and
allows for better monetisation; and (4) land is not an investment vehicle but a form of
saving in rural areas, where regular financial instruments are mostly unheard of.
Transformation manifested
These once-in-a-lifetime-of-a-country changes are exciting and have fascinating and wide-
ranging implications for society, the economy and politics. We highlight case studies from
our field-trips that show how the growth in productivity is becoming sustainable, as
consolidating manufacturing jobs drive services jobs in transportation and trade: enabled
by phones and roads. For example, we estimate poultry farming created as many person
days of work as NREGA between 2005 and 2010. By our calculations, 5.0-7.5% annual
real wage growth can drive meaningful changes to the consumption basket.
We highlight six liquid stories to play this theme: ITC (cigarette consumption), Shriram
Transport (greater consumption of goods transported from the nearby town => LCV sales),
Emami (personal care spend), more pukka housing (ACC) ,improving financial inclusion
(HDFC Bank), and increasing spend on entertainment/ cable charges (Dish TV).
The CS India team
undertook field trips and
extensive secondary
research to answer some
fundamental questions
about the economy
About 80% of households
are wage dependent
The multi-decade high wage
growth for unskilled workers
should continue given rising
productivity, better wage
discovery, and alternative
job opportunities
40% of households own at
least an acre of land: land
prices drive consumer
confidence
Rental yields have been
falling at least since 1890,
and not just in India
Improving connectivity,
rising yields, alternative
uses enabled by roads and
conclusive land titles, are
supportive of high prices
We highlight case studies
from our field-trips that show
the growth in productivity is
becoming sustainable:
poultry farming itself, for
example, created as many
jobs as NREGA
ITC, Shriram, Emami, ACC,
Dish TV and HDFC Bank
are the stock plays
13 March 2013
India Market Strategy 4
Vignettes from the field trips ■ Pre-stitched branded clothing in a store near you! Just five-six years back few
villages had shops for clothes. Cloth shopping was so infrequent for most people as to
be limited to trips made to the nearest town. Imagine our surprise (Figure 10) then that in
all villages we went to that had roads leading up to them, there were textile shops. More
surprisingly, these only stocked pre-stitched clothes—a luxury few years back.
■ Gulab Jamun instant mix: The second hottest-selling item in a rural grocery store
was packaged pre-mix for this delicious but dangerously high-calorie Indian sweet.
The preference for “purity” and “why pay more” has clearly given way to “save time”.
This is when a few years back, the same people would have preferred to mill their own
flour and grind their own spices to prepare Indian recipes.
■ When the Chicken crossed the road and beat NREGA! Rural roads are enabling
households with even 50-60 square feet of spare land to breed poultry. This yields
income of Rs1,000-1,200/month with a starting investment of Rs600. Here’s the
surprise: poultry farming created 3.8 mn jobs between 2005 and 2010: the 950 mn
person days of work thus created every year is the same as that by NREGA in the
same period.
Figure 10: Ready-made garments store in a remote village Figure 11: ITC’s Choupal Sagar with branded white goods
Source: Credit Suisse field visits Source: Credit Suisse field visits
■ Sony Bravia TV, LG refrigerators and air conditioners in villages: ITC’s Choupal
Sagar runs a retail store (Figure 11). Half the store was allocated to white goods, and
the store manager said 75% were sold to villagers. Sony service engineers go to
villages to install LCD TV sets, and LG service engineers are despatched to repair
broken bulbs in refrigerators. Villages that have 80% of the houses cemented, six-
seven grocery stores, a textile store, most houses with motorcycles, and 2% of the
households with cars, now being hard to separate from small town India!
■ “I save more than this software engineer in Bangalore”: A village headman
(sarpanch) in the state of Rajasthan mentioned that despite earning only Rs10-
11,000/month, he ended up saving more than this young software engineer in
Bangalore—the first one from the village. We heard many stories of people coming
back from nearby towns due to the better quality of life and easier commuting.
■ The power of plastic: Clear land titles, awareness and more push from the banks has
sharply increased the number of Kisan Credit Cards (interest cost 4-7%). This has
boosted consumption (marriages, education, motorcycle purchases), but also in the
cases where this is put to agricultural use, it allows inventory-holding by farmers, thereby
improving realizations. We heard ~40% of the soyabean crop was still with the farmers.
This was near impossible if the farmer had borrowed from the local money-lender
13 March 2013
India Market Strategy 5
Financial summary Figure 12: Focus stocks and the thematic connection
Company Thematic connection Detailed report
ITC Ltd ~80% of EBITDA from cigarettes; changing consumption basket Click here
HDFC Bank Banking system involved in some part(s) of all value chains; increasing financial inclusion Click here
ACC Limited Move towards better (pucca) housing Click here
Shriram Transport Finance Increasing “outside” items consumption translating to LCV sales/ pool of used LCVs Click here
Emami Ltd Changing consumption basket of personal care items Click here
Dish TV India Entertainment: Increasing penetration of TV/ higher spend on cable charges Click here
Source: Company data, Credit Suisse estimates
Figure 13: Financial summary of the focus set of stocks
Company RIC Rating Curr. price
(Rs)
Target
price
Mkt cap P/E (x) Yield P/B (x) ROE
(%)
Net debt/equity
(x)
Price (US$ mn) FY12A/E FY13E FY14E FY13E FY13E FY13E FY13E
ACC ACC.BO O 1,285 1,545 4,452 18.7 15.5 13.0 2.3 2.9 19.9 -46.3
Emami EMAM.BO O 595 710 1,660 34.8 27.9 22.2 1.4 10.2 40.6 -25.2
HDFC Bank HDBK.BO O 644 770 28,205 28.9 22.6 18.1 0.9 4.3 20.6 n.a.
ITC ITC.BO O 299 340 43,494 37.9 31.3 26.6 1.9 11.1 37.5 -19.0
Shriram Transport SRTR.BO O 702 840 2,936 12.1 10.9 9.4 1.2 2.1 20.9 n.a.
Dish TV DSTV.BO O 67 83 1,320 n.m. n.m. 178.4 0.0 n.m. 53.3 n.m.
Note: Priced as of 12 March 2012.
Source: RAVE, I/B/E/S, Credit Suisse estimates
Figure 14: Stocks to play the “India transforming” theme
Reuters Market cap Daily trading Performance
One-year forward
P/E (x)
Company ticker US$ mn US$ mn 1M 3M 12M Consensus
ITC Ltd ITC.BO 43,494 45.8 -1% -2% 44% 26.7
HDFC Bank HDBK.BO 28,205 34.1 -1% -7% 24% 18.0
Hindustan Unilever Ltd HLL.BO 17,712 26.0 -2% -18% 17% 26.4
Bajaj Auto Limited BAJA.BO 10,436 18.2 -4% -2% 9% 15.1
Asian Paints ASPN.BO 8,404 6.2 5% 11% 50% 31.8
Hero Motocorp Ltd HROM.BO 6,180 11.2 -3% -9% -13% 14.5
Godrej Consumer Prod. GOCP.BO 4,967 2.2 10% 11% 80% 29.8
ACC Limited ACC.BO 4,452 9.4 -1% -10% -3% 13.2
Dabur India DABU.BO 4,283 2.5 1% 2% 30% 25.3
Colgate-Palmolive India COLG.BO 3,296 3.7 -1% -7% 20% 29.2
Shriram Transport Fin. SRTR.BO 2,936 12.0 -7% -1% 21% 9.6
Marico Ltd MRCO.BO 2,589 0.8 0% 0% 36% 27.7
Pidilite PIDI.BO 2,386 1.5 7% 19% 59% 25.6
Emami Ltd EMAM.BO 1,660 0.6 3% -3% 53% 24.2
Dish TV India DSTV.BO 1,320 4.5 -7% -14% 22% 173.2
Note: Priced as of 12 March 2012.
Source: RAVE, I/B/E/S, Bloomberg, Credit Suisse estimates
13 March 2013
India Market Strategy 6
Table of contents Focus charts 2 India: The silent transformation 3
The drivers of productivity growth 3 The economics of land prices 3 Transformation manifested 3
Vignettes from the field trips 4 Financial summary 5 Structural productivity drivers 7
Rural wage growth matters, and it isn’t just ‘rural’ 7 1) Rural roads: Job access and diversification 8 2) Rural electrification: Lighting and automation 10 3) Phones: Cutting distance; price/wage discovery 13 4) Other drivers: Cooking gas, TV and water 15
The economics of land prices 17 The feeble link between land prices and productivity 17 Drivers of land prices 19 (1) Road connectivity 19 (2) Clear, computerised land titles 21 (3) Land as savings 23
Transformation manifested 25 1) Self-sustaining change: Productivity creates jobs 25 2) Changing consumption basket 27 Financial inclusion 31 Stock selection 32
Appendix I: Places visited 33 Appendix II: Company section 34 ACC Limited ACC.BO / ACC IN 35 Dish TV India DSTV.BO / DITV IN 36 Emami Ltd EMAM.BO / HMN IN 37 HDFC Bank HDBK.BO / HDFCB IN 38 ITC Ltd ITC.BO / ITC IN 39 Shriram Transport Finance Co Ltd SRTR.BO / SHTF IN 40
13 March 2013
India Market Strategy 7
Structural productivity drivers Much has been written about the unsustainable nature of India’s growth: how can the
Indian economy keep growing without any investments in infrastructure? Similarly, many
have written about the “unjustifiable” increase in rural/agricultural wages. Both these
questions are fundamental to projecting the path of India’s economy in the coming years.
In this section, we explain: (1) the importance of wage growth at the bottom of the pyramid;
and (2) that this wage growth is largely productivity-driven (and therefore sustainable to a
large extent), providing a floor to India’s cratering economic growth: the market’s obsession
with large-scale infrastructure projects forces attention away from substantial changes in
basic infrastructure that are taking place in areas other than big cities.
Rural wage growth matters, and it isn’t just ‘rural’
While the last ownership survey in 2003 reported only 10% of households as landless, it is
debatable if someone can sustain a household with output from half an acre or an acre of
land. If the line is drawn at two acres, almost 80% of households in India must necessarily
rely on labour for at least some time in a year (Figure 15).
Figure 15: 80% of Indian households have < 2 acres of
land
Figure 16: Real wage growth for rural labour
0
10
20
30
40
50
60
70
80
90
100
0.005 0.5 1 2 5 7 10 15 20 25 30 49 All
% o
f Hou
seho
lds
Land Area owned by Household (acre), scale non-linear
10% of HH have <215sq ft of land
60% of HH have <1 acre of land
0
1
2
3
4
5
6
7
8
1983-94 1994-2000 2000-05 2005-08 2008-13
Real Wage Growth (%)
Source: NSSO (2003), Credit Suisse Estimates Source: Labour Bureau, NSSO, Credit Suisse estimates
The 2010 employment survey suggested that 55% of the labour force was in agriculture.
However, because of labour mobility, agricultural wages are also the floor wage in the non-
farm economy1. The exceptionally rapid growth in real rural wages since 2008 (Figure 16)
therefore reflects not just “rural” growth, but growth at the bottom of the income pyramid.
After all, almost 40% of urban jobs are either in agriculture (likely animal husbandry) or in
low-skilled services (Figure 17). Not surprisingly, since 2006, the growth in services
inflation has also been the highest among services involving unskilled jobs, such as
domestic help and laundry (Figure 18).
Many mistakenly ascribe this to NREGA (National Rural Employment Guarantee Scheme).
In our note of 8 January 2013, Penny rich pound poor, we have demonstrated how even at
the peak, NREGA was generating work that was merely ~2% of available rural person
days (Figure 19).
1 Kotwal A, et al. Sectoral Labour Flows and Agricultural Wages in India, 1983-2004: Has Growth Trickled
Down? Economic and Political Weekly, 10 January 2009.
Wage growth at the bottom
of the pyramid is largely
productivity-driven and
hence sustainable
~80% of households rely on
labour for at least some time
in a year
Due to labour mobility, agri.
wages set a floor for the
non-farm economy and
reflect not just “rural” growth
but growth for the entire
bottom section of the
pyramid
Ascribing wage growth to
NREGA is incorrect
13 March 2013
India Market Strategy 8
Figure 17: About 40% of urban services jobs are low skilled Figure 18: Services inflation highest in the misc. group
Services (Low skill)31%
Services (Medium skill)
15%Services (High skill)25%
Manufacturing21%
Agri8%
100
110
120
130
140
150
160
170
180
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12
Services (Laundry, domestic help)
Personal care
Medical Care
Education,Entertainment
Transport
Services index grew by 12% last year vs. 7.2% for the misc. component of CPI-IW
Source: Employment Survey 2012, Credit Suisse estimates Source: Labour Bureau, CMIE, Credit Suisse estimates
Further, spending peaked two years back, but wage growth has continued (Figure 20:):
NREGA may have set a floor to wages a few years’ back, but the growth thereafter has
been for other reasons, in our view. We elaborate on these later in this section.
