Strategy Recapping our 2014 Strategy
Our 2015 Strategy
#1 Inflation to trend down sharply; CPI to be ~6% by end of 2014
#1 Earnings upgrades to define the market movement this year
#2 New interest rate environment to begin; Sub 8% Bond yields, Expect rate cuts in 2H
#2 Delta in Savings and Consumption led by lower fuel costs to drive volume growth
#3 GDP Growth to recover gradually led by Autos, Financials and Exports
#3 Quantum and quality of Govt. spend to be a dark horse and trigger demand pick up
#4 QE taper a positive for India; Lower commodity prices a bigger benefit than risk of outflows
#4 Sub-58 call on the INR-USD
#5 Rural India to slow down
#5 Pace and extent of interest rate fall to surprise
GAUTAM SINGH
[email protected] +91 22 4228 8152 VISHNU KUMAR A S
[email protected] +91 44 4344 0069
Find Spark Research on Bloomberg (SPAK
), Thomson First Call, Reuters Knowledge and Factset
Page 2
Transient phase leading to downgrades currently but we are calling for upgrades Strategy to current FY16 estimates While estimates for FY15 have been declining due to…
… we see FY16 having multiple levers for earnings upgrades
#1 Rural economy slowing; Urban Consumption yet to pick up
#1 Savings and Consumer demand to go up due to savings on fuel cost as well as lower inflation
#2 Government Finances on a weak footing still and spending have not picked up yet
#2 Govt. spending to pick up on lower subsidy bill
#3 Real estate related activity on a falling slide
#3 Led by demand, companies pricing power to improve
#4 Lower inflation has resulted in revenue growth getting impacted
#4 Raw materials cost to come down due to falling global commodity prices
#5 Net exports have remained weak
#5 Currency to appreciate leading to further benefits on landed cost of raw materials
#6 Lower than normal monsoon with wide disparities across regions
#6 Interest rates to come down by >100bps
Page 4
Huge impact on Savings and Consumption as India spends ~$70bn (Rs. 4.3tn) less on fuel over 2HFY15 & FY16
India to save ~$70bn (Rs. 4.3tn) between 2HFY15 & FY16 due to fall in crude oil prices. Considering a multiplier of 2.5, the total amount would be Rs. 10.7tn, which is ~8.5% of GDP. This should have a positive bearing on consumer spending because there is no leakage in the form of diesel price hikes & cut in govt. spending like in FY14
Strategy
Case 1
Case 2
Case 3
FY13
FY14
FY15E
FY16E
FY16E
FY16E
Crude oil prices ($/bbl)
108
106
84
65
55
45
Net oil imports
103
102
81
63
53
44
Gold imports
54
29
35
37
37
37
Non-oil non-gold imports
273
257
282
300
300
300
$48bn
$58bn
(US$ bn)
$21bn
Net savings vs. FY14
+
$39bn
In base case scenario, total savings on oil imports: 2HFY15 = $21bn FY16=$48bn Total savings in 18 months = $69bn
The impact of Rs. 1.5tn savings in FY14 on account of $25bn lower gold imports was offset by eighteen diesel price hikes (Rs. 1.2tn) and government expenditure cuts (Rs. 0.8tn). Successive diesel price hikes (Rs. 1.2tn)
Rs. 1.5tn cut in govt. spending in FY13 & FY14 2000
1,000
1500 1000
Source: Spark Capital Research
FY14
FY15E
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY15E
FY13
-1500
FY05
-
-806 -749
-1000 FY04
290
-500
FY03
250
0
FY02
886
500
FY01
500
18 successive diesel price hikes since Sep’12 had drained Rs. 1.2tn of liquidity from 50 the system in last two years
FY00
Rs. bn
750
Rs. 2tn of diesel price hikes and GoI expenditure cuts out of that offset the Rs. 1.5tn saved due to lower gold imports
Variance of RE over BE (Rs. Bn) Source: Spark Capital Research
Page 5
Revival of Urban Discretionary Consumption Why urban consumption suffered in the last 5 years
17.8
10
7.9
6.3
6
3.5
4
4.0
0.6
2
6.6
1.0
2.1
HH saving in urban India is over 2x of rural saving. Thus, a sharp decline in savings impacted the urban consumption more than the rural consumption
FY06
FY05
FY04
FY03
FY12
13
13.8
21.9
10 8
5.9
6
14 12
8
22.8
21.7
FY02
FY01 10
23.1
16
In the last 5-7 years, UPA policies put more cash in the hands of rural people through a sharp increase in MSP for foodgrains and NREGA, which pushed wages 3x in five years
12
23.6
Real organized sector wage growth, %
Movement of money from urban to rural India 14
25.2
23 22
Real rural wage growth, %
Organized sector wage growth, %
High inflation coupled with lower income led to fall in household savings, impacting consumption
24
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
Rural wage growth, %
25
0.3
-2.5
-1.8
FY11
-1.9
-4
FY10
-2
-4
FY09
-1.8
26
-0.1
0
FY08
4
8.3
5.4
FY07
8
8.3
8
11.7
12
6
4
4
HH total savings (% of GDP)
Source: Spark Capital Research
Currency in circulation (Rs. Tn) RHS
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
0
FY04
0
FY03
20 FY02
2
FY01
2 FY00
21
FY01
0
10
15.1
13.7
12.8
11.5
10.2
9.9
9.1
FY00
16
12
FY14
19.8 20
Adjusted for inflation, real wage in urban India actually de-grew in FY09, FY10 and FY13
FY13
Sharp deceleration in urban nominal wage growth, while rural wage had a dream run during the same time
Agri products inflation (%, yoy)
Source: Spark Capital Research
Page 7
Discretionary consumption rises with the rise in income level Share of food is down 15 ppt in rural and 16 ppt in urban, while share of durables has doubled in both in last 20 years Urban India
Rural India
Trend in urban household spending in last 20 years
Trend in rural household spending in last 20 years
3.4
4.8
6.1 24
17.3
19.6
23.4
24.0
26.1
0.2 0.20.5
0.2 0.30.5
8 5.3
7.4 3.2
7.5 2.9
60
18
5.9
7.6
2.2
50
9.2
12
63.2
59.4
53.6
48.6
20
6.6
2004-05
2009-10
2011-12
$319
$466
$663
$1,167
$1,564
7.3 7.8 1.9
24 4.7 5.6 9.9 8.0 1.2
6.5
20
7.6 1.4
16 12
54.7 48.1
20
42.5
40.7
38.5
10 2.7
2.9
3.1
2004-05
2009-10
2011-12
$1,564
1999-00
6.6 2.3
40
6.9 5.7
0
1993-94
Source: NSSO, Spark Capital Research
0.2
0.2
13.5
13.6
4.8
4.5
1.9
1.8
5.2
5.0
5.0
5.2
5.7
2004-05
2009-10
2011-12
39.7
0.9
$1,176
0
6.6 0.4
28
1.6
3
10
India’s per capita GDP
6
7.0 5.6
32
37.2
50
30
55.0
$663
30
9
31.3
4.7 1.1
0.6
0.9
5.6
4.6
40
6.3 36
37.8
60
5
0.9
40 6.7
0.8
15
2.4
4.1
70
8.8
9.5
2.7
3.6
90 27.5
7.6
10.2
3.3
9.3
6.3 70
100
80
21
80
0.3 0.5 0.3
8
14
4.4 1.8 5.5
4
0
0
1993-94 1999-00 2004-05 2009-10 2011-12
$1,564
2.6
$1,176
90
2.7
$663
27 100
Education Medical Entertainment HH consumables
Tobacco Clothing & footwear Durable goods
$1,564
Durable goods
Food Fuel & light Misc. goods & services
$1,167
Misc. goods & services
Education Medical Entertainment HH consumables
$663
Clothing & footwear
$466
Tobacco
Fuel & light
$319
Food
Page 8
Doubling of ~212m Indians’ income to drive non-linear discretionary consumption Income-wise distribution of India population Per capita Income
Rural
Urban
India
5m people 0.4% of population
20m people 1.6% of India’s population
$3250 to $5250
5m people 0.4% of population
18m people 1.5% of population
$1550 to $3250
73.3m people 6% of India's population
90.4m people 7.5% of India’s population
164m people 13.5% of India’s population
$1050 to $1550
82.5m people 6.8% of India’s population
42.7m people 3.5% of India’s population
125m people 10.3% of India’s population
667m people 55% of India’s population
206m people 17% of India’s population
>$5250
<$1050
25m people 2.1% of India’s population 23m people 2% of India’s population
Doubling income of these 212m Indians, which is equal to Indonesia’s total population, would drive the next phase of discretionary consumption boom in India
874m people 72% of India’s population
Source: NSSO, Spark Capital Research
Page 9
Strategy
An example from China discretionary consumption boom Spending share on discretionary rose sharply in last decade 100
5 3 10 4 3 12
90 80 70
6 8
50
Communications
9 7 7 8 4 10
60
Education Recreation and culture services Personal item
HH products & services
43
20
Apparel Food
2010
7
8
10
18
Per capita GDP: $6,807
Per capita GDP:
Source: Spark Capital Research
China's tourism & travel industry grew at double digits in last 10 yrs 3.3 bn
15
27
China's passenger cars (per 1,000 people)
Source: McKinsey Insights China, Spark Capital Research
1.1 bn
7
12
22
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0 2000
44 34
Health care
28
10
54 India is here In 2013, India has ~13 cars per 1000 people
Housing & utility
12
30
68 62
Transportation
9
40
Car penetration in China rose 5.7x during 2004 -13
98.2 mn
Chinese tourism industry is flourishing 1) Outbound tourism industry witnessed fast growth in China led by the emergence of a large middle class population with strong consumption power. 2) Since 2004, China's outbound tourists grew at 15% CAGR to 98mn, spending over US$120 bn on travel. Around 100 mn Chinese travelled abroad in 2013, double of 49 mn in 2009.
28.9 mn
3) Domestic tourism also grew at13%CAGR since 2004 to 3.3 bn tourists in 2013 2004
2013
Domestic travelers in China
Source: China National Tourism Administration
2004
2013
Outbound travelers from China
4) The domestic tourism and travel industry has increased 7.8x to $430bn in 2013, from $55 in 2004 and now contributes over 4% to its GDP Only ~11.5mn Indians travelled abroad in 2013, same as in China in 2001.
Page 10
Huge positive delta in savings likely… #1: CPI inflation to be 150bps lower than the RBI target
#2: Improving CAD to lead to more deposits in the banking system
11.2
12
Estimates
10
8.0
8
6.0
Better Savings
6 4
4.5
2 Dec-15
Sep-15
Jun-15
Mar-15
Dec-14
HH physical savings
16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0
1.2 13.8
Incremental currency in circulation (Rs. tn)
FY16E
FY15*
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY13
FY11
FY09
FY07
FY05
FY03
FY01
FY99
FY97
FY95
FY93
FY91
FY89
FY87
FY85
FY83
FY81
FY79
FY77
FY75
FY73
FY71
HH financial savings
FY06
32.4
30
1.5
4.1 FY05
40
FY04
50
FY03
60
Due to falling agri inflation, trend of money moving from urban to rural India will stop, leading to more deposits in the banking system
1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
FY02
67.6
#4: Lower currency in circulation to result in higher bank deposits
FY01
70 % of total HH savings
Higher Deposits
RBI target for CPI inflation (%)
#3: HH savings from physical to financial = more systemic liquidity
Source: Spark Capital Research
Lower CAD
FY00
CPI inflation (%)
Sep-14
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
0
Agri inflation (%, yoy) - RHS
Source: Spark Capital Research
Note: RBI has already delivered 25bps cut in repo rate, we expect 75bps cut in the remaining 2015
Page 11
… resulting in a sharp fall in market interest rates Expect short-end of the yield curve to fall more than the long-end leading to steepening of the yield curve Lower govt. borrowings to lead to lower supply for govt. securities... FY15-18E CAGR: 5.7%
FY05-15: CAGR: 25.9%
7.0 6.0 5.0
4.4
4.0
4.0
4.7
4.0
2.3
2.0 0.5
1.0
1.0
1.1
4.6
40% 5.5
5.6
30%
20%
3.5
3.0
1.3
18%
15% 32% of the banking sector’s incremental deposits funding Govt.’s borrowing requirements (vis-a-vis ~15% over FY02-07)
10%
Net market borrowings (Rs. tn)
FY18E
FY17E
FY16E
FY15BE
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
32%
35%
25%
3.3
3.0
4.5
5.1
…it could lead to decline in funding through banks deposits
5% 0%
FY08
FY09
Net market borrowings (% of GDP)
LAF+MSF borrowings to come down on enhanced liquidity…
FY10
FY11
FY12
FY13
FY14
FY15E FY16E
Incremental SLR to incremental deposits
…expect yield curve to shift down and steepen
800
8.5
600 8.0
200 %
Rs. bn
400
0
7.5
-200 7.0
-400
Estimates
Net LAF borrowing Source: Spark Capital Research
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
-600
6.5 3M
6M
1Y
2Y
3Y
4Y Current
Borrowing under MSF
5Y
7Y
9Y
10Y
15Y
Dec'15
Source: Spark Capital Research
Page 12
Strategy
The key question: Who can kick start the capex cycle? Let’s start with the basic demand-side GDP equation
GDP = Pvt. Consumption (C) + Investment (I) + Govt. expenditure (G) + Net imports (X-M)
Household (43% of Investment)
No
Private sector (26% of Investment)
HH are more leveraged, hence no capex until their income goes up
Share of indebted households has risen in the last ten years 31.4%
2002 2012
No
Idle capacity spurning new capacity creation
80%
72% 70% 68%
17.8%
Rural Households
66%
Urban Households
Percentage of indebted households Source: RBI, Spark Capital Research
Onus is on govt. to start the capex cycle
Since both the household and the private sector have no incentive to do capex, the onus is on the government to kick start the capex cycle.
