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5 November 2014
Asia Themes
EQUITY RESEARCH
India Equity Strategy
Indias real GDP has doubled in the past decade from cUS$700bn to US$1.4tn
(2013) and from cUS$650/capita to US$1,200/capita GDP. Following the changed
political scenario this year, expectations have risen that the country could again
double its GDP over the next decade.
Bhuvnesh Singh
+91 22 6719 6314
bhuvnesh.singh@barclays.com
BSIPL, Mumbai
Vijit Jain
Equity Research
Our equity strategy team analyses eight economic indicators across nearly 200
countries to study the feasibility of this. The analysis indicates that India compares well
with other countries that have achieved the transition from US$1,000-2,000/capita
GDP over the past 50 years. Further, while all economies have followed their own
unique path to growth, a number of economies have seen three changes: 1) GDP share
of household consumption reduced; 2) net exports increased; and 3) government
spending trended between 14-18% of GDP (vs 11% in India). Further, for high-growth
countries: a) investment as a proportion of GDP remained above 35%; and b)
manufacturing as a share of GDP rose above 20%.
Economics Research
Our economists believe India can achieve average real GDP growth rates of 7-8% over
the next 5-10 years. This will likely be on the back of a gradual cyclical recovery and
policy initiatives, which accord priority to: 1) boosting the manufacturing sector;
2) planned urbanization; and 3) improving the effectiveness of public services.
CONTENTS
EQUITY RESEARCH ........................................................................................... 3
Executive summary: Indias next steps What is possible? ............................................................. 3
Key Charts .................................................................................................................................................... 4
No simple achievement for India in the past decade ......................................................................... 8
India primed for further growth ............................................................................................................ 11
How could India change over the next decade? ............................................................................... 18
Our focus remains on the medium term ............................................................................................ 27
ECONOMICS RESEARCH................................................................................31
Governments three-pronged approach a sustainable boost for non-inflationary growth . 31
Political transition is the key catalyst ................................................................................................... 34
Why India is expected to do much better ........................................................................................... 36
What are the policy challenges? ........................................................................................................... 39
Manufacturing .......................................................................................................................................... 40
Urbanisation .............................................................................................................................................. 43
Public service delivery ............................................................................................................................. 45
5 November 2014
EQUITY RESEARCH
Executive summary: Indias next steps What is possible?
EQUITY RESEARCH
India Equity Strategy
Bhuvnesh Singh
+91 22 6719 6314
bhuvnesh.singh@barclays.com
BSIPL, Mumbai
Vijit Jain
+91 (0) 22 6719 6211
vijit.jain@barclays.com
BSIPL, Mumbai
Rachna Biyani
+91 22 6719 6248
rachna.biyani@barclays.com
BSIPL, Mumbai
Indias real GDP has doubled in the past decade from cUS$700bn to US$1.4tn (2013)
and from cUS$650/capita to US$1,200/capita GDP. Following the changed political
scenario this year, expectations have risen that the country could again double its GDP
over the next decade. We analyse eight economic indicators across nearly 200 countries
to study the feasibility of this.
No simple achievement in the past decade: India is one of the 40 countries to have crossed
the US$1,000/capita GDP threshold in the past 50 years. During this time, 42 countries
failed to achieve the same. Indias GDP growth rate at a 7.6% CAGR over the past decade is
also in the 90th percentile among nearly 200 countries.
Primed for further growth: On eight broad economic parameters, we find that Indias
economy compares well with 20 countries (growth countries) that doubled their GDP per
capita from a base level of US$1,000-US$1,100 over the past 50 years. Indias savings rate
of 26% (vs 21% average), inflation of 7.9% (vs 6.8% median), household consumption as a
share of GDP of 58% (vs 65% average) are all close to average for these growth countries
when they were at a similar stage of development.
Two issues to resolve, and one interesting find: However, India has a mountain to climb
compared to other growth economies in: 1) contribution to manufacturing (14% in India
and growth countries moved from an average of 13.5% to 28.8% over their US$1,000US$2,000 transition periods); and 2) net exports (-6% for India; improved c700bps for
growth countries). Prime Minister Modi has correctly identified this issue by launching his
Make in India campaign (for more details please see Megatrends: India's manufacturing
Exports poised for strong growth, 15 July 2014). Interestingly, we notice that Indian
government spending is rather small at c11% of GDP compared with a 14-18% range for
most other growth countries.
How could India change over the next decade? While all economies have followed their
own unique path to growth, we note that a number of economies have seen three changes
1) GDP share of household consumption reduced; 2) net exports increased; and 3)
government spending trended between 14-18% of GDP. Further, for high-growth countries:
a) investment as a proportion of GDP remained above 35%; and b) manufacturing as a
share of GDP rose above 20%.
Our focus remains on the medium term: Over the next three years, our economists expect
a cyclical economic recovery on lower inflation, improved consumer spending and
increased capacity utilisation. Improvement would initially benefit consumer-oriented
sectors, and we believe these sectors should be the first to exhibit earnings recovery.
Improvement in the policy environment is likely to impact corporates with low capacity
utilisation (materials, utilities) before percolating down to strong investment growth
(industrials). On these themes, we highlight our India stock picks: HDFC Bank, Axis Bank,
Tata Motors, Maruti Suzuki, Bharti Airtel, Tata Steel, Shree Cement, Havells, ONGC, Just Dial
and Lupin (all rated OW by our analysts).
5 November 2014
Key Charts
FIGURE 2
Decadal GDP growth of India accelerated to 7.6%
FIGURE 1
Only 18 sub-US$1,000/capita countries (1960) broke the
US$2,000/capita barrier over 1960-2012
40 broke into
>US$1,000/capita
4 broke into
>US$4,000/capita
18 broke into
>US$2,000/capita
7.6
8
7
4
14
18
6.2
40
5
22
4.2
3.8
3.2
3
42
2
1
1960-2012
0
FY54-64 FY64-74 FY74-84 FY84-94 FY94-04 FY04-14
Source: United Nations Statistics Division, Barclays Research
FIGURE 3
India needs to sustain, possibly improve its GCF
FIGURE 4
Indias capital formation pace
India
Belize
Cabo Verde
Bhutan
Swaziland
Botswana
Armenia
Bosnia
Congo, Rep.
Georgia
Turkmenistan
Azerbaijan
Dominican Rep.
Tunisia
Sri Lanka
Angola
Malaysia
Morocco
Korea
Thailand
China
India
23.8
40.9
63.5
80.3
53.5
21.1
13.5
34.1
26.6
48.6
32.0
6.5
45.7
24.8
35.7
11.5
19.0
7.3
37.4
37.3
39.9
43
gross capital formation % GDP
% GDP
100
90
80
70
60
50
40
30
20
10
0
38
33
28
23
18
13
8
-
500
1,000
1,500
Population
FIGURE 5
Inflation is comparable to most countries
FIGURE 6
And lending rates are also below the median
% GDP
20
15
5 November 2014
9.8
13.2
Thailand
5.8
11.5
8.2
7.5
18.2
Azerbaijan
Korea
18.8
Georgia
13.5
19.1
Armenia
13.3
Swaziland
11.3
14.3
12.2
Bhutan
Cabo Verde
India
China
Morocco
Sri Lanka
Tunisia
Bosnia
0
Botswana
India
China
Thailand
Korea
Morocco
Malaysia
Sri Lanka
Tunisia
Dominican Rep.
Azerbaijan
Georgia
Turkmenistan
Population
Congo, Rep.