Figure 19: Work from employment guarantee schemes Figure 20: Wages rising despite slowing NREGA spend
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
0
500
1,000
1,500
2,000
2,500
1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Total Person Days (mn) As % of Available Rural Person Days
-40
-20
0
20
40
60
80
100
120
0%
5%
10%
15%
20%
25%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Change in Spend on Rural Empl (Rs bn) Wage Growth (Y/Y %)
Divergence in trend for two consecutive years
Source: Ministry of Rural Development, Labour Bureau, Credit Suisse
estimates
Source: Ministry of Rural Development, Labour Bureau, Credit Suisse
estimates
1) Rural roads: Job access and diversification
We have found a strong correlation between per-capita output and road networks
(represented by vehicle penetration) both within and across states. In the state of
Maharashtra, for example, per-capita net district domestic product (NDDP) is strongly
correlated to vehicle ownership (70% of vehicles in Maharashtra are two-wheelers). As we
showed in our Apr-12 report (link), the exceptions in Figure 21 prove the rule, in our view:
the districts of Mumbai and Thane have higher productivity than road availability would
suggest given the better availability of public transport—metro rail. A similar correlation is
visible across states (Figure 22).
There exists a strong
correlation between per-
capita output and
connectivity (road
networks). Exceptions like
Mumbai and Thane that
have better public transport,
in fact, prove the rule, in our
view
13 March 2013
India Market Strategy 9
Figure 21: Vehicle penetration and district output per-capita Figure 22: Vehicle penetration versus state GSDP
0
20
40
60
80
100
120
140
160
0 50 100 150 200 250 300 350
Motor Vehicles per '000 People
Per
Cap
ita O
utpu
t (R
s'00
0, 2
011)
Mumbai
Thane
Helped by Public Transport
Each dot is a district in Maharashtra
0
5
10
15
20
25
0 50,000 100,000 150,000 200,000 250,000Income per capita (INR)
GoaVehicular Ownership(% households with cars) Delhi
Haryana
Maharashtra
Source: Maharashtra Economic Survey, Credit Suisse estimates Source: SIAM, Planning Commission, India Census, Credit Suisse
estimates
Our field trips validated several of the hypotheses regarding how rural roads are driving
strong socio-economic changes: In Figure 23, we note the sharp gap in wages between a
village that had a road three years back and another that is still waiting. These villages are
within 15 km of each other about 50 km from the city of Bhopal in Madhya Pradesh (see
Appendix A for location).
Figure 23: Road access significantly improves land prices, labour mobility, wages and alternative employment avenues
Village Mograram, Central MP Sukhlia Hansraj, Central MP
State of roads
Access to connecting road Yes, built in Oct-09 No, lies 4 km off the nearest road
Cellphone penetration, male 100% 100%
Electrification 100% of households 100% of households
Population 3,000 350
Land prices in 2007 Rs200,000/acre Rs120,000/acre
Land prices now Rs1,000,000/acre Rs350,000/acre
Land price CAGR (2007-13) 31% 20%
Daily commuting Yes None
Off-season wage rate (INR) 150-200 120
% of Pukka houses 80% 40%
Vegetable farming Yes None
Poultry farming Yes, destination markets: local, Sehore, Bhopal, Indore
(travel time cut from 5 to 3 hours due to the road) None
Dairy farming Yes, support from local milk cooperative Yes
Source: Field Visits, Credit Suisse research
There is a sharp gap in
wages between a village
that had a road three years
back and another that is still
waiting for a road.
13 March 2013
India Market Strategy 10
No one from Sukhlia was commuting (no road), whereas many from Mograram were
(especially post 2009 when roads were built), creating upward pressure on local wages.
People in Mograram had started to grow vegetables commercially, and were beginning to
dabble in poultry farming while these weren’t options available in Sukhlia.
Similarly, in Chhattisgarh, in villages outside Bilaspur, people with no farmland, but even
50 sq ft to spare, were raising 30 chicks at a time. This was earning them Rs1,000/month,
but it wasn’t possible to do this before roads were added.
Figure 24: 360,000km of rural roads built under PMGSY* Figure 25: Strong increase in new habitations connected
0
50
100
150
200
250
300
350
400
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Completed, Cumulative ('000 km)
360,000km of road connecting 88,000 new habitations so far.
Over the next five years: another 250,000km of roads, connecting another 80,000 habitations
0
20
40
60
80
100
120
140
160
180
Pre-2004 2006 2008 2010 2012 2014 2016
Hab
itatio
ns C
onne
cted
('00
0)
* Pradhan Mantri Gram Sadak Yojana (Prime Minister’s Rural Roads Plan).
Source: PM Gram Sadak Yojana, Ministry of Road Transport
Source: PM Gram Sadak Yojana, Ministry of Road Transport
Studies show that the first set of jobs created around roads are tea-shops, bicycle/
motorcycle repair shops and taxi services. Then, over the next 1-2 years numerous other
opportunities sprout: e.g. the production of mannequins has moved from Ulhasnagar just
outside Mumbai to villages in Rajasthan. Pottery (Orissa), saris (West Bengal), furniture
(Himachal Pradesh), etc., are all potential jobs difficult to carry out in remote villages
previously, but are now made easy by road connectivity.
In this light, the 360,000 km of rural roads built under the Prime Minister’s Rural Roads
Plan (Pradhan Mantri Gram Sadak Yojana: PMGSY: (Figure 24)) have significantly
impacted wages and job creation. In addition, another 100,000 kms have been improved
significantly.
In 2000 almost 40% (342,000 in total) of rural habitations across India lacked all-weather
road connectivity: of these about a quarter or 88,000 have already been connected, and
another 80,000 are to be connected in the next five years (Figure 25). Once done, every
habitation in India with 500 or more people will have all-weather road connectivity. Note
that in addition to this, some states have their own rural road-building programmes
targeting smaller habitations (250-plus). This scheme has been so successful in some
areas that while touring rural Madhya Pradesh we struggled to find villages not connected
by all-weather roads!
2) Rural electrification: Lighting and automation
For the authors of this report, sunrise and sunset are picturesque events occasionally
viewed during holidays from scenic locations. For a third of Indian households that don’t
have electricity, however, sunlight plays a commercial role, controlling the diurnal rhythm:
most of these households are in rural areas (Figure 26). Given the cost of other forms of
lighting (Figure 27: one light bulb costs Rs520/year less than a kerosene lamp) as well as
their poor quality, daylight has economic value. If one assumes one light bulb equals two
kerosene lamps (in luminescence it is 24x), the cost saving becomes Rs1,400/year.
Access to roads is helping
landless people raise poultry
(chicken) within limited floor
space and sell their produce
in nearby towns
Pottery, saris and furniture
are some of the new
employment opportunities
made possible by roads
A massive 360,000 kms of
rural roads have been built
under the flagship PMGSY
programme
In the next 5 years, it is
planned to connect every
habitation with 500 or more
people with all-weather
roads
13 March 2013
India Market Strategy 11
Figure 26: % of households with electricity Figure 27: Light bulb 60-80% cheaper than kerosene lamp
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2001 2011
Rural Urban All India
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Candle KeroseneLamp
Bulb (60W) Tube Light CFL
Unit Cost Maintenance Energy cost
Annual Cost of lighting (INR)
Source: Census Bureau, Credit Suisse estimates Source: S. Mahapatra et. al, Mills, 1999, Credit Suisse estimates
A Rs1,400/year difference per light source (for five hours of use per day) may seem trivial
to many, but for the bottom-three deciles in rural India, it is 3-5% of their total consumption
expenditure. At the most basic level therefore, electrification can add a few hours to the
work day, or at least provide flexibility.
Needless to say, household electrification drives productivity in many other ways: (1)
Reducing the effects of weather (fans and heaters); (2) the usage of the simplest of
consumer appliances can help save several hours a week; and (3) the usage of
electronics (cellphones, televisions, computers (even if free by state governments), etc.
It is not surprising therefore that per-capita output of states has a strong correlation with
the proportion of rural households with electricity (Figure 28). Causality here likely runs
both ways (richer states have spent more on electrifying villages), but the link between
electrification and productivity is strong, in our view.
Figure 28: State GDP correlates with electrified rural HHs Figure 29: Strong increase in villages electrified
0
20
40
60
80
100
120
0 20 40 60 80 100
GS
DP
per
capi
ta (
'000
)
% electrified households in rural areas
70%
75%
80%
85%
90%
95%
100%
0
5
10
15
20
25
30
35
1998 2000 2002 2004 2006 2008 2010 2012
Villages Electrified ('000) % of Total Cumulative (RHS)
% of Rural Households electrified rose from 44% in 2001 to 55% in 2011
Source: Census of India, RBI, Planning Commission, Credit Suisse
estimates
Source: Central Electricity Authority, Credit Suisse estimates
The cost savings from a
light bulb over kerosene
lamp equal 3-5% of total
consumption for people in
the bottom three deciles in
rural India
There is a strong correlation
between per-capita output of
states and % of rural
households with electricity
13 March 2013
India Market Strategy 12
Some 94% of India’s villages (with a population of 100 and above) are now electrified,
implying that the “big problems” have been largely resolved: 80% of the unelectrified
villages are in Uttar Pradesh (UP), Orissa, Bihar and Jharkhand: at least two of these
(Bihar and UP) are making good progress. But taking power to a village is only the first
challenge: two others still remain.
Figure 30: Electrified households (% of total) in 2001 Figure 31: Electrified households (% of total) in 2011
Source: Census of India, Credit Suisse estimates Source: Census of India, Credit Suisse estimates
The first of these is household electrification: some states have made rapid strides on this
front in just the last decade (see Figure 30 and Figure 31), and there is a clear pick-up in
power consumption in India (Figure 32). But with one third of households still not electrified,
this is where the future challenge lies. Government spending on the Rural Electrification
programme (Rajiv Gandhi Grameen Vidyutikaran Yojana, RGGVY) is expected to rise
sharply in the 12th five-year plan, i.e. until FY17 (Figure 33).
The most significant challenge is then providing regular electricity. India’s per-capita
consumption of electricity remains among the lowest in the world and the root cause is
generation. A few hours of power is better than no power at all, but for habits and rhythms
to change, regular power availability is critical.
Getting power to a village is
not enough, getting
households electrified and
then providing regular
supply of power are also
critical
While some power is better
than none, regular supply is
essential for bringing a
behavioural change in
people’s activities
13 March 2013
India Market Strategy 13
Figure 32: Agri/domestic consumption has picked up Figure 33: RGGVY budgets expected to keep rising
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1986-91 1991-96 1996-01 2001-06 2006-11Agriculture Domestic
5Yr CAGR for electricity consumed
Acceleration in electricity usage after 1996
0
20
40
60
80
100
120
140
160
180
200
2002 2004 2006 2008 2010 2012 2014 2016
Funds released under RGGVY (IN R Bn)
Projected
Source: Planning Commission, WG Report for XII FYP, Credit Suisse estimates
Source: MoSPI Energy Statistics 2012, Credit Suisse estimates
3) Phones: Cutting distance; price/wage discovery Intuitively, cellphones improve productivity. The grumbling we heard during our field trips from largely elderly upper-caste males about people (pointedly women, lower-caste poor and the youth) wasting time on cellphones was likely true, but the base line wasn’t the pre-cellphone era, we believe. The grumbling also likely reflects the loss of control and the disruption of the power structure that the cellphone has brought about.
Figure 34: Some representative use cases of cellphones improving productivity Activity Use case Source Marketing and sales Finding best market and timing for agri-produce CS field surveys
Reduction in price dispersion by 21% in Niger Aker (2008) Finding best market for fish Jensen (2007) Improvements to local laundry services in Cote d’Ivoire Kamga (2006)
Logistics Small supply boats called to stay out fishing longer Abraham (2007) Timing of harvests and delivery financing in Ghana Overa (2006) Reduction in wait-time while delivering farm output CS Field Surveys**
Operations Weavers call customers mid-process to revise garment plans Jagun (2008) Time Saving Early intimation of water supply timing in Hubli-Dharwad NextDrop
** At harvest time there is a spurt in activity at warehouses which sharply increases waiting time and therefore costs: in Madhya Pradesh for example, the farmer registers at a nearby counter, and then gets an SMS on his cellphone with the time and place where he must bring his harvest. Similarly, he does not need to stand in queue to get cash payment: the amount is deposited directly into his bank account through electronic transfers, with an SMS sent to him confirming it. Source: A review of evidence on mobile use by micro and small enterprises in developing countries, dated June 2010 by Jonathan Donner and Marcela X Escobari
The impact of cellphones on productivity began to be analysed very early: a useful paper by Donner & Escobari in 2009 winnowed and then classified several such studies (Figure 34) about the impact of mobile telephony on micro and small enterprises (MSEs), especially in developing economies. Most of the studies we encountered focused on price discovery in agriculture or on skilled artisans improving customer service, product customisation or price realisations. Most famously, Jensen (2007) documented the experience of Kerala fishermen, and the drop in the fluctuation of fish prices: “The adoption of mobile phones by fishermen and wholesalers was associated with a dramatic reduction in price dispersion (Figure 35), the complete elimination of waste and near-
Research literature indicates that cell phone usage has benefitted a diverse set of people—from fishermen to sari weavers.