78% 74%
22.4%
Yes
Capacity utilization in the manufacturing sector is very low at ~70%
76%
26.5%
Public sector (23% of Investment)
Capacity Utilization Source: RBI, Spark Capital Research
Page 15
Expect rupee to appreciate to 58 per USD on improving macro fundamentals
Non-oil imports
285
317
337
337
337
257
282
300
300
300
29
35
37
37
37
Total Exports (b)
313
316
314
321
328
Trade balance (a + b) = i
-138
-137
-98
-108
-117
Invisibles (ii)
115
113
111
111
111
Non-oil non-gold imports Gold imports
Discrepancy (iii) CAD (i+ii+iii)
10.0
10.3
10.3
10.3
10.3
-32.4
-33.6
2.7
-7.0
-16.7
CAD (% of GDP)
-1.7
-1.7
0.1
-0.3
-0.7
3.3 2.8 3.8 2.8 2.6 2.9 1.9 1.8
0.9
2
0.7 0.3 0.6 0.1 0.1 1.5 0.1 0.3 0.6 0.7 1.1 1.0 1.2
4
2.1 1.8 1.9
FII limit in debt to go up by $10bn in 2015
-2 -4 -6
-0.7 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 -5.7 -2.0 -1.6 Aug-13 -0.9 Sep-13 -2.2 Oct-13 -1.0 Nov-13 Dec-13 Jan-14 Feb-14 -1.5 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
0
Debt flows turned positive when tapering announced in Dec’13
Net FII flows: Debt
1.0 0.0 -1.0
-1.7
-2.0
-3.0 -4.0 -5.0
-4.7
-6.0 FY13
108
FY11
92
FY09
75
FY07
135
FY05
165
FY03
Oil imports
Rupee had appreciated from 48/$ in FY02 to 45/$ in FY05
2.0
FY01
445
FY99
428
FY97
412
FY95
452
FY93
450
Total imports (a)
3.0
FY91
FY16E
FY89
FY16E
FY87
Oil @65
FY16E
FY85
Oil @55
FY15E
FY83
Oil @45
FY14
(US$ bn)
Rupee appreciated 6% against the dollar during the last phase of current account surplus in India
FY81
India be CAD surplus in 2015 if $45 per barrel of Oil sustains
Current ac balance (% of GDP)
Rupee Outlook
In the short-term, volatile global economic sentiments can lead to a weaker rupee against the dollar due to muted foreign flows.
However, it is illogical for the rupee to remain under pressure in the long run at a time when there is a speedy improvement in India’s macro fundamentals in the form of lower CAD, lower fiscal deficit and low inflation. Considering the above factors, we believe that rupee should appreciate towards 58/$ in FY16.
Source: Spark Capital Research
Page 21
India strategy Market outlook
Mahesh Nandurkar
Budget’16: High expectations Need for higher infra spend with fiscal control.
Abhinav Sinha
In the upcoming budget on the 28th Feb, the Government will have to walk the fine line between the path of fiscal consolidation and the need to up Government spending to kick start the investment cycle. We believe that the tax revenue growth in FY16 will be 8-10pts higher than the previous years and will provide a relief. However, certain tax increases to fund infra investments appears likely but overall the budget will give a visible push to infra investments. With the Dec Qtr results season proving to be disappointing, budget will hold the key to investor sentiments.
2 February 2015
Debate on fiscal deficit targets but we think change unlikely
India
q The ‘Mid-year economic analysis’ published in Dec 14 argued for higher
Market Strategy
q However, the recent comments by the finance minister at the World Economic
Government spending to kick-start growth even at the cost of fiscal consolidation. Forum, clearly highlights that the Government is committed to the 3.6% fiscal deficit for FY16 and 3% for FY17.
Lower subsidies and higher tax collection growth to help investments q We estimate that the lower oil prices will drive a 35-40 bps savings for the
Government in FY16. Additional 5 bps savings could come through with the DBT implementation on LPG subsidy and the potential rationalisation of beneficiaries. This should be good enough to drive fiscal consolidation targets for FY16. q We estimate that the 3 existing measures of tax improvement (excise duty hike on auto fuel, normalisation of tax refunds and the higher excise duties on autos) would drive a 7-8% higher tax growth in FY16 vis-à-vis FY15. Improved tax buoyancy and potential tax increases could drive a much higher tax growth. (link to the note). q Adoption of the Finance commission recommendations might result in greater portion of central Government tax revenues (currently 28%) shared with the state Governments. But this might get offset by reduction in central Government’s assistance to state plan expenditure. Thus, the funds availability of the states need not necessarily improve but might get more discretion in spending.
Potential / Expected Government initiatives in the budget q Manufacturing boost: SEZ tax benefits for manufacturing sector. A +ve for Adani
Ports, Mahindra Lifespaces. Greater allocation to Delhi Mumbai Industrial Corridor
q Infrastructure boost: Greater allocation for Government capex in infrastructure. A
potential positive for L&T, IRB and other contractors.
q Social schemes: A fund for affordable housing, irrigation schemes. A +ve for
cement sector, Jain Irrigation etc.
q GST: As part of a deal with states centre has committed to clearing past sales tax
q
q
q q
dues of Rs100bn. Also, any roadmap with firm rates for rolling out GST will be seen as a positive, as this is one of the most significant transformational reforms. PSU banks recapitalisation: For FY15, the Government budgeted for Rs112bn for the PSU bank recapitalisation. A number substantially higher than that could be a sentimental positive for PSU banks. Further extension of DBT: DBT’s expansion to cover LPG is proceeding but same could also be utilized to target other welfare expenses like kerosene, PDS etc. Positive for PSU oil companies. Defence: The Government may raise defence expenditure. Tax increases: Higher commitments as above will require some balancing by increasing taxes selectively. A hike in Service tax to bring service tax rates closer to the GST rates, import duties on crude oil, increase in imports duties on steel, higher excise on cigarettes could be possible. This would be a potential negative for brokers, airliners, telcos, insurance & tobacco etc.
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India strategy
Budget’16: High expectations
Fiscal deficit & subsidies outlook Fiscal deficit path set earlier is likely to be adhered
With the government intent on following the fiscal deficit reduction path as envisaged earlier in the fiscal 15 budget; we believe FY16 fiscal deficit target will be kept at 3.0% of GDP i.e. 50bps lower YoY. 40bps of this reduction in fiscal deficit would come directly from lower fuel subsidy outgo if crude oil stays at spot level of c.US$50/bbl. Other subsidies viz. fertilizer (0.6% of GDP) and food (0.9% of GDP) look relatively inflexible in the near term. Figure 1
Fiscal deficit and subsidies as % GDP Of the 50bps reduction in fiscal deficit proposed for FY16, 40bps could come just from lower subsidies
6.0
% of GDP
5.0
4.8
Fiscal deficit
Subsidies
4.6 4.1
4.0
3.6
3.0
3.0
2.5
2.3
2.0
2.0 1.6
1.5
1.0
0.0 FY13
FY14
FY15E
FY16E
FY17E
Source: CLSA, FRBM document of Ministry of finance Figure 2
Lower fuel subsidy bill could be 35-40bps saving in FY16 subsidies
Subsidies outlook FY15 amount as a % of GDP
Outlook
Fuel subsidies
0.5
At spot, the total under-recovery on petroleum products for FY16 is likely to be Rs200bn of which the government may bear Rs100bn (<10bps) resulting in 40bps YoY saving.
Fertiliser subsidy
0.6
No relief likely in near term.
Food subsidy
0.9
The Food Security Act passed in 2013 makes this relatively inflexible though talks recently of government curbing the number of beneficiaries and adopting DBTL for PDS.
Source: Ministry of Finance
DBT scheme scale up continuing with financial inclusion scheme’s success
DBT’s expansion to LPG subsidies is a pre-cursor to the same being done for other welfare schemes
2 February 2015
DBT scheme expansion a structural positive for fiscal A longer term measure for subsidy curtailment that government has been building up is the Direct Benefit Transfer (DBT) scheme wherein the subsidy component is directly transferred to the customer’s bank account, reducing leakages in the process and enabling better targeting of subsidies. The scheme, while initiated by the previous Government, has seen another push under the BJP government as the PM’s financial inclusion plan started in Aug’14 has ensured that bank account penetration has reached nearly 100% for Indian households. The DBT scheme has now scaled up in LPG (cooking gas) distribution where the scheme, effective 1st Jan’15, covers all the 150m beneficiary households across India. Even with crude at US$50, LPG under-recoveries of c.Rs100bn are estimated for FY16. A 20% reduction of the same via implementing DBTL would be Rs20bn, small beginning, but a significant structural positive. We estimate that during FY15, LPG under-recoveries would be Rs400bn.
[email protected]
2
India strategy
Budget’16: High expectations
Figure 3
65% of the 150m households which get LPG have already joined the LPG-DBT scheme ‘PAHAL’
DBT LPG progress
120
No. of beneficiaries (m) Amount transferred under the scheme (Rs bn), RHS
m
40
Rs bn
35
100
30 80
25
60
20 15
40
10 20
5
0
0 30 Dec 14
9 Jan 15
22 Jan 15
30 Jan 15
Source: CLSA, Ministry of Petroleum Figure 4
Figure 5
UID issuances
No frills bank account opened under PMJDY
100
800
60
600
20
10 200
Source: CLSA, UIDAI
94
20 Jan 15
7 Jan 15
14 Jan 15
31 Dec 14
24 Dec 14
17 Dec 14
3 Dec 14
10 Dec 14
26 Nov 14
19 Nov 14
12 Nov 14
05 11 2014
28 10 2014
Jun 15
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
89
0
0
13 13 13 13 13 13 13 13 13 13 13 13 14 14 14 14 14 14 14 14 14 14 14 14 15
0
38
85 77 81 71 73 67 64
117 114 104108 100
18
28 08 2014
5
30
40
400
59 52 55
14 10 2014
15
45
07 10 2014
20
80
27 09 2014
25
No. of accounts opened
(m)
120
1,000
Target to hit 1bn isuuances by Jun'15
30
140
1,200
21 10 2014
(m)
20 09 2014
35
Monthly UID enrolment (LHS) Cumulative UID enrolment (RHS)
13 09 2014
(m)
05 09 2014
40
Source: CLSA, Ministry of Finance
Capex as a % of Govt expenditure should rise Figure 6
The capital expenditure component of budget spending will rise as subsidies contract and incremental revenues get re-directed
Capital expenditure as % of government expenditure
Non-Defense capex as % Govt expenditure
% 14
Defense capex as % Govt expenditure
12 10
8
7.9 5.6
6.0
7.0
6.8
7.0
7.4
6
4 2
4.6
5.0
5.2
5.2
5.0
5.0
5.3
FY09
FY10
FY11
FY12
FY13
FY14RE
FY15BE
0 Source: CLSA, Ministry of finance
2 February 2015
[email protected]
3
India strategy
Budget’16: High expectations
FY16 tax growth should be 8-10ppts higher than FY15 Figure 7
Tax growth build-up for FY16 Additionally tax growth can be higher on account of tax buoyancy in a recovering economy and possibility of select tax rate hikes
16
% 1
14 3
12 10
4
8
15
6 4
7
2 0 FY15 tax growth Excise duty hike Normalization of Higher excise FY16 tax growth on Petro tax refunds duties on autos products Source: CLSA
Gross tax collections already higher Paying for prior ‘aggressive’ tax collection
A discrepancy in growth in tax collections which Finance ministry officials point to is the large gap between ‘gross’ and ‘net’ tax collections. While the former refers to the taxes actually collected in the current financial year; ‘net’ taxes refer to the tax accruing to the government post refunds. Ideally, the growth rates of the two should coincide however there is currently a c.5-6% gap between the two rates as apparently aggressive tax collections of prior years’ implies that government is facing heavy refund pressure!. Going forward, as the refunds normalise, net tax growth should equal the gross tax growth i.e. 5-6% for the direct tax or c.3% for overall tax. Figure 8
The gap between gross and net tax collections is significant
Gross and net direct tax collection growth for 9MFY15
15
% YoY for Apr-Dec 12.9
Gross tax collections
Net tax collections
12.8
12.6
12
9
8.4 7.4
6.6
6
3
0 Total direct tax collections
Corporate taxes
Income taxes
Source: CLSA, Ministry of finance
2 February 2015
[email protected]
4
India strategy
Budget’16: High expectations
Taxes on petroleum already raised to add 4% to FY16 tax collections Figure 9
The tax hikes will add c.Rs750bn to FY16 tax collections and ~Rs200bn for FY15
Excise duties on Petrol and Diesel
10.0
Excise on Petrol (Rs/litre)
Rs/ltr
Excise on Diesel (Rs/litre)
9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0
1.0 0.0 Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Source: CLSA, Ministry of Petroleum
Key measures in the budget to look out for Figure 10
Key Budget measures and impact Key measure Higher spends in infra and higher taxes on services are amongst important measures likely
Manufacturing boost
Policy initiatives likely
Stock / Sector impacted most
SEZ tax benefits for manufacturing sector possibly in form of lower Minimum Alternate Tax (MAT) rates than current 18.5%
Adani Ports, Mahindra Life
Greater allocation to industrial corridor projects like DMIC Infrastructure boost
Re-orienting social schemes
Higher allocation for govt. capex spend particularly to boost EPC contracting. NHAI, DFCC, Railways can see big increases Increasing infra component of social schemes like MNREGA
L&T, IRB and other contractors
Cement sector, Jain irrigation
Push to affordable housing, irrigation via creating flagship schemes similar to push given to financial inclusion Higher Taxes GST push
Service tax rate hike to close to Goods rate Providing Rs100bn compensation to states for past dues to show government’s commitment
PSU bank recapitalization
Amount materially higher than last year's Rs112bn would signal move to Basel III rules
DBT extension
LPG subsidy eligibility tightened; Kerosene added possibly to DBT
Defence capex boost
Significant boost under Make in India program is possible
-ve for Telcos, Insurances, Banks FMCG, logistics
PSU banks sector
PSU Oil companies L&T, Tata Power etc
Source: CLSA
2 February 2015
[email protected]
5
India strategy
Budget’16: High expectations
Restructuring of centre / state tax revenue split on cards Figure 11
State’s share in Central taxes has been in the 2729% range for last 5 years
Trend of State’s share in Central tax revenues
30
%
States' share in Central tax revenues
28.7
29
28.1
27 26
28.0
27.7
28
25.8
25.4
26.5
26.4
FY09
FY10
27.5
25.6
25 24 23
FY06
FY07
FY08
FY11
FY12
FY13
FY14RE FY15BE
Source: CLSA, Ministry of Finance
14th finance commission report has probably suggested boosting state’s share of centre’s tax revenues
The Finance Commission is a constitutional body primarily to recommend measures and methods on how revenues, which the government earns through various taxes, need to be distributed between the Centre and states. The 14th finance commission has submitted its report to the President of India and media reports indicate that it has proposed that the central Government to share a higher proportion of its revenues with the state Governments. Currently, central Government shares about 28% of its total tax revenues directly with the states. Aside from sharing the tax revenues, the central Government shares, additionally, almost an equal amount with the states through plan expenditure. We believe that that the central Government might cut back on the second part by an equivalent amount. Thus, the funds availability of the states need not necessarily improve but might get more discretion in spending. Figure 12
The central government currently allocates 43% of its budget to states under various heads
State and Centre’s split of resources in Centre’s budget: FY15 – Rs18trn
State's share of taxes and duties 21%
Centre's expenditure 57%
Non-plan grants and loans to states 4%
Central assistance for State under various schemes 18% Source: CLSA, CGA, Ministry of Finance
2 February 2015
[email protected]
6
http://indianexpress.com/article/business/business-others/govt-may-have-room-for-over-rs1-5-tnstimulus/
‘Govt may have room for over Rs1.5 tn stimulus’ Ask an industrialist about the current state of the Indian economy and, but for a few exceptions, you would probably get a dejected shake of the head. Tax collection growth is the worst in recent history. It appears that even the government, which had assumed that the slowdown in investments was all due to a lack of clearances, is now losing patience. Projects have been cleared, but they are not restarting: demand seems to be an issue. Some economists would argue that the situation calls for a good old-fashioned Keynesian stimulus: if the private sector is not spending, the government should. But can it? It seems clear the government faces acute fiscal pressure this year, forcing it to sharply curtail discretionary expenditure. However, in the next fiscal year, the government in our view has significant fiscal room for a stimulus: we estimate more than Rs 1.5 trillion. This should come from windfall gains from raised excise duties on petroleum products, a drop in subsidies, and also a possible minor pushing out of its deficit reduction targets (if the spending is targeted sensibly, the rating agencies are unlikely to have serious concerns). That should make the upcoming Budget speech the most interesting in more than a decade. What the government decides to spend on will only be clear on February 28, when the finance minister presents the Budget. But, using a few logical assumptions, one can narrow down the options on what it “should” spend on. First, it should spend on “shovel ready” projects, i.e., where activity can start as soon as possible. Second, it should spend on projects that have a big “multiplier” effect: for example, spending on rural roads has a bigger immediate multiplier effect than, say, importing solar cells. Third, the commitment should be to “short cycle” projects, so the government can move out when private sector capital expenditure restarts. And, fourth, there must be “institutional capacity”, i.e., the ability to scale up rapidly. Using these assumptions, one can narrow down potential spending areas to NATIONAL HIGHWAYS, RAILWAYS, RURAL ROADS AND URBAN AND RURAL HOUSING. There are a large number of national highway projects that have the necessary clearances, but only need funding to proceed. Similarly, the Railways has been starved of funds for so long that their needs, particularly in terms of projects such as station modernization, can be substantial. But, in our view, the areas offering the fastest potential scale-up and also the largest growth multipliers would be rural roads and housing. It is surprising that housing is not a stronger priority area for us, given the 14 million slum households in the cities, and another 76 million non-pukka houses in villages. Living in a good pukka house improves health and productivity. Moving from a slum/mud-hut to a pukka house can free up a lot of time for a household. Pukka houses are also easier to provide civic amenities to, like drinking water, sanitation and electricity. And construction of these houses creates jobs, as well as higher demand for construction materials such as bricks, cement and steel, and also paint, wiring, curtains, appliances, furniture, and woodwork. That in turn has a big multiplier effect on job creation and growth. This appears to be as clear a “win-win” as one can think of. With the end objective clearly desirable, the question remains the process.
