WWAR Vol.2.018

18 th January 2019
What We Are Reading - Volume 2.018
The enclosed 2.018 version focuses on global themes for 2019, India economic view, capex green-shoots, US-China
trade dispute, India strategy and predictions for 2019. It also includes reports on transportation in India and insights
for better decision making.
• Global Themes 2019 CLSA
• India Economic View Citi
• The Capex Green Shoots Antique
• US-China Trade Dispute China Report
• India Strategy CLSA
• Transportation Kotak
• Year Ahead Predictions: 2019 AT Kearney
• Four Keys to Better Decision Making Daniel Kahneman

Global Themes 2019
Best ideas in Asian equities
13 December 2018
Key themes stocks, 2019
US Alphabet GOOGL US
China Alibaba BABA US
CCCC
1800 HK
China Moly 3993 HK
Hong Kong AIA
1299 HK
Japan Fanuc 6954 JP
SBI Holdings 8473 JP
Korea Samsung Elec 005930 KS
Philippines Ayala Corp AC PM
Singapore Venture Corp VMS SP
Economic volatility
What to watch for
with Shaun Cochran
Looking into 2019, our macro mavens see global growth peaking midyear
as the US tax relief and China stimulus come to a close. That said,
they are not convinced a recession is assured or that the trade war will
scuttle expansion, but China’s first full-year deficit will put downward
pressure on the renminbi. Long-duration US Treasuries seem to be the
only recommendation resilient to all likely scenarios we anticipate (clearly the return
of inflation is not one of those). Therefore, we’re not surprised that the recommended
style bias for equities remains bond-proxies and quality (high-through-the-cycle
ROICs), nor that our chartist remains cautious for 2019, but sees emerging market
outperformance as the next phase after impending lows.
GLOBAL STRATEGY: Trade deals and treasuries. GREED & fear has long argued an
interim deal on Sino-US trade is achievable. The G20 summit gave the first evidence
that bias should be retained in 2019. Of course, binary trade outcomes make
investment decisions more difficult. What is refreshingly clear is GREED & fear’s
steadfast structurally deflationist views. Long-duration US Treasuries are seemingly
policy-proof.
GLOBAL ECONOMICS: Mid-year global growth peak. Chief economist Eric Fishwick
expects the growth rate of the world’s two largest economies to peak by mid-year as
policy support does the same. However, he is not concerned about a trade war as he
notes that it is zero-sum globally and should not hurt the USA as the government can
recycle tariffs into spending. He also does not see trade as the primary driver of the
Chinese economy, but argues that China will print its first full-year current account
deficit in 2019, putting downward pressure on the semi-pegged renminbi.
Also inside
Global: Commodities; Oil, gas and
petrochemicals; Technicals;
Strategy; Banks; Autos; Battery;
Automation; Thematics
Asia: Tech; Consumer; Gaming;
Healthcare
China: CRR strategy; Infrastructure;
Oil, gas and petrochemicals; Power;
Thru Trains; Property; Autos;
Internet; Consumer discretionary;
Education
Hong Kong: Conglomerates
Japan: Benthos
Korea: Strategy
Taiwan: Semiconductors; Strategy
India: Strategy
Singapore: Strategy
Malaysia: Strategy
Thailand: Strategy
Indonesia: Strategy
Philippines: Strategy
Australia: Mining & Metals;
Strategy
Global: Themes 2018
www.clsa.com
GLOBAL MICROSTRATEGY: Bond-proxies and quality. Head of Microstrategy, Desh
Peramunetilleke suggests Asia will continue to suffer a bear market as rising rates and
persistent earnings downgrades suppress rallies in the historically strong first quarter.
Assuming no US recession, the cycle should bottom out in 2H19. Until we reach this
all-clear point, the team recommends bond-proxies and quality stocks.
GLOBAL TECHNICALS: Market lows ahead. Chief chartist Laurence Balanco sees
rising volatility, widening credit spreads, emerging-market and Asian weakness, and
widespread developed-market topping patterns as signs of a synchronised, rolling
global bear market (defined as 20% plus falls). However, it’s not all bad news, as such
experiences typically precede leadership changes with emerging markets beginning to
outperform developed ones once markets bottom. Sector-wise, energy, materials
and/or financials are potential future leaders.
Stocks to watch. We select from a cross-section of country and sector favourites to list 10
ideas that offer investors the best exposure to our 2019 themes. We remove Samsonite
from the existing portfolio given our unsuccessful attempt for a tactical trade after its
collapse in 1H18 upon accusations of accounting irregularities. We replace it with
Singaporean healthcare stock Venture as its own retracement on 2018 earnings
disappointment has created more reasonable expectations.
Portfolio stocks since last rebalancing
10
0
(10)
(20)
(30)
(%)
CCCC
Ayala Corp
MSCI World
AIA
Source: CLSA, Factset
Price change since rebalancing
MSCI Asia
SBI Holdings
Alphabet
Samsung Elec
Samsonite
China Moly
Alibaba
Fanuc
Portfolio performance
30
20
10
0
(10)
(20)
(%)
Inception
Source: CLSA, Factset
Port World Asia
Rebalanced
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
For important disclosures please refer to page 65.

Investment thesis Global Themes 2019
The 10 th in our
annual series
Our macro mavens see
slowing growth but no
train wreck despite
the trade tussles
GREED & fear goes as far
as a compromise deal
being the base case
Trump administration
faces material
indictment risk
Global themes
CLSA’s 10 th annual Global Themes report arrives almost a decade after this global
expansion began. The world’s political and economic leadership, and the
associated geopolitical and monetary conditions, have significantly changed since
2009 with the one constant being rising debt-to-income levels. As investors
contemplate how to profit from these opportunities and protect themselves from
the related risks, our analysts have laid down their tarot decks to glean how to
best proceed in 2019. In classic CLSA style, they don’t always agree.
Chief economist Eric Fishwick notes that world trade growth is currently narrow:
the USA has pulled away from Europe, driving developed world demand while
China is the emerging markets’ engine. He is confident that the world’s two
largest economies will grow into 1H19, but this will be short-lived. Trump’s fiscal
package begins unwinding in 2H19 and China will have passed through its own
stimulus. This ‘buy now and sell in May’ bias is in stark contrast to recent market
sentiment as are Eric’s trade views noting that it is zero-sum for the world.
China’s pain won’t extend globally and stimulus efforts will resist damage to its
growth. He believes tariffs are unlikely to do much harm to the US economy as it
runs a deteriorating deficit and the government recycles tariffs into spending.
On Sino-US trade, Christopher Wood long argued that an interim deal is
achievable. The G20 summit gave the first evidence of that bias, which he retains
into 2019. Both sides understand that retaliatory dynamics ultimately serve no
one. There is a deal to be made and The Donald’s instincts are clearly to strike
one and declare a ‘victory’. 1Q19 will determine if there is one China can tolerate.
Trump’s willingness to deal aligns with Theorality’s view that 2020 will
meaningfully constrain the administration on the back of the mid-term election
results, the Mueller investigation and the looming fiscal cliff. A recommendation
to indict at least one senior administration member is a clear and present danger.
World trade growth is good; trade volume growth at 3mma % YoY
10 (3mma %YoY)
Developed economies
9
Emerging economies
8
Total
7
6
5
4
3
2
1
0
(1)
(2)
(3)
(4)
(5)
12 13 14 15 16 17 18
Source: CLSA, cpb.ni
Effects of Trump’s tariffs on Chinese goods
600 (US$bn) 25% 10% 10% or 25%
500
400
267
300
200
200
100
250 250
0
34 50 50
6 Jul 18 23 Aug 18 24 Sep 18 1 Jan 19 (?) ???
Source: CLSA, Office of the United States Trade Representative
Ironically, China will
report its first annual
deficit next year
As to trade dynamics, Eric predicts that China will print its first full-year current
account deficit in 2019 as it remains a pro-consumption economy and domestic
growth continues to outpace global. This will show absolute mercantilist claims
against China to be outdated (albeit the relative US trade surplus remains stark).
The other critical ramification is for the pegged Rmb - the longer the deficit
persists the more difficult the PBoC will find managing the crawling peg.
13 December 2018 shaun.cochran@clsa.com 3

Investment thesis Global Themes 2019
China - a wavering
domestic economy that
absolutely needs
stimulus
Base metal prices to
experience relief
The commodity with the
strongest Chinese
demand support is gas
Of the other ‘Beautiful
China’ plays, Charles
favours the wind sector
Complex refiners will
benefit from tighter
sulphur rules for
bunker fuel
Zooming in on China, CRR strategist Haixu Qiu see less risk to the economy from
Trump’s tariffs than from the souring private sector. Echoing economics, CRR is
assuming Beijing is cognisant of declining sentiment and seeks to reverse it. They
expect favourable credit policies for SMEs and corporate tax cuts. On the liquidity
front, head of China industrial research and capital access Alexious Lee agrees.
Besides the already announced Rmb1.35tn special fund, he expects further Belt
and Road Initiatives via fresh PPP orders, of which state engineering,
procurement, construction (EPC) contractors are the core beneficiaries. He
favours CCCC and CRRC.
This is welcome relief for head of resources research Andrew Driscoll as trade
tensions and tepid Chinese demand have dragged down base-metal prices. He
believes the emerging demand support factors will gel with metal prices trading
well into industry cost curves and supply has already started to respond. All of
which should lift his top picks OZ Minerals, Alumina and Vedanta.
On the flip side is China’s impact on global gas markets. Here it is domestic
demand outstripping supply that is tipping the equation. Beijing’s strong
commitment to control pollution under the ‘Beautiful China’ banner is already
driving seismic shifts in its energy consumption and fuel mix. The emphasis on
coal-to-gas switching reforms will enact a move away from regulated pricing to
allow a greater role for market forces. We should expect stricter monitoring of
adherence to environment policies to persist. This will benefit large SOEs such as
our top picks CNOOC, PetroChina and Sinopec.
‘Beautiful China’ is more than coal-to-gas, enjoying Xi Jinping’s personal support.
Head of power and ESG research Charles Yonts directs us towards wind
(Longyuan/Huaneng Renewables) on its strong 2018 operating performance and
we expect policy improvements to continue in 2019. Environmental utilities have
passed the worst of the order flow and funding risks, and Charles argues that a
post-placement China Everbright offers asymmetric optionality.
Looking at policy-driven opportunities, the International Maritime Organisation
(IMO) fuel directives become effective in 2020: a cap of 0.5% on sulphur content
on bunker fuel versus the current 3.5%. While many uncertainties remain on how
ship owners and operators will comply, compliance would undermine high sulphur
fuel oil (HSFO) demand and margins favouring complex over simple refiners.
Sino-BRI collaboration; overseas contract revenue & new orders
350 (US$bn) Overseas contracting revenue New orders
300
250
200
150
100
50
0
2013 2014 2015 2016 2017 18CL 19CL
Source: CLSA, MOC, CITICS Securities
Global refinery product output (2016); structural change to follow
LPG
3%
Others
18%
Heavy Fuel
Oil
12%
Source: CLSA, IMO
Naphtha
6%
Gasoline
23%
Middle
Distilate
31%
Jet/Kerosene
7%
4 shaun.cochran@clsa.com 13 December 2018

Investment thesis Global Themes 2019
Strained market
conditions to continue
and then emerging
markets outperformance
Our strategist and sector heads see the potential for fundamental growth to
capitulate, but not quite yet. Meanwhile, our chief chartist Laurence Balanco
believes rising volatility, widening credit spreads, emerging-markets and Asian
weakness, and widespread developed-market topping patterns all suggests that,
globally, equities are lined up for a synchronised bear market (defined as 20% plus
falls). The encouraging element of all this downside is that it provides a classic
set-up for leadership changes where Laurence sees emerging markets taking over
leadership from developed markets, and energy and materials and/or financials as
potential sector leaders in the future.
MSCI EM and MSCI World weekly chart
MSCI Asia ex-Japan - rolling 3M earnings revision (18F)
L3M earnings revision (18F, %)
4
3
2
1
0
0.5
0.9
0.2
0.3
0.8
0.5
0.6 1.2
2.1
2.6
3.2
3.5
3.3
2.7
2.2
2.9
2.9
3.5
2.9
2.3
1.2
0.9
0.4
0.5
0.42
0.0
(1)
(2)
(0.6)
(1.2)
(1.4)
(3)
Jun 16
Aug 16
Oct 16
(2.1)
Dec 16
Feb 17
Apr 17
Jun 17
Aug 17
Oct 17
Dec 17
Feb 18
Apr 18
Jun 18
Aug 18
Oct 18
Source: CLSA, Wind
A potential increase in
Chinese inclusion
factors could help
One area of unwavering
conviction is GREED &
Fear’s love of longduration
US Treasuries
Microstrategy supports
the cautious tone and
prefers quality and
bond-proxies until
markets settle
Note: bottom-up calculated with free float adjustment based on current
MSCI universe. Source: CLSA, Facset
Interestingly, on the potential emerging-to-developing-market transition, head of
China capital access Alexious Lee sees the possible renewal in the Chinese public
credit cycle, the peaking of share-pledge risk in 3Q18 and potentially rising index
inclusion factors in 2019 as catalysts to renew A-share interest. The subsequent
question is whether the constituents, especially SOEs, see this as an opportunity
to raise alternative financing. On balance, he sees it all as positive.
With so many mixed fundamental and choppy market signals, Chris is refreshingly
clear in his steadfast structurally deflationist views. He recommends buying longduration
US Treasuries. While tensions rose in October 2018 as investors fretted
over a 10-year Treasury bond breakout, he reminds readers that yields did not
surpass the 37-year log-scale trend line. Although the false alarm of reaching an
intraday high of 3.26% on 10-year yields threatened to question this base case
that US cyclical momentum has peaked, he expects to see the deflationary trends
reassert themselves as US earnings and GDP slow in 2019.
This all gels well with Desh Peramunetilleke and his Microstrategy team. They
expect ongoing rate hikes, combined with the flattening of the yield curve, to
continue to fuel debate about the potential for a US recession. In that context,
Asia will continue to suffer a bear market as rising rates and persisting earnings
downgrades suppress any rallies in the historically strong first quarter. As to the
appropriate strategy, on their base case the USA won’t experience a recession,
investors should expect the cycle to bottom out somewhere in 2H19 at which
point valuations will be pushed upwards. Until we reach this all-clear point, they
recommend focusing attention on bond-proxies and quality (high ROIC/ROEs
through the cycle) that have corrected sharply this year and are now trading
below-average PB.
13 December 2018 shaun.cochran@clsa.com 5

Investment thesis Global Themes 2019
In global auto we
actually expect an
aggregate demand
contraction in 2019 . . .
. . . although
electrification will ramp,
especially in China
We like the battery
companies as
bargaining power tips
in their favour
While the global auto sector is an obvious whipping boy for Trump’s trade war,
the more interesting risk Japan autos analyst Christopher Richter highlights is the
likely decline in 2019 sales versus the downgraded 2018 figures, which will
primarily be driven by China. The positives within a challenged environment are
electrification, autonomous vehicles and the implications of 5G for connectivity.
Alexious sees similar themes playing out in China in a characteristically policyaccelerated
manner. While all this is Beautiful China positive, Chinese automakers
will not benefit. Startups developing intelligent-connected vehicles (ICV), self-drive
technology and NEVs are increasing competition, are compressing margins and
forcing sector consolidation, which initially benefits consumers over investors.
Of auto’s three positive themes, enabling electrification is closest to a profitable
inflection point. Electric vehicle (EV) sales remain robust, buoyed by falling
battery prices, improving customer acceptance, infrastructure availability as well
as stricter (ex-US) regulations on internal-combustion engines (ICE). A shift from
carrots (incentives) to sticks (regulations) means momentum will be sustained.
These stricter policy thresholds drive the need for improved driving ranges and
energy densities, which favours technology leaders, especially given stricter
quality and safety standards. Oil, gas and petro analyst Ken Shin sees a transfer of
value from upstream materials and components in the battery supply chain to cell
manufacturers, with CATL and LG Chem benefitting the most.
Global auto sales volume SAAR; approaching a stall
30 (m units)
25
Chinese ICE and NEV shipment volume forecast; slowing volume
30,000 (000' units)
(%) 20
ICE NEV YoY (RHS)
25,000
15
20
15
20,000
15,000
10
10
10,000
5
5
5,000
0
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
0
2013 2014 2015 2016 2017 18CL 19CL 20CL
(5)
Source: CLSA
Source: CLSA, CAAM, CITIC Securities
Dylan is unperturbed by
Lynas’ volatility,
suggesting investors
buy on weakness . . .
. . . while Morten sees
2019 as the best buying
opportunities for Fanuc
and Keyence in three
years
However, Australia materials analyst Dylan Kelly believes the market has
overlooked ex-China rare earths for alternative exposure to lithium, cobalt and
nickel sulphate. China’s dominance in rare earths, at over approximately 90% of
supply, will undergo a structural shift resulting from ‘Beautiful China’ and supplyside
reforms, which may squeeze supply (especially if trade-war tensions
escalate). As the largest ex-China producer, Lynas Corp is strategically positioned
to benefit as the primary alternative for what should be increased global demand
for rare earths.
Potential trade war escalation aside, a major auto sector replatforming clearly
offers opportunities as does partial trade clarity on a new Nafta agreement.
Global head of automation Morten Paulsen is confident that next year will offer
the best buying opportunity in three years as new technologies boost the
efficiency of automated solutions in new markets. While trade resolutions may
not be around the corner, what is more certain is Asia’s ambitions to modernise
factories.
6 shaun.cochran@clsa.com 13 December 2018

Investment thesis Global Themes 2019
Nicolas’ believes 2018’s
tech market trend is
still ongoing
Sebastian is steadfast
that semiconductors are
yet to bottom
Sanjeev likes DRAM
valuations but wants to
see trough margins to
go full bull
Elinor is excited about
the transition to more
mature voice systems
Head of technology Nicolas Baratte argued last year that Asian tech had
rallied too much and was ready to take a breather. That proved a good call
and, in his view, is still ongoing. He suggests revisiting tech stocks in late
1Q19 or early 2Q. As such, beware of sexy value traps. What made a stock
cheap in the old rising consumer unit volumes world does not necessarily
hold water today. He prefers less well understood or owned smallcap
Chinese names like ChinaSoft and Dahua.
Turning to the tech sector, Sebastian Hou see the cyclical downturn that he has
been calling for as incomplete. He sees pervasive demand deceleration, excessive
inventory across the supply chain and unfavourable leading macro indicators. The
similarities he sees in this cycle versus the dot-com bust could make this correction
the biggest since the GFC. He recommends selectively hiding in relatively defensive
large-cap names, with lower beta and solid FCF, such as TSMC.
His Korean counterpart Sanjeev Rana expects the DRAM weakness to continue
until at least 1H19. For NAND, he expects ASP declines to continue through the
entire year. That said the margin lows in 2H19 will exceed all previous cycle
suggesting valuations are relatively attractive but need an earnings floor.
Internet analyst Elinor Leung believes voice assistants have reached an inflection
point, with China’s global share of the market rising by over 10% to 29%. With
cloud services also branching out across industries as China migrates to the era of
the internet of things, industry incumbents Alibaba, Tencent and Baidu maintain
their leading positions.
Global smart speaker adoption; China outpaces the world
100 (%) Others
90
UK
80
China
70
US
60
20 29
50
40
30
20
46
42
10
0
1Q18
3Q18
Source: CLSA
Do we need tougher rules for breaches of data privacy?
Source: CLSA, HarrisX
No
17%
Yes
83%
Theorality sees the
global risk for the
incumbents as a shift
towards a privacy
oriented model
Oliver suggests M&A
will pick up in the
consumer space for
access to China . . .
Globally, it is important to note that last year Sir Tim Berners-Lee, co-creator of
the web, announced Inrupt, a startup to fund The Solid Project. Solid is a
decentralised platform that gives individuals ownership of their data by allowing
storage in Personal Online Data Stores (PODS). Its goal is essential in turning
current practices, and therefore business models, on their head. In this context
Theorality wonders if 2019 will be the year the internet pivots towards a privacyoriented
approach. Shaun Cochran prefers old-media content (Disney) over new
media ‘time-on-platform’ companies (Facebook).
Switching the focus back to Asia, head of consumer researcher Oliver Matthew
expects M&As between foreign brands seeking access to the Chinese market and
domestic companies facing distribution barriers to continue flowing. Beginning
faintly in 2018, the focus is now on millennials seeking premium items. Thus
fashion, health goods and cosmetics are particularly promising.
13 December 2018 shaun.cochran@clsa.com 7

Investment thesis Global Themes 2019
. . . while Dylan says
stock strategies on the
ground should favour
defensive business
models
Narrowing into China, analyst Dylan Chu advises focusing on defensive positions
until at least 3Q19. He sees weak discretionary consumption after property prices
peaked, and deteriorating wage and employment data. The generally calm retail
market means that OEMs may offer refuge from additional macro-uncertainties.
He favours Shenzhou International.
Consumer goods retail sales YoY growth; continued slowing
China’s internet education platform market; explosive growth
12
(%)
700
(Rmbbn) B2C Internet-education platforms
579.2
11
600
24.0
10
9
8
7
6
500
400
300
200
100
0
79.9
0.2
13-17 Cagr: +25.7%
99.1
0.3
79.7
98.8
124.5
159.2
124.8
0.6
0.3
158.6
17-22 Cagr: +23.8%
309.6
249.0 7.6
199.3 4.1
1.7
197.6
244.9
302.0
382.6
12.2
370.4
471.5
17.9
1Q15
2Q15
3Q15
453.6
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Oct 18
2013
2014
2015
555.2
2016
2017
2018E
2019E
2020E
2021E
2022E
Source: CLSA, NBS
Source: CLSA
Mariana is still excited
about secular education
opportunities despite
the policy risks
In contrast, one sector where Chinese spending is not letting off, regardless of
the macro conditions, is education. Mariana Kou believes three emerging catalysts
will continue to drive growth: personalisation, decentralisation and globalisation.
Growth is particularly strong in online education and this is beneficial for citizens
in lower-tier cities, who are showing greater interest to pay for such. Our top pick
is Tal Education on the back of its building investments in AI and data.
Jonathan sees a mixed
bag on Asia gaming and
conglomerates needing
trade clarity
Things aren’t quite as clear cut for the Asian gaming sector as macro-economic
and trade uncertainties have created significant overhangs for the share prices.
Still, as VIP growth has decelerated, the fundamentals around mass growth
remain firm and we expect 9% growth in 2019. With the weakness in VIP largely
priced in, the defensive nature of mass should support cashflow growth for the
sector. For regional head of gaming and conglomerates, Jonathan Galligan, the
conglos side presents a similar divergence between share-price performance and
bottom-up fundamentals. While the conglos outperformed the market
unceremoniously in 2018 despite little growth in earnings or NAV, 2019 is
shaping up to see more healthy NAV and earnings growth. For the highly
defensive sector, we forecast NAV growth of 12% in 2019 with the wildcard of
structural changes to capital allocation looming large. Although some
conglomerates covered ought to divest, acquisitions remain a possibility.
David sees a more
compelling story in Asia
healthcare innovators
like CSL and Takeda
Regional head of healthcare, David Stanton, notes that drug affordability and
accessibility continue to apply downward pressure on the market with payers,
including those in the USA and China. This is driven by payer scrutiny as they
seek to take advantage of genericisation of existing treatments and rising
competition from biosimilar products. Importantly, this is in many respects an
opportunity for Asian producers who seek to develop innovator and copycat
drugs (biologics and biosimilars) in emerging markets where entry barriers are low
and then enter higher-priced, established markets. His preferred BUY-rated Asian
innovators are CSL, Takeda, Beigene and Hua Medicine.
8 shaun.cochran@clsa.com 13 December 2018