13 March 2013
India Market Strategy 14
perfect adherence to the Law of One Price. Both consumer and producer welfare
increased.” 2
Several academic studies have also been conducted in sub-Saharan Africa: the economic
environment there is sometimes not too dissimilar from that seen in parts of rural India.
The detailed case study on the Nigerian market for traditional hand-woven ceremonial
cloth example by Jagun et al3 (2008) could very much apply to sari weavers in West
Bengal or Rajasthan: improved access to credit for the weavers, as fabric vendors can talk
to traders who can then vouch for the veracity of weavers’ orders, among other things.
Figure 35: Drop in fluctuating fish prices post phones Figure 36: Two in five mobile subscribers are now rural
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
0
50
100
150
200
250
300
350
Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12
Rural subscribers (Mn) As % of total base
Source: Jensen (2007) Source: TRAI, Credit Suisse estimates
That said, there is a difference between using a mobile to check market prices and using it
to bypass a middleman who carries goods to market. In the absence of supporting
infrastructure, such as roads or credit improvements, the positive impact of cellphones is
mitigated. An ICRIER (Indian Council for Research on International Economic Relations)
study documents numerous examples of small and marginal farmers in Rajasthan and
Uttar Pradesh4 complaining that despite being aware of better prices they could not act on
them because of the lack of roads. The interviews in this study were conducted in October
and November 2008, so the situation is likely to have improved by now.
The studies we came across, however, do not cover an important segment: the landless
unskilled worker. Just as researchers have documented the more efficient price discovery
of agricultural produce and fish, it is quite intuitive that wage discovery improves as well
with the advent of cellphones. More importantly, utilisation should improve, with the
information-related friction between jobs coming down quite significantly. Moving from
place to place to find the next job is far less efficient than finding the same information
through phone calls.
Rural cellphone penetration has risen substantially in the past five years (Figure 36): we
would not call this market saturated yet, though much research and our field surveys also
suggest most households already have at least one cellphone. The full economic impact of
this though may not yet be behind us.
2 Robert Jensen: The Digital Provide: Information (Technology), Market Performance and Welfare in the
South Indian Fisheries Sector, Quarterly Journal of Economics, August 2007. 3 Jagun A, Heeks R, Whalley J. The Impact of Mobile Telephony on Developing Country Micro-Enterprise:
A Nigerian Case Study. 2008. MIT Press 4 Mittal S, Gandhi S, Tripathi G. ICRIER Working Paper No. 246, Socio-Economic Impact of Mobile Phones
on Indian Agriculture. February 2010.
Cellphones’ impact does
depend on presence of
supporting infrastructure like
roads for the real benefits of
communication to get
realised
13 March 2013
India Market Strategy 15
4) Other drivers: Cooking gas, TV and water
There are several other seemingly minor time-saving developments that allow people to
take up other vocations. Few rural families can be strait-jacketed into one definition: some
can be land-owners of a small parcel, work part-time in someone else’s field, rent in a third
farmer’s field, and also breed 1-2 buffaloes and some chicken. A few hours a day of time
saved per day can therefore be utilized in other income-generating activities.
The simplest is cooking gas: 49% of households in India still use firewood (Figure 37):
collecting firewood or even maintaining a stove that uses crop residue, coal or cow-dung
cake is a time consuming task. Not surprisingly, while reverse causality may also be at
play (higher income implies greater likelihood of LPG use), there is a strong correlation
between LPG use per capita and productivity (Figure 38).
Figure 37: Split of households by cooking fuel (2011) Figure 38: State GSDP vs LPG consumption per capita
Firewood49%
LPG29%
Crop residue9%
Cowdung cake8%
Kerosene3%
Coal, Charcoal
1%
Other1%
Other includes electricity, biogas, etc.
0
20
40
60
80
100
120
140
0 5 10 15 20 25
GSDP per capita
Per capita consumption of LPG (kgs)
INR '000s
Punjab
Bihar
Haryana
Source: Census of India (2011), Credit Suisse estimates Source: Ministry of Petroleum, CSO, Credit Suisse estimates
Similarly, moving to pukka housing, i.e., houses with brick-and-cement walls, floor and
roof, reduces the effort in maintaining the house, improves security, and provides better
quality shelter even in inclement weather. Easy access to water for drinking and cleaning
also helps save time for women of the household.
Figure 39: Water tank outside village Jaitapur, Sehore, MP Figure 40: % of rural women in non-farm work from home
Home-based81%
Employer's location/ other
19%
Source: Credit Suisse field visits Source: Home-based work in India (Unni, Rani, 2004), Credit Suisse
estimates
Rural families have diverse
profiles: land owners, part-
time workers, agri. workers
on rented land, rearing
cattle/ poultry, etc. Thus, a
few hours of time saved can
be utilized for other income-
generating activities
Cooking gas (faster
cooking), pukka houses and
easy access to water: all
help save time
13 March 2013
India Market Strategy 16
States like Madhya Pradesh have attempted to provide running water by building water
tanks in most large villages (Figure 39).
Time saving especially for women can drive more productive work: it is estimated that 81%
of the women in the informal manufacturing sector work out of their homes, mostly in
subcontracting relationships (Figure 40, Unni and Rani, 2004).
13 March 2013
India Market Strategy 17
The economics of land prices Of the several common misconceptions about India, the most important concerns land
prices: yet another example of “what you don’t understand, you distrust”. The dramatic
increases in prices all over India are talked of in dismissive tones, and for the past few
years, a common view has been that this is one gigantic “bubble”, the bursting of which
could be catastrophic (given the large number of landholders). This is unlikely, in our view,
however “bubble-like” the price trends may appear to be.
Figure 41: Most land is rural (2003) Figure 42: Urban land ownership far more skewed
Rural94%
Urban6%
0
20
40
60
80
100
0.005 0.01 0.10 1 2 5 7 10 12 19 25 49
% o
f hou
seho
lds
Land area owned by households (acre), scale non-linear
Rural Urban
Source: NSSO, Credit Suisse estimates Source: NSSO, Credit Suisse estimates
This is important: land prices are critical to the sense of well-being for most Indians: land
ownership, not surprisingly given the higher population densities in cities, is primarily in
rural areas (Figure 41), and much of this section focuses on rural (and mostly agricultural)
land prices. As per the NSSO (National Sample Survey Organization) survey, conducted
in 2003, less than 40% of households had more than one acre of land (Figure 42): but
these in absolute numbers still number ~400 mn people.
The feeble link between land prices and productivity
Figure 43: US farmland prices Figure 44: Rental yields in the US 1967-2012
0
500
1,000
1,500
2,000
2,500
1850 1912 1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008
US Farmland (US$/acre)
0%
1%
2%
3%
4%
5%
6%
7%
1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Cropland rent-to-value
Source: US Department of Agriculture, Credit Suisse estimates Source: US Department of Agriculture, Credit Suisse estimates
The common view on land
prices is that of one gigantic
“bubble” waiting to burst: we
tend to disagree
While 94% of all land is
rural, only 40% of rural
households own more than
one acre
13 March 2013
India Market Strategy 18
Most of the research on land prices focuses on crop yields, and often suggests the farmer
may be better off selling the land, so low is the financial yield. But that’s misleading: land
yields have been falling for more than a century and not just in India (see Figure 43 for US
land prices and Figure 44 for yields), and the price of land in India (at least) has never
been the discounted value of rent (a proxy for agricultural profits). Even before
independence, yields were down to 3% (Figure 45), as land prices grew faster than rents,
and 1.8-2.2% in 1995. Mark Twain’s statement “Buy land. They’ve stopped making it,” is
likely popular.
Figure 45: Rental yields on land in Punjab Figure 46: Rising yields and the price of food grains
0
2
4
6
8
10
12
14
16
18
20
1890 1910 1930 1950 1970 1990
0
5
10
15
20
25
30
35
40
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
All India Yield Price of Foodgrains (Indexed to INR 1 in 1960)
Source: Hirashima (1978, 2008), Government of India Source: MoSPI, RBI, Credit Suisse Estimates
This is not to say that agricultural yields in India have not improved: they have as Figure
46 shows, or that the prices of agricultural commodities have not risen faster than average
inflation (they have too). In fact, food prices have risen at a 7.5% CAGR over the past 50
years, on top of the 2.2% CAGR in yield.
Figure 47: Agricultural rent CAGR in Punjab—1890-2010 Figure 48: CAGR of land prices in Punjab—1890-2010
-2%
0%
2%
4%
6%
8%
10%
12%
1900 1910 1920 1930 1940 1972 1988 1990 1995 2005 2010
Rent CAGR for the period
0%
5%
10%
15%
20%
25%
30%
1900 1910 1920 1930 1940 1972 1988 1990 1995 2005 2010
Land Price CAGR, Punjab (%)
Source: Hirashima (1978 & 2008), Ministry of Agriculture, Credit
Suisse estimates
Source: Hirashima (1978 & 2008), 99acres.com, Credit Suisse
estimates
Land yields have been
falling for more than a
century and not just in India
but also in the US
Food prices have risen at
7.5% CAGR over the past
50 years vs. the 2.2%
CAGR in agri. yields
13 March 2013
India Market Strategy 19
Not surprisingly, the rent on agricultural land has also risen quite sharply (Figure 47). But
this still cannot explain the (anecdotally) astronomical increases in land prices in the past
5-6 years—there is no corresponding data unfortunately to show recent price trends, but in
the past, land prices have risen quite steadily. Figure 48 is at best an approximation, given
the wide variance in land prices and the absence of a standardised data series over time,
but we believe quite representative.
While land does go through phases of correction too (e.g., between 1914 and 1942 in the
US5, Figure 43), it is usually only in times of serious distress. As land doesn’t depreciate
and can potentially be used forever, it is not hard to imagine why rental yields come down
with better law and order—the discounted cash flows can run much longer.
We believe there are four drivers of land prices: (1) Improved connectivity—just as in
cities, where the provision of metro rail connectivity to a particular area raises real-estate
prices, connecting a village by all-weather roads increases the value of its land; (2) Clear
land titles6—land then becomes easily tradable, somewhat like a stock with more free
float; (3) Availability of “excess liquidity”—the buying and selling of land as a form of
savings; and (4) Alternative uses of land. The third of these reasons (i.e., rural Indians
investing in land as a form of savings) is potentially bubble-forming: we look at it in detail
later in this section.
Drivers of land prices
(1) Road connectivity
The availability of all-weather roads has always impacted land prices. This impact is not
merely on the land adjoining the road, which then becomes useful for other much more
productive economic activities (e.g., a fertiliser shop, a doctor’s clinic or a grocery or
hardware store), but on all areas close to it. In fact, the further away that a village is from a
main road, the lower the land value: Figure 49 documents this in villages outside the town
of Ludhiana in Punjab in 1995. Figure 23 on Page 9 shows a more recent occurrence:
higher prices and higher price growth for land in a village with road connectivity.
Figure 49: Land prices vs. distance from main road (1995) Figure 50: Horticulture/Floriculture more productive
0
100
200
300
400
500
6000
5
10
15
20
25
A B C D
Dis
tanc
e fr
om M
ain
Roa
d in
Rev
erse
(km
)
Distance from Main Road (km) Price (Rs'000/acre, 1995, RHS)
1
5
7
7
9
10
14
32
42
0 10 20 30 40
Wheat
Tomato
Watermelon
Turmeric
Brinjal
Sugarcane
Cauliflower
Chrysanthemum
Banana
Net income per hectare (x times of wheat)
Source: Hirashima (2008) quoting R Chand (1999) Source: TN Agriculture University, Credit Suisse estimates
5 Long-run Trends in American Farmland Values, Peter H. Lindert, Working Paper No. 45, Agricultural
History Center, University of California, Davis. February 1988. 6 The Land Market in Development: A Case Study of Punjab in Pakistan and India, S Hirashima. Economic
and Political Weekly, October 2008.
We believe that there are
four drivers of land prices:
improved connectivity, clear
land titles, availability of
excess liquidity and land
being put to alternative uses
13 March 2013
India Market Strategy 20
There are three ways in which roads affect land prices:
(1) Arbitrage: Urban land prices are significantly higher than rural land prices—if an all-
weather road makes it easier to travel between the two land parcels, the price
arbitrage is likely to narrow.
(2) New usage: Some uses of land are not possible in a physically isolated habitation:
these can sometimes make significantly more productive use of land (Figure 50).
Intuitively, the agricultural rent on which yield on land is conventionally measured is
usually the lowest of all other uses that land can be put to: when measured on some of
these novel uses the yields may be quite a bit higher. Clearly, not all land can be used
to grow flowers/fruit, but with consumption picking up, an acreage shift is happening.
