outlook on capital market & financial...

Outlook on Capital Market

& Financial Services

Nirmal Jain

July 2, 2014

Analyst Meet

Outlook on Capital Market & Financial Services

2

Macro Outlook on Financial Services


3

Politics & Macros turning favourable

CAD under control & comfortably funded

GDP growth has bottomed-out

Fiscal consolidation in progress

Rates have peaked; easing early next year

Source: Bloomberg

11.4

9.1 8.2 8.7

9.6

7.6 7.0 6.5

5.8 4.5 4.6 4.4 4.4 4.7 5.2

4.6 4.6

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Q4 FY10

Q2 FY11

Q4 FY11

Q2 FY12

Q4 FY12

Q2 FY13

Q4 FY13

Q2 FY14

Q4 FY14

(%)

4.5 4.0 4.1

3.3 2.5

6.0 6.5

4.9

5.8

4.9 4.5

0.0

2.0

4.0

6.0

8.0

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

(%)

1.0 0.5

-0.7 -1.2

-2.3

0.4 1.2 1.0 1.3

2.3 2.8 2.7

4.2 4.7

1.7

-4.0

-2.0

0.0

2.0

4.0

6.0

FY0

0

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

(%)

2.0

4.0

6.0

8.0

10.0

12.0

Jan

-10

May

-10

Sep

-10

Jan

-11

May

-11

Sep

-11

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

Jan

-14

May

-14

WPI Repo Rate (%)

8.0%

6.0%


4

Financial services growth opportunity enormous

5 years 6% - 8% 6% - 7%

Real GDP Inflation

Double Nominal GDP

1.5x multiplier

Financial Services can Triple

Source: IIFL Research

Nominal GDP growth @ 15% p.a


5

Capital Market Outlook


6

Market cycle has turned positive after a long time correction

Source: Bloomberg

-

50

100

150

200

250

300

350

400

450

-

2,000

4,000

6,000

8,000

No

v-9

4

No

v-9

5

No

v-9

6

No

v-9

7

No

v-9

8

No

v-9

9

No

v-0

0

No

v-0

1

No

v-0

2

No

v-0

3

No

v-0

4

No

v-0

5

No

v-0

6

No

v-0

7

No

v-0

8

No

v-0

9

No

v-1

0

No

v-1

1

No

v-1

2

No

v-1

3

NSE Cash Turnover (Rs bn) Nifty (LHS)


7

Retail investment in equities has troughed

Retail flows in Equity have dried up; a rise to historical levels can trigger big jump in domestic liquidity

Equities just 8% of household fin savings … Only ~2% of aggregate savings

Growth in Demat account has decelerated sharply; should pick-up like it did 2003-04 onwards

Source: RBI,SEBI

Source: RBI Source: NSDL

6 4

31

20 22

6 10

13

8 10

4 6 4

0.0

7.0

14.0

21.0

28.0

35.0

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

(%)

48.4%

10.5% 7.8%

14.0%

17.3%

2.0%

Bank deposits

Cash

Equities

Provident/Pension Fund

Insurance funds

Non-banking deposits

March 2014 US$2tn

56.1%

14.2%

15.0%

4.1%

5.2%

3.1% 2.3%

Property

Gold

Bank Deposits

Provident/Pension Fund

Insurance Funds

Cash

Equities

March 2014 US$6tn

1.7 1.9

4.9 5.5

7.3

2.1 2.0 1.0 1.2

0.5

0.0

2.0

4.0

6.0

8.0

10.0

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

(% of savings flowing into equities)


8

Domestic liquidity into equities can rise with shift in asset allocation and hike in investment limits

Household Gold

holdings at ~US$1tn (2014)

Household Annual

Savings at Rs22tn (2013)

Bank FDs Rs70tn (2014)

Insurance AUM

Rs18.7tn (2013)

Investment Limit in Equities for Retirement Funds

Year 2005 5% cap

Year 2008 15% cap

2015 (Proposed) 30%

15% ETF Index Funds

15% Stocks ELSS

Rs9-10tn corpus of Retirement Funds

~Rs6.5tn EPFO Rs2.5-3.5tn Others

~Rs2tn Rs0.7-1.0tn

Source: Bloomberg, IIFL Research


9

India better placed to attract foreign money with bigger size of equity market cap within BRICS and other EMs