Bosnia
Armenia
Botswana
Bhutan
Swaziland
Belize
Cabo Verde
13.6
7.9
3.2
4.3
6.0
9.7
1.4
8.4
5.0
16.1
10
Belize
23.4
15
9.0
10.2
6.2
0.8
4.4
11.4
10.3
5.6
7.3
0.9
10
5
39.5
25
20
Population
Source: World Bank, IMF, Barclays Research Note: These are rates collected by
IMF as representative interest rates offered by banks to resident customers
FIGURE 8
Manufacturing as share of GDP has plateaued in India
FIGURE 7
Share of manufacturing is low in India (at US$1,000/capita
GDP)
31.6
15.2
21.9
16.2
7.9
3.4
14.3
16.8
21.8
8.6
34.7
6.8
11.2
4.7
11.7
14.9
10.1
4.4
10.1
8.5
9.4
India
16
Belize
Cabo Verde
Bhutan
Swaziland
Botswana
Armenia
Bosnia and
Congo, Rep.
Georgia
Turkmenistan
Azerbaijan
Dominican
Tunisia
Sri Lanka
Angola
Malaysia
Morocco
Korea, Rep.
Thailand
China
India
40
35
30
25
20
15
10
5
0
Manufacturing % GDP
at US$1,000/capita
% gdp
15
14
13
12
11
10
9
8
-
500
1,000
Population
Source: United Nations Statistics Division, Barclays Research
FIGURE 9
Net exports as % GDP
FIGURE 10
Indias net export position has weakened
India
4
4.2
1.6
5.8
Net Exports
at US$1,000/capita
Belize
-27.5
Cabo Verde
-28.9
Bhutan
-20.6
Swaziland
-23.9
Botswana
-24.7
Armenia
-18.9
Bosnia-47.3
Congo, Rep.
Georgia
-16.7
Turkmenistan
-31.1
Azerbaijan
Dominican Rep.
-18.2
Tunisia
Sri Lanka
-5.9
Angola
-2.3
NA
Malaysia
Morocco
-8.3
Korea
NA
Thailand
-9.2
China
India
-5.9
20
10
0
-10
-20
-30
-40
-50
-60
10.2
% GDP
1,500
0
-
500
1,000
1,500
-2
-4
-6
-8
-10
Population
FIGURE 11
Share of household consumption in India vs peers at
US$1,000/capita GDP level
FIGURE 12
Household consumption share has levelled in recent years
Population
5 November 2014
India
80
household consumption % GDP
Belize
Cabo Verde
Bhutan
Swaziland
Botswana
Armenia
Bosnia
Congo, Rep.
Georgia
Turkmenistan
Azerbaijan
Dominican Rep.
Tunisia
Sri Lanka
Angola
Malaysia
Morocco
Korea
Thailand
China
India
89.2
64.0
44.4
30.6
72.7
90.4
104.9
34.0
90.5
68.4
47.3
76.9
56.7
66.8
20.5
67.0
75.3
105.4
60.8
44.5
57.8
% GDP
100
90
80
70
60
50
40
30
20
10
0
75
70
65
60
55
50
-
500
1,000
1,500
FIGURE 14
India: Government consumption share of GDP has declined
over Indias US$500-US$1,000/capita GDP transition
FIGURE 13
Government consumption in India is lower than most
countries, possibly reflecting lower taxes as a % of GDP
Government consumption expenditure
at US$1,000/capita
25
11.6
11.1
14.9
17.2
14.6
11.0
10
16.1
20.3
20.9
9.2
11.9
11.3
28.7
7.7
8.5
13.3
12.2
7.1
15.0
12.9
20
15
India
14
govt consumption % GDP
30
56.6
% GDP
Belize
Cabo Verde
Bhutan
Swaziland
Botswana
Armenia
Bosnia
Congo, Rep.
Georgia
Turkmenistan
Azerbaijan
Dominican Rep.
Tunisia
Sri Lanka
Angola
Malaysia
Morocco
Korea
Thailand
China
India
13
12
11
10
9
8
-
500
1,000
FIGURE 15
NIFTY Index P/E ratio: 1yr forward P/E
FIGURE 16
NIFTY Index EPS growth trends
NIFTY Index
+Stdev
x
21
Avg
-stdev
% y/y
35
30
25
20
15
10
5
0
-5
-10
-15
-20
19
17
16.2
15
14.2
13
12.2
1,500
Population
14.7
11
9
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
27.9
15.0
16.7
18.9
10.5
5.2
1.0
-17.1
FY09
FY10
FY11
FY12
FY13
FIGURE 17
Barclays Research recommended Equity Portfolio relative to NIFTY Index
Ratio (x)
Building Materials
Telecom
Consumer dis.
Private sector Banks
IT
Healthcare
Energy
Consumer staples
Materials
Utilities
Public sector Banks
Industrials
0
0.2
0.4
0.6
0.8
1.2
1.4
5 November 2014
Price
target
Rating
(Rs/share) (Rs/share)
Tata Motors
Market Cap
(US $ mn)
EPS
CAGR
EPS
FY14
FY15E
P/E
P/B
EV/EBITDA
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
25.1
531
561 OW /Neu
25,710
46.5
65.3
85.1
35.3
8.1
6.2
2.0
1.6
24.8
3,287
3,764 OW /Neu
15,952
92.2
130.6
194.6
45.3
25.2
16.9
4.3
3.6
17.1
21.3
HDFC Bank
911
1,032 OW /Neu
35,279
35.3
43.9
54.3
24.0
20.7
16.8
4.2
3.5
22.1
22.6
445
463 OW /Neu
16,545
26.5
29.4
36.0
16.6
15.1
12.4
2.4
2.1
16.8
17.9
26.0
Maruti Suzuki
OW /Pos
1,687
17.2
15.6
30.5
33.3
98.0
50.1
17.1
13.0
17.4
1,530
489
2,000
618 OW /Neu
7,510
38.0
40.3
40.4
3.1
12.1
12.1
1.1
1.1
8.6
8.7
Shree Cement
9,127
8,980 OW /Neu
4,915
288.2
226.0
295.8
1.3
40.4
30.9
6.6
5.4
18.1
17.5
Lupin Ltd
1,359
1,592
OW /Pos
9,845
40.9
54.1
65.3
26.4
25.1
20.8
6.7
5.2
26.7
25.1
ONGC Ltd
405
440
OW /Pos
55,199
31.0
27.5
35.1
6.4
14.7
11.5
1.9
1.7
13.1
15.4
Bharti Airtel
396
467 OW /Neu
26,547
6.8
15.9
21.7
78.5
24.9
18.3
2.3
2.1
9.5
11.8
Havells
291
313 OW /Neu
2,848
7.2
9.2
11.9
29.2
31.6
24.4
9.1
7.4
28.2
30.3
5 November 2014
FIGURE 19
No. of countries at various GDP per capita levels (2013)
62
45
32
30
>US$8,000
US$4,000-8,000
US$1000-2,000
US$2,000-4,000
20
<US$1000
70
60
50
40
30
20
10
-
<US$1000
US$2,000-4,000
> US$8,000
no
100
90
80
70
60
50
40
30
20
10
-
19
26
9
12
11
10
15
1960
32
33
36
37
15
14
8
11
14
7
13
11
15
15
11
9
12
41
34
37
31
31
29
1970
1980
1990
2000
2010
2013
13
45
29
US$1000-2,000
US$4,000-8,000
Note: All GDP/capita figures in this and associated charts are in constant 2005
US$ terms. Source: United Nations Statistics Division, Barclays Research
Note: This chart is based on data from 95 countries for which all data from 1960
until 2012 is available.
Source: United Nations Statistics Division, Barclays Research
FIGURE 21
Only 18 sub-US$1,000/capita countries (1960) broke the
US$2,000/capita barrier over 1960-2012
FIGURE 22
of which just two countries are large (population >50mn)
Population distribution
sub US$1,000-2,000 countries
no
40 broke into
>US$1,000/capita
18 broke into
>US$2,000/capita
4 broke into
>US$4,000/capita
8
7
18
4
14
6
5
40
22
4
7
3
2
42
1960-2012
<1mn
5 November 2014
1-10mn
10-50mn
>50mn
US$1,000-1,100 to US$2,000-2,200/capita
12
10
8
6
11
2
2
0
<10 Years
10-20 Years
>20 Years
8.4
Bhutan
5.3
7.6
Tunisia
6.9
Swaziland
Turkmenistan
6.3
Georgia
Dominican 7.2
7.2
Cabo Verde
11.8
8.4
Botswana
Congo, Rep.