These uses pick up once roads are built. For example, an all-weather road allows the
cultivation of perishables (e.g., vegetables or poultry) for commercial reasons. Not
only does this create new jobs (as we show on page 27 in Figure 66), but also
increases the intrinsic value of the land. Thus, the strong recent acceleration in poultry
(Figure 51) and vegetable farming (Figure 52) are supportive of higher land prices.
Figure 51: Poultry farming growth at unprecedented pace Figure 52: Acreage under fruits/vegetables rising
0%
2%
4%
6%
8%
10%
12%
0
200
400
600
800
1,000
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
CAGR (5Yr, RHS) Poultry Birds (Mn)
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0
2007 2008 2009 2010 2011 2012
Mn Ha under Fruits/Vegetables % of Total (RHS)
Source: FAO, CS Estimates Source: RBI, Ministry of Agriculture, Credit Suisse estimates
(3) Better realisations on current crops: Of the various reasons the farmer would dump
his output pretty much in the week of harvest (i.e., the need for cash, lack of storage,
cost of freight), the difficulty in reaching an end-market in quick time when the price is
right is an important one. Our field trips suggest some farmers are increasingly holding
on to inventory themselves so as to avoid the low prices prevailing at harvest time
when much of the produce gets dumped onto the market (Figure 54).
Roads impact prices by
reducing arbitrage, enabling
new usage and better crop
realizations
13 March 2013
India Market Strategy 21
Figure 53: New roads mostly where connectivity is bad Figure 54: Cotton stored waiting for better prices
0
10
20
30
40
50
60
70
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
AP GU HA HP KA KE MH PU TN AS BI MP OR RA UP WB
% of Habitats connected (1997) Kms. Built (2001-11) (RHS)
Developed States Under-developed States
Source: PM Gram Sadak Yojana, Ministry of Road Transport Source: Credit Suisse field visits
In prior notes, as well as in the previous section, we have mentioned the tremendous
improvement in rural road connectivity over the past decade, and the sharp increase in
number of habitations connected by all-weather roads (Figure 24 and Figure 25 on page
10). These have been the prime drivers of land-price appreciation, in our view. The impact
of these roads has been amplified by the fact that much of this is in states and areas
where road connectivity was abysmal until PMGSY started (Figure 53).
(2) Clear, computerised land titles
According to a McKinsey study in 2001, 90% of land titles in India were unclear. This has
serious economic implications, chiefly: (1) the inability to monetise the asset by borrowing
against it or leasing it out (except informally); (2) introducing friction in the land market,
significantly reducing transactions; and (3) increasing the number of legal disputes. The
problem was compounded by a manual system of records, where the local registrar would
hand-transcribe records every five years. Records were often illegible and error-prone.
Starting August 2008 the central government started the National Land Records
Modernisation Programme (NLRMP), which aims to complete the process of conclusive
titling all over India by 2017. There are four prerequisites for this:
■ Single agency: to handle property records. Many states have 2-3 such agencies
■ Mirror principle: at any time, property records should reflect ground reality
■ Curtain principle: conclusive record; robing past records should be unnecessary
■ Title guarantee: insurance for indemnifying property holder against inaccuracies.
In this regard, the central government’s Ministry of Rural Development has a Bill in the
draft stage: the Land Titling Bill, 2011. It hasn’t yet been introduced in the Parliament. It is
a Model Bill: once passed by the central government, states will then legislate copies of
this bill.
India has embarked on a
programme to move from
presumptive titling to
conclusive titling (the
Torrens system)
13 March 2013
India Market Strategy 22
Figure 55: Significant progress in clear land titles Figure 56: Good pick-up in stamp duty/registration fees
States: 20
Area: 82%
17
78%
14
72%
11
61%
8
60%
States that havecompleted records modernization
Started digitzation of cadastral maps (likely to take time till 2017)
Provided legal sanctitiy to RoRs
Hosted RoR data online for citizen access
8 major states: AP, TN, KA, MP, MH, OR, RJ, UP (60% of area)
0
100
200
300
400
500
600
700
800
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013b
Stamps/ Registration
INR Bn
2010-13 CAGR: 22%
2002-07 CAGR: 17%
Source: Ministry of Rural Development, Credit Suisse estimates Source: RBI study on State Finances, Credit Suisse estimates
In the interim, however, many states have started doing the groundwork on this. They are
issuing and recognising computerised “presumptive titles”: after 2017, these are to
become “conclusive”. A “presumptive title” means that the land is presumed to belong to
the title-holder until some other claimant stakes claim. A “conclusive title” (the Torrens
system), on the other hand, means that the government certifies the title-holder as the sole
claimant and if at a later point some other valid claimant does emerge, he/she will be
compensated by the government.
Significant progress has already been made (Figure 55), with 20 states (82% of India’s
land area) having completed the modernisation of records, 17 (78%) having provided legal
sanctity to these records, 14 (61%) having started digitisation of cadastral (satellite) maps,
and eight major states (60% of land area) have also made these available on-line. Work is
progressing at a frantic pace in other major states, such as Bihar.
In Madhya Pradesh (MP), we spent some time with the very helpful Mr NS Solanki, the
Tehsildar of Sehore district (a tehsildar is the revenue administrative officer of the district
and the arbitrator of land disputes). He was busy certifying land-title proofs: the MP
government promises a certified land title within five working days (Figure 58). This is part
of a larger service guarantee of the MP government (Figure 57).
Figure 57: Public Service Centre with service guarantee Figure 58: Government promise: land title proof in 5 days
Source: Field trip photograph, Sehore, Madhya Pradesh Source: Field trip photograph, Sehore, Madhya Pradesh
Significant progress has
been made with states
accounting for 82% of total
area completing
modernisation of records
The MP Government
guarantees providing proof
of land title in five working
days
13 March 2013
India Market Strategy 23
(3) Land as savings
Anecdotally, the rural economy revolves around land: the ownership of land confers
prestige and the increase in land prices over the past few decades increases the use of
land as a vehicle for inter-generational wealth transfer.
For most villagers and farmers, interaction with the financial world is limited to borrowing
from banks. The trust element so critical to banking and financial services is yet to develop
fully: keeping savings in a bank/investing in financial assets is not common. In the last
available debt and investment survey of the Reserve Bank of India (1991), only 1% of rural
assets were financial (Figure 59), against 8% of urban assets (Figure 60).
Figure 59: Split of rural assets (1991) Figure 60: Split of urban assets (1991)
Land64%
Buildings22%
Livestock3%
Machinery4%
Durables6%
Financial1%
Land36%
Buildings39%
Livestock0%
Machinery5%
Durables12%
Financial8%
Source: RBI Debt and Investment Survey, Credit Suisse estimates Source: RBI Debt and Investment Survey, Credit Suisse estimates
At least the rural asset split is unlikely to have moved meaningfully towards financial
savings in the past two decades: during our field trips, bank managers indicated rural
branches were all about assets and the liability franchise was weak. Villagers save in
silver, gold and land. Only about 9% of the banking system deposits comes from rural
areas (Figure 61), and this ratio has fallen over the past decade despite the increased
number of rural branches and an increase in the number of rural bank accounts. Rural
credit is about 14% of overall credit (Figure 62).
The discrepancy between the rural share of credit and deposits is partly due to the
inclusion of Agri and related loans of cooperative banks and regional rural banks; no such
split is available for deposits, so we have only taken the rural deposits of scheduled
commercial banks. Once excluded, the rural credit ratio would fall to 9.6%.
The rural economy revolves
around land. Rising prices
have made it a useful
vehicle for inter-generational
wealth transfer
During our field trips, bank
managers indicated rural
branches were all about
assets and the liability
franchise was weak.
13 March 2013
India Market Strategy 24
Figure 61: Split of banking system* deposits Figure 62: Split of banking system** credit
8%
9%
10%
11%
12%
13%
14%
15%
16%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Rural Deposits (INR Bn) As % of total
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
0
1,000
2,000
3,000
4,000
5,000
6,000
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Rural Credit (INR Bn) As % of total
* only scheduled commercial banks
Source: RBI, CS estimates
** all rural credit
Source: RBI, Credit Suisse estimates
Thus, the wealth created by economic growth and rising agricultural and non-agricultural
productivity is ploughed back into land, making demand for land price inelastic: rental
yields then become less relevant. Even the rental income for the large landowners (also
growing at a 10% CAGR: Figure 47) with limited investment outlets gets deployed into
land purchases. Further, ownership of land confers prestige.
Rising productivity being
ploughed back into land
makes demand for land
price inelastic and rental
yields less relevant
13 March 2013
India Market Strategy 25
Transformation manifested As demonstrated in the first two sections of this report, we believe that: (1) wage growth at
the bottom of the income pyramid is likely to continue; and (2) the appreciation of land
prices is also likely to sustain for the foreseeable period.
These once-in-a-lifetime changes are exciting and have fascinating and wide-ranging
implications for society, the economy and also politics. These include: how India
urbanises; the relative wealth of rural and urban India; the relative wealth of lower-income
versus middle-income India; inflation and interest rates; financial inclusion; the
manufacturing versus services split in the economy; India’s global manufacturing
competitiveness; consumption trends; the current account; the currency, etc.
Each warrants a treatise, which we intend to work on. For now, though, we focus on the
most topical of these questions: (1) can these trends sustain without government largesse
(many believe they cannot); (2) the changing consumption basket; and (3) opportunities
for financial inclusion.
1) Self-sustaining change: Productivity creates jobs
Figure 63: Then and now—division of labour, specialisation, economies of scale, job creation
Source: Field Visits, Credit Suisse research
Contrary to popular belief that growth in all things “rural” is driven by unrestrained
government spending, we believe the changes are already showing signs of being self-
sustaining. Figure 63 tracks changes in two simple activities: tailoring clothes and making
We focus on answering
three questions: (1) can
these trends (wage growth
and land price appreciation
sustain without government
largesse; (2) what will be the
impact of the changing
consumption basket; and (3)
what are the opportunities
from financial inclusion
13 March 2013
India Market Strategy 26
home-cooked dessert (Gulab Jamun: a dangerously high-calorie but delicious sweet).
During our field trips, we encountered a shop in the village of Sagar (Figure 64) 50km from
the small town of Bilaspur in Chhattisgarh that would have been inconceivable five years
back when all clothes shopping was done in the nearby town. Not only was this shop quite
spiffy, but instead of just reams of fabric, it had only readymade garments. The brands,
though, were mostly local, and the garments were sourced from some nearby town.
Figure 64: Garments shop selling readymade garments Figure 65: Jamun Mix (packaged recipe for a local sweet)
Source: Field Visits, Credit Suisse research Source: Field Visits, Credit Suisse research
Similarly, according to the store owner in Mograram, the “24 Carats Gulab Jamun” instant
mix was flying off the shelves (Figure 65). Just five years previously, village households
would take pride in preparing their own ingredients: not just for the supposed purity, but
also to save money. Clearly, the priority now is time.
A simple “before and after” scenario analysis shows how the economy changes: against
600 households preparing the mix for Gulab Jamun themselves, it is done by machinery in
Indore, 160km away. It is then transported by SCV/LCV to grocery stores. The reduced
labour at home is replaced by jobs in transportation and trade services.
These are only two examples of a productivity improvement driven by roads, phones,
electrification, and we must say the changing aspirations triggered by more exposure to
the world outside. Another obvious example is poultry farming: rising wage growth has
increased the demand for meat (Figure 66), and chicken is the cheapest meat available.
Sale of ready-made
garments and Gulab Jamun
mix in far-off villages are
only two examples of new
economic activity being
enabled by roads, phones
and electrification
13 March 2013
India Market Strategy 27
As explained earlier (Figure 51 on Page 20), rising rural road penetration is enabling
marginal farmers or even landless households to experiment with poultry farming.
Figure 66: Spending on meat consumption across deciles Figure 67: Jobs created in animal farming (chicken/fish)
0
20
40
60
80
100
120
1 2 3 4 5 6 7 8 9 10
Decile wise spend on egg, fish, meat (INR per month per capita)
Gradual increase in spend on poultry products across deciles (barring the jump from 9 to 10)
11.1
14.9
1.3
1.6
0
2
4
6
8
10
12
14
16
18
2005 2010
People employed in animal farming in rural (mn) Urban (mn)
3.8 mn jobs created in rural areas
Source: NSSO, Credit Suisse estimates Source: NSSO, Dept. of Animal Husbandry, Credit Suisse estimates
This is creating jobs: 3.8 mn new jobs were created in rural areas just in chicken and fish
production (Figure 67). As an aside, new person days of work created by chicken and fish
production (950 mn) itself are equal to the NREGA person days of work created between
2005 and 2010 (965 mn, see Figure 19).
There would be similar job creation for other consumption items boosted by rising wages
and enabled by improving infrastructure.