US$ 0.6tn

US$ 1.5tn

US$ 1.5tn

US$ 0.6tn

US$ 0.4tn

US$ 0.2tn

US$ 3.2tn

US$ 1.1tn

US$ 0.7tn

US$ 0.5tn

75%

2008 M-Cap 2014 M-Cap % of GDP

India

China

Brazil

Russia

South Africa

Source: Bloomberg, IIFL Research

32%

47%

34%

145%


10

India currently receives only a small share of global capital

FII flows in equity market to accelerate

FII Flows to India below potential (2012 & 2013)

FII flows in Indian debt has revived in 2014

11 8

19

(13)

18

29

(1)

25 20

10

(20)

(10)

0

10

20

30

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD

(US$ bn)

(1)

1 2 3

1

10 9

7

(8)

11

(10)

(5)

0

5

10

15

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD

(US$ bn)

Source: Bloomberg, ICRA, IIFL Research

US$45bn US$120bn

India China

Institutional Brokerage industry revenue pool at Rs25-30bn p.a. currently

Domestic Brokerages account between 25-34% market share

Share typically shifts 3-5% towards domestic brokerages during strong capital markets

High growth visibility for institutional business


11

Recent dynamics in the Broking industry

Share of cash market can only rise from current levels

Blended yields have bottomed-out

6.9 6.7 5.8 6.1

4.3

3.2 2.9

0.0

2.0

4.0

6.0

8.0

10.0

2007 2008 2009 2010 2011 2012 2013

(%)

Signs of revival in cash market turnover

Improved dynamics with surge in the number of online clients

Source: Bloomberg Source: BSE & NSE

Source: CRISIL Source: NSE

0.0

0.2

0.3

0.5

0.6

0.8

0.0

70.0

140.0

210.0

280.0

350.0

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

4Q

13

2Q

14

Cash Turnover % of Market Cap

(Rs bn) (%)

0.2 0.3 0.5 0.9

1.4 2.2

4.4

5.6 6.1 6.3

0.0

2.0

4.0

6.0

8.0

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

11

20

13

(in mn; registered with NSE) 40% CAGR 2005-13

27.9 24.6 16.2 9.7 10.0 8.1 10.0

72.1 75.4 83.8 90.3 90.0 91.9 90.0

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012 2013 H1 2014

Cash Derivatives


12

Consolidation by large Brokers to continue

Share of Top 10 players

25% 40%

India

US

Source: NSE, McKinsey


13

Primary market activity to revive

IPO activity has been lackluster Other equity raising (QIP, Rights, etc) too has been lower

3,692

1,920

0

1000

2000

3000

4000

2006-10 2011-2014 (YTD)

(Rs bn)

Source: Bloomberg

0

25

50

75

100

0

100

200

300

400

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD

Amount Raised (LHS) Number of Issues

(Rs bn) (No)

Boost to Investment Banking & Distribution Business

Government’s disinvestment drive

As per ICRA (March 2013), SEBI reported that more than 130 companies deferred public issues worth ~Rs600bn in the past 3-4 years

Possible listings that can grow India’s equity market cap substantially

Insurance companies - LIC & Others

Air India

E-commerce companies

Indian Railways


14

Debt market activity on the rise

Increasing private placement of corporate debt Sharp uptick in public issue of corp bonds

0

10

20

30

40

50

0

100

200

300

400

500

FY09 FY10 FY11 FY12 FY13 FY14

Amount Raised (LHS) No of Issues

(Rs bn) (No)

1.2

1.7 2.1 2.2

2.6

3.6

2.8

0.0

1.0

2.0

3.0

4.0

FY08 FY09 FY10 FY11 FY12 FY13 FY14

(Rs tn)

1.0 1.5

4.0

6.1 5.9

7.4

9.7

0.0

2.0

4.0

6.0

8.0

10.0

FY08 FY09 FY10 FY11 FY12 FY13 FY14

(Rs tn: NSE, BSE & FIMMDA)

Trading of corporate debt on the rise

Source: SEBI, IIFL Research

29.3% of

Equity Cash Market

Turnover

2.3% of Total Equity Market

Turnover

Debt market activity small compared to Equity


15

Potential for Commodities and Currency Trading

Commodity market turnover Currency market turnover

Source: MCX, NCDEX, Source: NSE, MCX-SX

24% of Equities

258% of Equities

37% of Equities

15% of Equities

India US India US

Source: Exchange Websites, CME, IIFL Research

37

53

43 41 40 45

41 39 40

23

40

18 14

0.0

15.0

30.0

45.0

60.0

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

(Rs tn, MCX+NCDEX)