Belize
Bosnia and
6.7
13.4
Armenia
5.1
Sri Lanka
Azerbaijan
7.0
Malaysia
9.1
4.1
Angola
Morocco
8.8
Korea, Rep.
10.5
9.0
20.0
34.9
Population
20-50mn
Population >
50mn
China
20
18
16
14
12
10
8
6
4
2
0
Thailand
5 November 2014
FIGURE 25
Large countries (>50mn population): per capita income
distribution (2012)
FIGURE 26
Several large (>50mn population) and poor (<US$2,000 per
capita GDP) countries achieved >6% decadal growth CAGRs
10,000
9,000
14
12
10
8
6
4
2
0
-2
-4
-6
-8
8,000
US$/capita
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
100
200
10 year GDP
CAGR
India
1980
300
Countries:
1. Per capita GDP < US$2,000
2. Population >50mn
1985
1990
1995
2000
2005
2010
2012
Population (mn)
Note: Dots at the edge of chart represent values higher than the limits of the axis.
Source: United Nations Statistics Division, World Bank, Barclays Research
FIGURE 27
Decadal GDP growth rate of India accelerated to 7.6% over the past decade
%
7.6
8.0
7.0
6.2
6.0
5.0
5.0
4.0
4.2
3.8
3.2
3.0
2.0
1.0
FY54-64
FY64-74
FY74-84
FY84-94
FY94-04
FY04-14
5 November 2014
10
16
14
12
Years
35.0
17 years for doubling to
US$2,000/capita would be the
slowest quaritile globally
30.0
10
8
FIGURE 29
Pace of GDP/capita doubling to US$2,000: 17 years timeline
would put India in the slowest quartile
25.0
20.0
15.0
4
2
10.0
5.0
-2
-4
0.0
1st Quartile
2nd Quartile
3rd Quartile
4th Quartile
1st Quartile
2nd Quartile
3rd Quartile
4th Quartile
If we assume a 6-8% real GDP growth rate, Indias per capita GDP would double from 2010
levels during 2021-25. Note that over the past decade, Indias per capita GDP has increased
at a CAGR of 7.6% (4.6% CAGR over 2010-13). We present two alternative scenarios below
to examine the potential GDP to be achieved by India by 2025.
FIGURE 30
Scenario I: At c6% GDP CAGR, Indias per capita GDP could double in 15 years
India
2010
2025
US$/capita
1,032
2,092
Population (mn)
1,200
1,419
1,238
2,968
CAGR (%)
6.0
Source: United Nations Statistics Division, World Bank, Government of India, Barclays Research
FIGURE 31
Scenario II: At 8%+ GDP CAGR, Indias per capita GDP could double in 10 years
India
2010
2021
US$/capita
1,032
2,112
Population (mn)
1,200
1,367
1,238
2,888
CAGR (%)
8.0
Source: United Nations Statistics Division, World Bank, Government of India, Barclays Research
5 November 2014
11
FIGURE 32
Several countries, particularly in South East Asia and China, have experienced 25-year
periods of >6% GDP growth
16.0
14.0
12.0
10.0
8.0
6.0
1995
2000
Bhutan
China: Macao SAR
Malaysia
Qatar
Viet Nam
Botswana
Equatorial Guinea
Maldives
Singapore
2005
2010
Cambodia
India
Republic of Korea
Thailand
2012
China
Lao People's DR
Indonesia
Uganda
Population
5 November 2014
India
80
household consumption % GDP
Belize
Cabo Verde
Bhutan
Swaziland
Botswana
Armenia
Bosnia
Congo, Rep.
Georgia
Turkmenistan
Azerbaijan
Dominican Rep.
Tunisia
Sri Lanka
Angola
Malaysia
Morocco
Korea
Thailand
China
India
89.2
64.0
44.4
30.6
72.7
90.4
104.9
34.0
90.5
68.4
47.3
76.9
56.7
66.8
20.5
67.0
75.3
105.4
60.8
44.5
57.8
% GDP
100
90
80
70
60
50
40
30
20
10
0
FIGURE 34
Household consumption share has levelled in recent years
75
70
65
60
55
50
-
500
1,000
1,500
12
FIGURE 35
India needs to sustain, possibly improve its gross capital
formation share
Gross Fixed Capital Formation
at US$1,000/capita
India
Belize
Cabo Verde
Bhutan
Swaziland
Botswana
Armenia
Bosnia
Congo, Rep.
Georgia
Turkmenistan
Azerbaijan
Dominican Rep.
Tunisia
Sri Lanka
Angola
Malaysia
Morocco
Korea
Thailand
China
India
23.8
40.9
63.5
80.3
53.5
21.1
13.5
34.1
26.6
48.6
32.0
6.5
45.7
24.8
35.7
11.5
19.0
7.3
37.4
37.3
39.9
43
gross capital formation % GDP
% GDP
100
90
80
70
60
50
40
30
20
10
0
38
33
28
23
18
13
8
-
500
1,000
Population
FIGURE 37
Gross Domestic Savings Rate
FIGURE 38
Indias gross domestic savings pace
India
39.6
32.2
25.2
China
1.9
Korea
India
38
Thailand
15.6
Morocco
20.9
26.1
Angola
Malaysia
33.0
17.4
Tunisia
Sri Lanka
27.3
15.8
Dominican Rep.
9.9
Azerbaijan
2.7
Georgia
Armenia
-0.9
Congo, Rep.
Botswana
27.8
34.4
42.0
Bhutan
45
40
35
30
25
20
15
10
5
0
-5
Swaziland
% GDP
1,500
33
28
23
18
13
8
-
500
1,000
1,500
Population
Source: United Nations Statistics Division, Barclays Research
5 November 2014
13
FIGURE 40
and lending rates are comparable
FIGURE 39
Inflation is comparable to most countries except China,
Thailand
% GDP
25
20
20
15
9.8
13.2
5.8
11.5
8.2
7.5
18.2
Azerbaijan
13.5
18.8
Georgia
19.1
13.3
Swaziland
11.3
14.3
12.2
Bhutan
Cabo Verde
13.6
7.9
3.2
16.1
10
4.3
6.0
9.7
1.4
8.4
5.0
9.0
10.2
6.2
0.8
4.4
11.4
10.3
5.6
7.3
0.9
10
Belize
23.4
15
India
China
Thailand
Korea
Morocco
Sri Lanka
Tunisia
Bosnia
Armenia
India
China
Thailand
Korea
Morocco
Malaysia
Sri Lanka
Tunisia
Dominican Rep.
Azerbaijan
Turkmenistan
Georgia
Congo, Rep.
Bosnia
Armenia
Botswana
Bhutan
Swaziland
Belize
Cabo Verde
Population
Botswana
Population
Note: net domestic credit is the sumo f net claims on the central government and
claims on other sectors of the domestic economy.
Source: United Nations Statistics Division, IMF, World Bank, Barclays Research
13.9
17.2
China
India
36.3
20.8
57.3
27.8
73.6
57.5
64.2
45.2
Thailand
Morocco
Angola
Sri Lanka
Azerbaijan
Georgia
Turkmenistan
Armenia
0
Botswana
India
China
Population
19.3
57.3
Bhutan
50
Thailand
Korea
Morocco
44.2
100
8.6
8.4
Malaysia
Angola
Sri Lanka
Tunisia
Dom. Republic
Azerbaijan
Turkmenistan
Georgia
Congo, Rep.