The solution is not easy. Housing booms in the US in the last decade, and more recently in China, drove strong economic growth while they lasted. The aftermath was (and in the Chinese case appears to be) undesirable, but it came after the economy had grown substantially. The risk of a year or two of weak growth after five years of acceleration is one that many might argue is worth taking, especially if it means more people end up in better quality houses. Would India need to see “NINJA” (No Income No Jobs or Assets) loans, like in the US, or direct government construction of low-cost housing, like in China? Both might be undesirable: the first for being too speculative, and the second for arguably being ineffective in India, given the potential for encouraging corruption. However, for houses priced below a threshold, a suitably designed interest subsidy scheme together with incentives for private investors to put in the risk capital (a capital gains tax waiver on low-cost housing?) could enable small contractors in hundreds of cities to start work at short notice. If this were to work, the multiplier effect could be very large. Similarly, sharply increasing the rural housing subsidy programme could be a strong directed stimulus measure. At a broader level, aggressive money-printing by deflation-fearing central banks globally is sharply bringing down cost of capital. The challenge for India is to think up viable investment schemes to find a use for this capital, which would be available. The “Housing for All by 2022” target could be a starting point.
28 January 2015
Asian Daily India Market Strategy -----------------------------------------------------------------------------------------Indian market is pricey vs its own history; but has rarely been cheaper on a relative basis Neelkanth Mishra / Research Analyst / 91 22 6777 3716 / [email protected] Ravi Shankar / Research Analyst / 91 22 6777 3869 / [email protected]
● The strongest pushback to our Ideas Engine note on a fiscal boost driving a strong GDP growth pick-up has been on valuation. There is no denying it: India PE is now near +1 std dev. levels from a ten-year mean, levels from which downside risk is high (Fig. 1). ● But such adjectives are relative. 'Cheaper' or 'expensive' must be followed by 'versus what?'. It could be a bit expensive versus its own history, but when compared to global equities, its premium is just 12% off ten-year lows; it was 40% in 2010, and 80% in 2007. ● We also find that versus the most liquid asset in the world, the tenyear US government bond, Indian equities have only been cheaper during crises (Fig. 2). If the gap narrows from 4% to 2%, we would get cautious, given that the ten-year yield going to 3.75% seems unlikely right now, worrying about India's P/E is premature, in our view. ● Within the market, we continue to believe that companies with good growth visibility and the possibility of a growth surprise are unlikely to be sold down purely on valuation. We believe the government's fiscal boost is likely to drive earnings surprises
Figure 2: Indian equities cheapest vs the US Treasury ex-crisis times 10%
Diff betn MSCI India Earnings Yield & US 10Yr treasury yield 9/11; Dot-com aftermath 8% Decelerating Russian crisis; growth for India Pokharan blasts 6%
Financial crisis
4%
2%
0%
High diff => Indian equities undervalued Low diff => Indian equities overvalued
-2%
1996 1997 1999 2000 2002 2003 2005 2006 2008 2009 2011 2012 2014
Source: MSCI, Factset, Bloomberg, Credit Suisse estimates
Figure 1: While valuations near +1 std dev., India still cheap wrt World 24
80%
20
60%
16
40%
12
20%
8
0%
4 -20% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 MSCI India P/E +1 sigma -1 sigma PE Premium vs. World (RHS)
Source: MSCI, Credit Suisse estimates
India still looks cheap compared to global equities
The strongest pushback to our Ideas Engine note on the government's fiscal boost driving a 75–100 bp GDP growth pick-up has been valuations. India's outperformance over the past ten months is clearly making equity fund managers nervous. There is no denying it, MSCI India PE is now near +1 std deviation levels, levels from which downside risk is very high (Fig 1). But such adjectives are relative. 'Cheaper' or 'expensive' must be followed by 'versus what?'. The Indian market could be a bit expensive versus its own history, but when compared to global equities, its premium is just 12% off ten-year lows; it was 40% in 2010, and 80% in 2007. And it has rarely been cheaper against the US ten -year
Let us also use a new benchmark, perhaps the most liquid asset in the world: The ten-year US government bond. The difference between the Indian market's earnings yield and the ten-year treasury yield has been higher than now only during financial crisis, or periods of high risk.
A high gap implies that Indian equities are under-valued versus the US ten-year, that is the earnings yield (one upon P/E) is too high. A low gap implies they are over-valued. The gap has been higher than 4% only during periods of high uncertainty, or when Indian growth was decelerating (Fig. 2). This suggests that short of a crisis, Indian equities have rarely been cheaper versus US treasuries. The question then is: Would the US ten-year yield climb 2 pp from here (i.e. reach 3.75%) at which this gap shrinks to 2% where versus history, downside risk to Indian equities is quite high? At this stage that seems unlikely. The gap can, thus, shrink only if India market P/E rises. Sectors: Earnings visibility and surprises still matter
We continue to believe that in an environment of surplus liquidity, the market would reward companies with good growth visibility and positive earnings surprises. These surprises, given the government's fiscal boost, are most likely in sectors like cement and construction. Figure 3: Staples, pharma and industrials look expensive vs history Staples Health Care Industrials Materials MSCI India Financials Telecom Cons. Disc. IT Energy Utilities
Note: Zero indicates current value is "at the historical mean" -1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
P/E Z-Score: No. of std. deviations away from mean
Source: MSCI, Credit Suisse estimates
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
IN DEPTH
OPPORTUNITES IN A MODAL SHIFT FOR INDIAN LOGISTICS BY VIKRAM SURYAVANSHI
3 0 GROUN D VI EW
1st Jan 2015
THE WAY INDIA MOVES CARGO
India’s current cargo-movement scene — inefficient and costly Indian logistics landcape
Modal mix in Indian cargo
Cost per tonne, per kilometre (Rs)
Source: Industry, PhillipCapital India Research
• National highways 70,934km • Coastline 7516 km • Major ports 13 • Railway Route 64600km • Road Network 4.4mn km
Source: IWA
• Waterways 14,500 km nagigable
In India, logistics cost as a percentage of GDP is at 13% compared with 18% in China, 8.5% in USA, and 11% in Japan. However, China’s industry contribution to GDP is at around 47% compared to 18% in India (so in that context, its logistics costs are not high). Although it is costly and inefficient over long distances, road transport dominates freight movement in India. This is because capacity constraint is a major issue for Indian railways. Railways share in overall cargo transport has declined from 89% in 1951 to 32% due to lack of sufficient capacity addition.
3 2 GROUN D VI EW
1st Jan 2015
Moving slowly: Roads dominate freight transport The Indian logistics industry is valued at an estimated US$
In India, roads dominate the freight-transport mix
130bn and it has seen a CAGR of over 16% over the last
and constitute about 60% of total traffic. Rail and
five years. Aggregate freight traffic is estimated at about
coastal shipping account for about 32% and 7%,
2-2.3tn kilometres. Transportation costs in India have been
while the share of inland waterways and air is less
among the highest in the world, largely due to the inefficient
than 1% each.
(yet predominant) road transportation. For decades, Indian
The Total Transport System Study (TTSS) carried
companies have had to compromise on this vis-a-vis their
out by RITES for the Planning Commission cal-
foreign counterparts due to lack of choice. Unfortunately,
culated that railways’ share in total inter-regional
the rail-road mix in freight movement has developed rather
freight traffic has progressively come down to 30%
sub-optimally over the years, as railways consistently lost out to roads, unable to install capacity or respond to market needs.
in 2007-08 from 89% in 1951 and 65% in 1978-79. India has the second-largest road network in the world totalling 4.4mn kms, but most of it is of poor quality. National Highways constitute only 1.7% of
Freight transport in India: Dominated by Roads
the network, but carry as much as 40% of the road
%
China
USA
India
highways consists of single-lane roads, which have
Air
1
1
1
suffered from prolonged neglect. RITES estimated
Water
30
14
7
Rail
47
48
32
Road
22
37
60
freight. A significant part of the existing national
that this consistent and unchecked fall in the share of railways through the years cost the Indian economy about Rs 385bn (16% of total transport cost). The commodities that were historically moved by
“Truck capacity will get polarised towards high-capacity and light commercial vehicles (LCV). There will be a decline in the mid-range 14-18 tonne capacity trucks, as seen in developed countries, post implementation of GST,” said a consultant.
1st Jan 2015
G RO U N D V I EW
33
Avg lead distance (km)
Indian Railways - no steam left Indian Railways contribute significantly to the country’s macro-economic growth and global competitiveness, but account for only 32% of the freight traffic. The Indian rail network is the fourth largest after US, China, and Russia (however, these countries are much larger than India). It is also the largest passenger carrier in the world.
Source: RITES
Capacity constraint is a major issue for railways. Its freight performance has increased mainly because of over-utilisation of its already saturated network. For instance, the high-density golden quadrilateral network and its diagonals, which rail over long distances are now being moved by road. The average freight traffic lead distance of roads has increased over time, and railways have been affected by capacity constraints. Road transportation provides last-mile connectivity and is competitive up to 500kms when compared to rail transport. However, it has been widely used to carry heavy cargo over longer distance (i.e., greater than 500km) in India. The economic consequence is that roads carry goods inefficiently. This adds to the cost and reduces the competitiveness of exports. It also has environmental consequences in term of greenhouse gas emission and energy usage that is higher than they necessary. Road transport
comprise only 16% of the total railway network, carry 65% of total traffic. There are some sections where Indian railways have been facing super saturation in line capacity. These include Delhi–Howrah, Mumbai-Howrah, Delhi-Mumbai, Delhi–Chennai, and Kharagpur-Chennai. Currently these routes constitute 140-150% of capacity utilisation. Though rail freight has increased in absolute terms, its overall share in the country’s total domestic freight has reduced considerably. The freight segment generates around 70% of the Indian Railways’ revenue. Freight trains are supposed to maintain average speeds of 60kmpl, but operate at much lower speeds of 20-24kmpl.
depends on imported fuel while railways use mainly power
Rail Vikas Nigam is responsible for executing projects that
generated from domestic coal — this results in higher
pertain to rail-port connectivity including strengthening of
import dependency.
the golden quadrilateral and diagonals connecting four
Indian trucking is an unorganised industry where around 75% of trucking firms own small fleets of less than five trucks. Only 11% of trucking firms operate more than 20 trucks. “Shifted from own vehicles to lease and now
metro cities (Delhi, Mumbai, Chennai and Kolkata) comprising 10,000kms and developing multimodal corridors to the hinterland. The projects are developed with equity contribution from major ports and Rail Vikas Nigam is responsible for
operate with 85-90% lease fleet. These are attached vehicles on a trip basis. Driver shortage and poor condition of roads is a major concern,” said a truck operator.
