Indian Jewellery Demand in 2013: Can it Withstand the Challenges Ahead?

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1 Indian Jewellery Demand in 2013: Can it Withstand the Challenges Ahead? Shekhar Bhandari Executive Vice President, Kotak Mahindra Bank 13 th November 2012

2 India s GOLD Values (1900 BC) 2

3 India s GOLD Values Built over years Habits do not change in years takes much longer.process of evolution Gold is Connotation for Prosperity Social Security Safety Liquidity Returns Versatile : Sone ki Chidiya : Stri Dhan : At all times Swarna : Most Secured Currency : Consistent over 10 years : For Good times pleasure and for bad times security 3

4 Culture and Habits Affected by Changes with Economy Evolution Education Religion and Government Policy Key demand points on Jewellery in short run are : Marriage Monsoon and Harvest Government Policy 4

5 India s GOLD Values (1600 AD) 5

6 THE OPPORTUNITY US$10 TN OPPORTUNITY: WIN-WIN ALL THE WAY

7 US$10 TN Opportunity WIN-WIN all the way India s nominal GDP to spiral to US$7 tn by 2025E, cumulative savings flow to touch US$10 tn Projected nominal GDP (at current exchange rates) and saving inflows across products, March fiscal year-ends, E (US$ bn) 1,500 1,200 Currency Deposits Shares and debentures Claims on government Insurance funds Pension funds GDP (RHS) 8,000 7,000 6, ,000 4, , ,000 1, Source: Bloomberg, Company, Kotak Institutional Equities estimates

8 US$10 TN Opportunity WIN-WIN all the way Game Changers Financial services sector to present a US$10 tn opportunity Opportunity to emerge from favorable demographics, economic growth and progressive regulatory trends. India is likely to continue to be an economy of savers, like its Asian counterparts Physical savings (housing, gold*) will remain strong, while financial savings remain a big component of overall household savings with growing financial inclusion. The big trends: Inclusion, technology, efficient distribution The biggest trends over the next 15 years will be increased financial inclusion (driven by government programs mandating banking channel usage), technological improvements reducing the need for physical cash holding by citizens, mobile banking and reduced transaction costs. Continued economic growth Macro growth will continue steadily. Treat growth as an exogenous variable and model it as a given. Any setback to growth would have a proportionate impact on the opportunity size. * In Indian GDP Data Gold is classified as Investments and not Physical Savings

9 Key Changers Changing demographics As people move into the productive ages of 20-59, they save more. The Life Cycle theory of savings suggests that the peak of savings occurs during the late 30s-end 50s. This would indicate that 88% of India s population will be less than 60 years old by 2025E. We expect the household savings rate to go up to 18.9% in 2025E. Increasing income Nominal GDP growth expected at 12.3% pa, GDP per capita is expected to increase to US$5,000 in 2025E. Increased income translates into higher savings (financial as and Physical) as the marginal propensity to consume declines Geography and Financial inclusion not enough We expect India to have c1,200 mn bank accounts and c55 mn demat accounts in 2025E, We expect 170 mn life insurance policies in force, Tier III and Tier IV wealth still remains far from being tapped. Gold becomes natural asset class being widely distributed and consumed in Rural India. Inflation and Real Returns Sticky Inflation in India could lead to sustained demand for Gold. In an atmosphere where real income is safeguarded,consumption rising and other asset classes having negative real returns Gold stands out The Volatile World Gold is classified as secured risk free asset. Compared to other forms of financial assets and present volatile world, Gold becomes natural asset class to choose from

10 Changing Demographics To increase saving rate 88% of India s population to be less than 60 years old by 2025E India s age profile in 2025E (% of population) Source: Kotak Institutional Equities estimates

11 Changing Demographics To increase saving rate Life Cycle Theory of Savings suggests increased savings in the productive age range Example showing saving pattern for a typical person across his/her age (indexed) 6,000 4,000 2,000 - (2,000) Source: Kotak Institutional Equities estimates

12 Increasing Income To raise quanta of savings Increasing GDP and slowing population growth will lead to higher per capita incomes Projected nominal GDP, population and per-capita income, March fiscal year-ends, E (US$ tn) 7,500 GDP per capita (USD) GDP (RHS) Population (mn) 6,400 6,000 4,500 3,000 1,500 4,800 3,200 1, Source: Kotak Institutional Equities estimates

13 Increasing Income To raise quanta of savings Household savings rate to go up over time Household savings rate, March fiscal year-end, (% of GDP) 19.50% 19.00% 18.50% 18.00% 17.50% 17.00% 16.50% 16.00% 15.50% 15.00% 14.50% 14.00% Household Saving Rate Source: Kotak Institutional Equities estimates

14 India s GOLD Values (1900 AD) 14

15 MYTHS Illiterate/ Unaware and do not understand Price Sensitive 5 MYTHS Educated do not buy Gold Compromise on Quality Only Women buy Gold