Bhutan
Armenia
Cabo Verde
200
150
5 November 2014
250
Swaziland
71.9
31.5
57.9
43.7
16.1
21.5
8.7
20
8.4
6.4
40
9.3
60
21.2
47.6
59.4
80
350
300
82.5
120
100
% GDP
119.3
140
Cabo Verde
% GDP
FIGURE 42
External debt stock of India lower than peer countries
311.9
FIGURE 41
Net domestic credit levels higher than most countries at similar
levels of per capita GDP but lower than China and Thailand
Population
Source: United Nations Statistics Division, IMF, World Bank, Barclays Research
14
FIGURE 43
Indias net domestic credit
FIGURE 44
India: External debt stock
% GDP
% GDP
90
35
80
30
70
25
60
50
20
40
15
30
10
20
10
0
0
-
200
400
600
800
1,000
1,200
1,400
200
400
600
800
1,000
1,200
21.9
16.2
7.9
3.4
14.3
16.8
21.8
8.6
34.7
6.8
11.2
4.7
11.7
14.9
10.1
4.4
10.1
8.5
9.4
Population
Source: United Nations Statistics Division, Barclays Research
5 November 2014
India
16
Belize
Cabo Verde
Bhutan
Swaziland
Botswana
Armenia
Bosnia and
Congo, Rep.
Georgia
Turkmenistan
Azerbaijan
Dominican
Tunisia
Sri Lanka
Angola
Malaysia
Morocco
Korea, Rep.
Thailand
China
India
40
35
30
25
20
15
10
5
0
Manufacturing % GDP
at US$1,000/capita
% gdp
FIGURE 46
Manufacturing as share of GDP has plateaued in India
15
14
13
12
11
10
9
8
-
500
1,000
1,500
15
4.2
1.6
5.8
India
Belize
-27.5
Cabo Verde
-28.9
Bhutan
-20.6
Swaziland
-23.9
Botswana
-24.7
Armenia
-18.9
Bosnia-47.3
Congo, Rep.
Georgia
-16.7
Turkmenistan
-31.1
Azerbaijan
Dominican Rep.
-18.2
Tunisia
Sri Lanka
-5.9
Angola
-2.3
NA
Malaysia
Morocco
-8.3
Korea
NA
Thailand
-9.2
China
India
-5.9
20
10
0
-10
-20
-30
-40
-50
-60
Net Exports
at US$1,000/capita
10.2
% GDP
FIGURE 48
Indias net export position has deteriorated
0
-
500
1,000
1,500
-2
-4
-6
-8
-10
Population
Looking at how exports and imports have individually fared over the growth period, we note
recent stabilisation in the share of exports while imports continued to rise.
FIGURE 49
Exports as % of GDP at US$1,000/capita GDP
5 November 2014
30.9
19.1
27.4
84.9
NA
NA
26.6
59.7
42.7
82.4
32.2
39.3
30.1
40.7
88.4
66.5
69.4
53.9
45.8
34.0
39.7
21.6
23.3
21.5
NA
NA
18.3
21.1
31.7
34.9
51.3
38.0
44.2
23.0
23.8
12.5
41.8
41.9
25.0
25.2
Population
100
90
80
70
60
50
40
30
20
10
0
Imports
at US$1,000/capita
Belize
Cabo Verde
Bhutan
Swaziland
Botswana
Armenia
Bosnia
Congo, Rep.
Georgia
Turkmenistan
Azerbaijan
Dominican Rep.
Tunisia
Sri Lanka
Angola
Malaysia
Morocco
Korea
Thailand
China
India
82.5
% GDP
Belize
Cabo Verde
Bhutan
Swaziland
Botswana
Armenia
Bosnia
Congo, Rep.
Georgia
Turkmenistan
Azerbaijan
Dominican Rep.
Tunisia
Sri Lanka
Angola
Malaysia
Morocco
Korea
Thailand
China
India
90
80
70
60
50
40
30
20
10
0
Exports
at US$1,000/capita
64.6
% GDP
FIGURE 50
Imports as % of GDP at US$1,000/capita GDP
Population
16
FIGURE 51
India: Evolution of exports/imports
2012
2013
29%
2011
21%
34%
30%
2010
26%
18%
2009
2008
24%
19%
2007
2006
38%
24%
1,500
2005
1,000
2004
500
46%
44%
2003
2002
10
69%
15
2000
20
32%
25
1999
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
30
55%
2001
35
Export/Imports % GDP
FIGURE 52
Gold has accounted for one-third of Indias trade deficit
25
10
5
11.6
11.1
14.9
17.2
14.6
11.0
15
16.1
20.3
20.9
9.2
11.9
11.3
28.7
7.7
8.5
13.3
12.2
7.1
15.0
12.9
20
Belize
Cabo Verde
Bhutan
Swaziland
Botswana
Armenia
Bosnia
Congo, Rep.
Georgia
Turkmenistan
Azerbaijan
Dominican Rep.
Tunisia
Sri Lanka
Angola
Malaysia
Morocco
Korea
Thailand
China
India
Population
5 November 2014
India
14
govt consumption % GDP
30
56.6
% GDP
FIGURE 54
India: Government consumption share of GDP has declined
over Indias US$500-US$1,000/capita GDP transition
13
12
11
10
9
8
-
500
1,000
1,500
17
4.9
70.0
-7.0
-7.9
60.0
50.0
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
2021
2024
China
55.0
Thailand
-18.4
Morocco
Korea -21.8
-19.0
Malaysia
Angola
Sri Lanka
Tunisia
Azerbaijan
Turkmenistan
-32.3
Dominican Rep.
-11.5
-1.9
-18.3
-7.9
80.0
65.0
Georgia
Congo, Rep.
-18.5
Bosnia
Armenia
% GDP
75.0
3.2
11.3
29.7
-18.8
Botswana
Swaziland
Bhutan
-5.3
2.9
-0.6
Belize
Cabo Verde
Population
7.2
% GDP
40
30
20
10
0
-10
-20
-30
-40
FIGURE 56
At Indias trend rate, household consumption may decline
600bps to c53% by 2024E
FIGURE 57
Brazil and China experience suggests decline in share of
household consumption as share of GDP
FIGURE 58
at least until GDP reaches cUS$4000/capita
Brazil
China
65
household consumption % GDP
68
66
64
62
60
58
56
54
52
50
60
55
50
45
40
35
30
2,000
4,000
6,000
8,000
1,000
2,000
3,000
5 November 2014
4,000
18
FIGURE 59
Similar experience in Korea
Korea
110
household consumption % GDP
FIGURE 60
and Thailand
Thailand
70.0
68.0
100
66.0
90
64.0
80
62.0
70
60.0
58.0
60
56.0
50
54.0
40
52.0
50.0
30
-
5,000
10,000
15,000
20,000
25,000
1,000
2,000
3,000
4,000
10.6
10.7
China
India
16.5
24.5
18.2
16.1
18.8
21.0
10.8
15.3
13.0
Jordan
20.9
Thailand
Ukraine
Malaysia
Morocco
Angola
Tunisia
Guatemala
Azerbaijan
Bosnia
Armenia
Botswana
Belize
China
Thailand
Korea
Morocco
Angola
Malaysia
Tunisia
Sri Lanka
Georgia
Bosnia
Armenia
Botswana
Bhutan
Swaziland
Belize
Cabo Verde
5 November 2014
5.0
-
Population
14.8
11.9
13.7
10.0
18.5
23.0
11.6
16.6
8.1
3.6
Azerbaijan
Dominican Rep.
9.1
Turkmenistan
14.0
17.7
7.9
Congo, Rep.
16.9
9.8
14.2
10
Nicaragua
15.0
30.0
15
25.9
20.0
18.0
20
18.2
25.0
16.5
25
22.7
30.0
17.8
30
27.1
% GDP
Cabo Verde
% GDP
FIGURE 62
India has one of the lowest shares of tax revenues as % of
GDP (at US$1,000/capita GDP)
18.7
FIGURE 61
At US$2,000/capita, countries have an average c15% share
of government consumption
19
Brazil
26
China
18
25
17
FIGURE 64
China: Government consumption share consolidated at
c14% levels
24
23
22
21
20
19
18
16
15
14
13
12
11
17
16
10
-
2,000
4,000
6,000
8,000
1,000
2,000
3,000
4,000
FIGURE 65
Korea: Government consumption share at c15%
FIGURE 66
Thailand: Government consumption share at 14-16%
Korea, Rep.