2) Changing consumption basket
We believe that 80% of rural households are effectively landless (Figure 15 on page 7),
and therefore dependent on wage growth for their consumption. We therefore take the first
eight deciles from the National Sample Survey (NSS) on consumption as our base set to
assess the impact of wage growth. Of these we exclude the first decile (i.e., the poorest),
which we believe would be primarily in Naxalism-affected tribal areas, which are not yet
affected by the trends we discuss here, i.e. roads, electricity, phones, water supply, etc.
Figure 68:Gap between consumption deciles for rural Figure 69: Number of years to transition one decile
0%
5%
10%
15%
20%
25%
30%
35%
0
200
400
600
800
1,000
1,200
1,400
1,600
1 2 3 4 5 6 7 8
MPCE (2012, INR) % gap from next decile
Decile:
0
1
2
3
4
5
6
7
1 2 3 4 5 6 7 8
# of years to transition at 5% real wage growth at 7.6%
Decile:
Source: NSSO, Credit Suisse estimates Source: NSSO, Labour Bureau, Credit Suisse estimates
Job creation in the poultry
industry has been equal to
that created by NREGA! (for
the period 2005-10)
13 March 2013
India Market Strategy 28
For deciles 2-7, the gap between deciles is mostly in the teens (see Figure 68). If the 7.6%
real wage growth seen over the past five years was to sustain, households would jump
one decile in 1.5-2 years (Figure 69). If real-wage growth were to slow to 5%, the transition
could take 2-3 years. This is a dramatic pace of change. We then estimate consumption of
various items using the consumption basket for each decile.
Monetising high land prices and land ownership
The increase in land prices in terms of the wealth effect that can translate into
consumption behaviour, in our view, should be limited to those that own more than two
acres of land. While these are only 20% of the total, they still number ~110 mn people.
The top-two deciles in rural areas are therefore also likely to continue with their
expenditure.
Even for relatively smaller farmers, though, the improving availability of clear recognised
land titles and the government’s decade-old scheme of Kisan Credit Cards (KCC), or
farmer credit cards, is allowing farmers to borrow against land as collateral. While these
loans are given in theory for farming working capital, and have indeed brought about some
change, e.g. allowing the farmer to hold inventory to gain a better price later, in many
cases, these loans are taken to fund consumption, e.g. buying a motorcycle, a daughter’s
marriage or a son’s education.
Figure 70: Growth in loans on Kisan Credit Cards Figure 71: Sharp jump in SCB loans on KCC
0
10
20
30
40
50
60
70
80
90
100
0
2
4
6
8
10
12
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Total cards issued (mn) Credit sanctioned per card ('000 INR)
50
55
60
65
70
75
80
85
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2010 2011 2012
Outstanding credit (INR bn) Credit outstanding per card (INR '000)
Source: RBI, Credit Suisse estimates Source: RBI, Credit Suisse estimates
The quantum that they can borrow is not linked to the land value, but to the crops they
intend to grow, and is meant to be for working capital. This amount varies from state to
state (e.g., it is Rs30,000/acre for soya farmers in MP and Rs75,000 for cotton farmers in
Gujarat), and is regularly revised upward (Figure 70). In the early years, this scheme was
driven largely by cooperative banks. Over the past few years scheduled commercial banks
(SCB) (especially public sector undertaking banks) have sharply expanded their presence,
both increasing the number of KCCs as well as the amount outstanding (Figure 71).
Sharp increase in cigarette consumption across deciles
As CS analyst Arnab Mitra points out in his 13 March report on ITC, cigarette consumption
picks up dramatically as we move from one decile to the next (Figure 72). This is most
clearly visible in the middle deciles, where the transition from bidis (cheap hand-rolled
cheroots in tendu leaves) to cigarettes is the fastest (Figure 73). This need not result in
rapid cigarette volumes for ITC, which instead chooses to raise pricing, keeping volumes
unchanged.
With a 7.6% real wage
growth (as seen over the
past five years), households
would jump one decile every
1.5-2 years
Clear land titles and Kisan
Credit Cards are allowing
farmers to monetize land by
borrowing against it
Cigarette consumption picks
up dramatically as we move
from one decile to the next
13 March 2013
India Market Strategy 29
Figure 72: Cigarette consumption spikes from 9-10 decile Figure 73: Bidi/ Cigarette ratio declines from decile 5
0
2
4
6
8
10
1 2 3 4 5 6 7 8 9 10
Cigarettes (Rs/person/month) (rural)
Decile:
0
20
40
60
80
100
120
140
160
180
1 2 3 4 5 6 7 8 9 10
Bidi:Cigarette ratio rural
Source: NSSO, Credit Suisse estimates Source: NSSO, Credit Suisse estimates
Consumption of ‘outside’ Items
We have also noticed another remarkable trend: that across deciles the propensity to
consume material not locally available grows (Figure 74). Thus, as consumption picks up,
so must deliveries to villages: this is likely the reason that light commercial vehicle (LCV)
and small commercial vehicle (SCV) sales have been so strong in the past decade. While
they seem to have slowed temporarily for a few months, we expect sustained growth over
the next several years (Figure 75, click here to view Credit Suisse NBFC analyst, Sunil
Tirumalai’s note on Shriram Transport).
Figure 74: Consumption of ‘outside’ items picks up Figure 75: LCV sales increasing at 30%
24%
25%
26%
27%
28%
29%
30%
31%
32%
33%
0
100
200
300
400
500
600
700
800
900
1 5 10
Monthly consumption sourced non-locally As % of total (RHS)
Decile:
(INR)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
0
50
100
150
200
250
300
350
400
450
500
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
LCV Sales ('000s) Ratio of LCV:M&HCV (RHS)
Source: NSSO, Credit Suisse estimates Source: SIAM, Credit Suisse estimates
The move towards better housing
Only 50% of Indians live in pukka houses (Figure 76), which have cemented walls, floors
and roofs. Assuming that if real wage growth continues for the first five deciles, the move
towards pukka houses would continue. Further, government spending on its subsidy
scheme, the Indira Awaas Yojana (IAY), is likely to rise 70% from Rs45,000/house to
Rs70,000/house from 1 April 2013 (i.e. FY14, Figure 77).
~30% of consumption items
(by value) in rural areas are
sourced from outside
Government spending on its
housing scheme, IAY, is set
to rise 70% (on a support
per household basis
13 March 2013
India Market Strategy 30
Figure 76: Split of kuccha/semi-pukka/pukka houses Figure 77: IAY spend to increase by 70% YoY in FY14
Pukka56%
Semi-Pukka27%
Kuccha17%
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
Budgeted (Rs mn) Actual (Rs mn)
Per house allocation increased from Rs 25k to Rs 35k
Per house allocation increased from Rs 35k to Rs 45k
Per house allocation increased from Rs 45k to
Rs 60k
Source: NSS Survey on Housing Condition and Amenities, 2008-09 Source: Min. of Rural Development, Credit Suisse estimates
Given the directed nature of this subsidy, clarity in the minds of the recipient over where
the largesse is coming from, and to some extent the lack of scrutiny on where and how the
amount has been spent, this scheme generally meets its spending targets (Figure 78).
Figure 78: Except FY13, IAY spending always over-budget Figure 79: Housing contributes 3/5ths of cement demand
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
FY01 FY03 FY05 FY07 FY09 FY11 FY13
Actual expenditure as a % of budget
FY13 was only year to have IAY actual spend < Budgets
65% 61%
17% 21%
19% 18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY12 FY15
Housing Infrastructure Industrial
CAGR 7-8%
CAGR 15-18%
CAGR 6-7%
Source: Budget documents, Credit Suisse estimates Source: Budget documents, , Credit Suisse estimates
As CS India cement analyst Anubhav Aggarwal points out in his assumption of coverage
report, 60%-plus of India’s cement demand comes from housing (Figure 79). About two-
thirds of this, or 40% is rural housing. Steady consumption growth in this segment was
what kept cement demand growth steady for the last several quarters. The recent sharp
slowdown has been driven by a steep decline in industrial activity: over the medium term,
though, rural housing should be supportive of cement demand-supply, especially in an
environment where large supply increases are unlikely.
60%-plus of India’s cement
demand comes from
housing and two-thirds of
this is from rural housing
13 March 2013
India Market Strategy 31
Better personal care
Figure 80: Spending on personal care across deciles Figure 81: 2009-12—more branches added to rural/S-urban
0
5
10
15
20
25
30
35
40
45
50
1 2 3 4 5 6 7 8 9 10
Spend (INR p.m.) on personal care (soap, oil, shampoo, etc.)
Decile:
Average increase of ~13% in monthly spend in each transition from deciles 2 to 9
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2005 2009 2012
Rural + semi-urban Urban Metro
(No. of branches)
Source: NSSO, Credit Suisse estimates Source: RBI, Credit Suisse estimates
Higher entertainment spending
One of the most sensitive consumption items to changing deciles is entertainment: spend
on watching TV rises quite visibly (Figure 82). The rural region also has a higher
penetration of direct-to-home devices (Figure 83) for receiving TV content. For detailed
analysis, see CS analyst Jatin Chawla’s note on Dish TV.
Figure 82: Spend on cable charges for TV content Figure 83: Higher direct-to-home penetration in rural
0
2
4
6
8
10
12
14
16
18
20
1 2 3 4 5 6 7 8 9 10
Spend (INR p.m.) on cable charges
Decile:
Average increase of ~50% in monthly spend in each transition from deciles 2 to 9
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
TV Penetration Cable & SatellitePentration
Direct-to-homePenetration
Urban Rural
Source: NSSO, Credit Suisse estimates Source: TAM Research (2011), Credit Suisse estimates
Financial inclusion
In an earlier section we have flagged the falling share of deposits for rural India (Figure 61
on page 24). This reflects as much a lack of financial literacy as the lack of convenient
options available. Scheduled commercial banks have been expanding into rural areas of
late (Figure 81), and the effort is to improve availability of banking services. Our field trips
suggested that at least in the villages we surveyed the business correspondent model was
not as successful as we had earlier assumed. Suburban branches, which can have staff
staying in urban settings but within 15-20 kms of villages, offer a via-media solution. For
detailed analysis, see CS analyst Ashish Gupta’s note on HDFC Bank.
Suburban branches, within
15-20 kms of villages, offer
via-media solution for
banking
13 March 2013
India Market Strategy 32
Stock selection
We select six stocks that should benefit from these macro themes (Figure 84).
Figure 84: Our focus set of stocks that should benefit from the macro theme
Reuters Rating Market cap Daily trading Performance 1Y fwd P/E Thematic
Company Category ticker US$ mn US$ mn 1M 3M 12M consensus connection
ITC Ltd Tobacco ITC.BO O 43,494 45.8 -1% -2% 44% 26.7 ~80% of EBITDA from cigarettes;
changing consumption basket
HDFC Bank Financials HDBK.BO O 28,205 34.1 -1% -7% 24% 18.0
Banking system involved in some
part(s) of all value chains;
increasing financial inclusion
ACC Limited Cement ACC.BO O 4,452 9.4 -1% -10% -3% 13.2 Move towards better (pucca)
housing
Shriram Transport
Finance NBFC SRTR.BO O 2,936 12.0 -7% -1% 21% 9.6
Increasing “outside” items
consumption translating to LCV
sales/ pool of used LCVs
Emami Ltd Staples EMAM.BO O 1,660 0.6 3% -3% 53% 24.2 Changing consumption basket of
personal care items
Dish TV India Media DSTV.BO O 1,320 4.5 -7% -14% 22% n.m.
Entertainment: Increasing
penetration of TV/ higher spend
on cable charges
Note: Priced as of 12 March 2012. Source: RAVE, Bloomberg, I/B/E/S, Credit Suisse estimates
Credit Suisse Delta One team has also created an Index (CSAPINDR Index). This offers
exposure to the following stocks (Figure 85):
Figure 85: Stocks to play the “India transforming” theme
Reuters Market cap Daily trading Performance 1Y forward P/E
Company Ticker US$ mn US$ mn 1M 3M 12M consensus
ITC Ltd ITC.BO 43,494 45.8 -1% -2% 44% 26.7
HDFC Bank HDBK.BO 28,205 34.1 -1% -7% 24% 18.0
Hindustan Unilever Ltd HLL.BO 17,712 26.0 -2% -18% 17% 26.4
Bajaj Auto Limited BAJA.BO 10,436 18.2 -4% -2% 9% 15.1
Asian Paints ASPN.BO 8,404 6.2 5% 11% 50% 31.8
Hero Motocorp Ltd HROM.BO 6,180 11.2 -3% -9% -13% 14.5
Godrej Consumer Prod. GOCP.BO 4,967 2.2 10% 11% 80% 29.8
ACC Limited ACC.BO 4,452 9.4 -1% -10% -3% 13.2
Dabur India DABU.BO 4,283 2.5 1% 2% 30% 25.3
Colgate-Palmolive India COLG.BO 3,296 3.7 -1% -7% 20% 29.2
Shriram Transport Fin. SRTR.BO 2,936 12.0 -7% -1% 21% 9.6
Marico Ltd MRCO.BO 2,589 0.8 0% 0% 36% 27.7
Pidilite PIDI.BO 2,386 1.5 7% 19% 59% 25.6
Emami Ltd EMAM.BO 1,660 0.6 3% -3% 53% 24.2
Dish TV India DSTV.BO 1,320 4.5 -7% -14% 22% 173.2
Note: Priced as of 12 March 2012. Source: RAVE, I/B/E/S, Bloomberg, Credit Suisse estimates
13 March 2013
India Market Strategy 33
Appendix I: Places visited Given the diversity of India, trends vary from state to state, and often within states. We
therefore limited the usage of anecdotes from our field trips to idea generation and to
weed out obvious follies of armchair analysis. However, in the spirit of fair disclosure in the
map below we have pointed out locations our team visited.
