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We hosted our fifth annual Namaste, DB Access India conference last week with
110+ companies and independent speakers (including an array of CEO panels and
policy and thought leaders) and attended by 460+ institutional investors. We also
organized a policy day in New Delhi coupled with sector tours (Metals, Auto,
Infrastructure and Real Estate) including plant visits and dealer networks, across
India. In this report we present the key takeaways from the conference. Most
corporates remain cautiously optimistic on FY12 earnings, with the exception of
companies in the infrastructure and real estate sectors. Following the conference
and gauging - both - the investor and corporate sentiment we are reiterating our
CY11-end Sensex target of 21000. We believe that the markets will make a strong
directional shift in 2H2011.
Takeaways from CEO panel discussions
Banking – (i) panel expected wide range of 50-150bps increase in policy rates this
year and at the same time expressed confidence in banks’ pricing power. (ii)
Banking panel was surprisingly upbeat on corporate investment-related loan
demand. Metals – (i) panel was supportive of scrutiny by environment ministry
and need for more inclusive development. (ii) panel was supportive on need to
rehabilitate the displaced but the proposed 26% levy may not be the most suitable
option. Autos - (i) panel concurred that India is at an inflection point of growth
(car demand expected to grow at CAGR of 15-20% over next three years) similar
to that of China five years ago due to significant improvement in affordability (price
of car is lower than one year of family income). Telecom – (i) the worst is behind
in terms of competitive intensity as tariffs are stabilizing. (ii) 3G business case is
robust in the Indian context. Infrastructure – (i) Domestic coal supply remains
core constraint in India’s 9% GDP growth trajectory. (ii) Intensifying competition
may limit benefits from any revival in ordering of infrastructure projects.
Inflation, though worrisome, should trend lower in FY12; risk of knee jerk
policy error to contain inflation appears to be low
While concerns over persistent and elevated inflation remained, there was near
consensus among policy makers/independent commentators that inflation would
trend lower in FY12. Few speakers hinted that, barring past two years, the track
record of the Indian government on inflation management has been good in the
last decade. Further, few even expect that the inflation differential between
emerging and developed markets will contract. Our conclusion from policy makers
is that the risk of knee jerk policy error to curb inflation appears low with traditional
monetary policy not being the generic panacea to curb inflation. In addition, there
was a general belief that India's growth trajectory will not be derailed by the
prevailing policy inertia or the recent unearthing of scams.
Panel Discussions
Banking Panel
Panel discussion with the CEOs of Axis Bank, ICICI Bank, SBI and Bank of Baroda:
Panelists felt that despite a possible base-effect induced cooling of inflation, policy rates
could go up by 50-150bps.
There was unanimity within the panel on banks' pricing power and hence broad stability of
NIMs, though some of the high NIMs gains could be given up due to lagged deposit
repricing.
Panelists believe that the current high wholesale rates could correct but retail deposit
rates may remain elevated.
The panel was surprisingly upbeat on corporate investment-related loan demand including
infrastructure loans. Although there have been project delays, corporates have learnt
quickly and are adjusting strategies towards expediting projects.
Asset-liability mismatches are a myth in India, the panel suggested, because low-cost
deposit ratios are high, growing strongly and fairly stable.
Panelists felt that we may have to live with deposit growth lagging loan growth. Deposit
growth is sluggish due to more income in rural India which banks less, corporates being in
investment mode and the need to fill up the expanding ATM network. Also, it is only
recently that banks have renewed their deposit collection drives.
Most panelists appeared sanguine on asset quality due to the seasoning of portfolios
Consumption Panel
Panel discussion with Kishore Biyani, Founder of Future Group; Thomas Varghese, CEO of
Aditya Birla Retail; V G Siddharth, Chairman of Coffee Day -
On Indian consumption
The large Indian middle classes should drive consumption for many years to come. The
Indian consumption story, which has just begun to unfold, is at an inflection point.
The Indian consumer wants to move up the consumption curve and modern retail should
facilitate this uptrade. Modern trade should also be a facilitator in the creation of new
categories.
The rural consumer is as aspirational as the urban consumer. To capture this demand a
lot of the FMCG companies have brought in low price point SKUs for their top end
products
The Government schemes like NREGA and higher minimum support prices have given
significant money into the hands of the rural consumer.
The next 10 yrs should be very different from the past 10 yrs. The parents of today's
children are more liberal, and feel no guilt about consumption.
