Indian Jewellery Demand in 2013: Can it Withstand the Challenges Ahead? Shekhar Bhandari Executive Vice President, Kotak Mahindra Bank Email: shekhar.bhandari@kotak.com 13 th November 2012
India s GOLD Values (1900 BC) 2
India s GOLD Values Built over 4000+ years Habits do not change in 15-25 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
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
India s GOLD Values (1600 AD) 5
THE OPPORTUNITY US$10 TN OPPORTUNITY: WIN-WIN ALL THE WAY
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$10 tn Projected nominal GDP (at current exchange rates) and saving inflows across products, March fiscal year-ends, 2010-25E (US$ bn) 1,500 1,200 Currency Deposits Shares and debentures Claims on government Insurance funds Pension funds GDP (RHS) 8,000 7,000 6,000 900 5,000 4,000 600 3,000 300 2,000 1,000-2010 2012 2014 2016 2018 2020 2022 2024 - Source: Bloomberg, Company, Kotak Institutional Equities estimates
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
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$5,000 in 2025E. Increased income translates into higher savings (financial as and Physical) as the marginal propensity to consume declines Geography and Financial inclusion not enough We expect India to have c1,200 mn bank accounts and c55 mn demat accounts in 2025E, We expect 170 mn life insurance policies in force, Tier III and Tier IV wealth still remains far from being tapped. Gold becomes natural asset class being widely distributed and consumed in Rural India. Inflation and Real Returns Sticky Inflation in India could lead to sustained demand for Gold. In an atmosphere where real income is safeguarded,consumption rising and other asset classes having negative real returns Gold stands out The Volatile World Gold is classified as secured risk free asset. Compared to other forms of financial assets and present volatile world, Gold becomes natural asset class to choose from
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ Changing Demographics To increase saving rate 88% of India s population to be less than 60 years old by 2025E India s age profile in 2025E (% of population) 100 80 60 40 20 0 Source: Kotak Institutional Equities estimates
Changing Demographics To increase saving rate Life Cycle Theory of Savings suggests increased savings in the productive age range Example showing saving pattern for a typical person across his/her age (indexed) 6,000 4,000 2,000 - (2,000) - 10 20 30 40 50 60 70 80 Source: Kotak Institutional Equities estimates
Increasing Income To raise quanta of savings Increasing GDP and slowing population growth will lead to higher per capita incomes Projected nominal GDP, population and per-capita income, March fiscal year-ends, 2010-25E (US$ 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 1,600-2010 2012 2014 2016 2018 2020 2022 2024 - Source: Kotak Institutional Equities estimates
Increasing Income To raise quanta of savings Household savings rate to go up over time Household savings rate, March fiscal year-end, 2010-2025 (% 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% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Household Saving Rate Source: Kotak Institutional Equities estimates
India s GOLD Values (1900 AD) 14
MYTHS Illiterate/ Unaware and do not understand Price Sensitive 5 MYTHS Educated do not buy Gold Compromise on Quality Only Women buy Gold
In the midst of global turmoil India fighting its own battles and Gold is big attraction
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Real returns from bank deposits have witnessed volatility 11 9 % Real deposit rate (CPI based) Real deposit rate (WPI based) 7 5 3 1 (1) (3) (5) (7) (9) (11) Source: CEIC, Bloomberg, Kotak Mahindra Bank 17
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 and share of physical savings(ex Gold) have risen significantly 20 18 16 14 12 10 8 6 4 2 0 % 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
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Negative returns in equity market driving investors to other avenues 100 80 60 40 20 0 (20) (40) (60) (80) Real return on SENSEX (WPI based) (LHS) % Real deposit rate (WPI based) (RHS) % 10.0 8.0 6.0 4.0 2.0 0.0 (2.0) (4.0) (6.0) Source: CEIC, Bloomberg, Kotak Mahindra Bank 19
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Both MF and insurance industry are finding it difficult to attract household savings 700000 600000 500000 Rs cr AUMs of Indian MFs (end-march) Equity LHS Debt (LHS) yoy (RHS) % 120 80 400000 300000 40 200000 0 100000 0 (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
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Hence, gold has a big attraction 1,100 1,000 900 800 700 600 Volume of gold imports (tons, LHS) Value of gold imports (US$ bn, RHS) 45 40 35 30 25 60 40 20 Real Real return return on Gold on Gold (CPI (CPI based) based) % % 500 20 0 400 300 200 100 15 10 5 (20) (40) 0 0 Source: CEIC, Kotak Mahindra Bank 21
2013 22
2013 : Auspicious Days 25 20 15 10 2012 2013 5 0 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
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) 800 100 80 60 40 20 0 (20) (40) (60) 700 600 500 400 300 200 100 0 (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
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?
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 2012 26
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