Gauge -wise Indian Railway Network
The industry is intensely competitive with low entry barriers. Service quality, in terms of schedule and safety, are not priorities. Truck transport is impacted by poor quality of roads, which reduces speed to a third of that achieved in developed countries. It is also impacted by multiple checkpoints for inspection, payment of tolls and taxes, and octroi. The World Bank estimated that truck delays at checkpoints cost the Indian economy anywhere between Rs9bn and Rs 23bn.`` 3 4 GROUN D VI EW
Broad Gauge (1676mm) Metre Gauge (1000mm) Narrow Gauge (762 and 610mm) Total (km)
Route Km
Running track km
86.62
89.96
9.83 3.56 64600
7.49 2.56 89801
Source: Ministry of Railways (2012). Note: ‘Route kilometre’ is a unit of distance, measuring the distance by rail between two points on the railway network whereas ‘Running track km’ is the sum of all running lines (Counting each line of doubled, tripled, etc. lines separately) between two points.
1st Jan 2015
Waterways – underutilised but with enormous potential India has a long coastline, spanning 7,516 kilometres, form-
IWT is more fuel efficient as compared to road and train
ing one of the biggest peninsulas in the world. It is serviced by 13 major ports (12 government and 1 corporate) and 187
Operating cost per ton km
Fuel efficiency ton km/litre
Shipping
0.75
105
Rail
1.18
85
Road
1.51
24
notified minor and intermediate ports. These ports account for nearly 90% (by volume) of India’s international trade. Yet, coastal shipping accounts for only 7% of the country’s total domestic freight (on a tonne-km basis). In China, waterways have a larger share than that of roads. Presently, India has just 140 costal vessels, which carry 7% of overall cargo movement. China has around 12,000 vessels specially built coastal cargo ships for various sectors such as coal, steel, grains, and fertilisers.
Cargo breakup for costal movement
The economic growth seen in India over the past decade has led to congested roads and an over-burdened railway network. The potential of coastal shipping and inland waterways is untapped and provides significant opportunities. There are many inherent advantages of this mode of transportation. Coastal shipping or use of water as a mode of transportation is much safer, more economical, and less polluting. Waterways are 50% cheaper than roads and nearly 30% cheaper than rail. The coastal leg, apart from being more fuel efficient, can also carry larger parcel sizes and provides a great opportunity for consolidation of loads and over-dimensional
Source: IWA
cargo. The share of bulk cargo commodities such as POL, coal, iron and cement has come down from 94% in 2005-06 to 87% in 2009-10. On the other hand, the share of “Others”, which
Share of water transport (%)
includes container traffic, has seen a dramatic increase from 6% to 13% due to increasing containerisation of goods. Gujarat and Maharashtra lead in growth of coastal-cargo traffic at ports. They have been forerunners in creating infrastructure, forging a conducive environment for business, and attracting investments. These states are also bestowed with a thriving industrial hinterland and with the implementation of the Delhi-Mumbai Industrial corridor, the maritime environment in the two states will remain bullish. The container movement by sea is also adversely affected due to an absence of a hub in India. This causes additional delays because containers have to take a feeder voyage
Source: IWA
from India to a hub port and then wait at the hub port for the mainline ship to call. In the absence of a hub port in
3 6 GROUN D VI EW
1st Jan 2015
Source: PhillipCapital India Research
State-wise break up of coastal cargo
“Lots of opportunities are there for costal shipping. Currently tiles from Morbi, Gujarat are transported by road to Kerala despite both are at costal location. We need to connect minor ports with road infrastructure that has a carrying capacity of at least 15-30 tonnes,” said Atul Kulkarni, a port consultant.
India, a majority of the country’s containers are currently transhipped through other ports i.e. Colombo (just south of India), Singapore (east), Dubai, and Salalah (west). Handling these through the Indian transhipment terminal would result in savings of between Rs 6,000 and Rs 16,000 per TEU for the Indian exporter. The reasons for a hub port not evolving in India are insufficient traffic, cabotage law, and insufficient infrastructure, including low draft due to which mainline bigger ships cannot be berthed. All this routinely causes costly delays of anywhere between 25 hours to 40 hours.
Typical coastal route for cargo in India
Inland waterways in India: limited success India has almost 14,500kms of navigable inland waterways, of which 5,200kms are major rivers and 500kms are canals suitable for mechanised crafts. Currently, Inland Waterway Transport handles only around 1% of total inland cargo transport. There is potential for other cargo such as coal, finished steel, fertilisers, cement, food grains, dry bulk, and containers to be transported economically and effectively through IWT. It is environment-friendly and less costly vs. other conventional modes such as road and rail. It reduces traffic congestion problems on road and rail. National Waterways come under the purview of the central government and Inland Waterways Authority of India (IWAI), whereas other waterways are under the control of the state governments. IWT is functionally important in regions covered by the Brahmputra and the Ganges in the northeast and
Source: Company
eastern parts of the country, Kerala, Goa and in the deltas of the rivers of Krishna and Godavari where IWT offers natural advantages. In spite of its merits, its operation is constrained
1st Jan 2015
G RO U N D V I EW
37
by several factors like shallow water, narrow width during dry weather, siltation and bank erosion, inadequate vertical
Criteria for declaration of National Waterway
and horizontal clearances in a large number of overhead structures making navigation throughout the year a daunting task. Cargo movement by IWT increased from 32mn tonnes in 2003-04 to 63.8mn tonnes in 2012-13. Most of the cargo movement by IWT takes place in Goa, NW1 - Haldia and
l Should allow navigation of mechanically pro-
Maharashtra (90% share).
pelled vessels of minimum 300 tonnes (DWT) capacity (45m x 8m x1.2m). l 40mt wide channel with 1.4mt depth in case
National Waterway-1 (Ganga-Bhagirathi-Hooghly)
of rivers and minimum 30mt wide channel with 1.8mt depth in case of canals. Exception may be given in case of irrigation-cum-navigation canals based on request of the concerned state government in order to safeguard the interest of irrigation.
The National Waterway-1 has been divided into three stretches for operational convenience and is being devel-
l It should be a continuous stretch of minimum 50kms; only exception is for urban conglomera-
oped for shipping and navigation. Least Available Depth
tions and intra-port traffic. It should pass through
(LAD) of 2mts round the year is being maintained between
and serve the interest of more than one state
Haldia and Patna (1,020kms) and LAD of 1.5mts between
or connect a vast and prosperous hinterland
Patna-Varanasi (363kms) for most part of the year. However,
and major port. It should either pass through or
LAD of 1.5mts metre is maintained only for 4-5 monsoon
connect a strategic region where development
months in a year between Varanasi and Allahabad (237kms).
of navigations is considered necessary to provide
The volume of freight movement on National Waterways-1
logistic support for economic development or
was 2.7mn tonnes in 2012-13 and moved by CIWTC, VIVADA
national security, or connect place not served by
IWL and other private operators.
any other mode of transport.
The composition of cargo movement on National Waterway 1 over the years: Building material accounted for 64% in 2012-13.
Declared National Waterways National Waterway
Location
NW 1
Ganga-Bhagirathi-Hooghly river system from Allahabad to Haldia Brahmaputra river from Sadiya to Dhubri West Coast Canal from Kottappuram to Kollam along with Champakara and Udyogmandal canals Godavari & Krishna rivers & Canals between Kakinada and Puducherry
1620
Brahmani river & Mahanadi delta system along with East Coast Canal
623
NW 2 NW 3 NW 4 NW 5
Stretch (kms.)
Cargo movement on national waterways (mn tonnes)
891 205 1095
3 8 GROUN D VI EW
Source: IWA
In the first 25 years since the inception of the Inland Waterways Authority of India in 1986, it has spent Rs 11.07 bn for the country’s 4,500-kmlong river route. 1st Jan 2015
National waterways (NW1)
Composition of cargo moved on national waterway-I (tonnes) Year Building material
2009
2010
2011
2012
2013
835585
1388365
1492395
1529401
1727685
Fertiliser
7500
Food
42352
1434
9110
15000
345179
Miscellaneous
42814
145000
41984
22509
13842
1459428
21800
Mix ore/minerals POL Source: IWA
52000
96358
25283
2648
550
229000
337189
277030
324111
281954
247341
1205
79590
3310047
2716437
Coal Total
1st Jan 2015
1354298
1837112
1877748
G RO U N D V I EW
39
M O DA L S H I F T – E N A B L I N G S U S T A I N A B L E G R O W T H
The future of cargo in India: Railways, DFCs, DMICDC, and waterways
C
argo movement by train is more cost
Japan are pure passenger routes. The average
competitive than roads, particularly
speed of a goods train in India is about 25kms
for a distance of more than 500kms.
per hour, which makes trucks a better option for
However, in India, containers are
many customers. DFCC will reduce the unit cost
moved by road even for distances of more than
of transportation by creating rail infrastructure to
1,000kms due to poor rail infrastructure. With the
carry higher throughput per train. It will pro-
development of the Dedicated Freight Corridor
vide non-discriminatory access to freight trains
Corporation (DFCC) and Delhi-Mumbai Industrial
belonging to Indian Railways and other qualified
Corridor Corporation (DMICC), the growth rate in
operators
the container trade could see a structural shift in the coming years.
Construction of DFCs across the country is the most ambitious project ever conceived by the Indian Railways. Out of six DFCs planned in a phased manner, two corridors (eastern and
DFCs to the rescue
western) are scheduled to be fully commissioned by FY17-18. The eastern corridor will run from Ludhiana in Punjab to Dankuni near Kolkata with a length of 1,839kms and the western corridor will
Dedicated Freight Corridors (DFCs) will strengthen India’s rail transport infrastructure to meet expected high future demand for freight movement. The development of DFCs will result in enhancing the market share of rail in freight by providing an efficient, safe, economical, and environment-friendly option. The main earnings of the railways come from its freight operations, which cross subsidises its losses on running passenger trains. Currently, passenger trains are given preference and cargo trains are made to wait due to shortage of tracks. In contrast, US railroads are (almost) exclusively used for freight while high speed rail networks of
stretch from JNPT near Mumbai to Dadri (Delhi) with a length of 1,534kms. “Completion of project is dependent on how fast subcontracting is done. Most of the civil work is done by local players for smooth execution. Out of the 3Ms (man, material and machinery), managing the first two is critical. Labour viability is difficult due to NEREGA,” said an advisor to the DFC project. The phasing of corridors is synchronised with the existing most-saturated sections on the Mumbai-Delhi and Delhi-Kolkata rail links. The growth in demand is expected due to a DFC-driven increase in rail share in port-based container traffic from current 22% to 35-40%.
DFCC will reduce the unit cost of transportation by creating rail infrastructure to carry higher throughput per train. It will provide non-discriminatory access to freight trains belonging to Indian Railways and other qualified operators
4 0 GROUN D VI EW
1st Jan 2015
Source: DFCC
“For Dedicated freight corridor (DFC) to survive, shift from road to rail is a must. Parallel improvement in railway is also important to integrate existing terminals to DFCC,” said an advisor to the railway board.
Progress of Phase-1 of Western DFCC
1st Jan 2015
G RO U N D V I EW
41
DMICDC will significantly boost railway cargo and untangle bottlenecks DMICDC acts as a pass-through entity for specific pro-
CAGR), triple industrial output in five years (25% CAGR),
jects and raises various financing instruments such as
and quadruple exports from the region in five years (32%
‘Project Development Fund (PDF)’ that could be used
CAGR).
as a Revolving Fund and would specifically be used for undertaking project development activities on a Public-Private-Partnership basis. It will develop industrial cities around a multi-modal high-axle-load dedicated freight corridor between Delhi and Mumbai, covering an overall length of 1,400km.
DMICDC will have 24 investment regions developed in three phases out of which seven will be developed in the first phase over the next five years. Each state has one investment region, except Maharashtra, which has two. The master plan for all seven industrial regions is ready. DMICDC is planning to use information technol-
It will develop an area of around 150-200kms on both
ogy to the fullest in addition to having a physical master
sides of its alignment. Its project influence area (PIA)
plan for all these cities. Cisco and IBM are to create a
comprises 430,000 square kilometres, which consti-
digital layer on top of the physical plan for these cities.
tutes around 14% of India’s total geographical area.
The entire city control and governance will be managed
Six DMICDC states contribute 50% of India’s principal
from one place with an integrated approach on a mas-
crops, constitute 45% of the country’s GDP, and 58% of
sive scale. To monitor real-time container movement,
value of output. The development of industrial regions
DMICDC is working on logistics data software for con-
in these states will result in a 70% contribution to GDP
nectivity with all logistic players. Apart from DMICDC,
by 2030. The developmental planning for DMIC aims
four more corridors will be developed by the Ministry of
to double employment potential in five years (15%
commerce, where DMC will provide support.
Pithampur-Dhar- Mhow – Master Plan 4 2 GROUN D VI EW
1st Jan 2015
Source: DMICDC
Multimodal Logistics Hub –Investment Region of Madhya Pradesh ( 372.4 Sq. km) Components (cost in Rs mn)
Source: DMICDC
Site Development Cost
1st Jan 2015
2012-2016
2017-2021
2022-2031
2032-2041
Total
443
39
20
11
513
Infrastructure Costs
1469
494
384
156
2503
Building Development Cost
417.3
1313.2
150
90
1970
257
195
225
227
904
299
510
809
2587
2041
1078
993
6699
Equipment Cost Equipment Replacement Total Capital Costs
G RO U N D V I EW
43
Rail Transport: how can it attract more cargo?