35
Thailand
20.0
18.0
30
16.0
25
14.0
20
12.0
10.0
15
8.0
10
6.0
4.0
2.0
5,000
10,000
15,000
20,000
25,000
1,000
2,000
3,000
4,000
FIGURE 67
Sri Lanka: Government consumption surged over US$1k-2k
FIGURE 68
Morocco: Government consumption share surged to c20%
Sri Lanka
Morocco
25.0
16.0
15.0
14.0
13.0
12.0
11.0
10.0
20.0
15.0
10.0
5.0
-
500
1,000
1,500
2,000
1,000
2,000
5 November 2014
3,000
20
% GDP
35
-10%
30%
3.4
1.4
3.7
NA
NA
Malaysia
Indonesia
China
China
Thailand
Korea
Morocco
Angola
Malaysia
Tunisia
Sri Lanka
Azerbaijan
Dominican Rep.
Georgia
Turkmenistan
Bosnia
Congo, Rep.
Armenia
Botswana
Swaziland
Bhutan
Belize
Cabo Verde
20%
Thailand
-35
Population
10%
43.3
7.2
-6.9
-2.7
3.7
16.4
67.8
-25
0%
India
0.1
18.4
-20%
-29.0
-15
-0.4
-5.9
-5
1.2
0.3
6.3
25
15
FIGURE 70
Currency movements in regional countries over 2010-13
have made Indias exports more competitive
Depcn/(Apcn) vs US Dollar
While most countries improved their net export balance over the evolution from US$1,000US$2,000/capita, almost all countries experienced a robust growth in share of external
trade, with both imports and exports rising sharply as a share of national GDP.
FIGURE 71
China: Both imports and exports accelerated with exports
overtaking imports at initial stage
Exports of goods and services
Imports of goods and services
45
120
40
100
Export/Imports % GDP
Export/Imports % GDP
FIGURE 72
Malaysia: Net Exports have continued to strengthen even as
both imports and exports accelerated rapidly
35
30
25
20
15
10
5
80
60
40
20
0
0
-
1,000
2,000
3,000
5 November 2014
4,000
2,000
4,000
6,000
8,000
21
FIGURE 73
Similar experience in Morocco
FIGURE 74
Sri Lanka: Largely stable growth in global trade although
deficits have widened
40
Export/Imports % GDP
35
Export/Imports % GDP
60
30
25
20
15
10
5
0
50
40
30
20
10
0
1,000
2,000
3,000
500
1,000
1,500
FIGURE 75
Thailand: Strong growth in trade led by exports
FIGURE 76
Korea: Remains an exports/trade powerhouse
90
60
Export/Imports % GDP
80
Export/Imports % GDP
2,000
70
60
50
40
30
20
10
0
50
40
30
20
10
0
1,000
2,000
3,000
4,000
5,000
10,000
15,000
20,000
25,000
5 November 2014
22
FIGURE 77
Large countries see improvement in capital formation
India: GFCF
45.0
40.0
35.0
FIGURE 79
Brazil: Capital formation peaked at cUS$4,000/capita levels
FIGURE 80
China: Capital formation has continued to rise rapidly
Brazil
32
48
46
28
GCF % GDP
44
26
24
22
42
40
38
36
20
34
18
32
16
30
-
2,000
4,000
6,000
8,000
1,000
2,000
3,000
4,000
FIGURE 81
Korea: Capital formation remains fairly high at c25% GDP
FIGURE 82
Thailand: Capital formation remained near 40% until per
capita GDP comfortably crossed US$2,000 level
Korea, Rep.
45
Thailand
60.0
40
50.0
35
GCF % GDP
2012
China
50
30
GCF % GDP
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
20.0
1970
China
Korea
Thailand
Malaysia
25.0
Morocco
Angola -23.4
Sri Lanka
Tunisia
Azerbaijan
Dominican Rep.
-16.7
-30.0
Population
Turkmenistan
Georgia
Congo, Rep.
Bosnia
Armenia
Botswana -22.3
Bhutan
-32.9
30.0
Swaziland
Belize
Cabo Verde
% GDP
4.7
12.7
12.3
12.8
4.1
3.3
2.4
10.1
12.9
17.2
-0.6
1.1
4.6
16.4
50
40
30
20
10
0
-10
-20
-30
-40
40.1
% GDP
FIGURE 78
Investment as proportion of GDP remains above 35%
40.0
30
25
30.0
20
20.0
15
10
10.0
0
-
5,000
10,000
15,000
20,000
25,000
1,000
2,000
3,000
4,000
5 November 2014
23
61
51
35.0
10
25.0
8
22
1
9
2
30.0
29
32
40
24
1
High value-add
manufacturing
sectors
40.0
Belize
Cabo Verde -0
Bhutan
Swaziland
Botswana
Armenia
Bosnia and
Congo, Rep.
Georgia
Turkmenistan-3
Azerbaijan
Dominican Republic
Tunisia
Sri Lanka
Angola
Malaysia
Morocco
Korea, Rep.
Thailand
China
%
70
60
50
40
30
20
10
0
-10
FIGURE 84
Value addition in Indias manufacturing sector continues to
remain low compared with other EM peers
20.0
15.0
10.0
5.0
0.0
Population
2000
2010
FIGURE 85
China: Share of manufacturing grew rapidly until
US$2,000/capita GDP
FIGURE 86
Brazil: Share of manufacturing peaked at cUS$4,000/capita
China
Brazil
20
19
40
manufacturing % GDP
45
35
30
25
20
15
18
17
16
15
14
13
12
11
10
10
-
1,000
2,000
3,000
5 November 2014
4,000
24
FIGURE 87
Thailand: Share of manufacturing continues to rise
FIGURE 88
Korea: Share of manufacturing rapidly accelerated in initial
growth phase and continues to grow
Thailand
35.0
Korea
30
Manufacturing % GDP
30.0
25.0
20.0
15.0
10.0
25
20
15
10
5
5.0
1,000
2,000
3,000
4,000
5,000
10,000
15,000
20,000
25,000
Leverage comparison
Comparison of leverage levels with peer countries indicate that most countries witnessed
rises in net domestic credit levels over the US$1,000-2,000 transition, with a concurrent
decline in external debt stock.
FIGURE 89
Most peer countries experienced rising domestic credit
levels over the US$1,000-2,000/capita transition
9.8
27.9
(3.3)
6.9
(13.7)
Sri Lanka
(284.1)
(13.1)
Azerbaijan
(66.7)
(32.2)
Armenia
(62.9)
(25.6)
-150
Botswana
-100
(8.4)
29.8
-50
-60
5.1
0
(1.9)
48.2
8.5
21.9
51.9
46.2
50
-20
-40
% GDP
4.7
21.2
4.3
13.4
20
0.7
41.8
2.8
-200
-250
5 November 2014
China
Thailand
Morocco
Angola
Turkmenistan
Population
Georgia
Swaziland
China
Korea
Thailand
Morocco
Malaysia
Angola
Tunisia
Sri Lanka
Azerbaijan
Dom. Republic
Georgia
Turkmenistan
Congo, Rep.
