India Commentary

June, 2009

Political Stability & Improving Sentiment

India Overview Selected Macro Indicators FY07-08 FY08-09 FY09-10E FY10-11E
Consensus GDP Growth Rate 9.30% 6.70% 6.21% 6.93%
India’s surprising General Election outcome resulted in a stable WPI Inflation Rate 5.90% 8.30% 1.00% 4.00%

Congress-led UPA coalition (without the Left parties and with 206 Centre Fiscal Deficit (% of GDP) 3.30% 6.00% 6.00% 5.00%

seats vs 145 in the last term) to continue much needed reforms Forex Reserves (USD bln) 309.80 252.00 260.00 310.00
Forex USD - INR 43.1 49.0 47.0 44.0
over the next 4-5 years. Manmohan Singh, the Oxford-educated
Forex GBP - INR 78.7 75.0 76.0 70.0
economist, continues as Prime Minister and has put together a
10-Year Govt Yields 8.00% 8.25% 6.20% 5.75%
relatively straightforward cabinet with the addition of Pranab Source: RBI, IMF, Goldman, Merrill Lynch, Cresil, Nomura, JP Morgan, Morgan Stanley & Elysium
Mukherjee as Finance Minister. Mr Mukherjee was previously Estimates

Finance Minister under the Indira Gandhi government in 1982-

1984 where the ministry controlled the economy in minute detail.
Even with the current more open economy, Mr Mukherjee should
be competent in helping India achieve its goal of 9% annual
growth as he is a veteran politician, impediments to reaching that
goal is mostly political in India.
Consensus GDP - Real Growth Rate
10.00%

USD/INR Weekly 2005-2009 GBP/INR Weekly 2005-2009

8.00%

Additionally, the equities market rewarded results the first trading

6.00% day after elections with an upper circuit shutdown (10% rise) and
the market ending with a 17% gain that day. The Sensex is
4.00%
currently trading at a 9 month high and is expected to outperform
this year. Recent economic data that end-March 2009 GDP
2.00%
growth was 6.7% year-over-year, beating many analyst estimates,
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E has also buoyed the markets.

Source: RBI, IMF, Goldman Sachs, Merrill Lynch, Crisil & JP Morgan
The government will deliver its Budget in early July and is not
expected to present an expansionary one. The Reserve Bank is
expected to pursue a soft interest rate regime; India compared to
most countries has further scope for rate reductions. The
government has expressed its intent to reduce the structural
deficit without reducing capital and infrastructure (physical and
social) spending through actively pursuing disinvestment of
government holdings in public sectors. With the Left absent, this
is achievable and especially more so with the technocrat Singh
and wily veteran politician Muhkerjee at the reins.
Macro Fundamentals Remains Strong
As the global economic crisis continues, we are hopeful that the
worst is over but understand that there will be more pain in the
near term. It does appear that India remains partially insulated
from the ravages of write-downs and mass layoffs. Our argument
last year (Nov 08) that India is a domestic consumption economy,
with half the export exposure of China, remains the basis for
continued optimism. With elections over and the accompanying
strong showing of the UPA, estimates for the year ending March
2010 GDP growth has been revised upwards by Morgan Stanley, in
th
a May 28 note, to 6.2% from 5.8%. The note said "We are now
building in higher growth in the services sector - both the
financing, insurance, and real estate & business services, and the
community, and social & personal services segments - than
previously estimated". They kept their forecast for the following
year's GDP growth at 6.8%.
As Indian corporate confidence improves on both political and
economic fronts, we expect to see consumer confidence
improving in tandem as well. This bodes well for several sectors
of the economy such as real estate, retail and other consumption-
driven industries. Tax cuts across all levels including the surcharge
on corporate taxes and the Fringe Benefit Tax (FBT) will also spur
consumption.
The expected re-rating of the Indian market is underway as
investments into India have been historically hobbled by the
government’s lack of headroom on the fiscal front. Additionally,
the GoI’s intention to privatise airlines and financial services;
introduce reforms in the insurance sector to attract long term
capital; deregulate oil and fertiliser (50% cut in FY10) prices; and
the sales of 3G spectrum licences will boost the markets and the
state’s coffers, covering any higher spending. According to an
Economic Times Intelligence Group (ETIG) study released in early-
June, the GoI could reduce its fiscal deficit by a third if it lowers its
stakes in 21 public sector firms (PSUs) including NTPC, NMDC,
MMTC, Power Grid, Sail and Hindustan Copper to 75%. This is
achievable without reducing stakes in sensitive oil and banking
PSUs.
Elections 2009 – No More Excuses
Over the last five years, Congress has blamed shortcomings in
reform and populist measures on coalition politics. That excuse is
now implausible. The UPA now has a clear mandate to shore-up
reforms in education and agriculture, continue
infrastructure/capital spending and adding 25,000 MW of power
per year, all without expanding the budget. These were Congress’
election promises, though these also featured in the 2004