Figure 86: Places visited during the CS team’s field trips
Source: Credit Suisse research
13 March 2013
India Market Strategy 34
Appendix II: Company section
13 March 2013
India Market Strategy 35
ACC Limited ACC.BO / ACC IN Price (12 Mar 13): Rs1,285.40, Rating: OUTPERFORM, Target Price: Rs1,545.00, Analyst: Anubhav Aggarwal
Target price scenario
Scenario TP %Up/Dwn Assumptions
Upside 1,845.00 43.54 19x PE (1 standard deviaiton). Central Case 1,545.00 20.20 Two-year avg. P/E multiple (16x). Downside 1,009.00 (21.50) 0.8x replacement cost.
Key earnings drivers 12/12A 12/13E 12/14E 12/15E
Volume (mn tonnes) 24.1 25.1 26.0 27.1 Volume growth (%) 2.77 4.31 3.23 4.55 Price Increase (%) 9.4 6.9 8.0 6.8 Cost Increase (%) 7.20 6.18 5.58 5.44 EBITDA/t (Rs/t) 839 913 1,077 1,201
Income statement (Rs mn) 12/12A 12/13E 12/14E 12/15E
Sales revenue 111,680 124,424 138,539 154,505 Cost of goods sold 74,329 82,548 89,602 98,599 SG&A — — — — Other operating exp./(inc.) 17,287 18,921 20,984 23,305 EBITDA 20,065 22,955 27,953 32,601 Depreciation & amortisation 5,689 5,810 6,010 6,090 EBIT 14,376 17,145 21,943 26,511 Net interest expense/(inc.) 1,147 686 686 686 Non-operating inc./(exp.) 4,535 5,323 4,978 5,300 Associates/JV — — — — Recurring PBT 17,764 21,782 26,235 31,125 Exceptionals/extraordinaries (3,354) — — — Taxes 3,911 6,317 7,776 9,226 Profit after tax 10,499 15,465 18,459 21,899 Other after tax income — — — — Minority interests (94.3) (94.3) (94.3) (94.3) Preferred dividends — — — — Reported net profit 10,593 15,559 18,553 21,994 Analyst adjustments 2,348 — — — Net profit (Credit Suisse) 12,941 15,559 18,553 21,994
Cash flow (Rs mn) 12/12A 12/13E 12/14E 12/15E
EBIT 14,376 17,145 21,943 26,511 Net interest 1,147 686 686 686 Tax paid (3,911) (6,317) (7,776) (9,226) Working capital 266 (152) 1,067 638 Other cash & non-cash items 4,612 5,218 5,418 5,498 Operating cash flow 16,489 16,580 21,338 24,107 Capex (3,033) (10,000) (14,000) (14,000) Free cash flow to the firm 13,456 6,580 7,338 10,107 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) 4,538 5,323 4,978 5,300 Investing cash flow 1,505 (4,677) (9,022) (8,700) Equity raised — — — — Dividends paid (6,597) (6,597) (7,037) (7,037) Net borrowings — (4,000) — — Other financing cash flow (1,147) (686) (686) (686) Financing cash flow (7,743) (11,283) (7,723) (7,723) Total cash flow 10,251 621 4,594 7,685 Adjustments — — — — Net change in cash 10,251 621 4,594 7,685
Balance sheet (Rs mn) 12/12A 12/13E 12/14E 12/15E
Cash & cash equivalents 26,850 27,471 32,065 39,750 Current receivables 3,784 4,216 4,694 5,235 Inventories 12,414 13,831 15,400 17,174 Other current assets 5,640 5,641 5,641 5,641 Current assets 48,688 51,158 57,799 67,800 Property, plant & equip. 58,055 62,245 70,235 78,145 Investments 12,931 12,931 12,931 12,931 Intangibles — — — — Other non-current assets 4,407 4,407 4,407 4,407 Total assets 124,081 130,741 145,373 163,283 Accounts payable 23,012 24,544 26,569 28,784 Short-term debt 5,107 1,107 1,107 1,107 Current provisions 10,880 10,880 11,320 11,320 Other current liabilities 6,057 6,222 6,872 7,610 Current liabilities 45,056 42,753 45,868 48,821 Long-term debt — — — — Non-current provisions 5,238 5,238 5,238 5,238 Other non-current liab. — — — — Total liabilities 50,294 47,991 51,106 54,060 Shareholders' equity 73,787 82,750 94,266 109,224 Minority interests — — — — Total liabilities & equity 124,081 130,741 145,373 163,283
Per share data 12/12A 12/13E 12/14E 12/15E
Shares (wtd avg.) (mn) 188.0 188.0 188.0 188.0 EPS (Credit Suisse) (Rs) 69 83 99 117 DPS (Rs) 30.0 30.0 32.0 32.0 BVPS (Rs) 393 440 502 581 Operating CFPS (Rs) 88 88 114 128
Key ratios and valuation
12/12A 12/13E 12/14E 12/15E
Growth(%) Sales revenue 11.5 11.4 11.3 11.5 EBIT 21.2 19.3 28.0 20.8 Net profit (0.5) 20.2 19.2 18.5 EPS (0.5) 20.2 19.2 18.5 Margins (%) EBITDA 18.0 18.4 20.2 21.1 EBIT 12.9 13.8 15.8 17.2 Pre-tax profit 15.9 17.5 18.9 20.1 Net profit 11.6 12.5 13.4 14.2 Valuation metrics (x) P/E 18.7 15.5 13.0 11.0 P/B 3.27 2.92 2.56 2.21 Dividend yield (%) 2.33 2.33 2.49 2.49 P/CF 14.7 14.6 11.3 10.0 EV/sales 1.86 1.63 1.43 1.23 EV/EBITDA 10.3 8.8 7.1 5.8 EV/EBIT 14.4 11.8 9.0 7.2 ROE analysis (%) ROE 18.0 19.9 21.0 21.6 ROIC 24.3 28.8 32.3 33.9 Asset turnover (x) 0.90 0.95 0.95 0.95 Interest burden (x) 1.24 1.27 1.20 1.17 Tax burden (x) 0.73 0.71 0.70 0.70 Financial leverage (x) 1.68 1.58 1.54 1.49 Credit ratios Net debt/equity (%) (45.7) (46.3) (45.6) (46.4) Net debt/EBITDA (x) (1.68) (1.67) (1.54) (1.55) Interest cover (x) 12.5 25.0 32.0 38.6
Source: Company data, Thomson Reuters, Credit Suisse estimates.
0
2
4
6
8
10
12
14
16
18
20
2006 2007 2008 2009 2010 2011
12MF P/E multiple
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2006 2007 2008 2009 2010 2011
12MF P/B multiple
Source: IBES
13 March 2013
India Market Strategy 36
Dish TV India DSTV.BO / DITV IN Price (12 Mar 13): Rs67.20, Rating: OUTPERFORM, Target Price: Rs83.00, Analyst: Jatin Chawla
Target price scenario
Scenario TP %Up/Dwn
Upside Central case 83.00 23.51 Downside
Income statement (Rs mn) 3/12A 3/13E 3/14E 3/15E
Sales revenue 19,578 22,004 27,705 34,992 Cost of goods sold 10,025 11,311 13,535 16,192 SG&A 2,909 3,104 3,943 4,832 Other operating exp./(inc.) 1,661 1,815 2,013 2,232 EBITDA 4,984 5,775 8,214 11,736 Depreciation & amortisation 5,180 6,322 7,340 8,924 EBIT (196) (548) 874 2,812 Net interest expense/(inc.) 1,778 1,400 1,050 450 Non-operating inc./(exp.) 385.9 501.7 576.9 634.6 Associates/JV — — — — Recurring PBT (1,589) (1,446) 401 2,997 Exceptionals/extraordinaries — 764.0 — — Taxes — — — — Profit after tax (1,589) (682) 401 2,997 Other after tax income — — — — Minority interests — — — — Preferred dividends — — — — Reported net profit (1,589) (682) 401 2,997 Analyst adjustments — — — — Net profit (Credit Suisse) (1,589) (682) 401 2,997
Cash flow (Rs mn) 3/12A 3/13E 3/14E 3/15E
EBIT (196) (548) 874 2,812 Net interest — — — — Tax paid — — — — Working capital — — — — Other cash & non-cash items 5,180 6,322 7,340 8,924 Operating cash flow 4,984 5,775 8,214 11,736 Capex (5,210) (5,982) (8,955) (11,601) Free cash flow to the firm (226.1) (207.9) (741.3) 134.8 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) — — — — Investing cash flow (5,210) (5,982) (8,955) (11,601) Equity raised — — — — Dividends paid — — — — Net borrowings — — — — Other financing cash flow — — — — Financing cash flow — — — — Total cash flow (226.1) (207.9) (741.3) 134.8 Adjustments — — — — Net change in cash (226.1) (207.9) (741.3) 134.8
Balance sheet (Rs mn) 3/12A 3/13E 3/14E 3/15E
Cash & cash equivalents 3,851 4,874 5,598 1,382 Current receivables 286.1 286.1 286.1 286.1 Inventories 68.8 68.8 68.8 68.8 Other current assets 2,546 3,024 3,599 3,599 Current assets 6,752 8,253 9,552 5,335 Property, plant & equip. 14,204 13,864 15,479 18,157 Investments 1,500 1,500 1,500 1,500 Intangibles — — — — Other non-current assets 3,884 3,884 3,884 3,884 Total assets 26,340 27,501 30,416 28,877 Accounts payable 1,603 1,779 2,136 2,549 Short-term debt — — — — Current provisions 4,999 5,845 6,914 8,265 Other current liabilities 6,673 7,495 8,583 10,286 Current liabilities 13,275 15,119 17,633 21,099 Long-term debt 14,003 14,003 14,003 6,000 Non-current provisions — — — — Other non-current liab. — — — — Total liabilities 27,278 29,122 31,635 27,099 Shareholders' equity (938) (1,620) (1,220) 1,777 Minority interests — — — — Total liabilities & equity 26,340 27,501 30,416 28,877
Per share data 3/12A 3/13E 3/14E 3/15E
Shares (wtd avg.) (mn) 1,064 1,064 1,064 1,064 EPS (Credit Suisse) (Rs) (1.49) (0.64) 0.38 2.82 DPS (Rs) — — — — BVPS (Rs) (0.88) (1.52) (1.15) 1.67 Operating CFPS (Rs) 4.7 5.4 7.7 11.0
Key ratios and valuation
3/12A 3/13E 3/14E 3/15E
Growth(%) Sales revenue 36.3 12.4 25.9 26.3 EBIT 84 (179) 260 222 Net profit 16 57 159 648 EPS 16 57 159 648 Margins (%) EBITDA 25.5 26.2 29.6 33.5 EBIT (1.00) (2.49) 3.15 8.04 Pre-tax profit (8.11) (6.57) 1.45 8.56 Net profit (8.11) (3.10) 1.45 8.56 Valuation metrics (x) P/E (45) (105) 178 24 P/B (76.2) (44.1) (58.6) 40.2 Dividend yield (%) — — — — P/CF 14.3 12.4 8.7 6.1 EV/sales 4.17 3.67 2.89 2.18 EV/EBITDA 16.4 14.0 9.7 6.5 EV/EBIT (416) (147) 91 27 ROE analysis (%) ROE 1,022 53 (28) 1,075 ROIC (2.2) (6.5) 11.9 41.4 Asset turnover (x) 0.74 0.80 0.91 1.21 Interest burden (x) 8.09 2.64 0.46 1.07 Tax burden (x) 1.00 1.00 1.00 1.00 Financial leverage (x) (28.1) (17.0) (24.9) 16.2 Credit ratios Net debt/equity (%) (1,082) (563) (689) 260 Net debt/EBITDA (x) 2.04 1.58 1.02 0.39 Interest cover (x) (0.11) (0.39) 0.83 6.25
Source: Company data, Thomson Reuters, Credit Suisse estimates.
