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Factors Affecting Indian Economy

Fall in Oil Prices- Game Changer for Indian Economy:

Crude oil prices have corrected by close to 48% since hitting a peak in June 2014, driven by a
structural supply glut and political gridlock. Crude oil prices are currently at a 5 year low. Unlike
the past, the oil price drop is not linked to a crash in oil demand or risk- off in global equities.
OPECs decision to move away from being the sole manager of the demand- supply gap is
unprecedented and could lead to low oil prices for the next few years.

The current correction in oil prices is hugely positive for India as highlighted below:
Every USD 10/bb. fall in crude oil price improves Indias current Account Deficit by
around USD 9 billion or 0.5% of GDP.
Every USD 10/bb. fall in oil price can boost GDP growth by around 10 bps and reduce
fiscal deficit by 0.10%.
Every USD 10/bbl. Fall in crude oil prices lowers CPI inflation by 20 bps and WPI
inflation by 50 bps.
(source: Asian Economic Outlook, Nomura, 24th November, 2014)

FII & Domestic Flow:

FIIs continue to be positive on India, with highest flows amongst emerging markets. However
FII flows into equity were modest compared to last couple of years. A key reason could be that
FIIs also purchased 26 billion USD of Indian Fixed Income securities this calendar year. In the
past six years( FY 10-FY15) Indian households will have invested an estimated US $ 40 billion
into equities at an average annual rate of $ 6.7 billion (includes direct equity purchase, purchase
through mutual fund and life insurance). During the same period, FII inflows amounted to US $
106 billion at an average annual rate of close to $18 billion.

Economic Reforms and Earnings Growth:

The central and progressive state governments are expected to implement more meaningful
reforms in 2015. Fiscal reforms are underway with the gocernment focusing on implementation
of GST; Direct cash transfer schemes, etc. Introduction of GST and DTC will have a huge impact
as it will remove the tax anomalies and will increase GDP by over 1% and will help in
generating better revenues which is the need of the hour. Investment reforms in areas related to
labor, land and power reforms may erase the business conditions.
India continues to tank poorly in the World Banks Ease of Doing Business survey at no. 134 of
180 countries. Government Make in India initiative should over time help improve the
ranking as it creates congenial environment which facilitates investments.
Businesses will benefit from the likely reduction in interest rates, margin expansion owing to fall
in commodity prices, and reforms like GST, etc. Among the key overweight positions in portfolio
will be private sector banks, consumer discretionary( like Autos, Auto ancillaries, Building
materials, etc.), and businesses which will benefit from the revival in the manufacturing sector.

Indian Equity Market

With a population of more than a billion, a mere 1% of the population participates in capital
markets, and of that only a fraction in active. Indian households have traditionally preferred
safety of bank deposits and government saving schemes and much less than 10% of their
investments in financial assets is in shares, debentures and mutual funds.
Over the years, private equity investors have primarily remained minority, less than 25%
stakeholders in investee companies. In addition to it being part of the Indian promoters cultural
mindset towards external investors, PE investors also understand that promoters know the
business and industry best and the business control is of keen interest to Indian promoters.
Investors have started accommodating their investment outlook from merely backing the
business to backing the entrepreneur or promoter. So in instances where the promoter has strong
industry credentials or a successful track record of growing a business, PE investors are open to
backing such ventures.

Indian GDP Growth

World Bank Forecast

Raw Materials: Key raw materials for the paint industry include pigments (TiO2), solvents,
resins, chemicals and various crude derivatives. TiO2 typically accounts for 25-30% of total
COGS. Nearly 75-80% of raw materials are sourced locally and the remaining 20-25% are
imported. Much of the raw material prices (whether domestically sourced or imported) (~6065%) are influenced by crude oil and TiO2 movements, which are susceptible to global demand
supply dynamics and thus make the linkage to exchange rate fluctuations meaningful. While
TiO2 prices have been benign in the past few quarters (aided by increased global supply and
weak demand), it is the starting of an uptick there and recent sharp rupee depreciation further
limits gross margin expansion potential for the paint manufacturers.