The cargo follows the manufacturing and consumption through most economical ways including the time. The development of DFCCs is expected to provide high-speed capacity for railway to move cargo while DMICDC will create manufacturing and consumption centres. Though transport through railways is cheaper than roads even now, availability of capacity is a major constraint. DFCCs will provide faster evacuation on most congested routes by separating cargo from passenger train routes (currently, cargo is moved when passenger trains are not running).
poration Limited (PRCL), a 50:50 JV between
The development of DFCCs is expected to provide high-speed capacity for railway to move cargo while DMICDC will create manufacturing and consumption centres
The government’s target is that 50% of all the
Ministry of Railways (MoR) and Gujarat Pipavav Port Limited (GPPL), is operating a 271-km-long railway line connecting Port of Pipavav to Surendranagar junction (Western Railways) in Gujarat, both for freight and passenger operations, for a concession period of 33 years. The major concern for cargo movement through railways is that it subsidises passenger traffic with higher cargo charges. The average income from transporting a tonne of goods over a kilometre (revenue per net tonne km) is Rs 1.04, significantly higher
cargo in India should be transported by rail by
than the 27paise it gets from moving an
the end of the 15th plan. Rail and road freight
average passenger for every km. Subsidising
traffic are expected to grow at about 12% and 8% per annum
passengers through higher cargo charges has translated into a
respectively to achieve a 50% share each in the total. Such an
fare-to-freight ratio of 25.9% from 34% in 2003-04 while revenue
increase in rail freight will not take place without substantial
per passenger km has remained almost static. Another way to
expansion in rail-freight capacity. The government has recently
look at extent of cross subsidisation from freight to passenger
announced FDI in railways to improve rail connectivity to hub
is fare–freight ratio which is one of the lowest in world. It is the
centres. The Public Private Partnership (PPP) in rail projects has
ratio of passenger fare per km and freight rate per ton km. “India
had limited success so far.
needs separate regulator for holistic transport policy to reduce
The first PPP project, Pipavav Rail Corporation, has become success a story, which can be replicated. Pipavav Railway Cor4 4 GROUN D VI EW
total logistic cost for country. Indian railway controls the policy decision on notified commodities and haulage charges increas-
1st Jan 2015
Source: Planning Commission
Years
Rail % Traffic share (btkm)
Road Traffic (btkm)
% share
Total Traffic (btkm)
1950-51
44
88
6
12
50
1970-71
124
69
57
31
181
1990-91
247
47
283
53
530
2004-05
411
39
643
61
1054
2011-12
668
33
1385
67
2053
2016-17 (GDP -6.9)
1070
35
1987
65
3057
2021-22 (GDP -8%)
1885
39
2949
61
4834
2026-27 (GDP -8%)
3535
45
4321
55
7856
2031-32 (GDP -8%)
6559
50
6559
50
13118
Cost breakup Railway freight is a major cost for container train operators
Source: Company
Freight-traffic estimates with elasticity of 1.2
ing cost of rail transport with limited opportunities to private players and customers. ” said an advisor to railway board. With consistent increase in railway charges, private container train operators (CTO) are losing their competitive advantage over domestic truck operators. The increase in rates on an ad-hoc basis by Indian Railways is a point of concern and container train operators have very limited control over the largest cost component — namely rail haulage. “The railway is looking at private container operators as competitors and there is no policy support to make
The government’s target is that 50% of all the cargo in India should be transported by rail by the end of the 15th plan. Rail and road freight traffic are expected to grow at about 12% and 8% per annum respectively to achieve a 50% share each in the total
business viable,” said a logistic consultant. CTOs are requesting the Rail Tariff Regulatory Authority to bring rationality in traffic and increase rail share in cargo movement.
Fare-freight ratio of world railways
Source: IR
Source: PhillipCapital India Reserach
Revenue trend of Indian Railways (paise)
1st Jan 2015
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45
Association of Container Train Operator (ACTO) strongly recommends GoI to set up Rail Tariff Regulatory Authority The deregulation of rail transportation of containers by Indian Railways in 2006 was the first major effort of the Indian Railways in attracting private capital to the rail sector. The private investors invested over Rs 40bn in wagons, containers, and terminals in addition to Rs 6.5bn as license fee. PE investors, investment banks, and entrepreneurs have been keenly watching the railways’ ability to deliver a reasonable return on investment for the investors in this sector. However, the frequent and steep increase in Rail Haulage Charges for the container trains, together with incongruous policy decisions, has put the entire investment in the container rail sector in jeopardy and ruined the prospects of additional investments. This has also raised doubts about the Ministry of Railways’ seriousness and ability to attract private investment in rail Infrastructure. The Association strongly feels that the Government of India should set up a Rail Tariff Regulatory Authority, without further delay, to bring rationality and transparency in all rail freight pricing matters and direct the Ministry to draw up a roadmap for promoting more private investment in container rail business. Source: Maritime gateway! New Delhi, January 29, 2013
National waterway NW1 – Coal transport for power plant success story IWAI and NTPC developed NW1 for transporting coal through competitive bidding (Jindal ITE was an operator). NTPC has committed that it will transport 3mtpa of imported coal from Haldia to Farakka by IWT for seven years. There are several existing thermal power plants along the Ganga and many more are going to come up. The success of this pioneering project may pave the way for many more projects for transportation of coal on NW1 and possibly on other national waterways. It may also become a catalyst in reviving the inland water transport mode in the eastern and north-eastern parts of the country.
4 6 GROUN D VI EW
Waterways – finding its way The government’s focus on capitalising the potential of coastal shipping and inland waterways could result in opportunities for logistic players. It has relaxed cabotage norms for Vallarpadam port in an aim to transform it into a transhipment hub. It may consider the demand to relax cabotage at other ports a case-to-case basis. It is encouraging coastal shipping by giving an incentive package for manufacturers (50 paisa/tonne/nautical mile up to 500 nautical miles) and concessions on port chargers. The development of costal shipping is also linked to increased opportunities in container-feeder service. The possibility of a dedicated sea corridor with inter-port connectivity is also being explored. The future of the port sector in India, especially for the minor ports, hinges a lot on coastal movement and in-land waterways. Minor private ports are expected to play an extremely critical role in the development of coastal shipping. The government is encouraging PPP models for development of infrastructure at ports and rivers to develop connectivity and promote coastal movement. “Land around the river is not available for development and the government is planning a floating dock for cargo evacuation. Creating and maintaining sufficient draft is also major issue,” said Atul Kulkarni, a port consultant. A change in the merchant shipping rules by permitting cabotage and simplification in the administrative requirements for enabling foreign flag vessels to operate on coastal routes is much needed. This would ensure higher availability of ships and more tonnage for coastal movement. The development of inland waterways for coal transport and the upcoming Kaladan multimodal transport project will have a significant impact on cargo movement in India’s North East region. “Inland waterways are seeing renewed interest with the Jal Marg Vikas (Ganges waterways) project announced by the government with a budgetary allocation is Rs 42bn. World Bank support to revive NW1 would be a game changer,” said a consultant.
Kaladan Multimodal transport project Route Kolkata to Sittwe port in Myanmar Sittwe to Paletwa (River Kaladan)
Mode Distance (Km) Shipping
539
IWT
158
Paletwa to Indo-Myanmar Border ( in Myanmar)
Road
110
Border to NH.54 (Lawngtlai) In India
Road
100
1st Jan 2015
What is Cabotage? Carriage of cargo between two points within a country by a vessel or vehicle registered in another country. Permission to engage in cabotage is, in general, strictly restricted in every country. A change in India’s highly restrictive cabotage laws appears likely and this could have significant ramifications for ports and particularly container terminal operating companies across the country.
Kaladan Multimodal Transport Project: It is conceptualised by the Ministry of External Affairs to provide alternative connectivity for Mizoram with Haldia/Kolkata ports through the Kaladan River in Myanmar. The project envisages coastal shipping from Haldia to Sittwe, inland water transport from Sittwe to Paletwa (in Myanmar), and thereafter by road from Paletwa to Mizoram. It is funded at a cost Rs 3.42bn and the construction of Sittwe Port is 75% complete. The Kaladan Multi-modal Transit Transport Model is expected to be fully complete by 2016. The India-Myanmar-Thailand trilateral highway corridor is also one such projects that is expected to be ready by 2016, which will open up the possibility of trade and investment in the North-East region.
Change in custom rules to make coastal shipping cheaper As per current customs rules, imported cargo is required to be brought (physically landed) at the port facility, which increase the cost significantly. Since most major ports in India lack the ability to handle capesize vessels (largest cargo ships in the world), coupled with the complicated customs rule, cargo has to be brought to port in smaller vessels and then needs to be reloaded in barges — all this leads to an additional cost of Rs 500 per tonne. On other hand, Chinese steel industry imports ore from Brazil using very-large ships of 4.35mn MT and discharges cargo in mid-sea on to barges, which carry it to end points (industries). The cargo is treated as landed when it is transferred to the barges. For China, ocean freight and logistics cost comes up to Rs 1,400 per tonne while in India the same operation would cost Rs 4,500 per tonne as both rail and road costs are involved. The change in Indian customs (to examine the process of imported cargo (such as coal and iron ore) at anchorage point and levy import duty there) will allow cargo to
Cabotage relaxation gathers steam after NDA government takes over The shipping ministry has started talks with stakeholders about easing a cabotage law for transhipped export-import containers and empty containers on Indian waters, a spokesman said. The plan is to allow foreign-registered ship to undertake business on local routes. The cabotage law mandates using Indian ships for transporting cargo among ports along the country’s coast. Foreign ships are allowed to operate only when Indian ships are not available; this requires a licence from India’s maritime regulator. An exception was relaxing the cabotage for the international container transshipment terminal (ICTT) at Vallarpadam in Cochin port during the United Progressive Alliance (UPA) regime. The relaxation (for three years beginning September 2012) applies only to foreign-registered vessels that ships export and import containers out or in through ICTT at Vallarpadam. The Dubai-based DP World Ltd runs the ICTT. Shipping industry executives say a relaxation has become necessary for a new container terminal, the third, that has started operations at Mundra port through a venture between Adani Ports & Special Economic Zone (APSEZ) and Geneva-based Mediterranean Shipping Co. S.A. (MSC). “MSC wants to run the new terminal as a transshipment facility,” said a shipping industry executive on the condition of anonymity. “This can succeed only if the cabotage is relaxed.” The planned container transshipment terminal at Vizhinjam port in Kerala and a container terminal run by a joint venture of United Liner Agencies of India Pvt. Ltd at Vizag port in Andhra Pradesh have also sought easing of cabotage. However, local ship owners are against the plan. “We are opposed to relaxation in cabotage,” said Umesh Grover, chief executive officer of Indian National Shipowners Association (INSA), the local fleet owners lobby. Source: Mint, 16 June 2014
move directly from the ship to industries.
1st Jan 2015
G RO U N D V I EW
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February 2, 2015 The Next India
India – The Hottest Internet Market Globally The Indian internet industry is at a very interesting juncture internet penetration touched 20% in June 2014, significantly lower than in China and the US. Online retail (as a percentage of total retail) is below 1% relative to China at 8.4% and the US at 12.5%. However, in online travel, India has already touched penetration of 39%, significantly higher than in China. In the development of the online world, generally classifieds is the first mover (some of the Indian companies have already had success in local search and recruitment as an example), followed by travel and then it is the turn of eCommerce. Payments (online/digital) and logistics are key enablers of this growth and hence ride the wave. India is at this cusp at which eCommerce is small but poised for rapid growth.
Exhibit 23
India internet penetration is low… as % of total population 100% 80%
80% 60% 40%
46%
48%
22%
20%
55% 42%
58%
52%
56%
20%
17%
20%
88%
85%
82%
2% 0%
India
China
Brazil
Russia
Internet users
Japan
US
Germany
UK
Online shoppers
Source: CNNIC, IDC, Forrester, IAMAI, Morgan Stanley Research. Data as of 2013
Internet penetration in India is among the lowest globally – at 17% in 2013 – lower than in China, Brazil, and Russia, which all have penetration in excess of 45%, and significantly lower than in the US, Japan, and UK, which have penetration in excess of 80%. Even starker is the fact that online shoppers as a percentage of the total population is 2% in India versus over 20% for China, Brazil, and Russia and 4060% for the developed countries. As a result, the eCommerce market in India is insignificant in the context of the global eCommerce market of US$879bn. However, we believe India is reaching a point at which growth is likely to accelerate. Our global team cited in Internet/eCommerce: Global Insight: eCommerce Still In Early Innings (29 Oct 2014) that the history of the technology market suggests mega-trends such as mobility, virtualization, and online music tend to accelerate rather than decelerate at higher penetration rates. This is a function of addressing the hurdles to adoption in the early years – such as fast enough data networks for smartphones, storage and networking bottlenecks for virtualization, or product assortment and shipping costs in eCommerce that only come with scale. Additionally, there is a network effect whereby when 20% of consumers and/or corporations have adopted a technology, peers tend to see that progress and want to follow suit. Penetration of 20% is the typical knee of the curve, as seen in the global smartphone market in recent years. India’s internet penetration has reached that 20% mark, aided by faster smartphone adoption.
Exhibit 24
…leading to low eCommerce penetration US$ bn 4,000
Total Retail
Online Retail
3,750
3,000 2,040
2,000 1,000
630
539
18
60
466
314
255
China % of total retail 8.4%
US
Russia
UK
Brazil
12.5%
2.8%
11.2%
2.9%
0
13
454 3 India
0.6%
Source: IDC, Forrester, Euromonitor, Morgan Stanley Research. Data as of 2013
Exhibit 25
However, 20% internet penetration has been an inflection point globally (%) 100% 80%
2014 is an Inflection point for India
60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
So what is the attraction of the market?
Notebook Penetration of PCs US eCommerce Penetration of Retail India Internet Penetration (%)
Smartphone Penetration of Handsets Digital Penetration of Music Sales
Source: comScore, eMarketer, Forrester, IDC, US Census Bureau, IAMAI, Morgan Stanley Research, E=Morgan Stanley Research estimates
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February 2, 2015 The Next India
Mobile platforms, one of the biggest trends emerging in India, are leading to improving internet penetration. The Internet & Mobile Association of India (IAMAI) estimates that total internet users amounted to over 300mn in December 2014, with close to 60% via a mobile connection. India is soon going to become one of the biggest markets in terms of new smartphone users as most first-time internet users are jumping directly to mobile platforms. Smartphone shipments are now 8x higher than in 2011 (80mn in 2014 versus 10mn in 2011) and their share of total shipments has increased from 6% to 32% within two years. This market share gain has come at the expense of feature phones.