0
2
4
6
8
10
12
14
16
18
20
2006 2007 2008 2009 2010 2011
12MF P/E multiple
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2006 2007 2008 2009 2010 2011
12MF P/B multiple
Source: IBES
13 March 2013
India Market Strategy 37
Emami Ltd EMAM.BO / HMN IN Price (12 Mar 13): Rs594.65, Rating: OUTPERFORM, Target Price: Rs710.00, Analyst: Arnab Mitra
Target price scenario
Scenario TP %Up/Dwn Assumptions
Upside 750.00 26.12 Mentha prices correct by another 15-20%. Central case 710.00 19.40
Downside 630.00 5.94 Mentha prices move up in FY14 by 15-20%.
Key earnings drivers 3/12A 3/13E 3/14E 3/15E
Sales growth (%) 15.4 19.8 18.7 18.8 Margins (%) 20.4 19.9 21.3 22.2 — — — — — — — — — — — —
Income statement (Rs mn) 3/12A 3/13E 3/14E 3/15E
Sales revenue 14,535 17,407 20,655 24,538 Cost of goods sold 6,264 7,415 8,489 9,962 SG&A 5,303 6,534 7,759 9,125 Other operating exp./(inc.) — — — — EBITDA 2,968 3,458 4,407 5,451 Depreciation & amortisation 187.9 216.6 243.1 269.6 EBIT 2,780 3,241 4,164 5,181 Net interest expense/(inc.) — — — — Non-operating inc./(exp.) 389.1 547.6 716.7 928.1 Associates/JV — — — — Recurring PBT 3,169 3,788 4,881 6,109
Exceptionals/extraordinaries — — — — Taxes 401 568 830 1,161 Profit after tax 2,768 3,220 4,051 4,949 Other after tax income (179.4) — — — Minority interests 0.28 — — — Preferred dividends — — — — Reported net profit 2,588 3,220 4,051 4,949 Analyst adjustments — — — — Net profit (Credit Suisse) 2,588 3,220 4,051 4,949
Cash flow (Rs mn) 3/12A 3/13E 3/14E 3/15E
EBIT 2,780 3,241 4,164 5,181 Net interest — — — — Tax paid — — — — Working capital 699.8 (375.3) (88.4) (150.2) Other cash & non-cash items 125.0 195.9 130.1 37.0 Operating cash flow 3,605 3,062 4,206 5,068 Capex (1,131) (500) (500) (500) Free cash flow to the firm 2,473 2,562 3,706 4,568 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) (195.4) — — — Investing cash flow (1,327) (500) (500) (500) Equity raised — — — — Dividends paid (615) (1,495) (1,881) (2,297) Net borrowings — — — — Other financing cash flow (834.0) — — — Financing cash flow (1,449) (1,495) (1,881) (2,297) Total cash flow 829 1,067 1,825 2,271 Adjustments (174.3) — — — Net change in cash 655 1,067 1,825 2,271
Balance sheet (Rs mn) 3/12A 3/13E 3/14E 3/15E
Cash & cash equivalents 2,759 3,826 5,651 7,922 Current receivables 1,007 1,206 1,430 1,699 Inventories 1,122 1,335 1,585 1,882 Other current assets 1,237 1,431 1,698 2,017 Current assets 6,125 7,798 10,364 13,521 Property, plant & equip. 4,803 5,087 5,344 5,574 Investments 803.3 803.3 803.3 803.3 Intangibles 41.7 41.7 41.7 41.7 Other non-current assets — — — — Total assets 11,773 13,729 16,553 19,940 Accounts payable 1,328 1,471 1,738 2,057 Short-term debt — — — — Current provisions 1,621 1,709 2,095 2,512 Other current liabilities — — — — Current liabilities 2,950 3,180 3,833 4,569 Long-term debt 1,611 1,611 1,611 1,611 Non-current provisions — — — — Other non-current liab. 145.0 145.0 145.0 145.0 Total liabilities 4,706 4,937 5,589 6,325 Shareholders' equity 7,066 8,792 10,962 13,614 Minority interests 1.2 1.2 1.2 1.2 Total liabilities & equity 11,773 13,729 16,553 19,940
Per share data 3/12A 3/13E 3/14E 3/15E
Shares (wtd avg.) (mn) 151.3 151.3 151.3 151.3 EPS (Credit Suisse) (Rs) 17.1 21.3 26.8 32.7 DPS (Rs) 8.0 8.5 10.7 13.1 BVPS (Rs) 46.7 58.1 72.4 90.0 Operating CFPS (Rs) 23.8 20.2 27.8 33.5
Key ratios and valuation
3/12A 3/13E 3/14E 3/15E
Growth(%) Sales revenue 15.4 19.8 18.7 18.8 EBIT 16.1 16.6 28.5 24.4 Net profit 13.2 24.4 25.8 22.1 EPS 13.2 24.4 25.8 22.1 Margins (%) EBITDA 20.4 19.9 21.3 22.2 EBIT 19.1 18.6 20.2 21.1 Pre-tax profit 21.8 21.8 23.6 24.9 Net profit 17.8 18.5 19.6 20.2 Valuation metrics (x) P/E 34.8 27.9 22.2 18.2 P/B 12.7 10.2 8.2 6.6 Dividend yield (%) 1.35 1.43 1.80 2.20 P/CF 25.0 29.4 21.4 17.8 EV/sales 6.11 5.04 4.16 3.41 EV/EBITDA 29.9 25.4 19.5 15.3 EV/EBIT 32.0 27.1 20.6 16.1 ROE analysis (%) ROE 37.1 40.6 41.0 40.3 ROIC 37.3 44.1 51.2 59.0 Asset turnover (x) 1.23 1.27 1.25 1.23 Interest burden (x) 1.14 1.17 1.17 1.18 Tax burden (x) 0.87 0.85 0.83 0.81 Financial leverage (x) 1.67 1.56 1.51 1.46 Credit ratios Net debt/equity (%) (16.2) (25.2) (36.8) (46.4) Net debt/EBITDA (x) (0.39) (0.64) (0.92) (1.16) Interest cover (x) — — — —
Source: Company data, Thomson Reuters, Credit Suisse estimates.
0
2
4
6
8
10
12
14
16
18
20
2006 2007 2008 2009 2010 2011
12MF P/E multiple
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2006 2007 2008 2009 2010 2011
12MF P/B multiple
Source: IBES
13 March 2013
India Market Strategy 38
HDFC Bank HDBK.BO / HDFCB IN Price (12 Mar 13): Rs643.75, Rating: OUTPERFORM, Target Price: Rs770.00, Analyst: Ashish Gupta
Target price scenario
Scenario TP %Up/Dwn Assumptions
Upside 847.00 31.57 Sustainable higher RoEs as normalised retail credit cost remain below normalised cost for extended periods.
Central case 770.00 19.61 We are valuing HDFC Bank at 3.5x adjusted book value to arrive at our target price of Rs514.
Downside 693.00 7.65
Reversal in asset environment, significant increase in competition, high stock valuations and significant slowdown in consumer lending.
Key earnings drivers 3/12A 3/13E 3/14E 3/15E
Loan growth (%) 22.2 25.0 26.4 26.1 Fee income growth (%) 24.0 16.6 21.9 23.0 Cost income ratio (%) 49.0 48.1 46.9 45.6 Loan loss provisions (%) 0.45 0.55 0.67 0.70 — — — —
Valuation 3/12A 3/13E 3/14E 3/15E
EPS growth (%) 33.7 27.7 24.9 27.1 P/E (x) 28.9 22.6 18.1 14.3 P/B (x) 5.07 4.32 3.64 3.03 P/TB (x) 5.07 4.32 3.64 3.03 Dividend yield (%) 0.69 0.89 1.05 1.30
Income statement (Rs mn) 3/12A 3/13E 3/14E 3/15E
Interest income 272,864 329,186 394,324 479,582 Interest expense 149,896 178,968 205,510 242,656 Net interest income 122,968 150,218 188,814 236,926 Fee and commission income 54,396 63,447 77,333 95,111 Trading income — — — — Insurance income (& premiums) — — — — Other income — — — — Total non-interest income 54,396 63,447 77,333 95,111 Total income 177,363 213,665 266,147 332,037 Personal expense 33,999 40,946 49,323 58,793 Other expenses 51,902 62,801 76,617 93,473 Total expenses 85,901 103,746 125,940 152,266 Pre-provision profit 91,463 109,919 140,207 179,771 Loan loss provisions 14,367 13,896 19,403 25,097 Operating profit 77,096 96,023 120,805 154,674 Associates/JV — — — — Other non-operating inc./(exp.) (1,062) 2,000 2,500 2,000 Pre-tax profit 76,034 98,023 123,305 156,674 Taxes 23,466 30,877 39,457 50,136 Net profit before minorities 52,568 67,146 83,847 106,538 Minority interests — — — — Preferred dividends — — — — Exceptionals/extraordinaries — — — — Reported net profit 52,568 67,146 83,847 106,538 Analyst adjustments — — — — Net profit (Credit Suisse) 52,568 67,146 83,847 106,538
Balance sheet (Rs mn) 3/12A 3/13E 3/14E 3/15E
Assets Gross customer loans 1,970,652 2,462,126 3,113,841 3,926,093 Risk provisions — — — — Net customer loans 1,954,200 2,442,803 3,087,574 3,892,414 Interbank Loans 59,466 76,493 101,025 132,602 Investment & Securities 974,829 1,073,921 1,316,722 1,642,467 Cash & cash equivalents 149,911 197,389 248,687 311,776 Fixed Assets 23,472 26,766 32,046 38,184 Intangibles — — — — Other assets 217,216 209,931 263,511 297,958 Total assets 3,379,095 4,027,302 5,049,565 6,315,401 Liabilities Interbank deposits — — — — Customer deposits 2,467,064 2,960,477 3,789,411 4,812,552 Total deposits 2,467,064 2,960,477 3,789,411 4,812,552 Other liabilities 612,787 715,611 843,029 1,001,259 Total liabilities 3,079,851 3,676,089 4,632,440 5,813,811 Shareholders' equity 299,244 351,213 417,126 501,590 Minority interests — — — — Preferred stock — — — — Total liabilities & equity 3,379,095 4,027,302 5,049,565 6,315,401
Per share data 3/12A 3/13E 3/14E 3/15E
Shares (wtd avg.) (mn) 2,358 2,358 2,358 2,358 EPS (Credit Suisse) (Rs) 22.29 28.47 35.55 45.18 BVPS (Rs) 127 149 177 213 Tangible BVPS (Rs) 127 149 177 213 DPS (Rs) 4.45 5.75 6.79 8.36
Key ratios 3/12A 3/13E 3/14E 3/15E
Profitability and margins (%)
ROE stated 19.0 20.6 21.8 23.2 ROE - CS adj. 19.0 20.6 21.8 23.2 ROA - CS adj. 1.71 1.81 1.85 1.87 Gearing (x) 11.1 11.4 11.8 12.4 Asset quality (%) NPL/ gross loans 1.02 0.98 1.05 1.07 B/S loan loss coverage — — — — Loan/ deposit ratio 79.2 82.5 81.5 80.9 Capital ratios (%) Capital adequacy ratio 16.5 16.1 14.7 13.6 Tier 1 ratio 11.6 11.4 10.7 10.3 Equity Tier 1 ratio 11.6 11.4 10.7 10.3 Growth(%) Revenue 18.8 20.5 24.6 24.8 Operating expense 20.1 20.8 21.4 20.9 Pre-provision profit 17.6 20.2 27.6 28.2 Net profit 35.0 27.7 24.9 27.1 Deposit 18.3 20.0 28.0 27.0
Source: Company data, Thomson Reuters, Credit Suisse estimates.