Bhutan
Armenia
Cabo Verde
Population
Cabo Verde
-300
-80
Bhutan
40
15.5
60
15.0
% GDP
FIGURE 90
...while the external debt stock declined over the transition
25
FIGURE 91
China: Net domestic credit
FIGURE 92
China: External debt stock
% GDP
% GDP
160
25
140
20
120
100
15
80
10
60
40
20
0
0
0
500
1,000
1,500
2,000
2,500
3,000
3,500
500
1,000
1,500
2,000
2,500
3,000
3,500
FIGURE 93
Thailand: Net domestic credit
FIGURE 94
Thailand: External debt stock
% GDP
% GDP
120
200
180
100
160
140
80
120
60
100
80
40
60
40
20
20
0
0
0
500
1,000
1,500
2,000
2,500
3,000
3,500
5 November 2014
500
1,000
1,500
2,000
2,500
3,000
3,500
26
0.2
0.4
0.6
0.8
1.2
1.4
5 November 2014
27
FIGURE 96
NIFTY Index P/E ratio: 1yr forward P/E
FIGURE 97
NIFTY Index EPS trends
NIFTY Index
+Stdev
x
21
Avg
-stdev
% y/y
19
17
16.2
15
14.2
13
12.2
14.7
11
9
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
35
30
25
20
15
10
5
0
-5
-10
-15
-20
27.9
15.0
10.5
1.0
-17.1
FY09
FY10
FY11
FY12
FY13
FIGURE 98
Barclays GDP forecasts FY15-16
FIGURE 99
Interest rates v/s Inflation
6.4
5.0
4.7
5.7
4
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15E
2015-16E
CPI (% YoY)
18
16
14
12
10
8
6
4
2
0
10
9
8
7
6
5
4
3
2
1
0
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
9.3
6.2
8.6
4.0
4.3
4.3
5.5
6.7
8.1
7.0
6.7
7.3
5.4
5.7
6.4
7.6
8.0
9.5
9.6
9.3
% YoY
FIGURE 100
Utilization rate at a near 5-year low
FIGURE 101
CWIP/Net Fixed Assets ratio at near 20-year high
Capital work-in-progress
100%
84
82
95%
82
90%
79
78
85%
78
80%
78
76
76
75%
70%
74
65%
60%
72
FY10
FY11
FY12
5 November 2014
FY13
FY14
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
80
18.9
5.2
10
16.7
28
Stock
Price
(Rs)
Price
target
(Rs)
Stock rating/
industry view
Up/
downside to
PT (%)
445
463
OW /Neu
Axis is very well positioned from a growth perspective it is already a well established
national franchise and yet has significant room to expand its network. The banks deposit
franchise continues to develop well Axis has delivered the strongest CASA growth among
the top three private banks in the past eight years.
911
1,032
OW /Neu
13
With a strong deposit franchise and a clean balance sheet, HDFCB remains well positioned to
benefit from the recovery. It can continue to gain SA market share as it expands its presence
in semi-urban areas, and can benefit from the cyclical recovery in the CA deposit market.
Havells India
291
313
OW /Neu
We expect a strong earnings CAGR of c26% over FY14-17E on our expectations of 1) strong
domestic performance led by an increase in consumer durables demand (increase in
discretionary spends), market share gains (strong branding and channel strategy) and
recovery in industrial demand and; 2) stabilisation of the Sylvania subsidiary performance.
Maruti Suzuki
3,287
3,764
OW /Neu
15
1. Maruti Suzuki is the largest passenger car manufacturer in India with a market share of
51% in the passenger car segment (1QFY15). We believe the company will be the biggest
beneficiary of the recovery in the passenger car segment as discretionary spending improves
amid lower discounts.
2. Maruti continues to focus on its core strength of small cars, but it is also incrementally
filling its product and segment gaps, highlighted by the launch of the Ciaz (A3 luxury) and its
entry into SUV and LCV segments.
3. Maruti has been deepening its rural distribution. New products, combined with the
marketing muscle of the company, make for a very strong competitive positioning.
531
561
OW /Neu
Expect improvement in JLR to offset concerns on standalone operations. We are positive because
a) We believe JLR's EBIT margin is set to expand (221bps from FY13-17E) on account of
improved product mix and platform consolidation benefits. Also, we expect JLR to report strong
volumes supported by a healthy pipeline of launches and capacity expansion (JV with Chery and
b)Tata Motors standalone operations will be key beneficiary of macro-led recovery in the
demand of M&HCV volumes (expected from 2H FY15). Additionally, its performance in the
passenger car segment is likely to see a revival on the back of new launches (Zest and Bolt).
1,530
2,000
OW /Pos
31
Just Dial is the market leader in local search in India and has benefitted significantly from
growing mobile data use in India, with a 130% CAGR witnessed in mobile searches over
FY09-14. Given Just Dials significant focus on sales efforts, we expect growth in paid listings
to see a c23% CAGR over FY14-16E, which we estimate would drive revenue growth of c32%
over the same period. Another key catalyst could be the monetisation of Search Plus services,
which were launched in Dec-13. Management is currently not charging any fee from SMEs
for transactions through Just Dial and expects monetisation to begin in 2H FY16E.
489
618
OW /Neu
26
Multiple triggers in play, such as balance sheet de-leveraging, cash flow generation from
asset sales, growth visibility in India and efficiency improvements in Europe:
1. Displaying increasing flexibility in its capex programme (particularly for Odisha Phase-II).
Management expects both debt and capex to peak in FY15 and the company continues to
explore various options (debt refinancing, asset sales) to reduce gearing.
2. Losses in Europe appear to be hitting a trough: Macroeconomic indicators in Europe are
showing signs of recovery. In addition, Tata Steels initiatives to reduce costs have started to
yield results.
3. Project execution risk reducing: Odisha Phase-I expansion is tracking its commissioning
timeline of 4QFY15; timely execution would improve volume growth visibility beyond FY15.
Shree Cement
9,127
8,980
OW /Neu
-2
One of the most efficient cement companies in India in terms of operations due to its large
captive power availability, innovative fuel mix management and short lead distances. We
expect Shree Cement to remain FCF positive even as it pursues an aggressive expansion
strategy:
1. Cost leadership: The company is in a rapid expansion phase but has sought to maintain its
low-cost advantage, despite capacity additions, by building captive power plants and grinding
units closer to key markets
2. Cement capacity additions to drive growth: Shree Cement plans to increase capacity to
17.5mt and 21.5mt by June 2014 and March 2015, respectively.
3. Shree Cements core geographical location in north India should sustain the companys
above national-average utilisation levels, due to the regions low capacity overhang.
405
440
OW /Pos
1. Gas prices in India should rise from FY15, while net oil price realisations for ONGC should
also increase in FY16 as gross under-recoveries decline (helped by retail diesel price hikes).
2. Together we estimate these could drive an 18% EPS CAGR for ONGC over FY14-16E, with
room for earnings to surprise on the upside.
3. ONGC is now trading similar to its historical averages at 9.4x FY16 P/E, but still 8-10%
lower than global peers.
1,359
1,592
OW /Pos
17
Lupins strong 22% sales and 26% EPS CAGR (coverage leading) should be driven by:
1. Steady ramp-up in the US: Accelerating Gx market leadership, improving product quality
and a strong pipeline (130 products over the next three years).
2. Increasing traction in emerging markets (ramp-up in LATAM through partnerships;
recovering trend in the domestic market).
3. Enhancing product mix and efficiencies, which should drive margins (up 200bps over
FY14-16E) and improve returns.
ONGC
Lupin Ltd
5 November 2014
Analyst views
29
Stock
Bharti Airtel
Price
(Rs)
Price
target
(Rs)
Stock rating/
industry view
Up/
downside to
PT (%)
396
467
OW /Neu
18
Analyst views
1. Improving voice trends: we expect Bharti Airtel to be one of the biggest beneficiaries of
improving voice trends in the country given the high quality of its subscriber base (highest
subscriber market share of 21% in Metros and circles A). We forecast voice realisations to
improve strongly at a CAGR of 3.2% till FY17E as the company continues to weed out free
minutes.
2. Data Services: Bharti Airtel is one of the key players in the data market with revenues from
data to increase from Rs44bn in FY14 to Rs153bn in FY17, on our estimates, and contribute
21.6% of overall voice revenues (vs. 9.5% currently).
3. Margin expansion: We believe that margins will improve by 325bps from FY14-17E as a
result of improving realisations and a higher contribution from data services.