Investment thesis Global Themes 2019
In Japan, Abe has an
easy win by cutting
farming tariffs and
blaming Trump
Korea faces external
softness and domestic
policy own-goals,
which means the won
will weaken
Distilling into our country views, Japan strategist Nicholas Smith sees an
opportunity to mitigate the effects of the trade war as well as a potentially easy
win for Abe. With just 38% food self-sufficiency, Japan can’t feed itself. And with
67% of farmers over the age of 65, Nicholas suggests that undersupply is about
to get incomparably worse. By cutting tariffs on food imports, Abe can offer a
‘victory’ to Trump and so mollify his aggression with a ‘deal’. He also notes this
strategy offers Abe plausible deniability for dismantling a politically sensitive
tariff moat.
Less obvious policy decisions are found in Korea. Local head of research, Paul
Choi, expects economic difficulty with falling exports likely to be exacerbated by a
weakening property market in 1H19 after a series of policy own-goals in 2018.
The Korean won therefore becomes the saving grace, as its expected depreciation
will lend a hand to Korean exporters. Interestingly, the besieged DRAM makers -
Samsung Electronics and SK Hynix - and shipbuilders such as Hyundai Heavy are
well geared to this relief.
15-year ₩/US$ rate
Nifty earnings growth projections
1,600
1,500
1,400
1,300
1,200
30
25
20
15
10
5
(% YoY)
6
22
11
7
10
1,100
1,000
900
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: CLSA, QuantiWise
Source: CLSA
1
Downside risk
to earnings
8
9
10
25
18-20
0
(5)
(10)
FY10
FY11
FY12
FY13
FY14
FY15
(4)
FY16
FY17
FY18
FY19CL
FY20CL
Caught in the middle,
Taiwan is too techfocused
to offer more
than dividend
support . . .
. . . however, India is
hoping to deliver on
earnings with stronger
domestic potential
Singapore remains, at
the market level, a
slave to global trade . . .
Another market troubled by tech weakness is Taiwan. Potential tariff-induced
supply-chain adjustments and a domestic political standoff further compound this
decelerating tech cycle. With such an entrenched industry structure keeping the
island tethered to global tech trends (EV, 5G, datacentre, etc) it is difficult to
expect momentum, especially in 1H19. The upside is that Taiwan as a market
continues to run a net-cash aggregate balance sheet and so companies are in
excellent shape to weather the slowdown.
In contrast, India strategist Mahesh Nandurkar argues that the persistent optimism
embedded in consensus Nifty estimates will prove less acute next year. Economic
activity should pick up from levels seen in FY11-15 as irregular initiatives come to
an end (such as demonetisation, the NPL clean-up and GST implementations) and,
assuming that downside risks don’t materialise from generous margin
assumptions, Nifty earnings growth could be 18-20%. Corporate banks present
the best opportunities, with ICICI being our favourite.
Over to Asean, languishing global markets will take their toll on Singapore’s
economy given its dependence on international trade. Although the ride may be
tough, Singapore will perform better than others in the region given its robust
currency and yields. Our top pick here is DBS, but more broadly we recommend a
defensive strategy favouring dividends.
13 December 2018 shaun.cochran@clsa.com 9

Investment thesis Global Themes 2019
. . . whereas our
Indonesia strategist
sees genuine potential
for a rebound . . .
. . . and our Malaysia
strategist sees FDI
opportunity where
China sees a trade war
Thailand is in
desperate need of
political clarity which
should present itself
throughout the year
Another market caught in macro crosswinds is Indonesia. A volatile currency,
rising oil prices (for the bulk of the year) and rate hikes have all constrained
economic recovery since 2017. Head of research Sarina Lesmina sees elections
heralding a return to momentum. Assuming the recent oil-price weakness does
not violently retrace, and that the global liquidity tightening begins to ease into
2019, lower borrowing costs and infrastructure spend can trigger a consumption
and economic recovery. In this light, JCI is still a laggard with sensible valuations.
Turning to Malaysia, there are some lofty goals with a German-like Industry 4.0
blueprint that aims to make Malaysia a prime destination for high-tech industries,
including a development of an aerospace-industry hub. Coupled with a Sino-US
trade war and clear evidence of rising FDI in 2018 - the question becomes, is
Malaysia a viable production alternative? She hopes so, recommending
healthcare, banks and select tech exposure.
Thai head of research Suchart Techaposai faces far less political clarity, although
the military-led government appears committed to delivering elections in 2019.
With the National Strategy and Reform Plan set in place for the future
government to implement, Suchart sees a rerating of Thai banks, contractors and
properties as likely. The valuations are also undemanding so domestic demand
stocks are the best alternative for now.
Disappointing Thai investment
Singapore dividend portfolio performance
80
70
60
50
40
30
20
10
0
(10)
(20)
1Q12
(% YoY) Public construction investment
Public investment
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
140
130
120
110
100
90
80
70
May 15
(13 May 15 = 100)
Outperformance to MSCI SG
CLSA dividend cocktail (LHS)
MSCI SG (LHS)
Aug 15
Nov 15
Feb 16
May 16
Aug 16
Nov 16
Feb 17
May 17
Aug 17
Nov 17
Feb 18
May 18
(%)
Aug 18
Nov 18
25
20
15
10
5
0
(5)
Source: CLSA, NESDB
Alfred Dy believes
Philippines valuations
now offer and
asymmetric risk
reward . . .
. . . while Australia
needs to push through
a housing downturn
Source: CLSA, Bloomberg
In the Philippines, after a torrid 2018 that has seen the PCOMP down 10.26%
YTD, head of research Alfred Dy believes a number of things could go right in
2019. Potential catalysts include: falling inflation, improving earnings growth, preelection
spending, and progress on tax reform and infrastructure initiatives. While
peak valuations are less conducive to ‘what if’ thinking, he notes that value has
re-emerged with consensus PEs of 15x going into 2019 (under the 1sd below
mark). As such, Alfred says the market is poised for a comeback, suggesting
investors should be more inclined to add exposure than to take profit from here.
Finally, in Australia, the housing market should draw most attention with head of
research Richard Johnson forecasting falling property prices and other indicators,
which should make observers wary of the broader economic outlook - and is
consistent with the aggressive market underweight Global strategist Christopher
Wood has run for years.
10 shaun.cochran@clsa.com 13 December 2018

Citi Research
Economics
02 Jan 2019 09:13:37 ET │ 28 pages Emerging Markets
Asia
India Economics View
2019 Outlook – Macro Worries to Ease, Politics Takes Over
Nascent investment recovery to counter headwinds to consumption — We
expect FY20 GDP growth at 7.4%, as the nascent investment recovery could
neutralize the near-term consumption slowdown. Lower oil prices, improving
banking system health/credit flow and the possibility of rural stimulus will be
important tailwinds to watch. However, slowdown in NBFC lending, election-related
uncertainty and the structural concerns of less-than-adequate formal employment
growth and deteriorating terms of trade for farmers limit our growth expectations.
Benign food and fuel inflation, uncomfortable core — Expect a modest bounce
in CPI to 4% avg. in FY20 on a low base. Persistent surplus causing a structural
decline in food CPI but wary of some mean reversion in 2019. Headline CPI to stay
below the 4% mark until 1HFY20 before picking up to 4-4.5% in 2HFY20. Core CPI
is likely to converge to headline driven by relatively softer growth and strong base.
Samiran Chakraborty AC
+91-22-6175-9876
samiran.chakraborty@citi.com
Anurag Jha AC
+91-22-6175-9877
anurag.jha@citi.com
Gaurav Garg AC
+65-6657-4186
gaurav.garg@citi.com
Fiscal commitment strong but revenues disappoint — More concerns about
slippage from the 3.3% of GDP deficit target for FY19 as indirect tax collections
plummet. Innovative accounting through using NSSF and other means likely to be
deployed. Populist promises likely but fiscal implications could be back-ended.
Monetary easing could be shallow if fiscal slips — On the back of persistent
undershooting of headline CPI, lower oil and stable currency, we assign a 60%
probability to a stance change and a 15% probability of a rate cut in Feb itself. A
combination of relatively strong growth, high core inflation and uncertainty over
fiscal stimulus appear to be the hurdles in front of substantial easing. OMO
purchases support a bond rally; expect more in FY20 but at a reduced pace.
BoP to swing into surplus but basic balance still weak — With CAD
approaching ~2% of GDP in FY20, we expect a BoP surplus of US$20bn but the
basic balance to remain in deficit, exposing INR to the volatility of FPI flows. RBI to
be vigilant for external risks and likely to rebuild reserves, USDINR to trade in 68.5-
70.5 range.
Politics in focus — BJP-led alliance is likely to form the government in the Apr-
May general elections in our base case though recent state election results indicate
that surprises cannot be ruled out.
Strategy – INR and India rates outlook: External headwinds for INR have
receded. But INR’s outperformance will likely be cushioned by potential USD buying
by RBI. As a result, we prefer to take INR exposure on an opportunistic and tactical
basis. Also, we seek opportunities to buy the election event volatility. India rates are
likely to push lower across tenors as expectations of rate cuts take a firmer hold.
Potential for positioning squeeze persists, but that should present an opportunity to
get back into receivers. We discuss potential risks to a bullish fixed income view.
See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures.
Citi Research is a division of Citigroup Global Markets Inc. (the "Firm"), which 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. Certain products (not inconsistent with the author's published research) are available only on Citi's portals.

India Economics View
2 January 2019 Citi Research
Growth
GDP growth trends have been quite volatile in 2018 as the relatively strong
momentum of the earlier part of the year has waned. We believe 2019 could be
another year of robust but choppy growth as there are multiple uncertainties.
Question marks on rural demand, stimulus dependence: Persistent deflation in
food prices with rising input costs has worsened the outlook for agriculture and our
rural demand index has moderated from its highs (though still quite strong).
Relatively late winter sowing could also add to stress in agriculture. Affordable
housing-driven construction growth has supported the non-agri component of rural
demand but we anticipate that the construction growth could be decelerating in
2019 and there are no signs of any pick-up in rural wage growth as the labor
surplus sustains. Much will depend on whether the government opts for any preelection
stimulus for agriculture in the form of farm loan waivers, cash transfer to
compensate for lack of MSP realization or some form of universal basic income. We
maintain that the excess supply problem in agriculture doesn’t have a quick fix and
expect that food prices will increase only gradually in 2019.
Urban consumer sentiment remains weak, some tailwinds emerging: A
combination of less than adequate jobs/income growth, high oil prices and anemic
asset price increase has kept urban consumer sentiment in a “pessimistic” zone for
two years. However, lowering of household savings and a steady flow of retail credit
have ensured that the urban consumption demand doesn’t plummet. In the near
term, the credit flow could be impacted from relatively slower growth in the shadow
banking system (~10-15bps impact on GDP growth) but sharply lower oil prices
could neutralize the effect (10% drop in oil prices increase GDP growth by 15bps).
Government and net exports to be supportive: The possibility of pre-election
stimulus/impetus to finish projects remains the wildcard for consumption although,
in the recent past, only once did the government breach the fiscal deficit target in a
pre-election year – in 2009, more as a response to the global financial crisis. Also,
evidence of consumption boost from election-related activity is weak in the GDP
data. Nevertheless, we assume a small boost to growth in the early part of the year
from election-related activity. While fiscal discipline has been maintained by the
government, we are not factoring in any further reduction in fiscal impulse in our
projections for FY20. In fact, there could be small upside because of headwinds
from net exports abating in 2019 as the current account deficit improves.
A nascent capex recovery in place: Double-digit investment growth in three
consecutive quarters makes us hopeful about a nascent pick-up in investment cycle
aided by sectors where demand growth has been strong and capacity utilization
levels are improving. Our investment indicator is also showing a sustained broadbased
pick-up. Improved corporate profitability, expectations of softer interest rate,
reduced leverage in the corporate sector and gradual strengthening of the financial
sector balance sheet (NPA ratios likely to decline in 2019) with progress in IBC and
public sector bank recapitalization are supportive conditions for higher capex. We
are witnessing early signs of credit flow to industry which should ensure bank credit
growth stays robust. However, we acknowledge that the high capex requirement
sectors, like power and metals and mining, might take time to join this process and
there could be funding challenges in the SME space for further capex. Elections will
be another risk to this recovery as political uncertainty could temporarily suppress
business sentiment.
We revise down our FY19 GDP growth to 7.3% (7.5% earlier) as the 2Q FY19 printed a
surprisingly low 7.1%. Adverse base effects are anyway likely to pull down 2H FY19
prints. FY20 GDP growth could get materially altered by electoral outcomes but we
expect it to clock 7.4% if political stability is retained.
3

India Economics View
2 January 2019 Citi Research
Figure 1. Economic Activity Heat-map
Qtr GDP IIP Car CV 2-W Tractor Air
Sales Sales sales Sales Traffic
Rail
Freight Cargo Credit Indirect PMI PMI Rural
Traffic Tax Mfg Svc Wages New corp Diesel Petrol
Projs earning Sales Sales
Sep-12 7.5% 0.4% -7.6% 1.7% -3.8% -11.8% -7.1% 1.4% -0.8% 16.9% 17.9% 52.8 55.0 18.8% -44.8% 64.8% 10.3 6.1
Dec-12 5.4% 2.1% -2.0% -4.8% 6.0% 3.9% -5.0% -0.3% -2.7% 16.2% 20.1% 53.7 53.9 18.2% -43.0% 4.8% 4.2 6.7
Mar-13 4.3% 2.2% -20.5% -8.7% -0.6% -1.7% 2.2% -1.1% -1.0% 15.7% 31.1% 53.1 54.3 17.8% -34.7% 5.5% 2.7 5.8
Jun-13 6.4% 1.1% -10.4% -8.1% -0.8% 26.2% 3.5% 1.8% -1.0% 14.0% 0.2% 50.5 52.0 17.0% -13.5% 96.8% 0.8 12.9
Sep-13 7.3% 4.8% 2.2% -21.8% 8.2% 21.2% 13.1% 3.7% 5.8% 16.2% 6.1% 49.4 46.7 15.7% 11.4% -9.4% (2.2) 6.8
Dec-13 6.5% 3.0% -5.5% -24.5% 9.0% 20.6% 6.4% 0.1% 1.1% 15.0% 5.8% 50.5 47.0 16.1% 33.0% 1.5% (1.1) 9.5
Mar-14 5.3% 4.2% -3.2% -25.2% 13.1% 12.0% 2.0% 1.2% 1.4% 14.3% 5.9% 51.7 48.2 12.4% -12.4% -3.4% (1.6) 6.0
Jun-14 8.0% 5.6% 2.2% -16.2% 13.2% -1.4% 7.3% 3.3% 4.3% 13.2% -0.4% 51.4 51.1 10.0% -22.1% 27.2% 0.3 10.5
Sep-14 8.7% 4.4% 6.0% -3.8% 19.0% 0.3% 12.9% 6.3% 3.6% 10.9% 9.7% 52.1 51.5 5.6% 139.4% 4.0% 2.5 11.6
Dec-14 5.9% 3.8% 7.0% 4.6% 1.2% -21.8% 13.2% 7.9% 6.9% 10.6% 7.5% 53.1 51.3 4.4% 158.1% -3.5% 1.1 8.8
Mar-15 7.1% 2.4% 4.3% 4.9% -0.2% -29.9% 16.9% 3.5% 4.0% 9.8% 16.5% 52.1 53.1 5.3% 117.6% -13.2% 2.5 16.3
Jun-15 7.7% 1.2% 8.7% 4.7% 0.6% -16.2% 16.4% 0.9% 4.7% 9.5% 37.6% 51.8 49.9 5.1% 35.9% 0.9% 3.7 12.5
Sep-15 8.2% 2.4% 10.6% 9.5% -1.3% -24.8% 17.1% -2.9% 3.8% 9.0% 31.5% 52.1 51.3 6.0% -4.5% -5.7% 8.5 16.2
Dec-15 7.3% 4.2% 15.1% 11.0% 4.4% -1.6% 17.5% -6.9% 1.3% 9.7% 36.3% 50.0 52.3 5.09% -34.8% -10.0% 7.8 14.5
Mar-16 9.3% 5.4% -1.7% 20.0% 8.6% 7.9% 19.7% -8.4% 7.4% 11.0% 21.5% 51.5 53.3 5.31% 16.7% -14.7% 11.3 15.3
Jun-16 8.1% 7.1% -1.4% 13.0% 14.3% 14.8% 17.3% -8.6% 6.2% 9.2% 34.5% 51.0 51.7 5.77% 14.6% 3.2% 4.7 10.0
Sep-16 7.6% 4.5% 11.5% -0.2% 20.6% 27.7% 21.1% -8.0% 4.6% 9.4% 19.4% 52.2 52.9 4.61% -33.8% 9.7% 1.1 12.1
Dec-16 6.8% 3.8% -2.3% -1.1% -4.6% 17.7% 19.4% -4.7% 12.4% 6.7% 24.2% 52.1 49.3 5.56% -31.9% 23.6% 5.7 12.0
Mar-17 6.1% 3.1% 8.1% 5.7% -2.3% 13.1% 15.9% -0.2% 4.7% 4.3% 14.6% 51.2 50.2 5.99% -10.5% 20.5% (3.8) 1.8
Jun-17 5.6% 1.9% 4.0% -9.1% 7.8% 8.4% 15.5% 3.4% 5.3% 5.2% 13.4% 51.7 51.8 5.88% -33.3% -16.1% 5.9 10.9
Sep-17 6.3% 3.3% 9.0% 21.1% 12.3% 36.7% 13.5% 5.0% 1.2% 6.1% 30.3% 50.1 48.0 5.92% -61.4% 6.3% 7.2 9.8
Dec-17 7.0% 5.9% -0.5% 33.7% 15.7% 7.8% 16.5% 8.6% 4.3% 8.6% 8.1% 52.5 50.0 4.53% -20.8% 18.0% 4.7 7.3
Mar-18 7.7% 6.5% 0.9% 30.9% 24.8% 44.0% 20.2% 7.4% 8.1% 10.8% -16.8% 51.8 49.9 3.66% -25.7% -4.2% 9.6 13.5
Jun-18 8.2% 5.1% 18.0% 51.5% 15.9% 25.7% 17.1% 8.2% 3.9% 12.5% 36.3% 52.0 51.2 3.61% -7.2% 21.1% 3.6 8.7
Sep-18 7.1% 5.2% -2.4% 27.5% 4.9% 0.0% 16.1% 6.9% 6.4% 12.9% -16.8% 52.1 52.2 3.44% 11.6% 8.3% 2.7 6.6
Dec-18 5.7% -2.2% 18.5% 9.3% 9.8% 13.7% 7.0% 4.3% 14.4% -12.9% 53.1 52.3 0.4 5.9
Source: CEIC, Bloomberg, Citi Research
Figure 2. Rural and Urban demand moderate in 2H-2018
Figure 3. Consumer sentiment has not revived after demonetization
0.70
0.65
0.60
0.55
0.50
0.45
0.40
0.35
0.30
0.25
0.20
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Urban demand macro factors
Source: CEIC, Company reports, Citi Research
Sep-16
Jan-17
May-17
Sep-17
Jan-18
May-18
Sep-18
Rural demand macro factors
130
125
120
115
110
105
100
95
90
Optimism
Pessimism
NDA comes
to power
Demonetiza
tion
85
Jun-11 Mar-12Dec-12Sep-13Jun-14 Mar-15Dec-15Sep-16Jun-17 Mar-18Dec-18
Current Situations
Future Expectations
Source: CEIC, Citi Research
4

India Economics View
2 January 2019 Citi Research
Figure 4. Rural wage growth continues to languish
%YoY
25
20
15
10
5
-
(5)
Nov-05 Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 Nov-17
Nominal Rural Wage
Real Rural Wage
Source: CEIC, Citi Research
Figure 5. Similar story for Urban wage growth too
% YoY
17%
12%
7%
2%
-3%
-8%
Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18
Nominal wage
Real wage
Source: CEIC, Citi Research, Urban wage growth measured through different services
Figure 6. Signs of weakness in passenger car sales
3m/3m saar
200%
150%
100%
50%
0%
-50%
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
PV Sales
6 per. Mov. Avg. (PV Sales)
Source: CEIC, Citi Research
Figure 7. ….and 2W sales too
3m/3m saar
250%
200%
150%
100%
50%
0%
-50%
-100%
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
2W Sales
6 per. Mov. Avg. (2W Sales)
Source: CEIC, Citi Research
Figure 8. Investment starts to contribute to GDP growth
Figure 9. The investment recovery is visible in our indicator too
%YoY
10.0
8.0
0.70
0.60
Annual
Quarterly
25%
20%
6.0
0.50
15%
4.0
0.40
10%
2.0
-
(2.0)
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Consumption GCF Net Exports GDP
Source: Citi Research
0.30
0.20
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
MII Index (LHS)
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
GFCF Growth (RHS)
Source: CEIC, Citi Research, MII = Monthly Investment Indicator
5%
0%
5