19.1 19.5 22.2

24.9 29.4

17.8

9.0 8.1 7.8

0.0

6.0

12.0

18.0

24.0

30.0

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

(Rs tn, NSE+MCX)


16

Insurance and Mutual Fund mobilization to revive

Source: AMFI, IRDA, IIFL Research

Insurance - Private sector growth declining

Revival in Mutual Fund inflows

Low penetration of Insurance and Mutual Fund products remains a structural driver of growth

New business based on bond, interest rate and Vix products will pick up over time

92 169 299 292 316 305 220 203 173

217

445

486 402

501 522

425 417 393

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E

Private Players LIC (Rs bn)

18%

5%

-7% -6%

1%

-3%

12% 7%

-7%

9%

1%

-10%

15%

7%

Ap

r-1

3

May

-13

Jun

-13

Jul-

13

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

Dec

-13

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14


17

Budget Wishlist

Stamp duty and STT both charged on share market transaction (nowhere else in the world) Reduction of short-term capital gains tax to 10% from 15% presently Modify RGESS to boost new investor participation in Equities Removal of CTT (commodity market volumes have dropped 35-40%) Remove tax anomalies in bond market as specified by Mr. UK Sinha

Increase retail limit in public issues to Rs3-5 lakhs from present Rs2 lakhs

Industry status to Broking


18

Credit & Wealth Outlook


19

NBFCs on strong growth trajectory

Home finance by NBFCs to grow faster than banks CV financing to revive with the macros

Source: RBI, CRISIL, IIFL Research

1.6 2.0

2.5 2.9

3.5

7.6

0.0

2.0

4.0

6.0

8.0

FY09 FY10 FY11 FY12 FY13 FY18E

(Rs tn)

NBFC share in SME loans negligible at ~2%

59 121

275

517 525

980

0

250

500

750

1,000

1,250

FY09 FY10 FY11 FY12 FY13 FY18E

(Rs bn)

Organized gold loan market to grow rapidly

3.8 5.5 6.4 7.3 8.2 9.1

10.5

20.7

0

5

10

15

20

25

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY18E

(Bank SME Credit in Rs tn)

195

296 329

237

168

515

70 95 129

168 138

290

0

150

300

450

600

FY10 FY11 FY12 FY13 FY14E FY19E

M&HCV Disbursements LCV Disbursements

(Rs bn)


20

NBFCs on strong growth trajectory

LAP is one of the fastest growing market

LAS to receive fillip from buoyant markets

Source: RBI, CRISIL, India Ratings, IIFL Research

180 230

321 353 404

773

0

175

350

525

700

875

FY10 FY11 FY12 FY13 FY14E FY18E

(Disbursements in Rs bn)

74

42 52 52 55 57

65

118

0

25

50

75

100

125

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY18E

(Rs bn)

NBFC’s gaining share in system credit

0.0

1.0

2.0

3.0

4.0

5.0

FY09 FY10 FY11 FY12 FY13 FY14E FY15E

(% GNPLs of major NBFCs)

14.7

15.7

12.0

13.0

14.0

15.0

16.0

FY07 FY13

(% share in system credit)

Good credit track record of NBFCs


21

Wealth Management industry booming

Number of HNWIs (Networth >US$1mn)

123

84

127

153

126

153

0

20

40

60

80

100

120

140

160

2007 2008 2009 2010 2011 2012

('000)

Source: Capgemini Lorenz Curve Analysis, 2013

7,850

Number of ultra high net worth individuals in India,

2013 with >$30mn

7

The average number of products an affluent

client uses

51%

The percentage of HNW Indian respondents

willing to pay more for customized services

32.6%

The percentage of HNW Indians who turn to lawyers for wealth

planning advice

Source: The Guide to Wealth Management in India (January 2014 issue)


Thank you

Published in July 2014. © India Infoline Ltd 2014 IIFL - All rights reserved. Regd. Off: IIFL Centre, Kamala City, Lower Parel, Mumbai 400013. Tel.: (+91 22) 4249 9000 Fax: 4060 9049. This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended as an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIFL) and its subsidiaries or its employees or directors, associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete. IIFL or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. IIFL and/or its subsidiaries and/or directors, employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report.

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