5 November 2014
30
ECONOMICS RESEARCH
ECONOMICS RESEARCH
Rahul Bajoria *
+65 6308 3511
rahul.bajoria@barclays.com
Siddhartha Sanyal *
+91 22 6719 6177
siddhartha.sanyal@barclays.com
*These authors are members of
the Fixed Income, Commodities
and Currencies Research
department and are not equity
analysts.
FIGURE 103
We estimate improvements in productivity (incremental capital output ratio or ICOR) and capital formation could help India
average 7-8% growth over next 5-10 years
Investment rate (GFCF as a % of GDP)
ICOR
27%
30%
33%
36%
39%
42%
3.50
7.7%
8.6%
9.4%
10.3%
11.1%
12.0%
3.80
7.1%
7.9%
8.7%
9.5%
10.3%
11.1%
4.10
6.6%
7.3%
8.0%
8.8%
9.5%
10.2%
4.40
6.1%
6.8%
7.5%
8.2%
8.9%
9.5%
4.70
5.7%
6.4%
7.0%
7.7%
8.3%
8.9%
5.00
5.4%
6.0%
6.6%
7.2%
7.8%
8.4%
Note: Values in each cell indicate real GDP growth rate for a certain combination of ICOR and investment rate. Source: Barclays Research
5 November 2014
31
2) Planned urbanisation
We think another key focus area is planned urbanisation. Increasing urbanisation has been a
strong driver of growth in India since the 1990s, and urban areas now generate c63% of
Indias GDP up from c45% in 1990. A policy focus is to make the countrys urbanisation
plans more coherent with its industrialisation needs by creating new smart cities and
dedicated industrial corridors, as well as upgrading existing urban infrastructure and
improving the quality of life for Indias urban residents. If the government succeeds in these
areas, we think this would be a major enabling factor supporting industrial growth. Even if
past trends are maintained, we estimate that urban India could make up 35% of the
countrys population and contribute 70-75% of GDP by 2020. According to a report on
Urbanisation in India by the McKinsey Global Institute in 2010 in the next 20 years, India
could have 68 cities with a population over one million up from 42 in 2010.
5 November 2014
32
Next 10 years
(baseline
scenario)
Next 10 years
(optimistic
scenario)
GDP growth
(% y/y)
7.6
7-8
8-9
Agriculture
(% y/y)
3.6
3-5
5-6
Industry (% y/y)
7.2
7-8
8-10
Following the launch of the Make in India campaign and fresh focus
on manufacturing and construction, we expect a notable
improvement in the performance of Indias manufacturing sector. Our
baseline scenario of 7-8% annual growth in this sector might appear
high following the recent protracted weakness in Indias industrial
sector. However, India had a similar growth trajectory for
manufacturing during the pre-2008 years.
Services (% y/y)
9.0
8-10
10+
The services sector had been the key growth driver for the Indian
economy for nearly two decades. Importantly, growth stability, at near
double-digit levels, has been very strong in this sector. Interestingly,
and contrary to popular perception, the bulk of the contribution for
Indias service sector comes from domestic services (e.g., trading,
telecom, transportation, financial services, government services),
rather than export-oriented services (e.g., IT services). Given that it is
likely to play an important part in domestic economic activity in the
coming years, our base case factors in services sector growth
hovering around its growth rate of the previous decade.
Savings
(% of GDP)
32.7
34.0
37.0
Investment
(% of GDP)
35.1
36.0
39.0
Fiscal balance
(% of GDP)
-4.6
-3.0
-2.0
With fiscal consolidation efforts likely continuing, we expect the procyclicality of Indias fiscal dynamics will help bringing the headline
deficit number down. The ongoing reduction in subsidies and the
likely reforms in the tax system could potentially deliver a significant
improvement in Indias fiscal balance in the next 10 years.
Current account
balance
-2.2
-2.5
-1.0
(% of GDP)
Comments
5 November 2014
33
FIGURE 105
Political transition has been key to the change in the perception of India (% of total parliament seats)
100
90
80
70
60
50
40
30
20
10
0
51
57
62
67
71
BJP
77
Congress
80
84
89
Left parties
91
96
98
99
04
09
14
Others
5 November 2014
34
5 November 2014
35
FIGURE 110
Productivity of labour has fallen, but not dramatically
1,600
10
1,400
1,200
1,000
800
600
400
200
Residual
6
5
0
1982
0
1991 1997 2003 2009 2015 2021 2027 2033 2039
1986
1990
2
2014
Furthermore, Indias labour productivity has increased over the past 20 years, due to better
education and capital availability. This higher productivity, coupled with the improving
health and education of the Indian labour force, has provided a significant opportunity, both
in terms of consumption demand and economic size. We expect this demographic
dividend to continue for at least three decades, as the median age of India is expected to
remain low by global standards well into the 2040s.
FIGURE 107
Indias population will remain one of the youngest for a
considerable period
60
FIGURE 108
Rising incomes have allowed for better education and health,
which has raised the quality of labour
25
Median age
(years)
50
20
40
15
30
10
20
10
0
IN
BR
CN
2000
5 November 2014
ID
2015
2040
KR
US
0
FY98
FY03
FY08
FY13
Per capita personal disposable income (% y/y)
36
FIGURE 111
Savings rate has fallen in past seven years
40%
40%
35%
35%
30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
FY 54
FY 64
FY 74
FY 84
FY 94
FY 04
5%
FY 54
FY 14
FY 64
FY 74
FY 84
FY 94
FY 04
FY 14
But Indias savings rate remains healthy, in our view. Even at around 30% of GDP, it is among
the highest in emerging markets, and comparable to levels in East and South East Asia.
Indias savings pattern has kept pace with that of China, if one accounts for the gap in the
liberalisation phase. We view this as encouraging, as it points to the savings rate increasing in
tandem with per capita GDP, largely because consumption should moderate as a percentage
of GDP, given the falling marginal propensity to consume at higher incomes.
FIGURE 113
Indias saving improvement is in line with what China experienced post liberalisation
Change in savings
rate from the year
of takeoff (%)
20
15
10
5
0
-5
0
10
15
20
Year of takeoff
CN
IN
25
30
35
ID
Take-off year for China, India and Indonesia is defined as 1979, 1991 and 1973, respectively.
Source: Haver Analytics, Barclays Research
5 November 2014
37
FIGURE 114
Indias incremental capital output ratio should fall as growth improves
9
8
7
6
5
4
3
2
FY93
FY96
FY99
FY02
FY05
FY08
FY11
FY14
5 November 2014
38
5 November 2014
39
Manufacturing
Boosting manufacturing
The performance of Indias manufacturing sector has been suboptimal for a prolonged period,
which has negatively affected multiple areas of the economy such as growth, inflation and
employment. From a demographic point of view, creating jobs is the biggest challenge for
Indian policymakers. However, we believe the lack of depth in manufacturing remains a key
issue for India, and without it, Indias ability to boost its consumption potential could be cut
short. Most of the manufacturing sector issues arise from difficulties of doing business, sub-par
growth in heavy infrastructure and out-dated labour laws.
FIGURE 116
Capacity utilisation remains weak
FIGURE 115
Manufacturing sector needs to see a revival
15
17
10
16
5
0
15
-5
-10
14
Level of Capacity
utilisation (%)
-15
13
FY 89
FY 94
FY 99
FY 04
Manufacturing (% of GDP)
FY 09
FY 14
Trendline
-20
-25
Dec-02
Dec-04
Dec-06
Dec-08
Dec-10
Dec-12
Dec-14
45
Singapore
US
UK
Malaysia
Thailand
Mexico
Turkey
Vietnam
China
Philippines
Indonesia
Brazil
India
40
35
30
25
20
15
FY89
FIGURE 118
India ranks low in the ease of doing business index, which
reflects issues hampering investments
FY93
FY97
FY01
5 November 2014
FY05
FY09
Trendline
FY13
1
7
8
18
26
39
55
78
90
95
114
120
142
0
50
100
150
40
FIGURE 119
GST would help lower logistics costs for manufacturing
sector...