-
-
-
-
-
-
India Economics View
2 January 2019 Citi Research
Figure 10. What is improving/worsening on the investment side
Q3FY19 Q2FY19 Q1FY19 Q4FY18 Q3FY18
What improved in Q3
Air Cargo 23.9% 10.3% 11.9% 5.0% 7.8%
Capital Goods prod 16.8% 6.0% 8.6% 8.6% 7.4%
Cement 18.4% 12.6% 16.4% 18.7% 11.1%
Freight Traffic 7.4% 4.3% 6.5% 4.8% 4.2%
Electricity 8.5% 7.0% 5.1% 7.3% 6.3%
Non Food Credit 13.7% 13.0% 12.2% 11.4% 7.8%
What worsened in Q3
Infra industries 4.7% 5.4% 5.5% 5.4% 5.2%
Diesel 1.0% 2.7% 3.6% 9.6% 4.7%
Port Traffic 4.0% 6.4% 4.0% 8.3% 4.3%
Steel Production 2.2% 4.7% 2.4% 3.8% 7.8%
Capital goods imports 9.3% 18.3% 18.5% 14.9% 10.2%
Bitumen 13.7% 24.2% 16.1% 9.6% 3.9%
CV Sales 12.8% 27.4% 52.5% 29.9% 32.0%
Source: CEIC, Citi Research
Figure 11. Nominal interest rates likely to be on a gradual decline
%
13.0
11.0
9.0
7.0
5.0
Feb-12 Jan-13 Dec-13 Nov-14 Oct-15 Sep-16 Aug-17 Jul-18
Repo rate WALR Outstanding Loans WALR Fresh Loans
Source: CEIC, Citi Research WALR = Weighted Average Lending Rate
Figure 12. Capacity utilization improves, but more room to go
80
79
78
77
76
75
74
73
72
71
70
Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18
Deseasonalized Capacity Utilization
Last 5 yr avg
Source: CEIC, Citi Research
Figure 13. Banking Sector NPA falls after eight long years
%
14
12
10
8
6
4
2
-
10.4
8.8
7.2
5.2
3.5
1.2
2.8
4.5
3.5
5
5.8
5.9
2.5
2.3
2.3
2.4
2.5
3.1
3.6
4.1
0.9
2.4
0.5
4.3
6.4
7.6
3.9
9.6
11.5
10.8
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
1HFY19
Gross NPLs
Source: CEIC, Citi Research, % of total assets
Restructured Assets
Figure 14. Deposit growth lags the sharp improvement in credit
Figure 15. …which is also quite broad-based
%YoY
50
45
40
35
30
25
20
15
10
5
0
Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Dec-18
deposit YoY
credit YoY
Source: CEIC, Citi Research
INR bn
3,500
3,000
2,500
2,000
1,500
1,000
500
-500 0
-1,000
3,272
662 640
878
434
-245 -295 -225
Total credit
NBFC
Infra loans
Source: CEIC, Citi Research
Housing
7MFY18
295
67 143 123
31
-114 -195 -93 -73 -28 -131 -30 -164 -381
Agri
Chemicals
Infra Power
Infra roads
Textiles
Consumer durables
Iron and steel
7MFY19
6

India Economics View
2 January 2019 Citi Research
Inflation
A sustained downdrift in headline CPI from mid-2018 onwards with a strong
divergence between headline and core inflation has surprised the markets. We
expect a modest bounce in 2019 on a low base but still forecast a benign outlook.
Food price deflation – some tentative explanations: We note that food inflation
has been declining (on a seasonally-adjusted MoM basis) consistently from FY13
onwards. This has led to food inflation staying below the headline for almost three
years now. There appears to be a structural element in this decline which has got
accentuated in the last three quarters where seasonally-adjusted MoM food inflation
has been negative. One of the factors driving this could be steady increase in
supply of foodgrain and horticulture crops despite weather disturbances which has
possibly overshadowed demand growth. The overall supply has probably also
benefited from better supply-chain management reducing wastage and price
volatility. Introduction of GST has likely aided this by removing the state borders.
Even a sharp drop in net agri products exports (down ~US$9.5bn between FY14
and FY17) could have exacerbated the excess supply situation. On the other hand,
the increase in cost of production has been materially lower in the last four years,
contributing to lower food inflation. Although the pass-through for India is not
perfect, lower global food prices (in deflation for almost four years now) surely
helped in the structural decline.
The illusive MSP pass-through: The current bout of deflation is particularly
surprising considering the fact that the government increased the MSP of 13
summer (Kharif) crops by an avg ~ 20% in production weighted terms. In our daily
wholesale price tracker of these crops, the weighted avg price increase has been
only 4% from the day of MSP announcement and for retail prices, the cereals CPI
inflation fell to three-year low of 1.25%YoY in Nov. It appears that without the
reinforcements from rural wage growth and global food price inflation, MSP on its
own is not having the desired impact on food prices. Delayed winter sowing and any
populist reaction by government considering the political fallout of protracted food
deflation appear to be the upside risks to food prices.
Core inflation diverges from food: The momentum in core inflation has started
inching up from mid-2017 onwards as the economy was coming out of the twin
shocks of demonetization and GST and it was aided by idiosyncratic events like
HRA increase for public sector employees. Inflation in items like health and
education has been consistently high, partly reflecting the change in spending
pattern. Output gap appears to be closing as the GDP growth nears the 7.5% mark.
However, our preferred measure of non-volatile CPI index (excluding pulses,
veggies, housing, transportation, wt=73%) fell to 3.7%YoY in November, an all-time
low for the current 2011-12 data series.
Low fuel prices could also be supportive: With expectations of Brent crude
averaging US$60/bbl in 2019 vs US$72 in 2018, we expect the pressure on the fuel
index to be low. In our estimate, a 10% drop in oil prices leads to ~20bps fall in
headline CPI.
Outlook for 2019: Going forward we expect headline CPI to stay below 4% mark
until 1HFY20 before picking up towards 4-4.5% in 2HFY20 under the broad
assumption of crude prices staying close to US$60/bbl and monsoon conditions
stable. This would imply FY19 CPI to avg at 3.7% and FY20 at 4%.The divergence
between core and food inflation is likely to narrow as the relatively softer growth and
strong base drag down core inflation. Food inflation has shown some characteristics
of structural decline but delayed winter crop sowing and a weak base should be
supportive of deflationary trends in food inflation reversing in 2019. Large MSP
hikes in 2018 have not impacted food prices as yet and remain a wild card if finally
7

India Economics View
2 January 2019 Citi Research
prices drift towards MSP in 2019. Headline CPI is likely to stay below 4% in 1H
2019 but could be approaching 4.5% by Dec 2019 on adverse base effect.
Figure 16. Softening of food inflation momentum, core inflation remains more stable
% MoM
1.10%
1.0%
0.90%
0.70%
0.50%
0.30%
0.10%
0.57%
0.7%
0.64%
0.5%
0.33%
0.4%
0.38%
0.2%
0.40%
0.3%
0.44%
0.44%
0.41%
0.2%
0.49%
0.1%
0.43%
0.4%
0.35%
-0.10%
-0.30%
-0.50%
FY13
FY14
FY15
FY16
FY17
FY18
-0.3%
1QFY19
-0.1%
2QFY19
3QFY19
FY19E
FY20E
Food CPI
Core CPI
Source: CEIC, Citi Research
Figure 17. Broad-based decline in inflation for even protein items
% YoY
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
Meat&Fish Cereals Milk
Source: CEIC, Citi Research
Figure 18. Vegetable price volatility reducing
200
180
160
140
120
100
80
60
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
Vegetables Index
Poly. (Vegetables Index)
Source: CEIC, Citi Research
8

India Economics View
2 January 2019 Citi Research
Figure 19. MSP pass-through far lower than expected
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
7/5 7/20 8/4 8/19 9/3 9/18 10/3 10/18 11/2 11/17 12/2 12/17 1/1
Paddy based Index
Rice Based Index
Source: Bloomberg, Citi Research, % change in a CPI-weighted MSP items price
index from the date of MSP announcement
Figure 20. Cost of agri input materials increasing
%YoY
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
input cost labor cost input materials
Source: CEIC, Citi Research
Figure 21. Service sector inflation starts inching up to the mid-point of their respective medium-term ranges
%YoY
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
5.5% 6.5% 0.9%
11.3%
4.9%
6.5%
8.8%
5.5% 4.8%
8.6%
6.0%
7.8%
3.5%
5.2% 5.7%
House Rent
School Fee
Telephone charge
Bus/Tram fare
Cable tv
Doc consult fee
Servant/cook
Private tutition
Taxi/auto fare
Barber/Beautician
Medical tests
Hospital charges
Tailor fee
Max Min current
Grinding charge
Core CPI Services
Source: CEIC, Citi Research
Figure 22. Different measures of core inflation (%YoY)
%YoY
10%
9%
8%
7%
6%
5%
4%
Core CPI ex trans ex housing
Core CPI YoY
Core CPI ex-trans
CPI ex pulses, veggies ex housing ex trans
3%
Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18
Source: CEIC, Citi Research
Figure 23. Fuel inflation could correct following sharp oil price drop
Brent YoY
CPI trans YoY
100%
10%
80%
8%
60%
40%
6%
20%
4%
0%
2%
-20%
-40%
0%
-60%
-2%
-80%
-4%
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
Brent INR YoY LHS
CPI transportation YoY RHS
Source: CEIC, Citi Research
9

India Economics View
2 January 2019 Citi Research
Figure 24. Inflation expectations stay elevated
%YoY
18
16
14
12
10
8
6
4
2
0
Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18
Infl. Exp 3m ahead
Infl. Exp 12m ahead
Source: CEIC, Citi Research
Figure 25. Projecting convergence of headline and core CPI in FY20
%YoY
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Headline CPI
Core CPI %YoY
Source: CEIC, Citi Research
10

India Economics View
2 January 2019 Citi Research
Fiscal
The government has reiterated its commitment to stick to the FY19 fiscal deficit
target of 3.3% of GDP despite the Apr-Nov deficit being 115% of the target.
Although the February budget is likely to be a vote-on-account budget without major
announcements, the mantle of continuing fiscal prudence will lie with the postelection
budget to be presented in June.
Revenue shortfall acute but expenditure discipline maintained: While direct tax
collection growth at 13.6% in the Apr-Nov period has been comfortable (BE 14.4%),
indirect tax collection growth of only 2% is falling far short of the 19% target. There
could be ~INR1.3trn shortfall in indirect taxes even if the growth rate improves to
20% for the rest of the year, which itself appears to be a tall ask. Tardy GST
collections primarily to be blamed – monthly average at INR968bn against a target
of INR1.06trn. Even the divestment revenue at INR 338bn is way short of the
budget estimate of INR 800bn. Expenditure growth at 9.1% is close to the target
(10.1%) but further pruning could be required. Heavy-spending infra ministries like
Roads and Railways have seen robust spending growth but social sector ministries
like HRD and Women and Child development have been slow in spending.
Innovative ways to meet the FY19 fiscal deficit target might not be enough:
Although it appears that meeting the 3.3% target is going to be challenging, the
government still has some levers. One, the National Small Savings Fund (NSSF)
collections at INR1.3trn has been much better than the budget estimate of INR
750bn. Even towards the end of FY18, ~INR400bn was loaned out from this
account to reduce the expenditure on food subsidy and keep the fiscal deficit at
3.5%. Two, there could be some surplus in the compensation cess fund of GST
which can now be shared equally between the states and the center after recent
legislative changes. Three, RBI could be asked to provide an additional interim
dividend. Four, some expenditure could be pushed back to 1QFY20, taking
advantage of the cash accounting system. Despite these accounting levers,
meeting the 3.3% of GDP fiscal deficit target appears to be increasingly difficult.
Populism, but how? Markets always worry about fiscal populism in a pre-election
phase but, in the last few instances, the governments have been relatively prudent
even in that period, except 2008-09 (though it was also to counter the global
financial crisis). The spate of farm loan waivers announced from 2017 onwards
could cost the state exchequer ~INR 2trillion (~1.2% of GDP), though the actual
impact could be staggered over several years. Even if a national farm loan waiver is
announced, we do not expect it to be rolled out before elections and hence it is
more of a FY20 fiscal risk. Other kinds of income support for farmers (Telangana
model) could be less distortionary but more difficult to implement given lack of
proper land records, and it could be regressive too. PM Modi has promised to bring
99% of the items under 18% or less GST rates (at present ~97% of the 1,200 items
fall in this category). This is prompting some tweaks in GST rates despite stiff
revenue challenges.
State fiscal health still a concern: States had budgeted for a 2.6% of GDP fiscal
deficit in FY19 after breaching the 3% mark for three years running. There is not
much consolidation noticed in our 12-month rolling state fiscal deficit data despite a
sharp cutback in capital expenditure growth. Tax revenue growth for the states has
also been tardy, indicating that their fiscal marksmanship could be continuing even
in FY19 with chances of the 2.6% target being breached. Large farm loan waivers
could only worsen this situation
11

India Economics View
2 January 2019 Citi Research
Figure 26. FYTD deficit reaches a historic high in November
Figure 27. Revenue shortfall causing the deficit to rise
%
130%
110%
90%
70%
50%
30%
43%
45%
48%
70%
49%
63%
61%
65%
35%
59%
43%
59%
75%
101%
103%
91%
85.7%
102.9%
114.8%
%
80%
70%
60%
50%
40%
30%
20%
10%
47%
50%
48%
49%
47%
47%
54%
48%
47%
46%
50%
45%
50%
46%
52%
49%
46%
53%
52%
48%
52%
55%
52%
47%
55%
45%
65%
48%
65%
48%
64%
52.0%
63.9%
56.0%
66.7%
53.4%
66.1%
49.3%
10%
FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19
fiscal deficit as % of budgeted
0%
FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19
expenditure as % of budgeted
revenues % budget
Source: CEIC, Citi Research, *for the Apr-Nov period
Source: CEIC, Citi Research, *for the Apr-Nov period
Figure 28. Table of Central Govt Expenditure 7MFY19 vs budget
Figure 29. Direct tax compliance increase
Ministry
Budget: FY19
(INR bn)
Expenditure:
Apr-Oct 2018
(INR bn)
Expenditure:
Apr-Oct
2018, % BE
%YoY
Defence 4044 2654 65.6 9.2
Consumer Affairs, Food
1759 1377 78.3 3.4
and Public Distribution
Rural Development 1149 769 66.9 12.1
Home Affairs 1076 731 68.0 18.0
Human Resource
850 461 54.3 -0.8
Development
Road Transport and
710 534 75.2 29.0
Highways
Chemicals and
706 508 72.0 15.2
Fertilisers
Agriculture 576 394 68.5 20.2
Railways 551 309 56.1 34.9
Health and Family
Welfare
546 349 64.0 21.1
Source: Budget Documents, CEIC, Citi Research
mn
80
70
60
50
40
30
20
10
0
68.4
Up 26%
54.3
37.9
54.2
FY18 FY17 FY14 Apr- Aug
2018
Source: PIB, Citi Research
Up 71%
31.7
Apr-Aug
2017
Up 15%
9.9 8.6
New filers New filers
in FY18 in FY17
Figure 30. Central government’s total indirect tax collections very flat in FY19
Rs Bn
1,200
1,000
800
600
400
200
-
(200)
(400)
(600)
939
536 576 496 495 508 496 607 523 492 490 526 416 514
317
261
- - - 0
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Customs+Excise+Service CGST Cess IGST GST (CGST+IGST+Cess)
Source: CEIC, Citi Research
12

India Economics View
2 January 2019 Citi Research
Figure 31. Oil dependence of exchequer was on the rise
INR bn
%GDP
6,000
4.0%
3.5%
5,000
3.0%
4,000
2.5%
3,000
2.0%
1.5%
2,000
1.0%
1,000
0.5%
-
0.0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 1H19
Contribution to central govt
Contribution to state govts
Total contribution as% GDP
Source: CEIC, Citi Research
Figure 32. GST collections fall short of the INR 1.06trn pm target
Month IGST CGST SGST Comp Total
Cess
Nov-17 395 157 229 79 861
Dec-17 431 136 194 77 839
Jan-18 453 148 208 82 891
Feb-18 450 146 205 81 882
Mar-18 448 157 215 73 894
FY18 avg. 431 132 191 69 823
Apr-18 505 187 257 86 1035
May-18 491 159 217 73 940
Jun-18 495 160 220 81 956
Jul-18 499 159 223 84 965
Aug-18 499 153 212 76 940
Sep-18 501 153 211 80 944
Oct-18 534 165 228 80 1007
Nov-18 497 168 231 80 976
Dec-18 479 164 225 79 947
FY19 avg. 500 163 225 80 968
Source: CEIC, Citi Research
Figure 33. State finances leave little room for farm loan waiver
INR bn
Quantum
of
proposed
Loan
waiver
Total agri
loan
outstanding
end FY18
Total
crop
loans
disburse
d in
FY17
Fiscal def
as % of
GSDP
Debt as %
of GSDP
MP 360 671 429 3.4% 25%
Rajasthan 180 737 579 3.5% 33%
Chhattisgarh 61 110 94 3.0% 16%
Karnataka 420 901 417 2.8% 18%
Maharashtra 345 3293 413 1.8% 17%
Uttar Pradesh 360 666 37 3.1% 25%
Punjab 100 720 580 4.5% 42%
Assam 6 103 15 12.7% 18%
Total 1832 7201 2564
Source: CEIC, Citi Research
Figure 34. Expected improvement in general government deficit difficult
% of GDP
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19
Center fiscal deficit
State fiscal deficit
Source: CEIC, Citi Research
Thousands
Figure 35. No major improvement in states fiscal deficit
INR bn
1,000
0
-1,000
-2,000
-3,000
-4,000
-5,000
-6,000
Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18
Revenue Surplus or Deficit Fiscal Surplus or Deficit
Source: CEIC, Citi Research, 12-month rolling deficit
Figure 36. …despite sharp pullback in capital expenditure growth
%YoY
12 month rolling
30%
25%
20%
15%
10%
5%
0%
-5%
Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18
Expenditure Expenditure: Revenue Expenditure: Capital
Source: CEIC, Citi Research
13

India Economics View
2 January 2019 Citi Research
External Sector
India’s external sector outlook remains inextricably linked with global crude prices,
unlike several other EM economies that may be impacted by the evolving contours
of a Sino US trade war. The recent plunge in Brent crude price by over 30% in past
three months creates a favorable backdrop for India’s balance of payments and
Indian rupee, but only as long as the prices stay benign.
Current account deficit set to narrow by US$15bn in FY20: After rising to a fiveyear
high of 2.9% of GDP in 2QFY19, the current account deficit is set to narrow in
FY20 to a relatively more comfortable ~2% of GDP on account of lower oil forecast
(US$60/bbl in FY20 vs US$72/bbl in FY19). In US$bn terms, we expect FY20
current account deficit at US$59bn from US$74bn in FY19. Note that
everyUS$1/bbl decline in crude reduces annual trade deficit by around US$1.3bn.
We expect gold imports to stay largely unchanged at US$36bn with gold prices
likely to flat line at US$1275/oz. We continue to expect exports and non-oil non-gold
imports to stay resilient at 10% and 11% respectively in FY20. The relative
constancy of the high non-oil trade deficit remains a structural concern as neither
import substitution nor export promotion have achieved their desired pace.
Capital account surplus to rise by US$34bn in FY20: It was not just the current
account that worsened in FY19, but the capital flows also fell from US$91bn in
FY18 to an estimated US$49bn in FY19 with FPI flows turning from US$22bn inflow
to US$8bn outflows. For FY20, we expect portfolio flows to normalize to US$16bn
as lower crude prices and stable outcome post general elections (our base case)
could enhance attractiveness for Indian assets. We expect FDI flows to also pick up
to US$36bn in FY20 after having dipped in last two years, although recent
notification regarding FDI in ecommerce market place companies could act as a
dampener.
BoP to swing into surplus, Basic Balance still in deficit: As a result of improved
current and capital account dynamics, we expect the balance of payments for FY20
to swing to a surplus US$24bn as compared to a deficit US$25bn in the previous
year. That said, the basic balance (FDI+CAD) could stay in deficit even in FY20 (-
US$23bn vs -US$43bn last year), which will keep the Central Bank vigilant for
external risks and possibly predisposed towards rebuilding reserves and resilience.
INR Outlook: rebuilding reserves, REER overvaluation to cap gains: Since end
FY18, the RBI’s foreign exchange reserves have declined by ~US$30bn
(US$424bn to US$394bn) and its forward book has swung from long US$21bn to
short US$3bn, resulting into a total drag of over US$50bn. As for the exchange rate,
while the INR fell by a meaningful ~10% against the dollar, its drop was only 4% in
real effective exchange rate terms. In fact, the rupee was still overvalued by ~10%
as per 36 country REER (2004-05 base). So while the swing in balance of payment
to a surplus in FY20 remains a major tailwind for INR, we expect the gains to be
capped for the following reasons: 1) RBI will look to opportunistically rebuild its
depleted reserves; 2) RBI will remain watchful of further REER overvaluation; 3)
basic balance remains negative thus exposing INR to FPI flow volatility. As a result,
we expect the rupee to trade at 68.5 in 0-3m and 70.5 over 6-12m horizon in 2019.
The crude price and general election results will be crucial determinants of current
account and capital account flows respectively, and any disappointment would
introduce a downside risk to the rupee.
14