Exhibit 28
Further, smartphone adoption has improved because of lower handset prices and wider availability. Smartphones sold for below US$200 account for 81% of the total.
0%
Exhibit 26
Top 10 smartphone markets globally as of 2Q14 (million) 700 600
Smartphone shipments accounted for 32% of phones in India in 3Q14 100%
7%
7%
6%
9%
10%
16% 19% 22%
60% 40%
93% 93% 94% 91% 90%
84% 81% 78%
Smartphone could reach 300m by CY16e
400
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Feature Phone
Smartphone
Source: IDC, Morgan Stanley Research
Exhibit 29
Percentage of smartphones sold below US$200 90% 81%
70%
300
71% 71% 68%
20%
80%
500
29% 29% 32%
80%
67%
60%
200 100
50%
e Fr an c
U K
y an
G er m
a
Ja pa n
R us si
In di a In do ne si a
zi l Br a
U SA
C hi
na
0 2Q13
Exhibit 30
Median price of smartphones was Rs7,000 in June 2013 survey
Exhibit 27
Smartphone shipments 8x higher than in 2011 90
180%
80
160%
70
140%
60
120%
50
100%
40
80%
30
60%
20
40%
10
20%
0
0% CY12
CY13
Smartphone Shipments (million) Source: IDC, Morgan Stanley Research; E= IDC estimates
2Q14
Source: IDC, Morgan Stanley Research
Source: GSMA Intelligence, Morgan Stanley Research e=Morgan Stanley Research estimates
CY11
40%
CY14e % yoy
Rs 1000112000, 11%
Rs 650110000, 31%
Rs 1200114000, 11% Rs 7,000 Median Price
Rs 1400118000, 11%
Rs 1800130000, 9% More than Rs 30000, 1%
Less than Rs 6500, 26%
Source: IAMAI, Morgan Stanley Research
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February 2, 2015 The Next India
7% 10%
13%
90% 80%
14%
3% 6%
7%
8%
16%
15%
12%
24%
70%
39%
50% 40%
20%
22%
20%
60%
31%
26%
30%
31%
30% 20%
36%
28%
26%
10%
30%
25%
0% Worldwide
China 15-24
India 25-34
Russia
35-44
45-54
Brazil 55+
Source: comScore, Morgan Stanley Research; above data represents % of population accessing the internet via a desktop platform, Data as of Mar-2013
Exhibit 32
Distribution of online population in India will become more even across age groups in 2020 (%) 2020
2013
36%
15-24
39%
31%
25-34 16%
35%
35-44 6%
21%
45-54
3%
10%
55+
4%
Source: comScore, United Nations (UN), Morgan Stanley Research estimates
Exhibit 33
Rural internet users now constitute 30% of total internet users versus 8% in F2009 700 600 500 400 300 200 100
Urban
F21E
F20E
F19E
F18E
F17E
F16E
F15E
F14
F13
F12
In China, 26% of online purchases were made on mobile devices in 1H14 and this figure is likely to touch 50% in the next two to three years. While eCommerce is still in its infancy in India, mobile business is fast becoming a key driver of growth. Flipkart and Snapdeal have mentioned in several interviews that mobile business accounts for 60-70% of transactions and this could increase to 90% over the next few years. There may be a time when traffic from PC-based websites becomes negligible. Quikr mentioned that 90-95% of its technology team is primarily working on improving its mobile offering.
100%
F11
Furthermore, rural India is providing a major thrust to internet penetration – rural internet users accounted for 31% of total internet users in F2014, up from 8% in F2009. We believe this can increase to over 40% in the next few years. This is quite similar to the situation in China, where of the 780mn active mobile devices in 1H14, 58% were registered in lower-tier cities where users’ first internet experience is likely to be through a mobile platform. Our discussions with industry participants suggest that the bulk of the growth in merchandise is coming from tier II-III cities, where the nonavailability of retail infrastructure or lack of product/category variety is more of an issue than the convenience itself.
75% of the online population in India is aged between 15 and 34
F10
Our Chinese eCommerce team notes that consumers with more years of online experience buy more categories and spend more online. Shoppers with 4-9 years’ experience are likely to contribute the most. We believe India is likely to witness a similar boom in online retail as first-time internet users become more mature users over the next few years, familiarize themselves with the new way of life and appreciate the convenience of online shopping, payment mechanisms, and delivery satisfaction.
Exhibit 31
F09
India has more favourable demographics for internet penetration than have China, Brazil and Russia with 75% of its online population aged between 15 and 34. This demographic dividend is significantly better than in developed markets such as the US and hence is a huge driver for internet penetration and changing buying behavior. The demographics for India are likely to stay in its favor for a long time – in 2020, we estimate 66% of internet users will be aged 15-34, and another 21% aged 35-44. These people (the young/working population) will primarily surf the internet through a smartphone and are more likely to transact online given busy work schedules and the associated convenience. In China, the 18-33 age group referred to as the ‘millennial’ represents 60% of the online shopping population and 80% of eCommerce transactions. These ‘digital natives’ generate above average income and spend more on credit.
Rural
Source: IAMAI, Morgan Stanley Research, E=Morgan Stanley Research estimates
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February 2, 2015 The Next India
Our macro team had written in The Next India - From a Cyclical Downturn to a Structural Upturn (11 May 2014) that India’s per capita income will more than double from US$1,500 now to US$3,750 by F2025 and the size of the consumption basket will grow from US$1.2tn presently to US$3.6tn in F2025. This in itself provides a solid backdrop for growth in eCommerce. We believe the lack of adequate physical retail infrastructure is another fundamental reason for people to move online. In the US, non-grocery retail space per capita is 1.9 sq meters, while Indians enjoy just 5% of this. Offline retail infrastructure in China, Brazil, and Russia too is significantly lower than in the US, which explains why eCommerce has grown strongly in these markets. Heavent Malhotra, CEO of Rocket Internet India, notes that organized retail (as a percentage of total retail sales) is 8% in India versus 20% in China. A top offline retailer may be in 40 cities, while some of the top websites may be in a position to deliver to over 300 cities. Offline retailers may get 70-75% of their revenue from tier I cities while for top online retailers revenue could be evenly distributed among tier I, II and III cities. This point is further corroborated by Exhibit 36, which shows that online spending per capita as a percentage of GDP per capita in India (and China) is significantly higher than in the US. This suggests that online commerce is filling the demand that is not being met by an undeveloped offline retail infrastructure. As Kunal Bahl of Snapdeal puts it: “For every consumer who can buy something offline in India, there are at least 100 who don’t have access to that product or service. That’s the problem we want to solve.”
Exhibit 34
57% of India’s GDP is private consumption and eCommerce accounts for 0.3% of consumption 60% 50% 40% 30% 20% 10% 0% Pvt consumption as % of GDP
Retail as % of pvt consumption
Online retail as % of total retail
Source: CEIC, Euromonitor, Morgan Stanley Research. Data for FY14
Exhibit 35
Non-grocery retail space per capita is lowest in India (sq meter) 2.5 2.0
1.9
1.5 1.0
1.0
1.0
1.0 0.6 0.4
0.5
0.3 0.1
0.0 US
Germany
UK
Japan
Brazil
Russia
China
India
Source: Euromonitor, World Bank, Morgan Stanley Research. Data for 2013
Exhibit 36
Thus, consumption habits, maturity of offline retailing, and the complexity/fragmentation of wholesale and retail distribution are critical factors shaping online digital commerce dynamics.
India ranks highly in terms of online spending per capita as a percentage of GDP per capita (2013) 16% 14% 12% 10% 8% 6% 4% 2% 0% China
India*
Japan*
UK*
Korea*
Taiwan*
US
Source: IDC, CEIC, Morgan Stanley Research, *B2C online spending per capita for countries with asterisks
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February 2, 2015 The Next India
Indian eCommerce Sales to Exceed US$100bn by 2020
The key questions among investors are what has led to the growth in the Indian eCommerce market and whether it is likely to become big enough to be interested in. We believe trends in India are quite similar to those in China. The inflection point for China was in 2010-11, when smartphone penetration overtook PC penetration. The Chinese eCommerce market then was about US$70bn and grew to US$300bn in 2-3 years, 5x faster than total retail growth. We believe the same story is unfolding in India – smartphone penetration overtook PC penetration sometime in 2014 and we have seen online shopping begin to accelerate. Although the eCommerce size is small in the global context, growth is likely to be explosive and hence the surge in investor interest. In terms of total internet users, India is lagging China by almost seven years. However, with respect to online buyer penetration, there is a nine-year gap. Amid the rapid adoption of smartphones, we expect the number of online shoppers to increase from 20mn in 2013 to 45mn by 2015 and 220mn by 2020. Online shopper penetration (as a percentage of internet users) will increase from 9% in 2013 to 36% in 2020, primarily led by mobile users. In comparison, in China, online shopper penetration was 49% in 2013 and will be 69% in 2020, we estimate.
In China, online shopping penetration accelerated at the inflection point when smartphone penetration overtook PC penetration in 2010-11…India is following the same trend and lagging China by about five years 40%
16%
30%
12%
20%
8%
Online shopping inflection point
PC penetration Online shoppers penetration
F2020e
F2019e
F2018e
F2017e
F2016e
F2015e
0% F2014
0% F2013
4%
F2012
10%
F2011
We expect the Indian online retail market to expand at a 66% CAGR between 2013 and 2020 to touch US$102bn, making it the fastest-growing online market globally.
Exhibit 37
F2010
Interestingly, China’s online retail penetration was close to 1% in 2008, which is where India is today. Between 2008 and 2013, China’s online retail market compounded at over 70%, outstripping the 22% growth in India. We believe the near doubling of internet penetration in China was one of the key reasons for the discrepancy in the growth rates. We expect internet penetration in India to grow from 17% in 2013 to 46% in 2020, providing a shot in the arm for the online retail market.
We expect India’s eCommerce market to evolve and internet penetration to grow in a similar way to the trends seen in China since 2007.
F2009
The total retail market in India (organized and unorganized) was about US$454bn in 2013 and expanded at a CAGR of 13% in 2004 to 2013. Online retail in C2013 was under US$3bn translating to penetration of 0.6%. This is significantly lower than in China, as an example, where the total retail market is around 10x that in India, but online penetration is 8.4%.
Smartphone penetration
Source: IAMAI, Morgan Stanley Research; e = Morgan Stanley Research estimates
Exhibit 38
Internet user numbers in India in 2013 were where they were in 2007 for China (mn)… Total population Internet users Online shoppers
Source: CNNIC, IDC, Statisa.com, Morgan Stanley Research
China
India
1,321 210 46
1,234 213 20
Exhibit 39
…but India is nine years behind China in terms of online buyer penetration (%) 80% 60% 40% 9 years 20% 0% 2009
2010
2011
2012
2013 2014E 2015E 2016E 2017E 2018E
China online buyers as % Internet users India online buyers as % Internet users Source: CNNIC, IAMAI, Morgan Stanley Research, E = Morgan Stanley Research Estimates
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Exhibit 40
Exhibit 43
China’s online retail sales grew with rising internet penetration over 2007-14 (US$bn, %)
Internet penetration and online shoppers will aid growth in eCommerce market size (US$bn, %)
500
60% 50%
400
40%
300
Online shoppers penetration (%) 80%
France
70%
China
60% 50%
30% 200
20%
100
10%
0
0% 2007 2008 2009 2010 2011 2012 2013 2014E China online retail GMV (US$ bn) Internet Penetration (%)
Japan
Argentina
40%
Italy
30%
Mexico
20%
South Korea
US
Germany Spain Australia
Chile
UK
Brazil Russia
India
10%
Bubble size represents Size of eCommerce market (US$ bn)
0% 0%
20%
40%
60%
80%
100%
120%
(%) Internet Penetration Source: Forrester, Morgan Stanley Research. Data as of 2013
Source: CNNIC, Euromonitor, CEIC, Morgan Stanley Research, E=Morgan Stanley Research estimates
Exhibit 44 Exhibit 41
Key numbers at a glance
We believe India’s online retail sales could follow a similar trajectory over the next six years (US$bn, %) 120
50%
eCommerce GMV (B2C) YoY growth
100
40%
Online shoppers YoY growth
80
30%
60
Avg online spending Internet users
20%
40
YoY growth Smartphone shipments
10%
20 0
0% 2013
2014E 2015E 2016E 2017E 2018E 2019E 2020E
India online retail GMV (US$ bn)
2013
2020e
201320e CAGR
US$bn
2.9
101.9
66%
%
8.5
56.9
mn ppl
20
220
%
66.0
22.3
41%
US$
147
464
18%
mn ppl
213
612
16%
%
42.2
4.0
mn
44
175
% of annual phone shipments
%
17.1
64.0
eCommerce (B2C) as % of retail sales
%
0.6
11.3
Source: Euromonitor, IAMAI, IDC, Morgan Stanley Research. e=Morgan Stanley Research estimates
22%
Internet penetration (%)
Source: IAMAI, Morgan Stanley Research Estimates, E=Morgan Stanley Research estimates
Exhibit 42
eCommerce market growth 2013-18e 80% 70%
69%
60% 50% 40%
32%
30%
28% 22% 20% 20%
20%
19%
17% 17% 14%
14% 13% 12%
10%
11% 10% 10% 10% 2% Argentina
UK
South Korea
Japan
US
Australia
Canada
Germany
Spain
France
Italy
Global
Mexico
Brazil
Russia
China
India
Chile
0%
Source: Forrester, Morgan Stanley Research, e=Morgan Stanley Research estimates for India
22
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Exhibit 45
Key enablers for growth in eCommerce 2013
2015e
2018e
2020e
CAGR (2013-20)
Total eCommerce size (US$ bn)
2.9
11.0
40.3
101.9
66%
Total online shoppers (mn)
20
45
140
220
41%
Online shoppers as % of total internet users (%)
9
11
25
36
266,734
737,785
1,631,176
2,866,168
40%
147
247
288
464
18%
# of transactions per day (x) Average spend per online shopper (US$)
Source: Euromonitor, Industry Sources, Morgan Stanley Research; e = Morgan Stanley Research estimates
Exhibit 46
Exhibit 48
Online buyer penetration in India to reach 36% by 2020, which is where China was in 2010 (%)
Online spending per capita will continue to rise (US$)
80%
2500
70%
2013-18e CAGR China 13% India 14%
2000
60% 50%
1920
1500
40%
1060 1000
30% 20%
500
10%
288
147
0% 2010 2011 2012 2013 2014e 2015e 2016e 2017e 2018e 2019e 2020e India
0 2013
China
2018e China
India
Source: IDC, CNNIC, IAMAI, Morgan Stanley Research, e=Morgan Stanley Research estimates
Source: CNNIC, Euromonitor, CEIC, IDC, Morgan Stanley Research. e=Morgan Stanley Research estimates
Exhibit 47
Exhibit 49
Average number of orders for India to cross one billion in 2020, which is comparable to the total of key firms’ in China (exc. Alibaba) in 2014 (mn)
India eCommerce as a percentage of retail reaches a level in 2020 similar to that of China in 2014 25%
2000 18,200 20%
1800 1600
15%
1400 1200
10%
1000 800
5%
600 400
0%
200
2013
0 2014e Other key players in China
2020e Alibaba India
Source: Company data, Morgan Stanley Research. e=Morgan Stanley Research estimates
2014e
2015e
2016e India
2017e China
2018e
2019e
2020e
Source: CNNIC, Euromonitor, CEIC, Morgan Stanley Research. e=Morgan Stanley Research estimates
23
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February 2, 2015 The Next India
Exhibit 50
Exhibit 52
Scenario analysis for eCommerce market 2013 2020e
2020e
2020e
BASE
BULL
BEAR
213 17
612 46
763 57
471 35
Total online shoppers (million) Online shoppers as % of total internet users
20 9
220 36
305 40
132 28
Average spend per online shopper (US$)
Total internet users (million) Internet penetration (%)
147
464
492
423
Total online retail market size (US$ bn)
3
102
150
56
Total online retail as % of total retail (%)
1
11
15
7
Source: Morgan Stanley Research estimates
Key categories of retail and online penetration in India (US$bn, %) 2013 Category
Apparel/Fashion Electronics Furniture and home décor Health and Personal care Jewelry Others Total
Total Retail
2020e
Online
Online as % of total
Total Retail
Online
Online as % of total
55.0 96.6
0.9 1.5
2% 2%
115.1 198.5
30.6 49.9
27% 25%
22.0
0.0
0%
50.3
2.4
5%
20.0 4.1 256.2 453.9
0.1 0.1 0.4 2.9
0% 1% 2% 1%
57.8 10.8 466.9 899.4
4.6 0.8 13.5 101.9
8% 8% 3% 11%
Key categories and competitors
Source: Euromonitor, Morgan Stanley Research, e=Morgan Stanley Research estimates
Electronics and apparel account for the lion’s share of India’s eCommerce sales. Within electronics, mobiles and tablets is a larger category than other consumer electronics. Furniture & home decor, food & groceries, books, and music follow. Books account for a reasonable portion of transactions (probably 8-10%); however, their contribution to GMV is smaller because of the lower ticket size. Categories such as jewelry and furniture/home decor are still small as: a) females are still a smaller proportion of online shoppers; and b) consumers prefer buying these at offline stores because of the touch-feel factor and concerns around quality.