On FDI in retail
The panelists were of the opinion that FDI is very important for bringing inefficiencies
into the sector and for controlling inflation and hence the government would consider
FDI in retail after the political pressure due to state elections is over.
The cash and carry model anyway gives international retailers a back door entry into the
sector.
If the government were to allow FDI in retail, it could result in higher competitive
intensity bringing operational efficiency to the benefit of the consumer in the long run.
On investment in gold and real estate
Indians traditionally believe in investing in gold and real estate. Indians have about 18000
tons of gold, which offers some protection during inflationary times.
Metals Panel
Panel participants: Mr B Muthuraman (Vice Chairman, Tata Steel), Mr P K Bishnoi (CMD,
Rashtrihya Ispat Nigam Ltd) and Mr Prashant Ruia (Group CEO and MD, Essar Group) .The
following are the key takeaways from the panel discussions:
Government proposal for 26% mining tax as part of the new mining bill
With a significant portion of the mineral resources of India located in the underdeveloped
areas, the panelists were unanimously supportive of the need for increased corporate
investments for the upliftment of various stakeholders, especially for those impacted by the
land acquisition process. Further, the panel believed that there should be a more scientific
method of arriving at the quantum of levy. The levying of proposed 26% tax on mining profits
is likely to make India one of the most highly taxed regions for resource companies, which
could have potential implications for future investments as well. Further, the panelists
anticipated a lot of roadblocks in the implementation of the impost in the present form and
preferred to provide for the social costs as a part of the operational costs. Also, the panelists
were of the view that there was scope for streamlining of the mine allocation process by
making the methodology more scientific and transparent. Auctioning of the iron ore mining
blocks was also discussed as one of the options that could be explored further.
Environment conservation remains a key priority area
The panelists were also quite sensitive to issues related to the conservation of environment
and infact supported the increased scrutiny being done by the environment ministry for the
allocation of new projects. The panel was of the view that the miners in India need to explore
the use of new mining methods as well as effective waste discharge, which remains a critical
issue due to the unorganized nature of the mining industry in India.
Balancing of social and development needs a must for sustainability
The panel was cognizant of the need to balance the social aspects along with the
development needs of the country. There is increased awareness of the need to involve the
various stakeholders in the development process and make them partners in the economic
transition of the respective regions. The panel remained quite optimistic of an improving
investment climate in these regions supported by the strong CSR programme being
undertaken by various Indian corporates.
Cross border M&A to continue to gain access to resources
The panel was of the view that cross border M&A in the Indian steel industry is likely to be
limited to the acquisition of raw material assets while the steelmakers enhance their volumes
in India through organic and inorganic means. Though an increase in size is likely to lead to
bargaining power in the raw material negotiations, the panel believed that savings on
overhead costs and better R&D cost management will be the prime drivers of the
consolidation in the domestic industry in various steel producing regions across the globe.
Lastly, the panel was quite upbeat on the ongoing price momentum in the domestic steel
industry, but believed that the future steel pricing movements will continue to be determined
by the trends in raw material prices.
Real Estate Panel
Residential:
The panel generally believes that excluding the two major markets (NCR and Mumbai),
the residential segment in India is witnessing strong demand supported by economic
growth and affordability (as prices are still significantly below the peak achieved in 2007).
However, the panel also believes that prices in Mumbai and NCR are above their 2007
peak levels, resulting in lower affordability. Hence, the segment is now witnessing
sluggish volumes. Further, the panel believes that, even in these geographies, only highend
projects in specific locations (central Mumbai) would likely witness sharp correction
due to demand-supply mismatch. Other regions may witness only marginal ~10-15%
price declines.
Commercial/Office:
Due to the liquidity crisis in 2008 and 2009, commercial spaces have witnessed lower
net absorptions and hence, vacancy rates have increased. However, after a pickup in
2010, the panel expects new supply to match demand. Carry-forward inventory will
continue, however.
Hence, lease rentals are expected to increase in only a few selected pockets such as
BKC (in Mumbai) and Gurgaon (in NCR), depending on geography-specific demandsupply
equations.
Retail:
The panel believes that while the supply of retail space will be higher in 2011 (expect
~50 retail malls across India), the quality of these spaces will be far inferior (no mall
management, lower construction quality, etc.).