India Economics View
2 January 2019 Citi Research
Figure 37. Balance of Payment to turn to surplus in FY20
US$bn
80.0
61
60.0
44
40.0
13 13
16 18 2220
24
14
20.0
4
4
0.0
-20.0 -6
-13
-11
-20 -20
-18
-40.0
-25 -23
-36
-60.0
-43
-56
-80.0
-68
FY09 FY11 FY13 FY15 FY17 FY19E
Overall BoP
Basic Balance
Source: CEIC, Citi Research
Figure 38. .. Led by narrowing in current account deficit
US$bn
20
0
-20
-40
-60
-80
-100
-4 -1 -3 -6 -5 -5 -4 -5 -3 3 6 14 -2
-10-10-16
-28
-38
-48
-78
-88
-32 -27-22-15 -49
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
Source: CEIC, Citi Research
Current Account Balance(LHS)
% to GDP(RHS)
-74
% GDP
3
-59
2
1
0
-1
-2
-3
-4
-5
-6
Figure 39. Lower oil prices to help narrow current account deficit
Figure 40. Capital flows to improve in FY20 on better FPI flows
% GDP
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
120
100
80
60
40
20
US$Bn %
10
8
6
4
2
-6.0
FY08
FY09
FY10
FY11
FY12
CAD % GDP
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
Net Oil Imports % GDP
FY20E
0
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
Capital account
% to GDP
0
Source: CEIC, Citi Research
Source: CEIC, Citi Research
Figure 41. FDI inflows have moderated from their recent highs
USD bn
50
40
30
20
10
8/2012 8/2013 8/2014 8/2015 8/2016 8/2017 8/2018
Net FDI 12 month trailing sum
Gross FDI 12m trailing sum
Source: CEIC, Citi Research
Figure 42. FPI flows turn negative in FY19 in both equity and debt
US$bn
50
40
30
20
10
0
-10
-20
Debt
20
0
2 20 0 10
1 0
9 10 11
-2
1
6
3
13
0
-10
7
8
23 24
10
9
5
26
27
13 18
-5 -2 -1
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19YTD
Source: CEIC, Citi Research
Equity
8
-1
19
4
-7
-7
15

India Economics View
2 January 2019 Citi Research
Figure 43. Forward adjusted reserves down over US$50bn in FY19
Figure 44. RBI likely to intervene in FY20 to recoup reserves
Thousands
US$bn
500
450
400
350
300
250
200
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Fx Reserves
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Forward adj reserves
Oct-18
US$bn
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
-25.0
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
RBI Net Intervention
36-country REER
REER
125.0
115.0
105.0
95.0
85.0
75.0
65.0
Source: CEIC, Citi Research
Source: CEIC, Citi Research
Figure 45. Balance of Payment Projection for FY20E ( US$bn)
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
a.Trade Balance -195.7 -147.6 -144.9 -130.1 -112.4 -160.0 -190.0 -176.8
Exports 306.6 318.6 316.5 266.4 280.1 309.0 347.0 381.7
Imports 502.2 466.2 461.5 396.4 392.6 469.0 537.0 558.5
ow : Gold 53.8 28.9 34.4 27.5 27.5 33.6 35.6 36.3
: Oil 164.0 164.8 138.3 82.9 87.0 109.1 137.9 119.3
: Non-oil Non-gold 272.9 256.6 275.3 270.5 269.9 317.0 355.0 394.1
b. Invisibles 107.5 115.2 118.1 107.9 97.1 111.3 116.3 117.7
Services 64.9 73.0 76.6 69.7 67.5 77.6 82.0 86.4
ow:Software Services 63.5 67.0 70.4 71.5 70.1 72.2 78.0 81.9
Transfers 64.0 65.3 65.7 62.6 56.0 62.4 65.0 64.0
ow:Private Transfers 64.3 65.5 66.3 63.1 56.6 62.9 65.5 64.5
Investment Income -21.5 -23.0 -24.1 -24.4 -26.3 -28.7 -30.7 -32.7
1. Current Account (a+b) -88.2 -32.4 -26.8 -22.2 -15.3 -48.7 -73.8 -59.1
% GDP -4.8 -1.7 -1.3 -1.0 -0.7 -1.9 -2.7 -2.0
c.Loans 31.1 7.8 3.2 -4.6 2.4 16.7 15.0 14.0
d.Foreign Investment 46.7 26.4 73.5 31.9 43.2 52.4 23.0 52.0
ow: Portfolio Investments 26.9 4.8 42.2 -4.1 7.6 22.1 -8.0 16.0
: FDI 19.8 21.6 31.3 36.0 35.6 30.3 31.0 36.0
e.Banking Capital Net 16.6 25.4 11.6 10.6 -16.6 16.2 14.0 16.0
Ow: NRI deposits 14.8 38.9 14.1 16.1 -12.4 9.7 11.0 14.0
f. Other capital -5.0 -10.8 1.1 3.3 7.6 6.2 -3.0 1.0
g.Rupee debt service -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1
Capital Account (c:g) 89.3 48.8 89.3 41.1 36.5 91.4 49.0 83.0
Overall Balance of Payment 3.8 15.5 61.4 17.9 21.6 43.6 -24.8 23.8
Source: Citi Research
16

India Economics View
2 January 2019 Citi Research
Rates and Liquidity
Change in monetary policy stance expected soon: In hindsight, the change in
monetary policy stance to “calibrated tightening” by the RBI in Oct 2018 appears to
have been premature. The persistent undershooting of headline CPI, lower oil and
stable currency opens up the possibility of change in policy stance and/or a rate cut
in the Feb policy itself. We assign a 60% probability to a stance change and a 15%
probability of a rate cut in Feb. The influence of the new RBI Governor, Mr.
Shaktikanta Das, on the nuances of the MPC thought process would be critical for
the markets. While the RBI has targeted to keep the ex-ante real policy rates in the
125-175bps range, the ex-post real policy rates have turned out to be significantly
higher because of forecast misses on inflation. Any signs of change in the
forecasting approach, more emphasis on near-term inflation trajectory and any
indication of supporting growth through lower real rates could increase rate-cut
expectations. We will update our stance change/rate-cut probabilities based on
incoming data and any change in MPC narrative.
Hurdles to substantial easing: The Feb decision will also depend on the fiscal
stance expressed in the budget. If the government plans any fiscal easing in FY20
or slips sharply on the FY19 target, then the scope of monetary easing will be
limited as core inflation concerns will be lingering on the backdrop of rather robust
growth. This combination of relatively strong growth, high core inflation and
uncertainty over fiscal stimulus appears to be the hurdle in front of substantial
monetary easing though rate cycle might have peaked out. Adding to it, some might
argue that the structural issue of lower household financial savings might warrant
slightly elevated real rates for longer. Otherwise, despite softening of market rates,
deposit rates could inch up to incentivize household financial savings and shift of
that into bank deposits – in FY18 only 26% of household gross financial savings
was in bank deposits versus an average 55% in the five years before that. This is
leading to marginally higher lending rates despite soft inflation prints.
Liquidity assurance a defining moment: Banking system liquidity got squeezed in
FY19 with a remarkable INR 2trn increase in currency in circulation and US$25bn
FX intervention in the spot market. To counter this liquidity drainage, the RBI has
infused INR1.9trn through OMO purchases and, in a market-friendly development,
has given an explicit assurance to increase the total FY19 OMO purchase to at
least INR 3.38trn. The RBI’s proactive assurance has mitigated the liquidity woes
during the NBFC stress and is likely to provide comfort during the seasonally tight
4QFY19 (could be accentuated by election spend) when RBI will make at least INR
1.5trn of OMO purchases. We expect OMO purchase to continue in FY20 too but
the extent may be lower as the BoP is likely to switch from deficit to surplus.
Bond markets – OMO, rate cuts, fiscal: With ~90% of the net supply of
government bonds being bought by the RBI in FY19, bond markets have witnessed
a sharp rally as the demand supply balance has become skewed towards excess
demand. Even a fiscal slippage, though a non-negligible risk, might not be able to
alter this skew any time soon. There could be some more room for this rally if the
MPC indicates its comfort for rate easing in 2019. However, if fiscal risks become
large enough to cause rating concerns, then the bond rally could halt.
Time to uphold Central Bank independence: Markets have taken the change of
guard in RBI in their stride. The new Governor has promised to uphold the
autonomy of the central bank and, over the course of the year, markets are likely to
assess Central Bank independence from his policy actions. We expect continuity in
the interest rate and FX policies with no significant government influence. On other
issues, like transfer of excess capital of RBI, governance structure in RBI, MSME
credit, change in norms for PCA banks and NPA recognition, we expect a more
consultative approach with stakeholders.
17

India Economics View
2 January 2019 Citi Research
Figure 46. Real policy rate remains high
Figure 47. …as the output gap closes
10
9
8
7
6
5
4
3
2
1
0
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Real Policy Rate
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
6.0
4.0
2.0
-
(2.0)
(4.0)
(6.0)
(8.0)
(10.0)
%
6
4
2
0
-2
-4
-6
-8
Q1 FY06
Q4 FY06
Q3 FY07
Q2 FY08
Q1 FY09
Q4 FY09
Q3 FY10
Q2 FY11
Q1 FY12
Q4 FY12
Q3 FY13
Q2 FY14
Q1 FY15
Q4 FY15
Q3 FY16
Q2 FY17
Q1 FY18
Q4FY18
Real rate RHS
Repo Rate
Source: CEIC, Citi Research
Source: CEIC, Citi Research
Figure 48. Liquidity in deficit mode for most of 2018
Figure 49. Citi Financial Condition Index for India (FCI)
Hundreds
Rs bn
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
(1,000)
(2,000)
(3,000)
(4,000)
(5,000)
Core Liquidity
System Liquidity -6
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18
2
1
0
-1
-2
-3
-4
-5
Jan-06
Jan-07
Loose
Jan-08
Jan-09
Jan-10
Tight
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
sys liquidity core liquidity 14 per. Mov. Avg. (sys liquidity) 14 per. Mov. Avg. (core liquidity)
Source: CEIC, Citi Research
Source: Bloomberg, Citi Research
Figure 50. OMO reach all-time high in FY19 to neutralize FX intervention
Figure 51. Annual OMO purchase/sale vs annual Gsec issuance net
Rs trn
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
Net Fx Intervention Net OMO Purchases total
4000
3500
3000
2500
2000
1500
1000
500
0
-500
-1000
-1500
40%
FY09
24% 21%
31% 33%
FY10
FY11
FY12
FY13
12%
FY14
-14%
FY15
13%
FY16
32%
FY17
-22%
FY18
92%
FY19E
100%
80%
60%
40%
20%
0%
-20%
-40%
RBI Net OMO purchase(INR bn, LHS)
% of Annual Borrowing
Source: CEIC, Citi Research
Source: CEIC, Citi Research
18

India Economics View
2 January 2019 Citi Research
Politics
Politics will be pivotal for macros and markets in 2019 as India approaches the
general elections in Apr-May. Policy reforms are likely to be absent in the run-up to
the elections, with chances of an indulgent dose of populism. The post-election
period could usher in discussions about reforms through legislative changes if there
is a stable government as the political capital to undertake contentious reforms is
high in the early part of the government’s term.
State election results point towards a close contest: In the Dec state elections,
Congress toppled the BJP government in three important Hindi-heartland states of
Rajasthan, Madhya Pradesh and Chhattisgarh. BJP held 62 out of 65 Lower House
seats from these three states in the 2014 election and hence a substantial loss in
seats for BJP in the 2019 elections in these three states could be feared. While antiincumbency
could have been behind BJP’s loss of vote share in all the three states,
the opposition parties would be energized by the invincibility of BJP in Northern
India being arrested. This could help opposition unity in the run-up to the general
elections, particularly in states like Uttar Pradesh. If this unity persists then the
“math” clearly suggests difficult times ahead for BJP but a seamless transfer of
votes would require the “chemistry” of opposition parties to work too. If the
chemistry works, the dynamics of opposition unity can become a major risk to the
formation of a BJP-led government at the center in 2019.
Different voting pattern in state vs general elections implies base case of
BJP-led government with reduced majority: As Fig 26 shows, the voting pattern
differed substantially between state and national elections in 2013-14. While it is
debatable whether the same person votes differently between state and national
elections, it is quite clear that the share of votes of the smaller parties (“Others” in
the table) drops substantially in the national elections and BJP has benefitted
disproportionately from this shift in the past. With the vote share gap being very
small between BJP and Congress in the state elections, our base case for macro
forecasts remains of a BJP-led government with a much reduced majority. Opinion
polls closer to the election date would be a barometer to test this forecast.
Risks of populism increase: While the BJP-led government has shown exemplary
fiscal responsibility in the first four years, the markets might be wary about risks of
populism. It is difficult to pump-prime the economy in a short span of time before the
code of conduct for the national elections kicks in, but the government might be
tempted to change the narrative through some new announcements. Some
schemes to guarantee MSP in the hands of the farmer through cash subsidies or an
area-based cash subsidy, promise of a universal basic income and even a national
farm loan waiver could come under consideration (though the FM has denied any
such plan) if the electoral decline of BJP has to be tackled from the economic side.
Also, relaxations in GST rates, and small relief for direct tax payers could be
considered. The noise level on non-economic issues could also rise substantially.
Elections outcome and economic policy: Different political parties are likely to
announce their election manifestos in late Mar/early Apr. These are likely to give
pointers towards the future course of economic policy. However, we do not expect a
sudden U-turn in the policy direction regardless of the political outcome. If a BJP-led
coalition comes to power then, for the first time, it has a chance of having a majority
in both houses of the Parliament, though the recent setback in the three state
elections will be a deterrent towards achieving that. It could be easier to push
through reforms which require legislative approval if it can achieve a majority in both
houses. For a Congress-led alliance the lack of Upper House majority could affect
the pace of decision making. The number of coalition partners could also have a
bearing on the speed of policymaking. Major political risk will arise only if none of
the parties are in a position to offer a stable government.
19

India Economics View
2 January 2019 Citi Research
Figure 52. Voting Pattern Shifts between State Assembly and National Elections
% of votes polled Assembly 2013 National 2014 Assembly 2018
Madhya Pradesh
BJP 45.7 54.8 41.1
Congress 37.1 35.4 41
Others 17.2 9.8 17.9
Chhattisgarh
BJP 42.3 49.7 32.8
Congress 41.6 39.1 43.2
Others 16.1 11.2 24
Rajasthan
BJP 46 55.6 38.8
Congress 33.7 30.7 39.3
Others 20.3 13.7 21.9
Source: Election Commission, Citi Research, *Assembly 2018 results are not yet final
Figure 53 State election results have altered BJP’s national dominance
% of Popn
Number of
80%
states
25
70%
60%
20
50%
15
40%
67% 69%
30%
10
51%
20%
41% 43%
5
10%
25%
0%
0
May 2014 July 2015 July 2016 July 2017 Dec-17 Dec-18
Population under BJP
States under BJP
Source: Election Commission, Citi Research
Figure 54. BJP unlikely to achieve RS majority soon
Rajya Sabha
Seats
100
90
80
70
60
50
40
30
20
10
0
92
94
70
BJP+ INC+ Others
End 2018 End 2019
Source: Election Commission, Citi Research
68
82
82
Figure 55. Rural houses construction slows in FY19
mn units
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
0.2
0.4
1.1 1.1
CAGR 42%
1.4
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 (till
Dec)
Total including states IAY PMAY-G State schemes
2.1
3.3
4.6
2.8
Figure 56. Similar deterioration in rural roads too
Thousand kms
Kms/day
60
160
Length constructed,LHS ( thousand km) 130 134
140
50
Rate of construction per day, RHS (km)
120
40
100 100
85
100
30
66 69
72
80
20
60
40
10
20
0
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FYTD19
Source: PMAY-G website, Citi Research
Source: PMGSY website, Citi Research
20

India Economics View
2 January 2019 Citi Research
Strategy Outlook: INR and India Rates
External headwinds for INR have receded…The pressure on INR from its
struggle to win more capital inflows to finance a yawning current account deficit has
certainly eased. Fed hike expectations have been priced out considerably and
global yields have receded. The USD is likely to weaken in 2019, as the Fed signals
the end of its hiking cycle. This shapes a less hostile external backdrop for capital
inflows into India.
…in fact, the lower oil price is proving to be a tailwind. Not only has the outlook
improved for portfolio inflows into EM in general, and India in particular, the
financing requirement of current account has also shrunk considerably. A sharp
drop in oil prices (~40% from the highs in 2018) has eased the current account
deficit expectations to below 2% of GDP. This has squeezed bearish INR positions
and is reflected in normalization of USDINR NDF points.
But INR’s outperformance will likely be cushioned by potential USD buying by
RBI…RBI’s intervention is likely to get more asymmetric in 2019 as it seeks to
replenish USD reserves amid a potential pick-up in portfolio inflows. Sharp decline
in FX reserves in 2018 (Figure 59) and arguably a still strong currency on REER
basis are likely to shape RBI’s intervention bias. This shall curb any excessive
outperformance of INR even as flow seasonality is favourable for INR at start of the
year. As a result, we prefer to take INR exposure on an opportunistic and tactical
basis.
…and risk of a market un-friendly election outcome. Although our base case is
for BJP-led government with a reduced majority, the risk of a market un-friendly
outcome like a hung parliament has risen especially since the outcome of five State
Elections in late 2018. This risk does reflect in elevated levels of USDINR implied
volatility covering the election dates in Apr-May’19. We seek opportunities to buy
the election event volatility.
India rates are likely to push lower across tenors…Continued downside CPI
inflation surprises (with even the core inflation coming off), disappointing growth
data and change in RBI’s governorship have flipped market expectations of
monetary policy from hikes to cuts. This bias for next move from RBI MPC to be a
dovish move is likely to persist, in our view. Together with policy makers’ preference
to ease liquidity pressures – thus far, mainly through OMO bond buybacks – this
should continue to keep yields on a downward trend.
…as expectations of rate cuts take a firmer hold. ND-OIS curve is already
reflecting 2x25bp rate cuts over next 12 months. There seems room for the market
to price in more rate cuts further out, potential flattening 1s2s. Potential for
positioning squeeze persists, but that should present an opportunity to get back into
receivers. 1y1y ND-OIS can potentially ease towards 5.70% (from about 6.23%)
once the rate cut cycle gets under-way. Bond yields are also likely to drift lower and
10y bond yield could ease down towards 7.10%, under the base-case election
outcome.
Risks to the bullish fixed income view and potential reasons for a steeper
yield curve: 1) fiscal slippage: if the central government slips down the populist
path and/or revenue shortfall persist; 2) timing of rate cuts: delayed rate cuts may
flatten the curve; 3) evolution of data: upside CPI inflation risks pricing of rate cuts;
4) potential squeeze higher in oil prices; and 5) election risk: hung parliament or a
populist leaning coalition government.
21

India Economics View
2 January 2019 Citi Research
Figure 57. USDINR implied volatility reflects the election event risk
Figure 58. Seasonality for INR tends to be favourable at start of the year
especially in Mar
240
220
6m USDINR NDF points
6m implied volatility (RS)
9
8.5
3.00
2.50
200
8
2.00
180
160
140
7.5
7
6.5
6
1.50
1.00
0.50
120
5.5
-
100
5
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19
(0.50)
J F M A M J J A S O N D
Source: Bloomberg, Citi Research
Figure 59. RBI’s intervention is likely to get more asymmetric as it
seeks to replenish USD reserves
Source: Bloomberg, BIS, Citi Research; Note: average cumulative performance of
INR’s NEER 2014-17
Figure 60. Short tenor ND-OIS yields are likely to drift lower once the
rate cut cycle gets under way
500
450
400
USD bn
9.0
8.5
8.0
7.5
1y1y ND-OIS
1y ND-OIS
Policy rate
350
7.0
300
250
Headline FX reserves
Net FX reserves
6.5
6.0
5.5
200
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Source: CEIC, Citi Research
Figure 61. Received positioning in offshore seems stretched: Potential
positioning squeeze could be an opportunity to receive
5.0
Jan-14 Oct-14 Jul-15 Apr-16 Jan-17 Oct-17 Jul-18
Source: Bloomberg, Citi Research
Figure 62. Low CPI inflation trajectory may continue to shape bias for
rate cuts down the road
15
10
5
Spread b/w 5y ND-OIS and OIS (bp)
5y ND-OIS (RS)
5y OIS (RS)
0
-5
-10
-15
-20
-25
-30
-35
-40
Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19
Source: Bloomberg, Citi Research
8.0
7.8
7.6
7.4
7.2
7.0
6.8
6.6
6.4
6.2
6.0
12
10
8
6
4
2
RBI's CPI fan chart (as of Dec)
0
Apr-11 Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Jul-16 Apr-17 Jan-18 Oct-18
RBI median projection
Latest CPI
Source: RBI, Citi Research
22