16 In the midst of global turmoil India fighting its own battles and Gold is big attraction

17 Real returns from bank deposits have witnessed volatility 11 9 % Real deposit rate (CPI based) Real deposit rate (WPI based) (1) (3) (5) (7) (9) (11) Source: CEIC, Bloomberg, Kotak Mahindra Bank 17

18 and share of physical savings(ex Gold) have risen significantly % of GDP Gross Domestic Saving: Household: Physical Savings (India) Gross Domestic Saving: Household: Financial Savings (India) Gross Domestic Saving: Household (India) Source: CEIC, Kotak Mahindra Bank 18

19 Negative returns in equity market driving investors to other avenues (20) (40) (60) (80) Real return on SENSEX (WPI based) (LHS) % Real deposit rate (WPI based) (RHS) % (2.0) (4.0) (6.0) Source: CEIC, Bloomberg, Kotak Mahindra Bank 19

20 Both MF and insurance industry are finding it difficult to attract household savings Rs cr AUMs of Indian MFs (end-march) Equity LHS Debt (LHS) yoy (RHS) % (40) 100,000 Rs cr LIC Private players 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Source: AMFI, IRDA 20

21 Hence, gold has a big attraction 1,100 1, Volume of gold imports (tons, LHS) Value of gold imports (US$ bn, RHS) Real Real return return on Gold on Gold (CPI (CPI based) based) % % (20) (40) 0 0 Source: CEIC, Kotak Mahindra Bank 21

23 2013 : Auspicious Days Jan Feb Mar April May June July Aug Sep Oct Nov Dec Source: Kotak Mahindra Bank, Lunar Calender 23% more wedding days 24% more marriages No Hindu wedding dates for four month i.e Chaturmas (148 days lost in 2012 vis a vis 117 in 2013) Chaturmas : period when Lord Vishnu, and his fellow Gods and Goddesses, are believed to be in Yogi Sleep for the four months. Hindu weddings are not held so that the Gods are not disturbed. 23

24 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 Monsoon and Harvest 120 Rainfall (surplus/deficient, %, LHS)) Gold imports growth (y/y %, RHS, 6M lag) (20) (40) (60) (80) (100) Monsoon/harvest has direct correlation to demand for Gold Government action in January 12 and March 12 having a bearing on demand for gold 2013 expected to be good Monsoon year

25 Many questions.and Policy Direction Is gold demand purely on account of Culture and Habits? Did the government contain gold demand by increasing duties? Should growth aspirations be moderated in the context of the current volatile political and social circumstances? In the new global context, should we aspire for a higher gold consumption? Will India and China make gold unaffordable for the commoner?

26 2013 : Indian Jewellery 23% more number of Auspicious days 24% more Marriages Normal monsoon/harvest conditions Government to push Financial Savings 2014 is an election year 25% growth over

27 Happy Diwali

28 Disclaimer In the preparation of the material contained in this document, Kotak Mahindra Bank Ltd. (Kotak Bank), has used information that is publicly available, including information developed inhouse. Some of the material used in the document may have been obtained from members/persons other than the Kotak Bank and/or its affiliates and which may have been made available to Kotak Bank and/or its affiliates. Information gathered & material used in this document is believed to be from reliable sources. Kotak Bank however does not warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material no such party will assume any liability for the same. Kotak Bank and/or any affiliate of Kotak Bank does not in any way through this material solicit any offer for purchase, sale or any financial transaction/commodities/products of any financial instrument dealt in this material. All recipients of this material should before dealing and or transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice. We have included statements/opinions/recommendations in this document which contain words or phrases such as "will", "expect" "should" and similar expressions or variations of such expressions, that are "forward looking statements". Actual results may differ materially from those suggested by the forward looking statements due to risks or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices, the performance of the financial markets in India and globally, changes in domestic and foreign laws, regulations and taxes and changes in competition in the industry. By their nature, certain market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses could materially differ from those that have been estimated. Kotak Bank (including its affiliates) and any of its officers directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipient alone shall be fully responsible/ are liable for any decision taken on the basis of this material. The investments discussed in this material may not be suitable for all investors. Any person subscribing to or investing in any product/financial instruments should do so on the basis of and after verifying the terms attached to such product/financial instrument. Financial products and instruments are subject to market risks and yields may fluctuate depending on various factors affecting capital/debt markets. Please note that past performance of the financial products and instruments does not necessarily indicate the future prospects and performance thereof. Such past performance mayor may not be sustained in future. Kotak Bank (including its affiliates) or its officers, directors, personnel and employees, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation in the financial instruments/products/commodities discussed herein or act as advisor or lender/borrower in respect of such securities/financial instruments/products/commodities or have other potential conflict of interest with respect to any recommendation and related information and opinions. The said persons may have acted upon and/or in a manner contradictory with the information contained here. No part of this material may be duplicated in whole or in part in any form and or redistributed without the prior written consent of Kotak Bank. This material is strictly confidential to the recipient and should not be reproduced or disseminated to anyone else.

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