0
2
4
6
8
10
12
14
16
18
20
2006 2007 2008 2009 2010 2011
12MF P/E multiple
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2006 2007 2008 2009 2010 2011
12MF P/B multiple
Source: IBES
13 March 2013
India Market Strategy 39
ITC Ltd ITC.BO / ITC IN Price (12 Mar 13): Rs298.85, Rating: OUTPERFORM, Target Price: Rs340.00, Analyst: Arnab Mitra
Target price scenario
Scenario TP %Up/Dwn Assumptions
Upside 360.00 20.46 No increase in taxation duty in budget Central case 340.00 13.77
Downside 250.00 (16.35) Adverse increase in taxataion duty on budget
Income statement (Rs mn) 3/12A 3/13E 3/14E 3/15E
Sales revenue 247,984 287,556 330,834 381,422 Cost of goods sold 96,325 107,598 120,002 135,002 SG&A 27,352 30,554 35,153 40,528 Other operating exp./(inc.) 39,575 44,778 51,452 58,832 EBITDA 84,732 104,626 124,228 147,061 Depreciation & amortisation 6,985 7,862 8,900 9,939 EBIT 77,747 96,764 115,327 137,122 Net interest expense/(inc.) 779.2 623.8 623.8 623.8 Non-operating inc./(exp.) 12,007 12,007 14,409 17,291 Associates/JV — — — — Recurring PBT 88,975 108,147 129,112 153,789
Exceptionals/extraordinaries — — — — Taxes 27,352 33,526 41,316 49,212 Profit after tax 61,624 74,622 87,796 104,577 Other after tax income — — — — Minority interests — — — — Preferred dividends — — — — Reported net profit 61,624 74,622 87,796 104,577 Analyst adjustments — — — — Net profit (Credit Suisse) 61,624 74,622 87,796 104,577
Cash flow (Rs mn) 3/12A 3/13E 3/14E 3/15E
EBIT 77,747 96,764 115,327 137,122 Net interest (2,315) (11,383) (13,785) (16,667) Tax paid (23,180) (33,526) (41,316) (49,212) Working capital (4,868) 2,530 2,828 4,241 Other cash & non-cash items 764 7,238 8,276 9,315 Operating cash flow 48,149 61,623 71,331 84,799 Capex (23,678) (20,000) (20,000) (20,000) Free cash flow to the firm 24,471 41,623 51,331 64,799 Disposals of fixed assets 559.3 — — — Acquisitions — — — — Divestments — — — — Associate investments (1,202) — — — Other investment/(outflows) 2,219 12,007 14,409 17,291 Investing cash flow (22,102) (7,993) (5,591) (2,709) Equity raised 7,650 — — — Dividends paid (40,015) (52,384) (61,633) (73,413) Net borrowings (99.1) — — — Other financing cash flow (1.3) (623.8) (623.8) (623.8) Financing cash flow (32,466) (53,008) (62,257) (74,037) Total cash flow (6,419) 622 3,482 8,053 Adjustments — — — — Net change in cash (6,419) 622 3,482 8,053
Balance sheet (Rs mn) 3/12A 3/13E 3/14E 3/15E
Cash & cash equivalents 28,189 40,818 58,709 84,053 Current receivables 9,860 11,434 13,154 15,166 Inventories 56,378 65,375 75,214 86,715 Other current assets 16,942 23,229 26,725 30,811 Current assets 111,370 140,855 173,802 216,745 Property, plant & equip. 90,992 103,130 114,230 124,291 Investments 63,166 63,166 63,166 63,166 Intangibles — — — — Other non-current assets 22,768 22,768 22,768 22,768 Total assets 288,295 329,918 373,965 426,969 Accounts payable 47,861 55,432 63,713 73,384 Short-term debt 118.0 118.0 118.0 118.0 Current provisions 44,111 55,927 65,530 77,699 Other current liabilities — — — — Current liabilities 92,090 111,477 129,360 151,200 Long-term debt 773.2 773.2 773.2 773.2 Non-current provisions — — — — Other non-current liab. 8,882 8,882 8,882 8,882 Total liabilities 101,745 121,132 139,016 160,856 Shareholders' equity 187,919 210,156 236,319 267,483 Minority interests — — — — Total liabilities & equity 289,664 331,288 375,335 428,339
Per share data 3/12A 3/13E 3/14E 3/15E
Shares (wtd avg.) (mn) 7,818 7,818 7,818 7,818 EPS (Credit Suisse) (Rs) 7.9 9.5 11.2 13.4 DPS (Rs) 4.50 5.73 6.74 8.03 BVPS (Rs) 24.0 26.9 30.2 34.2 Operating CFPS (Rs) 6.2 7.9 9.1 10.8
Key ratios and valuation
3/12A 3/13E 3/14E 3/15E
Growth(%) Sales revenue 17.2 16.0 15.1 15.3 EBIT 20.3 24.5 19.2 18.9 Net profit 23.6 21.1 17.7 19.1 EPS 22.3 21.1 17.7 19.1 Margins (%) EBITDA 34.2 36.4 37.5 38.6 EBIT 31.4 33.7 34.9 36.0 Pre-tax profit 35.9 37.6 39.0 40.3 Net profit 24.8 26.0 26.5 27.4 Valuation metrics (x) P/E 37.9 31.3 26.6 22.3 P/B 12.4 11.1 9.9 8.7 Dividend yield (%) 1.51 1.92 2.25 2.69 P/CF 48.5 37.9 32.8 27.6 EV/sales 9.4 8.1 7.0 6.0 EV/EBITDA 27.5 22.2 18.5 15.5 EV/EBIT 30.0 24.0 19.9 16.6 ROE analysis (%) ROE 35.5 37.5 39.3 41.5 ROIC 36.1 40.4 45.0 51.4 Asset turnover (x) 0.86 0.87 0.88 0.89 Interest burden (x) 1.14 1.12 1.12 1.12 Tax burden (x) 0.69 0.69 0.68 0.68 Financial leverage (x) 1.53 1.57 1.58 1.60 Credit ratios Net debt/equity (%) (14.5) (19.0) (24.5) (31.1) Net debt/EBITDA (x) (0.32) (0.38) (0.47) (0.57) Interest cover (x) 100 155 185 220
Source: Company data, Thomson Reuters, Credit Suisse estimates.
0
2
4
6
8
10
12
14
16
18
20
2006 2007 2008 2009 2010 2011
12MF P/E multiple
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2006 2007 2008 2009 2010 2011
12MF P/B multiple
Source: IBES
13 March 2013
India Market Strategy 40
Shriram Transport Finance Co Ltd SRTR.BO / SHTF IN Price (12 Mar 13): Rs701.55, Rating: OUTPERFORM, Target Price: Rs840.00, Analyst: Sunil Tirumalai
Target price scenario
Scenario TP %Up/Dwn Assumptions
Upside 1,008.0
0 43.68
NIMs assumed to increase by 25 bp over next 2-3 years
Central Case 840.00 19.73 NIMs assumed to decrease by 75 bp over next 2-3 years
Downside 672.00 (4.21) NIMs assumed to decrease by 175 bp over next 2-3 years
Key earnings drivers 3/12A 3/13E 3/14E 3/15E
Loan growth 0.17 0.26 0.28 0.26 NIMs 0.08 0.07 0.07 0.07 — — — — — — — — — — — —
Valuation 3/12A 3/13E 3/14E 3/15E
EPS growth (%) 7.4 10.9 16.3 16.2 P/E (x) 12.1 10.9 9.4 8.1 P/B (x) 2.51 2.09 1.75 1.48 P/TB (x) 2.51 2.09 1.75 1.48 Dividend yield (%) 1.08 1.19 1.39 1.65
Income statement (Rs mn) 3/12A 3/13E 3/14E 3/15E
Interest income 58,836 65,336 76,677 90,397 Interest expense 25,457 28,567 33,867 40,956 Net interest income 33,379 36,769 42,809 49,441 Fee and commission income 1,155 1,732 2,338 2,923 Trading income — — — — Insurance income (& premiums) — — — — Other income 1,284 1,651 1,918 2,247 Total non-interest income 1,155 1,732 2,338 2,923 Total income 34,534 38,500 45,147 52,364 Personal expense 4,079 4,577 5,390 6,292 Other expenses 4,467 5,303 6,141 7,100 Total expenses 8,546 9,880 11,531 13,392 Pre-provision profit 27,272 30,272 35,535 41,219 Loan loss provisions 7,696 8,564 10,299 11,902 Operating profit 19,575 21,708 25,236 29,317 Associates/JV — — — — Other non-operating inc./(exp.) — — — — Pre-tax profit 19,575 21,708 25,236 29,317 Taxes 6,488 7,192 8,360 9,712 Net profit before minorities 13,088 14,515 16,876 19,605 Minority interests — — — — Preferred dividends — — — — Exceptionals/extraordinaries — — — — Reported net profit 13,088 14,515 16,876 19,605 Analyst adjustments — — — — Net profit (Credit Suisse) 13,088 14,515 16,876 19,605
Balance sheet (Rs mn) 3/12A 3/13E 3/14E 3/15E
Assets Gross customer loans 246,049 309,623 396,530 497,209 Risk provisions 5,961 6,777 8,268 10,139 Net customer loans 238,353 301,059 386,231 485,307 Interbank Loans — — — — Investment & Securities — — — — Cash & cash equivalents 53,946 70,177 84,756 103,170 Fixed Assets 556.8 659.8 768.4 874.2 Intangibles — — — — Other assets 83,996 90,317 105,385 123,181 Total assets 376,852 462,213 577,140 712,532 Liabilities Interbank deposits — — — — Customer deposits — — — — Total deposits — — — — Other liabilities 313,644 386,372 486,633 605,038 Total liabilities 313,644 386,372 486,633 605,038 Shareholders' equity 63,208 75,840 90,507 107,494 Minority interests — — — — Preferred stock — — — — Total liabilities & equity 376,852 462,213 577,141 712,532
Per share data 3/12A 3/13E 3/14E 3/15E
Shares (wtd avg.) (mn) 226.4 226.4 226.4 226.4 EPS (Credit Suisse) (Rs) 57.81 64.12 74.54 86.60 BVPS (Rs) 279 335 400 475 Tangible BVPS (Rs) 279 335 400 475 DPS (Rs) 7.6 8.3 9.8 11.6
Key ratios 3/12A 3/13E 3/14E 3/15E
Profitability and margins (%)
ROE stated 23.0 20.9 20.3 19.8 ROE - CS adj. 23.0 20.9 20.3 19.8 ROA - CS adj. 3.73 3.46 3.25 3.04 Gearing (x) 6.16 6.03 6.25 6.51 Asset quality (%) NPL/ gross loans 2.82 2.74 2.61 2.55 B/S loan loss coverage 85.9 80.0 80.0 80.0 Loan/ deposit ratio — — — — Capital ratios (%) Capital adequacy ratio 24.3 23.5 22.6 21.8 Tier 1 ratio 17.0 16.5 15.6 14.8 Equity Tier 1 ratio 17.0 16.5 15.6 14.8 Growth (%) Revenue 16.2 12.1 17.2 16.0 Operating expense 17.5 15.6 16.7 16.1 Pre-provision profit 15.7 11.0 17.4 16.0 Net profit 7.5 10.9 16.3 16.2 Deposit — — — —
Source: Company data, Thomson Reuters, Credit Suisse estimates.
0
2
4
6
8
10
12
14
16
18
20
2006 2007 2008 2009 2010 2011
12MF P/E multiple
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2006 2007 2008 2009 2010 2011
12MF P/B multiple
Source: IBES
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India Market Strategy 41
Companies Mentioned (Price as of 12-Mar-2013)
ACC Limited (ACC.BO, Rs1285.4) Asian Paints (ASPN.BO, Rs4749.6) Bajaj Auto Limited (BAJA.BO, Rs1955.15) Colgate-Palmolive India (COLG.BO, Rs1313.75) Dabur India (DABU.BO, Rs133.2) Dish TV India (DSTV.BO, Rs67.2) Emami Ltd (EMAM.BO, Rs594.65) Godrej Consumer Products Ltd (GOCP.BO, Rs791.15) HDFC Bank (HDBK.BO, Rs643.75) Hero Motocorp Ltd (HROM.BO, Rs1677.65) Hindustan Unilever Ltd (HLL.BO, Rs444.1) ITC Ltd (ITC.BO, Rs298.85) Marico Ltd (MRCO.BO, Rs217.7) Pidilite (PIDI.BO, Rs252.35) Shriram Transport Finance Co Ltd (SRTR.BO, Rs701.55)
Disclosure Appendix
Important Global Disclosures
Neelkanth Mishra, Arnab Mitra, Jatin Chawla, Sunil Tirumalai, Anubhav Aggarwal, Ashish Gupta, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutral s the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian a s well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Au stralia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total retu rn of the relevant country or regional benchmark.
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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
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India Market Strategy 42
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 43% (54% banking clients)
Neutral/Hold* 38% (46% banking clients)
Underperform/Sell* 16% (40% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a rel ative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment ob jectives, current holdings, and other individual factors.
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Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (DABU.BO, HLL.BO, HDBK.BO, EMAM.BO, DSTV.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (HLL.BO, DSTV.BO) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (HDBK.BO) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (DSTV.BO) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (HLL.BO, DSTV.BO) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (COLG.BO, DABU.BO, HLL.BO, HROM.BO, EMAM.BO, DSTV.BO) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (HDBK.BO) within the past 12 months
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (DSTV.BO).
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BAJA.BO, COLG.BO, DABU.BO, HLL.BO, HROM.BO, MRCO.BO, ACC.BO, SRTR.BO, ITC.BO, HDBK.BO, EMAM.BO, DSTV.BO) within the past 12 months
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To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
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India Market Strategy 43
Credit Suisse Securities (India) Private LimitedNeelkanth Mishra ; Arnab Mitra ; Jatin Chawla ; Ravi Shankar ; Akshay Saxena ; Sunil Tirumalai ; Chunky Shah ; Anubhav Aggarwal ; Ashish Gupta ; Prashant Kumar
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683.
13 March 2013
India Market Strategy IA0146.doc
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