India Economics View
2 January 2019 Citi Research
Figure 63. India Macroeconomic Summary FY07 – 20E
Fiscal Year to 31 March FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
National Income Indicators
Nominal GDP(Rs bn) 42,947 49,871 56,301 64,778 77,841 87,363 99,440 112,335 124,680 137,640 152,537 167,731 188,036 210,867
Nominal GDP (US$ bn) 950 1,241 1,224 1,367 1,708 1,816 1,841 1,860 2,027 2,111 2,273 2,600 2,706 3,004
Per Capita GDP (US$) 847 1,090 1,061 1,168 1,440 1,489 1,491 1,468 1,600 1,642 1,742 1,969 2,024 2,221
Real GDP growth – mkt prices (%) 9.3 9.8 3.9 8.5 10.3 6.6 5.5 6.4 7.4 8.2 7.1 6.7 7.3 7.4
By Demand (%YoY)
Consumption 7.7 9.4 7.7 8.4 8.2 8.9 4.7 6.2 6.6 7.3 8.0 7.2 8.0 7.9
Pvt Consumption 8.5 9.4 7.2 7.4 8.7 9.3 5.5 7.3 6.4 7.4 7.3 6.6 7.8 7.9
Public Consumption 3.8 9.6 10.4 13.9 5.8 6.9 0.6 0.6 7.6 6.8 12.2 10.9 9.0 7.8
Gross Fixed Capital Formation 13.8 16.2 3.5 7.7 11.0 12.3 4.9 1.6 2.6 5.2 10.1 7.6 9.5 8.2
Cons; Invst, Savings * (%GDP)
Consumption 68.0 67.2 68.6 69.1 67.5 67.3 67.1 67.9 68.6 69.2 69.9 70.5 71.0 71.3
Gross Capital Formation 35.7 38.1 34.3 36.3 36.5 39.0 38.7 33.8 34.3 31.8 30.3 30.6 31.2 31.3
Gross Domestic Savings 34.6 36.8 32.0 33.7 33.7 34.6 33.9 32.1 32.2 30.7 30.7 28.8 28.5 29.4
By Activity (%YoY)
GVA (%YoY) 9.6 9.3 6.7 8.6 8.9 6.7 5.4 6.1 7.2 8.1 7.1 6.5 7.1 7.3
Agriculture growth (%) 4.2 5.8 0.1 0.8 8.6 5.0 1.5 5.6 -0.2 0.6 6.3 3.4 4.2 3.0
Industry growth (%) 12.2 9.7 4.4 9.2 7.6 7.8 3.3 3.8 7.0 9.8 6.8 5.5 7.8 7.3
Services growth (%) 10.1 10.3 10.0 10.5 9.7 6.6 8.3 7.7 9.8 9.6 7.5 7.9 7.4 8.4
Monetary Indicators (% YoY)
Money supply 21.7 21.4 19.3 16.9 16.1 13.5 13.6 13.4 10.9 10.1 10.1 9.2 10.0 12.5
Inflation – WPI (Avg) 6.5 4.8 8.0 3.6 9.6 8.8 7.5 4.6 0.4 -3.1 1.9 3.0 4.5 3.8
CPI (Avg) 6.8 6.2 9.1 12.3 10.5 8.4 9.9 9.4 5.9 4.9 4.5 3.6 3.7 4.0
Bank credit growth 28.1 22.3 17.5 16.9 21.5 17.0 14.1 13.9 10.4 9.5 8.2 10.0 11.0 12.0
Deposit growth 23.8 22.4 19.9 17.2 15.9 13.5 14.2 14.1 12.6 7.5 15.3 6.2 9.5 11.0
Fiscal Indicators (% GDP)
Centre's fiscal deficit) -3.3 -2.5 -6.0 -6.5 -4.8 -5.9 -4.9 -4.5 -4.1 -3.9 -3.5 -3.5 -3.3 -3.0
State fiscal deficit -2.1 -1.4 -2.3 -2.9 -2.1 -1.9 -2.0 -2.2 -2.6 -3.6 -3.4 -3.0 -2.6 -2.6
Combined deficit (Centre+State) -5.4 -4.0 -8.3 -9.3 -6.9 -7.8 -6.9 -6.7 -6.7 -7.5 -6.9 -6.5 -5.9 -5.6
Combined liabilities ( dom+ext) 79.9 76.1 76.8 75.5 70.2 71.9 71.1 71.6 71.0 72.6 71.7 72.9 72.1 69.5
External Sector (% YoY)
Exports (US$bn) 128.9 166.2 189.0 182.4 256.2 309.8 306.6 318.6 316.5 266.4 280.1 309.0 347.0 381.7
% YoY 22.6 28.9 13.7 -3.5 40.4 20.9 -1.0 3.9 -0.6 -15.9 5.2 10.3 12.3 10.0
Imports (US$bn) 190.7 257.6 308.5 300.6 383.5 499.5 502.2 466.2 461.5 396.4 392.6 469.0 537.0 558.5
%YoY 21.4 35.1 19.8 -2.6 27.6 30.3 0.5 -7.2 -1.0 -14.1 -1.0 19.5 14.5 4.0
Trade deficit (US$bn) -61.8 -91.5 -119.5 -118.2 -127.3 -189.8 -195.7 -147.6 -144.9 -130.1 -112.4 -160.0 -190.0 -176.8
Invisibles (US$bn) 52.2 75.7 91.6 80.0 79.3 111.6 107.5 115.2 118.1 107.9 97.1 111.3 116.3 117.7
Current Account Deficit (US$bn) -9.6 -15.7 -27.9 -38.2 -48.1 -78.2 -88.2 -32.4 -26.8 -22.2 -15.3 -48.7 -73.8 -59.1
% to GDP -1.0 -1.3 -2.3 -2.8 -2.8 -4.3 -4.8 -1.7 -1.3 -1.0 -0.7 -1.9 -2.7 -2.0
Capital Account (US$bn) 45.2 106.6 7.4 51.6 63.7 67.8 89.3 48.8 89.3 41.1 36.5 91.4 49.0 83.0
% GDP 4.8 8.6 0.6 3.8 3.7 3.7 4.8 2.6 4.4 1.9 1.6 3.5 1.8 2.8
Forex Assets (incl gold) (US$bn) 199.2 309.2 252.3 277.0 303.5 294.4 292.6 303.7 341.4 355.6 370.0 424.4 399.6 423.4
Months of imports 12.5 14.4 9.8 11.1 9.5 7.1 7.0 7.8 8.9 10.8 11.3 10.9 8.9 9.1
External Debt (US$bn) 172.4 224.4 224.5 260.9 317.9 360.8 409.4 446.2 474.7 485.0 471.3 529.3 514.4 529.4
Short Term Debt (US$bn) 28.1 45.7 43.3 52.3 65.0 78.2 96.7 91.7 85.5 83.4 88.1 102.2 98.7 103.7
Exchange Rate
US$/INR - annual avg 45.2 40.2 46.0 47.4 45.6 48.1 54.0 60.4 61.5 65.2 67.1 64.5 69.5 70.2
% depreciation 2.0 -11.1 14.4 3.0 -3.8 5.5 12.3 11.9 1.8 6.0 2.9 -3.9 7.8 1.0
* At current prices. FY13-15 GDP data based on New GDP series
Source: CSO, RBI, Ministry of Finance, Citi Research estimates
Statistical Snapshot
23

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 1
FROM THE RESEARCH DESK
Dhirendra Tiwari
+91 22 4031 3436
dhirendra.tiwari@antiquelimited.com
Dipojjal Saha
+91 22 4031 3417
dipojjal.saha@antiquelimited.com
Top picks:
Large Caps: TCS, HDFCB, SBIN,
ICICIBC, LT, HNDL, MRCO, DRRD,
UPLL, SIEM
Mid Caps: MUTH, HWA, VOLT,
BYRCS, KVB, NITEC, NJCC, TMKN,
CCLP, DN
INDIA STRATEGY
The Capex green-shoots!
The economy gains its mojo back!
The year gone by was not without its share of surprises. The INR tumbled
weighed down by rising imbalances in external sector, as did stocks led by FII
selling - the highest in a decade. Outlook for 2019 will be shaped by the
earnings trajectory which though not particularly weak remains susceptible
to downgrades in the banking sector. In 2019, markets are likely to be volatile
with multiple global and local events, the most important being the general
elections in May and further noise around the global trade war. However, we
believe that policy formulation, irrespective of the formation in power, has
become more predictable and thrust towards infra, housing and roads is
unlikely to see a cut-back. As for sectors, consumption will remain a relevant
theme for the markets but we also believe that capex cycle recovery will emerge
as a preferred bet as utilizations rise and earnings pick-up from cyclical lows.
Our Nifty year-end target for 2019 is 12,250 based on FY21e EPS of INR 720.
2019: Expect some volatility but macro fears known
The good bit is that the worst macro out-turns - oil, BoP shock, interest rates and liquidity
crunch- have coalesced in 2018 itself. It is unlikely that there will be a co-ordinated deterioration
in each of these variables for 2019 as well. Global volatility will be a drag on market
performance especially in 1HCY19 and that will co-incide with the noise around general
elections. But we neither foresee a jump in CPI nor will a liquidity crunch even at a base case
of crude at USD 70/bbl. Macro volatility will be more contained although the stock volatility
will peak out in 1HCY19.
2019: A year for the investment revival
India's capex cycle has disappointed over the last 4-5 years with GFCF/GDP ratio at sub-
30% levels since 2013. However, we believe that investment rate has bottomed out and
while there is unlikely to be a full-fledged capex uptick in 2019, an incipient recovery is afootbuoyed
by a cyclical uptick in corporate capex across sectors like energy, metals and power
while momentum will be sustained in public sector through thrust on infra and roads, again
irrespective of the formation post 2019 general elections. Exports are adding a tailwind with
increased focus from both domestic as well MNC engineering companies. From a bottom-up
perspective, this observation is corroborated by our analysis on the sectoral capex pipe-line
as well as the order inflows which are up by 32% YoY.
2019: Top picks and model portfolio
The capex related sectors (capital goods and corporate focused banks) have underperformed
in the last cycle and valuations are at a steep discount as compared to consumption sector.
Going ahead, we expect earnings growth to accelerate for these two sectors. We are
overweight the capital goods sector and also as a proxy for the investment cycle, we prefer
corporate focused banks as credit costs are likely to decline sharply and the sector emerges
stronger by FY20. Funding constraints in NBFCs are beginning to ease out and we like players
in niche segments such as gold financing and CV financing. We remain cautious on export
plays like pharma as we see room for further earnings cuts while in IT we are neutral as the
outlook for deal momentum is balanced by risks such as escalation in trade wars and reversal
in USDINR. Consumption will continue to remain a relevant theme due to structural tailwinds
('AAA' phenomenon*) but the valuations already build in a lot of these positives.
Overall, earnings trajectory seems to have stabilized and although minor downgrades are
possible we are unlikely to see large cuts such as in FY14-17 cycle. Financials will be in focus
given its outsized contribution as credit costs are expected to decline. Our Nifty EPS for FY21e
stands at INR 720 and based on current 1 yr forward P/E of 17x, our index target for the
next year stands at 12,250.
* AAA phenomenon is Awareness, Aspiration and Availability as highlighted in our flagship ‘Hello India’ report

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 2
FROM THE RESEARCH DESK
Key charts
Nifty EPS Nifty sectoral PAT growth (%)
700
600
500
400
300
200
100
0
95
128
175
207
239
283
247
284
330
351
385
427
391
402
427
447
500
610
717
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19e
FY20e
FY21e
Nifty EPS
YoY, RHS
35%
25%
15%
5%
-5%
-15%
Sector (% YoY) FY18 FY19e FY20e FY21e
Auto ex TTMT 5.4 2.9 19.2 2.8
TTMT 53.9 -34.2 26.6 8.1
Cement -41.8 17.3 11.5 13.8
Consumption 18.2 14.1 16.7 14.2
Energy 4.5 9.6 19.3 8.3
Pvt corp banks -47.8 6.4 Loss to profit 31.2
PSU banks Profit to loss Loss to profit NA 40.3
Other banks/fin 49.0 10.0 16.4 37.6
Health Care -45.9 9.5 25.7 26.7
Industrials 22.4 29.2 14.4 3.0
IT Services 2.0 16.0 13.2 9.1
Materials 33.3 100.9 -3.4 13.9
Telecom -23.8 Profit to loss Loss Loss to profit
Utilities -3.6 30.7 10.7 14.1
Nifty 7.5 15.0 22.0 16.6
Source: Bloomberg, Antique
Source: Bloomberg, Antique
Nifty EPS contribution (FY16-21e)
750
716.9
(Contribution to Nifty EPS)
700
650
600
550
500
450
400
9.7
7.9
17.9
41.6
11.0
111.8
11.9 9.2 5.4 4.3 -3.5 -4.3 -9.8 -9.9
28.1 16.2 498.2
48.6
402.0
6.5 5.6 3.7
1.7
1.2
350
0
Source: Bloomberg, Antique
On a trailing basis, valuations are still above long term averages
Trailing P/E Average +1 Std. Dev -1 Std Dev
30
25
20
15
10
5
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
FY16
Dec-17
Materials
Jun-18
Energy
Dec-18
Financials
IT Services
Industrials
Consumption
Utilities
Health Care
Cement
Telecom
Auto
FY19
Financials
Energy
IT Services
Utilities
Auto
Consumption
Materials
Health Care
Industrials
Telecom
Cement
FY20e
(Nifty trailing P/E)
Source: Bloomberg, Antique

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 8
FROM THE RESEARCH DESK
Why will 2019 be the year of investment pick-up?
Over the last few years, a big concern has been the dwindling investment rate. GFCF to GDP
at FY17 stood at 28.5%, a far below from its FY12 peak of 34.3% and also below the
decadal average of 29.3%. However, since the last 2 quarters, this investment rate is gradually
inching up and now stands at 29.2% as of Sep-2018, a good 120bps off its Sep-2017 lows.
GFCF to GDP off its lows
35.0
33.0
31.0
29.0
27.0
25.0
23.0
21.0
29.2
19.0
17.0
15.0
FY83
FY85
FY87
FY89
FY91
FY93
FY95
FY97
GFCF to GDP, %
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17
FY19td
Source: CMIE, Antique
The slowdown between F12-17 and where we stand now?
The sub-categorisation of GFCF has changed between the extant and older series but broadly
the GFCF can be split into two broad segments- machinery and construction. As of FY17, both
construction and machinery contributes almost equally to GFCF. Further, as per classification
by institution, the GFCF can be split into public sector, private sector and households.
What does the GFCF comprise of?
Source: CMIE, Antique
Through the above illustration, a 2x3 matrix for GFCF can be constructed and important,
larger sub-segments identified. For the public sector, the main driver is public administration
and defence followed by utilities while for the private sector it is predominantly machinery
and for households it is real estate.

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 9
FROM THE RESEARCH DESK
The GFCF cycle over the last decade can be broken down into four phases- the sharp uptick
between FY05-08, followed by a slump in FY09, a transient recovery in FY10-12 and post
that an entrenched slowdown between FY13-16. The contributors to the different phases are
as highlighted below:
Phases of capex cycle in India
Phase Main capex drivers
FY06-08 'True' capex cycle led by private sector machinery segment but saw participation from
public sector construction and a late cycle thrust from household sector as well
FY09
Dragged down by private sector machinery capex
FY10-12 Largely led by household sector capex (real-estate) and moderating private sector machinery
capex
FY13-16 Slowdown in real estate, uptick in public sector construction
FY16-17 Of interest is the uptick seen in FY17-18. Although disaggregated data for FY18 is not
available, data for FY17 suggests a mild revival for private sector machinery capex along
with a steady uptick in public sector construction segment.
Source: CMIE, Antique
The drivers of GFCF: by assets…
...by institutions
As % of GFCF, 3 yr avg
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
As % of GFCF, 3 yr avg
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
FY84
FY87
FY90
FY93
FY96
FY99
FY02
FY05
FY08
FY11
FY14
FY17
FY84
FY87
FY90
FY93
FY96
FY99
FY02
FY05
FY08
FY11
FY14
FY17
Construction
Machinery
Public sector Private corporate sector Household sector
Source: CMIE, Antique
Source: CMIE, Antique
In the backdrop of a prolonged slowdown in GFCF between FY13-FY17, the recent
improvement in the investment rate from 27.5% to 29.2% of GDP has generated a fair bit of
interest. Two questions are being raised (1) is this growth uptick for real, and (2) if so, how
sustainable is this?
To understand both the aspects we looked at a cross-section of both macro as well as micro
level data. The broad findings are that:
Top down macro-data suggesting an uptick
1) Strong thrust on capital expenditure from the public sector: Public sector
thrust remains healthy, with contribution from states, centre as well as CPSEs. In fact, the
capex by states as well as CPSEs contribute almost 75% of total public sector spend. The
last few years has seen a significant jump in off-budgetary spending by CPSEs and
states too have ramped up their capital expenditure. It is unlikely that we see this trend
softening especially from the states given the strong thrust on specific segments like roads
and irrigation. The only doubt remains on the sustainability of central government's capex
given the emerging fiscal constraints and also the uncertainties around the 2019 general
election outcome. The three broad categories of central government's expenditure is
defence, railways and roads. Whichever formation heads the new government, we are
unlikely to see a pull-back in roads and railways. On defence though, the growth rate
has been 7% CAGR since 2015 and there could be some scale-back if a new formation
comes into place.

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 10
FROM THE RESEARCH DESK
Public sector capex: thrust likely to continue
Component, nominal terms (% share) FY12-FY19, CAGR %
CPSE 36.3 11.7
State Govt 40.8 17.8
Union govt 22.8 9.6
Source: CMIE, Antique
Extra budgetary funding key for roads and railways
600
External borrowing, INR bn
500
400
300
200
100
0
2013 2014 2015 2016 2017 2018
Indian Railw ays
NHAI
Developmental capex from state governments will remain high
30%
4%
7%
8%
9%
22%
20%
Irrigation
Roads and Bridges
Pow er
Rural Development
Water Supply and
Sanitation
Urban development
Others
Source: CMIE, Antique
Source: CMIE, Antique
2) Utilisation levels are inching up: System wide capacity utilization levels are north
of 75% as per RBI's OBICUS survey. PMIs also remain strong and the RBI’s various industrial
surveys also point to recovery gaining ground. The only lacunae still remains the sub-par
traction in new projects announcement which is still languishing at 6% of GDP, although
it must be mentioned that stalled projects to GDP is also falling. This data possibly validates
our observation that even though capex cycle is recovering from a low base, we are still
a couple of years away from a full-fledged uptick in investment cycle.
Utilisation levels across industries inching up
85
PMI also remains healthy
65.0
Capacity utilisation, %
80
75
70
65
India PMI
60.0
55.0
50.0
45.0
60
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
40.0
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
May-17
Nov-17
May-18
Nov-18
Source: CMIE, Antique
Source: CMIE, Antique

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 11
FROM THE RESEARCH DESK
The nascent uptick in the investment cycle is being led by higher utilization levels as consumption
demand picks up pace. Steel demand, for instance has risen by 8% YoY in 2018, buoyed by
the infra push across sectors like roads and housing. Auto demand, despite the recent hiccups,
is likely to maintain a healthy trend of ~8-10% over the next few years as will the demand for
core FMCG products which has already seen a decent uptick post the demonetisation induced
moderation. Also as we had highlighted in our flagship 'Hello India' report there is a significant
latent demand for consumer durables and discretionary goods like ACs and home appliances.
As we had highlighted that the 'premiumization theme is not entirely new to India but we
believe that the story is now at a critical inflexion point, ready for a lift-off. The enablers are
increased access to electricity and better roads while per-capita incomes are coalescing
towards a threshold level which will lead to even more demand for deep discretionary items.'
Even from a sector positioning perspective although multiples in consumption sector are
demanding, we are unlikely to see many negative surprises as far growth is concerned. The
sector is riding the wave of 'AAA' phenomenon - Awareness, Aspiration and Availability and
thus growth is likely to be secular. Relative positioning for a switch between consumption to
investment theme is only a tactical call as the sector's underlying dynamics remains robust.
Thus even as there may be short term disruptions (such as the recent liquidity crisis), consumption
will continue to be a relevant theme for the markets.
Steel demand expected to be healthy
Car sales expected to pick-up post recent moderation
16
35
Steel demand, %, YoY
14
12
10
8
6
4
2
Passenger car sales, % YoY
30
25
20
15
10
5
0
-5
0
-10
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Source: CMIE, Antique
Source: CMIE, Antique
FMCG voloume traction to remain healthy
14.0
Construction sector well-supported by govt schemes
14
12.0
10.0
8.0
6.0
4.0
2.0
Construction sector GDP, % YoY
12
10
8
6
4
2
0.0
0
FY09
FY10
FY11
FY12
FY13
FY14
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
HUVR volume growth, %
FY15
FY16
FY17
FY18
Source: CMIE, Antique
Source: CMIE, Antique

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 12
FROM THE RESEARCH DESK
New projects bottoming out
New projects announced % GDP
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Stalled projects beginning to come off
8.0
7.0
Stalled projects % GDP
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Source: CMIE, Antique
Source: CMIE, Antique
Also what cannot be ignored is the traction seen in the IIP. Industrial production growth at
5.8% FY19 td is the highest in last five years. Capital goods segment is showing particular
traction, buoyed by CV cycle but the growth in other segments too is catching up. There is a
meaningful uptick in construction segment, albeit on a low base. The sum total of all frequently
tracked indicators suggest that investment activity is bottoming out, if not an outright increase.
On annual basis, tracking highest IIP growth in last one year
With particular emphasis on capital goods sub-index
18.0
60.0
16.0
50.0
IIP, %, YoY
14.0
12.0
10.0
8.0
6.0
4.0
IIP capital goods, % YoY
40.0
30.0
20.0
10.0
0.0
-10.0
2.0
-20.0
0.0
-30.0
FY83
FY85
FY87
FY89
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17
FY19td
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Source: CMIE, Antique
Source: CMIE, Antique
3) Do not write-off the strong CV cycle: The last two years have witnessed a very
strong upsurge in CV cycle with sales growth at 15% CAGR. The strength in the CV cycle
has often been a precursor to the uptick in the overall GFCF cycle. The recent slowdown
notwithstanding, we expect the CV cycle to post a strong momentum as (1) sales are
concentrated in the higher tonnage segments indicating traction in construction activity
(2) contrary to perception, excess in the system is far lower than those created in 2010-
13 cycle (3) we are behind the worst phase of the credit squeeze and liquidity is likely to
return to normal levels from here-on.