35
FIGURE 120
and reduce time wastage during transit
30
25
Check posts
26%
20
15
Driving
40%
10
5
0
Resting and
meals
13%
Logistics
Labour compensation
5 November 2014
Vehicle
refueling
and traffic
21%
Distribution of time
spent in movement
for goods
41
FIGURE 122
Coal mining output improving after three poor years
FIGURE 121
Significant power capacity additions in past 10 years
230
600
210
550
190
500
170
450
150
400
130
350
110
300
90
Sep-99
Sep-02
Sep-05
Sep-08
Sep-11
5 November 2014
Sep-14
250
Sep-99
Sep-02
Sep-05
Sep-08
Sep-11
Sep-14
42
Urbanisation
Growing smartly
Urban areas have powered Indias growth over the past two decades and now generate
c63% of Indias GDP up from c45% in 1990. We believe Indias high population density
and low GDP per capita indicate that urbanization trends have significant scope to
accelerate further. Even if past trends are maintained, we estimate that urban India could
have 35% of the countrys population and contribute 70-75% of its GDP by 2020.
FIGURE 124
Urban India powered last decades growth* acceleration
FIGURE 123
Share of GDP produced from urban regions
% YoY
%
90
85
Urban
Rural
8.0
84
7.0
80
78
76
1.8
6.0
5.0
75
70
63
65
3.0
60
2.0
55
1.0
2.3
2.6
4.0
65
2.0
1.8
5.7
1.6
3.4
2.7
1.4
50
United
States
Western
Europe
Latin
America
China
India
FIGURE 125
Faster urbanisation is positively correlated with rapid GDP growth globally
12
China
10
8
India
6
4
2
Germany
USA
0
0
10
15
20yr chg in urban share of population
20
25
5 November 2014
43
FIGURE 126
India already has several smart cities under construction or being proposed
City
Ajmer
Allahabad
Dholera
Kochi smart city
Lavasa
Naya Raipur
Shimla
Varanasi
Vizag
State
Partner
Status
Rajasthan
US
Brownfield
Uttar Pradesh
US
Brownfield
Gujarat
Japan
Greenfield
Kerala
Greenfield
Maharashtra
Greenfield
Chhattisgarh
Greenfield
Himachal Pradesh
France
Brownfield
Uttar Pradesh
Japan
Brownfield
Andhra Pradesh
US
Brownfield
5 November 2014
44
5 November 2014
45
EQUITY RESEARCH
Appendix: Methodology
EQUITY RESEARCH
India Equity Strategy
Bhuvnesh Singh
+91 22 6719 6314
bhuvnesh.singh@barclays.com
BSIPL, Mumbai
Vijit Jain
+91 (0) 22 6719 6211
vijit.jain@barclays.com
BSIPL, Mumbai
Rachna Biyani
+91 22 6719 6248
rachna.biyani@barclays.com
BSIPL, Mumbai
All per capita GDP figures used in this report are constant 2005 US$-based figures, as reported
by the United Nations Statistics Division. We have analysed the 1960-2012 data on per capita
income to identify countries that achieved the transition from less than US$1,000/capita GDP
to US$1,000/capita (like India) and countries that achieved the transition from
US$1,000/capita to US$2,000 in real GDP during the 1960-2012 time horizon.
We examined eight key economic data points: 1) household consumption; 2) government
consumption; 3) gross fixed capital formation; 4) gross domestic savings rate; 5) net
exports (goods and services); 6) inflation rate (based on GDP deflator); 7) lending rates; and
8) manufacturing footprint in GDP. We then analysed the trends for these indicators across
the subset of 20 countries that achieved the transition from cUS$1,000-1,100 to
cUS$2,000-2,200/capita for these parameters, during the course of that transition.
FIGURE 127
Countries that made the US$1,000-2,000/capita transition in past 50 years (1960-2012)
Country
Belize
Population
(mn)
Start
Year
per capita
GDP
Target
Year
per capita
GDP
0.3
1962
1,007
1980
2,065
Cabo Verde
0.5
1995
1,041
2006
2,178
Bhutan
0.8
2001
1,042
2012
1,972
Swaziland
1.2
1973
1,055
1992
2,013
Botswana
2.0
1972
975
1982
2,099
Armenia
3.0
2001
986
2007
2,110
3.8
1995
719
1998
2,042
Congo, Rep.
4.4
1968
1,010
1982
2,064
Georgia
4.5
2000
1,019
2012
2,084
Turkmenistan
5.2
1997
1,108
2007
2,056
Azerbaijan
9.4
2002
1,046
2006
2,100
Dominican Republic
10.4
1961
1,025
1977
2,004
Tunisia
10.9
1968
1,061
1990
2,034
Sri Lanka
20.5
2000
1,052
2013
2,004
Angola
21.5
1995
1,045
2006
1,991
Malaysia
29.7
1961
1,028
1978
2,069
Morocco
33.0
1973
1,004
2006
2,080
Korea, Rep.
50.2
1960
1,107
1971
2,131
67.0
1984
1,018
1994
2,105
1,357.4
1999
1,051
2007
2,203
Thailand
China
5 November 2014
46
ANALYST(S) CERTIFICATION(S):
In relation to our respective sections we, Bhuvnesh Singh, Balaji Prasad, M.D., Somshankar Sinha, Anish Tawakley, Venugopal Garre, Sahil Kedia,
Hitesh Das, Chirag Shah, Rahul Bajoria and Siddhartha Sanyal, hereby certify (1) that the views expressed in this research report accurately reflect
our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was,
is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
47
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Risk Disclosure(s)
Master limited partnerships (MLPs) are pass-through entities structured as publicly listed partnerships. For tax purposes, distributions to MLP unit
holders may be treated as a return of principal. Investors should consult their own tax advisors before investing in MLP units.
Guide to the Barclays Fundamental Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below)
relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage
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In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or
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should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month
investment horizon.
5 November 2014
48
China Merchants Bank Co., Ltd. (3968.HK) China Minsheng Banking Corp., Ltd. (1988.HK)
5 November 2014
49
ScinoPharm (1789.TW)
CJ CGV (079160.KS)
CJ Hellovision (037560.KS)
JD.com (JD)
KT Skylife (053210.KS)
MakeMyTrip (MMYT)
Qunar (QUNR)
YY Inc. (YY)
POSCO (005490.KS)
UC Rusal (0486.HK)
CNOOC (0883.HK)
LG Chem (051910.KS)
PetroChina (0857.HK)
S-Oil (010950.KS)
Sinopec (0386.HK)
SK Innovation (096770.KS)
5 November 2014
50
DiGi.Com (DSOM.KL)
KT Corp. (030200.KS)
M1 (MONE.SI)
Maxis (MXSC.KL)
PT Indosat (ISAT.JK)
PT Telkom (TLKM.JK)
PT XL Axiata (EXCL.JK)
SK Telecom (017670.KS)
Distribution of Ratings:
Barclays Equity Research has 2600 companies under coverage.
45% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 54% of
companies with this rating are investment banking clients of the Firm.
40% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 46% of
companies with this rating are investment banking clients of the Firm.
13% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 41% of
companies with this rating are investment banking clients of the Firm.
Guide to the Barclays Research Price Target:
Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will
trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price
target over the same 12-month period.
Barclays offices involved in the production of equity research:
London
Barclays Bank PLC (Barclays, London)
New York
Barclays Capital Inc. (BCI, New York)
Tokyo
Barclays Securities Japan Limited (BSJL, Tokyo)
So Paulo
Banco Barclays S.A. (BBSA, So Paulo)
Hong Kong
Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)
Toronto
Barclays Capital Canada Inc. (BCCI, Toronto)
Johannesburg
Absa Bank Limited (Absa, Johannesburg)
Mexico City
Barclays Bank Mexico, S.A. (BBMX, Mexico City)
Taiwan
Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan)
Seoul
Barclays Capital Securities Limited (BCSL, Seoul)
Mumbai
Barclays Securities (India) Private Limited (BSIPL, Mumbai)
Singapore
Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)
5 November 2014
51
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