Exhibit 53
Exhibit 51
Breakdown of Indian eCommerce market in 2013
15% 10% 5%
India
2020e
2019e
2018e
2017e
2016e
2015e
2014e
2013
2012
2011
0%
China
Source: Euromonitor, Morgan Stanley Research. e=Morgan Stanley Research estimates
Exhibit 54
Electronics penetration: India reaches a penetration rate in 2020 where China was in 2012 35% 30%
20% 15% 10% 5%
India
2020e
2019e
2018e
2017e
2016e
2015e
0% 2014e
Jewelry 2%
25%
2013
Food and grocery 2%
Books 7% Health and Personal care Baby care 2% 3% Others 2%
20%
2012
Fashion, footwear, eyewear, accessories 30%
25%
2011
Electronics and appliances 51%
30%
2010
Furniture and home décor 1%
35%
2010
We believe standardization of product, brand awareness, lower quality risk, and easy-to-search features have led to the faster adoption of the online platform for electronics followed by apparel. Within overall retail sales, electronics, apparel and food & grocery account for 80%. We expect this trend to be eventually reflected in online sales too.
Fashion penetration: India reaches a penetration rate in 2020 where China was in 2012
China
Source: Euromonitor, Morgan Stanley Research. e=Morgan Stanley Research estimates
Source: Euromonitor, Morgan Stanley Research
24
MORGAN
STANLEY
RESEARCH
February 2, 2015 The Next India
Exhibit 55
Within the general merchandise segment, Flipkart is the largest competitor in terms of GMV followed by Snapdeal and Amazon. According to Flipkart, 34% of its GMV as of 2014 is electronics followed by 30% from apparel. Interestingly, Flipkart now accounts for 10-20% of all Samsung, Micromax, and Apple smartphone sales in India, up from about 1% a few years back. This equates to 40-50% market share for all online sales of smartphones. The company has a similar level of market share for books, apparel, and footwear. The top 1520 brands command 50% of GMV. The marketplace model accounts for 25-30% of GMV and this could climb to 50% in the next few years, according to the company.
Flipkart, Snapdeal, and Amazon account for 90% of eCommerce at present; we do not expect this to change materially over the next few years Flipkart
32% 15%
Snapdeal
9%
Amazon
others
44%
The general merchandise firms are the largest companies in the eCommerce segment. We believe this is purely a function of the wider variety of goods (more categories, brands and product range) and better brand visibility (because of higher advertising spend and better deals/offers). The eCommerce space is still in its early days, so we do not think this is likely to change in the next few years. However, over the next 3-5 years, we are likely to see the vertical specialized websites starting to garner larger numbers. Some of these could include Zovi and Yepme for fast fashion; FabFurnish, Pepperfry and Urban Ladder for furniture & home décor; Firstcry and Babyoye for baby products; and BigBasket for groceries. In our view, the large general merchandise companies may not gain scale in niche segments such as groceries and furniture unless they go the inorganic route.
Source: Euromonitor, Company data, Morgan Stanley Research, Data as of 2014
Exhibit 56
GMV of the top three eCommerce companies is already close to that of the top 5/10 offline retailers (2014) (US$ bn) 12
10.6
10 7.8
8 5.7
6 4 2 -
Top 3 eCommerce companies
Top 5 offline retailers
Top 10 offline retailers
Source: Company Data, Euromonitor, Morgan Stanley Research
Exhibit 57
Details on some of the eCommerce companies Name
Model
Category
Flipkart Hy brid Snapdeal Mark etplace Amazon Marketplace Myntra Hy brid Jabong Hy brid Shopclues Mark etplace Pepperfry Marketplace FabFurnish Hybrid Paytm Mark etplace Yepme Inv entory Zovi Inv entory
General Merchandise General Merchandise General Merchandise Fashion Fashion General Merchandise Furniture and Home Decor Furniture and Home Decor General Merchandise Fast Fashion Fast Fashion
Firstcry Inv entory BigBasket Inventory
Baby products Food and grocery
MUV (mn)
Mobile (%)
Active customers (mn)
Categories
Brands
Sellers
SKUs
68 # # # 26 40 2 3 # 8.2 5
57% 60% 50% 25% 27% 45% 35% 30% 70% 60% 35%
10 40 # # # >5 0.45 # 22 3 1.4
70 500+ 28 14 9 5000+ 5 8 60 4 3
8,000 10,000 # 1000 1,600 7500 70+ 500 # NA NA
20,000,000 10,000,000 19,000,000 1,50,000 144,000 16,000,000 60,000 100,000 5,000,000 12,000 4,000
# #
40% #
# #
16 9
600+ 1,000
7,000 1,00,000 16,000 10,000 # >100,000 1,000 30,000 13,000 NA NA 700+ suppliers NA
Source: Company data, Morgan Stanley Research, NA = not applicable, # = data not available
90,000 10,000
25
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February 2, 2015 The Next India
With mobile usage increasing, advertisement costs (primarily search engine optimization [SEO]) are declining as traffic is increasing either directly to the website or through a mobile app. This is also increasing customer stickiness as once an app has been downloaded customers generally visit that website before visiting any other site. An article in the Hindu Business Line on December 23, 2014 suggested that Myntra is set to achieve 75% of its revenue through mobile transactions by March 2015, as against 52% presently and 13% in January 2014. Of the mobile revenue, 60% is through the app with the balance through a web browser. Interestingly, by May-June 2015, it expects to become a mobile-only company, as 55% of its new customers are visiting the site everyday through a mobile device. Tier II and III cities/towns account for 50% of its revenues and users there are mostly mobile users. GMV trumps profitability as an important metric, at least in the early stages of growth: Large global eCommerce companies have profitability (EBITDA) in single digits (as a percentage of GMV) despite 5-20 years of operations and existence. However, they command large market caps/EVs of US$7bn-240bn, which imply 0.4-1.2x GMV. We believe the situation in India will be similar and companies could continue to focus on growing GMV/revenues while profitability may remain absent in the initial stages. In terms of size (or GMV), India is still at a nascent stage when compared with global markets and growth rates could be significantly faster than in other markets. This could require investments in multiple areas including logistics (warehousing, last mile delivery), payment solutions (customer wallets), and customer acquisition (marketing spend).
Exhibit 59
Globally eCommerce companies command EV/GMV of 0.4-1.2x; however, profitability remains low EV/GMV ((x) (L.H.S.)
eCommerce EBITDA as % of GMV (R.H.S.)
4.0
8%
3.5
7% 6%
3.0
5%
2.5
4% 2.0 3% 1.5
2%
1.0
1%
0.5 0.0
0% -1%
*
240
138
65
31
7
0.5
1.3
13
^
15
20
19
10
17
15
5
6
Alibaba+
Amazon
eBay
JD.com
Rakuten
Dang Dang
Jumei
VIPSHOP
*Enterprise Value (US$ bn) and ^No of years of operation
Source: Bloomberg, Company data, Morgan Stanley Research +Alibaba 2014 = FY2015 while for the others the data is for 2014
Exhibit 60
Take rates vary significantly across categories (%) 50%
45%
45%
40%
40%
35%-45%
~30%-40%
35% 30%
25%
25% 20% 15% 10% 5%
5%-15% ~2%-7%
0% Electronics
Grocery
Babycare/ Healthcare
Fashion
Lingerie
Home & Furniture
Eyewear
Source: Company data, Morgan Stanley Research, Data for 2014.
Exhibit 58
Mobile business has become an integral part of the overall online experience (mobile traffic as a percentage of overall traffic) 90%
60%
30%
Makemytrip
Jabong
Bookmyshow
Myntra
Zomato
Flipkart
Snapdeal
Freecharge
OLX
Quikr
Facebook
0%
Source: Company data, Morgan Stanley Research. Data for 2014
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February 2, 2015 The Next India
Key Charts Exhibit 1
Exhibit 4
India lagging behind China by over seven years
India is the fastest-growing international market globally to reach US$1bn in sales for Amazon
Online Shoppers as % of Internet Users
Internet Penetration 50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0% India 2013
India China 2020 2013
~1.5 years India 2013
India 2020
China 2013
Source: Internet & Mobile Association of India (IAMAI), China Internet Network Information Centre (CNNIC), CEIC, OVUM, International Data Corp (IDC), Morgan Stanley Research
Exhibit 2
UK
China
Japan
India
Mobile wallets could penetrate faster than cards mn 900
302
300
Germany
Exhibit 5
Profiling India’s internet users in 2014 (mn) 350
France
Source: Euromonitor, Morgan Stanley Research
% of population 75%
250
60%
200 140
150
600
45%
112
100
70
68
30%
300
30
28
Online buyers
Linkedin members
50
15%
Total SmartphoneFacebook Whatsapp Flipkart Internet internet users users MUVs Users users
Source: IAMAI, Company data, Economic Times, Times of India, DNA India, Morgan Stanley Research
Exhibit 3
Smartphone shipments have started accelerating and provide the kicker mn 450
0% Mobile wallets
Credit cards
Debit cards
Mobile users
Source: Reserve Bank of India (RBI), Telecom Regulatory Authority of India (TRAI), Morgan Stanley Research, No of credit cards, debit cards and population as of Mar-2014 and nu mber of mobile wallets as of Nov-2014
Exhibit 6
Robust VC/PE funding activity in 2014 (US$mn) 7,000
China
400
0
6,000
350
5,000
300 250
India
200 150
4,000 3,000
100 50
2,000
C2020e
C2013
C2014e
♦ Inflection point
C2012
C2011
C2010
C2009
C2008
C2007
C2006
C2005
C2004
0
Source: OVUM, IDC, Morgan Stanley Research; e = Morgan Stanley Research estimates
1,000 0 pre 2009
2010
2011
2012
2013
2014
Source: Medianama.com, VCCircle, Company data, Morgan Stanley Research
4
Key Figures
1 in every 3
incremental internet users globally will come from India over the next three years
Online shoppers as a percentage of internet users in India to reach
36%
by 2020, similar to current figures for Russia and Brazil
80%
of internet users in India Over will access the internet through a smartphone by 2020
India’s internet market to hit
US$137 bn
by 2020; eCommerce to contribute 74%
India’s eCommerce sales growth to average
66%
over 2013 – 20, making it the fastest-growing market globally
Indian internet companies’ market cap to reach
US$160 – 200 bn
by 2020
M ORG AN
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February 2, 2015 The Next India
Exhibit 10
Companies in various internet businesses Category
US
China
India
Travel
Expedia
Ctrip
Makemytrip
Priceline
eLong
Yatra
Qunar
Cleartrip
Tuniu
Goibibo
Uber
Didi Dache
Ola
Lyft
Kuaidi Taxi
Uber
Taxi aggregators
Taxiforsure Bookmycab Search/Classifieds Job search / professional networking
Linkedin
51Job
Info Edge
Monster.com
Zhaopin
Timesjobs, Shine
Dice Real estate search
Linkedin
Zillow
Soufun
Magicbricks
Trulia
Leju
99acres Commonfloor Housing.com Indiaproperty Makaan
Auto search
Truecar
Bitauto
Cardekho
Autohome
Carwale Cartrade
Restaurant discovery/ food ordering
General search Local search/ cross-category classifieds
Yelp
Dianping
Zomato
Opentable
Meituan
Foodpanda
Grubhub
Taodiandian
Tinyowl
Google
Baidu
Google
Yahoo
Qihoo
Yahoo
Yelp
58.com
Just Dial
Craigslist
Ganji
Askme Quikr OLX
Financial Services
Policybazaar Facebook
WeChat, Momo
Facebook
Twitter
Sina Weibo
Twitter
Amazon ebay
Alibaba Dangdang JD.com
Flipkart Snapdeal Amazon ebay
Niche eCommerce companies Fashion/apparel Furniture and home furnishing Beauty Eyewear Baby products Healthcare products
Wanolo Wayfair Birchbox Warby Parker Zulily
Vipshop, Meilishuo, Mogujie
Jabong, Myntra , Zovi, Yepme, Limeroad Fabfurnish, Pepperfry, Urban Ladder Nykaa Lenskart Firstcry, Babyoye, Hopscotch Healthkart
Online B2B commerce
Amazon
Alibaba HC International
Indiamart
Payment companies
Paypal
Alipay Tenpay
Paytm Mobikwik
Social networking B2C/C2C eCommerce General Merchandise
Source: Morgan Stanley Research
Jumei Beibei, Redbaby, Miyabaobei
11
DIGITAL IND IA
Presentation-I
Digital India A programme to transform India into a digitally empowered society and knowledge economy
DIGITAL IND IA
What is Digital India?