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 13
FROM THE RESEARCH DESK
CV cycle has been the harbinger of GFCF
100.0
30.0
80.0
25.0
60.0
20.0
(% YoY)
40.0
20.0
0.0
15.0
10.0
5.0
(% YoY)
-20.0
0.0
-40.0
-5.0
-60.0
-10.0
FY85
FY87
FY89
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17
CV
GFCF- RHS
Source: CMIE, Antique
MHCV growth - lead & lag with GDP
Excess capacities much lower than in the previous cycle
16
14
12
10
8
6
4
2
% FY10-12 FY16-19e
GDP growth (CAGR) 7.8% 7.0%
Capacity Addition growth ( CAGR) 13.4% 8.3%
Multiple to GDP (x) 1.7x 1.2x
0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
% capacity growth % GDP growth
Source: CMIE, Antique
Source: CMIE, Antique
4) Lower rates, more supportive liquidity: Based on the recent soft readings in the
CPI and the continuous downside surprises, we believe that RBI policy stance will remain
neutral if not accommodative for major part of FY20. CPI for December is likely to be sub
2% and in such a scenario a rate tightening cycle is unlikely. Also the RBI has stepped up
on its OMOs and has expanded its December OMO purchase by INR 100bn to INR
500bn. The RBI also announced that in Jan 2019 it plans to conduct OMOs for another
INR 500bn and will consider similar quantum of OMO purchases
No further rate hikes by RBI
Even as liquidity is likely to remain supportive
9.0
2,000
India repo rate, %
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
RBI OMO (INR bn
1,500
1,000
500
0
-500
-1,000
-1,500
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
May-17
Nov-17
May-18
Nov-18
May-19
Nov-19
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19td
Source: CMIE, Antique
Source: CMIE, Antique

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 14
FROM THE RESEARCH DESK
Bottom-up sector level data too indicating a pick-up
After seven year hiatus, private corporate capex to witness a recovery
2,500
Corporate capex turning around
In our view, corporate GFCF in India has followed a seven year upcycle-downcycle. The first
real corporate capex cycle was in 1995-97 which was a result of the capacity addition in
the machinery segment. In fact the lifting of various quotas and industrial licensing, led to a
spurt in addition of new machinery in the mid-90s implying a higher productivity growth as
well. However, growth was not sustainable as there was there was little contribution from
the public sector while private sector push fizzled out in the face of Asian financial crisis.
Emerging from the recession of the early 2000s, the sharp increase in capacity addition
between FY04-08 was the highest ever. Like the mid-90s capex cycle, this was too driven
by higher investment in the machinery and equipment segment. In fact, the machinery
and equipment segment contributed to 53% of the incremental GFCF. This was also a
more broad-based capex cycle with jump in corporate capex not restricted to a sector
alone as multiple tailwinds (domestic and global) converged in augmenting capacity
growth across various sectors including metals and cement.
From 2011-12 onwards, the corporate capex cycle has shown signs of stagnation and
the overall GFCF cycle was driven by higher growth in the public sector capex. However,
within the private sector, power was the outperformer with significant additions in generation
(especially thermal) and distribution.
Thus with a near seven year stagnation and as capacity utilization picks up, we believe
that there is a case for private corporate capex cycle to pick up speed. We highlight
below in charts the main sectors and rationale behind the revival of capex.
2,000
Capex (INRbn)
1,500
1,000
500
Indicates phases of
corporate capex
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Crude Oil Power Telecom Automobile & Ancillaries Iron & Steel
Source: CMIE, Antique
Relative valuations in favour of Capital Goods sector
1.20
Cap goods vs FMCG sector ex ITC
1.00
0.80
0.60
0.40
0.20
0.00
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
1 yr fw d P/E Average
Source: CMIE, Antique

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 16
FROM THE RESEARCH DESK
Steel- Higher domestic demand will be the key driver of capex
Steel consumption in India has grown at a CAGR of 5.6% over the last three years and is
witnessing robust growth this fiscal with YTD consumption up 8% YoY at 56MT. Domestic
demand is expected to remain healthy on the back of increased spending by the government
on infrastructure and outlay on affordable housing with preference for domestic steel
under the national steel policy. Although there is short term liquidity concerns which could
hamper steel demand in the near term we expect the impact to be short lived. World Steel
Association forecasts domestic steel consumption to grow by 7.6%/7.2% for CY18/19e
respectively.
Capacity utilization for the industry has risen to ~82% in FY18 and with robust growth
projected for the next two years ,we are seeing major steel players announcing new
capacity expansion plans as well as actively bidding for stressed steel assets to capitalize
on the growth in demand. Major announcements include Tata Steel commencing Phase II
at its Kalinganagar facility which would increase capacity by 5MTPA as well as JSW
announcing expansion at Vijaynagar facility by 5MTPA and Dolvi facility by 5MTPA
Capacity utilization off its lows…
…to result in higher capex
160
140
120
100
140
120
100
80
60
40
20
-
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17FY18P
92
90
88
86
84
82
80
78
76
74
Capex (INR bn)
80
60
40
20
-
Steel sector capacities (mn tn)
Total Crude steel production (mn tn)
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19e
FY20e
FY21e
Capacity Utilization (%)
Tata Steel JSW SAIL JSPL
Source: Company, Antique
Source: Company, Antique
Cement - Un-relented Capacity additions in Cement space continue
India is the world's second largest cement market, currently boasting of ~470-475MT of
annual effective capacity. Despite the oversupply scenario, cement players in India have
constantly been adding capacity over the past six-to-eight years in the race to gain larger
scale dominance and access to better performing regional markets. The industry witnessed
capacity addition of ~100MTPA during FY14-18, which put pressure on capacity utilization
as volume growth was subdued at a CAGR ~4-5% during this period. While we estimate
Industry utilisations at sub-70% for FY18, with lot of manufacturers not disclosing the
production details, there is no clarity on the exact utilisation number for the industry, more
so for Clinker utilisation.
Despite the suboptimal utilisation levels, the cement industry seems to be gearing up for
the up-cycle in demand, as reflected by the massive capacity addition in the pipeline.
Industry did witness double digit volume growth in the past 4 quarters. Over the past
year, Cement sector has seen a splurge of capacity addition announcements. The upcoming
expansions are mix of Greenfield and brownfield projects. There are a number of players
(Old, Relatively new and Newly born) who want to become big in the sector and are
looking to add capacities in expectation of the healthy (to possibly very healthy) volume
growth over near to medium term - which shows the intent of some of these companies to
become a more relevant player in the sector and their region of operation.
Almost every meaningful player is looking to add capacity over next 2-3 year period. We
estimate that cement industry could commission ~70MTPA of new capacities between
FY19e and FY21e, as unrelenting fight for capacity market share continues.

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 17
FROM THE RESEARCH DESK
FY19-20 to see un-relented capacity additions in cement
Capex (INR mn) FY16 FY17 FY18 FY19 FY20e FY21e
ACC 11,236 5,222 5,349 4,000 4,000 4,000
Ambuja 6,214 3,911 5,623 8,000 10,000 10,000
Dalmia Bharat 6,384 5,658 1,994 12,680 23,110 15,680
JK Lakshmi Cem 1,470 1,270 1,380 2,000 1,000 1,000
Orient Cement 3,697 1,070 1,481 700 700 700
Shree Cements 7,356 12,809 25,251 18,000 14,000 12,000
UltraTech Cem 20,770 12,609 19,380 18,000 12,000 12,000
Birla Corp 1,694 2,065 2,792 3,000 8,000 10,000
Deccan Cement 71 277 89 200 200 200
Heidelberg 1,249 474 232 600 600 600
India Cement 1,632 788 1,977 2,000 5,000 5,000
JK Cement 3,163 2,949 1,775 8,000 14,500 3,000
Mangalam Cement 660 909 193 1,200 200 200
NCL Indutries 185 1,606 2,228 700 400 400
Ramco Cement 2,780 3,067 4,958 8,000 6,500 2,000
Sagar Cement 1,251 1,452 1,965 3,000 3,200 2,500
Sanghi Industries 464 752 2,891 6,000 7,000 500
Star Cement 817 890 324 1,800 2,700 700
Total 71,093 57,777 79,882 97,880 113,110 80,480
Based on reported data and management commentaries
Source: Company, Antique
Power sector capex - The light is at the end of the tunnel!
Doubtless for power generation as a sector as such, the last few years were bad. In India,
the slower industrial growth and poor health of the state Distribution companies (Discoms)
resulted in precipitous drop in power consumption. During FY16-18, the power consumption
growth just ticked around 4-4.5%-- a far cry from a desirable level of 6-7%. Worse, during
the same period, demand growth from remunerative industry sector, which accounts for
40% of the aggregate demand, collapsed to a meager 1%. This exerted further pressure
on state-owned-Discom's financials. Even worse, coupled with sharp capacity addition in
past 4-5 years, the spot power prices fell. These events led to a negative feedback loop.
A spate of bankruptcies, undue strain on the banking system, and a chronic drought for
new project announcements: these were just a part of apocalyptic canvas.
From FY11, the power demand has grown by 5% CAGR, with growth moderating in the
last few years
25,000
20,000
15,000
10,000
75%
73%
70%
66%
64%
62%
60%
61% 61%
80%
75%
70%
65%
60%
5,000
0
10,371
18,779
19,927
16,725
20,643
22,442
6,990
5,008
2,720
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E
55%
50%
Thermal capacity added (MW)
Thermal PLF (RHS)
Source: CEA, Antique

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 18
FROM THE RESEARCH DESK
However, the dire situation is a thing of past; a turnaround is around the
corner
The economic activity is on the upswing. The early signs of private capital expenditure are
visible. This is expected to revive demand in next few years (FY19 running at 5%+). Alongside,
intervention of UDAY scheme is making the financial health of key states better, which in turn
is leading to increased demand. We believe this trend is expected to continue.
Power shortage situation looming large; the ask PLF is high, drawing parallel
to FY07.
As on date, 52GW of thermal power capacity is under construction. We assume 36GW of
net coal based capacity addition (after deduction of 2GW annual capacity retirement) till
FY24. Further, during the same phase, we assume a high target of ~150GW of renewable
capacity. Yet we think India may hit power shortage of 4% in FY24. This is all based on a
premise that the average demand over FY19-24 will grows by 6.2% (Antique Estimates).
Further, we plug in high 68% PLF for all thermal plants in the country (as contrast to 61%
now). This is possible only if central sector power plants run at all-time high PLF of 76-77%-- a
situation seen in FY06-07, when power shortage rose to 7-8%.
In this backdrop of looming energy crisis, a re-ignition of power sector investments, we
anticipate, is clear on cards
25,000
20,000
15,000
10,000
5,000
0
2.8%
2.2%
0.4% 0.8% 1.7% 1.5%
2.1%
10,371
18,779
19,927
16,725
20,643
22,442
6,990
0.2% 0.6% -1.0%
5,008
2,720
-3.7% -4.1%
-4.2%
13,220
15,285
3,980
400
3.9%
400
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
Thermal capacity added (MW)
Pow er Deficit (RHS)
Source: CEA, Antique
In the last few months, spot prices moved up due to shortage of coal and growing demand
(Indexed price of electricity to 100)
114
112
110
108
106
104
102
100
98
96
94
1-Nov-13
1-Mar-14
1-Jul-14
1-Nov-14
1-Mar-15
1-Jul-15
1-Nov-15
1-Mar-16
1-Jul-16
1-Nov-16
1-Mar-17
1-Jul-17
1-Nov-17
1-Mar-18
1-Jul-18
1-Nov-18
Source: Bloomberg, Antique

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 19
FROM THE RESEARCH DESK
Order books and exports also pointing to significant traction
Exports - Industrial players have seen a boost
Engineering is by far the largest segment in the Indian industry, employing over 4mn skilled
and semi-skilled workers. The sector has witnessed tremendous growth, led by significant
investments in power projects and infrastructure development. India's merchandise exports
registered a growth of 12.5% YoY during 1HFY19.
Break up of Engineering
Source: Industry, Antique
Thus, engineering companies have reported traction in exports. Several domestic industrial
companies have resorted to increased thrust on exports in order to diversify or beat the
domestic slow down. In case of foreign engineering companies, the growth in exports is
additionally driven by the group's thrust on exports given lower cost from developing countries
and making certain countries its global hub for certain products. The obvious beneficiaries
are countries like India which has further accentuated by rising wages in China.
Besides targeting the developed economies of Europe and US which makes up about 40% of
exports, Indian companies are incrementally diversifying in the developing markets of Africa,
South America, Middle East and South East Asia. For this, we have seen companies
collaborating with technology institutes for developing skilled manpower and R&D
Rise in overall engineering exports
Break up of engineering exports
90
75
60
Non-Ferrous
13%
Other Engg
Products
10%
Electrical
Machinery
9%
45
30
15
Industrial
Machinery
17%
Shipping
4%
Aviation
3%
-
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Exports (USD bn)
FY15
FY16
FY17
FY18
Automobiles
21%
Ferrous
23%
Source: Industry, Antique

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 23
FROM THE RESEARCH DESK
Potential spending over the next five years
Public sector thrust to continue
Public sector capex across important segments such as power generation, roads, railways,
metros, renewables, defence and housing can unlock significant capex opportunities. We
estimate that incrementally new investments in these areas can result in at least INR 5-6tn/
year capex. Below we highlight two segments- roads and railways in little more detail.
Railways: We estimate the railways capital
expenditure cINR1.62trn. This is a part of approved
INR8.6trn five year plans of the past. The year before
had INR1.45trn budgeted. Further we foresee INR2trn
additional opportunity-both from HSR and RRTS
projects.
Metros: The approved opportunity size is INR2trn.
In Mumbai, INR1.3trn metro projects are underway.
In Delhi, INR450bn phase-IV is approved. Excluding
Mumbai lines and Delhi phase-IV, there are many more
rail projects on cards. For instance, Government has
approved INR680bn projects.
Defence: Defence capex likely at INR 1tn for FY19e
and is expected to grow at 5-8% p.a. Thrust on
localisation and offset can result in a significant
opportunity for Indian manufacturers as well.
Roads: The central budgeted expenditure on roads
is cINR750bn. However, with INR1.3trn HAM projects,
done by private players, and states engaging in
individual projects, the market size is estimated at
INR1.5trn.
Renewables: Enhancing India's renewable power
capacity to 175GW by 2024, at an estimated
investment of INR 6tn.
Power generation: With 6-7% growth in power
demand and a virtual collapse in commissioning of
new projects, India is likely to face a power shortage
in the next few years which will trigger a new power
capex cycle with a potential investment of INR 1.5tn/
annum. As on date, 52GW of thermal power capacity
is under construction. We assume 36GW of net coal
based capacity addition (after deduction of 2GW
annual capacity retirement) till FY24.
Housing: Under Pradhan Mantri Awas Yojana
(PMAY)- urban and rural housing with strong
government intent, presents a huge opportunity in
India. It is being implemented across all the states with
a target to deliver 20mn houses by FY22.
Source: Antique
Roads
Government revises the NH construction target to 10,000kms for FY19; we
expect 14600 for FY20
For FY19, this translates into construction rate of 27kms a day, deviating from earlier revised down
number of 30kms a day, forecasted by industry experts and companies. As against this target,
India has achieved construction of 5759 km i.e. 57.59% as on 30th November, 2018. Most of the
challenges are encountered in timely acquisition of land, shifting of utilities (like electrical lines,
Water supply lines etc.) coming in the right of way, time taken in obtaining statutory clearances
(such as forest, tree-felling, wildlife clearances etc.) problems encountered in availability of soil/
aggregate etc. Most of these challenges relate to the states, which are sorted out through regular
monitoring and reviews with the state authorities, central government opines.
Land acquisition in Gujarat
The Gujarat High Court quashed and set-aside the 'poor compensation' awarded to several
landowners whose plots were acquired by the NHAI for the construction, expansion, and
widening of NH 8-E (51) between Bhavnagar and Veraval, and the Vadodara-Mumbai
Expressway. The court has also remanded the matter back to the competent authorities who
are supposed to re-determine the compensation afresh in accordance with law.
NHAI to borrow INR2trn to fund Bharatmala, other projects
The funds would be raised to partly finance a slew of infrastructure projects, including
Bharatmala. The centre plans to invest a INR6.9trn during FY18-23, of which INR3.8trn is for
the Bharatmala Pariyojana and about INR3trn for other projects including the conventional
highways that it normally finances.

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 24
FROM THE RESEARCH DESK
Total projects awarded are on a rising trend
20,000
16,000
12,000
8,000
4,000
0
10000 10000
9659
11934
3303
6491
5730
4821
10000 10000
4883
7396
800
3069
4368 4337
1116 1438
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
NHAI
MORTH
Source: Industry, Antique
Pace of construction is moving up
16000
14000
12000
10000
8000
6000
4000
2000
0
14600
10950
9829
8231
5732
6061
5013
4250 4410
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Kms constructed by NHAI
Source: Industry, Antique
Daily completion of projects is dependent on land acquisition/financial closures
40
35
30
25
20
15
10
5
-
40
30
27
23
16
17
14
12 12
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Kms/day constructed by NHAI
Source: Industry, Antique

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 25
FROM THE RESEARCH DESK
Plus, there are opportunities from Bharatmala too
100,000
80,000
34800
60,000
40,000
20,000
0
9000
26200
6000
15500
5000
2000 24800 10000
2000 800
0 5300 0 1600
10000
0
58600
Economic
Corridor
Inter-corridor
& feeder
Routes
National
Corridors
Efficiency
Border &
International
connectivity
Coastal & Port
connectivity
roads
Expressways
Total under
Bharatmala
Pariyojana
NH remaining
under NHDP
Total to be
built or
upgraded
Total Length (In Kms)
Phase-I (In kms)
Source: Industry, Antique
Adding to the above, there are others in fray as well.
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
624
Port
Connectivity
9,594
2,895
3,359
2,605
111
SARDP-NE Others BRT NH(O) Total Others
In Kms
Source: Industry, Antique
Funding of NHAI is intact
INRmn 2017 2016 2015
Receipts of Cess 23,270 154,200 68,860
Toll Plough Back 75,000 65,000 54,480
Additional budgetary support 56,490 3,700 6,000
Capital Gain Tax exemption bonds 55,730 42,810 33,430
Other Bonds 275,450 190,000 -
Decrease in cash - - 61,970
Other Inflows 19,000 11,870 13,150
Total 504,940 467,580 237,900
Land Acquisition 178,230 219,340 90,980
Project Expenditure 208,430 125,730 78,850
Repayment of Loans 70,100 51,300 42,920
Increase in Cash 16,360 40,680 -
Other outflows 31,810 30,530 25,140
Total 504,940 467,580 237,900
Source: Industry, Antique

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 26
FROM THE RESEARCH DESK
Railways:
Reportedly, the railways is seeking highest-ever capital expenditure of INR1.65-1.7trn for the
upcoming Budget. Meanwhile, to cough up the finances, the ministry has sought help from
railway ministry to increase gross budgetary support by 28% from the budgeted INR530bn in
FY19 to around INR680bn in 2019-20.
Particulars (All figures in INRbn) FY17 FY18 FY19B FY20E
New lines - network expansion 144 212 285 328
Doubling - network decongestion 91 180 174 200
Gauge conversion - network expansion 38 37 39 45
Track renewals - safety spending 51 83 104 119
Road safety works - Road over / under bridges 32 62 63 72
Traffic facilities - yard remodelling & others 9 31 29 33
Signalling - telecom works 10 23 20 23
Electrification projects 29 35 63 72
Other electrical works 1 9 2 3
Rolling stocks 196 252 319 367
Leased assets - payment of capital component 70 80 92 106
Workshops including production units 15 33 26 30
Metropolitan transport projects 14 14 16 19
- Govt commercial undertaking 5 7 18 21
- Non-Govt JV / SPVs 71 168 95 109
Others 324 85 71 82
Total Expenditure 1,099 1,310 1,415 1,627
Source: Antique
Another plausible theme is high-speed/semi-high speed rail corridor. Be it bullet trains (highspeed)
or regional rail transport (semi-high speed), the progress made can translate into an
addressable opportunity of ~INR2trn in the near term (NCR-phase 1 RRTS and Ahmedabad-
Mumbai bullet train).
As a part of integrated plan for 2032, Regional Rapid Transit System (RRTS) is a dedicated,
high-speed, high-capacity commuter service connecting regional nodes in National Capital
Region (NCR). Also, RRTS is different from conventional railway. It aims to provide reliable,
high-frequency, point-to-point regional travel at a dedicated path way. Further, RRTS is different
from metro.
A huge opportunity in high-speed rail corridor
Route
Length (Kms)
1 Pune-Mumbai-Ahmedabad 680
2 Delhi-Chandigarh-Amritsar 480
3 Delhi-Agra-Lucknow-Varanasi-Patna 1,000
4 Howrah-Haldia 140
5 Hyderabad-Dornakal-Vijayawada-Chennai 780
6 Chennai-Bengaluru-Ernakulam-Thiruvananthapuram 1,020
7 Delhi-Jaipur-Jodhpur 530
Total HSR kms 4,630
Source: Antique

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 27
FROM THE RESEARCH DESK
Metros: INR2trn opportunity approved; to fill up the order book soon.
In Mumbai, INR1.3trn metro projects are underway. In Delhi, INR450bn phase-
IV is approved. Excluding Mumbai lines and Delhi phase-IV, there are many
more rail projects on cards. For instance, Government has approved
INR680bn projects.
Since May-2014 to this date, for instance, 13 new metro projects with a total length of about
248 Kms at a total cost of INR680bn have been approved. This includes Nagpur, Ahmedabad,
Gurugram, Lucknow, Chennai Extension, Pune, Delhi Metro Extensions, Noida - Greater
Noida, Bhopal and Indore.
Operational status: At present, about 536 kms of Metro Rail lines are operational in 10
cities. This includes Delhi & NCR, Bangalore, Hyderabad, Kolkata, Chennai, Jaipur, Kochi,
Lucknow, Mumbai and Gurugram.
Around 650 kms of metro rail projects are at various stages of implementation in Delhi &
NCR, Kolkata, Bangalore, Chennai, Kochi, Jaipur, Mumbai (including state initiatives by
MMRDA), Hyderabad, Nagpur, Ahmedabad, Lucknow, Pune, Noida, Bhopal and Indore.
About 750 kms of metro rail systems and 373 km of Rapid Rail Transit Systems (RRTS) are
under planning in various cities.