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elections. If Congress does not perform yet again, Indian voters
will move on.
India – Still Best Placed of the BRICs
India is largely a domestic economy where hinterland
consumption is 58% of the country’s GDP, and with exports,
including software, at 17% of GDP. As such, India has shown
itself to be relatively insulated from current global weakness,
especially in comparison with most other economies. India’s total
trade constitutes only 32.5% of GDP (half that of China). Thus
India is better protected from fluctuations in global trade than
other emerging nations. India’s favourable demographic profile
with a median age of 24.4 yrs (2004 estimates) also gives it a
distinct advantage. Thus, over the next decade, India will
continue to draw on the benefits of a young and rapidly-growing
labour force (2/3 of India’s population is under 35) compared to
China’s aging population (current median age of 35).
Inflation Benign
Inflation is expected to remain benign over the medium term
which would allow the RBI to further soften rates and thus help
speed up consumption further and availability of cheaper credit.
The RBI has allowed the restructuring of commercial real estate
debt with about INR90 bln in debt rolled over recently. Banks are
increasingly taking a positive viewpoint at new loan
disbursements (mostly in the affordable housing space), a 180
degree reversal from just a few months ago.
Previous spikes in inflation were mainly a result of price shocks
from oil and food prices.
Increased risk averseness by commercial banks led to a comfortable
liquidity situation in the banking system post November 2008. Banks
have continued to park more funds with the RBI through the reverse
repo window despite the 50 bps reduction in the reverse repo rate in
March 2009. Banks could easily meet their short-term demand for
funds, as is evident from the low call rates, which stayed close to
reverse repo rate during April as per the latest available data (April 16,
2009). Earlier, towards the end of March 2009, call rates had surged to
repo rate levels on account of advance tax outflows and redemption
pressures in mutual funds. – Crisil Research Monetary Policy Impact
Analysis, April 2009
India imports 72% of its oil needs with total oil consumption
forming 10% of GDP. With 2009’s oil price forecast at $68/barrel
(IMF Nov 2008), a reduction of $32/barrel over 2008 actual, India
will be better positioned to deal with oil imports.
Additionally, gas production from the Krishna Godavari basin D-6
gas field would help in reducing the fiscal deficit and provide
“some downside protection” to economic growth rate, a Goldman
Sachs report said. The report added that gas production would
increase the power generation capacity and further expects
production to substitute about 7% of oil consumption in 2009-10
and 10-11% over fiscal years 2011-1014.
Affordable Housing Demand Strong and Growing
We have long maintained that affordable housing (defined as the
≤INR15-20 lakhs per unit price range) in the residential asset class
is where the deeper market is and will continue to show demand
as long as India Inc continues to grow. Buoyed by recent sales of
affordable housing by various developers and highly marked-
down completed properties by the large developers, companies
such as Unitech, DLF, HDIL and others have lined up over 60 mln
ft2 of residential projects this fiscal year alone (sources: Cushman
& Wakefield and other analysts). Private Equity firms are also
returning to the real estate space with strong interest in
affordable housing, but not in other asset classes. Unitech, DLF,
Tata and other real estate firms are reportedly in negotiations
with several offshore PE funds that are looking to move into that
space.
Elysium Capital Ltd
The GoI has made the affordable housing sector a priority since
last year and is now increasing its participation through Private-
Public Partnerships with developers and introducing schemes to
provide urban land at affordable costs and reduction of the cost of
credit for end-users.
Elysium Capital has pipelined and is currently planning several
affordable housing projects in South India. These townships range
from 50 to 100 acres and are priced from INR4 to 15 lakhs per
unit. Our per ft2 prices range from INR1,400 to 1,700.
80% of all mortgages in India are below INR20 lakhs (USD40,000) and
avg housing prices in South India are around INR3,000 to 5,000 per ft2.
Conclusion
As we continue through the global financial crisis, perhaps more
of sliding down a slope than freefall now, we are more than
encouraged by India’s effort to stabilise and grow its economy. Its
people surprised India watchers with a strong showing at
elections and voting back the UPA with a definitive mandate. The
technocrats holding the reins have a strong understanding of what
needs to be done and, with political discipline, should be able to
return India towards a 9% growth rate. Congress fully
understands that India has had no better chance than now to
effect real reforms.
We also feel that the affordable residential segment will have a
long life cycle, along with current limited opportunities in
industrial/warehousing and selective hospitality and other
specialised asset classes. The government is introducing
favourable FDI norms (mixed development projects exempt from
minimum capitalisation rules and area development norms) to
encourage further investments into housing and reforms
underway to clear up entitlement issues, transparency and review
tax advantages for rental properties are moving in the right
direction as India’s real estate market matures.
It is also important that the reader takes a micro-market
viewpoint to India. Better thought of as a continent, India is a
very large and diverse country where driving 200 km could mean
speaking a different language and with very different cultural
values. India isn’t just Mumbai and Delhi, it is also Chennai, Kochi
and a series of highly-educated and industrious Tier 2 and lower
cities. Around 60% of India’s wealth is in the Top 30 Tier 2 and 3
cities in India.
We reiterate our position that end-users for the residential asset
class are still buying at the right price, providing the location
makes sense and has proper transportation links. We have seen
more than reasonable absorption of affordable projects in and
around the metros and other cities. We expect demand to
gradually increase as India finds its way back towards the 9%
growth territory.
Oliver Ontiveros
Chief Investment Officer
oliver@elysiumprop.com
The views expressed above are based on information which we believe to be reliable
but are not guaranteed as to accuracy or completeness by Elysium Capital Ltd. This
document is not, and should not be construed as, an offer or the solicitation of any
offer, or general or definitive advice to buy or sell any investments and expressions
of opinion are subject to change without notice. Sources of data are available from
Elysium on request.
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