Hence, lease rentals are expected to witness continual pressure.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We hosted our fifth annual Namaste, DB Access India conference last week with
110+ companies and independent speakers (including an array of CEO panels and
policy and thought leaders) and attended by 460+ institutional investors. We also
organized a policy day in New Delhi coupled with sector tours (Metals, Auto,
Infrastructure and Real Estate) including plant visits and dealer networks, across
India. In this report we present the key takeaways from the conference. Most
corporates remain cautiously optimistic on FY12 earnings, with the exception of
companies in the infrastructure and real estate sectors. Following the conference
and gauging - both - the investor and corporate sentiment we are reiterating our
CY11-end Sensex target of 21000. We believe that the markets will make a strong
directional shift in 2H2011.
Takeaways from CEO panel discussions
Banking – (i) panel expected wide range of 50-150bps increase in policy rates this
year and at the same time expressed confidence in banks’ pricing power. (ii)
Banking panel was surprisingly upbeat on corporate investment-related loan
demand. Metals – (i) panel was supportive of scrutiny by environment ministry
and need for more inclusive development. (ii) panel was supportive on need to
rehabilitate the displaced but the proposed 26% levy may not be the most suitable
option. Autos - (i) panel concurred that India is at an inflection point of growth
(car demand expected to grow at CAGR of 15-20% over next three years) similar
to that of China five years ago due to significant improvement in affordability (price
of car is lower than one year of family income). Telecom – (i) the worst is behind
in terms of competitive intensity as tariffs are stabilizing. (ii) 3G business case is
robust in the Indian context. Infrastructure – (i) Domestic coal supply remains
core constraint in India’s 9% GDP growth trajectory. (ii) Intensifying competition
may limit benefits from any revival in ordering of infrastructure projects.
Inflation, though worrisome, should trend lower in FY12; risk of knee jerk
policy error to contain inflation appears to be low
While concerns over persistent and elevated inflation remained, there was near
consensus among policy makers/independent commentators that inflation would
trend lower in FY12. Few speakers hinted that, barring past two years, the track
record of the Indian government on inflation management has been good in the
last decade. Further, few even expect that the inflation differential between
emerging and developed markets will contract. Our conclusion from policy makers
is that the risk of knee jerk policy error to curb inflation appears low with traditional
monetary policy not being the generic panacea to curb inflation. In addition, there
was a general belief that India's growth trajectory will not be derailed by the
prevailing policy inertia or the recent unearthing of scams.
Panel Discussions
Banking Panel
Panel discussion with the CEOs of Axis Bank, ICICI Bank, SBI and Bank of Baroda:
Panelists felt that despite a possible base-effect induced cooling of inflation, policy rates
could go up by 50-150bps.
There was unanimity within the panel on banks' pricing power and hence broad stability of
NIMs, though some of the high NIMs gains could be given up due to lagged deposit
repricing.
Panelists believe that the current high wholesale rates could correct but retail deposit
rates may remain elevated.
The panel was surprisingly upbeat on corporate investment-related loan demand including
infrastructure loans. Although there have been project delays, corporates have learnt
quickly and are adjusting strategies towards expediting projects.
Asset-liability mismatches are a myth in India, the panel suggested, because low-cost
deposit ratios are high, growing strongly and fairly stable.
Panelists felt that we may have to live with deposit growth lagging loan growth. Deposit
growth is sluggish due to more income in rural India which banks less, corporates being in
investment mode and the need to fill up the expanding ATM network. Also, it is only
recently that banks have renewed their deposit collection drives.
Most panelists appeared sanguine on asset quality due to the seasoning of portfolios
Consumption Panel
Panel discussion with Kishore Biyani, Founder of Future Group; Thomas Varghese, CEO of
Aditya Birla Retail; V G Siddharth, Chairman of Coffee Day -
On Indian consumption
The large Indian middle classes should drive consumption for many years to come. The
Indian consumption story, which has just begun to unfold, is at an inflection point.
The Indian consumer wants to move up the consumption curve and modern retail should
facilitate this uptrade. Modern trade should also be a facilitator in the creation of new
categories.
The rural consumer is as aspirational as the urban consumer. To capture this demand a
lot of the FMCG companies have brought in low price point SKUs for their top end
products
The Government schemes like NREGA and higher minimum support prices have given
significant money into the hands of the rural consumer.
The next 10 yrs should be very different from the past 10 yrs. The parents of today's
children are more liberal, and feel no guilt about consumption.