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 28
FROM THE RESEARCH DESK
Elections are important but not the most critical macro factor
With the advent of the 2019 general elections, there is a fair bit of concern over the outcomes.
This is especially true given the recent electoral reversals which the ruling BJP has faced in the
assembly (state) elections in December 2018. We are of the view that a positive or negative
election outcome can affect markets only sentimentally but are unlikely to dent the macrooutturns.
Our premise is based on the following:
1) Flagship schemes unlikely to witness any changes: Irrespective of the new
regime in place, we believe that structural reforms are likely to continue, whichever
regime is in place. We highlight two schemes- the Pradhan Mantri Gram Sadak Yojana
(or PMGSY, rural roads and infra) and Mahatma Gandhi National Rural Employment
Gurantee Act (or MGNREGA, rural employment). The PMGSY was launched in 2000
under the previous NDA dispensation. This was one of the flagship schemes of the
government and ushered in new development in rural infra. However when the UPA-1
came to power, it neither reduced the allocation for the scheme, nor diluted it. In fact
rural infra continued to be a priority for the UPA-1 government as well. Similar was the
case with MGNREGA which was the flagship scheme of the UPA government.
Allocations increased significantly post the 2008 financial crisis as the government
looked to pump-prime the economy and is viewed as a program to enhance its rural
development schemes. In fact, many of the rural development schemes which the
current government is pursuing be it rural housing or electrification are expanded
modifications of the UPA schemes.
Allocation and thrust on flagship schemes have remained steady across electoral formations
40,000
700
Rural roads execution, kms
35,000
30,000
25,000
20,000
15,000
10,000
5,000
NDA
UPA
MGNREGA allocations, INR bn
600
500
400
300
200
100
UPA
UPA
0
FY02 FY03 FY04 FY05 FY06 FY07 FY08
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Budget documents, Antique
In a similar vein we believe that the current government's social sector projects- be it PM
Ujjwala Scheme (LPG cylinder for every household) or Saubhagya (electrification) is
unlikely to be changed. If anything there could be tweaks to enhance the program
further.
2) Institutionalization of reforms: Most reforms over the last decade or so have
been institutionalized. For example, as we had highlighted in our flagship Hello India
report, the schemes are administered through Aadhaar based DBT (Direct Benefit
Transfer) to plug the leakages. The cumulative total direct benefit transfer since FY15 is
INR 5.6tn with INR 1.9tn transferred in FY19 so far and the annual savings have been
in the range of INR 330-350bn for the central schemes alone. Therefore, given the
huge savings any new dispensation is unlikely to roll-back the institutional reforms
which have taken place. A point to note is that whatever maybe the political overtones,
our understanding based on our discussions in Hello India is that the states are adopting
Aadhaar based DBT for most local schemes as well.

ANTIQUE STOCK BROKING LIMITED 02 January 2019 | 29
FROM THE RESEARCH DESK
States, irrespective of the
political affiliation are
adopting DBT for their
respective schemes
State
Number of schemes under DBT
Punjab 119
Karnataka 164
Kerala 59
Tamil Nadu 102
Telangana 43
Source: DBT website, Antique
Structural upswing in growth unlikely to be affected by elections
3) Empirical evidence also points to electoral formations being growth
neutral: Simple empirical evidence also suggests that political formation at the centre
has been immune to growth. Prior to BJP gaining a majority in the 2014 elections, the
last time a party won such a large mandate was the Congress in 1984. And one can
argue that the most of the reforms in the intervening period were carried out by coalition
governments. Reforms trajectory can be sustained irrespective of the formation at the
centre and governance has matured not to disrupt long term structural changes.
12
10
UPA
GDP, % YoY
8
6
4
BJP
2
NDA
0
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19e
Source: Antique
Markets have invariably bounced back post elections
180
Sensex performance around elections
(indexed to 100)
160
140
120
100
80
60
40
M-10
M-9
M-8
M-7
M-6
M-5
Elections
M-4
M-3
M-2
M-1
M
M+1
M+2
M+3
2004 2009 2014
M+4
M+5
M+6
M+7
M+8
M+9
M+10
Source: Antique

COVER STORY
US-China Trade Dispute
Photo by Sheng Jiapeng
us should look inward to solve Trade Deficit
The trade imbalance between the US and China stems from internal problems in the US, which can
only be addressed by an inward-looking approach. Trade friction can only lead to lose-lose results
By Zhu Min and Miao Yanliang
Trade tensions between the US and China, the world’s two
largest economies, have been and continue to be a major
concern for investors all over the world, injecting a great
level of uncertainty into the global economy. It is therefore imperative
to examine the economic fundamentals of the Sino-US trade imbalance.
To do that, we must look at both countries’ economic policies
to trace the roots of the issue.
he US has been in constant trade deicit since 1976. Since 1999,
its deicit has never dipped below two percent of GDP, peaking in
2006 at 5.5 percent. Since then, it has maintained an average level of
about three percent of the country’s GDP.
One major reason behind the US’s trade deicit lies in its low savings
rate and high rate of consumption. In the past decade, the average
personal savings rate of Americans hovered around six percent,
reaching a historical low of 2.4 percent in 2017. he US Federal government
also has no savings, having run on deicit for 17 years since
2002. By the end of September 2018, US gross national debt reached
a record high of US$21.52 trillion, accounting for 105.4 percent of
its current-dollar GDP.
he Trump administration’s tax cut plans are expected to further
22
CHINAREPORT I January 2019

Share of US imports, exports and trade balance to GDP
raise the debt level in the coming years. A high debt level, combined
with a low savings rate, means the US consumes more than it produces,
so the additional spending has to go to foreign goods and services.
With minimal savings to put into investment, the US has to either
borrow from foreign investors, or to extract foreign funds to the US.
his is the driving force behind the US trade deicit, which exists not
just with China, but with almost all industrial powers.
Another major reason is the dollar’s status as the global reserve currency,
which allows the US to enjoy what economists call an “exorbitant
privilege.” Unlike any other country which needs to produce an
equivalent value of products to obtain US$100, the US can simply
print a 100 dollar bill to purchase imports from other countries. he
US is also immune from concerns over a current account payment
crisis, which can be caused by a persistent current account deicit in
any other country.
his means that when the US government does not have enough
revenue, it can always resort to issuing treasury bonds. By the end of
2017, the total amount of treasury bonds amounted to US$12.3 trillion,
more than 50 percent of which had been purchased by foreign
investors.
his is why the Trump administration is able to launch a tax cut
plan and expand the government deicit at the same time, even
though it will further push up government debt. It is estimated that
the iscal deicit of the US Federal Government will increase from 3.5
percent of annual GDP in 2017 to 4.6 percent in 2019.
To put it simply, the US’s global trade deicit, including that with
China, is a result of structural problems inherent in the US economy,
including a low savings rate, high consumption rate and an expansionary
iscal policy, something enabled and encouraged by the i-
nancial privilege of the dollar’s global reserve currency status. hat
is precisely why the US trade deicit has grown by a further seven
percent in the three-month period between May and July, despite additional
import tarifs imposed on major trading partners, including
China. In fact, Washington’s trade protectionism will very likely harm
its own long-term economic development.
Not Seeking Surplus
China appears to be just the opposite of the US in many aspects.
Compared to the US, China has long maintained a very high savings
rate. Since joining the World Trade Organisation (WTO) in 2001,
China’s total exports have rapidly increased, maintaining an annual
growth rate of over 20 percent between 2001 and 2007. In the same
period, China’s personal savings rate increased from 36 percent in
2000 to 51 percent in 2007.
While the rapid increase in exports has made a great contribution to
China’s economic growth, it has also led to an unbalanced economy,
especially when a high savings rate resulted in a low consumption rate,
Share of US exports to GDP
Share of US imports to GDP
US balance of trade to GDP
Source: US Bureau of Economic Analysis
US trade deicit and foreign holders of US treasury
securities (Unit: US$ billion)
US trade deficit (right
axis)
Foreign holders of US
treasury securities (left
axis)
Source: US Treasury Department, US Bureau of Economic Analysis
CHINAREPORT I January 2019
23

COVER STORY
Household savings rate, federal budget deicit and trade deicit in the US
US household savings rate (left axis)
US federal budget deficit to GDP (left axis)
US household account balance to GDP (right axis)
Source: US Bureau of Economic Analysis
a problem exacerbated by the global inancial crisis in 2008. Since
then, China has conducted sweeping structural reforms to promote
domestic consumption. Between 2007 and 2017, the contribution of
domestic consumption to national economic growth increased from
50.1 percent to 58.8 percent, while the service sector accounted for
51.6 percent of the economy in 2017, up from 42.9 percent in 2007.
In the meantime, China’s trade surplus with the rest of the world
as a percentage of GDP has steadily decreased since 2007. In 2017,
China’s current account surplus dropped from 9.9 percent of annual
GDP in 2007 to 1.3 percent in 2017, about the same level as prior
to China’s entry into the WTO. During the irst half of 2018, China
reported a current account deicit of US$28.3 billion, the irst in 20
years. his shows that China has not intentionally adopted unilateral
commercialism as a way to maximise its trade surplus as some have
accused it of. Instead of focusing on promoting exports, China’s economic
policy centres on domestic-oriented structural reform.
Moreover, much of the trade deicit with China is created by US
companies. For example, Apple iPhone products alone contribute
about US$17 billion to the trade deicit of the US on paper. But in
reality, most of its value went to various foreign suppliers of Apple,
such as South Korea’s Samsung and Japan’s Toshiba. It is estimated
that only ive percent of the manufacturing cost of iPhone products
goes to Chinese suppliers. It is both unfair and unrealistic to expect
China to sacriice its own interests and economic health to solve a
problem that results from an internal imbalance in the US economy.
Given the diferent structures of the two economies, the trade
relationship between China and the US is still complementary. First,
unlike the trade disputes between the US and Japan in the 1980s
– between two developed economies as Japan’s per capita GDP had
already reached the same level as the US’s – the trade relationship
between the US and China is still one between a developed economy
and an emerging economy, as China’s GDP per capita is only oneseventh
the size of the US’s.
Second, unlike Japan, whose GDP was only 32 percent of that of
the US in 1985, the Chinese economy is now 62 percent of the US’s,
which means China has the potential to provide a much greater market
for American products, making the trade relationship between the
two countries more reciprocal.
hird, bilateral trade between the US and China is more of a supply-chain
trade, which is associated with international production
networks, rather than inter-industry or intra-industry trade. In short,
it means rather than directly competing with each other within an
industry, the US and China occupy diferent positions in an international
supply chain. By 2016, labour intensive products, including
light industrial products and low-end electronic products, accounted
for 80 percent of China’s exports to the US. In the meantime, the US
has a solid position in the supply chain of high-end industries, with
exports of intellectual property worth US$128 billion, 26 times that
of China.
Supply Chain Decline
he problem with the supply chain trade between the two countries
is structural. For example, while American multinationals have
garnered huge proits from their trade with China, the supply chain
of low-end industries in the US may witness a decline, such as those
in the rust belt states. Given the overall reciprocity of the bilateral
24
CHINAREPORT I January 2019

US products ranked by level of trade deicit with China
in 2017 (Unit: US$ billion)
Communication equipment
Computer equipment
Miscellaneous commodities
relationship, the US should address this problem through domestic
structural measures to better distribute resources between the
winners and losers of globalisation, rather than using its entire trade
with China as a scapegoat.
CHINAREPORT I January 2019
Clothing
Kitchen furniture
Source: US Bureau of Economic Analysis
Current account balance ratio to GDP – China and US
(including IMF predictions for 2018-2023)
Source: International Monetary Fund
Semiconductors
Footware
Household appliances
Audio/Visual equipment
Plastics
China - current account
balance to GDP
US - current account
balance to GDP
Curbing the Deicit
In the past years, the Chinese economy has been transforming into
one driven by consumption, which will not only help China sustain
its economic growth, but will provide massive opportunities for
advanced economies, including the US.
In the past years, China has experienced major demographic changes,
which has led to a decline in its labour force. hese changes will
inevitably drive down China’s savings rate and promote consumption.
In the process, China’s consumption will increasingly shift from
low-end consumer products to high-end products, which will ofer
advanced economies, including the US, greater market potential.
As a matter of fact, this scenario is already happening. In 2017,
Chinese purchased 32 percent of the world’s luxury products, mostly
made by foreign companies. China’s overseas students and outbound
tourists also made major contributions to the economic growth of
various countries, including the US. During the earlier trade negotiations,
China ofered to increase imports of American products and
services, which serves the interests of both countries.
By contrast, escalating the trade dispute with China will not only
fail to fundamentally address the trade imbalance of the US, but will
also limit the access of American products to the Chinese market,
hurting US consumers and the country’s economic development in
the long run.
he US must be aware that the robust economic growth experienced
by the US in 2018 came as a result of its recent tax cuts and iscal
stimulus. By the time the policy efects start to diminish in 2020,
its side-efects, such as inlation, will start to kick in. Trade tensions
with China will further drive up inlation, causing consumers to rein
in their spending and US companies to possibly reduce investment
due to concerns over uncertainties. All these will increase the possibility
of an economic recession in the coming years.
To efectively solve its trade imbalance, the US should look inward
to address its structural problems within its economy. In the past decades,
the US has taken advantage of its inancial dominance to paper
over its domestic problems at a very low cost. Whenever the US
encountered a inancial problem, it has resorted to printing money,
directly or indirectly.
But as the US continues to abuse its inancial dominance, it has
eroded many countries’ trust and conidence over the global monetary
order that centres on the greenback. If the US continues to refuse
to relect on ways to address its domestic economic problems
and instead entrenches itself further into its debt-centric approach, it
will further dampen conidence in the US dollar and expose the US
economy to serious inancial crisis.
Zhu Min is chairman of the National Institute of Financial Research,
Tsinghua University and former vice president of the IMF. Miao Yanliang
is a chief economist with the State Administration of Foreign Exchange
Investment Centre.
25

India strategy
Market outlook
Mahesh Nandurkar
mahesh.nandurkar@clsa.com
+91 22 6650 5079
Abhinav Sinha
+91 22 6650 5069
Alok Srivastava
+91 22 6650 5037
15 January 2019
India
Market Strategy
www.clsa.com
Budget 2019 – What to expect
Farmer support scheme may be on its way, impacting capex spend
The pressure to further expand the farmer welfare programme ahead of the
2019 national elections is high for PM Modi. A possible announcement of a
nationwide direct farmer support scheme is quite likely in the budget on 1 Feb,
or possibly even earlier. A Telangana-style scheme could cost ~Rs1.2trn, further
complicating fiscal maths, as it could be a recurring liability. The RBI’s possible
large dividend might help just one time. The GST-led tax revenue shortfall of 75-
80bps of GDP is not reflected in the reduced Govt expenditure for FY19 due to
off-balance-sheet funding, which is not a sustainable solution and will create its
own problems later and distort the reported fiscal deficit for FY19. We expect
the ‘real’ govt expenditure growth to slow down. The impact on capex will be
even greater if the farmer support scheme is implemented. ITC should see some
relief rally, as the budget is unlikely to tinker with tobacco taxation.
Direct support to farmers could cost the Centre Rs700bn/annum
q Proliferation of farm loan waivers and BJP’s recent defeat in state elections have led to
expectations of major policy intervention by the Central govt for farmer support.
q Modi has largely ruled out a national farm loan waiver, but a scheme implemented by
the Telangana govt is seen as promising. The ‘Rythu Bandhu’ (Farmer Investment
Support Scheme) provides Rs4,000/acre/season to farmers as direct cash support.
q Telangana’s ruling party TRS scored an emphatic win in the recent state elections.
Other states, viz, Odisha (BJD ruled) and Jharkhand (BJP ruled), have since announced
similar schemes in their states.
q The Telangana scheme costs Rs120bn. It covers all farmers irrespective of land
holding. A nationwide scheme may follow the Odisha model which limits the scheme to
small and marginal farmers, ie, whose land holdings are less than 5 acres.
q Such a scheme will cover 47-48% or ~230-240m acres of total crop area (including
multi-cropping). It would cover 86% of all farmers, making it fairly broad-based.
q At Rs5,000/acre, the cost of such a scheme would be Rs1.15-1.20trn. However, the
Centre could split the costs with the participating states, say, in a 60-40 ratio. This
would then imply a cost of ~Rs700bn/35bps of GDP to the Centre in FY20.
Bridging GST shortfall to be crucial for FY20 budget spending spurt
q We estimate (link) a total FY19 GST shortfall at Rs1.5trn or 80bps of GDP. While this is
largely to the Central Govt’s account, since the Central Govt shares 42% of its own
revenues with states, the shortfall will effectively reflect for both state & central govt.
q The large GST shortfall keeps total indirect tax growth at just 6% vs 23% budgeted.
This will mean that the good growth in direct taxes (17%, near target) notwithstanding,
Centre’s net (of state share) tax collections would be 8ppt/Rs1.0trn short of target.
q Potential compliance improvement should drive a GST growth of 20% during FY20.
Off-balance-sheet borrowings, disinvestment pressures unlikely to subside
q The ~50bps of revenue shortfall in FY19 will mostly (~40bps) be bridged by an increase
in off-balance-sheet expenditures. These could include pushing the food subsidy
expenditure onto the books of FCI among other things.
q Large disinvestment programmes (Rs1.8trn over FY18-19) and repeated off-balancesheet
spending (c.Rs1.2trn over FY18-19) have created a high base effect of on-budget
spending. As such, mean reversion to better-quality fiscal will take time and FY20
could still see another Rs0.8-1.0trn disinvestment being targeted.
Limited scope for fiscal consolidation in FY20
q Starting any large social spending scheme, as above, without a commensurate measure
to increase revenues would mean that the government may not be able to budget for a
more than 10-20bps of fiscal consolidation in FY20.
q Also, the government would clearly be hard-pressed to fund capex directly via its own
budget. Any such increases then would need off-balance-sheet spending to rise
further. Interestingly, the government’s auditor CGA has pointed out this issue, which
could force the government to disclose the impact of such borrowing on its budget.

Budget 2019 – What to expect
India strategy
We would like to thank Evalueserve for its help in preparing our research reports. Bhavik Mehta (IT); Kamal Verma (Banking & Financial Services); Kushal
Shah (Midcaps), Jinesh Pagaria (Capital Goods, Utilities, Power); and Suraj Yadav (Cement, Oil & Gas) provide research support services to CLSA.
86% of farmers own 24.7
acres)
1%
Large (>24.7
acres)
9%
Marginal (

Budget 2019 – What to expect
India strategy
Figure 5
Fiscal accounts and estimations for FY19 and FY20
Limited scope for fiscal consolidation in FY20
Rs bn FY17 FY18 FY19BE FY19CL FY20CL % YoY
FY19BE
% YoY
FY19CL
% YoY
FY20CL
Corporation 4,849 5,712 6,210 6,683 7,686 8.7 17.0 15.0
Income 3,648 4,082 5,290 4,776 5,492 29.6 17.0 15.0
Total direct 8,497 9,794 11,500 11,459 13,178 17.4 17.0 15.0
Excise 3,821 2,586 2,596 2,457 2,580 0.4 (5.0) 5.0
Service 2,254 812 52 65 65 (93.5) (92.0) 0.0
Customs 2,586 1,369 1,125 1,301 1,457 (17.8) (5.0) 12.0
CGST - 2,048 6,039 4,611 5,533 194.8 125.1 20.0
IGST - 1,688 500 300 360 (70.4) (82.2) 20.0
GST Cess collections 626 900 946 1,088 43.8 51.1 15.0
Total indirect taxes 8,661 9,130 11,212 9,680 11,083 22.8 6.0 14.5
Others & adjustments (65) 232 (25) - -
Total taxes 17,094 19,157 22,687 21,139 24,261 18.4 10.3 14.8
Less state share 6,080 6,730 7,881 7,343 8,427 17.1 9.1 14.8
Net tax revenues (1) 11,014 12,427 14,806 13,796 15,833 19.2 11.0 14.8
Non-tax revenues (2) 2,728 1,925 2,451 2,500 2,750 27.3 29.9 10.0
Non-debt capital receipts (3) 654 1,158 922 900 990 (20.4) (22.3) 10.0
Total revenues (1+2+3 = 4) 14,396 15,510 18,179 17,196 19,573 17.2 10.9 13.8
Revenue expenditure (5) 16,906 18,790 21,418 20,784 23,581 14.0 10.6 13.5
Food subsidy 1,102 1,003 1,693 1,193 1,693 68.8 18.9 41.9
Other subsidies 939 908 950 950 998 4.6 4.6 5.0
Interest 4,807 5,292 5,758 5,758 6,276 8.8 8.8 9.0
Other revenue expenditures 10,058 11,586 13,016 12,883 14,614 12.3 11.2 13.4
Capital expenditure (6) 2,846 2,637 2,999 2,999 3,149 13.7 13.7 5.0
Total expenditure (on budget)
19,752 21,427 24,422 23,784 26,730 14.0 11.0 12.4
(5+6 = 7)
Off-balance sheet spending (8)* 250 400 - 800 300
Actual expenditure (7+8 = 9) 20,002 21,827 24,422 24,584 27,030 11.9 12.6 10.0
Fiscal deficit (7-6 = 10) 5,356 5,917 6,243 6,588 7,157 5.5 11.3 8.6
GDP (11) 152,537 167,731 187,223 188,407 211,016 11.6 12.3 12.0
FD as % GDP (10/11 = 12) 3.51 3.53 3.33 3.50 3.39 -20bps -3bps -11bps
Source: CLSA, Ministry of finance. BE is budget estimate. *CLSA Estimates
Centre’s GST collections are
actually running down YoY
on a monthly run-rate basis
Weak Centre GST collections…
Figure 6
Monthly GST collections for the Central government
1,000
900
800
700
600
500
400
300
200
100
0
(Rs bn)
Aug
17
Sep
17
Source: CLSA, CGA, PIB
Oct
17
Nov
17
Dec
17
Centes's GST collection as per govt accounts
FY18 Average
FY19 Average
FY18 average :
-14% YoY
Rs465bn/mth FY19YTD average :
Rs400bn/mth
Jan
18
Feb
18
Mar
18
Apr
18
May
18
Jun
18
Jul
18
Aug
18
Sep
18
Oct
18
Nov
18
Dec
18

Budget 2019 – What to expect
India strategy
Direct tax collections have
done well but too large a
shortfall in GST
…have led to a substantial shortfall in total tax revenues
Figure 7
Direct and indirect tax collections
25
% YoY
FY18P FY19 BE FY19YTD
23
20
15
15
17
16
12
18
10
5
5
2
7
0
Direct taxes Indirect taxes (*) Total taxes
Source: CLSA, CGA. Indirect taxes include GST. P is provisional or close to Actual. BE is budget estimate.
Since GST rollout in FY18,
fiscal consolidation has
slowed substantially
Substantially slowing the fiscal consolidation trend
Figure 8
Fiscal deficit as % GDP
% GDP
7.0
6.3
6.0
5.0
4.0
4.9
5.9
4.9
Fiscal deficit as % GDP
4.5
4.1
3.9
3.5 3.5 3.5 3.4
3.0
2.0
1.0
0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19CL FY20CL
Source: CLSA, Ministry of finance
Under-provisioning of
expenses, such as food
subsidy, is leading to more
debt being taken on offbalance-sheet
of the
government and on the
programme implementing
agencies such as FCI and
NHAI
Incrementally higher amount of deficit being ‘hidden’
Figure 9
Total debt on Food Corporation of India (FCI) balance sheet
2.5
2.0
1.5
1.0
Rs Trn
0.8 0.9 0.9
Debt on FCI balance sheet
1.3
1.7
2.2
0.5
0.0
Mar'14 Mar'15 Mar'16 Mar'17 Mar'18E Mar'19CL
Source: CLSA, FCI, Ministry of finance.