Digital India is a Programme to prepare India for a knowledge future. The focus is on being transformative – to realize IT + IT = IT The focus is on making technology central to enabling change. It is an Umbrella Programme – covering many departments. It weaves together a large number of ideas and thoughts into a single, comprehensive vision so that each of them is seen as part of a larger goal. Each individual element stands on its own. But is also part of the larger picture. It is coordinated by DeitY, implemented by the entire government – both at the Centre and State. The weaving together makes the Mission transformative in totality
The Programme:
Pulls together many existing schemes. These schemes will be restructured and re-focused. They will be implemented in a synchronized manner. Many elements are only process improvements with minimal cost.
The common branding of programmes as Digital India highlights their transformative impact.
DIGITAL IND IA
Nine Pillars of Digital India Electronics Manufacturing
4. E-Governance –
7. Electronics Manufacturing –
1. Broadband Highways
Reforming government through Technology
2. Universal Access to Mobile Connectivity
5. eKranti – Electronic delivery of services
8. IT for Jobs
3. Public Internet Access Programme
6. Information for All
9. Early Harvest Programmes
Target NET ZERO Imports
DIGITAL IND IA
Pillar 1. Broadband Highways Broadband for all Rural
Broadband for all Urban National Information Infrastructure
• Coverage: 250,000 GP • Timeline: December 2016 • CAPEX: Rs 32,000 Cr • Nodal Dept: DoT
• Virtual Network Operators for service delivery. • Mandate communication infrastructure in new urban development and buildings.
• Coverage: Nationwide • Timeline: March 2017 • Cost: Rs 15,686 Cr • Nodal Dept: DeitY
1yr: 50,000 GP 2yr: 100,000 GP 3yr: 100,000 GP
Changes in Rules to facilitate.
Integration of SWAN, NKN, NOFN. To be implemented in 2 years
DIGITAL IND IA
Pillar 2. Universal Access to Mobile connectivity
• Coverage: Remaining uncovered villages (~ Universal Access to 42,300 villages) mobile • Timeline: FY 2014-18 connectivity • Cost: Rs 16,000 Cr • Nodal Dept: DoT
Ongoing Programme Increased network penetration & coverage of gaps
DIGITAL IND IA
Pillar 3. Public Internet Access Programme – National Rural Internet Mission • Coverage: 2,50,000 villages (now 130,000) • Timeline: 3 Years - March 2017 made viable, multi- • Cost: Rs 4750 Cr functional end-points • Nodal Agency: DeitY
CSCs –
Ongoing Programme Reach of Govt. services to all GPs
for service delivery
Post Offices to become Multi-Service Centres
• Coverage: 1,50,000 Post Offices • Timeline: 2 Years • Nodal Agency: D/o Posts
This should be long term vision for POs
DIGITAL IND IA
Pillar 4. e-Governance: Reforming Government through Technology
Government Business Process Re-engineering using IT to improve transactions • Form Simplification, reduction • Online applications and tracking, Interface between departments • Use of online repositories e.g. school certificates, voter ID cards, etc. • Integration of services and platforms – UIDAI, Payment Gateway, Mobile Platform, EDI
Electronic Databases – all databases and information to be electronic, not manual Workflow automation inside government Public Grievance Redressal - using IT to automate, respond, analyse data to identify and resolve persistent problems – largely process improvements
To be implemented across government - critical for transformation.
DIGITAL IND IA
Pillar 5. eKranti - Electronic Delivery of Services Technology for Education – e-Education • All Schools connected with broadband • Free wi-fi in all schools (250,000) • Digital Literacy program • MOOCs – develop pilot Massive Online Open Courses Technology for Health – e-Healthcare • Online medical consultation • Online medical records • Online medicine supply • Pan-India exchange for patient information • Pilots – 2015; Full coverage in 3 years Technology for Planning • GIS based decision making • National GIS Mission Mode Project
Technology for Farmers • Real time price information • Online ordering of inputs • Online cash, loan, relief payment with mobile banking Technology for Security • Mobile Emergency Services Technology for Financial Inclusion • Mobile Banking • Micro-ATM program • CSCs/ Post Offices Technology for Justice • e-Courts, e-Police, e-Jails, e-Prosecution Technology for Security
National Cyber Security Co-ordination Center
Ongoing Programme (NeGP) – will be revamped to cover these elements
DIGITAL IND IA
Pillar 6. Information for All
Online Hosting of Information & documents
Citizens have open, easy access to information Open data platform
Government pro-actively engages through social media and web based platforms to inform citizens
MyGov.in
2-way communication between citizens and government
Online messaging to citizens on special occasions/programs
Largely utilise existing infrastructure – limited additional resources needed
DIGITAL IND IA
Pillar 7. Electronics Manufacturing Target NET ZERO IMPORTS by 2020 Target NET ZERO Imports is a striking demonstration of intent Ambitious goal which requires coordinated action on many fronts Taxation, Incentives Economies of Scale, Eliminate cost disadvantages Focused areas – Big Ticket Items FABS, Fab-less design, Set top boxes, VSATs, Mobiles, Consumer & Medical Electronics, Smart Energy meters, Smart cards, micro-ATMs Incubators, clusters Skill development Government procurement
There are many ongoing programs which will be fine-tuned. Existing Structures inadequate to handle this goal. Need strengthening.
DIGITAL IND IA
Pillar 8. IT for Jobs Train people in smaller towns & villages for IT sector jobs
IT/ITES in NE
• Coverage: 1 Crore students • Timeline: 5 years • Cost: Rs 200 Cr for weaker sections • Nodal Agency: DeitY
• Scope: Setting up of BPO per NE State • Coverage: NE States • Nodal Agency: DeitY
Train Service Delivery Agents • Coverage: 3,00,000 to run viable businesses • Timeline: 2 Years delivering IT services • Nodal Agency: DeitY Telecom service providers to • Coverage: 5,00,000 train rural workforce to cater • Timeline: 5 Years to their own needs • Nodal Agency: DoT
New Scheme IT ready workforce
ICT enabled growth in NE
Ongoing Skilled VLEs and Viable CSCs
Telecom ready workforce
DIGITAL IND IA
Pillar 9. Early Harvest Programmes IT platform for messages
Government Greetings to be e-Greetings
Biometric attendance
• Coverage: Elected representatives, All Govt employees • 1.36 Cr mobiles and 22 Lakh emails • Mass Messaging Application developed
• Basket of e-Greetings templates available • Crowd sourcing of e-Greetings thru MyGov • e-Greetings Portal ready by 14 August 2014
• • • •
Targeted Mass messaging since July 14
1st e-Greeting from PM on 15th Aug 2014
Coverage: All Central Govt. Offices in Delhi Operational in DeitY & Initiated in Urban Development To be completed On-boarding started in other depts by Oct 2014 Procurement of devices – tender issued
DIGITAL IND IA
Pillar 9. Early Harvest Programmes Wi-fi in All Universities
Secure email within government
Standardize government email design
• Scope: All universities on NKN • 400 additional Universities • Cost: Rs 790 Cr
• Phase I upgradation for 10 Lakh employees done • Ph II for 50 Lakh employees by March 2015 • Cost: Rs 98 Cr
• Standardised templates under preparation
Approval - Oct 2014 Implementation done by Dec 2015
Email to be primary mode of communication
To be ready by October 2014
DIGITAL IND IA
Pillar 9. Early Harvest Programmes Public wifi hotspots School Books to be eBooks SMS based weather information, disaster alerts
National Portal for Lost & Found children
• Coverage: Cities with pop > 1 Mill., tourist centres • Nodal Agency: DoT/ MoUD
• Nodal Agency: MHRD/ DeitY
Digital Cities Completed by Dec 2015 Completed by Mar 2015
• DeitY’s Mobile Seva Platform ready • Nodal Agency: MoES (IMD) / MHA (NDMA)
In place by Dec 2014
• Nodal Agency: DeitY/ DoWCD
In place by Oct 2014
DIGITAL IND IA
Estimated Costs and Impacts Overall Costs of Digital India ~ Rs 100,000 Cr in ongoing schemes (only DeitY, DOT & not incl. those in other line Ministries) ~ Rs 13,000 Cr for new schemes & activities Impact of Digital India by 2019 • Broadband in 2.5 lakh villages, universal phone connectivity • Net Zero Imports by 2020 • 400,000 Public Internet Access Points • Wi-fi in 2.5 lakh schools, all universities; Public wi-fi hotspots for citizens • Digital Inclusion: 1.7 Cr trained for IT, Telecom and Electronics Jobs • Job creation: Direct 1.7 Cr. and Indirect at least 8.5 Cr. • e-Governance & eServices: Across government • India to be leader in IT use in services – health, education, banking • Digitally empowered citizens – public cloud, internet access
http://cfi.co/asia/2015/01/nouriel-roubini-the-return-of-currency-wars/
Nouriel Roubini: The Return of Currency Wars January 30, 2015 | By CFI
The recent decision by the Bank of Japan to increase the scope of its quantitative easing is a signal that another round of currency wars may be under way. The BOJ’s effort to weaken the yen is a beggar-thy-neighbor approach that is inducing policy reactions throughout Asia and around the world. Central banks in China, South Korea, Taiwan, Singapore, and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies – or will soon ease more. The European Central Bank and the central banks of Switzerland, Sweden, Norway, and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating. All of this will lead to a strengthening of the US dollar, as growth in the United States is picking up and the Federal Reserve has signaled that it will begin raising interest rates next year. But, if global growth remains weak and the dollar becomes too strong, even the Fed may decide to raise interest rates later and more slowly to avoid excessive dollar appreciation. The cause of the latest currency turmoil is clear: In an environment of private and public deleveraging from high debts, monetary policy has become the only available tool to boost demand and growth. Fiscal austerity has exacerbated the impact of deleveraging by exerting a direct and indirect drag on growth. Lower public spending reduces aggregate demand, while declining transfers and higher taxes reduce disposable income and thus private consumption. In the eurozone, a sudden stop of capital flows to the periphery and the fiscal restraints imposed, with Germany’s backing, by the European Union, the International Monetary Fund, and the ECB have been a massive impediment to growth. In Japan, an excessively front-loaded consumption-tax increase killed the recovery achieved this year. In the US, a budget sequester and other tax and spending policies led to a sharp fiscal drag in 2012-2014. And in the United Kingdom, self-imposed fiscal consolidation weakened growth until this year. Globally, the asymmetric adjustment of creditor and debtor economies has exacerbated this recessionary and deflationary spiral. Countries that were overspending, under-saving, and running current-account deficits have been forced by markets to spend less and save more. Not surprisingly, their trade deficits have been shrinking. But most countries that were over-saving and under-spending have not saved less and spent more; their current-account surpluses have been growing, aggravating the weakness of global demand and thus undermining growth. As fiscal austerity and asymmetric adjustment have taken their toll on economic performance, monetary policy has borne the burden of supporting faltering growth via weaker currencies and higher net exports. But the resulting currency wars are partly a zero-sum game: If one currency is weaker, another currency must be stronger; and if one country’s trade balance improves, another’s must worsen.
Of course, monetary easing is not purely zero-sum. Easing can boost growth by lifting asset prices (equities and housing), reducing private and public borrowing costs, and limiting the risk of a fall in actual and expected inflation. Given fiscal drag and private deleveraging, lack of sufficient monetary easing in recent years would have led to double and triple dip recession (as occurred, for example, in the eurozone). But the overall policy mix has been sub-optimal, with too much front-loaded fiscal consolidation and too much unconventional monetary policy (which has become less effective over time). A better approach in advanced economies would have comprised less fiscal consolidation in the short run and more investment in productive infrastructure, combined with a more credible commitment to medium- and long-term fiscal adjustment – and less aggressive monetary easing. You can lead a horse to liquidity, but you can’t make it drink. In a world where private aggregate demand is weak and unconventional monetary policy eventually becomes like pushing on a string, the case for slower fiscal consolidation and productive public infrastructure spending is compelling. Such spending offers returns that are certainly higher than the low interest rates that most advanced economies face today, and infrastructure needs are massive in both advanced and emerging economies (with the exception of China, which has overinvested in infrastructure). Moreover, public investment works on both the demand and supply sides. It not only boosts aggregate demand directly; it also expands potential output by increasing the stock of productivity-boosting capital. Unfortunately, the political economy of austerity has led to sub-optimal outcomes. In a fiscal crunch, the first spending cuts hit productive public investments, because governments prefer to protect current – and often inefficient – spending on public-sector jobs and transfer payments to the private sector. As a result, the global recovery remains anemic in most advanced economies (with the partial exception of the US and the UK) and now also in the major emerging countries, where growth has slowed sharply in the last two years. The right policies – less fiscal austerity in the short run, more public investment spending, and less reliance on monetary easing – are the opposite of those that have been pursued by the world’s major economies. No wonder global growth keeps on disappointing. In a sense, we are all Japanese now.