On FDI in retail
The panelists were of the opinion that FDI is very important for bringing inefficiencies
into the sector and for controlling inflation and hence the government would consider
FDI in retail after the political pressure due to state elections is over.
The cash and carry model anyway gives international retailers a back door entry into the
sector.
If the government were to allow FDI in retail, it could result in higher competitive
intensity bringing operational efficiency to the benefit of the consumer in the long run.
On investment in gold and real estate
Indians traditionally believe in investing in gold and real estate. Indians have about 18000
tons of gold, which offers some protection during inflationary times.
Metals Panel
Panel participants: Mr B Muthuraman (Vice Chairman, Tata Steel), Mr P K Bishnoi (CMD,
Rashtrihya Ispat Nigam Ltd) and Mr Prashant Ruia (Group CEO and MD, Essar Group) .The
following are the key takeaways from the panel discussions:
Government proposal for 26% mining tax as part of the new mining bill
With a significant portion of the mineral resources of India located in the underdeveloped
areas, the panelists were unanimously supportive of the need for increased corporate
investments for the upliftment of various stakeholders, especially for those impacted by the
land acquisition process. Further, the panel believed that there should be a more scientific
method of arriving at the quantum of levy. The levying of proposed 26% tax on mining profits
is likely to make India one of the most highly taxed regions for resource companies, which
could have potential implications for future investments as well. Further, the panelists
anticipated a lot of roadblocks in the implementation of the impost in the present form and
preferred to provide for the social costs as a part of the operational costs. Also, the panelists
were of the view that there was scope for streamlining of the mine allocation process by
making the methodology more scientific and transparent. Auctioning of the iron ore mining
blocks was also discussed as one of the options that could be explored further.
Environment conservation remains a key priority area
The panelists were also quite sensitive to issues related to the conservation of environment
and infact supported the increased scrutiny being done by the environment ministry for the
allocation of new projects. The panel was of the view that the miners in India need to explore
the use of new mining methods as well as effective waste discharge, which remains a critical
issue due to the unorganized nature of the mining industry in India.
Balancing of social and development needs a must for sustainability
The panel was cognizant of the need to balance the social aspects along with the
development needs of the country. There is increased awareness of the need to involve the
various stakeholders in the development process and make them partners in the economic
transition of the respective regions. The panel remained quite optimistic of an improving
investment climate in these regions supported by the strong CSR programme being
undertaken by various Indian corporates.
Cross border M&A to continue to gain access to resources
The panel was of the view that cross border M&A in the Indian steel industry is likely to be
limited to the acquisition of raw material assets while the steelmakers enhance their volumes
in India through organic and inorganic means. Though an increase in size is likely to lead to
bargaining power in the raw material negotiations, the panel believed that savings on
overhead costs and better R&D cost management will be the prime drivers of the
consolidation in the domestic industry in various steel producing regions across the globe.
Lastly, the panel was quite upbeat on the ongoing price momentum in the domestic steel
industry, but believed that the future steel pricing movements will continue to be determined
by the trends in raw material prices.
Real Estate Panel
Residential:
The panel generally believes that excluding the two major markets (NCR and Mumbai),
the residential segment in India is witnessing strong demand supported by economic
growth and affordability (as prices are still significantly below the peak achieved in 2007).
However, the panel also believes that prices in Mumbai and NCR are above their 2007
peak levels, resulting in lower affordability. Hence, the segment is now witnessing
sluggish volumes. Further, the panel believes that, even in these geographies, only highend
projects in specific locations (central Mumbai) would likely witness sharp correction
due to demand-supply mismatch. Other regions may witness only marginal ~10-15%
price declines.
Commercial/Office:
Due to the liquidity crisis in 2008 and 2009, commercial spaces have witnessed lower
net absorptions and hence, vacancy rates have increased. However, after a pickup in
2010, the panel expects new supply to match demand. Carry-forward inventory will
continue, however.
Hence, lease rentals are expected to increase in only a few selected pockets such as
BKC (in Mumbai) and Gurgaon (in NCR), depending on geography-specific demandsupply
equations.
Retail:
The panel believes that while the supply of retail space will be higher in 2011 (expect
~50 retail malls across India), the quality of these spaces will be far inferior (no mall
management, lower construction quality, etc.).
Hence, lease rentals are expected to witness continual pressure.
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