Budget 2019 – What to expect
India strategy
The large disinvestment
target has seen government
adopt multiple measures
such as creation of cross
holdings in PSUs, selling
stakes in several PSUs via
ETFs, etc
Disinvestment target is still some way off
Figure 10
List of disinvestments done / likely in FY19
Issue
Bharat 22 ETF
Amount raised (Rs
bn)
Comment
83 22 stocks including 19 PSUs like SBI, Power Grid
etc. and 3 private cos (Axis, ITC, L&T) with govt.
stakes
RITES Ltd. 5 IPO
IRCON international 5 IPO
Garden Reach Shipbuilders 3 IPO
KIOCL 2 Buy-back
Coal India 53 OFS
HSCC India 3 Sale to another PSU (NBCC)
NLC India 10 Buyback
NALCO 3 Buyback
CPSE ETF - 3 170 11 listed PSUs like NTPC, GAIL etc; sold at a
discount to market price which pressures stock
BHEL 10 Buyback
Cochin Shipyard & Others 5 Buyback etc
Total YTD FY19 351
Proposed issues
IOCL 25 Buyback announced already
SJVN 70 Sale to another PSU (NTPC)
REC 140 Sale to another PSU (PFC)
NHPC 200 Sale to another PSU (NTPC)
Other IPOs 15 Railway companies
CPSE ETF / Bharat 22 /
SUUTI
Issues in Pipeline for FY19 500-600
Total FY19E
Source: CLSA, DIPAM
~800bn target
50-150 Another tranche can be used as balancing item
Cumulative surplus in GST
compensation cess, meant
to compensate states for
GST shortfall is Rs296bn
States are doing well on GST: Cess in large surplus
Figure 11
GST compensation cess collection, draw down and surplus till Nov’18
600
Collection Draw down Surplus
700 (Rsbn) FY18 FY19YTD Surplus
500
400
300
296
200
144 152
100
0
Source: CLSA, CGA, PIB

Budget 2019 – What to expect
India strategy
Government has argued
that the adequacy of the
contingency reserves of RBI
needs to be assessed and if
in excess then a part of it
could be given out as
dividend to help the fiscal
RBI balance sheet
Figure 12
Summary balance sheet of RBI
As on 30 June (Rsbn) 2014 2015 2016 2017 2018
Liabilities
Issue department 13,445 14,732 17,077 15,063 19,120
Notes issued 13,445 14,732 17,077 15,063 19,120
Banking department 12,798 14,159 15,353 17,978 17,056
Net worth 65 65 65 65 65
Capital 0.05 0.05 0.05 0.05 0.05
Reserves 65 65 65 65 65
Deposits 3,893 5,327 5,223 9,136 6,701
Banks 3,677 3,947 4,294 5,042 5,071
Others 215 1,380 929 4,094 1,630
Contingency & other reserves 8,227 8,058 9,343 8,410 9,631
Contingency 2,424 2,434 2,429 2,510 2,549
Revaluation reserve 5,803 5,624 6,914 5,900 7,082
Surplus transferable to Govt. 527 659 659 307 500
Other liabilities 87 50 63 60 159
Total liabilities 26,244 28,892 32,430 33,041 36,176
Assets
Issue department 13,445 14,732 17,077 15,063 19,120
Gold 650 637 729 690 743
Foreign securities 12,783 14,083 16,336 14,367 18,367
G-Secs and others 12 12 12 6 9
Banking department 12,798 14,159 15,353 17,978 17,056
Investments 11,494 12,464 13,774 16,911 14,315
G-Secs 6,685 5,175 7,023 7,558 6,297
Foreign securities 4,793 7,276 6,728 9,221 7,879
Others 16 13 23 132 138
Loans 371 802 520 173 1,639
Government 7 26 20 50 569
Banks 364 777 501 123 1,069
Others 0 0 0 0 0
Gold 590 579 662 627 697
Fixed assets 5 4 3 4 4
Other assets 338 310 393 263 402
Total assets 26,244 28,892 32,430 33,041 36,176
Source: RBI, CLSA

Transportation
India
ATTRACTIVE
DECEMBER 26, 2018
THEME
BSE-30: 35,470
Stage set for steady price increases by airlines. With the theme of share gains from
IR having largely played out, airlines may consider taking modest price increases to aid
moderating volume growth prospects. Airlines have used the pricing lever to accelerate
share gains from railways and in the process have been able to pass on a modest 30%
of the cost increase over the past nine years to its customers. Increase in yields at stable
pricing can meaningfully aid profitability and fair value for airlines businesses.
Airlines used pricing lever to accelerate share gains from IR since FY2015
Airlines matched Indian railways in terms of comparable volumes (long-distance AC travel) in
FY2017 and have extended their lead in the last two years. The last four years have been great
for airlines as they garnered a dominant ~80% share in growth volumes for long-distance AC
travel. Airlines would end FY2019 with a four-year volume CAGR of 20% versus a ~5% CAGR
for IR’s comparable volumes. Over this period, airlines have reduced their pricing by almost 20%
against broadly static base pricing of Indian Railways. Airlines have also benefitted in volume
terms from the flexi-pricing scheme of IR - volume activity for 2 nd AC rail travel declined yoy for
a nine-month period after the introduction of flexi-fares on premium trains. The outperformance
for airlines has come at the cost of profitability - airlines have grown pricing at a sub-2% CAGR
over the past nine years versus a 5% CAGR in key input costs.
Recent moderation in air travel reflective of limited scope of further gaining from railways
Growth in domestic air volumes has moderated to 11% yoy in Nov 2018 (13% yoy in Oct-
2018) after growing ~20% over 1HFY19. Our assessment of route-wise traffic suggests that the
moderation is driven by the top 50 routes (40% of volumes), with other routes (60% of volumes)
growing in excess of 20% on a yoy basis. The thirteen nodes forming the top-50 routes (tier 1
and 2 cities) are where airlines would have benefitted from share gains from Indian railways.
While noting limited scope of growth support to air volumes from IR, we note scope of some
reversal as IR intends to utilize the capacities freed on existing north-west/north-east corridor
(70% freight will move to DFC) for running more premium passenger trains.
A steady price hike may be the best way forward for airlines from hereon
With the shift of growth in volumes to airlines having happened to a large extent, airlines may
consider taking price hikes from hereon. Airlines may take comfort in limited inelasticity in
demand seen in FY2013, when a ~20% hike in prices led to a modest 4% yoy decline in
volumes. We note the high sensitivity of a small increase in yields (e.g. for Indigo, an increase of
Rs100 in yield or 2.5% higher quantum yields ~20% higher FY2021E EPS).What may moderate
down the pace of price increase for airlines is recent relaxations by IR to its flexi-fare scheme.
Indian Railways largely continues with flexi-fare scheme with some changes
Indian Railways has benefited from the flexi-fare scheme with a recent response to a Lok Sabha
question quantifying Rs10 bn of additional revenues in FY2018 (amount to 7% growth over AC
rail revenues in FY2017). With no meaningful loss seen in occupancy in the key
Rajdhani/Shatabdi/Duronto trains, Indian Railways has made changes to its flexi-pricing scheme
largely to address the issue of low-occupancy in other trains. The changes include (1) discontinuation
of such scheme in 15 trains and for another 32 trains during the lean period, (2) reducing cap
on surge pricing now at 1.4X of base rate versus 1.5X earlier and (3) graded discount on trains
with low occupancy four days prior to chart preparation. These changes would impact travel
after 15th March 2019.
Aditya Mongia
Ajinkya Bhat
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

Transportation
India
Exhibit 1: Air travel has significantly outperformed long-distance AC rail travel over the next four years
Comparison of passenger volumes across air and rail modes of transport, March fiscal year-ends, 2010-2019E ( bn kms)
160
Long-distance AC rail
140
Domestic air travel
140
120
5% CAGR
120
100
19% CAGR
100
80
60
40
13% CAGR
80
60
40
9% CAGR
20
20
0
0
2010
2011
2012
2013
2014
2015
2016
2017
2018E
2019E
2010
2011
2012
2013
2014
2015
2016
2017
2018E
2019E
Source: Indian Railways, DGCA, Kotak Institutional Equities estimates
Exhibit 2: Air travel is accounting for majority share of growth volumes for long-distance AC travel
Share of air travel in growth volumes of long distance AC travel, March fiscal year-ends, 2011-8MFY19E (%)
90
60
30
60
Share of air travel in growth volumes
Share Average (2011-15) Average (2015-18)
79 81 81 79
40
41
28
-
(30)
(60)
2011
2012
(35)
2013
Notes:
(a) We assume long-distance AC rail travel to outperform the growth of passenger revenues by 3% for
FY2018/8MFY19.
Source: Indian Railways, DGCA, Kotak Institutional Equities estimates
2014
2015
2016
2017
2018E
8MFY19E
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

India
Transportation
Exhibit 3: Airlines have meaningfully reduced tariff since FY2015 versus static base tariff of Indian
Railways for AC rail travel
Comparison of domestic air and long-distance AC rail volumes, March fiscal year-ends, 2010-18E (Rs per paxkm)
5
4
3
3.1 3.2
3.4
2nd AC rail
4.1
Air travel
4.3 4.4
3.9
3.5 3.6
2
1
1.1 1.2 1.2 1.3
1.4 1.5 1.5 1.5 1.5
0
2010
2011
2012
Notes
(a) Data on air is based on disclosed actuals and estimates for Indigo.
(b) FY2018 figures for rail is based on revised estimates of Indian Railways.
2013
2014
2015
2016
2017
2018E
Source: Indian Railways, DGCA, Kotak Institutional Equities estimates
Exhibit 4: Airlines have also benefitted in volume terms from introduction of flexi-fare schemes
Percentage variation on passenger count across key classes of trains impacted by flexi-fares scheme of Indian
Railways (%)
6
4
2
0
(2)
(4)
(6)
(8)
Change over Sep 2016 - June 2017 on a yoy basis
0.7
(2.5)
4.6
(10)
(12)
(9.5)
2nd AC 3rd AC Chair car Sleeper
Source: Lok Sabha questions, Kotak Institutional Equities
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Transportation
India
Exhibit 5: Airlines have grown tariff at much below the cost inflation
CAGR of per unit revenue and cost for Indigo, March fiscal year-ends, 2010-19E (%)
6
5
4.8
CAGR (%) over 2010-19E
5.3
5.0
4.6
4
3
2
1
1.2
0
Tariff Fuel cost Staff cost Rental Others
Source: Company, Kotak Institutional Equities estimates
Exhibit 6: Growth in the passenger traffic for the top-5% routes has moderated meaningfully over
the past six months
Yoy growth in the top-50 routes for domestic air passenger traffic (%)
40
Top 50 routes Remaining routes Total
30
20
10
-
14
11 10 10
17
20
18
7 8
11 11
10
21
12
3
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Source: DGCA, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

India
Transportation
Exhibit 7: Modest 4% yoy decline in volumes against 20% growth in pricing in FY2013 reflects
inelasticity of demand for air travel against price increase
Yoy change in volumes for air travel and in tariff, March fiscal year-ends, 2011-19E (%)
Yoy growth in air travel activity
Tariff
Volumes
25
20
15
20
12
21
13
21
22
19 18
10
5
2
5
5
4
2
3
0
(5)
(10)
(15)
(4)
(10) (11)
(3)
2011
2012
2013
2014
Notes:
(a) We assume tariff of Indigo as that for air travel.
2015
2016
2017
2018
2019E
Source: DGCA, Kotak Institutional Equities estimates
Exhibit 8: Air travel is likely to grow volumes in healthy double-digit over the next four years
Comparison of passenger volumes across air and rail modes of transport, March fiscal year-ends, 2010-2023E ( bn kms)
900 800
800 700
700
600
600
500
500
400
400
300
300
200
200
Domestic air+ AC rail+ sleeper
8%
7%
CAGR
CAGR
7% CAGR
8% 9% CAGR
160
140
120
100
80
60
40
8% CAGR
Sleeper rail
4% CAGR
5% CAGR
100
20
-
2010
2011
2012
2013
2014
2015
2016
2017
2018E
2019E
2020E
2021E
2022E
2023E
-
2010
2011
2012
2013
2014
2015
2016
2017
2018E
2019E
2020E
2021E
2022E
2023E
160
Long-distance AC rail
250
Domestic air air
140
120
100
13% CAGR
5% CAGR
6% CAGR
200
150
12% CAGR
80
60
100
9% CAGR
19% CAGR
40
50 50
20
-
2010
2011
2012
2013
2014
2015
2016
2017
2018E
2019E
2020E
2021E
2022E
2023E
- -
2010
2010
2011
2011
2012
2012
2013
2013
2014
2014
2015
2015
2016
2016
2017
2017
2018E
2018E
2019E
2019E
2020E
2020E
2021E
2021E
2022E
2022E
2023E
2023E
Notes:
(a) The above analysis assumes air volumes would become 1.6X AC rail volumes over the next four years
Source: Indian Railways, DGCA, Kotak Institutional Equities estimates
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

(https://www.cfainstitute.org)
Daniel Kahneman: Four Keys to Better
Decision Making
By Paul McCaffrey (https://blogs.cfainstitute.org/investor/author/paulmccaffrey/)
Nobel laureate Daniel Kahneman has transformed the fields of economics and investing.
At their most basic, his revelations demonstrate that human beings and the decisions
they make are much more complicated — and much more fascinating — than previously
thought.
He delivered a captivating mini seminar on some of the key ideas that have driven his
scholarship, exploring intuition, expertise, bias, noise, how optimism and
overconfidence influence the capitalist system, and how we can improve our decision
making, at the 71st CFA Institute Annual Conference (https://annual.cfainstitute.org/)
in Hong Kong.
“Optimism is the engine of capitalism,” Kahneman said. “Overconfidence is a curse. It’s
a curse and a blessing. The people who make great things, if you look back, they were
overconfident and optimistic — overconfident optimists. They take big risks because
they underestimate how big the risks are.”
But by studying only the success stories, people are learning the wrong lesson.
“If you look at everyone,” he said, “there is lots of failure.”
The Perils of Intuition
https://blogs.cfainstitute.org/investor/2018/06/08/daniel-kahneman-four-keys-to-better-decision-making/ 1/7

“We trust our intuitions even when they’re wrong,” he said.
But we can trust our intuitions — provided they’re based on real expertise. And while we
develop expertise through experience, experience alone isn’t enough.
In fact, research demonstrates that experience increases the confidence with which
people hold their ideas, but not necessarily the accuracy of those ideas. Expertise
requires a particular kind of experience, one that exists in a context that gives regular
feedback, that is effectively testable.
“Is the world in which the intuition comes up regular enough so that we have an
opportunity to learn its rules?” Kahneman asked.
When it comes to the finance sector, the answer is probably no.
“It’s very difficult to imagine from the psychological analysis of what expertise is that
you can develop true expertise in, say, predicting the stock market,” he said. “You
cannot because the world isn’t sufficiently regular for people to learn rules.”
That doesn’t stop people from confidently predicting financial outcomes based on their
experience.
“This is psychologically a puzzle,” Kahneman said. “How could one learn when there’s
nothing to learn?”
That sort of intuition is really superstition. Which means we shouldn’t assume we have
expertise in all the domains where we have intuitions. And we shouldn’t assume others
do either.
“When somebody tells you that they have a strong hunch about a financial event,” he
said, “the safe thing to do is not to believe them.”
Noise Alert
Even in testable domains where causal relationships are readily discernible, noise
can distort the results.
Kahneman described a study of underwriters at a well-run insurance company. While
not an exact science, underwriting is a domain with learnable rules where expertise can
be developed. The underwriters all read the same file and determined a premium. That
there would be divergence in the premium set by each was understood. The question
was how large a divergence.
“What percentage would you expect?” Kahneman asked. “The number that comes to
Accept
2/7

Better Decision Making | CFA Institute Enterprising Investor
“Which really means that those underwriters are wasting their time,” he said. “How can
it be that people have that amount of noise in judgment and not be aware of it?”
Unfortunately, the noise problem isn’t limited to underwriting. And it doesn’t require
multiple people. One is often enough. Indeed, even in more binary disciplines, using the
same data and the same analyst, results can differ.
“Whenever there is judgment there is noise and probably a lot more than you think,”
Kahneman said.
For example, radiologists were given a series of X-rays and asked to diagnose them.
Sometimes they were shown the same X-ray.
“In a shockingly high number of cases, the diagnosis is different,” he said.
The same held true for DNA and fingerprint analysts. So even in cases where there
should be one foolproof answer, noise can render certainty impossible.
“We use the word bias too often.”
While Kahneman has spent much of his career studying bias, he is now focused on
noise. Bias, he believes, may be overdiagnosed, and he recommends assuming noise is
the culprit in most decision-making errors.
“We should think about noise as a possible explanation because noise and bias lead you
to different remedies,” he said.
Hindsight, Optimism, and Loss Aversion
Of course, when we make mistakes, they tend to skew in two opposing directions.
“People are very loss averse and very optimistic. They work against each other,” he said.
“People, because they are optimistic, they don’t realize how bad the odds are.”
As Kahneman’s research on loss aversion has shown, we feel losses more acutely than
gains.
“Our estimate in many situations is 2 to 1,” he said.
Yet we tend to overestimate our chances of success, especially during the planning
phase. And then whatever the outcome, hindsight is 20/20: Why things did or didn’t
work out is always obvious after the fact.
“When something happens, you immediately understand how it happens. You
immediately have a story and an explanation,” he said. “You have that sense that you
learned something and that you won’t make that mistake again.”
These conclusions are usually wrong. The takeaway should not be a clear causal
relationship.
“What you should learn is that you were surprised again,” Kahneman said. “You should
learn that the world is more uncertain than you think.”
So in the world of finance and investing, where there is so much noise and bias and so
little trustworthy intuition and expertise, what can professionals do to improve their
decision making?
Kahneman proposed four simple strategies for better decision making that can be
applied to both finance and life.
1. Don’t Trust People, Trust Algorithms
Whether it’s predicting parole violators and bail jumpers or who will succeed as a
research analyst, algorithms tend to be preferable to independent human judgment.
3/7

. “There are very few examples of people outperforming
algorithms in making predictive judgments. So when there’s the possibility of using an
algorithm, people should use it. We have the idea that it is very complicated to design an
algorithm. An algorithm is a rule. You can just construct rules.”
And when we can’t use an algorithm, we should train people to simulate one.
“Train people in a way of thinking and in a way of approaching problems that will
impose uniformity,” he said.
2. Take the Broad View
Don’t view each problem in isolation.
“The single best advice we hae in framing is broad framing,” he said. “See the decision
as a member of a class of decisions that you’ll probably have to take.”
3. Test for Regret
“Regret is probably the greatest enemy of good decision making in personal finance,”
Kahneman said.
So assess how prone clients are to it. The more potential for regret, the more likely they
are to churn their account, sell at the wrong time, and buy when prices are high. Highnet-worth
individuals are especially risk averse, he said, so try to gauge just how risk
averse.
“Clients who have regrets will often fire their advisers,” he said.
4. Seek Out Good Advice
Part of getting a wide-ranging perspective is to cultivate curiosity and to seek out
guidance.
So who is the ideal adviser? “A person who likes you and doesn’t care about your
feelings,” Kahneman said.
For him, that person is fellow Nobel laureate Richard H. Thaler.
“He likes me,” Kahneman said. “And couldn’t care less about my feelings.”
This article originally appeared on the 71st CFA Institute Annual
Conference blog (https://annual.cfainstitute.org/).

He exposes two key shortcomings tht humans possess. Our knowledge on any
subject is more limited than we realize and our inability to predict the future
because noise will always get in the way.
4. — John LaVine (http://www.johnlavinemedia.com) says:
There is no such thing as a Nobel prize in economic sciences. Beginning in 1901,
Nobel Prizes have been awarded in the following five categories: literature, peace,
physics, chemistry, and “physiology or medicine.” In 1969, in an effort to improve
the image of economists, enthusiasts managed to establish the confusingly named
“Bank of Sweden Price in Economic Sciences in Memory of Alfred Nobel.”
The Wall Street Journal and The New York Times carefully refer to this award as
the Nobel Memorial Prize in Economic Science. Recipients are not Nobel
Laureates.
Amartya Sen, after receiving the prize in 1998, said in an interview: “I’ve always
been skeptical of the prize, but it’s difficult to express that until you get it because
people think it’s sour grapes.”
Reply (https://blogs.cfainstitute.org/investor/2018/06/08/daniel-kahnemanfour-keys-to-better-decision-making/?replytocom=559927#respond)
8 August 2018 at 11:47
(https://blogs.cfainstitute.org/investor/2018/06/08/daniel-kahneman-four-keysto-better-decision-making/#comment-564537)
I found this piece humorously informative, referring to the mental patterns that
affect our risk taking and assessment. I do believe that my best successes in the
market have come from some long shots, albeit with a reason for the gamble taken.
Despite some losses, often at the suggestion of investment by learned
professionals, rather than my own gut, I have to feel optimistic and think that since
the market is so often driven by knee-jerk emotion, that we’re all better off by too
much optimism than cautious pessimism, unless we’re set for life. I, of course, am,
as long as I don’t live to see 2019.
Reply (https://blogs.cfainstitute.org/investor/2018/06/08/daniel-kahnemanfour-keys-to-better-decision-making/?replytocom=564537#respond)
5. — Martin Colwell says:
15 August 2018 at 09:13
(https://blogs.cfainstitute.org/investor/2018/06/08/daniel-kahneman-four-keysto-better-decision-making/#comment-565503)
I would suggest readers read Thinking Fast And Slow by Messrs Kahnemahn and
Twersky to fully understand how to control bias and ‘gut feeling’ so that it is
relative but not your main driver for decisions.
Reply (https://blogs.cfainstitute.org/investor/2018/06/08/daniel-kahnemanfour-keys-to-better-decision-making/?replytocom=565503#respond)